Secured Transactions Flashcards
Secured Transaction decision tree
(1) Secured Transaction in first place?
(2) What type of collateral?
(3) What rights, if any, creditor has in the collateral? ((a) attachment, then (b) perfection)
Secured Transaction
Debtor (1) voluntarily grants (2) an interest in personal property (3) to secure payment or performance of an obligation
- Interest = security interest
- Personal Property = collateral
- If definition above for secured transaction is met, then transaction is governed by UCC Article 9
GENERAL NOTES:
- PAY ATTENTION to FORM rather than the WORDS the parties use, if the transaction itself creates an interest in personal property to secure payment/performance then its a secured transaction governed by UCC Article 9, even if parties don’t use the correct words, BUT even if they use the words interest etc it may not actually be a secured transaction
- must be personal property, cant be land
Types of collateral
Why this matters: (1) determines the steps creditor must take to have an enforceable security interest, (2) determines the steps creditor must take to give 3rd parties notice of the secured creditor’s security interest
Collateral is classified based on how a particular debtor is using it (thus same piece of collateral might be classified differently depending on who the debtor is)
Tangible property collateral
- Inventory = (a) goods for sale/lease, (b) raw materials consumed in debtor’s business (ex: bakery’s cakes/pastries)
- Farm products = goods, other than timber, engaged in farming operation (a) crops, (b) livestock, (c) supplies used/produced in farming operation, (d) products of crops/livestock in their unmanufactured states (ex: farmer’s wheat)
- Consumer Goods = bought primarily for personal, family, or household purposes (ex: homeowner’s microwave, or the family minivan)
- Equipment = catchall category, goods debtor uses in it’s business that aren’t inventory, farm products, or consumer goods (ex: oven used to cook at restaurant)
- Fixtures = goods that have become so attached to real estate that they have become part of the real estate (ex: elevators, escalators) (NOTE: While UCC 9 doesn’t apply to real property, it does apply to security interests in fixtures)
Quasi-tangible property collateral
- Instruments = any writing that evidences a financial obligation, which in the ordinary course of business is transferred by delivering the writing with any needed endorsement or assignment (but doesn’t evidence a lease or security interest in specific goods) (ex: checks or promissory notes)
- Chattel Paper = record that evidences both a monetary obligation and security interest in specific goods (ex: transaction in which expensive items like cars or equipment are purchased on credit)
- Documents = record or receipt of title (ex: warehouse receipt that warehouse issues upon receiving goods)
- Investment Property
Intangible property collateral
- Accounts = debtor’s right to receive payment
- Deposit Account = bank account
- Commercial Tort Claims = civil claim for harm which claimant is an organization
- General Intangibles = catchall for intangible property collateral (ex: software, civil claims that aren’t commercial tort claims)
- Payment Intangibles = any general intangible in which the relevant obligation is monetary
Attachment and Perfection
Attachment = process by which an unsecured creditor becomes a secured creditor and obtains an enforceable security interest in specific collateral
- Requires: (1) secured creditor provides value to the debtor, (2) debtor has rights in the collateral, or, at least power to transfer rights in the collateral, (3) debtor must authenticate a written agreement, which grants the secured creditor rights in specific collateral and reasonably describes the collateral
NOTES:
- “Provide value” = give enough consideration to create a K (ex: lend money, extend credit, etc.)
- “rights in collateral” = have enforceable interest in collateral (aka debtor owns the collateral)
- “written agreement” = (a) writing, (b) signed, (c) sufficiently particular described (aka “all debtor’s equipment or account’s (describing the collateral classification, BUT not “all the debtor’s personal property)
Perfection = process by which secured creditor gives 3rd parties notice of its rights in the collateral
- Typically done by filing a financing statement that shows (a) debtor’s name/address, (b) secured party’s name, (c) some indication of the collateral
– NOTE: can use supergeneric language here to describe the collateral, but can’t be “seriously misleading” aka someone searching debtor’s name wouldn’t be able to locate the statement
- financing statement lasts 5 years, and secured creditor must file a continuation statement within 6 months of when financing statement expires then perfection lapses
- EXCEPTION TO GENERAL FINANCING STATMENT REQUIREMENT
– (a) fixtures collateral can only be perfected with a “fixture filing”, requires (i) normal financing statement requirements, (ii) says it covers fixtures, (iii) is filed with state real-property records office (iv) describes relevant real property
– (b) money collateral can only be perfected with actual possession
– (c) deposit account collateral can only be perfected with “control”, requires (i) being bank where account is maintained, (ii) becoming customer of the bank with respect to the deposit account in question, or (iii) have an authenticated agreement among itself, the bank, and the debtor, directing bank that funds can be withdrawn by creditor without consent from debtor
– (d) certificate-of-title systems (like cars) can only be perfected by “notation/lien”
Transfers of collateral
Once security interest for creditor has been created, a debtor is free to keep using the collateral in any lawful manner, including selling the collateral to the buyer
- Security interest continues in the collateral, even after a sale or other disposition, unless an exception applies
– EXCEPTIONS (buyer takes collateral object free and clear of the security interest embedded in it)
— (a) secured creditor authorized the disposition free of the security interest
— (b) buyer in the ordinary course of business (i) buying in good faith, (ii) without knowledge of the security interest, (iii) from seller who is in the business of selling goods of that kind
— (c) buyers of consumer goods from consumer (i) person who used the goods as consumer goods, (ii) without knowledge of the security interest, (iii) for value, (iv) for use as consumer goods for buyer’s own personal purposes, (v) before a financing statement covering the security interest is filed
Competing creditor interests in the same collateral
Competing creditor interests
- GENERALLY: First in time, first in right
– between competing perfected security interests, priority date is the earlier of: (a) date financing statement was filed, or (b) date which security interest was actually perfected
- BUT, regardless of time:
– Secured creditors priority over unsecured creditors
– Perfected security interests priority over unperfected security interest
Party rights once debtor defaults
UCC 9 doesn’t define default, instead that is defined under the individual K that was signed
Remedies:
- Normal judicial processes (court judgment, judicial foreclose/repossess)
- BUT: creditor can also “self-help”, meaning take possession of the collateral itself, sell it, and apply proceeds to debt, BUT if creditor uses self-help, CAN’T “breach the peace” (creates imminent violence/potential for violence/public disturbance)
Payments required in default = full payment of debt and reasonable expenses of foreclosure/collection
- Creditor must dispose of the collateral in a “commercially reasonable” manner (ensure a fair price for the collateral)
MEE cliff notes
INTRO: UCC article 9 governs any transaction regardless of form that grants a security interest. This includes security interests in both tangible and intangible property.
ATTACHMENT: (1) value, (2) rights, (3) writing/”security agreement” ((a) signed/authenticated, (b) sufficiently describe collateral) OR possession/control
PERFECTION: financing statement (a) appropriate state office, (b) debtor’s name, (c) creditor’s name, (d) generic description of collateral
priority issues:
- (1) BIOCOB (buyer in ordinary course of business), (a) good faith, (b) no knowledge violating security interest (can actually know of interest, but can’t know your violating), (c) from merchant
- (2) perfected interest (first in time)
- (3) unperfected interest
