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
What are proceeds?
Includes whatever (literally) is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. If collateral is insured and money is received from the insurance company on account of loss or damage to the collateral, the money is a proceed of the collateral (up to the value of the collateral) unless it is payable to someone other than the debtor or the secured party claiming it. In addition, any claims arising out of the loss of, defects in, or damage to collateral are proceeds of the collateral (up to the value of the collateral). Unless otherwise agreed, a security agreement automatically gives the secured party a right to identifiable proceeds
First Bank has a security interest in Hilda’s inventory. Hilda sells some inventory on credit. Does First Bank’s security interest reach the accounts resulting from such sales?
Yes, if identifiable (probably invoices)
People owe her money for inventory sold, so she has accounts, those would also be proceeds
Hilda sells some inventory for $3000, which cash is deposited in Hilda’s bank account. Does First Bank’s security interest reach this money?
Yes, but only if the proceeds are still identifiable (meaning that the secured party can prove that all of the monies in Hilda’s bank account are proceeds).
How can you determine proceeds in a co-mingled bank account?
Apply the “lowest intermediate balance” test
Look at the balance in a commingled bank account starting at the time the proceeds are deposited and ending at the time you are applying the test. The law deems that the lowest balance during that time period is the secured party’s identifiable proceeds (but it cannot exceed the value of the cash proceeds originally deposited).
For the “lowest intermediate balance” test, what if Hilda’s bank account had a $1000 balance (all non-proceeds) just before the $3000 from the inventory sale was deposited? The account balance never dropped below $4000. How much of the bank account is the secured party=s identifiable proceeds?
$3000
For the “lowest intermediate balance” test, what if Hilda’s bank account had a $1000 balance (all non-proceeds) just before the $3000 from the inventory sale was deposited? The account balance then dipped to $1000, increased to $7000, dropped to $50, increased to $2000, and dipped again to $750. How much of the bank account is the secured party=s identifiable proceeds?
$50
Sarah grants Finance Company a security interest in her accounts receivable. One of these accounts has a surety, who promised Sarah that she would pay the account if the account debtor did not. Does the security interest attach?
Finance Company’s security interest automatically attaches to this supporting obligation - The attachment of a security interest in collateral also is an attachment of a security interest in a supporting obligation for that collateral
What is perfection?
Perfection deals primarily with rights as between the secured party and third parties. Perfection is not necessary to create a valid, enforceable security interest as between the debtor and the secured party. (This merely states to the other creditors of the world that you have a security agreement, that has now been perfected with the Debtor)
What are the methods of perfection? 5
- Automatic Perfection
- Possession of Collateral by a 3rd Party
- Perfection by “Control”
- Notion of Lien of Certificate of Title
- Filing a Financing Statement
How can a security interest be perfected automatically?
A PMSI in consumer goods; e.g. D borrows money from S Loan Company to buy a new dining room set for her home (the money from S Loan Company is used to buy the dining room set). S obtains a security interest in the dining room set. The security interest is automatically perfected.
- PMSI, and;
- In consumer goods
When is a security interest perfected in possession of collateral of a third party?
The security interest is perfected from the moment of possession without relation back to the time of attachment. Perfection continues only so long as possession is retained: HOWEVER the exception to this rule is that it is impossible with items you cannot take physical possession of - i.e. General intangibles, accounts, deposit accounts
When is a security interest perfected by “control”
- Investment property: Basically, a secured party has control of an item of investment property when the secured party has taken whatever steps are necessary to be able to have the investment property sold without further action from the owner
- Nonconsumer deposit accounts (spike on the bar): 2 Types
i. The bank in which a nonconsumer deposit account is
maintained automatically has control over the deposit account.
ii. If the secured party is not such a bank, it can obtain control over the deposit account be either: (1) putting the deposit account in the secured party’s name (i.e. Add wells fargo name as co owner to Chase business bank account), or; (2) agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will follow the secured party’s orders without further consent by the debtor (Control agreement - K between debtor, creditor and bank, you say that if you default creditor has access to account) - Electronic Chattel Paper: A party has control over electronic chattel paper when a system showing the transfer of interests in chattel paper reliably establishes the secured party as the assignee
When is a security interest perfected through a notation of lien on a certificate of title?
Example type: The only way to perfect a security interest in an automobile is for the secured party to note its lien on the certificate of title, HOWEVER there is an exception - If the debtor is holding the automobile as inventory (i.e., if the debtor is a dealer), then a secured party may perfect by filing a financing statement against inventory. There is no need in this situation for the secured party to note its lien on the certificate of title (if this does come up on the bar, I need to be able to elaborate the reasoning behind it, would not want to file thousands of liens on titles individually)
When is a security interest perfected through filing a financing statement? (i.e. UCC 1
The financing statement is premised on the concept of “notice filing.” The notice must indicate merely that a person may have a security interest in the collateral indicated. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs
To be complete what must a financing statement contain? 6 elements
- The debtors name
- Description of the Collateral
- The secured party’s name
- Real Property Related to the Financing Statement
- Debtor must Authorize the Filing (this does not mean that a signature is required, just that it must be authorized)
- Authenticated security agreement itself may be filed: If it is filed, it must contain all of the elements discussed above
Where should a financing statement be filed?
Except as otherwise specifically provided in a state’s Article 9, the financing statement is ordinarily filed with the Secretary of State, HOWEVER real estate related (i.e. timber, resource extraction or fixtures) financing statements should be filed with the county recorders office where the real property is located
On a financing statement what is a debtors name?
If the debtor is an individual, the individual’s name should be given. If the debtor is a corporation, the corporate name should be given. If the debtor is a partnership, the partnership name should be given.
- Individuals - The name on the unexpired DL (not defined by Art. 9, CL is a mess here)
- Business - Put the name of the business as incorporated and not the trade name (i.e. Burger King is a trade name, will not suffice)
Suppose a secured loan is made to Michael Sabbath. The financing statement mistakenly shows the name as Michael Sadbath. Is the financing statement effective?
YES - As long as the financing statement is not seriously misleading (what do the results from a reasonable search produce)
What if the debtor changes his/her name from what it is on the financing statement? (e.g. gets married)
If the debtor so changes its name that a filed financing statement becomes seriously misleading the financing statement is effective to perfect a security interest in collateral acquired by the debtor before or within 4 months after the change. It is not effective to perfect a security interest in collateral acquired by the debtor more than 4 months after the change (unless an amended financing statement is filed within the 4 months that renders the financing statement not seriously misleading)
Will a security interest in Hilda’s hats be perfected by a properly filed financing statement that describes the collateral as “inventory?” Description of the collateral in a financing statement
Yes - Art. 9 categories work, normal vocab works (here there is flexibility as before) she could have described the collateral as hats
Will a security interest in Hilda’s hats be perfected by a properly filed financing statement that describes the collateral as “all assets” or “all personal property?”
Valid in the financing statement; invalid in security attachment
Will errors in the secured party’s name effect the perfection?
Because searches are not conducted under the secured party’s name, an error in the name of the secured party will not be seriously misleading (though, in an appropriate case, this type of error may give rise to an estoppel in favor of a particular holder of a conflicting claim to the collateral
How may a debtor authorize the filing of a financing statement?
- Any signed writing (e.g. the security agreement itself may have it)
- Ipso Facto authorization = authenticates - Debtor signs security agreement, and authorized
- BAR TIP - Debtor signed the security agreement, but the bank forget them to sign the authorization
What is the general rule for filing a financing statement when there are multiple states involved in the transaction?
The general rule is that you file in the state where the debtor is located, the debtor is located in the state where he is domiciled (principal residence)
- If the debtor is a business or a corporation than they are located where they are incorporated (do not go for the Bar headfake, that they are located anywhere else)
- If a partnership or something similar than they are located where in the principal place of business and if more than one than can be located at chief executive offices
What if the creditor is perfected as to a debtor who lives in NC and the debtor moves to UT?
The secured party will become unperfected after 4 months after the move, UNLESS he files a new financing statement with the state to where the debtor moves within the 4 months
What if the creditor is perfected as to a debtor who is located in NC and the collateral is transferred to a new debtor in UT?
The secured party will become unperfected after 1 year after the collateral moves, UNLESS he files a new financing statement with the state to where the collateral moves within the 1 year
How long is a financing statement valid for?
5 years from the date of filing
How may a financing statement be extended beyond 5 years?
By filing a continuation statement -the continuation statement must be filed in the last 6 months of the five-year “life” of the financing statement (i.e., between 4.5 and 5 years)
What is perfection as to the proceeds?
If a secured party has a perfected security interest in collateral, a secured party automatically has a perfected security interest in whatever proceeds the debtor receives in exchange for that collateral for 20 days. To remain perfected in those proceeds beyond 20 days, the secured party must take new action to perfect its interest UNLESS:
- The proceeds are identifiable cash proceeds, or;
- The security in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral (sometimes called the “same office” rule)
S loans money to D and takes a security interest in D’s inventory. S perfects its security interest by filing a financing statement with the secretary of state. D trades some of its inventory to X for some equipment. S remains perfected as to the equipment.
Equipment is now proceeds, yes attachment if identifiable, invoice was traded for the collateral
Is it perfected? Yes - for 20 days then,
Equipment is not cash (part 1 not met), we dont have to do a thing
S loans money to D and takes a security interest in D’s inventory. S perfects its security interest by filing a financing statement with the secretary of state. D sells some inventory for cash, and uses the cash to purchase some equipment. Unless the financing statement’s description was broad enough to include the equipment, S would need to file a new financing statement within 20 days to be perfected as to the equipment.
- Same Office Rule: Filed in the same office, but cant use cash to purchase the proceeds, on the 21st day we are unperfected, now we have to amend the financing statement to cover the the equipment or file a new one
- Sell inventory on credit which creates accounts, this is a same office rule exception, this is a classic same office rule event
What if there is change in the Use of Collateral:
If the debtor changes its use of the collateral (e.g., equipment to inventory), the filed financing statement (with the description of “equipment”) remains effective to perfect the security interest. The secured creditor has no duty to monitor the collateral or to amend the financing statement even if it knows that the description is seriously misleading
What is priority?
A situation where the secured party and some third party are claiming the same collateral. The third party may be another secured party, a purchaser of the collateral, or a creditor who has obtained a judgment against the debtor. There are rules that specify which party is entitled to first satisfy its claim out of the collateral.
What is the general rule for a secured party v. secured party?
The first to file or perfect, whichever occurs first, has priority.
Debtor needed money for his clothing business. He went to First Bank and Second Bank, asking each to loan him money and offering his inventory as collateral. They each made him sign a security agreement and a financing statement. First Bank filed first, on March 10, but did not loan Debtor any money (nor make any commitment to do so) until June 15. On April 20, Second Bank loaned Debtor the money and filed a financing statement. Debtor paid neither bank. Did both banks have a perfected security interest, assuming they both filed in the proper place?
Yes, they both attached and performed one of the five methods of perfection
Debtor needed money for his clothing business. He went to First Bank and Second Bank, asking each to loan him money and offering his inventory as collateral. They each made him sign a security agreement and a financing statement. First Bank filed first, on March 10, but did not loan Debtor any money (nor make any commitment to do so) until June 15. On April 20, Second Bank loaned Debtor the money and filed a financing statement. Debtor paid neither bank. Which Bank has a superior right to the inventory?
First Bank wins, the fight rule is: First to file or perfect, so each creditor can choose; First Bank perfected on June 15, and First Bank filed on March 10 - Second Bank perfected on April 20, and Second Bank filed on April 20
On February 1, A lends D $5000 and takes a security interest in D’s equipment. On March 1, B lends D $3000 and takes a security interest in the same equipment. B files a financing statement on March 5. A does not file a financing statement until March 20. Whose claim has priority?
B wins - This is a secured party v. secured party and B perfected first
What is the general rule for an unperfected secured creditor v unperfected secured creditor?
The first to attach has priority
On March 1, A loans D $2000 and takes a purchase money security interest in consumer goods. No financing statement is filed. On April 1, B obtains a non-purchase money security interest in the same consumer goods. B files a financing statement on April 2. D is unable to pay A or B. Who has priority?
A wins, automatically perfected (PMSI and Consumer Goods)
What is one of the special rules in conjunction with a PMSI that allows you to jump other creditors in line?
Purchase money security interests in goods other than inventory or livestock (so equipment): A purchase money security interest in such goods has priority over a conflicting security interest in the same goods or its proceeds if the purchase money security interest is perfected at the time the debtor received possession of the collateral or within 20 days thereafter.
On May 1, D buys equipment from A on credit, and A retains a security interest in the equipment. A delivers the equipment to D on May 5, but does not file a financing statement until May 12. In the interim, D borrows money from B, who obtains a security interest in the same equipment and files a financing statement on May 10. D defaults, and the value of the equipment is less than the amount owed to both A and B. Who has priority?
A wins under the special rule, I need to spot the PMSI in the hypo, PMSI in equipment, and perfects within 20 days, if you do not file within 20 days you blow it
On October 1, A loans money to D and obtains a security interest in “all equipment now owned or hereafter acquired” by D. A filed a financing statement that same day. On November 5, B sold D some new equipment on credit, retaining a security interest in it. This new equipment was delivered to D on November 10. On November 20, B filed a financing statement. Which security interest has priority to this new equipment?
B does, under the special rule, PMSI and within 20 days
What is the general rule for a PMSI in inventory or livestock?
A purchase money security interest in inventory or livestock has priority over a conflicting security interest in the same inventory or livestock (as well as proceeds that are chattel paper, instruments and identifiable cash proceeds) if, before the debtor receives possession of the inventory or livestock, the secured party (1) perfects, and (2) sends an authenticated notification to holders of previously filed conflicting security interests in the collateral. The holder of the conflicting security interest must receive this notice within five years before the debtor receives possession of the inventory (i.e., the notification is effective for deliveries of the same type of collateral for 5 years).
On June 5, A obtains and perfects a security interest in all of D’s inventory “now owned or hereafter acquired.” On July 2, D buys inventory from B on credit and B retains a security interest in the inventory. On July 3, B files a financing statement and sends notification of the transaction to A. B delivers the inventory to D on July 6. D subsequently defaults on its obligations to A and B, and the value of the inventory is less than both these obligations. Who has priority?
B wins under the special rule
*If you are lending against inventory, there is a way to jump ahead of people (this is the one PMSI you dont have to know)
If B had never sent notification to A under the rule than A would have one, I must make sure that all of the elements are met
What is the general rule for conflicting purchase money security interests (PMSI’s)?
The Code says that a seller purchase money security interest has priority over a financer purchase money security interest, otherwise the first to perfect wins
What is the Special priority rules for investment property? 4
- A security interest perfected by control has priority over a security interest perfected by any other method (filing or automatic)
- If conflicting security interests each were perfected by control, they rank according to the time of obtaining control
- A security interest granted to a debtor’s intermediary has priority over a security interest granted by the debtor to another secured party (unless the intermediary agrees otherwise)
- Except as provided in (1), (2), or (3) above, the first to file or perfect rule governs priority questions (default)
What are the special rules for deposit security accounts? 4 (These are hot on the bar right now, especially 3 & 4)
(1) A security interest perfected by control has priority over a security interest perfected via proceeds.
(2) If conflicting interests each were perfected by control, they rank according to the time of obtaining control.
(3) A secured party who has obtained control by putting the deposit account in its own name has priority over all other secured parties with control.
(4) A bank that has control because it maintains the deposit account has priority over all other secured parties with control except a secured party who has obtained control by putting the deposit account in his name.
* Note: As a general rule, a bank with which a deposit account is maintained may exercise any right of recoupment or set-off against a secured party that holds a security interest in the deposit account. If, however, the secured party has control of the deposit account by putting the account in its own name, then any set-off exercised by the bank based on a claim against the debtor is ineffective
* Note Also: If a debtor transfers money or deposit account funds (e.g., by writing a check or making an electronic funds transfer), the transferee of the funds takes free of a security interest in the funds unless the transferee acts in collusion with the debtor in violating the rights of the secured party
Secured Party v Buyer of Collateral general rule
If you buy something with a lien on it than you bring it home with the Lien still on it
2 EXCEPTIONS
1. Debtor authorizes the sold item to be free of the security
2. Unauthorized sales
What is the definition of an authorized sale?
If the sale is authorized by the secured party, the buyer takes free of the security interest. This authorization may be express, or it may be implied from the type of sale or from the seller’s conduct.
Bank extends credit to an appliance store and obtains a security interest in the store’s inventory. The security agreement gave no express authority to sell any of this inventory. The appliance store sells a washer and dryer to Harry Homebody. Is this sale authorized?
Yes - Implicit authorization for inventory sold to an ordinary consumer
Bank extends credit to an appliance store and obtains a security interest in the store’s inventory. The security agreement gave no express authority to sell any of this inventory. The appliance store had sold its entire inventory to L, a liquidation sales company. Would this be authorized?
No - Not an ordinary consumer - L brought it home with a lien
Bank extends credit to D, a hog farmer, and obtains a security interest in D’s hogs. The security agreement provides that D would not sell his hogs without written consent of the bank. Despite this provision, the bank acquiesced in over 100 sales of these hogs over a five-year period. Were these sales authorized?
Yes - Implicit authorization by acquiescence (they waived their right to object)
What is the general rule for an unauthorized sale?
A buyer in the ordinary course of business (other than a person buying farm products from a person engaged in farming operations) takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.
What is a buyer in the ordinary course of business?
A buyer in the ordinary course means a person who buys goods in good faith, without knowledge that the sale violates the rights of another person (usually the secured party) in the goods, and in the ordinary course from a person in the business of selling goods of that kind.
Carla Consumer buys a new refrigerator from Appliance World, a retail store. Several months later, a representative of State Bank came to Carla’s home demanding that she turn over the refrigerator. The representative explains that State Bank has a perfected security interest in all of Appliance World’s inventory, and that because Appliance World has defaulted on its loan, the bank was repossessing. What should Carla tell the bank’s representative?
Legal Analysis: GR - when she brought it home had the lien, but the exception will probably apply here
yes, here is where the exception can apply run through the steps, debtors create the security interest, Carla would win under both exceptions *Pay in cash, then they cant find you
The Bogarts purchased a sailboat with money borrowed from State Bank, which took a security interest in the sailboat and promptly perfected. Three months later, the Bogarts sold the sailboat to Mabel’s Marina, which sells new and used boats. A month later, the sailboat was sold to Nudnik. State Bank has tracked down the sailboat, and seeks to enforce its security interest in the sailboat which is in Nudnik’s hands. Can it enforce its security interest in the sailboat? [Note: The security interest was created by the Bogarts and not by Nudnik’s seller]
The Smart student says Nudnik is a buyer in the ordinary course, the debtor is the Boegarts, and so Nudnik does not have an exception
The question is what was it in the hands of the debtor
What do Buyers not in the ordinary course of business take?
Take subject to perfected security interests. They take free from unperfected security interests (and unperfected agricultural liens) unless they know of the security interest
Finance Company had a perfected security interest in Acme Manufacturing Company’s equipment. Without the knowledge of Finance Company, Acme sold a piece of its equipment to Baker Manufacturing Company. Acme defaulted on its loan to Finance Company, and Finance Company seeks to repossess all equipment. Can Finance Company recover the equipment that Acme sold to Baker?
Yes - Baker is not a buyer in the ordinary course, Baker takes subject to the perfected security interest of finance; HOWEVER if if Finance Company’s interest were unperfected at the time of the sale? - Than baker would take free of the unprotected security interest
What is the special rule on consumer to consumer sales?
In the case of consumer goods, a buyer takes free of a security interest even though it is perfected if he buys 1. without knowledge of the security interest, 2. for value, and 3. for his own personal, family, or household purposes, unless prior to the purchase the secured party has filed a financing statement covering such goods.
Note: The goods must be consumer goods in the hands of both the buyer and the seller.
Consumer buys a new television set on credit from S. S retains a security interest but does not file a financing statement. Consumer holds a garage sale and sells the television to Irma (who will use the television in her home). Does Irma take free of S’s security interest?
Yes under the special rule of consumer to consumer sales, if Irma knew of the security interest than she would not take free, the buyer must not know, also if S had perfected before Irma bought the TV than Irma would not have taken free; (I need to know the analysis
Secured party v judgment lien holders general rule:
An unperfected security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfected. If the security interest is perfected before the person becomes a lien creditor, the security interest has priority.
KEY: Look at the time of perfection of the security interest and the time of the levy by the sheriff.
If the security interest is perfected before the sheriff levies, the security interest has priority.
If levy precedes perfection of the security interest, the judicial lien has priority.
*NOTE: Technically, the priority rule for secured party v. judgment lien holder is that the secured party has priority (1) if the secured party perfected before the judgment lien holder got its lien; OR (2) if the secured party obtained a security agreement and filed a financing statement before the judgment lien holder got its lien.
What is a judgment lien holder under Article 9?
Article 9 defines a “lien creditor” as “a creditor who has acquired a lien on the property involved by attachment, levy or the like.” While Article 9 does not clearly define the moment when the status of “lien creditor” arises, the lien obtained by judicial proceedings must attach to the collateral. An unsecured creditor who has obtained a judgment and has levied on that judgment is a “lien creditor.”
On April 5, S loans $5000 to D and obtains a non-purchase money security interest in D=s equipment. On April 10, L tries to collect her $20,000 judgment against D by having the sheriff levy on D’s equipment. S perfects its security interest by filing on April 13. The equipment is worth only $20,000. Who has priority?
L, levy before perfection
-What if S’s security interest had been perfected by filing on April 8?
A: Than S wins, perfection before levy
Special Rule: PMSI v Lien Judgment Holder:
If the secured party files with respect to a purchase money security interest within 20 days after the debtor receives possession of the collateral, he takes priority over the rights of a lien creditor which arises between the time the security interest attaches and the time of filing
What is the general rule for Priority for Future Advances?
A security agreement can secure present and future advances. A future advance by a secured creditor has priority over a lien creditor if the future advance is made (1) without knowledge of the lien, OR (2) within 45 days of the lien arising, OR (3) pursuant to a commitment entered into without knowledge of the lien
Secured party v. statutory lien claimants (mechanical lien holders) general rule
Statutory lien wins - Beats even a perfected security interest (they have a “privileged” status)
Bank has a perfected security interest in a car owned by D. D takes the car to Bubba’s garage for repairs. Bubba makes the repairs, but D fails to pay Bubba. By statute (and common law) Bubba has a lien on the car. D also defaults on his loan to Bank. Who has priority to the car?
Statutory lien wins - Beats even a perfected security interest (they have a “privileged” status)
What is the definition of default?
The right of the secured party to proceed against collateral is normally triggered by default. But Article 9 does not define the term “default.” Typically, grounds of default are specified in the security agreement (e.g., failure to make payment when due, selling collateral without the secured party=s permission, failing to keep the collateral insured). In the absence of such a specification, default has been restricted to failure to perform or pay the obligation when it is due.
- Look for late or missed payments
- Also look for a possible waiver by the secured party of late or missed payments
What is self-help repossession?
After default the secured party is entitled to take possession of the collateral without judicial process if this can be done without “breach of the peace.” When a secured party breaches the peace, he loses the authorization to repossess, may be sued for conversion (and possibly assault, battery, trespass, etc.), and is liable for actual (and frequently punitive) damages
What constitutes a “breach of the peace” under self-help repossession?
Any conduct by the secured party that has the potential to lead to violence is a breach of the peace. Generally, physical presence by the debtor plus verbal objection is enough to create a breach of the peace
-Physical presence + verbal words or physical action
Generally the bank hires a repossession company
Several burly men come to Wanda’s house and inform her that they have come to repossess her dinette set. Wanda tells them to go away, but one of the men tells her: “get your butt out of the way if you don’t want to get hurt.” Wanda takes his advice, and the dinette set is repossessed. Has a breach of the peace occurred?
Yes, physically present, verbal, has a right to sue the bank
While D is off at work, S enters an open window of D’s home to repossess a stereo. S leaves through the same window, doing no damage to the premises. Has a breach of the peace occurred?
Probably, unauthorized entry into a home is likely a breach of the peace (residential more likely) - provokes suspicion and possibility for violence
While D is asleep in his home, S hotwires D’s car and drives it from D’s driveway. Has there been a breach of the peace?
No - This is a perfect self help repossession - Night time is the right time
What if a car was taken from an open garage at D’s home late at night?
Attached garage more likely to be seen as part of the residence, more likely to be a breach of the peace
Courts all over the place, we are looking at a majority rule jurisdiction
While D’s restaurant is closed, S picks a lock to gain entry, and repossess several pieces of equipment. Has there been a breach of the peace?
Commercial premises less likely to be a breach of the peace
There are cases that say if you pick the lock and do not re-lock the premises than there is a breach of the peace, leave the debtors premises open to thieves
*Note: If self-help is unavailable, the secured party can use judicial process (e.g., replevin) to get the goods (you can use the Sheriff and the Sheriff can use force)
What is retention of collateral (strict foreclosure)?
After default and repossession, the secured party may propose retaining the collateral in full or partial satisfaction of the debt, if the debtor does not object and no other creditor with a lien in the item does not object
How does a creditor retain possession of collateral?
- A secured party wishing to do so must send its proposal to any other secured party from whom the foreclosing party has received notice of a claim to the collateral, and any other secured party who has perfected a security interest in the collateral by filing a financing statement or noting its security interest on a certificate of title. If a notified party objects within 20 days after the secured party sent notice, the collateral must be disposed of by sale.
- A secured party wishing to retain the collateral also must obtain the debtor=s consent. The debtor consents by either: (1) agreeing in an authenticated record after default, or (2) in the case of a full strict foreclosure, failing to make an authenticated objection within 20 days after the secured party sent notice (a debtor cannot consent to a partial disclosure in this manner).
What is the resale of collateral?
After default, the secured party may sell, lease, license, or otherwise dispose of the collateral in its condition when repossessed or after reasonable preparation. The sale may be either public (auction) or private, and may be by one or more contracts. The sale discharges the security interest under which the sale is being made and all subordinate security interests. The purchaser, however, is still subject to superior security interests.
What is reasonable notification for the resale of collateral?
Reasonable notice that is authenticated by the secured party (the notice cannot be oral) must be given to the debtor and any sureties on the debt, and (except in the case of consumer goods) to any other secured parties who have notified the secured party of their interests, and any secured parties who have perfected by filing a financing statement or making a notation on a certificate of title. This notice is not necessary when the collateral is perishable or threatens to decline rapidly in value or is of a kind ordinarily sold in a recognized market (e.g., stock). The debtor or the surety may, after default, in an authenticated agreement waive the right to notice.
What is the definition of timeliness within the notification requirement when reselling collateral?
Notice must be sent within a reasonable time before the sale (a question of fact). In nonconsumer transactions, notice is deemed to be sent within a reasonable time if it is sent 10 days or more before the time of sale
What is the definition of content within the notification requirement when reselling collateral?
The content of the notice depends on the type of sale and type of collateral.
(1) The statute provides “safe harbor” notice forms.
(2) For a public sale, notice of the time and place of sale is required.
(3) For a private sale, notice of the time after which the sale will occur must be given (e.g., the car will be sold at a private sale after January 1, 2006).
(4) Extra information is required for consumer goods.
What is a commercially reasonable sale when reselling collateral?
Every aspect of the sale (including the method, manner, time, place and terms) must be commercially reasonable
**This is important to know and remember, on the bar say “commercially reasonable”
What is a Secured party buying collateral when reselling collateral?
The secured party may buy at any public sale, but may buy at a private sale only if the collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations.
D owes S $20,000, and S has a security interest in D’s inventory. D defaults and S properly repossesses and resells the collateral. The sale yields only $15,000. What are S’s rights?
S gets a $5000 deficiency judgment - Sheriff can seize sell and pay you
Is there a right to a deficiency judgment?
General rule: If the secured party fails to conduct a commercially reasonable sale, there is a rebuttable presumption that the sale proceeds equal the amount of the debt.
What is the debtors right to redeem?
Any time before the secured party has resold the collateral or has entered into a contract for its disposition, or the obligation has been discharged by the secured party’s retention of the collateral, the debtor may redeem the collateral. To do so, the debtor must tender fulfillment of all obligations secured by the collateral. Because most security agreements contain an acceleration clause, the debtor typically must tender the entire balance in order to redeem.
D buys a car from S on credit, with S retaining a security interest in the car. D is to make 60 monthly payments of $200 (a total of $12,000). After making five monthly payments (a total of $1000), D defaults and S repossesses. How much will D have to pay to redeem?
Assuming that S accelerates, about $11,000
You have to repay the creditor all you owe him and before he sells the item,
Acceleration clause will probably be in the K
