Secured Transactions Flashcards
Requirements to Create an Enforceable and Attached Security Interest
All three elements of enforceability and attachment under UCC § 9-203 are:
- value was given (e.g., loan),
- the debtor had rights in the inventory, and
- the debtor authenticated a security agreement containing a description of the collateral.
Perfected Security Interest in Business Equipment
First, value must be given. UCC §9. This criterion is fulfilled by the loan made by the bank to the business.
Second, the debtor must have rights in the collateral.
Third, either the secured party must take possession of the collateral or the debtor must authenticate a security agreement containing a description of the collateral.
The agreement that the business owner signed is a “security agreement” because it is an agreement that creates or provides for a security interest. By signing the security agreement, the business owner authenticated it.
Perfection Through Possession
In the case of security interests in goods, one method of perfection is for the secured party to take possession of the goods.
Security Interest Perfected Before Judgment Creditor Lien
Except as otherwise provided in the UCC, a security agreement is effective against creditors.
However, a judgment lien has priority over an unperfected security interested.
A security interest is not perfected unless it has “attached.” A security interest attaches when it becomes enforceable unless the time of attachment has been postponed by agreement.
Priority of Perfected Security Interest
Priority between competing perfected security interests is generally determined by the “first to file or perfect” rule of UCC §0-322(a)(1).
A perfected security interest has superiority over unperfected security interests.
Exception to Shelter Principle: BIOCOB
Under the Shelter Principle, a security interest continues after the sale of collateral. But this general rule is subject to several exceptions. In particular, a buyer in the ordinary course of business (BIOCOB) takes free of a security interest created by its seller even if the security interest was perfected.
A BIOCOB is a buyer who buys in good faith withoutknowledge that the sale violates the rights of another from a person in the business of selling goods of the kind and in the ordinary course of the seller’s business.
Shelter Principle
Under the “shelter principle,” once a buyer acquires consumer goods free of the finance coompany’s security interest, any subsequent transfer of the property by the buyer to someone else was also free of the finance company’s security interest.
Disposal of Collateral
When collateral is disposed of, a secured party automatically obtains a security interest in identifiable proceeds of the collateral.
Security interest in the check as proceeds is perfected for a 20-day period unless one of three criteria in the UCC is satisfied.
Sale of an Account
Sale of “accounts” as that term is defined in Article 9 of the Uniform Commercial Code.
A sale of accounts is governed by UCC Article 9 even though the transaction is not one in which property secures an obligation. Because Article 9 governs a sale of accounts, Article 9 vocabulary is applied to the sale, so that the rights of the buyer of the accounts are referred to as a “security interest,” the sold accounts are “collateral,” the seller is the “debtor,” and the buyer is the “secured party.”
Unperfected Security Priority
An unperfected security interest is subordinate to a perfected security interest in the same property.
A purchase-money security interest in collateral other than inventory has priority over a competing non-purchase money security interest (even if it was perfected before the purchase money security interest) if the purchase-money interest was perfected when the purchaser received possession of the collateral or within 20 days thereafter.
Authentication of Assignment of Accounts to a Bank
Under UCC Article 9, an account debtor with respect to assigned accounts is entitled to discharge its obligation by paying the assignor only until the account debtor receives nothing of the assignment to the assignee, authenticated by either the assignor or the assignee, directing the account debtor to make payment to the assignee. Once such a notice has been received, the account debtor is entitled to discharge only by paying the assignee.
Secured Party Disposal of Secured Property
Under the UCC Article 9, after default by the debtor, a secured party may dispose of the collateral. If it does so, the proceeds of that disposition will be applied first to the expenses of that process and then to the satisfaction of the debtor’s obligation to the secured party.
Before disposing of the collateral, however, the secured party must send the debtor a “reasonable authenticated notification of disposition.” The only exception to this notification requirement is if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market.
Security Interest Denominated as a “Lease”
Whether a transaction in the form of a lease actually creates a “true lease” or a security interest depends on the economic realities of the transaction, not on the form of the transaction or the supposed intent of the parties. Under the UCC, a transaction in the form of a lease creates a security interest if lease payments must be made for the full term of the lease and are not subject to termination, and the lessee has an option to become the owner of the goods for nominal additional consideration at the conclusion of the lease agreement.
Substance v. Form
Under the UCC, the substance of a transaction controls, rather than its form or the lable given to it by the parties. If a lender’s interest exists to secure performance of the borrower’s payment obligation, it is a security interest even though the parties did not lable it as such.
Inventory
If an item is not held for sale or lease, it is not inventory; it is equipment. However, if an item was acquired upon the exchange of collateral, the item is “proceeds” of that collateral. A security interest in collateral extends to identifiable proceeds of that collateral.
Exception to Shelter Principle: Buyer of Consumer Goods
Under the Shelter Principle, a security interest continues after sale of the collateral.
However, a buyer of consumer goods takes free of a security interest in those goods if:
1. the buyer buys without knowledge of the security interest;
2. gives value;
3. buys for personal, family, or household use; and,
4. receives the goods before the filing of any financing statement covering them.
Perfected Security Interests
Under UCC Article 9, a security interest is perfected when a financing statement is filed or have possession of the collateral.
Exception to Perfection Requirement: PMSI
Even if a financing statement is not filed, a security interest perfects automatically upon attachment if it is a purchase money security interest (PMSI) in consumer goods. A PMSI is when a seller retains the security interest in the collateral to secure the buyer’s obligation to pay the remainder of the purchase price. Consumer goods means it was bought for personal, family, or household purposes.
Superior Claims: Contract Terms
Even if a creditor has a contract with the debtor stating that they retain title to the collateral until the debtor pays for them, the creditor does not have a priorirty claim over the collateral unless they have a perfected security interest in the collateral (i.e., filed a financing statement).
Superior Claims: Reselling of Collateral
When a secured party with priority disposes of collateral, the proceeds of that disposition are applied in the following order:
1. expenses of the disposition;
2. satisfaction of the obligation owed to the disposing secured party; and,
3. satisfaction of any obligation secured by a subordinate interest.
A secured party’s disposition of collateral after a debtor’s default transfers the debtor’s rights in the collateral to any transferee for value, and also discharges the secured party’s interest in the collatereal and any subordinate security interest.
