Secured Transactions Flashcards
Intro - What Is a Secured Transaction?
UCC Article 9
Business deal, generally a loan of money plus “security interest” in personalty (not realty):
If borrower doesn’t repay the loan, lender can grab the asset (collateral) and sell it to create value to pay off the borrower’s debt.
Collateral - Property Focus of Secured Transactions - Tangible Items
Property is judge on how debtor uses it.
Tangible = moveable things:
- Inventory = goods held by a business for sale/lease and any raw or consumable materials (i.e. flour, sugar, chemicals, etc).
- Equipment = catch-all; any tangible thing owned by a business not w/in another category (i.e. anything else that’s not inventory must be tangible).
- Agribusiness (seldom tested), its farm products like livestock and eggs, grain, apples, etc (unmanufactured). Farmers have inventory too (like cheese) and equipment.
Collateral - Property Focus of Secured Transactions - Consumer Goods
Tangible Things:
- Used; or
- Bought for use PRIMARILY for personal, family, or household use.
- Focus on PRIMARY intended use WHEN SECURITY granted to determine what it is.
Collateral - Property Focus of Secured Transactions - Rights in Real Property
Not governed by Article 9. However…Article 9 collateral…
Fixtures:
1. Moveable thing so incorporated into (affixed to) an immovable that it becomes part of the realty under property law. Even though item can be moveable again.
As-Extracted Collateral:
1. Oil/gas/coal/minerals, S.I. attach at extraction.
Collateral - Property Focus of Secured Transactions - Intangible Rights (6 Types)
- An Account - Right to collect on a promise of another to pay debtor later on a monetary obligation after sale or lease of non-land related thing.
- Deposit Account - COMMERCIAL bank account (bank promises to give back money deposited.
- Instrument - Promise to pay memorialized in a note or certificate of deposit.
- Chattel Paper - Papers representing both a promise to pay AND a prop right:
(i) Any lease of a moveable (right to collect + reversionary right) - Ex. Car dealer lease of a car to a person is chattel paper.
(ii) Retail installment sale agreement, RISA, promissory note + security agreement - Ex. Buyer agrees to installment payments + take car if not payment is chattel paper. - Investment Prop - stocks/bongs, certificated/uncertificated, security agreement.
- General Intangibles - Intellectual property, biz’s goodwill, non-monetary K rights.
Creating Rights Valid Against the Debtor - Attachment
Three Requirements:
- Value must be given (past or present loan, binding promise of future loan);
- Debtor must have rights in the collateral; and
- Debtor must’ve have “authenticated” (see slide 7 for more) a security agreement.
Creating Rights Valid Against the Debtor - Attachment - “Authentication” Requirements
- Authenticated = signed or otherwise indicated assent in some perceivable form, i.e. sending an email or voicemail.
- Oral agreement okay if debtor agreed to put collateral in the creditor’s possession or “control” (rare).
- Description of collateral - Simply “reasonably identity,” generally by categories (inventory, equipment, accounts). ALL ASSETS too vague.
- After-acquired collateral - The description doesn’t have to be limited to present collateral, can be future prop.
- Consumers Transactions -
(i) Description must be more specific
(ii) After-acquired collateral clauses apply only if consumer acquires prop w/in 10 days of secured value having been given.
Creating Rights Valid Against the Debtor - Attachment - Future Loans
Future obligations can be secured, i.e. all indebtedness. Don’t be put off by aggressive creditors.
Creating Rights Valid Against the Debtor - Attachment - Proceeds
Proceeds:
- Whether or not the security agreement says, A S.I. ATTACHES AUTOMATICALLY to whatever the D receives FOR OR ON ACCOUNT of the collateral, i.e. PROCEEDS;
- The proceeds are somehow “identifiable” as linked to original collateral.
Creating Rights Valid Against the Debtor - Attachment - S.I. & Prop Transfer
A perfected S.I. follows property into the hands of other people who acquire collateral from the D UNLESS the creditor consents to a release of the S.I.
May create a priority dispute.
Creating Rights Valid Against the Debtor - Attachment - Inadvertent - and Undesired - Attachment
Despite parties desire, these are treated as S.I.’s
- “Lease” as Disguised Sale - Lease of a moveable thing:
(i) structured so lessor has no expectation of reversion of value;
(ii) treated as installment sale w/ S.I. (rather than rental payment and right of eviction/reversion.
Simplified:
- Lease term of over entire USEFUL life of thing; OR
- Option to buy leased thing at end for “nominal” value ($1).
- LESSOR TREATED AS SELLER.
- Consignment - When delivering non-consumer goods worth more than $1000 to a merchant for sale, treated as consignor not as owner with right of return, but creditor with S.I. in goods, IF MERCHANT:
- Acts under its own separate name;
- Is not an auctioneer; and
- Is not generally known to sell other people’s goods (goods
Making Rights Enforceable Against 3rd Persons - Perfection
ENFORCEABLE ONLY AFTER ATTACHMENT HAS OCCURRED AND ONE OF VARIOUS STEPS FOR PERFECTION TAKEN PROPERLY
Making Rights Enforceable Against 3rd Persons - Perfection - Filing & Requirements
Filing a financing statement:
- Most common perfection method, filing this simple one page form w/ Sec. of State on form UCC-1.
- ONLY record notice to 3rd parties, doesn’t create rights.
Requirements:
- Debtor’s name.
- Secured creditor’s name (not tested).
- Description of chattel
Making Rights Enforceable Against 3rd Persons - Perfection - Filing & Debtor’s Name
Financing statements are indexed by D’s name:
- Full, accurate legal name of D (trade names, nick names, insufficient).
(i) Driver’s license name for individuals, Sec. of State will have this. Most recent, even if mistakenly misspelled.
(ii) Business’s name as listed on its “public organic record” forming the entity. For other businesses just go w/ their regular name. - If misspelled/wrong name not found by searching on the correct full legal name, fin. state. is “seriously misleading,” “ineffective” and S.I. unperfected.
- If debtor’s name changes to make fin. state. “seriously misleading” NO EFFECT on EXISTING COLLATERAL, but fin. state. INEFFECTIVE TO PERFECT a S.I. in any new collateral acquired after 4 months of name change. Prospective effect.
(i) Most often after incorporation of a sole proprietorship OR merger.
Making Rights Enforceable Against 3rd Persons - Perfection - Filing & Description of Collateral
Super generic description like “all of D’s prop” or “all assets” okay, BUT…
- To be effective, a UCC-1 filing must have been “authorized” in an “authenticated record” by the D, i.e. security agreement covering that same collateral.
- If fin. state. describes collateral more broadly than the security agreement, the filing is likely unauthorized to the extent of the overbroad description of collateral not mentioned in sec. agreement.
Making Rights Enforceable Against 3rd Persons - Perfection - Fixture Filing
IF collateral is related to land - fixture or extracted collateral - fin. state should be filed as a fixture filing.
- Filed in the mortgage records, not Sec. of State, of county where the land is.
- More info:
(i) Describe real prop w/ sufficient detail to support a mortgage.
(ii) State that it covers fixtures; and
(iii) Identify the owner of the realty if other than the owner of the fixture.
Making Rights Enforceable Against 3rd Persons - Perfection - Effective for all Transactions 5 Years
Properly filed UCC-1 state. perfects ANY S.I. in described collateral in ANY secured loan b/w creditor and debtor.
- Lapse - This effect lasts for 5 years after filing. Unless the statement is “continued” it lapses and is treated in most cases as if the statement had never been filed.
- Continuation - To cont. UCC-1’s effectiveness beyond 5 years, one must file a form “continuation statement” in the same office where the original UCC-1 was filed during the 6-month period below expiration - no earlier!
Making Rights Enforceable Against 3rd Persons - Perfection - Interstate Transactions & Filing Locations (Choice of Law)
Law governing perfection is the law of the jurisdiction where the D is (regardless of collateral is for non-land related collateral):
- Individuals are located in the state of their principal place of residence (same for sole proprietorships).
- “Registered Organizations” formed by filing/issuance of a “public organic record” - Corp’s, LP’s, LLC’s, (NOT LLP’s)
(i) located in their state of registry, not PPOB. - Organizations not formed on pub. org. record located where office is, if more than one, its chief executive office.
- If the D moves to a new state creditor has 4 months to discover the move and refile in the new state’s Sec. of State office, otherwise the UCC-1 filed in the previous state is retroactively ineffective as to other creditors.
Making Rights Enforceable Against 3rd Persons - Perfection - Certificates of Title
For public roadway vehicles covered by a cert. of title, PERFECT ONLY by applying to DMV to have the lien noted on the cert. of title. Includes cars, motorcycles, boats, pleasure craft.
Exception - New or used cars at dealership are inventory so perfection needs UCC-1.
Making Rights Enforceable Against 3rd Persons - Perfection - Possession
Creditor in possession of collateral by agreement, possession satisfies BOTH the writing requirement for attachment & the perfection step. Possession superior perfection to filing for instrument or chattel paper.
Making Rights Enforceable Against 3rd Persons - Perfection - Automatic Perfection Upon Attachment - Purchase-Money Security Interest (PMSI)
PMSI in consumer goods are auto-perfected, but only in consumer goods.
PMSI:
- This is a S.I. that secures repayment of whatever portion of a loan (usually 100%, perhaps less) ACTUALLY USED to PURCHASE THE COLLATERAL.
(i) Bank creditor lends $ to allow debtor to buy the collateral. Chase gives $ to buy a car.
(ii) Seller of the collateral extends credit to allow D to buy the collateral. Sears gives $ to D to buy a dryer from Sears is PMSI. - Consumer goods - bought or used primarily for personal, family, or household use.
Making Rights Enforceable Against 3rd Persons - Perfection - Control
EXCLUSIVE method of perfecting an interest in commercial deposit accounts (alternative method for perfecting an interest in investment property, though perfection by control in investment prop beats perfection in any other way).
Making Rights Enforceable Against 3rd Persons - Perfection - Control - Control of Deposit Accounts
- If the secured creditor is the bank where the deposit is held; it has control.
- Gets a control agreement in which the bank agrees to follow the secured’s creditor’s instructions w/ respect to the $$$ in the account; or
- The creditor can become the bank’s customer w/ respect to the deposit account by adding to the creditor’s name to the account.
Making Rights Enforceable Against 3rd Persons - Perfection - Control - Control of Investment Prop
Three Forms of Holding the Investments:
- Certificated Securities - If a person’s stock or bond holding is represented by a paper certificate - transfer of possession of the certificate to the creditor and proper indorsement or re-registration in creditor’s name on the comp’s books is perfected by delivery.
- Uncertificated Securities - “delivery,” official transfer on issuer’s books into the creditor’s name.
- Indirect Holdings - Securities Accounts & Security Entitlements SEE pg 8 in h/o book
