Secured Transactions Flashcards
Article 9 - TX UCC
When must consignments comply with Article 9 of the UCC?
Must comply with Article 9 if:
1. Consigned goods are worth a total of $1,000.00 or more AND
2. The consigner did NOT use the goods for personal, family, or household purposes, AND
3. Potentially deceptive consignee:
(when in position to deceive)
• Consignee deals with goods of that kind under a name other than the consignor’s name,
• Consignee is NOT an actioner, and
• Consignee is NOT generally known by consignee’s creditors to be substantially engaged in selling consigned goods.
Lease – Purchase Agreements
Leases are not governed by Article 9, but when the lease is actually an installment sale, it is covered.
Evidence of secured transaction:
- Lease term is equal to or greater than remaining economic life of good, or
- Lessee owns property at end of lease term or
- Lessee has option to buy for nominal consideration at end of lease term
If the creditor wants to have rights to the goods superior to the claims of other creditors – must comply with Article 9.
Classification of Collateral – 2 main classifications (and subcategories):
- Goods:
• Consumer goods – personal, family, or household purposes
• Equipment – business purposes
• Inventory – consumed material, goods held for sale or lease, or raw material and work progress
• Farm products – in possession of farmer engaged in farming operations and in unmanufactured condition - Semi-Tangible and intangible collateral:
• Instruments – represent money (CD, promissory note, drafts, checks)
• Documents – written/electronic representation of goods (warehouse receipt, bill of lading)
• Chattel Paper – monetary obligations and security interests in or lease of goods
• Account – Accounts receivables, credit card receivables
• Deposit Accounts – checking and savings
• Investment property – stock, bonds, mutual funds
• Commercial tort claims – business tort claims that do not involve personal injury
• General Intangibles – copyrights, patents, license
Proceeds
Whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds.
• Automatically perfected for 20 days from the debtor’s receipt of the proceeds
• When perfection continues beyond 20 days:
1. Same office: Original security interest perfected by filing and a financing statement covering the proceeds would be field in the same office as the original collateral (i.e., inventory traded for equipment – perfection transfer to equipment because proceed and both are perfected by filing in secretary of state so no new filing needed)
2. Identifiable cash proceeds
3. Proceeds perfected within the 20 day period: The perfection could occur without further action on the creditor’s part or the creditor might need to take action to perfect beyond 20 days (i.e., File). When perfect – same priority as original collateral.
Attachment
3 elements: (VCR)
- Creditor gave VALUE
- CONTRACT – the security agreement
- Debtor has RIGHTS in collateral – debtor has rights in the collateral either though ownership, identification to a contract, or permission.
Method of proving the security agreement:
- Oral: If the collateral is in the creditor’s possession. Also known as PLEDGE.
- Authenticated record: Written or electronic that reasonably identifies the property.
- Control: Control of the collateral when nonconsumer deposit accounts, electronic chattel paper, or investment property. (CONTROL = the creditor has the right to sell or cash in the collateral without further action from the debtor.) Secured party with control will prevail over all others.
Is “all my consumer goods” a reasonable identifying description of the collateral in a security agreement?
• No – consumer goods and commercial tort claims may NOT be described by type alone. The description must be more specific.
Is “all my personal property” a reasonable identifying description of the collateral in a security agreement?
• No – super generic descriptions are not allowed in a security agreement. The description of the collateral must reasonably identify the property. It must be clear what property will be repossessed if the debtor defaults.
After Acquired Property (2 types)
• Inventory - floating lien.
• Consumer goods – but limited to 10 days after credit gives value.
For example: Loan company loaned Mr. Consumer $5,000 and made him sign a security agreement giving it a security interest in Consumer’s televisions “now owned or after-acquired”. This clause is only effective against TVs that are acquired by Mr. Consumer within 10 days after the loan.
• NOT valid for after acquired commercial tort claims
Perfection
• Process by which the creditor protects the security interest from most other claimants to the same collateral.
• ELEMENTS:
1. Attachment (value, contract, debtor rights to collateral)
2. Act of perfection:
• Possession of collateral by creditor
• Filing of financing statement by creditor
• Automatic permanent perfection
• Automatic temporary perfection
• Control
• Notation of security interest on certificate of title
Perfection by Possession
Almost all collateral may be perfected by possession EXCEPTIONS: • Accounts • Deposit accounts • Nonnegotiable documents • Electronic documents • Electronic chattel paper • General intangibles
• If the creditor no longer has possession of the collateral, perfection is lost
Perfection by filing a financial statement
Almost all collateral may be perfected by filing
EXCEPTIONS:
• Deposit accounts
• Money
Financing statement requirements:
- Names of debtor and creditor
- Address of debtor and creditor
- Debtor’s authorization in AN authenticated record
- Description of the collateral
- Description of the land if the collateral is timber, minerals fixtures, or crops
Financing Statement – Debtor’s authorization
- Authorization cannot be oral
- (i.e.: debtor signs security agreement but not financing statement – okay because underlying security agreement signed)
- Can be authorized after filing.
Financing Statement – Description of the collateral
- The description may be broader terms than the security agreement such as “all assets”
- After-acquired property covered by the security agreement that fits within the description is automatically included
Change in the Debtor’s Name from what is reflected on the Financing Statement:
- Collateral debtor has at the time of the name change – perfection continues
- Collateral debtor obtains within 4 months of the name change – perfection continues
- Collateral debtor obtains after 4 months of name change – perfection ends UNLESS under new name, filing made, within 4 month period
Where to file the financing statement in Texas:
- Generally = Secretary of State Office in Austin
* Fixtures, minerals, and timber to be cut = county where mortgage on real estate would be filed
Once filed, how long a financing statement is effective for:
- 5 years from the date of filing
- EXCEPTION: A recorded real property mortgage covering fixtures continues until the mortgage s released or satisfied
• Continuation Statement: extend beyond 5 years – file a continuation statement within 6 months prior to the expiration date and before the 5 years expires
Termination Statement
Consumer Goods – Required:
• The CREDITOR must file a termination statement in a timely manner that is the earlier of:
• (1) within 20 days after the debtor’s written demand; or
• (2) within 1 month after there is no outstanding secured obligation or commitment to make advances, even without a demand from the debtor
Non-consumer goods – only upon the debtor’s request
• Creditor must provide the debtor with a termination statement within 20 days of written demand. Debtor incurs cost and responsibility of filing termination statement
Automatic Permanent Perfection
- Purchase money security interest in consumer goods
- Assignment of insignificant amount of debtor’s accounts
- Sale of promissory notes
Automatic Temporary Perfection
- Proceeds – automatically perfected for 20 days from debtor’s receipt of proceeds
- New value for instruments, negotiable documents, and certified securities – creditor automatically perfected for 20 days ( a grace period to prefect using normal methods) from time of attachment if the creditor gave new value
- Delivery of instruments, negotiable document, or certified security to debtor for 20 days for a certain purpose – i.e., give creditor back notes to collect payments owed – if don’t regain possession before expiration of 20 days, perfection is lost
Perfection by Control
Applies to investment property – stocks and bonds
CONTROL = the creditor has the right to sell or cash in the collateral without further action from the debtor. Secured party with control has priority over all other creditors not in control.
If a deposit account – security party has control if the secured part is the bank in which the deposit account is maintained. Secured party with control prevails over all other parties.
Perfection by a Notation on Certificate of Tile
Type of items this type of perfection covers:
• Cars
• Boats
• Manufactured housing
Applies if collateral consumer goods or equipment (i.e., give bank your car as collateral for a loan. To perfect the bank needs to note its security interest directly on your car’s certificate of title)
NOT when car dealer sells car – then collateral is inventor which perfection is obtained by filing or possession.
What State’s version of the UCC is used to determine whether a creditor is perfected?
Generally – State where the debtor located
1. Individual = principal residence
2. Registered Organization = Law of state where it organized
Exceptions:
Where creditor must following law of collateral location
1. Security interests perfected by possession
2. Fixtures
3. Timber
4. Agricultural liens = law of state where farm product covered by lien is located
Certificate of title items = law of state which issued most recent certificate of title
Deposit Accounts = law of state in which bank has its chief executive office
Debtor or collateral changes state where located:
General Rule = if debtor moves, perfection continues for 4 months
Perfection by possession = perfection continues as long as perfected under new state’s law
Certificate of title items = Perfection continues for as long as it would have under the original certificate of tile
Priorities
Secured v. Unsecured/General Creditor:
• Secured creditor prevails
Secured Part v. Secured Party:
• Both creditors unperfected – 1st to ATTACH wins
• One creditor perfected – PERFECTED creditor prevails
• Both Creditors Perfected – first creditor to either (1) FILE OR (2) PERFECT
Purchase Money Security Interest in Inventory obtains superior title when:
• A PMSI creditor that has an interest in inventory will prevail over other creditors if:
1. The PMSI creditor perfected at the time the debtor receives passion of the inventory and
2. Proper notice to holder of conflicting security interest – Authentication notification given to all creditors who have already filed with respect to the collateral and must be given BEFORE debtor receives possession of the inventory
• Notice is effective for deliveries of the same type of collateral for 5 years.
Purchase money Security Interest in Goods obtains superior title when:
• Prevails (even though second) if it is perfected:
- At the time the debtor receives possession of the collateral, OR
- Within 20 days of when the debtor received possession of the collateral
Purchase money Security Interest in Livestock obtains superior title when:
• A PMSI creditor that has an interest in livestock will prevail over other creditors if:
3. The PMSI creditor perfected at the time the debtor receives passion of the livestock and
4. Proper notice to holder of conflicting security interest – Authentication notification given to all creditors who have already filed with respect to the collateral and must be given BEFORE debtor receives possession of the livestock
• Notice is effective for deliveries of the same type of collateral for 5 years.
What happens to a secured interest if the collateral is given to a donee as a gift?
If the debtor makes a gift of the collateral to a done, the collateral remains subject to the security interest in the donee’s hands.
Buyers in the Ordinary Course of Business
A BOCB can prevail even over a perfected creditor if the following requirements are satisfied:
- In good faith
- Without knowledge that the sale violates the rights of another person in the goods
- Buys in to ordinary course from a person in the business of selling goods of that kind
Buyer takes free of existing security interest
Buyer of consumer goods (garage sale rule) takes priority when:
- A consumer (buyer)
- Buying consumer goods AND
- Those goods are held by and bought from a consumer (debtor seller)
Takes free of the security interest, even if creditor is perfected, if consumer buys:
• Without knowledge of security interest
• For value
• For personal, family or household use and
• Before the filing of a financing statement covering goods
PMSI creditor will loose under garage sale rule if does not file.
Does a Holder in Due Corse of Negotiable Instruments have priority over other creditors?
A HDC will prevail over earlier perfected interest in negotiable instruments
Future Advances –
A creditor gives mover money to the debtor based on collateral that the debtor has already sold the to purchaser who does not qualify as a buyer in the ordinary course of business. Can the buyer prevail over the secured creditor for future advance amounts?
Yes, but on for future advance amounts made after the first of these events occurs:
- Secured creditor obtains knowledge of the purchase or
- 45 days have elapsed from the date of purchase
Secured Creditor v. Lien Creditor
Lien Creditor = creditors who have acquired a judicial lien by a levy on the debtor’s property or a bankruptcy trustee.
If secured creditor unperfected at time lien attached = lien creditor prevails
If secured creditor perfected at time lien attached = Secured creditor prevails
PMSI Creditor = if prefects by filing within 20 days after debtor receives possession, PMSI will prevail
Future Advances = secured creditor will lose priority to a lien creditor for future advance after both of follow occurs:
- The secured creditor obtains KNOWLEDGE of the lien, and
- 45 days elapse from date of lien
Secured Creditor v. Statutory Mechanics Lien
Statutory lien prevails if following conditions satisfied:
- Person furnished services or materials with respect to the goods covered by the security interest
- Furnishing was in ordinary course of business, AND
- Collateral is in the POSSESSION of the statutory lien holder
Fixtures – Secured Party v. Holder of Real Property Mortgage
Fixture = something that can be removed by some damage will occur to realty (furnace, AC, sink, commode)
Secured party may win if:
- Perfected before real estate interest recorded AND
- Perfected with a fixture filing
A fixture filing requires additional requirements
• Describes the real property
• Filed in office where a mortgage on the real property would be recorded
Priority Interest in Crops v. lien
A perfected security interest in corps has priority over a conflicting interest in the land on which the crops are growing. It does not matter who filed or perfected first.
Repossession
- Occurs on debtor’s default.
- No judicial process is needed (use self help)
- NO NOTICE to DEBTOR required
- Limitation on repossession – NO BREACH OF THE PEACE
- Creditor able to engage in trickery - tell debtor to come in to get something repaired but really repossessing car
Creditor Liability for Breach of Peace during repossession:
- Strict liability – nondelegable duty
* Liability could be for conversion of repossessed item, actual damages, and even punitive damages
Creditor’s Choices after proper repossession:
- Resell collateral – sue for deficiency, give surplus to debtor
- Strict foreclosure – keep collateral and call things square
Resale
- Reseal can be PUBLIC or PRIVATE
- Validity of the sale determined by commercial reasonableness (burden on creditor to show) of:
• Method
• Manner
• Time
• Place
• And terms of sale - Generally debtor and other parties must receive written notice of resale within a reasonable time before sale (for nonconsumer transaction – 10 days)
Contents of resale notice:
- Description of debtor and secured party
- Description of the collateral
- The method of sale (i.e. public or private)
- Statement that the debtor is entitled to an accounting for unpaid indebtedness and charge for perming accounting, if any
- Time and place of public sale or the time after which a private sale will be made
Collateral that is consumer goods, notice must also include: - Explain that debtor liable for deficiency
- Telephone # of person from whom debtor can obtain amount needed to redeem collateral
- Telephone # or address from which debtor can get additional information about the sale
Debtor’s Right to Redeem
Debtor ability to cure the default and regain the collateral if certain requirements satisfied:
- Creditor not yet sold or entered into a contract to sell collateral
- Strict foreclosure has not yet occurred
- Debtor has not waived right to redeem after default
- Debtor must tender fulfillment of ALL obligations secured by collateral
- Debtor must tender creditor’s reasonable expenses
Title purchaser obtains at resale
The reselling creditor warrants TITLE, POSSESSION, and QUITE ENJOYMENT of the collateral by the purchaser UNLESS the creditor takes steps to disclaim the warranties.
Application of Resale Proceeds
- Reasonable expenses of reselling creditor
- Satisfaction of debt
- Satisfaction of subordinate creditors
- Surplus, if any, to debtor
If no surplus but loss instead – creditor is unsecured for the deficiency
Penalty for NOT complying with resale requirements
- Creditor is liable for actual damages – could be to the debtor or to another creditor
- Consumer goods – creditor is automatically liable for amount equal to finance charge plus 10% of principal
- Effect or creditor’s ability to recover deficiency
• Consumer transaction = absolute bar to recover deficiency
• Nonconsumer transaction = rebuttable presumption that value of collateral was equal to the amount of debt
Strict Foreclosure
Creditor retains collateral in total satisfaction of debt, or in nonconsumer transaction creditor retains collateral for total or partial satisfaction of debt.
Requirements:
1. Debtor consents
• Expressed – authenticated record made AFTER default
• Implied – debtor fails to object to creditor’s proposal to strictly foreclose within 20 days of when creditor stent notice
2. Creditor send authenticated notice to retain collateral to:
• Debtor – unless debtor has waived notice in an authenticated agreement AFTER default
• If collateral not consumer goods – notice to creditors who have perfected by filing, notation or certificate of title, or who have given notice to creditor
3. No timely objection
• If debtor or another creditor object in WRITING with 20 DAYS creditor may not keep collateral and must conduct resale
Strict Foreclosure for High Equity (debtor has paid 60% of price) consumer goods:
Resale necessary with 90 days of repossession
