Secured Transactions Flashcards
Secured Transactions - Source of Law?
UCC Article 9
What is the scope of Article 9?
Applies to consensual security interests in personalty and fixtures.
How does a creditor attach under Art 9?
To attach you need: Value Contract Rights in the collateral [VCR]
Once attached, how does the creditor attain PERFECTION?
PERFECTION = PUBLICITY
By putting the world on RECORD NOTICE of its existence.
When more than one creditor has a stake in the same collateral, what are the rules of PRIORITY?
First in time = first in right.
The first to perfect takes first, generally.
What if the debtor DEFAULTS on the debt or obligation?
The Art 9 creditor has statutory and judicial remedies
What is personalty under Art 9?
Goods.
Does Art. 9 apply to statutory or mechanic’s liens?
No. Art. 9 applies only to consensual liens.
Collateral Classifications
- Tangible
2. Intangible
Tangible Collateral Test
Subjective - collateral’s primary use in the hands of the debtor (subjective).
Tangible Collateral Types
- Consumer goods
- Equipment
- Inventory
- Farm products
- Fixtures
Intangible Collateral Types
- Patents
- Trademarks
- Copyrights
- Stocks
- Bonds
- Mutual funds
- Proceeds from the sale of collateral
- Accounts
- Promissory notes
- Drafts
Three Requirements for Attachment
Value must be given by creditor
Contract must evidence the secured transaction
Rights in the collateral - debtor must have rights in the collateral
[VCR]
When will Attachment exist without a writing/contract?
If the secured party is in POSSESSION of the collateral.
How can the RECORD/Contract be authenticated?
- Signed/Electronically marked; and
2. Reasonably identify the collateral
Are “after-acquired collateral clauses” enforceable?
Yes.
Floating lien: A lien on a set of assets that can change in quantity and scope over time (e.g. inventory).
How does the creditor perfect security interests?
By record or constructive notice through:
- Possession
- Files public record notice
What is the purpose of creditor perfection?
Protects the secured party from competing creditors.
What is a PMSI?
Purchase Money Security Interest
Enables the debtor purchase the goods and applies to CONSUMER GOODS ONLY.
Automatic attachment but still has to file within 20d of buyer taking possession.
Not just vendor - any loan specifically for purchasing the goods.
What must a creditor file for public record notice?
A “financing statement” containing:
- Debtor’s name and address
- Creditor’s name and address
- Description of the collateral (even general - “all of his assets”)
Where is the “financing statement” (UCC) filed?
With the Secretary of State in the state where the:
INDIVIDUAL DEBTOR has principal residence.
CORPORATIOND DEBTOR is organized.
(EXC - land based collateral)
Exception to central filing of financing statement
If the collateral is timber, minerals, or fixtures then it is filed locally in the county where the land is located.
(Not with SoS)
What is an AUPie?
Attached Unperfected Creditor
What is a lien creditor (“LC”)?
A general unsecured creditor who goes to court to get a judicial lien on collateral
What is a Perfect Attached Creditor (“PAC”)?
Art 9 creditor who succeeds in attaining perfection.
What is a NOCie?
Non-Ordinary Course Buyer who purchases the collateral OUTSIDE the normal stream of commerce.
What is a BIOC?
Buyer In the Ordinary Course who purchases the collateral in the normal stream of commerce.
What is a GUC?
General Unsecured Creditor - creditor who never bothered to take collateral
What is the order of subordination?
[BPL NAGs me in Rivlin]
- BIOC
- PAC
- LC
- NOCie
- AUPie
- GUC
Can a PAC perfect by filing EARLY?
Yes, beginning during negotiations and gets the benefit of the early filing date.
What is an AACF?
After Acquired Collateral Fiancier
Creditor who takes as collateral a security interest “in all of Debtor’s [ ]”e.g. floating lien holder
Who wins in an AACF v. PMSI with Equipment?
PMSI wins, even if later in time, so long as it files properly within 20 days of the debtor taking possession.
Who wins in an AACF v. PMSI with Inventory?
PMSI gets priority ONLY IF:
1. PMSI files properly BEFORE debtor takes possession AND
2. PMSI must notify AACF before debtor takes possession.
(to prevent debtor fraud, floating lien creditor should know status all the time)
Default Defined
A breach of the CONTRACT or security agreement.
Default & Self Help
Self help repossession is PERMISSIBLE so long as the creditor does not BREACH THE PEACE.
Self Help Repossession - Breach the Peace Defined
Whether the creditor did something provocative likely to incite violence
OR
over any protest of the debtor, however mild.
OR
impersonating law enforceemnt (= constructive force)
Self Help Repossession - Entry into creditor’s home?
Home enjoys “zone of privacy”.
May not enter without voluntary and contemporaneous CONSENT!
What is a judicial writ ordering sheriff repossession in NY?
Writ of replevin.
Strict Foreclosure
Creditor retains the collateral in full satisfaction of the debt.
To do so, must send notice proposing to strictly foreclose. To whom?
Strict Foreclosure - notice to whom?
Consumers goods: To debtor and secondary obligors (guarantors and co-signers).
Not consumer goods: Also other known secured parties.
How can strict foreclosure be prevented?
If a notified party objects within 20 days after notice, strict foreclosure is not allowed.
Collateral must then be disposed of by sale.
60% Rule for Consumer Goods
No strict foreclosure if collateral is consumer goods AND debtor has paid 60% of:
[non-PMSI] the loan
[PMSI] the cash price
Secured party must sell collateral within 90 days or be liable in conversion.
The Sale - General Requirements
Must be COMMERCIALLY REASONABLE, whether sale is public or private. (Use this term all over the essay?)
The Sale - Notice
Required to be sent to debtor and secondary obligors and known/perfected secured creditors.
Notice period: REASONABLE. In non-consumer - 10d is reasonable.
The Sale - May the creditor purchase at the sale?
If public sale - yes
If private sale - no
The Sale - Consumer protections
For consumer goods there are rules about:
- How to calculate deficiency
- How debtor can redeem
Deficiency Judgment
Credit files a deficiency judgment if the sale does not satisfy the loan.
Effect of collusion
If secured party sells low to an inside buyer, we apply the price payable by “an independent 3rd party”
How can debtor redeem?
Before foreclosure or resale, debtor must pay
- missed payments owed; and
- interest; and
- creditor’s reasonable expenses including attorney’s fees.
Acceleration Clause
Permits the creditor to declare the entire balance immediately due if any default occurs.
Commercial Paper - Source of Law
UCC Article 3
COMMERCIAL PAPER
Bright Line Rule
When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.
Negotiable Instrument Defined
A writing calling for the payment of money.
Negotiable Instruments - 2 Types
- Promissory note
2. Draft
Promissory Note - Defined
A writing articulating a specific promise to pay. (Not just IOU)
Draft Defined
A written order or command to pay.
Check
Draft - players
Drawer - gives order.
Drawee - the bank
Payee - the beneficiary of the order (can “indorse”)
Requirements for a Negotiable Instrument
otherwise just a contract
WOSSUPP:
- Writing
- payable “to Order” or “bearer”
- Signed by its maker or drawer
- recite a Sum certain
- contain Unconditional promise or order (and no others)
- Payable on demand or at a definite time; and
- Payable in currency.
Conditions permissible in negotiated instrument
Referring to another writing.
Referring to collateral, repayment, acceleration (eg. accelerated upon specific event - OK!).
Reciting a Sum Certain - Must it recite a specific interest rate?
No, in that case the statutory rate will be used.
“Sum certain” - ability to calculate exact amount without reference to any other source.
What causes of action on commercial paper?
- Contract/signature liability
2. Warranty/Transfer liability
For contract liability, who is the defendant?
The maker/promissor/signatory.
What does an indorser promise?
If the check bounces and indorser is notified, indorser promises to pay.
What happens when the words “without recourse” appear?
Indorser/signor passes title with no signature liability.
Warranty/Transfer Liability - Defined
Liability for SELLING a defective instrument
Who is the defendant in a warranty/transfer liability action?
Any transferor who sells the negotiable instrument
Who may sue for breach of warranty?
Anyone in possession of an indorsed instrument.
If not indorsed, only direct transferee can sue transferor.
What warranties in a warranty/transfer claim?
- D (transferor) has good title to the instrument
- All signatures are genuine and authorized
- Instrument has not been materially altered (forgery=breach).
- No defense/claim against D == instrument is enforceable.
- D has no knowledge of bankruptcy or insolvency action against the maker or drawer.
What makes an instrument duly negotiated?
An instrument that was properly transferred –> Holder in Due Course
Duly Negotiated - Payable to the order of a specific payee
When it is delivered to that specific payee.
Thereafter - must be indorsed.
Types of Indorsements
- Special or blank
2. Restrictive unrestrictive
Special Indorsement
Names a particular person as the designated indorsee. Indorsee must SIGN for it to be duly negotiated.
Blank Indorsement
Does not name a specific indorsee.
Negotiated by delivery alone.
Restrictive Indorsement
Contains a restriction such as “deposit only.”
Holder in Due Course Status - Requirements
A holder who takes the instrument:
- for VALUE
- in GOOD FAITH (subjective!)
- WITHOUT NOTICE of a defect (objective! Should have known?)
Holder in Due Course Status - “Value” Requirement
Not “consideration”.
Not promise to do something later.
Can be payment for old debt.
Holder in Due Course Status - “No notice” Requirement - Arrears
Principal in arrears = defect! No HIDC.
Interest in arrears = not a defect. Can be HIDC.
Holder in Due Course Status - “No notice” Requirement - Examples of defects
Appearance gives notice (stamped "void") Obligation is voidable (bad consideration) Competing claim (lost/stolen) Fiduciary negotiated instrument in breach of fiduciary duty.
Holder in Due Course & Shelter Rule
Transferee acquires whatever rights the HIDC transferor had and become an HIDC.
EVEN IF other HIDC requirements are not fulfilled!!
Rights and Liabilities of a Holder in Due Course
- HDC takes free from CLAIMS and PERSONAL DEFENSES; but
2. Subject to REAL DEFENSES.
HDC - Claim Defined
A claim is a right to a negotiable instrument because of superior ownership.
This is defeated by HIDC transferee.
HDC - Personal Defenses Defined
Every defense available in ordinary contract actions, such as: - lack of consideration - unconscienciability - waiver - estoppel - fraud in the inducement These are defeated by HIDC transferee.
HDC - Real Defenses Defined
HIDC takes subject to these! [MAD FIFI] Material Alteration Duress Fraud In the Factum Incapacity Illegality Infancy Insolvency
HDC - Material Alteration Defined
A change in the terms of the instrument.
Maker may bear liability for negligence in leaving open spaces on the check.
HDC - Fraud in Factum
“Real fraud” - lie about instrument. (Lying to maker about meaning of note)
Other fraud - eg. about goods sold - is personal fraud and does not pass to HDC.
When does death of customer revoke bank’s authority to pay check?
Bank knows of death and has reasonable time to act on knowledge.
Stop payment order - how long valid?
Oral - 14d, renewable during period.
Written - 6 months, renewable every 6m.
