Secured Transactions Flashcards
Secured Transactions Opening Statement
The Uniform Commercial Code (UCC) Article 9 controls a creditor’s security interest in a debtor’s collateral.
How do you get a security interest?
A security interest is obtained by possession/control of the collateral or through a security agreement.
What is a security agreement?
A security agreement is a written contract between a creditor and a debtor authenticated by the debtor, identifying the collateral in reasonable detail (no generic categories), its primary use, and its county location, agreeing that the CR may claim the collateral for debt repayment.
What are the categories of collateral?
Tangible: inventory, equipment, consumer goods, and farm products (the primary use in the debtor’s hand controls, established at the date of attachment), and the proceeds therefrom (from sale of the collateral)
Intangible: NI, title document, accounts, lease, TMs, software, etc.
What is a PMSI?
A purchase money security interest (PMSI) applies where the collateral purchased by the DR secures repayment of the purchase price owed to the CR. It has a “close nexus” between the collateral and the secured obligation. It occurs on a collateral sale where the CR sells goods to the DR and takes back a paper receivable secured by the same goods, such as buying an appliance on credit from a department store, or where a bank loans the DR money to buy a specific asset from a third party (not just a working capital loan though).
Why do I want a PMSI so bad?
A CR w/ a PMSI gets special rights in perfecting the SI. A PMSI is the only way to create a valid SI for household goods (FTC), it allows for perfection by mere attachment for consumer goods, it allows a 20-day grace period to file from the date of receipt for non-inventory goods, and it gives get super priority on inventory with notice to other CRs.
What about an after-acquired property clause?
An after-acquired property clause includes all future collateral the DR may acquire or manufacture later. A filed PMSI interest in their own collateral other than inventory is superior to a preceding PMSI’s after-acquired clause. A PMSI providing new inventory collateral must inform all prior CRs w/ after-acquired clauses.
What happens on the sale of collateral?
The SI in the collateral itself continues against third-party transferees if the interest in the original collateral was attached or perfected and is available for repossession. An attached or perfected SI in proceeds continues for 20 days automatically, after which the SI survives only in identifiable cash proceeds (file a new FS w/ particular ID for new non-cash proceeds).
What constitutes default, and what happens then?
Default is typically broadly defined in the SA and can include failure to pay tax or an invoice. At that point, the CR is granted the replevin right to enter the DR’s property, take possession of the collateral, and liquidate it.
What is attachment, and when does it occur?
Attachment establishes the CR’s rights against the DR and some third parties w/ knowledge of the SI. It is necessary for replevin. It is effective when the last of three events occurs:
1) Security agreement signed by the DR
2) DR has rights in the collateral (if not possession, at least a receipt?)
3) Value is given; the CR makes the loan or delivers the collateral to the DR (binding commitment to extend credit sufficient)
What is perfection, and when does it occur?
Perfection is the highest form of a CR’s protection for collateral rights against third parties who may also have claims against the DR’s property. Perfection requires attachment plus one of the following PCFMT:
1) Possession (required for cash; highest form of perfection)
2) Control (intangible assets; by being the depository or entering agreement with it)
3) Filing a financing statement (preferred and only method to perfect most intangibles and many tangibles)
4) Mere attachment (w/ a PMSI for consumer goods or farm equipment under $2,500)
5) Title certificate notation (required for cars)
What is a financing statement?
It sufficiently indicates the collateral covered (though may be more generic). It is filed in the state designated recording office of the DR’s principal residence or place of business and is effective for five years. The CR has a duty to know the location of the DR and refile.
What are a CR’s rights upon repossession of the collateral?
The CR may retain it and waive any deficiency w/ notice, or hold a disposition sale (at which the CR warrants title, possession, and quiet enjoyment) if the DR objects to retention in 20 days. Proceeds go to repo/sale costs first, then the debt. Senior interests are not discharged; they survive the sale as priority liens (junior interests get any remaining proceeds). After the sale, the DR may repossess by paying the full balance plus repo expenses.
Which interests have priority in a piece of collateral?
First in time, first in right between multiple perfected interests (perfected PMSI inventory CR prevails if notice to prior perfected non-PMSI CR), then attached, then unsecured.
Exceptions: a retail business inventory buyer takes free and clear (even w/ knowledge), laborer’s and material liens are available if value was added to the collateral, and preferential bankruptcy interests are avoided.
