Secured Transactions Flashcards
What is a purchase money security interest?
Seller-Financed PMSI: The secured party sells the goods to the debtor on credit and retains a security interest in the goods sold.
Financer-Financed PMSI: A creditor loans funds to the debtor to enable the debtor to buy specific collateral, those funds are used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral.
What are the categories of goods?
Consumer Goods: Goods used or bought primarily for personal, family, or household purposes.
Equipment (Default Category): Goods that are used or bought for use in a business.
Farm Products: Crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states if they are in the possession of a debtor engaged in farming operations.
Inventory: Goods held for sale or lease, goods that are to be furnished under service contracts, and materials used or consumed in a business in a short period of time.
What are the categories of intangible goods?
Instruments: Pieces of paper representing the right to be paid money.
Documents: A document that represents the right to receive goods.
Chattel Paper: A record or records which evidence both (1) a monetary obligation, and (2) a security interest in or a lease of specific goods.
Investment Property: Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items.
Accounts: Includes a right to payment (that is not evidenced by an instrument or chattel paper) for property sold or services rendered.
Deposit Accounts (Nonconsumer): An account maintained with a bank.
Consumer Tort Claims: A tort claim where (1) the claimant is an organization or (2) the claimant is an individual, the claim arose out of the claimant’s business or profession, and the claim does not include damages for personal injury or the death of an individual.
General Intanigbles: General intagibles mainly include intellectual property. A general intangible under which the account debtor’s principal obligation is a monetary obligation is a payment intangible.
What are the rules for attachment?
Attachment deals with those steps legally required to give the secured party a security interest in the collateral that is effective as against the debtor.
Attachment arises when (1) the parties agree to create a security interest, as evidenced by (i) the creditor taking possession of the collateral, (ii) an authenticated security agreement, or (iii) the creditor taking control of nonconsumer deposit accounts, electronic chattel paper, and investment property, (2) the secured party gives value, and (3) the debtor has rights in the collateral.
What are the requirements for a valid security agreement?
(1) The agreement is evidenced by a record showing an intent to create a security interest, (2) the agreement is authenticated by the debtor, (3) a description of the collateral that reasonably identifies it.
Note: Supergeneric descriptions of collateral are inadequate.
What is the scope of the security interest?
After-Acquired Property: If the security agreement includes an after-acquired property clause, the secured party’s security interest will reach property acquired by the debtor after the fact. An after-acquired property clause does not apply to consumer goods unless the debtor acquires rights in the goods within 10 days after the creditor gives value.
Exception: Even without an after-acquired property clause, a security interest will attach automatically to collateral of a type that’s rapidly depleted and replenished, such as accounts and inventory.
Proceeds: A security interest in collateral automatically attaches to identifiable proceeds of the collateral.
Lowest Intermediate Balance Rule: If cash proceeds are commingled in a bank account, the proceeds are the lowest balance accrued starting at the time the proceeds were first deposited and ending at the time the rule is applied.
Supporting Obligations: A security interest automatically attaches to a guarantee or a surety for the collateral.
What are the rules for perfection?
Perfection deals with those steps legally required to give the secured party an interest in the collateral that is effective against the world.
PMSI in Consumer Goods: A PMSI in consumer goods is perfected as soon as it attaches.
Possession (Pledge): Where the secured party takes actual possession of the collateral, the security interest is perfected from the moment of possession and continues as long as possession is retained.
Control: Security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by “control.”
Example - Nonconsumer Deposit Accounts: Security interests in nonconsumer deposit accounts can only be perfected by control. Control is automatic if the secured creditor is a bank maintaining the nonconsumer deposit account. A non-bank party can obtain control over a nonconsumer deposit account by (1) putting the deposit account in the secured party’s name or (2) entering into a control agreement with the debtor and the bank.
Motor Vehicles: Security interests in motor vehicles required to be titled can ONLY be perfected by notation on the certificate of title issued by the state. Exception - Car Dealerships: Security interests created by dealers in vehicles held in inventory for sale or lease are perfected by filing a financing statement under the ordinary Code rules.
What are the rules for perfection by financing statement?
The financing statement must contain (1) the debtor’s name and mailing address, (2) the secured party’s name and mailing address, and (3) a description of the collateral. Additionally, the financing statement must be authorized in a signed writing (an authenticated security statement is also adequate). This statement is generally filed in the office of the secretary of state, but financing statements for timber to be cut, minerals, and fixures are filed in the county where a mortgage on real estate is filed.
Debtor’s Name: If the debtor is an individual, it must be the name included in an unexpired driver’s license. Otherwise, the name is the debtor’s personal name and surname. If the debtor is a registered organization, it must be the name in public organic records.
Errors in the debtors name will not invalidate a financing statement unless the error was seriously misleading.
If the debtor’s name changes and becomes insufficient, the financing statement is effective only against collateral acquired by the debtor before the name became insufficient and within 4 months after.
Description of Collateral: The description of collateral must reasonably identify the collateral. Supergeneric descriptions of collateral are adequate.
Continuations: A financing statement is valid for 5 years. A continuation statement may be filed, good for an additional 5 years. The continuation statement can only be filed within 6 months before the lapse of the filed statement.
What law governs perfection?
The law of perfection is based on where the debtor is located. If the debtor is an individual, they are located in the state of their principal residence. If the debtor is a registered organization, the debtor is located in the state under whose law it is organized. If the debtor is an unregistered organization, it is located at its place of business if it only has one place of business or at its chief executive office if it has more than one place of business.
Movement of Collateral: If the debtor moves from one state to another, the security interest generally will become unperfected 4 months after the debtor moves unless the secured party files a financing statement in the new jurisdiction before that 4-month period is up. If collateral is transferred to a new owner who is located in a different state, the security interest will become unperfected one year after the collateral moves.
What are the rules for temporary perfection?
If a secured party has a perfected security interest in collateral, the secured party automatically has a perfected security interest in any proceeds of the collateral for 20 days after receipt of the proceeds.
The proceeds will be perfected beyond this period if (1) the proceeds are identifiable cash proceeds; (2) (i) the security interest in the original collateral was perfected by filing a financing statement, (ii) a security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral, and (iii) the proceeds were not purchased with cash proceeds of the collateral (“same office” rule); or (3) the security interest is perfected in the 20-day period.
Note: The same office rule comes up in swaps. The most common example is when the debtor has inventory on credit and accounts are produced.
What are the rules for priority?
Perfected Secured Party vs. Perfected Secured Party: Priority goes to the party that first perfects or files the financing statement.
Unperfected Secured Party vs. Unperfected Secured Party: Priority goes to the first party to attach.
Unperfected Secured Party vs. Perfected Secured Party: The perfected secured party has priority.
PMSI Superpriority - Goods Other than Inventory and Livestock: A PMSI in goods other than inventory and livestock has priority over conflicting security interests in the same goods or their proceeds if the interest is perfected before or within 20 days after the debtor receives possession of the goods.
PMSI Superpriority - Inventory and Livestock: A PMSI in inventory or livestock has priority over conflicting interests in the same inventory or their proceeds if (1) it is perfected at the time the debtor gets possession of the inventory and (2) all other secured parties receive authenticated notice of the PSMI before the debtor receives possession of the inventory. The notice is effective for five years.
Conflicting PMSIs: A secured party seller-financed PMSI has priority over a secured party with a financer-financed PMSI. Otherwise, the first secured party to file or perfect prevails.
Investment Property: A secured party that perfects by control prevails over all other secured parties. If multiple secured parties perfected by control, earlier control prevails over later control, unless one of the secured parties with control is a securities intermediary, in which case the securities intermediary will prevail.
Deposit Accounts: A secured party that perfects by control prevails over all other secured parties. If multiple secured parties perfected by control, earlier control prevails over later control subject to the following priority hierarchy from best to worst: (1) obtaining control by placing the deposit account in the secured party’s name, (2) the secured party is a bank and the bank has control over the deposit account, and (3) the secured party has a control agreement with the bank and the debtor.
Secured Party vs. Judicial Lien Creditor: A judicial lien creditor prevails over the holder of a security interest in collateral if the lien creditor becomes such before the security interest is perfected. On the other hand, a prior perfected security interest has priority over a judicial lien.
When does a security interest remain on collateral sold or leased to a buyer or leasee?
Secured Party vs. Buyer or Other Transferee: When a buyer (or lessee) buys or leases something with a security interest on it, the security interest stays on the item.
Authorized Sale: If the sale or lease of the collateral is authorized by the secured party free of the security interest, the transferee takes free of the security interest.
Unauthorized Sale: A buyer in the ordinary course of business (“BIOC”) takes free of a nonpossessory security interest in the goods created by the buyer’s seller, even though the security interest is perfected and even though the buyer knows of the security interest. A “buyer in the ordinary course” is one who buys goods (1) in good faith, (2) without knowledge that the sale violates the rights of another person in the goods, and (3) in the ordinary course of business from a seller in the business of selling goods of the kind purchased. If the buyer or lessee is not in the ordinary course of business, the buyer or lessee will take subject to perfected security interests and free from unperfected security interests.
Exception: If a secured party attaches a PMSI in the debtor’s collateral before the buyer or lessee without knowledge pays value and receives delivery, the secured party will have priority over the buyer or lessee if the secured party files within 20 days after the debtor receives the collateral.
Consumer-to-Consumer Sales: A buyer takes free of ANY security interest if the buyer takes (1) without knowledge of the security interest, (2) for value, (3) for the buyer’s own personal, family, or household purposes, and (4) before a financing statement covering the goods has been filed.
What are the rules for default?
Self-Help Repossession: After default, the secured party is entitled to take possession of the collateral without judicial process (that is, by “self-help”) if this can be done without a breach of the peace. A breach of the peace arises from conduct that has the potential to lead to violence, an in-person objection by the debtor to the repossession, and breaking and entering into a residence.
Strict Foreclosure: After default and repossession, the secured party may retain the collateral in full or partial satisfaction of the debt. The secured party must send notice of its proposal to retain the collateral to (1) any other known secured party and (2) 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. The secured party must also obtain the debtor’s consent. Consent can be obtained in an authenticated record or by failing to make an authenticated objection within 20 days after the secured party sends notice to the debtor.
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. Reasonable and timely written notice of the resale must be given to the debtor, known secured parties, and secured parties that perfect by writing. For a public sale, notice of the time and place of sale is required. For a private sale, notice of the time after which the sale will occur must be given. The notice must also describe the parties and the collateral. Every aspect of the sale must be commercially reasonable. If the collateral when sold doesn’t bring in enough to pay the expenses of the sale and the secured party’s debt, the secured party may recover any deficiency from the debtor.
Debtor’s 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 (as well as any surety or other secured party or lienholder) may redeem the collateral.
What happens if the secured party fails to comply with the UCC following a default?
Actual Damages: A secured party is liable for the actual damages caused by failure to
follow any of the Code’s rules.
Consumer Goods: If the collateral is consumer goods and the secured creditor violates the Code’s rules on default (for example, the sale isn’t commercially reasonable), the debtor is entitled to a minimum of 10% of the cash price of the goods plus an amount equal to all the interest charges to be paid over the life of the loan.
Deficiency Judgment: Generally, if the secured party fails to follow the Code’s rules on default, there is a rebuttable presumption that the sale proceeds equal the amount of the debt. In other words, the secured party presumptively loses any deficiency.
What are the rules for accession?
Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost. If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral. General priority rules apply, but a security interest in an accession is subordinate to a security interest in a whole (for example, a car) which is perfected by compliance with the requirements of a certificate-of-title statute.
