Secured Transactions Flashcards
Requirements for Attachment
1) 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; and
2) Value must be given by the secured party; and
3) The debtor must have rights in the collateral
Form of the Authenticated Security Agreement
A) Evidenced by a Record - The agreement must be evidenced by a record (that is, a written or electronically stored information) and must show an intent to create a security interest.
B) Agreement Must Be Authenticated - The agreement must be authenticated by the debtor. This usually means that it is signed by the debtor. Any symbol, including an electronic symbol, that is made with the presnent intent to authenticate the record will work.
C) Description of Collateral - The agreement must contain an description of the collateral. The description must reasonably identify the collateral. Collateral can be described broadly by category or type, or specifially. NO SUPERGENERIC DESCRIPTIONS.
Lowest Intermediate Balance Rule
In the case of commingles cash proceeds (for example, in a bank account), the identificable proceeds can be traced using the lowest intermediate balance rule.
Under that rule, you will look at the bank account starting at the time the proceeds are deposited and ending at the time you are applying the rule. The lowest balance during that time period is the secured party’s identifiable proceeds (but the amount cannot exceed the value of the cash proceeds originally deposited).
Methods of Perfection
1) Filing
2) Taking possession of the collateral
3) Control
4) Automatic perfection
5) Temporary perfection
Automatic Perfection
A PMSI in CONSUMER GOODS is perfected as soon as it attaches.
Perfection by Control
Security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by “control.”
Note that security interests in NONCONSUMER deposit accounts can ONLY be perfected by control (unless they’re perfected as proceeds of collateral.
Methods of Obtaining Control
1) The bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account.
2) Putting the deposit account in the secured party’s name.
3) Agreeing in an authenticaled record (control agreement) 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.
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.
Requirements of a Filing Statement
1) The debtor’s name and mailing address,
2) The secured party’s name and mailing address, and
3) A description of the collateral covered by the financing statement (may contain a supergeneric description of the collateral).
Debtor Authorization of the Filing Statement
For a financing statement to be effective, the debtor must authorize the filing in any signed writing either before or after it is filed.
In addition, 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.
Perfection for Proceeds
If a secured party has a perfefcted 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 20 days if:
1) The proceeds are identifiable cash proceeds,
2) 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 procees were not purchased with cash proceeds of the collateral, or
3) The security interest in the proceeds is perfected within the 20-day period.
PMSI in Goods Other than Inventory and Livestock
A PMSI in goods other than inventory and livestock 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 recevies possession of the goods.
PMSI in Inventory
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, and
>Any secured party who had filed their security interests 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.
Conflicting PMSIs
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 in the same collateral as a lender (a financer-financed PMSI)
>Otherwise, the first secured party to file or perfect prevails
Understanding Secured Transactions
Secured transactions involve transactions based on credit and are governed by UCC Art. 9. How it generally works:
>One party (debtor) receives something from another party (creditor or secured party) without paying immediately
>To ensure debtor will pay eventually, debtor gives creditor rights to a piece of debtor’s property as collateral (i.e., a security interest)
>Security interest (“SI”) = right given to creditor in debtor’s property
»Collateral = property in which creditor obtains rights
»Right allows creditor to take or sell property if debtor fails to fulfill the credit obligation
»Arrangement memorialized in a security agreement
Attaching & perfecting security interests:
>Attachment - process of creating a security interest
»Effect - once a SI attaches, creditor has a right to take the collateral if debtor defaults
>Perfection - process by which creditor secures her rights in the collateral as it relates to third parties
»Relevant where third parties also have an interest in the same piece of collateral
»Creditor must perfect her SI to have priority in the collateral over third parties
Identifying & Classifying Collateral
Classifying the type of collateral involved in a transaction is important in determining how it’s secured and perfected; the main categories are as follows:
Tangible goods - four types classified based on how the debtor is using them:
1) Farming products - items used/produced in farming
2) Consumer goods - items used or bought for personal, household purposes
3) Inventory - goods held for sale or lease
4) Equipment - catchall for tangible items that do not fit above
Intangibles - most common types:
1) Instruments - writings representing the right to be paid money (e.g., promissory notes, checks, etc.)
2) Documents - writings representing the right to receive goods (e.g., bills of lading, receipts, etc.)
3) Chattel paper - record evidencing an obligation and SI in goods or a lease of goods (e.g., a promissory note and security agreement)
4) Accounts - a right to payment of a monetary obligation (not evidenced by an instrument or chattel paper) for property sold or services rendered
»E.g., money owed to a dentist after seeing a patient
»Does not include deposit accounts, investment property, or commercial tort claims
5) Deposit accounts - bank accounts
6) General intangibles - e.g., patent rights, software
Creation & Attachment of Security Interests
SIs are created by contract (security agreement), and security agreements are typically in writing, signed by the debtor and include a description of the collateral
>Once a SI attaches, the creditor is secured, meaning creditor has a right to take the collateral if debtor defaults
Requirements for attachement - three requirements for a SI to attach:
1) Valid security agreement - agreement memorializing SI
>May be evidenced by (1) authenticated security agreement or (2) an oral security agreement in conjunction with creditor’s possession or control of collateral
>Authenticated security agreement - record authenticated by debtor that describes collateral
»Signing, initialing, etc. is adequate proof of authentication
»Agreement must reasonably identify collateral
2) Value - secured party (i.e., creditor) must give value to create a SI
>E.g., creditor laons debtor money or delivers equipment in exchange for SI
>Almost any consideration is sufficient
3) Rights in collateral - debtor must have rights in property he offers as collateral
>Ownership or possessory interest is usually sufficient
Security Agreement Provisions (After-Acquired Property, Future Advances, & Specification Clauses)
UCC Art. 9 generally gives discretion to parties to create their own terms regarding security agreements. Below are common issues:
After-acquired property clauses - extends the SI to property acquired by the debtor after signing the security agreement
Future advances - security agreements may contemplate future loans/advances from creditor to debtor based on debtor’s present collateral or collateral to be acquired in the future
>In such cases, a new security agreement is not required
Specification clauses - parties may includes clauses specifying terms and/or creating provisions for potential events
>E.g., parties may define what consitututes a default, may provide for acceleration of payments upon the happening of a certain event (e.g., one missed payment), etc.
Perfection of Security Interests
A single piece of the debtor’s property may serve as collateral for multiple creditors who all have their own security interest; perfection is relevant to priority of the interests
>I.e., once a SI is attached it is enforceable against the debtor, but it must typically be perfected to give its holder (creditor) superior priority over the other potential SIs to which collateral may be attached.
Significance of perfection - a perfected SI has maximum priority over collateral as compared to other unperfected SIs in that collateral
Attachment as a prerequisite - attachment is a prerequisite for perfection
Methods of perfection
1) Filing
2) Taking possession
3) Automatic perfection (PMSI)
4) Control
Methods of Perfecting Security Interests
There are three primary ways a SI can be perfected:
1) Filing financing statement - usually filed with state office
>Requirements - financing statement must:
»i. Identify debtor - name must match publicly filed articles
»ii. Identify secured party/creditor
»iii. Contain an adequate description of collateral
>Authorization for filing must be obtained from debtor (usually a signed security agreement itself satisfies the requirement)
2) Taking possession (“pledged collateral”) - secured party may perfect a SI in many types of collateral simply by taking possession
>E.g., goods (pawnshop), negotiable documents, instruments
>Certain intangible collateral cannot be perfected by possession (e.g., accounts, electronic chattel paper, general intangibles)
3) Automatic perfection & PMSIs - in some transactions, once collateral is attached, perfection occurs automatically
>PMSI = purchase money security interest
Motor vehicles - SIs in vehicles are perfected by notation on the vehicle’s certificate of title
Automatic Perfection & PMSIs
In some transacctions, SIs are perfected automatically oncce attached; automatic perfection occurs with the following:
PMSI in consumer goods - PMSI arises where a creditor sells goods on credit to debtor and/or advances funds to debtor to buy goods, reserving a SI in the goods themselves
>Consumer goods only - automatic perfection only occurs for PMSIs in consumer goods; a PMSI in inventory or equipment can be perfected by filing or possession
>Limitation - motor vehicles and fixtures:
»Motor vehicles - notation on vehicle title is required for perfection
»Fixture filings - consumer goods that are to become fixtures require a fixture filing to obtain priority over an interest in the real property to which fixture is affixed
Temporary Perfection of Proceeds
SIs in proceeds from original collateral is perfected automatically for 20 days from the debtor’s receipt of the proceeds, but may become unperfected on the 21st day
>Arises where debtor sells property used as collateral; Art. 9 gives creditor an automatic SI in identifiable proceeds from the sale of collateral
Identifiable proceeds - SI in proceeds from collateral is automatically perfected for 20 days from debtor’s receipt of goods
Continuing perfection beyond 20 days - a perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds unless:
a) a filed financing statement cover the original collateral;
b) the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and
c) the proceeds are not acquired with cash proceeds
Priority of Security Interests
Almost any Secured Transaction MEE question will involve issues of priority; note:
>Type of collateral involved
>Type of parties invovled
Priority between parties
>Secured creditor vs. unsecured creditor - SI prevails
»Note - beware of scendariors where someone signed a security agreement but have not given value or has no rights in the collateral
>Perfected vs. unperfected SI - perfected SI prevails
»Applies even if perfected party takes interest with knowledge of earlier unperfected interest
>Perfected vs. perfected SI - first to file or perfect prevails
»When there are conflicting perfected SIs, priority goes to party that first filed or perfected (usually will be first to file)
»Where collateral is not subject to filing requirements (or cannot be filed), first to perfect obtains priority
»Knowledge of prior unperfected SI will not prevent a prospective secured party from filing first to obtain priority
Priority in PMSIs
PMSIs are superpriorities, meaning they are superior to prior perfected SIs in the same goods, subject to the below conditions
PMSI in inventory - has priority over other SIs in the inventory or certain proceeds (instruments, chattel paper, identifiable cash proceeds) if:
1) PMSI is perfected when debtor takes possession of inventory; and
2) Other parties who filed their SIs in inventory receive authenticated notification of the PMSI before debtor takes possession of inventory
>Notification must state that PMSI will be taken in debtor’s inventory and describe the kind and type of inventory
PMSI in goods other than inventory and livestock - has priority over other SIs in the same goods and their proceeds if PMSI is perfected before or within 20 days after debtor receives possession of the collateral
>No requirement that secured party notify other SI holders
Conflicting PMSIs - where there are multiple PMSIs in the same collateral, priority goes to:
a) Secured party who has a PMSI as the seller of the collateral (as opposed to the lender), or
b) Otherwise, first secured party to file or perfect
