Secured Transactions Flashcards
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Definition: Secured Transaction
A transaction intended to create a security interest in personal property or fixtures.
Sale on credit
Sale where buyer doesn’t pay the full purchase price - pays remainder over time
Security Interest
An interest in personal propetry or fixtures that secures payment or performance of an obligation (property is collateral)
The SI is triggered/contingent on the debtor’s default of payment – then secured party’s interest in the collateral springs to life
Purchase Money Security Interest
Arises when:
1. A secured party sells the goods to debtor on credit and retains a security interest in the goods sold, OR
2. The creditor loans the funds to debtor so debtor can purchase the specific collateral, the funds are used by the debtor to purchase it, and the creditor takes a SI in the collateral for whatever portion of the purchase price still has to be paid.
PMSI’s have special rules and priority as against most other SI’s
After-Acquired Property Clause
A SI in the debtor’s present property and also property that the debtor will obtain in the future. SI in after-acquired property attaches as soon as Debtor acquires it.
Clause must be explicit. Exceptions to A-A clause requirement:
* SI will automatically attach to collateral of a type that’s rapidly depleted and replenished (accounts and inventory)
* SI will automatically attach to identifiable proceeds of collateral
Otherwise, without an A-A clause, only get SI in property owned at the time of signing the agreement
A-A Clause does not apply to consumer goods acquired by debtor more than 10 days after creditor gives value, OR commercial tort claims.
Future Advance Clause
Grant of security agreement securing future loans with the same collateral, no need to sign a separate sec. agmt in the future
Attachment
Steps legally required to give the sec party a SI in the collateral that is effective as against the debtor
Attachment is what makes a creditor a secured creditor
Perfection
Steps legally required to give the sec party a interest in the collateral that is effective as against the other creditors with interests in the same collateral (notice to the world)
Perfection generally through a financing statement filed with the proper authority
Types of Goods (Tangible Collateral)
Focus is on how the debtor uses the collateral
- Consumer goods - used or bought for personal purposes
- Equipment - used or bought for business use (also a default category)
- Farm Products - crops, livestock, or supplies used/produced in farming operations, unmanufactured crops/livestock products - if they are in the possession of a farmer debtor
- Inventory - goods held for sale or lease, goods to be furnchished undre service contracts, and materials used/consumed in a business in a short time period
Intangible or Semi-Intangible Collateral
- Instruments - doc representing right to be paid $ (prom. note, checks)
- Documents - doc representing right to receive goods (warehouse receipt)
- Chattel Paper - record showing (1) monetary obligation and (2) a SI in or lease of specific goods
- Investment Property - stocks, bonds, brokerage accts
- Accounts -right to payment for property sold or services rendered (account receivable)
- Deposit Accounts - bank-maintained account, Art 9 only applies to nonconsumer (usually business) accts
- Commercial tort claims - (does not include PI or wrongful death claim of an individual
- General Intangibles - (default)
Scope of Art. 9
- Transaction that creates a SI in personal property or fixtures by contract
- seller’s retention of title (in delivered goods until buyer pays)
- Agricultrual liens - (perfection and priority of agr. liens)
- Sales of accounts, chattel paper, payment intangibles, and promissory notes
- commercial consignment of goods
- secured sale disguised as a lease (was it reasonable at the time of transaction but the lesser would get the item back while it still had a meaningful economic value?)
Secured sale disguised as a lease
Not a true lease, lease is intended to serve as a security arrangement. Art. 9 governs.
Test: at the time the parties entered the transaction, was it reasonably likely that lessor would get item back while the item still had meaningful economic value?
* if yes – true lease
* if no – actually a sale with a security interest and governed by Art. 9
Requirements for Attachment
Three requirements must coexist:
Agree to create SI
By Security Agreement : parties agree to create the SI
* evidenced by a record/writing showing an intent to create SI
* must be authenticated by debtor (signed)
* with a description of collateral that reasonably identifies the collateral by category/type or specifically (no supergeneric descriptions)
By control or possession
* a secured party in possession must use reasonable care in storing and preserving collateral.
* If insurance is deficient, risk of loss is on debtor
Value must be given to the secured party
any consideration is sufficient, even past consideration or promise to repay
Debtor must have rights in the collateral
debtor must have rights, but need not have title (right to possession is sufficient)
Proceeds
Whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. Can include proceeds of proceeds (second generation.
Proceeds must be identifiable: traced back to the original collateral
SI automatically attaches to identifiable proceeds.
Methods of Perfection
- Filing a financing statement in the proper place (must have debtor and sec. party info, + collateral desc.)
- Taking possession of collateral (pledge) – (e.g. SI in money)
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Control
— Bank maintaining the nonconsumer deposit account
— Putting deposit acct in sec. party’s name
— Control agreement between debtor, bank, sec. party -
Automatic Perfection upon attachment
(e.g. PMSI in consumer goods) -
Temporary Perfection
– automatic temporary perfection of proceeds of a secured collateral for 20 days after receipts of proceeds (except: cash proceeds rule, same office rule)
