Secured Transactions Flashcards
Purpose of Article 9
cover any transaction intended to create a security interest in collateral; creditors can reduce monetary risk if debtor defaults b/c there is specific collateral available to satisfy the obligation
Tangible Goods
- Classification – all moveable inventory, equipment, consumer goods, or farm products
a. Inventory – held for sale or lease in the ordinary course of business; raw materials
b. Equipment – used or bought for use in the productive capacity of a business; machinery
c. Consumer Goods – used or bought for non-business, personal, family, household purpose
d. Farming Products – crops growing or harvested, livestock, supplies used in farming operation
e. Manufactured Homes
2. Primary Use Controls – if debtor uses for more than one purpose; category established at date of attachment; debtor’s or 3d party’s use can change (identify each change)
3. Example – horse in horse trader’s hands is inventory, equipment in a riding stable’s hands, etc.
Intangible and Documentary Collateral
- Instrument – negotiable instrument, promissory note; security interest perfected by possession
2. Document of Title – evidence of intangible ownership in goods held by others
3. Chattel Paper – record that evidences monetary obligation and security interest in specific goods; e.g., consumer’s installment or purchase agreement assigned to finance company
4. Account – unsecured right to payment of monetary obligation; e.g., credit card balance
5. Deposit Account – bank demand or other account other than consumer’s checking account
6. Investment Property – certified and uncertified securities, commodity accounts, and commodity contracts to buy or sell in the future
7. Commercial Tort Claims – right to pursue judgment arising from COA in claimant’s business or profession (other than personal injury or death)
8. Letter of Credit Rights – right to receive payment or performance under UCC A5 letter of credit
9. Insurance Policies – original insurance (life insurance policy covering debtor) not collateral; insurance claims based on destruction or involuntary conversion of secured collateral maybe proceeds
10. Lease – of personal property w/term greater than expected asset life transfers title to debtor; lessor must file to protect rights in that collateral
11. General Intangibles – copyrights, trademarks, patents, franchise rights, software, and royalties
Proceeds
whatever debtor acquires or collects from the sale, trade, or other disposition of the primary collateral; categorized as cash or non-cash; also includes license revenue and infringement claims arising from collateral
Description Importance
collateral must be reasonably identified; creditor has burden to show that the at issue is their collateral; “all collateral” too vague, but “all inventory” probably OK
CREDITORS AND PURCHASE MONEY SECURITY INTEREST (PMSI)
creditor who has PMSI in goods is allowed special or extra rights in perfecting their security interest; PMSI has “close nexus” between collateral and secured obligation; creditor may be part non-PMSI if more than one item of collateral is specified
Burden of Proof – secured party claiming PMSI status has burden to establish status
Two ways to acquire status:
A. Collateral Sale – creditor sells goods to a debtor and takes back a paper receivable secured by same goods; e.g., consumer buys washing machine on credit from department store, store retains PMSI in appliance collateral transferred to consumer; non-PMSI security interest in household goods not allowed under FTC rules
B. Loan to Acquire Specific Collateral – creditor loans a debtor $ to buy specific asset from 3d party (e.g., BECU car loan!); creditor has PMSI in the specific asset
Working Capital Loan
general business line of credit NOT PMSI b/c not associated w/specific collateral; no special privileges
Advantages to PMSI Status
analyze status of potential PMSI for every creditor in the question
1. Household Goods - PMSI in household goods sold to debtor creates a valid security interest for for seller. 2. Mere Attachment Perfection – allowed the right to perfect by mere attachment if PMSI if for consumer goods 3. 20-Day Grace Period – to file interest in non-inventory goods, from date debtor receives collateral 4. Super Priority on Inventory – PMSI providing inventory gets super priority so long as they send notice to other creditors who can also claim a security interest in that inventory category; notice to prevent previous creditor claiming collateral under after-acquired clause even though subsequent creditor actually provided collateral to debtor; PMSI of creditor giving collateral gets priority
SECURITY AGREEMENTS (SA) In General
creates security interest in collateral; K between creditor and debtor must be written or authenticated record; debtor’s signature, encryption required; creditor not required to sign; debtor agrees creditor can claim described collateral for debt repayment
Floating Lien
collateral turns over (e.g., cars at a dealership); not practical to execute new security agreement every time individual items of collateral change
SA: Other Provisions
- Set-off or Recoupment Rights – where other right of creditor (e.g., another loan to same debtor) is set off against property of the debtor subject to the agreement
2. Debtor Duties – to pay insurance and taxes and to repair chattel
3. Default – broadly defined; failure to pay an invoice, tax, bankruptcy, entry of judgment v. debtor
4. Remedies – creditor usually granted replevin right to enter and take possession of collateral, and liquidate it; must be reasonable as to time and extent, not involve breach of peace
5. Costs and Attorney Fees – most seller agreements say secured party entitled
6. Good Faith Required – can’t waive creditor’s obligation of good faith, diligence, reasonableness, due care; must provide debtor w/accounting of obligations w/in 14 days of request
Prohibition on Assignment of Security Interest
K terms prohibiting transfer of debtor’s right in collateral usually ineffective, as are provisos specifying that a transfer = default
Agreement Not to Assert Defenses
B can waive right to assert defense against assignee of security interest even though defense might be good against seller
1. Commercial Contract – assignee can enforce waiver if takes SI For value, In good faith, and No notice of defense (FIN); B can still assert A3 “real defenses” 2. Consumer Credit Contract – FTC: any assignee takes rights subject to all defenses consumer could assert against seller
ATTACHMENT − ARV
establishes creditor’s rights against debtor and some 3d parties who have knowledge of SI; prevails over most unsecured or normal trade creditors; necessary for replevin; requires:
A. A Security Agreement
1. Writing Required – written SA authenticated by debtor, unless secured party has control of collateral
2. Reasonable Collateral Identity – location and use in debtor’s hands
3. Consumer Goods – generalized descriptions insufficient for consumer goods, commercial tort claim, commodity account, security account, or entitlement
B. Rights in Collateral – debtor must have rights in collateral; receipt required if debtor hasn’t received goods
C. Value Given – creditor must make loan or deliver collateral to debtor
PERFECTION − PCFMT
best form of creditor protection against 3d parties who may also have claims against debtor’s property; requires attachment + one of 5 methods of perfection:
Possession
of the collateral by secured party
1. Application – required for cash; negotiable collateral places higher priority w/transferee (HDC) 2. Examples of Possession Collateral – checks, promissory notes, certificates of deposit, warehouse receipts, negotiable instruments 3. Effective Date – date of possession; filing still possible and will prevail over bankruptcy trustee, but ineffective against an HDC w/possession
Control
- General Application – applies to intangible assets; control automatic if depository is secured party; can also be achieved by debtor and secured party entering into agreement w/depository
2. Specific Application – four kinds of collateral subject to control:
a. Deposit Account – bank, debtor, creditor all agree in authenticated record that bank will comply w/secured party’s instructions directing disposition of the funds in the “blocked” deposit account; control only way to perfect
b. Electronic Chattel Paper – control or filing will perfect security interest
c. Investment Property – control or filing will perfect security interest
d. Letter of Credit Rights – control only method of perfection
3. Continuation – as long as the secured party retains control of the collateral
Filing
filing a standardized financing statement form is preferred method for most intangibles; also method for inventory and equipment (except vehicles)
1. Financing Statement (FS) a. Contents – sufficiently indicate collateral covered; authorized by debtor; include names and addresses of debtor and creditor b. Seriously Misleading Change – original creditor seeking priority must file new FS w/in 4 months; e.g., debtor using new married name; new filing required b/c 3d party usually uses specific wording in debtor’s name in filing search 2. Filing Place – state of debtor’s principal residence or place of business controls a. Proper – filings must be made w/state-designated central recording office; interests in land must be filed in county where real property located b. Improper – if filed in improper place, ineffective to create perfection except against those w/actual knowledge of its contents; attachment still effective 3. Effective Date a. General Rule – effective as of date and time of filing; if filing occurs before debtor acquires rights in collateral, effective upon attachment b. Filing 20-Day Grace Period – PMSI for non-inventory consumer goods has 20-day grace period to file; effective date relates back to date of attachment; also overrides “after-acquired property” clause of a previous creditor c. Inventory Rule – new PMSI must send authenticated notification in writing to holder of prior after-acquired inventory interest, before delivering new inventory to debtor, in order to gain priority d. Proceeds 20-Day Grace Period – debtor may transfer covered collateral to 3d party w/out creditor’s permission; SI continues in any identifiable proceeds under the “lowest intermediate balance rule”; if debtor uses proceeds to buy new collateral, creditor must file new FS w/in 20 days, otherwise SI unperfected on 21st day e. Effective Period – usually 5 years, can extend by filing a continuation statement w/in 6 months of the end of the original period 4. Consignment – consignor must comply w/filing requirements and send authenticated notification to any previously perfected inventory creditors before delivering goods on consignment to consignee; effective to create PMSI status and override “after-acquired property” clause 5. Multi-State Transactions – debtor’s location determines applicable state law and filing rules a. Collateral Location Not Controlling – interested parties must check filings in debtor’s state even if the collateral is in a different state b. Debtor Movement and Four Month Refiling – if debtor moves, SI becomes unperfected if no re-filing w/in 4 months by perfected creditor c. New State and New Debtor – creditors w/SI in collateral transferred to new debtor in new state must re-file w/in 1 year 6. Termination Statement – secured party penalized $500 for failure to file termination statement w/out reasonable cause w/in 20 days after receipt of request by debtor
Mere Attachment
- Requirements – creditor has PMSI, and collateral is consumer goods of any value or farm machinery equipment under $2,500
2. Consumer Transferee Problem – perfection not effective against bona fide transferee of debtor who also uses collateral for personal or household purposes; transferee must give value and be w/out notice of creditor’s SI in goods; gifts don’t qualify; creditor can’t repossess
3. Equipment or Inventory Purposes – transferee takes junior interest in prior perfected interest
Title Certificate Notation
- State or Federal Statute – may create a 5th perfection category; states have title certificate system that applies to motor vehicles, mobile homes; federal government registers airplanes
2. Notation Required – to create SI in such collateral; e.g., car title SI usually referred to as “lien”
3. Exception – vehicle dealers in the business of selling automobiles; must perfect by filing
Retention of Collateral
- Repossession Details – attached creditor has replevin right to repossess collateral from debtor w/or w/out judicial process; self-help is authorized; if SI perfected, repossession is also good against transferee; trespass allowed to recover
2. Retention Requirements – strict foreclosure allowed if creditor sends written notice to debtor and other known secured parties of record, proposing to retain collateral and waive any deficiency against debtor
3. Objection – secured party must hold disposition sale if debtor or junior lienholder objects to retention w/in 20 days
4. Bankruptcy Exception – automatic “stay” issued to prevent all creditor actions
Disposition Sale
creditor allowed to conduct non-judicial disposition sale of collateral and obtain deficiency judgment v. debtor
1. Sale Details – liquidating creditor must conduct lien search, notify debtor and other perfected parties w/authenticated notice informing of date, time of sale, 10 days prior; may be public or private; creditor can purchase collateral, but low-price sales to associates are scrutinized; debtor may redeem collateral by tendering full balance + repossession expenses prior to sale 2. Reasonable Aspects – non-waivable requirement that every aspect of sale be commercially reasonable by industry standards; secured party who fails liable for damages, up to 10% of debt 3. Creditor Warranty – title, possession, and quiet enjoyment of collateral to the disposition sale purchaser unless expressly disclaimed at sale 4. Proceeds Application – first: costs of repossession and disposition sale; second: indebtedness owed to creditor conducting sale 5. Other Creditors’ Security Interests a. Senior Interests – not discharged if created prior to interest of liquidating creditor; survive sale as property lien against collateral (e.g., pay them off before you can sell) b. Junior Interests – no proceeds above amount due to liquidating creditor; purchaser takes free and clear of everything except senior interests; all subordinate interests discharged 6. Surplus and Deficiency – surplus must be returned to debtor; deficiency judgment possible if collateral sale brings in less than debt
60% Payment by Debtor
creditor must hold sale w/in 90 days of repossession if debtor has paid at least 60% of price for consumer goods; debtor can waive after default
Unauthorized Sale, Removal, or Conversion
debtor guilty of at least misdemeanor if they sell, remove, conceal, or convert collateral upon which they know a valid security agreement exists, if done w/out permission of secured party, and w/intent to hinder, delay, or defraud the collateral rights of secured party
PRIORITY RULES
apply first in time, first in right generally
A. First to Attach – if no creditor has perfected or perfection failed
B. Perfection Prevails over Attachment – includes proceeds if the SI in the original collateral was perfected or if a proceeds perfection in non-cash collateral occurs w/in 20 says of collateral disposition date
C. Competing Perfected Interests – first in time, first in right, usually
1. PMSI Two Advantages – 20-day grace period rule for filing, mere attachment can perfect
2. Inventory PMSI v. Non-PMSI – perfected inventory PMSI creditor will prevail if they notify the prior perfected non-PMSI creditor
D. Judgment Creditor – perfects on the date the judgment registered in county seat; becomes a lien on debtor’s real property and related fixtures in county; creditor must levy to perfect interest in personal property
E. Bankruptcy Trustee – perfection as of the date the petition is filed in federal bankruptcy court; priority attaches to any collateral in which a valid perfection was not previously accomplished
F. Unsecured Creditor – lowest priority in liquidation; creditors in this class share pro rata
Exceptions to Priorities − RAP
- Retail Inventory – except for farm products purchased from a farmer, any sale by a retailer conveys title to the buyer free from any claims of the retailer’s creditors
a. Buyer in the Ordinary Course – purchasing inventory in ordinary course of business from a person who regularly sells goods of that kind
b. Collateral Category Irrelevant – rule applies regardless of use of collateral in hands of buyer
c. Actual Knowledge Irrelevant – buyer could know about prior SI and still take free and clear
d. Prior Filing Irrelevant – even if by secured creditor, B still takes free and clear
e. Entrusting to a Merchant – who regularly deals in goods of that type empowers her to transfer all ownership rights to her buyers in ordinary course of business
f. Farm Products – must be from roadside stand or grocery store, otherwise no exception
2. Adding Value to Collateral − Laborer’s and Materials Lien – applies to labor and materials furnished by suppliers which have added value to collateral
a. Chattel and Real Property Liens – a person or firm that has performed labor or furnished materials in construction or repair of real property or chattel has a lien; labor gets priority over material
(1) Filing of Lien – w/jurisdiction’s designated office w/in 90 days of last day of work
(2) Lien Priority – superior to any interest that attached previously that wasn’t perfected; also superior to any interest created subsequent to labor or material being provided; statute must authorize to override prior perfected interest
(3) Filing and HDC Exception – must file w/in 90 days or new chattel owner who acquires for value, in good faith, w/out actual notice takes free and clear of lien interest
b. Warehouse and Carrier Lien – for storage and transportation charges over collateral they possess; lost if lienholder voluntarily redelivers collateral to owner
c. Lien Foreclosure – may also require disposition sale; must give prior notice of legal action to debtor and any secured parties
3. Preferential Bankruptcy Interests Avoided – court has power to set aside debtor’s bargain sale of assets and any SI given in payment for antecedent debts on the eve of bankruptcy
a. Asset Bargain Sale – transfer of assets for less than full and fair consideration; usually constitutes unauthorized sale or conversion
b. Preferential SI Given – debtor granting SI must have owed an antecedent debt to creditor; doesn’t apply purchase of new collateral and giving back SI
c. 90 Days from Petition – applies to sale or SI given in 90-day period immediately preceding bankruptcy petition date
d. One Year Extension – if transferee is an “insider,” related party, or transfer was fraudulent
e. Interest Voided – if above requirements met, trustee files a motion w/judge to void sale or SI so the asset is available to unsecured creditors
SECURED TRANSACTIONS CHECKLIST
- Who are creditors?
- Are they a PMSI?
- What is the collateral category?
- When did the creditor attach or perfect?
- Who has priority in each item of collateral?
- What is the creditor(s) right of execution?
- What is transferee’s position?
Collateral Description
collateral categories are sufficiently descriptive unless consumer transaction or a commercial tort claim; must specify collateral’s primary use in debtor’s hands
Proceeds
Collateral Interest Continues – against 3d party transferees if the interest in the original collateral was attached or perfected; creditor may repossess from transferee unless specified to the contrary or sale/disposition was w/secured party’s consent
SI Automatic – may continue for 20 days automatically; after 20 days, interest survives only in identifiable cash proceeds that creditor can trace
After-Acquired Property
clause in security agreement includes all future collateral debtor may acquire or manufacture later; may create conflict w/rights of subsequent creditor providing and/or financing new collateral
Future Advances
allows further cash advances to be secured by collateral covered by an earlier SA; if bank makes new loan, existing collateral may apply as security for new loan
