Secured Transactions Flashcards
Attachment
Generally, a security interest that is enforceable against the debtor is said to have “attached” to the collateral. Attachment requires that: (i) value has been given by the secured party, (ii) the debtor has rights in the collateral, and (iii) the debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement.
Buyer in the Ordinary Course of Business
A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that interest. However, a buyer in the ordinary course of business (BOCB) takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. A BOCB is a person who: (i) buys goods; (ii) in the ordinary course of business; (iii) from a merchant who is in the business of selling goods of that kind; (iv) in good faith; and (v) without knowledge that the sale violates the rights of another in the same goods. In order to qualify as a buyer, the purchaser must give new value, which in addition to paying cash for the goods includes purchasing the goods on credit.
Consumer Buyer
A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that interest. However, a consumer buyer of consumer goods takes free of a security interest, even if perfected, unless prior to the purchase the secured party filed a financing statement covering the goods. A consumer buyer is a person who: (i) buys consumer goods for value; (ii) for his own personal, family, or household use; (iii) from a consumer seller; and (iv) without knowledge of the security interest. This is often referred to as the “garage sale” rule.
PMSI
A PMSI is a special type of security interest in goods that has priority over other security interests in the same goods. It arises when a creditor sells goods to a debtor on credit and retains a security interest in those goods, or the creditor advances funds, which are then used to purchase the goods and the creditor reserves a security interest in those goods.
“Accounts”
“Accounts” include the right to payment for goods sold, property licensed, or services rendered.
Inventory
“Inventory” includes not only goods, other than farm products, that are held for sale or lease, but also raw materials, works in process, or materials used or consumed in a business.
Equipment
“Equipment,” a catchall class, consists of goods that are not consumer goods, farm products, or inventory.
Judicial Lien
A judicial lien creditor is a creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law. A judicial lien creditor takes the property subject to a perfected security interest but generally has priority over an unperfected security interest.
Perfection
A security interest is perfected upon attachment of that interest and compliance with one of the methods of perfection. A secured party can perfect a security interest by: (i) filing a financing statement; (ii) taking possession of the collateral; (iii) exerting control over the collateral; or (iv) automatic perfection.
Proceeds
Nevertheless, a security interest in collateral automatically attaches to identifiable proceeds. Proceeds include that which is acquired upon the sale, exchange, or other disposition of collateral. If the security interest in the original collateral is perfected, then a security interest in proceeds is temporarily perfected for 20 days from the time it attaches. Under the same office rule, a perfected security interest in proceeds may continue indefinitely when: (i) the filed financing statement covers the original collateral, (ii) the proceeds are collateral in which a security interest may be perfected by filing in the same office as the financing statement, and (iii) the proceeds are not acquired with cash proceeds.
PMSI Priority in Inventory
While, generally, a PMSI has priority over other security interests in the same goods, a PMSI in inventory has priority only if: (i) the PMSI is perfected by the time the debtor receives possession of the collateral; and (ii) the purchase-money secured party sends an authenticated notification of the PMSI to the holder of any conflicting security interest before the debtor receives possession of the collateral.
Default
Upon default, one of the alternatives generally available to a secured party once in possession of collateral is to dispose of the collateral at a sale, which may be public or private, in order to satisfy the obligor’s outstanding obligation. In addition to conducting the sale in a commercially reasonable manner, the secured party is generally required to send an authenticated notification of disposition to, among others, the debtor. This notice must be given sufficiently far enough in advance of the disposition (e.g., at least 10 days) to allow the notified party to act on the notification. A secured party is not required to send a notice of disposition when the collateral is perishable, threatens to decline speedily in value, or is of a type customarily sold on a recognized market. A person entitled to notification may waive the right to notification. If a secured party fails to comply with these requirements, then the debtor or other secured party may seek damages for any loss caused by the secured party’s failure to notify. There is also a rebuttable presumption that the secured party is not entitled to collect a deficiency. The secured party can rebut this presumption in whole or in part by showing that the deficiency would have existed even had the secured party complied with Article 9.
Lease
UCC Article 9 applies if the substance of a transaction creates a security interest. A transaction in the form of a lease is treated as a security interest if the lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease, the payment obligation cannot be terminated by the lessee, and the lessee is bound to become the owner of the goods upon completion of the lease agreement.
PMSI in Goods Priority
A PMSI in goods other than inventory or livestock prevails over all other security interests in the collateral, even if they were previously perfected, if the secured party perfects before or within 20 days after the debtor receives possession of the collateral.
