Secured Transactions Flashcards
Secured Transaction
Transaction that give a party a security interest.
Security Interest
Essentially like a mortgages on personal property.
Governing Law of Secured Transaction
UCC Article 9
What to look for in secured transaction questions?
- A credit transaction
AND - An agreement that creates a security interest in the debtor’s personal property to secure the debt.
Security Interest as Liens: What is a Lien?
An interest in property that secures payment of a debt or performance of an obligation.
Lien Operation: Securing Payment in Two Ways
- Additional Remedies
2. Priority
Additional Remedies Afford to Secured Interests
Lienholders generally can repossess the collateral and then sell the collateral at a foreclosure sale, all without going through the full judicial process.
Priority: Competition Between Lienholders and Unsecured Creditors
When collateral is sold at a foreclosure sale, the proceeds of the sale are used to pay creditors with liens before those without liens.
Priority: Competition Between Lienholders
If there is more than one lien no a piece of property, the general rule is that the first lienholder to provide public notice of its lien gets paid first.
Liens Compared to Other Property Interests
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Types of Liens
- Consensual Liens
- Judicial Liens
- Liens Obtained by Operation of Law
Consensual Liens
Liens created by contract
**Security Interest and Real Estate Mortgages
Judicial Liens
Liens obtained by some judicial process.
**Execution lien
Liens Obtained by Operation of Law
Liens obtained by statute or common law.
**People who do work on you land or house receive a mechanics lien.
Collateral
The property subject to a security interest.
Debtor
Person who owes money to someone.
Any person with an interest in the collateral, other than a security interest.
Secured Party/Secured Creditor
A lender, seller, or other creditor who has a security interest.
Secured Agreement
An agreement between the secured party and the debtor that creates a security interest in personal property.
Purchase Money Security Interest
Created where the money loaned as party of a secured transaction is used to buy the collateral
Types of PMSI
- Seller
2. Lender
Seller PMSI
A security interest taken by the seller of collateral to secure all or party of the purchase price of the collateral
**The seller and lender must be the same person
Elements of a Seller PMSI
Creditor sells goods to debtor on credit and retains security interest
or
Creditor advances debtor funds used to buy and takes security interest in goods
Lender PMSI
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Scope of Article 9
Contractual Security Interest
Sales of Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes
Commercial Consignments
Agricultural Liens
Leases intended to serve as security arrangements
Seller’s retention of title to delivered goods
Article 9 Exception
Does not Apply to Land Interests
Dual Status Rule: PMSI
Security Interest in Nonconsumer goods does not lose its status as PMSI if:
security interest also secured by property not purchased on credit; collateral also secures advances not made for purchase; or PMSI has been refinanced
Types of Collateral
Tangible Collateral;
Intangible Collateral; and
Proceeds
Tangible Collateral
Consumer Goods
Inventory
Farm Products
Equipment
Intangible/Semi-Tangible Collateral
Instruments Documents Chattel Paper Accounts Deposit Accounts--bank accounts Investment Property Commercial Tort Claims General Intangibles
Proceeds
What is received from sale, exchange, collection, or other disposition of collateral or proceeds
Attachment
Secures rights against debtor
Rights against third party require perfection
Requisites for Attachment
Need all three:
- Parties agree to create security interest in which (i) creditor takes possession of collateral, (ii) debtor’s authenticates security agreement describing collateral, or (iii) creditor takes control of certain types of collateral; and
- Value give by secured party; and
- Debtor has rights in collateral
Description of Collateral
Cannot say “all of the debtor’s assets”
Consumer goods, consumer securities accounts and commercial tort claims need specific descriptions
Methods of Obtaining Control
Nonconsumer Deposit Accounts
Electronic Chattel Paper; and
Investment Property
Nonconsumer Deposit Account
Bank which nonconsumer deposit account maintained automatically has control over bank account.
Secured party not bank, may obtain by either (i) putting deposit account in secured party’s name, or, (ii) agreeing in authenticated record with debtor and bank that bank will comply with the secured party’s orders w/o debtor’s consent
Electronic Chattel Paper
Electronic Chattel Paper–electronically stored
Tangible Chattel Paper–written on paper
Investment Property
Certificated Securities
Securities Accounts
Certificated Securities
Type of Investment Property
Secured party obtains control by taking possession of certificate if in bearer form; or
If registered form must take possession and certificate must be indorsed or registered by issuer
Securities Accounts
Secured Party obtains control if:
Secured Party has same rights in account as owner; or
Intermediary may comply with secured party’s orders without the owner’s further consent
Secured Party in Control
Must use reasonable care in storing and preserving, but entitled to reasonable reimbursement for storage
Risk of Loss
In secured party’s possession on debtor to extent of insurance deficiency
After Acquired Property
May be created and if so will attach to property as soon as debtor acquires an interest.
Does not apply to consumer goods unless acquired within 10 days
Does not apply to commercial tort claims
Perfection of Security Interest
Establishes secured party’s rights to collateral as against the debtor
Other parties may also have rights; perfection protects secured party over these interest
Methods of Perfection
Filing Taking Possession Control Automatic Temporary Perfection
Time of Perfection
Perfection occurs upon attachment
Perfection by Filing
Must file financing statement
Must file with SOS
Filing Valid for 5 years; continuation statement can get additional 5
Certification of Title Law (for vehicles)
Financing Statement Requirements
Debtor name and mailing address
Secured party’s name and mailing address
Indication of Collateral
If real property, description of related real property, name of record owner, and indication to file in real property records
Effect of Mistake on Debtor Name
Minor errors do not invalidated
Seriously Misleading Errors will (name not returned on search)
Perfection by Possession
Cannot include general intangibles, nonconsumer deposit accounts, nonnegotiable documents, electronic chattel paper, certificate of title goods, and accounts
Time of Actual Possession Triggers
Perfection by Control
Available for investment property, nonconsumer deposit accounts, and electronic chattel paper
Automatic Control
PMSI in consumer goods perfected upon attachment
Limited in motor vehicles and fixtures
Temporary Perfection
Proceeds from original collateral for 20 days
Occurs when new value given for authenticated security agreement for instruments, negotiable documents, or certificated securities; valid for 20 day
Continuation of 20 Day Interest in Proceeds
Will continue if:
Original collateral perfected by filing financing statement, security interest in type of collateral constituting proceeds would be filed in same place as financing statement and proceeds not purchased with case;
Proceeds are identifiable cash proceeds; or
Security interest perfected withing 20 day period
Priority: Secured v. Secured
Unperfected: First to attach
Perfected: will beat unperfected
Both perfected: First to file OR perfect
Special Priority Rule for Conflicting Security Interest in Investment Property
Perfected by Control will prevail over any other method
PMSI Priorities
Enjoy superpriority
In Inventory: if perfected at time debtor gets possesion and secured party receives written notification; e.g. consigner
In Goods Other than Inventory/Livestock–if same goods or their proceeds priority if perfected within 20 days after debtor takes possession
Chattel Paper Purchasers
If purchaser in good faith gives new value and takes possession in ordinary course (or control electronic chattel paper) will have priority over:
Proceeds of inventory unassigned to anyone other than purchaser; and any other security interest as long acquired without knowledge that purchase violated the rights of secured party
Instrument Purchaser Priority
If gives value and takes possession in good faith without knowledge that purchase violated rights of secured party will have priority
Priority in Proceeds
Filing Collateral achieves priority through filing financial statement
Non-filing Collateral achieves priority by possession or conrol
General Rule Priority in Proceeds
Perfected Security Interest in proceeds with have same date of priority as perfected security interest int he original collateral
Special Rule for Certain Proceeds of Non-Filing Collateral
Priority in proceeds of non-filing collateral if (i) priority in original collateral, (ii) security interest in proceeds is perfected, and (iii) proceeds are cash proceeds or proceeds of same type as original collateral.
Exception–Filing Collateral as Proceeds of Non-Filing Collateral
“if a security interest in original collateral that is non-filing collateral is perfected by a method other than filing, and the proceeds of the original collateral are filing collateral, the first secured party to file a financing statement covering the proceeds has priority over the proceeds” WHAT THE FUCK DOES THAT MEAN!
Fixture Filing
Generally, first party to file a fixture filing or record its real property interest will prevail
Exception: PSMI who makes fixture filing within 20 days of affixation
Accessions Priority
Generally First to file or perfect
Exception: becomes part of whole subject to security interest perfected by notation on certificate of title
US v. B/L Priority
B/L will generally has interest superior to US interest if received without knowledge of security interest, gives value and receives
If account no need for deliver (receipt)
No delivery requirement if account, electronic chattel paper, general intangible, or investment property other than certified security
PSP v. Br/L
Holder perfected secuirty interest has rights superior except:
secured party consents
buyer or lessee in ordinary course of business takes free of nonpossessory perfected security interest in goods unless knows sale of lease is in violation of security interest
consumer purchaser from consumer
buyer/lessee not in ordinary course of business
SP v. HIDC
HIDC has priority over security interest in negotiable instrument
SP v. TM/DAF
Debtor transfers to person, they will take free of any security interest int he money or funds unless acts in collusion
SP v. JL/C/HPL
Types:
USP v. JLC
PSP v. JLC
SP v. PLN
SP v. JL/C: USP v. JL/C
JL/C prevails over holder of security interest in collateral if lien becomes before security interest is perfected
PMSI Exception–attaches PMSI before JL/C acquires interest in collateral, attachment gives priority over judicial lien if filed within 20 days of receipt
IMPORTANT
Abbreviations of Parties
Secured Party--SP Unsecured Party--UP Perfected Secured Party--PSP Unperfected Secured Party--USP Buyer/Lessee--B/L Holder in Due Course--HIDC Judicial Lien/Creditor--JL/C Possessory Lien--JL
PSP v. JL/C
Prior perfected generally has priority
Exceptions: Future Advances if perfected before lien but made more than 45 days after lien arose after unless made without knowledge or pursuant to commitment made without knowledge
SP v. Article 2
Art. 2 grants buyer/seller possessory security interest in goods with priority as long as in possession
Priorities in Nutshell
1-5
Excluding investment property and nonconsumer deposits accounts with control priority generally as follows:
- Buyer in Ordinary Course
- HIDC
- Tranferee of Money or funds from Deposit Accounts
- Purchasers of Chattel Paper or Instruments
- Possessory Lienholder
Priorities in Nutshell
6-11
- Article 2 Claimant with Possession
- PMSI
- Perfected Security Interests and Judicial Liens that have attached to collateral
a. first to file or perfect for PSI
b. attached lien generally if attached before perfection - Purchaser buys for value and receives delivery without notice.
- Unperfected Security Interests
- Debtor
Rights on Default
Right to Take Possession and Sell Collateral
Ordinary Judicial Action
Remedies are Cumulative but only 1 Satisfaction
JXN Rules
General: Law of State where Debtor is Located
PSI, Fixtures, and timber is state of collateral’s location
Certficate of Title state of title
CEO Exceptions for Investment Property and Deposit Accounts
Taking Possession and Sale
SP has right to sue on debt or take possession, sell it by public or private sale, and sue to collect deficiency.
Must be commercially Reasonable
Debtors and Sureties entitled to Notice
Reasonableness of a Sale
Sufficiency of the Advertising
If limited market, whether people in the market were contacted
whether needed cleaning or repair; and
Sale by Public Auction, convenience of the time and place
Retention of Collateral in Satisfaction of Debt
60% paid, SP must dispose of collateral within 90 days of repossession or debtor can recover in conversion
Secured Party may propose to retain collateral in full satisfaction of obligation; requires consent or case full satisfaction is not objected to retention within 20 days after notice sent and SP must send written notice of such proposals to debtor, and if object in writing within 20 day, SP must dispose and properly disburse proceeds
Debtor Right of Redemption
Until SP sells collateral/discharged debt by retention of the collateral, debtor, surety, other SP or lienholder may redeem collateral by paying all obligations secured plus reasonable expenses
Failure to Comply with Code Requirements
SP liable for actual damages caused by failure to follow Art. 9 Apply: Rebuttable Presumption of Value Absolute Bar Rule; or Setoff Rule
Rebuttable Presumption of Value
In nonconsumer transactions unless SP proves otherwise value of collateral is presumed equal to debt
Absolute Bar Rule
Deny SP deficiency regardless of whether SP can prove collateral is worth less than debt
Setoff Rule
Allow SP to recover deficiency minus actual damages that debtor can prove
Relocation of Debtor
Perfection governed by law of state where debtor is located, security interest generally remain perfected for 4 months after move or until lapse
New Debtor Different State
Transferred to new debtor located in different state perfection does not lapse for one year or first perfection lapses, whichever earlier.
