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.
WHICH STATE’S LAW GOVERNS PERFECTION - General Rule
The law of the state where the debtor is located generally governs perfection of the security interest.
-> Therefore, the secured party must generally file the financing statement in that state.
Location of Debtor
- 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 laws it is organized (that is, where its articles of incorporation are filed).
- If the debtor is an unregistered organization (for example, a general partnership), 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.
WHICH STATE’S LAW GOVERNS PERFECTION -Exceptions (to general rule of debtor’s domicile)
- Possessory Security Interests and Security Interests in Fixtures and Timber to Be Cut: governed by the law of the state in which the collateral is located.
- Goods Covered by Certificate of Title: the law of the state issuing the most recent certificate of title governs perfection.
- Deposit Accounts: unless the debtor’s agreements
with the bank provide otherwise, the law of the state in which the bank has its chief executive office governs perfection. - Investment Property: Separate rules (other card)
- Agricultural Liens: governed by the law of the state in which the farm product covered by the lien is located.
General rules: Governing law for perfection of Investment Property
- If the collateral is a certificated security, the law of the state where the certificated security is located governs perfection.
- If the collateral is an uncertificated security, unless the debtor’s agreements with the issuer provide otherwise, the law of the state where the issuer was organized governs perfection.
- If the collateral is a securities account, unless the debtor’s agreements with the securities intermediary provide otherwise, the law of the state where the securities intermediary’s chief executive office is located governs perfection.
Exception: Governing law for perfection of Investment Property
If a security interest in investment property is perfected by filing, or if it’s automatically perfected by a securities intermediary, the law of the state where the debtor is located governs perfection.
Collateral in Which Perfection Is Governed by Debtor’s Location: Relocation of Debtor
The security interest generally will become unperfected 4 months after the debtor’s move unless the secured party files a financing statement in the new jurisdiction before that 4-month period is up.
Collateral in Which Perfection Is Governed by Debtor’s Location: Debtor in Different State
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 unless the secured creditor files a financing statement in the new jurisdiction before that one-year period is up.
If a perfected security interest in collateral is a possessory security interest (which is governed by the law of the state in which the collateral is located), and the collateral is moved from one state to another, the security interest will ____
remain perfected without any further action as long as the security interest is also perfected by possession under the laws of the new state.
If a vehicle is moved from one state to another and is covered by a certificate of title issued by the new state, a security interest in the vehicle that was properly perfected in the original state _____
lasts as long as it would have if the vehicle had not been covered by the new certificate of title.
If a vehicle subject to a perfected security interest in one state is moved to a new state and is covered by a certificate of title issued by the new state, the security interest in the original state is perfected as against a purchaser for value of the vehicle only until the earlier of:
- The time when the security interest would have become unperfected in the original state if the vehicle had not been covered by the new certificate of title (same rule as the general rule), or
- 4 months after the vehicle is covered by the new certificate of title
If the certificate of title issued in the new state does not note the secured party’s interest in the vehicle, the following parties have priority over the secured party:
- A buyer of the vehicle who is not in the business of selling vehicles who purchases for value and receives delivery of the vehicle without knowledge of the security interest, and
- A secured party who perfects a security interest in the vehicle without knowledge of the other security interest after the clean certificate of title is issued in the new state
If the bank, issuer, or securities intermediary moves to a new state, perfection of an interest in the deposit account, uncertificated security, or securities account continues until the earlier of:
- The time when the security interest would have become unperfected in the original state if the bank, issuer, or securities intermediary had not moved to the new state, or
- 4 months after the bank, issuer, or securities intermediary moves to the new state
A financing statement is valid for ____.
5 years
Continuation Statements
- 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.
- The authorization of the debtor is not required for a continuation statement; the secured party may authorize it.
Termination Statements
- Generally, a secured party is not obligated to terminate a financing statement.
- However, if there is no outstanding obligation of the debtor and no commitment on the part of the secured party to make further advances, or if the debtor didn’t authorize the filing of the initial financing statement, the secured party must, on demand of the debtor, within 20 days, file a termination statement or provide one to the debtor.
Termination Statements: Timing for Consumer Goods
In the case of consumer goods, the secured party must file the termination statement within 1 month after there is no obligation or commitment, or if the debtor demands it, within 20 days of the demand.
TEMPORARY PERFECTION (AND CONTINUATION FOR PROCEEDS) - General categories
- Perfection for Proceeds
- Temporary Perfection for Instruments, Negotiable
Documents, and Certificated Securities
Perfection for Proceeds
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 security interest in proceeds will continue to be perfected beyond the 20 days if:
- The proceeds are identifiable cash proceeds
- The security interest in the original collateral was perfected by filing a financing statement, 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 the proceeds were not purchased with cash proceeds of the collateral, or
- The security interest in the proceeds is perfected within the 20-day period
Where new value is given under an authenticated security agreement for instruments, negotiable documents, or certificated securities, perfection is valid for ____
20 days after attachment; neither filing nor
possession is necessary.
Where the creditor who has perfected their security interest by possession delivers instruments, negotiable documents, certificated securities, or goods in the possession of a bailee to the debtor
for disposition (for example, where the creditor gives the debtor a promissory note, which is serving as collateral, so that the debtor can present the note to its maker for payment), perfection is valid for
____, after which the creditor ____
20 days; must re-perfect (by filing or taking possession) or lose their perfection
Financing Statement: CHANGE IN USE OF COLLATERAL
- 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 the creditor knows that the description is seriously misleading.
Priority Between Perfected Secured Parties
Priority goes to whichever party was the first to either file or perfect—whichever is earlier—provided that there is no period thereafter when there is neither filing nor perfection.
Priority Between Unperfected Secured Parties
When two unperfected security interests conflict, the first to attach has priority.
Priority Between Unperfected and Perfected Secured Parties
A perfected security interest generally prevails over an unperfected security interest.
PMSI Superpriority (two categories)
- PMSI in Goods Other than Inventory and Livestock
- PMSI in Inventory and Livestock
A PMSI in goods other than inventory and livestock (for example, equipment) 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
A PMSI in inventory collateral has priority over a conflicting security interest in the same inventory or proceeds of the inventory that are chattel paper, instruments, or cash if:
- It is perfected at the time the debtor gets possession of the inventory (filing must take place before the inventory is delivered to the debtor), and
- Any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects
to take a PMSI in inventory of the debtor described by kind or type. The notification is effective for deliveries of the same type of collateral for 5 years.
Under Article 9, a consignor’s interest in the consigned goods is considered to be a ____.
PMSI in inventory
-> Therefore, a consignor can acquire PMSI superpriority in consigned goods if the consignor complies with the above requirements for gaining PMSI superpriority in inventory.
If more than one party has PMSI superpriority in collateral, the following rules apply:
- A secured party who has a PMSI in collateral as a seller (a seller-financed PMSI) has priority over a secured party who has a PMSI inthe same collateral as a lender (a financer-financed PMSI)
- Otherwise, the first secured party to file or perfect prevails
Special Priority Rules for Conflicting Security Interests in Investment Property
- A security interest perfected by control has priority over a security interest perfected by any other method (that is, by filing or automatic
perfection). - For conflicting security interests perfected by control, they rank according to the time of obtaining control (unless one of the secured parties with control is a securities intermediary, in which case the securities intermediary will prevail).
- In all other cases, the “first to file or perfect” rule governs priority questions for investment property.
Special Priority Rules for Conflicting Security Interests in Deposit Accounts
- A security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method (namely, as proceeds of other collateral).
- If there are conflicting security interests that are perfected by control, they rank according to the time of obtaining control, subject to the following exceptions:
–> A secured party who has obtained control by putting the deposit account in the party’s name has priority over all other secured parties with control, and
–> A bank that has control because it maintains the deposit account has priority over all secured parties with control, other than the party who has obtained control by putting the account in their name
If a debtor transfers money or deposit account funds (for example, by writing a check or making an electronic funds transfer) to a person, that person takes free of any security interest in the money or funds, unless ____
the transferee acts in collusion with the
debtor in violating the rights of the secured party.
Special rule for Chattel Paper Purchasers Priority
If a purchaser of chattel paper in good faith gives new value and takes possession of the chattel paper in the ordinary course of business (or takes control of electronic chattel paper), the purchaser has priority over:
- A security interest in chattel paper that arises merely as proceeds of inventory, as long as the chattel paper doesn’t indicate that it has been assigned to anyone other than the purchaser, and
- Any other security interest in the chattel paper, as long as the chattel paper purchaser acquired their interest without knowledge that its purchase violated the rights of the secured party.
A chattel paper purchaser also has priority in the proceeds of the chattel paper if either:
(1) the purchaser would have had priority
under the general priority rules (the purchaser was the first party to file or perfect), or
(2) the proceeds are the specific goods covered by the chattel paper or cash proceeds of the specific goods.
Special rule for Instrument Purchasers Priority
A purchaser of an instrument has priority over a perfected security interest in the instrument if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party.
For purposes of determining the priority of security interests in proceeds, the Code divides collateral into “filing collateral” and “non-filing collateral.” (define these terms)
- Filing collateral is collateral in which a secured
party would normally achieve priority by filing a financing statement (for example, goods, accounts, commercial tort claims, general intangibles, and nonnegotiable documents). - Non-filing collateral is collateral in which a secured party would normally achieve priority by possession or control, rather than filing (for example, cash, chattel paper, nonconsumer deposit accounts, negotiable documents, instruments, and investment property).
Priority in Proceeds: General Rule
Generally, a perfected security interest in proceeds will have the same date of priority as the perfected security interest in the original collateral (for example, under the “first to file or perfect” rule), as long
as the perfection of the security interest in the proceeds extends beyond the 20-day temporary perfection period (see 4.10, above).
-> Recall that there are also special superpriority rules for certain proceeds of collateral subject to PMSIs (see Section 5.4, above).
Priority in Proceeds: Special Rule for Certain Proceeds of Non-Filing Collateral
Because the rules governing priority in non-filing collateral contain many exceptions to the “first to file or perfect” rule (for example, a party with control over a deposit account has priority over a party without control, regardless of when control was obtained), the
Code contains a special priority rule for certain proceeds of that collateral.
A secured party has priority in the proceeds of non-filing collateral if: (1) the secured party has priority in the original collateral, (2) their security interest in the proceeds is perfected, and (3) the proceeds are cash proceeds or proceeds of the same type as
the original collateral.
-> If the proceeds are proceeds of proceeds, all intervening proceeds must be cash proceeds, proceeds of the same type as the original collateral, or accounts relating to the collateral.
If a security interest in original collateral that is non-filing collateral is perfected by a method other than filing, and the proceeds of the original collateral are filing collateral, the ____ has priority in the proceeds.
first secured party to file a financing statement covering the proceeds
SECURED PARTY VS. BUYER OR OTHER TRANSFEREE: General Rule
- When a buyer (or lessee) buys or leases something with a security interest on it, the security interest stays on the item.
- There are a few exceptions to this rule, discussed below.
Exceptions to the rule that secured interest stays on item when transferred to buyer (high level)
- Authorized Sales
- Buyers in the Ordinary Course
- Consumer-to-Consumer Sale
Authorized Sales Exception to (SECURED PARTY VS. BUYER OR OTHER TRANSFEREE)
- 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.
- The authorization may be express, or it may be implied from the type of sale or from the seller’s conduct (often covers inventory)
A buyer in ____ 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.
the ordinary course of business (“BIOC”)
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.
Buyers or lessees not in the ordinary course of business:
- Take subject to perfected security interests, and
- Take free from unperfected security interests unless they know of the security interest when they give value or take delivery
A buyer or lessee not in the ordinary course of business has priority over future advances or commitments to make future advances made by a secured party either after _____
the secured party learns of the purchase or lease or more than 45 days after the purchase or lease.
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.
In the case of consumer goods, a buyer takes free of a security interest, even though it’s perfected, if the buyer buys
(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.
-> *Note that the goods must be consumer goods in the hands of both the buyer and the seller.
PMSIs in consumer goods are perfected
automatically without filing. Nevertheless, holders of
these security interests will still lose to consumer buyers under this rule (Consumer-to-Consumer Sales) unless ____
they file.
Secured Party vs. Holder in Due Course or the Like
A holder in due course of a negotiable instrument (and similar holders of negotiable documents of title or securities) has priority over a security interest in the negotiable instrument.
Secured Party vs. Judicial Lien Creditor
- A judicial lien creditor (that is, a person who has acquired a lien on the collateral through judicial attachment, levy, or the like, or a bankruptcy trustee) 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.
A creditor who has won a judgment in court becomes a judicial lien creditor at the time of ____.
levy (that is, seizure of the collateral by the sheriff)
-> Therefore, look to see when the sheriff levies on the collateral and when the security interest is perfected (if at all) to determine who has priority.
As noted above, the secured party has priority if the secured party perfected before the judicial lien arose. However, the secured party will also have priority if the secured party obtained a security agreement and filed a financing statement (but did not attach and perfect) before the judicial lien arose, as long as ____
the secured party eventually attaches and perfects.
Secured Party vs. Judicial Lien Creditor: PMSI Grace Period Exception
If the secured party files a financing statement with respect to a PMSI within 20 days after the debtor receives the collateral, the secured party will have priority over a judicial lien arising between the time the security interest attaches and the time of filing.
For a perfected future advance to gain priority over a subsequent judicial lien, the future advance must be made
(1) without knowledge of the lien,
(2) within 45 days of the lien arising, or
(3) pursuant to a commitment entered into without knowledge of the lien.
Secured Party vs. Possessory (Statutory) Lien Holder
A possessory lien imposed by other (that is, non-Code) state law in favor of those who supply goods or services (for example, an artisan’s lien or a materialman’s lien) has priority over a security interest (even if perfected) as long as the goods or services were provided in the ordinary course of business and the collateral remains in the lien holder’s possession.
SECURED PARTY VS. ARTICLE 2 CLAIMANT
If Article 2 grants a buyer or seller a possessory security interest in goods (for example, if the buyer rightfully revokes acceptance of goods), the Article 2 claimant has priority over an Article 9 secured party as long as the Article 2 claimant retains possession of the goods.
Excluding investment property and nonconsumer
deposit accounts, in which the party with control generally has priority, the ranking is as follows:
- Buyer in the ordinary course of business, if the security interest is created by the buyer’s seller
- Holder in due course and the like of a negotiable instrument
- Transferee of money or funds from deposit accounts
- Certain purchasers of chattel paper or instruments who have possession or control
- Possessory lienholder
- Article 2 claimant with possession of goods
- PMSI (except that a consumer purchaser from a consumer—such as a neighbor buying from a neighbor—has priority over an automatically perfected PMSI in the consumer goods)
- Perfected security interests and judicial liens that have attached to the collateral (including trustees in bankruptcy as of the date the bankruptcy petition is filed)
- As between perfected security interests in the same collateral, the first to file or perfect has priority
- As between a perfected security interest and an attached lien, the attached lien generally has priority if it attached before the security interest was perfected. Otherwise, the security interest has priority
- Purchaser of collateral who buys for value and receives delivery without notice of any unperfected security interest
- Unperfected security interests (rank in priority according to order of attachment)
- Debtor
The right of the secured party to proceed against collateral is triggered by ____
default.
Article 9 does not define the events that will trigger a default, but ______
the security agreement usually will define default to include events such as failure to pay or maintain insurance.
If the security agreement lacks such a provision, “default” is generally construed as _____
a failure to pay or perform.
To determine if there has been a default, look out for late or missed payments. However, also look for ____
a possible waiver by the secured party of late or missed payments.
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.
- When a secured party breaches the peace, the secured party 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.
Breach of the Peace
- 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 (or a representative of the debtor) plus a verbal objection by the debtor over the repossession is enough to create a breach of
the peace.
If self-help is unavailable, the secured party can use ____
judicial process (for example, a replevin action) to get the goods.
Without removal, the secured party may also _____
make equipment unusable and dispose of it on the debtor’s property if the secured party can do so without a breach of the peace.
-> This right is directed toward the problem of taking possession of heavy, bulky equipment that is not easily movable.
After default and repossession, the secured party may retain the collateral in full or partial satisfaction of the debt (in other words, the secured party may make a full or partial strict foreclosure) if the secured party does the following:
- The secured party must send its proposal to retain the collateral to (1) any other secured party from whom the foreclosing party has received notice of a claim to the collateral, 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.
–> If a notified party objects within 20 days after the secured party sends the notice, the collateral must be disposed of by sale. - The secured party must also 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 sends notice (a debtor can’t consent to a partial strict foreclosure in this manner)
RESALE OF COLLATERAL - Notice
Reasonable notice that is authenticated by the secured party (that is, the notice can’t be oral) must be given (1) to the debtor and any sureties on the debt, and (except in the case of consumer goods) (2) to any other secured parties who have notified the secured party of their interests, and (3) to any secured parties who have perfected by filing a financing statement or making a notation on a certificate of title.
Default: In a consumer transaction, a secured party may not _____
keep the collateral in partial satisfaction of the debt and seek a deficiency judgment.
-> The secured party may keep the collateral only in full satisfaction of the debt.
RESALE OF COLLATERAL - Timing of notice
- The notice must be sent within a reasonable time before the sale (a question of fact).
- In non-consumer transactions, notice is deemed to be sent within a reasonable time if it’s sent 10 days or more before the sale.
The sale discharges the security interest under which the sale is being made and _____. The purchaser, however, is _____
all subordinate security interests
still subject to superior security interests
RESALE OF COLLATERAL - Notice Exceptions
This notice isn’t necessary when the collateral is perishable or threatens to decline rapidly in value or is of a kind ordinarily sold in a recognized market (for example, stock).
Self-Help in Accounts
- If the debtor defaults and the collateral is an account, the secured party can notify the person owing money to the debtor (that is, the account debtor) to make payment to the secured party, rather than to the debtor.
- Upon notification, the account debtor must pay the secured party, rather than the debtor.
- Payment to the debtor will not discharge the obligation
Default: If the debtor has paid 60% of the cash price on a PMSI in consumer goods, or 60% of the loan on a non-PMSI in consumer goods, the secured party must _____
dispose of the collateral within 90 days after repossession.
-> If the debtor has paid less than 60%, the general rules, above, apply.
Every aspect of the sale of collateral (including the method, manner, time, place, and terms) must be ___
commercially reasonable.
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.
After default, the debtor or the surety may waive the right to ____
notice in an authenticated agreement.
In the sale of collateral the secured party must show ____
that they made an effort to obtain the best price for the collateral.
-> low price alone is not enough to make the sale not commercially reasonable, but if the price is very low, courts will give extra scrutiny to the other circumstances of the sale.
RESALE OF COLLATERAL - Contents of notice
The content of the notice depends on the type of sale and type of collateral.
-> 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.
+ Extra info is required for consumer goods
Factors for determining if sale is commercially reasonable:
- The sufficiency of the advertising,
- If the collateral had a limited market, whether people in that market were contacted,
- Whether the collateral needed cleaning or repair, and
- If the sale was by public auction, the convenience of the time and place
The secured party may buy the collateral at any ____ but may buy at a private sale only if ____.
public sale
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
Proceeds of the Foreclosure Sale
The money from a foreclosure sale goes first to repay the costs of the repossession and sale, then to pay off the debt of the foreclosing creditor, and then to pay off the debt of creditors with lower priority than the foreclosing creditor. If any money is left over, the debtor gets this surplus.
-> Creditors with higher priority than the foreclosing creditor receive no money from the sale because they don’t lose their liens as a result of the foreclosure sale.
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.
If the debtor is a consumer, then after the sale, the secured creditor must send the debtor an ____
explanation of the calculation of any debt still owed (the deficiency) or money the debtor will receive (the
surplus).
A secured party is liable for the _____ caused by failure to follow any of the Code’s rules.
actual damages
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.
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.
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 ____.
To do so, the debtor must _____
redeem the collateral;
tender fulfillment of all obligations secured by the collateral, plus additional reasonable expenses.
Because most security agreements contain an acceleration clause (that is, a clause allowing the creditor to declare the entire loan balance due upon default), the debtor typically must tender ____ in order to redeem.
the entire balance (not just missed payments)
DEFINITION OF FIXTURE
- Fixtures are goods that have become so related to real property that an interest in them arises under real property law.
- In general, personal property attached to real estate with the intent that it become a permanent part of the real estate is a fixture (for example, central air conditioning, built-in appliances, elevators, etc.).
- The distinctive aspect of a fixture is that interests in it may arise under both the Code and under the law of real estate.
No security interest can exist in _____ that are incorporated into an improvement on land.
ordinary building materials (for
example, bricks, lumber, shingles, etc.)
Fixtures - Perfection
- To perfect a security interest in fixtures, a fixture filing must be made in the office where a mortgage on the real estate would be filed.
- In addition to the usual requirements for a financing statement, a fixture filing financing statement must reasonably identify the real estate and must show the name of the owner (if the debtor does not have an interest of record in the real estate).
Fixtures: Rights on default
- When the security interest in the fixture has priority over all interests in the real property, the holder of the security interest in the fixture may, upon default, remove the fixture from the real property.
- If the debtor does not own the property from which the collateral is removed, the creditor must reimburse the owner of the property for the cost to repair damage to the property caused by removal, but not for any other diminution in value.
PRIORITY: Secured Party v. Subsequent Real Estate Interest
A security interest in fixtures has priority over any real estate interest that is recorded subsequent to the perfection of the security interest by fixture filing (in other words, what is filed first)
PRIORITY: Secured Party v. Prior Real Estate Interest
A prior real estate interest that is properly recorded has priority over a security interest that subsequently arises.
PRIORITY: Secured Party v. Prior Real Estate Interest = PMSI rule
A PMSI takes priority over an earlier in time realty interest if it’s perfected by a fixture filing before the goods become fixtures or within 20 days thereafter.
PRIORITY: Secured Party v. Prior Real Estate Interest = Construction mortgages
A construction mortgage takes priority over a subsequent PMSI in fixtures, even if the security interest is perfected by a fixture filing within 20 days of affixation. (super priority rule!)
A secured party need not fixture file as to _____
readily removable (1) factory or office machines, (2) equipment that is not primarily used or leased for use in the operation of the real estate, or (3) replacements of domestic appliances which are consumer goods.
-> Any method of perfection before such goods become fixtures entitles the secured party to priority.
A secured party of fixtures need not perfect at all to have priority _____
(1) if the encumbrancer or owner of the real estate has, in an authenticated record, consented to the security interest or has disclaimed an interest in the goods as fixtures, or
(2) if the debtor has a right to remove the goods as against the real estate claimant.
DEFINITION OF 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 (for example, tires on a car).
Accession: Perfection
If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral.
Accession: Priority
As a general rule, the rules for priority previously discussed (for example, first to file or perfect, special PMSI rules) apply to accessions.
Accession: Special Priority Rule
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.
Accession: REMOVAL AND REIMBURSEMENT FOR PHYSICAL
INJURY TO THE WHOLE
- A secured party may remove an accession from other goods if the
security interest in the accession has priority over the claims of every person having an interest in the whole. - The secured party
removing the accession is responsible for the cost of repair of any physical injury to the whole or the other goods. - A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse.
Automatic Perfect in accounts
- Perfection may occur automatically, without filing, in the case of a security interest in a small-scale assignment of an account or payment intangible.
- This rule applies to an assignment of accounts or payment intangibles that does not alone, or in conjunction with other assignments to the same assignee, transfer a significant part of the assignor’s outstanding accounts or payment intangibles to the creditos.
