Secured Transactions Flashcards
What is a Secured Transaction?
A transaction intended to create a security interest in personal property or fixtures.
What is a Sale on Credit?
A sale on credit (also known as a credit sale) is a sale in which the buyer does not pay the full purchase price at the time of the sale.
What is a Debtor?
The person who owes payment or performance of the obligation secured.
- The person who owes the money.
What is a Secured Party?
A secured party (or secured creditor) is a party in whose favor there is a security interest. They are a creditor with special collection rights (security interest).
- The person who money is owed to.
What is a Security Agreement?
An agreement between a debtor and secured party that creates the security interest.
- A contract between a debtor and creditor. However, it must have language creating a 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 (default) occurs, the interest is activated and the creditor gains rights in the debtor’s collateral.
What is Default?
An event causing a security interest to spring to life.
What is collateral?
Property subject to a security interest.
What is a Purchase Money Security Interest? How is it created?
A purchase money security interest (“PMSI”) is a special type of security interest in goods. A PMSI can arise in two ways:
(1) The secured party (i) sells the goods to the debtor on credit AND (ii) retains a security interest in the goods sold (Seller-Financed PMSI), or
(2) The secured party (i) loans the funds to the debtor to enable the debtor to buy specific collateral, (ii) those funds are used by the debtor to acquire the specific collateral, and (iii) the creditor takes a security interest in that collateral (Financer-Financed PMSI). The PMSI secures whatever portion of the purchase price still has to be paid.
- The second type is a third party providing the funds.
- In the second type, if the debtor doesn’t use the actual loaned dollars to buy the item, a PMSI security interest can’t be established–it’s just a normal security interest.
- PMSI IS A VERY IMPORTANT CONCEPT!!! THEY FLIP A LOT OF GENERAL RULES.
What is an After-Acquired Property Clause?
A grant of a security interest in property to be obtained in the future.
- A contract provision that the debtor agrees to that creates this interest in the future.
What is a Future Advances 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, in which case a new security agreement is not needed when a future advance is made.
- This is a provision in the contract.
- Making something collateral for a loan that may be made in the future.
What is Attachment in Secured Transactions?
This deals with the steps legally necessary to create a security interest that is effective against the debtor.
- A creditor is not a secured creditor until attachment!
- IMPORTANT!
What is Perfection in Secured Transactions?
This deals with the steps legally necessary to create a security interest that is effective against the world (as opposed to just the debtor).
- This gives them rights vis a vis other creditors.
What is a Financing Statement?
A document used to convey notice of a security interest.
- Filing this in the public records is the most common way to “perfect” a security interest.
Why is classification of collateral important?
Classification of the collateral is important because many provisions of Article 9 (particularly those dealing with perfection and priorities) make legal distinctions based on the type of collateral.
What are goods?
Tangible, movable, personal property.
What are the ways to categorize goods?
Classified based on how the collateral is used (by the debtor). The categories are:
- Consumer goods
- Equipment
- Farm products
- Inventory
NOTE: these categories are mutually exclusive. Can only be one of the things.
What are consumer goods?
Consumer goods: goods used OR bought primarily for personal, family, or household purposes.
What is equipment?
Equipment: goods that are used or bought for use primarily in a business.
- Note: This is also the default (catch-all) category for goods (if the collateral is a good, and it doesn’t fit the definition of consumer goods, inventory, or farm products, it gets classified as equipment).
What are farm products?
Farm products: crops OR livestock OR supplies used or produced in farming operations OR products of crops or livestock in their unmanufactured states (EX: ginned cotton, wool-clip, maple syrup, milk, and eggs) IF they are in the possession of a debtor engaged in farming operations (there always needs to be a farmer involved).
What is Inventory?
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 (EX: raw materials, consumables, and rentals).
What is Semi-Intangible and Intangible Property?
Intangible and semi-intangible property are assets that lack physical substance but still hold value that can be used as security. There are eight types of intangible or semi-intangible collateral. The category into which intangible or semi-intangible collateral is placed depends on the nature of the collateral (rather than its use):
- Instruments (EX: promissory note)
- Documents (EX: receipt to farmer from silo operator when farmer stored grain there)
- Chattel paper (EX: written contract where car buyer purchasing on credit promises to pay the car dealership for the car and grants the dealership a security interest in the car)
- Investment Property (EX: stock certificate)
- Accounts (EX: store sells some tires on credit)
- Deposit Accounts (EX: checking account)
- Commercial Tort Claims (EX: right to sue corp for stealing an employee)
- General Intangibles (EX: patent, trademark, security interest)
What are Instruments?
Pieces of paper representing the right to be paid money, like promissory notes, drafts (EX: checks), and certificates of deposit.
What are Documents under Article 9?
A document that represents the right to receive goods (EX: a bill of lading, a warehouse receipt).
What is 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.
- A “record” is information that is stored in either a tangible medium (EX: written on paper), or an intangible medium (EX: electronically stored). Chattel paper that is stored in an electronic medium is also called “electronic chattel paper.”
What is Investment Property?
Includes items such as stocks, bonds, mutual funds, and brokerage ACCOUNTS containing such items.
- Remember the definition of accounts with this one!
What are Accounts under Article 9?
Includes a RIGHT TO PAYMENT (that is not evidenced by an instrument or chattel paper) for property sold or services rendered.
- Note: A contractual obligation arising from a loan of money is NOT an account—it is a general intangible. Not a bank account.
What is a Deposit Account?
An account maintained with a bank.
- Note: In general, Article 9 only applies to security interests in non-consumer deposit accounts and account monies that are claimed as proceeds of other collateral.
What is a Commercial Tort Claim under Article 9?
A tort claim where (1) the claimant is an organization (EX: a partnership or corporation), 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.
- Note that Article 9 also applies to noncommercial tort claims that are claimed as proceeds of other collateral.
What are General Intangibles under Article 9?
Any personal property not coming within the scope of the other definitions, such as patent and trademark rights, copyrights, and goodwill. A general intangible under which the account debtor’s principal obligation is a monetary obligation is a payment intangible.
- This is the default for intangible property.
What are the requirements for creating Attachment under Article 9?
(1) Either the debtor must authenticate a Security Agreement granting the creditor a security interest in the collateral that describes the collateral OR the creditor must take possession or control of the collateral; (2) Value given by creditor; (3) Debtor has rights in the collateral.
- The agreement between parties to create a security interest (security agreement), must be evidenced by (1) the creditor TAKING POSSESSION of the collateral, (2) an AUTHENTICATED security agreement (in writing), or (3) the creditor taking CONTROL of non-consumer deposit accounts, electronic chattel paper, and investment property (control depends on the type of collateral).
When a security agreement is in writing, what are its requirements to be valid?
(1) Agreement evidenced by a record showing intent to create a security interest (specific language–though nothing specific is required); (2) Agreement must be authenticated by the debtor (usually debtor’s signature, though any symbol will work); (3) Description of collateral (“reasonably identify”–allowed to use Article 9 categories; can say “all debtor’s equipment”).
What does it mean for “value” to be given in a security agreement? What is the main question in a value analysis?
Anything that would be consideration under contract law counts as value under Article 9.
- Even broader than contracts consideration because here, past consideration WILL work.
- The question is whether the creditor gave value to the debtor (the debtor always implicitly provides value by promising to repay the loan).
What does it mean for a debtor to have rights in collateral for security agreement purposes?
The debtor must have some ownership interest in the collateral.
When do a creditor’s rights attach?
The instant the last of the three requirements are met (agreement, value, and debtor rights in collateral).