SECURED TRANSACTIONS Flashcards
What is a secured transaction?
A secured transaction is a transaction intended to create a security interest in personal property or fixtures. It generally involves a sale on credit or a loan in which the seller or the lender obtains a lien on some or all of the debtor’s property as security for payment.
Look for: (1) a credit transaction (sale on credit or a loan) and (2) an agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt.
What is a sale on credit?
Sale where the buyer does not pay the full purchase price at the time of the sale
What is a security interest?
The agreement between the debtor and the secured party that creates the security interest.
What is a security interest?
An interest in personal property or fixtures which secures payment or performance of an obligation. It is a contingent property interest in the debtor’s collateral that the debtor grants to the creditor. When the contingency, which is default occurs, interest springs to life and the creditor has rights in the debtor’s collateral.
What are Purchase Money Security Interests (PMSI’s)?
- Secured party sells debtor collateral on credit and retains a security interest in the item sold (seller financed)
- An enabling loan (like for a car); a loan to a debtor that enables the debtor to buy specific collateral, and the creditor takes a security interest in the specific collateral
* Note: The credit or loan proceeds must actually be used to acquire the collateral.
What is an After-acquired property clause?
A secured party often will want to obtain a security interest not only in debtor=s present property, but also in property that the debtor will obtain in the future. This is permissible. Security agreements typically contain an after-acquired property clause
What is a Future advance clause?
A secured party often contemplates making future loans to the debtor and wants to secure these future advances in the present security agreement. This is permissible. Security agreements typically contain a future advance clause (as in the hypo), in which case a new security agreement is not needed when a future advance is made.
What is attachment?
Steps legally required to give the secured party a security interest in the collateral that is effective as against the debtor. Once a security interest attaches, it is effective against the debtor and the creditor has all of the rights of a secured creditor under article 9. A creditor is not a secured creditor until attachment.
What is perfection?
Deals with those steps legally required to give the secured party an interest in the collateral that is effective as against the world. In general, perfection is the process of giving public notice of the security interest to the world.
What is a Financing statement?
Document generally used to provide public notice of the security interest, and so to perfect the security interest.
What are the types of collateral identified in Article 9?
Goods, and semi-intangible and tangible property
What are the different types of Goods as classified by Article 9?
- Consumer Goods
- Equipment
- Farm Products
- Inventory
What are “consumer goods” as classified in Article 9?
Used or bought for use primarily for personal, family or household purposes
What is “equipment” as classified in Article 9?
Used or bought for use primarily in business. Generally equipment is the default category for “goods,” even if it does not fit the definition
What are “farm products” as classified in Article 9?
Crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk and eggs) if they are in the possession of a debtor engaged in farming operations (easy to spot because there is a farmer
What is “inventory” as classified in Article 9?
Held by a person who holds them for sale or lease or to be furnished under service contracts; materials used or consumed in a business
What is a guitar purchased by Harry Homebody as a present for his son Marvin?
Harry Debtor purchases guitar - This is a consumer good
I think this is a consumer good under art. 9, The definition of consumer good in article 9 is …, and then specify the fact that I think makes it a consumer good (personal reasons, etc.)
What kind of collateral is a guitar purchased by Sterling Studly, a professional rock musician, to be used on tour
Equipment, equipment is used…, Striling uses this for .. .
What kind of collateral is milk in the hands of a farmer (who got it from his cows)?
A farm product
What kind of collateral is milk in the hands of a grocery store (or a restaurant)?
Inventory
What kind of collateral are automobiles held by a local car rental agency?
Inventory
What kind of collateral are pencils and other stationery supplies used by Sears or some other large retailer in its credit offices
Equipment, on the other hand this could be inventory - In the real world there can only be one - Mutually exclusive, on the bar you can hyothesize how it could be both (that would be good for points)
What are the 8 types of semi-intangible and intangible property?
- Instruments
- Documents
- Chattel Paper
- Investment Property
- Accounts
- Investment Accounts
- Commercial Tort Claims
- General Intangibles
In semi-intangible and intangible property what is an instrument?
Negotiable instruments and any other writing which evidences a right to the payment of a monetary obligation, and which are in the ordinary course of business transferred by delivery with any necessary indorsement or assignment (does not include investment property).
In semi-intangible and intangible property what is a document?
A document which in the regular course of business is treated as evidencing that the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers (e.g., bill of lading, warehouse receipt).
In semi-intangible and intangible property what is chattel paper?
A promise to pay and a security interest and put them together - A record or records which evidence both a monetary obligation and a security interest in or a lease of specific goods. A Arecord@ is information that is stored in either a tangible medium (e.g., written on paper), or an intangible medium (e.g., electronically stored). Chattel paper that is stored in an electronic medium also is called Aelectronic chattel paper.@
In semi-intangible and intangible property what is investment property?
Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items.
In semi-intangible and intangible property what are accounts?
A right to payment [not evidenced by an instrument or chattel paper] (1) for goods, (2) for services, (3) for real property, (4) for a policy of insurance issued or to be issued, (5) for a secondary obligation incurred or to be incurred, (6) for energy provided or to be provided, (7) for the use or hire of a vessel, (8) arising out of the use of a credit card, or (9) as lottery winnings. Health care insurance receivables are included. A contractual obligation arising from a loan of money is not an account - it is a general intangible (usually just the 1 & 2)
In semi-intangible and intangible property what are deposit accounts?
An account maintained with a bank. Note: Article 9 only applies to nonconsumer deposit accounts and deposit accounts that are claimed as proceeds of other collateral.(i.e. Bank cannot take an article 9 security interest in a personal bank checking account)
In semi-intangible and intangible property what is a commercial tort claim? (2 ways)
A claim arising in tort with respect to which the claimant is an organization (e.g., partnership or corporation), or;
Where the claimant is an individual and the claim arose in the claimant’s business or profession and does not include damages for personal injury or the death of an individual.
In semi-intangible and intangible property what is a general intangible? (Default category)
Any personal property not coming within the scope of the other definitions (e.g., software, patent and trademark rights, copyrights, goodwill). A general intangible under which the account debtor=s principal obligation is a monetary obligation is a payment intangible.
How would a promissory note be classified?
Instrument of semi-intangible and intangible property, art. 9 defintion of instrument
How would a stock certificate be classified?
Investment property of semi-intangible and intangible property
How would a receipt given to a farmer by a silo operator when the farmer stored her grain there be classified?
It’s a Warehouse receipt so a Document of semi-intangible and intangible property
How would a written contract in which a car buyer purchasing on credit promises to pay the car dealership for the car and grants the dealership a security interest in the car be classified?
Chattel Paper of semi-intangible and intangible property - Put them together
Big T sells tires on credit. What are its customers’ obligations? - How would that be classified?
Accounts of semi-intangible and intangible property- People owe me money for goods, ie tires
A hospital has patients who come in for treatment sign paperwork authorizing the hospital to seek payment from their health insurance coverage provider. Can the hospital use the monies due from the various health plans as collateral?
Yes - These are accounts, health care insurance receivables (of semi-intangible and intangible property)
Credit Card Company issues millions of credit cards to cardholders, who use them in transactions with merchants. Merchants send the resulting paperwork to Credit Card Company for reimbursement (minus certain fees). Can Credit Card Company use these credit card transactions as collateral?
Yes - These are accounts (of semi-intangible and intangible property)
What is the checking account that you have at your bank, can that be used as collateral?
A deposit account under Art. 9 Speak, the question is how is it categorized
What are patent and trademark rights, copyrights, goodwill, a tax refund claim, a liquor license, a commercial clamming license, a right to the return of a security deposit held by a landlord be used?
General Intangibles (the default)
What type of collateral is the right to sue a corporation for wooing away a trusted employee?
Commercial Tort claim - Horrific collateral - No one will take it as collateral on its own
What type of collateral is a claim arising in tort that has been settled and reduced to a contractual obligation to pay?
General intangible - Account cannot be for a lawsuit, right to payment for services or goods
What type of collateral is a computer program.
If sold separately than general intangible, if embedded on the computer, follows the computers classification
The scope of article 9 applies to what? 5 Categories, if on the bar look for 1 & 5
- Any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
- An agricultural lien
- A sale of accounts, chattel paper, payment intangibles, or promissory notes (unless the sale is for the purposes of collection only, or the sale is part of the sale of a business)
- Certain consignments
- A secured sale disguised as a lease
D rents a stall at Ark Self Storage and stores his goods there. The rental agreement provides that Ark has Aa contractual lien@ on the contents of the stall, and that if D defaults in his rental payments, Ark has the right to enter the stall, seize the contents and sell them to satisfy the rental obligation. No mention is made of the creation of any security interest. Is there a security interest?
YES - a security interest has been created that is governed by Article 9; Any transaction regardless of what you call it, if the effect is that one party gets contingent property on default than it will be covered by art. 9 - Substance over form doctrine
Is a “true lease” covered by Article 9
NO
What is a secured sale disguised as a lease?
To distinguish the “true lease” from the “disguised sale,” ask whether the transaction is, in substance, a lease or a sale. In a lease (e.g., a car rental), the lessor is going to receive the item back at the end of the lease term when the item still has meaningful economic value. In a sale, the buyer is the owner and is generally going to drain all of the economic value from the item. The relevant question is: at the time the parties entered into the transaction, was it reasonably likely that the “lessor” would get the item back when it still had meaningful economic value? If yes, it is a “true lease.” If no, it is a sale with a security interest in substance, and it is governed by Article 9.
Machines, Inc. leases a duplicating machine to Print Shop. The parties execute a 5-year lease. Is this is a “true lease” outside the scope of Article 9, or it is a “disguised secured sale” governed by Article 9?
Cases like this must be determined on a case by case basis
Article 9 will apply if a 3 part test is met:
(1) at the end of the lease period, the lessee (Print Shop) becomes the owner of the machine for little or no consideration (e.g., option to purchase for $1); or;
(2) the lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life of the goods; or;
(3) the lease is for the entire economic life of the leased goods, with or without renewal.
What are the 3 elements that must be fulfilled to create an Article 9 Security Attachment?
- Security agreement
- Value has been given
- Debtor has rights in the collateral
* Note: Once all 3 elements have been met, no matter the order, a security attachment is created
What is the general rule for a security agreement?
Unless the collateral is in the possession or control of the secured party pursuant to an agreement, a written (or electronically stored) security agreement is required. Most often, the debtor wants possession of the collateral, so a writing is necessary. 99% of the time the agreement is in writing
What are the requirements for an oral agreement to have a security agreement?
If the collateral is in the possession of the secured party pursuant to an oral security agreement (e.g., I’ll loan you $50 but we agree that I will keep your watch until you pay me back; if you don’t pay me back, we agree that I can sell your watch), this meets the “security agreement” requirement.
What are the general requirements for the “written” element to be satisfied for a security agreement? 3 elements
- The agreement must be evidenced by a record (written or electronically stored information) and must show an intent to create a security interest (No magic language needed, just intent to communicate the idea)
- The agreement must be “authenticated” by the debtor. This usually means “signed” by the debtor. Any symbol, including an electronic symbol, that is made with the present intent to authenticate the record will work (e.g., an “X,” a smiley face)
- The agreement must contain a description of the collateral (and if the security interest covers timber to be cut, a description of the land concerned)
* Note: The Code says that the security agreement must “reasonably identify” the collateral. - Also super generic language can undermine the security agreement
What are the general requirements for the “value has been given” element to be satisfied for a security agreement?
The value definition is very liberal. Any consideration sufficient to support a simple consideration. Even past consideration is enough. The debtor always gives value because the debtor, at a minimum, promises to pay. So
the question is whether the secured party gave value (Usually the debtor promises to repay and a promise to pay is consideration, so ask if the creditor has given something of value )
How is the element of “the debtor must have rights in the collateral” to be satisfied?
The debtor must have rights in the collateral because the debtor cannot grant a contingent property interest in property that it does not own (The instant that all of the elements are met, no matter the order, than there is attachment, now you are a secured creditor)
First Bank loans Hilda $20,000 on the date of the transaction, March 5. On May 10, First Bank lends Hilda an additional $5000. No new security agreement is signed. What is the amount of debt secured?
All $25K because of the future advance clause
Because: Debt secured may include future advances
Assume that Hilda buys new inventory six months after her agreement with First Bank, using money supplied by Second Bank. Is the new inventory subject to First Bank’s security interest?
Yes - Because of the after acquired property clause
Because: Property secured may include after-acquired property
What is the general rule for the scope of a security agreement (attachment) for lack of an after acquired property clause?
Without an explicit after-acquired property clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement
What are the exceptions to the general rule for the scope of a security agreement (attachment) for lack of an after acquired property clause?
- Even when there is not an explicit after-acquired property clause, the courts will often imply an after-acquired property clause when the collateral is of a type that is rapidly depleted and replenished (e.g., inventory or accounts). The courts assume that the parties must have meant to cover after-acquired property, or the security interest will reach nothing.
- A security interest does not attach under an after-acquired property clause to consumer goods unless the debtor acquires rights in them within 10 days after the secured party gives value
- An after-acquired property clause is ineffective as to commercial tort claims
