Secured Transactions Flashcards
thank you doug moll <3
default
an event that causes the security interest to spring to life
Article 9 doesn’t define what constitutes default
look to the contract bt the debtor and creditor to define default
collateral
the property subject to the security interest
A creditor can repossess this property upon the debtor’s default to ensure the debt is paid
security interest
an interest in personal property or fixtures that secures payment or performance of an obligation
* aka a contingent property interest in the debtor’s collateral
* a creditor has no rights in the debtor’s property unless the contingency (default) happens
* when default occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral
- language in an agreement must explicitly create a security interest
debtor
the person who owes the money
creditor
person to whom the money is owed
security agreement
contract between the debtor and creditor that must have language creating the security interest
no magic language necessary- any language creates the idea of a security interest suffices
seller-financed purchase money security interest elements
- The secured party sells the debtor collateral on credit and
- retains a security interest in that collateral
financer-financed PMSI
- A loan to the debtor to purchase specific collateral
- the loan is used to acquire that collateral and
- the creditor takes a security interest in that specific collateral
Someone other than the seller loans to the debtor
after-acquired property clause
a security agreement in which the creditor takes a security interest in the debtor’s present property and property the debtor acquires in the future
future advance clause
grant of a security interest in which the debtor’s same collateral is used to secure future loans
Debtor puts a clause in the security contract that says “the car I’m giving you a loan for today is going to be collateral for this loan and for any loan I might make to you in the future”
attachment
the steps legally required to create a security interest in collateral effective against the debtor
attachment= security interest created
A creditor is not a secured creditor until attachment
perfection
steps necessary to give the secured party an interest in the collateral that is effective against the world (other creditors)
process of giving public notice of the security interest to the world
goods
Article 9
tangible, movable, personal property
four types of goods
- consumer goods
- equipment
- farm products or
- inventory
how are goods classified
definition not categories
based on how the debtor is using the collateral
What is the collateral in the hands of the debtor?
consumer goods
goods used or bought for use, primarily for personal, family, or household purposes
equipment goods
A good used or bought for use in business
what is the default/catch-all category for goods
equipment
good doesn’t fit the other good definitions -> classify the good as equipment even if it doesn’t fit the def of equipment
farm products
goods associated with farming - facts must include a farmer
crops or livestock or supplies used or produced in farming operations
or products of crops or livestock in their unmanufactured state if they are in the possession of a debtor engaged in farming operations
inventory
goods held by the debtor who holds them for sale or lease including materials used or consumed in a business in a short period of time (raw materials, consumables)
define
intangible or semi-intangible collateral
collateral categorized by the nature of the collateral (rather than its use)
instruments
pieces of paper representing the right to be paid money
intangible/semi-intangible good
ex: promissory notes, drafts, certificates of deposit, checks
documents
intangible/semi-intangible good
doc that represents the right to receive goods (warehouse receipt)
chattel paper
record or records that evidence:
- monetary obligation (usually a promissory note) AND
- a security interest in or a lease of specific goods (usually a security agreement)
record
information that is stored in a tangible medium or an intangible medium
electronic chattel paper
Chattel paper that is stored in an electronic medium
investment property
stocks, bonds, mutual funds
accounts
a right to payment for property sold or services rendered
(account receivable)
NOT bank accounts
deposit accounts
a non-consumer account maintained with a bank
non-consumer= business bank account
if you just see “bank account” assume a deposit account
commerical tort claim
basically a lawsuit
claim arising in tort to which
1. the claimant is an organization (partnership or corp) or
2. claimaint is an individual, the claim arose of out the claimant’s business or profession, and the claim does not include dmaages for personal injuryor the death of an individual
general intangible
any personal property not falling in the other definitions
ex: intellectual property, patent and trademark rights, goodwill
default/catch-all category for intangible goods
general intangible
Three requirements for attachment
- security agreement
- value given
- debtor has rights in the collateral
three requirements for creating a security interest
three ways to show evidence of a security agreement
- the creditor takes possession of the collateral (oral agreements only)
- the parties create an authenticated security agreement or
- the creditor takes control of the nonconsumer deposit accounts, electronic chattel paper, and investment property
requirements for a written security agreement
for attachment
- a written record that shows an intent to create a security interest
- that is authenticated by the debtor (signed or by any means that would show the present intent to authenticate the record)
- and contains a description of the collateral that reasonably identifies the collateral
what is required for a valid oral security agreement/pledge
The secured party (creditor) must be in possession of the collateral AND language that creates or provides for the security interest
methods to describe collateral in a written security agreement
- by normal vocab (fridge, tv, etc)
- by the article 9 categories of goods/intangible goods
CANNOT say “all of the debtor’s property/assets” -> too generic, doesn’t reasonably identify the collateral
“value given” requirement of attachment
exchange of value between the creditor and debtor (each gives something)
* every debtor gives value by promising (if implicitly) to repay the loan
* consider whether the creditor gave value to the debtor
definition of “value given” for attachment
any consideration sufficient to support a simple contract is enough
BUT even past consideration is enough in article 9
debtor has rights in the collateral
the debtor has to have rights in the thing he or she is offering up as collateral
right is usually ownership
when does attachment occur
at the moment the last requirement is satisfied (requirements can be satisified in any order)
what rights does the secured party have in the debtor’s property at the time of signing the security agreement if there is no explicit after-acquired property clause
The secured party only has a security interest in collateral the debtor had rights to at the time of the signing agreement
when will courts imply an after-acquired property clause even when it is not explicitly stated in the security agreement
if the collateral is of a type rapidly depleted and replenished
* usually inventory or accounts
* ex: grocery stores -> it wouldn’t make sense for the creditor not to take an interest in after-acquired property bc the inventory turns over so much
proceeds
whatever is recceived upon the sale, exchange, collection, or other disposition of collateral or proceeds of the collateral
identifiable
in terms of proceeds
the secured creditor can prove that the proceeds can be traced back to the creditor’s original collateral
huge idea about proceeds and secured creditors
secured creditors automatically get a security interest in identifiable proceeds
co-mingling
when you mix proceeds with non-proceeds such that you cannot distinguish them
happens most often with cash
what is the lowest intermediate balance test used for?
to determine whcih part of a comingled mass of cash is identifiable (and thus gives creditors a security interest in it)
lowest intermediate balance test
- look at the balance in a co-mingled bank account starting at the time the proceeds are deposited and ending at the time you are applying the test.
- the lowest balance during that time period is the secured party’s identifiable proceeds but the amount can’t exceed the value of the cash proceeds originally deposited
**Pick the lowest number that the account was at during the time period that does not exceed the original proceeds dumped into the account **
supporting obligation
guarantee or surety- a promise to pay the debt of another
when has a security interest been perfected?
- when it has attached AND
- one of the methods of perfection has occurred
order is irrelevant
methods of perfecting a security interest
- automatic perfection
- possession
- control
- notation of the lien on certificate of title
- filing a financing statement
situations in which automatic perfection occurs
- PMSI in **consumer goods **(either PMSI)
- Secured party takes physical possession of the collateral
consumer goods do not include motor vehicles (see notation on certificate of title)
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when is perfection by physical possession impossible?
When the goods are general intangibles, accounts, electronic chattel papers
most common type of collateral that can be perfected by possession
goods (any type)
what is the only way to perfect a security interest in money?
posession
methods of perfection by control
- automatic control by the bank maintaining the nonconsumer deposit account
- putting the deposit account in the secured party’s name
- control agreement
types of collateral that can be perfected by control
security interest in investment property, nonconsumer deposit
accounts, and electronic chattel paper
what is the only method for perfection of non-consumer (business bank account) deposit accounts?
perfection by control
control agreement
method of perfection by control in which a contract is created between the debtor, creditor, and the bank where the bank account is that gives the bank account permission to give the creditor the debtor’s bank account upon default
only way to perfect a security interest in a motor vehicle
notation on the certificate of title
notation on certificate of title
secured party’s lien is noted on the cetificate of title by a governmental authority
if debtor is holding cars and trucks as inventory (car dealership), how can they perfect their security interest in those vehicles?
By filing a financing statement
if a car dealership is loaning money to a debtor that holds the vehicle as inventory, the car dealership can perfect a security interest in those vehicles as inventory by filing a financing statement that describes the collateral as inventory (can’t use notation on certifitate)
perfection by filing a financing statement
contents of the financing statement
- the debtor’s name
- description of the collateral
- authorization of filing the financing statement by the debtor (no signature required)
what is a form UCC1
financing statement
debtor is a partnership- what name should be on the financing statement
The partnership name
notes on debtor’s name requirement on a financing statement
- can’t use debtor’s trade name (trade name: non-legal name used by a business)
- must file under an individual’s name on their non-expired driver’s license
- no non-expired driver’s license -> file under debtor’s “name” (name= name by which you are known in the community)
- can have mistakes in the financing statement as long as they are not seriously misleading and still have the statement be effective
test for whether the debtor’s name is seriously misleading in a financing statement
- whether a search under the debtor’s correct name,
- using the filing office’s search logic (depends on the search logic the most)
- would retrieve the original financing statement
If the filing system woudl find the original financing statement -> name error is not seriously misleading
does not -> error is seriously mistleading
is a spelling error seriously misleading in a financing statement?
most likely yes
there is no search engine that corrects for spelling errors
are errors by the financing office seriously misleading
No. the financing statement is still effective
debtor changes name under a financing statement effects
A financing statment with the debtor’s wrong name is still effective to perfect a SI in any collateral the debtor owed at the time of the name change plus four months
For collateral acquired after the four month period, the creditor must refile with the debtor’s correct name
description of the collateral in the financing statement
description must reasonably identify the collateral
same test as the security agreement EXCEPT supergeneric descriptions are allowed here “all of the debtor’s property” etc
are after-acquired clauses required in financing statements to have a SI in property acquired after the financing statement is filed?
No. As long as the description in the financing statement is broad enough to cover the after-acquired property
“now owned or later acquired” sufficient
**
authorization of the filing statement def
authorization may be in any writing signed by the debtor (security agreement can be the signed writing)
ipso facto authorization
ipso facto authorization of the filing statement
the debtor automatically authorizes the financing statement if she authenticates (signs) a security agreement authenticating the same collateral
as long as the debtor signs the security agreement, that signature ipso facto authorizes the creditor to file a financing statement covering the same collateral
where do you file the financing statement
unless otherwise provided in the state’s article 9, with the secretary of state
where do you file the financing statement for real estate related collateral
county filing with the county clerk where the real estate is located
where do you file the financing statement for everything BUT real estate related collateral (personal property)
file with the secretary of state for the state whose law applies to the transaction
multiple state transactions
where to file the financing statement?
file in the state where the debtor is located
where is the debtor located for purposes of filing the financing statement
if debtor is an individual
located at their principal residence
where is the debtor located for purposes of filing the financing statement
if the debtor is a registered org (org that had to file with the state to exist)
located in the state where the org is incorporated/where the org is organized
where is the debtor located for purposes of filing the financing statement
if the debtor is an unregistered org (general partnership)
located in its place of business or if more than one, at its chief executive office
individual debtor moves across state lines - where are they located?
for purposes of filing the financing statement
The secured party will become unperfected four months after the debtor’s move unless it files a financing statement in the new jx before the four months end
collateral moves across state lines to a new owner in a different state- where are they located
for purposes of filing the financing statement
the secured party will become unperfected one year after the collateral moves unless the secured creditor files a new financing statement in that jx within that period
how long is a financing statement effective for
five years from the date of filing
how to extend the life of a financing statement
by filing a continuation statement within the last 6 months of the five year life of the financing statement
continuation statement extends by 5 more years
termination statement
document the creditor files that states that there is no outstanding obligation of the debtor
creditor has no more security interest in the debtor’s collateral
must be provided to the debtor within 20 days of paying off the debt
security interest in proceeds
- how long does perfection last
creditor gets 20 days of free perfection
same office rule
The security interest in proceeds will continue to be perfected
beyond the 20 days if:
1. the security interest in the original collateral was perfected by filing in the same place as the financing statement for the original inventory AND
- all personal property is at the secretary of state’s office
2. the proceeds were not purchased with cash
usually in swap transactions -> rule doesn’t work if the collateral was bought with cash
the free 20 days of automatic perfection ends at day 21 UNLESS the proceeds are:
- identifiable cash or
- if the same office rule applies
most common same office rule example
**inventory to accounts **
debtor has inventory that is sold on credit so accounts are produced
- financing statement against inventory
- inventory got sold on credit -> accounts were produced
- the accounts are proceeds
- financing statement for accounts is filed in the same place as inventory (secretary of state)
- accounts were not acquired with cash
same office rule applies
priority
determines which creditor is first in line to get paid against a single piece of collateral
1- identify the creditors
2- apply the relevant priority rule
self-help repossession
creditor takes collateral without going to court first
judicial repossession
creditor taking back the collateral with the judicial process
creditor files a replevin lawsuit to get the sheriff to repossessor the debtor’s property
when can a creditor do self-help repossession
If taking the collateral can be done** without breach of the peace**
If the secured party breaches the peace, he loses the authorization to repossess and can be sued for conversion, assault, trespass, etc and liable for actual and punitive damages
what constitutes a breach of peace
jurisdictionally dependent but in general:
* any conducted by the secured party that has the potential to lead to violence (usually physical presence of the debtor or rep plus verbal objection = breach of peace)
- unauthorized entry into a home, even through an open window (less likely for commerical property than residential) and even if authorized in the security agreement (need consent at the time of entry
- picking a lock and then not re-locking on the way out (leaving premises open for theieves)
what doesn’t constitute breach of peace
- simple trespass is not usually a breach of the peace
- taking a car from the driveway without confrontation (best at nighttime)
if self-help is unavailable, how can the secured party get the goods?
judicial process
replevin
court proceeding to repossess collateral
self-help method for equipment
If the goods are equipment, the secured party can make the equipment unusable and dispose of it on the debtor’s property if she can do so without breach of the peace (taking keys, taking engine wires)
this is allowed bc of the issue of taking possession of bulky, heavy-duty equipment that is not easily movable
self-help method for accounts
if the collateral is accounts, the SC can notify the all persons who owe money to the debtor and tell them to pay the SC not the debtor
Upon noticiation, the others debtor must pay the SC. Payment to the debtor doesn’t discharge the obligation
strict foreclosure
creditor repossesses the collateral and keeps it to satisfy the debt instead of selling the collateral
when is strict foreclosure allowed
- if the debtor objects -> can’t keep collateral -> must sell
- if other creditors who have liens in the same collateral objection -> can’t keep -> must sell
- if neither objects -> creditor can keep collateral
A SC wishing to retain the collateral must:
* notify any other creditor who has a lien in that same collateral and get permission from them to keep the collateral AND
if the other creditor(s) object, the creditor cannot keep the collateral
- obtain the debtor’s consent through agreement or failing to make an authenticated objection within 20 days (only full strict foreclosures)
when there is a foreclosure sale, the foreclosing lien gets wiped out and any junior liens. Any liens senior to foreclosing lien stay on the property
foreclosure sale requirements
- reasonable notice to the debtor and anyone else who has an interest in the property
- sent within a reasonable time before the sale (10 days or more before sale)
every aspect of a foreclosure sale must be WHAT
commerically reasonable
anything that seems like it’s screwing the debtor in some way is not commercially reasonable
low price alone is not enough to make a sale commercially unreasonable -> must consider other factors
where does the money from a foreclosure sale go?
In order of where the money goes
1. repaying the cost of the repossession and sale
2. paying off debt of foreclosing creditor
3. paying off debt of creditors with lower priority than foreclosing creditor
4. leftover surplus goes to debtor
deficiency judgment
the amount a creditor can collect from the debtor beyond the value of the collateral
if the foreclosure sale is not commercially reasonable, who is punished and how?
The creditor is penalized under the statute for the goods AND the creditor cannot obtain a deficiency judgment (presumptively loses any deficiency)
debtor’s right to redeem
debtor’s ability to recover collateral by paying everything owed to the creditor before the foreclosure sale
acceleration clause
if the debtor defaults (even for one installment payment), the bank can demand the entire loan balance due right now
present in most security agreements
how to perfect a security interest in real fixtures
- a fixture filing must be filed in the office where a mortgage in the real estate would be filed (county filing)
- basically a financing statement (form UCC1)
fixture
goods permanently attached to real property
something that started off as personal prop but then got attached to real estate in such a way that it is difficult to remove (law treats it as part of the real estate)
what must a fixture filing contain
- info from the financing statement and
- description of the real property and
- name of the owner
rights of the secured party in the fixture when the debtor defaults
if the secured party has an SI that has priority over all interests in the real prop, the secured party can remove the fixture from the real prop
f the debtor doesn’t 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.
secured party with interest in fixtures vs subsequent real estate interest
an SI fixtures has priority over any real estate interest that is recorded after the perfection of the SI by fixture filing
secured party with interest in fixtures v. prior real estate Interest
A prior real estate interst that is properly recorded has prior over a later SI in fixtures
secured party with PMSI in fixtures v. prior real estate Interest
Secured party with PMSI in fixtures takes priority over an earlier real estate interest if the PMSI in fixtures pefects with a fixture filing before the goods become fixtures or within 20 days thereafter (??)
secured party with PMSI in fixtures vs. construction mortgage
construction mortgage always wins
accessions
goods physically united with other goods in such a matter than the identity of the original goods is not lost
little thing attached to a bigger thing but you can still see the little thing and remove it
ex: tires on a car
perfection of an SI in an accession
if the SI is perfected when the collateral becomes an accession, the SI remains perfected in the collateral
priority of an SI in an accession
general priority rules apply to accessions
special priority rule for accession
applies to vehicles only
an SI in an accession is subordinate to a SI in the whole if the SI in the whole is perfected by compliance with the certificate of title statute
