Secured Transactions Flashcards
Secured Transaction
Transaction intended to create a security interest in personal property or fixtures.
Look for (1) credit transaction (sale on credit or loan); and (2) agreement creating a lien in favor of creditor in debtor’s personal property to secure debt
UCC Article 9
Applies to:
- any transaction creating security interest in personal property or fixtures by K
- Agricultural lien
- Sale of accounts, chattel paper, payment intangibles, promissory notes
- certain consignments
- secured sale disguised as lease
Debtor
Person who owes payment or perfromance of obligation secured
Secured Party
Lendor, seller, or other person in whose favor there is security interest
Security Agreement
Agreement between debtor and secured party creating securrity interest
Written (or electronically stored) agreement is required unless collateral ins in the possession or control of secured party
Can have oral agreement if collateral is in possession of secured party (“pledge”)
Security Interest
Contingent property interest in debtor’s collateral that debtor grants to creditor. When contingency (default) occurs, property interest springs to life and creditor has right in collateral
Collateral
Property subject to security interest -property that unsecured party can repossess on default to make sure debt paid
Purchase Money Secured Agreements (PMSI)
(a) secured party sells debtor collateral on credit adn retains security interest in item sold
(b) AN enabling loan (loan to debtor letting him buy specific collateral) -creditor takes interest in collateral
Credit/loan proceeds must ACTUALLY BE USED to buy collateral
After-Acquired Property Clause
Secured party can obtain security interest in both debtor’s present property and future property
Without it, only reaches collateral debtor has rights to at time signed security agreement.
Exception:
(1) if collateral is type that is rapidly depleted and replenished, court will assume clause
(2) Does not attach to consumer goods unless debtor acquires rights in them within 10 years
(3) Doesn’t apply to commercial tort claims
Future Advance Clause
Permissible -new security agreement not needed for future advances
Attachment
Security interest attaches so that it is effective against debtor
1) Security agreement
2) Value has been given
3) Debtor has rights in collateral
Perfection
Process of giving public notice of the security interest to the world. Secured party’s interest in collateral is effective against the world.
Financing Statement
Document generally used to provide public notice of security interest so as to perfect security interest
Good 5 years from filing date
Types of collatearl
1) Goods (tangible, moveable, personal property)
2) Semi-Intangible and Intangible Property
Goods Classifications
1) Consumer goods: used or bought for use primarily for personal, family, household purposes
2) Equipment: used or bought for use primarily in business
3) Farm Products: crop or livestock or supplies used or produced in farming operations or products of crops or livestock in unmanufactured states if in possession of farmer debtor
4) Inventory: Held by person who holds them for sale or lease or to be furnished under service K; materials used or consumed in a business in short period of time
Semi-Intangible and Intangible Property
1) Instruments; 2) Documents; 3) Chattel Paper; 4) Investment property, 5) accounts, 6) deposit accounts, 7) commercial tort claims, 8) general intangibles
Instruments
Semi-intangible property
Negotiable instruments and any other writing evidencing right to payment of monetary obligation, in ordinary course of business transferred by delivery with any necessary endorsement or assignment.
E.g. checks, notes, promissory notes
Documents
Semi-intangible property
Document which in regular course of business is treated as evidencing that the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers.
E.g. warehouse receipt
Chattel Paper
Semi-intangible property
Record which evidences both monetary interest and security interest in or a lease of specific goods. Can be stored intangibly or tangibly.
E.g. promissory note + security agreement
Investment Property
Semi-intangible property
Stocks, bonds, mutual funds, brokerage accounts
Accounts
Right to payment for (1) goods, (2) services
Deposit accounts
Semi-intangible property
Account maintained with bank. Article 9 only applies to nonconsumer bank accounts (not personal)
Commercial Tort Claims
Semi-intangible property
Claim arising in tort with respect to which claimant is organization or where claimant is an individual and the claim arose in the claimant’s business or profession and does not include damages for PI or wrongful death
General Intangibles
Any personal property not within scope of other definitions (e.g. patent, trademark, copyright, software).
Payment Intangible
General intangible under which the account debtor’s principal obligation is a monetary obligation
Pledge
Permissible oral security agreement due to collateral being in hands of secured party
Form of a written security agreement
(1) Record that shows intent to create security interest
(2) Authenticated by debtor (signed)
(3) Reasonably identify collateral (if covers timber to be cut, need description of land) (e.g. NOT “all of debtor’s property interests/assets”)
Value secured party must grant
Any consideration sufficient to support a simple contract -even past consideration enough.
Property secured generally includes proceeds
Proceeds includes whatever is received upon the sale, exchange, collection, or disposition of collateral or proceeds.
Any claims arising out of the loss of, defects in, or damage to collateral are proceeds of collateral (up to collateral’s value)
Lowest Intermediate Test
Test to determine which part of comingled cash is identifiable so secured party has interest
Look at balance in comingled bank account starting at time proceeds deposited and ending at time applying test. Lowest balance during time is secured party’s identifiable proceeds (but cannot exceed value of cash proceeds originally deposited)
Automatic Perfection
PMSI in consumer goods (perfected on attachment)
Collateral Classification: Promissory Note
Instrument
Collateral Classification: Stock certificate
Investment property / funds
Collateral Classification: Receipt given to farmer by silo operator when farmer stored grain there
Documents (warehouse receipt)
Collateral Classification: Written contract in which a car buyer purchasing on credit promises to pay car dealership for the car and grants the dealership a security interest in car
chattel paper
Collateral Classification: Big T sells tires on credit. What are customers’ obligations?
Accounts
Collateral Classification: A hospital has patients who come in for treatment sign paperwork authorizing the hospital to seek payment from their health insurance coverage provider. Can hospital use the monies due from the various health plans as collateral?
Yes (accounts)
Collateral Classification: Credit Card company issues millions of credit cards to cardholders, who use them in transactions with merchants. Merchants send the resulting paperwork to Credit Card company for reimbursement (minus certain fees). Can Credit Card company use credit card transactions as colalteral?
Yes (accounts)
Collateral Classification: checking account you have at bank
Deposit Account (no art. 9 security interest)
Collateral Classification: Patent and trademark rights, copyrights, goodwill, tax refund, liquor license, clamming commercial license, right to return of security deposit held by landlord
General Intangibles
Collateral Classification: claim arising in tort that has been settled and reduced to a contractural obligation to pay
Payment intangible or general intangible
Collateral Classification: computer program
- if sold separately, general intangible
- if program embedded in computer, falls under computer’s classification
Methods of perfection
- Automatic perfection (PMSI consumer goods)
- Possession of collateral by secured party (only so long as possession retained)
- Control (i.e. invesment property,eletronic chattel paper, & nonconsumer deposit accounts (can only be perfected by control))
- Notation of lien on certificate of title
- Filing financing statement
Perfection of nonconsumer deposit accounts
- Can only be perfected by control
1) bank in which account maintained auto control
2) non-bank secured party can put deposit account in secured party’s name or put in control agreement- agree in authenticated record with debtor and bank that bank will follow secured party’s orders w/out debtor consent
Perfection of electronic chattel paper
- Can be perfected with control
- System showing transfer of interests in chattel paper reliably establishes secured party as assignee (e.g. secured party has authenticated copy of records, that copy ID secured party as assignee of recrord)
Perfecting security interest in automobile
Only way to perfect is notation of lien on certificate of title
Exception: if debtor holding automobile as inventory then secured party must file financing statement to perfect
Filing a financing statement (Form UCC 1)
1) Notice Filing indicating person may have security interest in collateral indicated
2) Debtor’s name
3) Description of collateral
4) Debtor must authorize
5) Filed in proper place
Debtor’s name for financing statement
Name of individual if individual, business if business, etc.
- Individual: if have unexpired driver’s license in state where filed, use that name (trade name not sufficient)
- If error, financing statement effective as long as not seriously misleading (incorrect statement still comes up even if search correct name in filing office’s search)
- Secured party not responsible for filing office errors
- If debtor changes name so seriously misleading, interest retained for 4 months
Description of collateral in financing statement
- Can be specific or say “all assets/property”
- for realty interests (timber, fixtures, materials to be extracted) must reasonably identify & indicate will be filed in real estate records
- Metes and bounds not required for real estate
Where to file financial statement
- Generally filed with Secretary of State
- If realty, usually filed in real estate records of county where real property located
- If agricultural lien, perfected in state where farm products are
Where to file financial statement in multiple state transactions
- General rule is file in state where debtor is located (principal residence if individual, state where registered org is organized , place of business or chief executive office for unregistered org)
- If debtor moves secured party unperfected 4 mo. later
- If collateral transfered to new debtor in another state, have 1 year before unperfected
Continuation Statement (Form UCC 3)
Can extend filing statement’s effectiveness an additional 5 years if filed in last 6 months before 5 months are up
If no debt, and secured party receives authentication demand from debtor
Must provide within 20 days a termination statement saying no longer claims security interest under filing statement
If consumer goods, then 1 months after no outstanding obligations or within 20 days of authentication demand from debtor, termination statement must be filed (liable for $500 & any loss for failure to comply)
Perfection as to proceeds
If perfected security interest in collateral, automatically have same for proceeds receives in exchange for collateral for 20 days
After 20 days, must take new action to perfect unless (1) proceeds are identifiable cash proceeds or (2) security interest in proceeds filed where interest in original collateral perfected by filing financing statement
Change in use of collateral
financing statement still effective to perfect security interest (secured creditor has no duty to monitor the collateral or amend statement)
Priority
-Perfected vs. Perfected: first to file or perfect wins
-Perfected vs. Unperfected: perfected wins
Unperfected vs. Unperfected: first to attach wins
Special PMSI Priority (Consumer goods)
If PMSI perfected at time debtor possession or within 20 days after
Special PMSI Priority (Inventory or Livestock -and proceeds that are chattel paper, instruments, identifiable money proceeds)
Perfects and sends authenticated notification to holders or previously filed SI interests (must receive notice within 5 years before debtor receives possession of inventory)
Special PMSI Priority (vs. other PMSI)
Seller PMSI has priority over financer PMSI
Special investment property priority rules
- SI perfected by control has priority over all other methods
- If each SI perfected by control, rank according to time of obtaining control
- Si granted to debor’s intermediary (broker) has priority over other SI (unless intermediary agrees otherwise)
Special deposit account priority rules
- SI perfected by control has priority over SI perfected via proceeds
- If each SI perfected by control, rank according to time of obtaining control
- Secured party who obtained control by putting deposit account in its own name has priority over all other secured parties with control
- bank that has control because maintains account has priority over all with control except secured party who put deposit account in name as control
If debtor transfers money or deposit account funds, transferee….
takes free of security interest unless acted in collusion with debtor in violating secured party’s rights
Purchaser of chattel paper
If in good faith gives new value and takes possession in ordinary course of business, havve priority over:
1) SI that arises merely as proceeds of inventory
2) any Si interest in chattel apper as long as purchaser acquired interest without knowledge that violated rights of secured party
Purchaser of instruments
Priority over perfected SI in instrument if purchase gives value and takes possession of the instrument in good faith and without knowledge that purchaser violate the rights of the secured party
Priority: secured party v. buyer of collateral
General Rule: if you buy something with security interest on it, security interest stays on it.
Exceptions: authorized sale, buyer in ordinary course of business, consumer to consumer sales, buyers not in ordinary course of business as to unperfected SI’s unless know about it
Authorized sale
If sale authorized by secured party free of security interest, buyer takes free of interest (may be expressed or implied by type of sale or buyer’s conduct)
-E.g. implied authority to inventory collateral sold to ordinary consumer, implied authority by acquiesence
Unauthorized sales
Gen rule: buyer in ordinary course of business (other than buying farm products from person engaged in farming operations) takes free of security interest created by seller even tho perfected & buyer knows about it
Buyer in ordinary course of business
Person who buys goods in good faith without knowledge that sale violates rights of other person in good and in ordinary course from person in the business of selling goods of that kind
Buyers not in ordinary course of business
Take subject to perfected security interest. Take free from unperfected security interests unless know of security interest
Consumer to consumer sales
Special rule -in case of consumer goods, buyer takes free of security interest even though perfected if takes withotu knowledge of security interest, for value, and for own personal/family/household purposes UNLESS prior to purchase secured party filed financing statement covering goods
Secured party v. judgement lien holders
Unperfected security interest is subordinate to rights of a person who becomes a lien creditor before security interest is perfected. If security interest is perfected before the person becomes a lien creditor, security interest has priority
If sheriff levies before perfection, judicial lien has priority / if perfect before lien, then security interest wins / if obtain security agreement and filed financing statement before lien, then security interest wins
Lien creditor
Art. 9: creditor who has acquired a lien on the property involved by attachment, levy, etc. Lien obtained by judicial proceedings must attach tot he collateral. Unsecured creditor who obtained judgment and levied on judgment = lien creditor.
Special rule: PMSI v. Lien Creditor
If secured party files with respect to purchase money security agreement within 20 days after debtor receives possession of collateral, takes priority over rights of lien creditor which arises between time security interest attaches and time of filing
Priority for Future Advances
Further advance by secured creditor has priority over a lien creditor if future advance can be made (1) without knowledge of lien OR (2) within 45 days of the lien arising, OR (3) pursuant to a commitment entered into without knowledge of the lien
Secured party v. statutory lien claimants
Statutory lien beats even a perfected security creditor
Default
Grounds of default are typically specified in the security agreement. If no such terms, restricted to failure to perform or pay obligation when due (altho possible waiver by secured party of late or missed payments)
Self-help repossession
After default, secured party entitled to take possession of collateral without judicial process if can be done without breach of the peace. If breach peace, lose authorization to repossess, may be sued for conversion/trespass/etc and liable for actual/punitive damages.
Breach of the peace
Any conduct by secured party with potential to lead to violence
Generally, physical presence by debtor plus verbal objection enough, unauthorized entry into home, if attached open garage door even tho unlocked, if don’t re-lock after picking lock to gain entry to business premises (biz premises less likely breach than home)
Replevin
If self-help unavailable after default, secured party can use judicial process to recover goods
Retention of collateral (strict foreclosure)
After default and repossession, secured party may propose retaining collateral in full or partial satisfaction of the debt (if other creditors or debtors object w/in 20 days after notice, must sell can’t keep it)
- Must send proposal to any other secured party from whom foreclosing party received notice of claim and any who perfected.
- Must also retain debtor consent by agreeing in authenticated record after default or in case of full strict foreclosure failing to make authenticated objection within 20 days of notice
Resale of collateral
Sale discharges security interest under which sale being made and all subordinate interests. Purchaser is still subject to superior security interests.
- Need reasonable notification
- Every aspect of sale (time, manner, method, place, terms) must be commercially reasonable
- Secured party may buy at any public sale but may buy at private sale only if collateral is a type customarily sold in a recognized market or is a type which subject is widely distributed standard price quotations
- compliance with resale requirements (e.g. secured party’s right to deficiency
- If failed to comply with resale requirements, deficiency judgment may be entered
Reasonable notice in resale of collateral
- authenticated by secured party (cannot be oral)
- given to debtor adn any securities on debt AND to any other secured parties who notified secured party of interests, AND any perfected interests
- notice not necessary if collateral perishable or threatens to decline rapidly in value or is of a kind ordinarily sold n a recognized market (e.g. stock). Debtor or surety may after default in authenticated agreement waive right to notice
- notice must be sent within reasonable time before sale (question of fact)
- in nonconsumer transactions, notice is deemed to be sent within reasonable time if sent 10 days or more before sale
Content of reasonable notice in resale of collateral
(1) Statute provides “safe harbor” notice forms
(2) For public sale, notice of time and place of sale is required
(3) For private sale, notice of time after which sale will occur must be given
(4) extra info required for consumer goods
Failure to comply with resale requirements (right to deficiency judgment)
Gen rule: if secured party fails to conduct commercially reasonable sale, there is a rebuttable presumption that sale proceeds equal the amount of the debt (presume so no deficiency -take away deficiency)
Debtor’s right to redeem
any time before secured party has resold collateral or entered into contract for disposition, or obligation has been discharged by secured party’s retention of collateral, debtor may redeem collateral
- must tender fulfillment of all obligations secured by collateral
- b/c most security agreements have acceleration clause, debtor typically must tender entire balance to redeem
Fixtures
Goods that have become so related to particular real property that an interest in them arises under real property law
- Interest in fixtures may arise under both Art. 9 and under real estate law
- No security interest can exist in ordinary building materials (e.g. bricks, lumbar, shingles) incorporated into an improvement on land
Perfecting security interest in fixtures
Need fixture filing (normal UCC 1 form filed in county office where real estate located) which must reasonably identify real estate, show name of owner (if debtor does not have an interest of record in real estate)
Rights on default in fixtures
If install fixture in home that sells on credit (retaining security interest), seller can repossess fixture on default even if repossession will render property uninhabitable
Priority in fixtures
- Secured party v. subsequent real estate interest: secured interest wins if perfect before real estate interest arises
- Secured party v. prior real estate interest: real estate interest wins if prior to SI and properly recorded
- Prior construction mortgage always wins
When fixture filing is uncessary
Need not fixture file as to readily removable (1) factory or office machines; (2) equipment that is not primarily used or leased for use in the operation of real estate, or (3) replacements of domestic appliances that are consumer goods
Any method of perfection before such goods becomes fixtures entitles secured party to priority . Don’t need perfection for priority if encumbrancer or owner of real estate has in authenticated record consented to security interest has disclaimed an interest in the goods as fixtures or if debtor has right to remove goods as against real estate claimant
Accessions
Goods that are physically united with other goods in such a manner that the identity of the original goods is not lost (e.g. tires on car)
Perfection of accessions
If security interest perfected when collateral becomes an accession, security interest remains perfected in the collateral
Priority in accessions
Rules for priority previously disclosed (first to file or perfect, special PSMI rules) apply to same
Special rule: security interest in accession is subordinate to a security interest in the whole which is perfected by compliance with the requirements of a certificate of title statute
Removal and reimbursement for physical injury to the whole in accessions
secured party may remove an accession from other goods is security interest in accession has priority over claims of every person having an interest in the whole. Secured party removing accession is responsible for costs of repair of any physical injury in whole or to goods. Person entitled to reimbursement may refuse permission to remove accession until secured party gives adequate assurance for performance of obligation to reimburse
Automatic perfection for security interest in small-scale assignment of account or payment intangible
Applies to assignment of accounts or payments intangibles that does nto alone, or in conjunction with other assignments to the same assignee, transfer a significant part of assignor’s outstanding accounts or payment intangibles to creditor
