Secured Transactions Flashcards
DEFINITION OF 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.
To spot a secured transaction, look for:
(1) a credit transaction (a 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.
Debtor
The debtor is the person who owes payment or performance of the obligation secure
Secured Party
The secured party (also called the “creditor”) is a lender, seller, or other person in whose favor there is a security interest (here, First Bank).
Security Agreement
The security agreement is the agreement between the debtor (Hilda) and the secured party (First Bank) that creates the security interest.
Security Interest
- A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation.
- It’s a contingent property interest in the debtor’s collateral that the debtor grants to the creditor.
- When that contingency (which is default) occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral.
Collateral
- Collateral is the property subject to a security interest
- It is property that the secured party can repossess upon default to ensure that the debt is pai
A PMSI can arise in two ways:
(1) Seller-Financed PMSI: The secured party sells the goods to the debtor on credit an
retains a security interest in the goods sold, or
(2) Financier-Financed PMSI: The creditor loans the 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. The PMSI secures whatever portion of the purchase price still has to be paid.
After-Acquired Property Clause: Security agreement
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
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 above), in which case a new security agreement is not needed when a future advance is made.
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.
- 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
Perfection
- 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.
Financing Statement
Document generally used to provide public notice of the security interest, and so to perfect the security interest.
TYPES OF COLLATERAL (high level)
- Goods
- Intangible or Semi-Intangible Collateral
“Goods” include ____
all things which are movable at the time the security interest attaches (including unborn animals and growing crops).
-> Goods also include fixtures (discussed below).
The category into which the good is placed depends on _____
how the debtor is using the collateral.
Category of goods:
- Consumer goods: goods used or bought primarily for personal, family, or household purposes
- Equipment—goods that are used or bought for use in a business. (+fallback category)
- Farm products—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
- 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
The category into which intangible or semi-intangible collateral is placed depends on _____
the nature of the collateral (rather than its use)
Intangible or Semi-Intangible Collateral - Categories
- Instruments—Pieces of paper representing the right to be paid money, like promissory notes, drafts (for example, checks), and certificates of deposit
- Documents—A document that represents the right to receive goods (for example, a bill of lading, a warehouse receipt)
- 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 (for example, written on paper), or an intangible medium (for example, electronically stored).
- 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.
-> Note: A contractual obligation arising from a loan of money is not an account—it is a general intangible (see below). - Deposit accounts—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. - Commercial tort claims—A tort claim where (1) the claimant is an organization (for example, 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)
- General intangibles—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.
Instruments
Pieces of paper representing the right to be paid money, like promissory notes, drafts (for example, checks), and certificates of deposit
Documents
A document that represents the right to receive goods (for example, a bill of lading, a warehouse receipt)
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 (for example, written on paper), or an intangible medium (for example, electronically stored).
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
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.
Commercial tort claims
A tort claim where (1) the claimant is an organization (for example, 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)
General intangibles
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.
Scope = Article 9 applies to the following transactions:
- A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract
- A seller’s retention of title—if a seller and buyer of goods agree that the seller will retain title to the goods after they are delivered until the buyer has paid for them, the agreement will be treated as the seller’s retention of a security interest
- Agricultural liens—that is, non-possessory liens on farm products that are created by state statute in favor of persons providing goods, services, or rental land to farmers (only the perfection and priority of agricultural liens are governed by Article 9; creation and enforcement of the liens are governed by state statutes)
- Sales of accounts, chattel paper, payment intangibles, and promissory notes
- Commercial consignments of goods (that is, where the consignor did not use the goods for personal, family, or household purposes) worth a total of $1,000 or more to persons who (1) deal in goods
of that kind under a name other than the consignor’s, (2) are not auctioneers, and (3) are not generally known by their creditors to be substantially engaged in selling the goods of others - A secured sale disguised as a lease—that is, leases that are intended to serve as security arrangements (but not true leases); and a lease where the rental obligation is not terminable by the lessee and either: (1) the lease term is equal to or greater than the remaining economic life of the goods, (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) at the end of the lease, the lessee has an option to purchase the goods or
renew the lease for the remaining economic life of the goods for no or nominal consideration
There are three requirements for attachment, which must coexist:
- The parties must agree to create the security interest (that is, they must enter into a security agreement), and
- Value must be given by the secured party, and
- The debtor must have rights (for example, ownership) in the collateral
Requirements to create security interest
The parties must agree to create the security interest (that is, they must enter into a security agreement), as evidenced by:
(1) the creditor taking possession of the collateral,
(2) an authenticated security agreement, or
(3) the creditor taking control of nonconsumer deposit accounts, electronic chattel paper, and investment property
Form of the Authenticated Security Agreement
1 - The agreement must be evidenced by a record (that is, written or electronically stored information) and must show an intent to create a security interest
2 - The agreement must be authenticated by the debtor (usually means that it is signed by the debtor, any symbol, including an electronic symbol, that is made with the present intent to authenticate the record will work)
3 - 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).
–> The description must reasonably identify the collateral.
Collateral can be described broadly by ____(for example, “all of the debtor’s equipment”) or specifically (for example, by serial number or by saying “the debtor’s television” if the debtor has only 1 television)
Exception: _____ cannot be described by type alone; a more specific description is needed.
category or type
Consumer goods, consumer securities accounts, and commercial tort claims
In the case of commingled cash proceeds (for example, in a bank account), the identifiable proceeds can be traced using ____
the lowest intermediate balance rule.
The attachment of a security interest in accounts, chattel paper, documents, general intangibles, instruments, and investment property automatically extends to _____
a supporting obligation (for example, a surety) for that collateral.
Methods of perfection:
(1) filing
(2) taking possession of the collateral;
(3) control;
(4) automatic perfection; and
(5) temporary perfection.
A security interest is not enforceable against anyone until it has attached to the collateral. If all of the steps for perfection are taken before the security interest has attached, perfection will occur ____.
upon attachment
AUTOMATIC PERFECTION
- In certain situations, a security interest is automatically perfected upon attachment.
- The most common such situation is a PMSI in consumer goods.
Limitations on AUTOMATIC PERFECTION
A security interest in motor vehicles can be perfected only by notation on the vehicle’s certificate of title and a PMSI in fixtures will have priority over an encumbrancer of the real estate only if the PMSI holder files a fixture filing
PERFECTION BY TAKING POSSESSION (PLEDGE)
Security interests in most types of collateral can be perfected simply by taking possession of the collateral.
PERFECTION BY TAKING POSSESSION (PLEDGE) - Time of Perfection
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.
Where the collateral (other than certificated securities and goods covered by a document) is in the hands of a bailee, the secured party is deemed to be in possession from _____
the moment the bailee authenticates a record acknowledging that it is holding the collateral for the secured party’s benefit.
Collateral that Cannot Be Pledged
Security interests in general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, certificate of title goods, and accounts cannot be perfected by possession.
PERFECTION BY CONTROL
Security interests in investment property, non-consumer deposit accounts, and electronic chattel paper may be perfected by “control.”
-> Note that security interests in non-consumer deposit accounts can only be perfected by control (unless they’re perfected as proceeds of collateral)
Methods of Obtaining Control: Non-consumer Deposit Accounts
- The bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account
- Putting the deposit account in the secured party’s name
- Agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will comply with the secured party’s orders regarding the deposit account without requiring the debtor’s consent
Methods of Obtaining 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.
PERFECTION FOR MOTOR VEHICLES
Under the state’s certificate of title law, security interests in motor vehicles required to be titled can only be perfected by notation on the certificate of title issued by the state.
-> Perfecting by another method won’t work!
Methods of Obtaining Control: Electronic Chattel Paper
A party has control over electronic chattel paper when a system put in place to show the transfer of interests in chattel paper reliably establishes the secured party as the assignee.
Exception to PERFECTION FOR MOTOR VEHICLES rule
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, even if a certificate of title covering the vehicle is outstanding.
A secured party may obtain perfection by filing (either in writing or electronically) a financing statement. The financing statement must contain:
- The debtor’s name and mailing address,
- The secured party’s name and mailing address, and
- A description of the collateral covered by the financing statement
A security interest may be perfected by filing as to all kinds of collateral except _____
deposit accounts and money.
Financing statements are indexed under the debtor’s name.
- In most states, if the debtor is _____ where the financing statement is to be filed, the debtor’s name on the financing statement must match the
license.
- If the debtor doesn’t have such a license, then the financing statement may include the _____ or the debtor’s ____.
- If the debtor is a registered organization (for example, a corporation or limited partnership), the debtor’s name must ____
an individual with an unexpired driver’s license issued by the state
debtor’s individual name (which Article 9 does not define); personal name and surname
match its most recent public organic record (that is, the publicly available record that forms or organizes the organization).
Debtor’s name: Use of the debtor’s ____ is insufficient.
trade name
Effect of Error in Debtor’s Name
- Minor errors in the debtor’s name won’t invalidate a financing statement, but seriously misleading errors will.
–> A financing statement is not seriously misleading if it would be discovered in a filing office search under the debtor’s correct name, using the filing office’s standard search logic (spelling error would never meet this)
The failure of the filing office to correctly index a financing statement _____ its effectiveness.
does not impact
If the debtor’s name as indicated on a filed financing statement becomes insufficient and thus seriously misleading (for example, because the debtor changed their name), the financing statement is effective only ____
against collateral acquired by the debtor before the name became insufficient and within 4 months after.
-> For collateral acquired after the 4-month period, the secured party must refile using the debtor’s correct name.
Although Article 9 provides specific rules for how a
debtor’s name must be listed on a financing statement, remember that the financing statement becomes invalid only if _____
the name is seriously misleading.
As with an authenticated security agreement, the description of collateral in a financing statement is sufficient if ____
it reasonably identifies the collateral, which can be broadly by category or type (for example, “equipment”) or specifically (for example, by serial number).
For an authenticated security agreement a _____ of collateral such as “all of the debtor’s assets” or “all of the debtor’s personal property” is not a sufficient description.
super-generic description
Enlike the requirements for an authenticated security
agreement, a financing statement may contain a _____ of the collateral, such as “all assets.”
supergeneric description
After-Acquired Property: Financing Statement
The financing statement need not mention after-acquired property to perfect a security interest in such property if the description in the financing statement is broad enough to cover the after-acquired property.
Secured Party’s Name: Financing Statement
Because searches aren’t conducted under the secured party’s name, an error in the secured party’s name will not make the financing statement seriously misleading.
Real Property-Related Financing Statements:
In addition to the requirements discussed above (that is, the names and addresses of the debtor and secured party and a description of the collateral), financing statements that cover real property-related
collateral (that is, minerals, timber to be cut, and fixtures) must also contain:
(1) a description of the related real property,
(2) the name of the record owner (if not the debtor), and
(3) an indication that it is to be filed in the real property records.
For a financing statement to be effective, the debtor must ___
authorize the filing in any signed writing either before or after it is filed.
The debtor automatically authorizes the financing statement if ____
the debtor authenticates the financing statement or authenticates a security agreement covering the same collateral as the financing statement.
The authenticated security agreement itself may be ____
filed as the financing statement if the parties so desire.
-> If it’s filed, it must contain all of the elements described above.
Effect of Missing Address - Financing Statement
If a financing statement that doesn’t contain the debtor’s and/or secured party’s mailing address is accepted by the filing office, the financing statement is effective despite the lack of the address(es).
Place of Filing - General Rule
Generally, filing must be done “centrally” in the office of the secretary of state
Place of Filing - Exception to central office
- If the collateral is timber to be cut or minerals, or if the collateral is or is to become a fixture and the filing is a fixture filing, filing is in the county where a mortgage on real estate is filed (“locally”).
- In the case of fixture filing, it is safest to file both in the real estate records and at the place that would be proper if the goods were not fixtures.
