Secured Transactions Flashcards
Secured transaction
Transaction intended to create security interest in personal property or fixtures.
-Generally, a lender obtains a lien on a piece of property that the debtor purchases on credit.
Sale on credit/credit sale: a sale where the buyer does not pay the full purchase price at the time of sale.
Debtor = person who owes the money.
Creditor = person to who the money is owed.
Secured creditor = creditor with special collection rights (security interest).
Security agreement = agreement b/w the debtor and the secured creditor that creates the security interest.
Security interest = interest in personal property or fixtures securing payment or performance.
Default = event causing security interest to spring to life (if no default, then the secured creditor has no interest in your collateral property!). In other words, a security interest is a dormant, contingent interest UNTIL the debtor defaults.
Collateral = property subject to the security interest.
Purchase money security interest (PMSI)
Creating PMSIs:
(1) Seller-financed PMSI: secured party sells collateral on credit AND retains a security interest in the item sold/the collateral.
(2) Financer-financed PMSI: a loan to a debtor for the purpose of enabling the debtor to buy specific collateral, used by the debtor to acquire that specific collateral; AND that third-party creditor (i.e. someone other than the seller) takes security interest in that collateral.
After-acquired property clause
Grant of security interest in property obtained in future. (“Hey debtor, I’m going to take a security interest in the stuff you own today and in the stuff you may acquire in the future!”
Future advances clause
Grant of security agreement securing future loans with same collateral. (“Hey debtor, your house is collateral for the loan I make you today and for any loans I give you in the future!”
Attachment
Attachment: steps necessary to create security interest effective against debtor.
A creditor is not a secured creditor until attachment.
Types of collateral (goods)
UNDER THE ORIGINAL USE TEST, A DEBTOR’S ORIGINAL INTENDED USE OF COLLATERAL GOVERNS THE COLLATERAL’S CLASSIFICATION.
(1) Goods: tangible, movable, personal [i.e. not land] property. To determine which type of good it is, look at how the debtor is using the collateral! The same collateral can be a different category of good based on how the debtor is using it.
Goods may be:
-(1) Consumer goods: goods used or bought for use primarily for personal, family, or household purposes.
-(2) Equipment [default category]: a good used or bought for use in business.
-(3) 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 gin, cotton, milk, eggs, etc. if they are in the possession of a debtor engaged in farming operations.
-(4) Inventory: goods held by a person who holds them for sale or lease OR materials used or consumed in a business in a short period of time.
Types of collateral (Semi-intangible and intangible property)
-Instruments (checks, promissory notes, CDs)
-Documents (bills of lading, warehouse receipts); gives you right to receive goods.
-Chattel paper: record or records which evidence both a monetary obligation and a security interest in or a lease of specific goods, i.e. security agreement + promissory note.
-Investment property (stocks, bonds, brokerage accounts)
-Accounts: rights to payment for property sold or services rendered.
-Non-consumer deposit accounts: accounts maintained with a bank; not for personal use, e.g. corporate “demand” accounts.
-Commercial tort claims: a claim arising in tort to which the claimant’s an org or the claimant is an individual and the claim arose in the claimant’s business or profession and does not include damages for personal injury or death
-General intangibles [catch-all]: IP, goodwill, licenses, copyrights.
Scope of Article 9
Applies to a transaction regardless of its form that creates a security interest in personal property or fixtures by contract, an agricultural lien, a sale of accounts, chattel paper, payment intangibles or promissory notes, certain consignments or a secured sale disguised as a lease (b/c true leases are not covered by Article IX - if at the end of the lease, not reasonably likely that the lessor would receive item back with meaningful economic value, it’s actually a sale with a security interest).
Basically, even if you don’t call it a security interest, if in substance the debtor is giving a contingent property interest in the debtor’s property to the creditor which will kick in upon default, it’s covered by Article IX!
Attachment
Three reqs:
-(1) Security agreement: should be in writing, but oral valid if the collateral is in the possession of the secured party. If in writing, three sub-reqs:
-(i) Record showing intent to create security interest
-(ii) Agreement must be authenticated by the debtor, i.e. usually signed by the debtor. Any symbol including an electronic symbol that is made with the present intent to authenticate (including an ‘X’ or a smiley face) will work.
-(iii) Agreement must contain description of the collateral; must “reasonably identify” the collateral. E.g. “Debtor grants a security interest in all of the debtor’s property” –> invalid, too generic.
-(2) Value given: any consideration sufficient to support a simple contract is enough. Past consideration is valid for Article IX.
(3) Debtor has rights in the collateral; most commonly ownership of the collateral.
Scope of the security interest
After-acquired property: security interest only reaches collateral that the debtor had rights in at the time of signing security agreement.
-Exception: collateral is of a type rapidly deleted and replenished (inventory, accounts)
Proceeds: anything received from sale, exchange, collection, or disposition of collateral or proceeds of the collateral.
-Unless otherwise agreed, a security interest automatically gives the secured party a right to identifiable proceeds from the collateral.
-Cash proceeds pose an issue because they can get easily co-mingled with other non-proceed case. To determine which part of a co-mingled mass of cash is identifiable, use the lowest intermediate balancing test : look at the balance of the co-mingled back account starting at the time the proceeds are deposited and ending at the time you’re applying the test. The lowest balance during that time period is the secured party’s identifiable proceeds, but can’t exceed the value of the cash proceeds originally deposited.
Perfection
Steps necessary to create security interest effective as against the world. Unperfected does not mean unsecured - those are two different q’s.
In general, perfection is the process of giving public notice of the security interest to the world.
Financing statement = document used to convey notice of security interest [to perfect the security interest].
To meet perfection, you need to attach the security interest + do one of the methods of perfection:
-(1) Automatic perfection [upon attachment] in certain cases. Most commonly PMSIs in consumer goods.
-(2) Possession of the collateral by the secured party. Perfection continues only so long as possession is retained. Most commonly: goods. (Obvi impossible for things you can’t take possession of, like general intangibles). The only way to perfect a security interest in money is via possession.
(3) Control - the only way to perfect a security interest in a deposit account. Three different ways of control of non-consumer deposit accounts:
-(i) Automatic control by bank maintaining account.
-(ii) Putting the deposit account in secured party’s name.
-(iii) Control agreement: contract b/w creditor, debtor, and the bank where the account is that grants permission to bank to give the creditor the customer’s bank account if the bank gets notice from the creditor that the customer has defaulted.
(4) Notation on certificate of title [naming the creditor]; a government authority has to note your lien on the title. Most commonly, cars and trucks (so consumer goods but NOT automatically perfected upon attachment).
-Exception: if the debtor is holding car or truck as inventory (car dealers), a secured party must perfect by filing a financing statement against inventory - noting its lien on the certificate of title will not work.
(5) Filing a financing statement (UCC-1) [MOST LIKELY TO BE TESTED]: premised on the concept of notice filing - the notice must indicate merely that a person may have a security interest in the collateral indicated. Can have mistakes as long as they’re not “seriously misleading.” Sections of the statement:
-(i) Debtor’s name + mailing address. Do not file under a debtor’s trade name only. In the case of individual debtors, if they have an unexpired driver’s license in the jurisdiction, that is the name you file under by statute. Financing statement not seriously misleading when: search with correct name using standard search logic [never accounts for spelling errors] and see whether that would find financing statement. If filing officer mistakenly files a financing statement so that the index shows the secured party as the debtor, the filing is still effective.
-Name change: financing statement under old name still good on collateral received four months or less after change.
-(ii) Collateral description: as in the security agreement, the description must “reasonably identify” the collateral. But unlike in the security agreement, super generic descriptions (e.g. “all of my property”) are valid.
-Don’t need to have an after-acquired clause. Only worry about that clause in the security agreement.
-(iii) Secured party’s name + mailing address.
-(iv) Need not be signed, but must be authorized –> in any signed writing by the debtor, authorizes the creditor to file a financing statement.
-Ipso facto authorization: In addition, the debtor automatically the authorizes the financing statement if she authenticates a security agreement covering the same collateral.
Where to file financing statement:
-If real-estate related collateral, you make a county filing with the county clerk where the real estate is located
-Everything else: file with secretary of state. State to file in = state where state law applies.
-Multiple state transactions: file where debtor is located. If debtor is individual = the debtor is located at her principal residence. If debtor is registered org (business org created by filing a specified doc with the state, e.g. a corp, LLC), the debtor is located where the registered org is organized.
-What if debtor moves after filing? The secured party will become unperfected four months after the debtor’s move, unless it files a financing statement in the new jurisdiction before that four-month period is up.
-What if collateral is moving across state lines to a new owner located in a different state? The secured party will become unperfected one year after the collateral moves, unless it files a financing statement in that new jurisdiction before that 1 year is up.
Length of financing statement effectiveness = 5 years. Can be extended by filing a continuation statement in the last six months of the five-year life.
As long as you’re authorized to file financial statement, you can file it even before a security agreement has been entered into.
Perfection for proceeds
If a secured party has a perfected security interest in collateral, a secured party automatically has a perfected security interest in whatever proceeds the debtor receives in exchange for that collateral for 20 days.
To remain perfected in those proceeds beyond 20 days:
-The secured party must take new action to perfect its interest UNLESS
-The proceeds are identifiable cash
-OR (i) the security interest in the original collateral was perfected by filing a financing statement, (ii) the proceeds would be perfected by filing in the same place as the financing statement for the original collateral, AND
-the proceeds were not purchased with cash proceeds.
Priority
Creditor: where is my place in line vis-a-vis other creditors against a particular item of collateral? Which creditor is first in line to get paid?
For every pairing of creditor “combatants,” Article IX tells us a priority rule that tells you who wins the fight.
(1) Between two perfected security interests, the first to have been filed OR perfected (whichever is earlier) has priority.
-Priority is NOT affected by the knowledge that one may have of the other’s interest.
(2) As between two unperfected secured creditors, the first to attach wins.
(3) As between a perfected secured party and an unperfected secured party, the perfected party wins.
(4) PMSIs (in goods other than inventory or livestock) have priority over ALL conflicting security interests in the same goods or its identifiable proceeds non-PMSIs IF perfected immediately or within 20 days.
(5) PMSIs in inventory or livestock have priority over conflicting security interests over the same stuff IF:
-Before debtor receives possession: secured party perfects AND sends authenticated notice to other holders AND the holder of the conflicting security interest must receive notice within 5 years of debtor getting possession.
(6) As between a seller-financed PMSI and a financer-financed PMSI, the seller-financed PMSI has priority.
(7) A security interest perfected by control has priority over a security interest perfected by any other method. If conflicting security interests, each perfected by control, they rank according to the time of obtaining control (i.e. earlier control beats later control).
-A security interest granted to a debtor’s intermediary (e.g. broker) has priority over a security interest granted by the debtor to another secured party.
(8) A security interest perfected by control has priority over a security perfected by a proceeds. If conflicting interests, each perfect by control, they rank according to the time of obtaining control.
-A secured party who has obtained control by putting the deposit account in its own name has priority over all other secured parties with control. Next best: maintain account. Worst: control agreement.
-If a debtor transfers money or deposit account funds, the transferee of the funds takes free of a security interest in the funds unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
(9) Secured party wins over a buyer of the collateral unless:
-Secured party wins unless authorized sale (i.e. secured creditor authorizes sale free of the security interest)
-There is also implied authorization for inventory sold to an ordinary consumer when sale is not expressly prohibited (i.e. when security agreement is silent). Acquiescence exception as well.
-Buyer in the ordinary course of business exception: takes free of a security interest created by YOUR SELLER even though the security interest is perfected and the buyer knows of its existence. BIOC = buyer in good faith w/o knowledge that the sale violates the rights of another person and in the ordinary course from seller of goods of that kind. (e.g., if a store gets a loan from a bank and gives the bank a security interest in its inventory of refrigerators, and then you buy a refrigerator from the store, the bank loses its security interest because you are a buyer in the ordinary course of business).
-Buyers not in the ordinary course: take subject to perfect security interests; take free of unperfected security interests unless they know of the security interest.
-Consumer-to-consumer sales: buyer take free of security interest if
-No knowledge
-Value
-Personal use
-No financing statement
(10) Secured creditor vs. judgment lienholder [a creditor who won a judgment in court - gives you right to send the Sheriff out to seize the debtor’s collateral, sell it, and then give the lienholder the money to pay off the judgment].
-Judgment lienholder wins if lien arose before security interest was perfected.
-If the secured party files with respect to a PMSI within 20 days after the debtor receives possession of the collateral, he takes priority over the rights of a lien creditor which arises b/w the time the security interest attaches and the time of filing.
-A future advanced by a secured creditor has priority over a lien creditor if the future advance is made w/o knowledge of the lien or within 45 days of the lien arising or pursuant to a commitment entered into w/o knowledge of the lien.
(11) Secured party vs. statutory lien claimant [e.g. auto mechanic’s lien statute]: statutory lienholder wins if they maintain possession of collateral. Even over a perfected lien.
Default
Event causing security interest to spring to life. Usually specified in security agreement (not defined by Article IX).
Self-help repossession: creditor permitted to take collateral without going to court first IF this can be done without breach of the peace. If they breach the peace, they lose the statutorily privilege and may be found liable for torts, etc.
-Breach of peace: any conduct by the secured party that has the potential to lead to violence. Generally, physical presence by the debtor + their verbal objection is enough to create a breach of the peace.
-Unauthorized entry into home = breach of peace.
-Taking car from driveway = NOT breach of peace. But taking car from garage would be a breach.
-Picking a lock [and leaving the doors open after] = breach of peace.
If self-help unavailable, you can ask court for a writ of replevin - court proceeding to repossess collateral.
The secured party may also make equipment unusable (e.g. taking keys, engine wires) and dispose of it on the debtor’s property if she can do so without breach of the peace. This latter right is directed toward the problem of taking possession of heavy, bulky equipment that is not easily movable.
Self-help and accounts: if the debtor defaults and the collateral is accounts, the secured creditor can notify the persons owing money to the debtor to make payment to the secured party instead of the debtor. Upon notification, the account debtor MUST pay the secured creditor rather than the debtor. Payment to the debtor will not discharge the obligation.
Strict foreclosure
Creditor keeps collateral itself to satisfy debt (instead of selling it). Reqs:
-Have to notify any other creditor that has a lien in that same collateral. If they object, you can’t keep the collateral.
-Must also obtain the debtor’s consent (agreement either through an authenticated record after default or in the case of a full strict foreclosure [i.e. all debt gone], failing to make an authenticated objection within 20 days after the secured party sent notice).
