Secured Transactions Flashcards
Scope of Article 9
Article 9 of the UCC applies to ANY transaction intended to create a security interest in personal property or fixtures (not mortgages on real property).
A security interest gives a creditor the right to sell a debtor’s property in order to satisfy a debt.
Generally, in an Article 9 transaction, personal property or fixtures secure the payment of a debt or insure performance of a contract obligation with the property serving as collateral.
Article 9 Goods
Article 9 defines “goods” as all things that are moveable when a security interest attaches.
Article 9 Consumer Goods
Article 9 defines “consumer goods” as goods that are used mainly for personal, family, or household purposes.
Article 9 Inventory
Article 9 defines “inventory” as goods that are kept by a person for sale or lease (does not include goods that are only being held for repair).
ARTICLE 9 “ACCOUNTS”
A security interest in a debtor’s “accounts” covers any right to payment of a monetary obligation, whether or not earned by performance, for property that has been or is to be sold (i.e., accounts receivable). A secured party can collect directly from the person who owes the debtor if the debtor defaults.
Attachment
Attachment is essentially how a security interest is created. A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment. A valid attachment requires that:
- The secured party extends value to the debtor (almost any consideration will suffice);
- The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; AND
- A UCC Sec. 9-203(b)(3) condition is met
Perfection
Once the security interest attaches, it is enforceable. Perfection of the interest only enhances the secured party’s rights to the property serving as collateral. Generally, there are three different methods in which a security interest may be perfected:
- The filing of a financing statement or the security agreement with the state by an authorized party;
- Taking mere possession of a security interest in negotiable documents, goods, instruments, or money; OR
- Automatic perfection.
Automatic Perfection
The following security interests are perfected automatically when they attach:
- A purchase-money security interest in consumer goods; AND
- An assignment of accounts that does NOT transfer a significant part of the assignor’s outstanding accounts.
Priority of Purchase-Money Security Interests
Generally, PMSIs have priority over prior perfected security interests if the PMSI is properly executed. A PMSI is either:
- A security interest held by the seller of collateral to secure payment of all or part of the price; OR
- A security interest of a person that gives value to a debtor so that the debtor may acquire rights in or the use of collateral.
PRIORITY OF PERFECTED vs. UNPERFECTED INTERESTS
Generally, a perfected security interest has priority over a conflicting unperfected security interest in the same collateral.
PRIORITY OF MULTIPLE PERFECTED CREDITORS
Between multiple perfected creditors, the first to file obtains priority.
Some collateral is not subject to the state filing system or cannot otherwise be filed. In these instances, the first to perfect obtains priority.
Generally, knowledge of a prior unperfected interest will not prevent a potential secured party from filing first to obtain priority
Priority of Buyers in the Ordinary Course of Business
A buyer in the ordinary course of business is a person who buys in the ordinary course from a person in the business of selling goods of that kind. A buyer in the ordinary course of business takes the item free of a security interest created by the buyer’s seller even if the security interest is perfected and the buyer knows of its existence.
Shelter Principle. The protected buyer may sell the purchased collateral to a third-party free of the secured party’s security interest.
