Secured Transactions Flashcards
Secured Transaction, Secured Party, Debtor, Security Interest, Security Agreement, Collateral, Financing Statement: Transaction when the payment of a debt is guaranteed, or secured, by personal property owned or held by the debtor
Secured Transaction
Secured Transaction, Secured Party, Debtor, Security Interest, Security Agreement, Collateral, Financing Statement: Any creditor who has a security interest in the debtor’s collateral. This creditor can be a seller, a lender, a cosigner, or even a buyer of accounts or chattel paper
Secured Party
Secured Transaction, Secured Party, Debtor, Security Interest, Security Agreement, Collateral, Financing Statement: A party who owes payment or other performance of a secured obligation
Debtor
Secured Transaction, Secured Party, Debtor, Security Interest, Security Agreement, Collateral, Financing Statement: Interest in the collateral (such as personal property, fixtures, or accounts) that secures payment or performance of an obligation
Security Interest
Secured Transaction, Secured Party, Debtor, Security Interest, Security Agreement, Collateral, Financing Statement: Agreement that creates or provides for a security interest
Security Agreement
Secured Transaction, Secured Party, Debtor, Security Interest, Security Agreement, Collateral, Financing Statement:Subject of the security interest
Collateral
Secured Transaction, Secured Party, Debtor, Security Interest, Security Agreement, Collateral, Financing Statement: Instrument normally filed to give public notice to third parties of the secured party’s security interest
Financing Statement
Creation of Security Interest
- Written or Authenticated Security Agreement that clearly described the collateral subject to the security interest and is signed or authenticated by the debtor
- Secured party must give the debtor something of value
- Debtor must have rights in the collateral
Security Interest Question: is only the creditors signature required? Only the debtor? or both?
Only the debtor’s signature or authenticate is required to create the security interest
Perfection of Security Interest
Legal process by which secured parties protect themselves against the claims of third parties who may wish to have their debts satisfied out of the same collateral
Security Interest Question: Would a description of “ all the debtor’s personal property” be sufficient? “ All the debtor’s assets”?
A security agreement must contain a description of the collateral that reasonably identifies it. These would not constitute a sufficient description
Requirements for Perfection of Security Interest
- Must be filed in the name of the debtor
- Must describe the collateral
- Filing
Requirements for Perfection of Security Interest: What if the name of the debtor changes?
If the’s name changes, the financiangin statement remains effective for collateral the debtor acquired before or within 4 months after the name change. Unless an amendment to the finan statement is filed within this 4 month period, collateral acquired by the debtor after the 4months period is unperfected
Requirements for Perfection of Security Interest: What must describe the collateral the security agreement or the financing statement
Both. The description in the security agreement must be more precise than the description in the financing statement, which is allowed to be more general
Requirements for Perfection of Security Interest Filing: By who
Financing statements are filed in a state Secretary State’s office where the principal debtor is located. An exception occurs when the collateral consists of timber to be cut, fixtures, or items to be extracted - such as oil, coal, gas, and minerals. In those circumstances, the fin statement is filed in the county where collateral is located
Consequence of an improper filing
Any improper filing renders the secured party’s interest unperfected and reduces the secured party’s claim in bankruptcy to that of an unsecured creditor.
Effective time of statement:
A financing statement is effective for five years from the date of filing. A continutation statement can by filed within 6 months prior to expiration to continue the effectiveness of the financing statement for another 5 years.
If a financing statement lapses, the security interest that had been perfected by the filing now becomes unperfected. A purchaser can take the property that was used as collateral as if the security interest had never been perfected.
Perfection of Security Interest Exceptions to Filing: Perfection by Possession
A security agreement need not to be in writing to be enforceable if the collateral is transferred to the secured party.
Ex: Example: Sheila needs cash to pay for a medical procedure. She obtains a loan for $4,000 from Trent.
As security on the loan, she gives him a promissory note on which she is the payee. Even though the
agreement to hold the note as collateral was verbal, Trent has a perfected security interest. He does not
need to file a financing statement because he has possession of the note. No other creditor of Sheila’s
can attempt to recover the promissory note from Trent in payment for other debts.
Certain items – such as stocks, bonds, negotiable instruments, and jewelry – are commonly transferred
into the creditor’s possession when they are used as collateral for loans
Perfection of Security Interest Exceptions to Filing: Purchase Money Security Interest
A PMSI in consumer goods (items brought primarily for personal, family, or household purpose) is created when a seller or lender agrees to extend credit to a buyer for part or all of the purchase price of the goods in a sales transaction
Example of what type of perfection of security interest exception perfection by posession, purchase money security interest, : Sheila needs cash to pay for a medical procedure. She obtains a loan for $4,000 from Trent.
As security on the loan, she gives him a promissory note on which she is the payee. Even though the
agreement to hold the note as collateral was verbal, Trent has a perfected security interest. He does not
need to file a financing statement because he has possession of the note. No other creditor of Sheila’s
can attempt to recover the promissory note from Trent in payment for other debts.
Example of what type of perfection of security interest exception perfection by posession, purchase money security interest, : Sheila needs cash to pay for a medical procedure. She obtains a loan for $4,000 from Trent.
As security on the loan, she gives him a promissory note on which she is the payee. Even though the
agreement to hold the note as collateral was verbal, Trent has a perfected security interest. He does not
need to file a financing statement because he has possession of the note. No other creditor of Sheila’s
can attempt to recover the promissory note from Trent in payment for other debts.
Certain items – such as stocks, bonds, negotiable instruments, and jewelry – are commonly transferred
into the creditor’s possession when they are used as collateral for loans
Example of what type of perfection of security interest exception perfection by posession, purchase money security interest : Jami purchases a Whirlpool washer and dryer from West Coast Appliance for $2,500.
Unable to pay the entire amount in cash, Jami signs a purchase agreement to pay $1,000 down and
$100 per month until the balance, plus interest, is fully paid. West Coast Appliance is to retain a
security interest in the appliances until full payment has been made.
Example: Jami purchases a Whirlpool washer and dryer from West Coast Appliance for $2,500.
Unable to pay the entire amount in cash, Jami signs a purchase agreement to pay $1,000 down and
$100 per month until the balance, plus interest, is fully paid. West Coast Appliance is to retain a
security interest in the appliances until full payment has been made. Because the security interest was
created as part of the purchase agreement with a consumer, it is a PMSI, and West Coast Appliance’s
security interest is automatically perfected
Example of what type of perfection of security interest exception perfection by posession, purchase money security interest : Jackson purchases a car from a dealership using a loan from XYZ Bank, which is secured by the car itself. In Jackson’s jurisdiction, the state requires a security interest in automobiles to be perfected through a certificate of title
Exceptions to Automatic Perfection of a PMSI:
Certificate of Title Statutes: Many jurisdictions, for instance, have certificate-of-title statutes that
establish perfection requirements for security interests in certain goods, including automobiles, trailers,
boats, mobile homes, and farm tractors
Scenario:
Jackson purchases a car from a dealership using a loan from XYZ Bank, which is secured by the car itself. In Jackson’s jurisdiction, the state requires a security interest in automobiles to be perfected through a certificate of title. While PMSIs are typically automatically perfected, in this case, XYZ Bank must follow the state’s certificate-of-title statutes to perfect its security interest in the vehicle. This involves recording its interest on the vehicle’s title to protect its claim against potential third-party buyers and creditors. Without this step, the bank’s security interest would not be perfected, leaving it vulnerable if Jackson defaults on the loan or sells the car.
Example of what type of perfection of security interest exception perfection by posession, purchase money security interest : ABC Company, a retail business, takes out a loan to purchase inventory, securing the loan with the inventory itself.
Exceptions to Automatic Perfectionof a PMSI: PMSIs in Nonconsumer Goods: PMSIs in nonconsumer goods, such as a business’s inventory or
livestock, are not automatically perfected. UCC 9-324. Scenario:
ABC Company, a retail business, takes out a loan to purchase inventory, securing the loan with the inventory itself. Since this inventory is classified as nonconsumer goods, the Uniform Commercial Code (UCC) 9-324 states that PMSIs in business inventory are not automatically perfected. Therefore, to ensure a perfected security interest, ABC’s lender must file a financing statement with the appropriate government office (often the state’s Secretary of State) to protect its interest in the inventory. Without filing, the lender’s PMSI in ABC’s inventory would not be perfected, and the lender could lose priority to other creditors if ABC defaults.
Rules of priority: Perfected security interest versus unsecured creditors and unperfected security interests When two or more parties have claims to the same collateral
a perfected secured party’s interest has priority over the interest of most parties
Rules of priority: Conflicting perfected security interest, when two or more secured parties have perfected security interest in the same collateral
generally the first to perfect (by filing or taking posession of the collateral) has priority
Rules of priority: Conflicting unperfected security interests when two conflicting security interests are unperfected.
the first to attach ( to be created) has priority) this is often called the f irst in time rule
Rules of priority: Example: Rick Morales and his wife and son own a dairy farm called Lost Creek Heifers (LCH) that
has received multiple loans through Ag Services, Inc. Morales executes a promissory note and security
agreement in favor of Ag Services. The note lists all of LCH’s accounts, equipment, farm products,
inventory, livestock, and proceeds as collateral. A year later, Morales and his wife separate and he
signs a separation agreement giving her some cash and land.
The following year, Morales buys out his son’s interest in LCH by giving him a promissory note for
$100,000. The note lists all of LCH’s equipment, inventory, livestock, and proceeds as collateral.
Morales also sells a herd of dairy cows for $500,000 and gives his former wife a check for $240,000.
LCH files for bankruptcy shortly thereafter. A dispute arises over which party (Ag Services, Morales’s
son, or Morales’s former wife) is entitled to the proceeds from the sale of the cows.
Example: Rick Morales and his wife and son own a dairy farm called Lost Creek Heifers (LCH) that
has received multiple loans through Ag Services, Inc. Morales executes a promissory note and security
agreement in favor of Ag Services. The note lists all of LCH’s accounts, equipment, farm products,
inventory, livestock, and proceeds as collateral. A year later, Morales and his wife separate and he
signs a separation agreement giving her some cash and land.
The following year, Morales buys out his son’s interest in LCH by giving him a promissory note for
$100,000. The note lists all of LCH’s equipment, inventory, livestock, and proceeds as collateral.
Morales also sells a herd of dairy cows for $500,000 and gives his former wife a check for $240,000.
LCH files for bankruptcy shortly thereafter. A dispute arises over which party (Ag Services, Morales’s
son, or Morales’s former wife) is entitled to the proceeds from the sale of the cows. In this situation, a
court will likely find that because Ag Services’ security interest in the proceeds was the first in time to
attach, Ag Services has first priority to the proceeds.
Release, Assignment, Termination Statement: A secured party can provide a __ of any collateral described in the financing statement, thereby terminating its security interest in the collateral.
A secured party can release all or part of any collateral described in the financing statement, thereby terminating its security interest in the collateral. The release is recorded by filing a uniform amendment form
Release, Assignment, Termination Statement: A secured party can provide ____ of the security interest to a third party (the
assignee).
A secured party can also assign all or part of the security interest to a third party (the
assignee). The assignee becomes the secured party of record if the assignment is filed by use of a
uniform amendment form
Q: Under UCC 9-609(b), what remedy is available to a secured party on the debtor’s default?
A: Self Help Remedy: The secured party can take possession (peacefully or by court order) of the collateral covered by the security agreement
When the debtor has fully paid the debt, if the secured party perfected the
security interest by filing, the debtor is entitled to have a ___
When the debtor has fully paid the debt, if the secured party perfected the
security interest by filing, the debtor is entitled to have a termination statement filed. Such a statement
demonstrates to the public that the filed perfected security interest has been terminated. UCC 9-513
Q: What constitutes “peaceful possession” under the UCC?
A: Peaceful possession occurs if the secured party takes the collateral without committing trespass, assault/battery, or breaking and entering.
Q: What does UCC 9-620 allow a secured party to do with collateral after repossession?
A: The secured party may retain the collateral to satisfy the debt, subject to limitations.
Q: What is the exception to collateral retention for consumer goods under UCC 9-620(e), (f)?
A: If the debtor has paid 60% of the purchase price or loan amount on a PMSI, the secured party must sell or dispose of the collateral within 90 days.
Q: How must a secured party dispose of collateral if they choose not to retain it, according to UCC 9-611(b), (c)?
A: The secured party must dispose of the collateral in a commercially reasonable manner and notify the debtor and other parties in advance.
Q: When is notification not required before disposing of collateral under the UCC?
A: Notification is not required if the collateral is perishable, will rapidly decline in value, or is customarily sold on a recognized market.
Q: What is a deficiency judgment?
A: A court order allowing the creditor to collect any remaining debt if the collateral disposition does not cover the entire debt.
Q: What must a debtor do to redeem the collateral under UCC 9-623?
: The debtor must pay the entire debt owed, plus any reasonable expenses and attorney fees incurred in retaking and maintaining the collateral.
