Secured Transactions Flashcards
How must one describe collateral in the security agreement?
It may be described broadly by category type (e.g. “equipment”) or specifically (e.g. by serial number)
However, consumer goods, consumer securities accounts, and commercial tort claims cannot be described by type alone; a more specific description is needed
A generic description of collateral such as “all of the debtor’s assets” is not a sufficient description
What is attachment?
It establishes a secured party’s rights in the collateral as against the debtor
What are the requirements for attachment?
(1) An agreement to create a security interest evidenced by:
- possession,
- the debtors authentication of the security agreement, or
- control
(2) Value given by the secured party; and
(3) Debtor has rights in collateral
What is perfection?
(1) Attachment, and
(2) One of the following:
- Filing (in the proper place) of a financial statement describing the collateral,
- Taking possession of the collateral;
- Taking control of the collateral;
- Automatic perfection (e.g. of a PMSI of consumer goods); or
- Temporary perfection (e.g. of a security interest in proceeds received from the sale of collateral)
What are the methods of perfection?
Filing - effective for all classes of collateral except deposit accounts and money
Possession - effective for all classes of collateral except general intangibles, accounts, nonconsumer deposit accounts, electronic chattel paper, and nonnegotiable documents, although it is impractical for some classes of collateral (e.g. if secured party takes debtor’s equipment or inventory, it will be difficult for debtor to run his business)
- Perfected upon the moment of possession and continues as long as possession is retained
Automatic - effective only as to PMSI’s in consumer goods, small scale assignments of accounts, sales of payment intangibles and promissory notes, beneficial interests in a decedent’s estate, and certain investment property transactions
Temporary - effective for 20 days (and possibly longer) for proceeds; 20 days when a secured party gives new value under a security agreement where collateral is a negotiable document, instrument, or certificated security; 20 days where a secured party makes available a negotiable document, instrument, certificated security, or goods in possession of a bailee on a temporary basis (e.g. for debtor to present for payment or to sell); four months where debtor moves from one state to another if debtor’s location governs perfection
Control - effective only for nonconsumer deposit accounts, electronic chattel paper, and investment property
If filing a financing statement, what must the financing statement contain?
Debtor’s name and mailing address,
Secured party’s name and mailing address,
An indication of the collateral covered by the financing statement, and
If for real-property related collateral (minerals, timer, fixtures, etc.), a description of the related real property, the name of the owner of the property, and an indication that it is to be filed in the real property records
- Must be filed in the local real property records - in the county where a mortgage or real estate is filed
Must be filed “centrally”; in the secretary of state’s office
How long is perfection by filing effective?
Five years
After, a continuation statement may be filed, which is good for an additional five years
- Cannot be filed any earlier than six months prior to the expiration of the original filing
- Authorization by debtor is not required to file a continuation statement
How do you continue to perfect a security interest in proceeds beyond the temporary 20 days?
The security interest in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting the proceed would be filed in the same place as the financing statements for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral (“same office rule”);
The proceeds are identifiable cash proceeds (“cash proceeds rule”), or
The security interest in the proceeds is perfected within the 20-day period
What happens if the steps for perfection occur before attachment?
Perfection will occur upon attachment
When do different classes of collateral become perfected by a PMSI?
A PMSI in consumer goods is automatically perfected
A PMSI in equipment can be perfected (usually by filing) anytime within 20 days after the debtor gets possession of the collateral
A PMSI in inventory must be perfected (usually by filing) by the time the debtor gets possession
- There is no 20 day grace period
- Others with a security interest in the inventory must be given written notice
When is a PMSI perfected?
Perfected at the time the debtor gets possession of the inventory
Filing for inventory must take place before the inventory is delivered to the debtor); and
Any secured party who has perfected his security interest in the same inventory receives written notification of the PMSI before debtor receives possession of inventory, and the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type
What is the dual status rule?
A security interest in nonconsumer goods does not lose its status as a PMSI if:
- (1) the purchase money collateral also secures an obligation that it not a purchase money obligation;
- (2) nonpurchase money collateral also secures the purchase money obligation; or
- (3) the purchase money obligation has been renewed, refinanced, consolidated, or restructured
Does not apply to consumer good transactions
What are the three types of collateral?
Tangible collateral or goods
Intangible or semi-intangible collateral
Proceeds
What are tangible collateral or goods?
Consumer goods - goods bought or used for personal, family, or household purposes
Inventory - goods held for sale or lease and goods consumed by a business
Farm products - goods (including crops and animals) used or produced in farming that are in the possession of or used by a farmer; and
Equipment - goods that are not consumer goods, inventory, or farm products (e.g. durable goods used by a business, such as machinery)
The categorization depends on the primary use of the property by the debtor
What are intangible or semi-intangible collateral?
Instruments - notes, drafts, and certificates of deposit
Documents - bills of lading and warehouse receipts
Chattel paper - records (i.e. written or electronically stored information) evidencing both a monetary obligation and a security interest in or lease of goods, such as a promissory note and written security agreement
Accounts - rights to payment for goods, services, etc., such as accounts receivable
Deposit accounts - savings accounts, passbook accounts, etc. (note that Article 9 only applies to nonconsumer deposit accounts and consumer deposit accounts that are claimed as proceeds of other collateral)
Investment property - stocks, bonds, mutual funds, brokerage accounts, etc.
Commercial tort claims - tort claims filed by organizations and tort claims filed by individuals that arose out of the individuals’ business and do not involve personal injury (only applies to commercial tort claims and noncommercial claims that are claimed as proceeds of other collateral)
General intangibles - intangibles not fitting the definitions of other types of intangibles, such as copyrights and goodwill (general intangibles in which the principal obligation of one of the parties is the payment of money is a payment intangible)
What are proceeds?
Whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.
- Includes second generation proceeds
- Insurance payable by reason of loss or damage to the collateral is a proceed, unless it is payable to someone other than the debtor or secured party
- Claims arising out of the loss of, defects in, or damage to collateral are also proceeds
What is after-acquired property?
A security interest in property to be acquired in the future
- Attaches as soon as the debtor acquires an interest in the collateral
Generally created only by including an after-acquired property clause in the security agreement
Will attach automatically to proceeds from the disposition of collateral and to accounts and new items of inventory collateral, even without an after-acquired property clause
When does a lease act as a security interest?
When the document is characterized as a lease but intended to have effect as security
It will be governed by Article 9 and treated as a security interest
The document will be deemed to create a security interest if the rental obligation is (1) not terminable by the lessee, and (2) the lessee has an option to purchase the goods for no or nominal consideration at the end of the lease term
These transactions often amount to an installment sales contract with the lessor retaining a security interest in the collateral leased
What are the rules when a seller delivers goods to a buyer but reserves title?
If a seller reserves title in delivered goods, usually because payment is due after delivery, the seller has a security interest in the goods delivered
- It usually qualifies as a PMSI because it acts as delivering the goods on credit
Perfection depends on the type of collateral
- PMSI in consumer goods is automatically perfected
- PMSI in other goods, such as inventory, may require filing, possession, control, etc. for perfection, and if inventory requires notice
What is the hierarchy of priority in security interests?
Buyer in ordinary course of business, HDCs, and the like
Transferee of money or funds from deposit account
Purchasers of chattel paper or instruments who have possession or control
Possessory lienholder
Secured party with possession of goods (pledge)
PMSI holders with superpriority
- A party who has a PMSI as a seller has priority over other PMSI’s
Otherwise, the first to file or perfect prevails
- Perfected security creditors and lien creditorsPerfected security creditor vs. perfected security creditor: first to file or perfect wins
- A security interest perfected by control has priority over a security interest perfected by any other method
- It is the date of filings or perfection that determines priority, not the date of attachment
- Perfected security creditor vs. lien creditor: first to perfect (security interest) or attach (lien) wins
- Secured party vs. possessory lien holder
- A possessory lien imposed by other (i.e. non-UCC) state law in favor of those who supply goods or services (e.g. an artisan’s lien or materialman’s lien) has priority over a security interest as long as the goods or services were provided in the ordinary course of business and the collateral remains in the lien holder’s possession
Unperfected secured party vs. judicial lien creditor
- Judicial lien creditor prevails if the lien creditor becomes such before the security interest is perfected
Unperfected security creditors
Unperfected vs. unperfected: first to attach wins
Debtor
What is a buyer in the ordinary course of business?
Buying in the ordinary course of one’s business in good faith and without knowledge or notice that the sale is in violation of another’s rights
- A buyer buys in the ordinary course of business when the seller is engaged in the business of selling goods of the kind purchased
How do you become a holder in due course?
(1) the note must be negotiable in form; it must be payable to “bearer” or to “the order of” the named payee and contain a promise to pay a fixed amount of money
(2) the original note must be indorsed by the named payee
(3) The original note must be delivered to the transferee
(4) the transferee must take the note in good faith
(5) the transferee must pay value for it.
(6) The transferee must not have any notice that the note is overdue or has been dishonored, or that the maker has any defense to the duty to pay it
What is the rule for chattel paper purchasers?
If a purchaser of chattel paper in good faith gives new value and takes possession of the chattel paper in the ordinary course of business, the purchaser will have priority over:
- A security interest in chattel paper that arises merely as proceeds of inventory, as long as the chattel paper does not indicated that it has been assigned to anyone other than the purchaser, and
- Any other security interest in the chattel paper, as long as the chattel paper purchaser acquired it’s interest without knowledge that its purchase violated the rights of the secured party
When does a purchaser of an instrument have priority over a perfected security interest in the instrument?
When the purchaser gives value and takes possession in good faith and without knowledge that the purchase violates the rights of the secured party
Which state law governs perfection?
General rule is the law of the state where debtor is located governs perfection
- If an individual, then in the state of her principal residence
- If a registered organization, then the state under whose laws it is organized
- If unregistered corporation, then its place of business if only one place, or its chief executive office if more than one place of business
What if the security interest is governed by state of debtor’s location and debtor moves?
The security interest will generally remain perfected without further action for four months or until perfection in the first state lapses, whichever is first
Then the secured party must re-perfect its security interest
What if collateral is transferred to a new debtor (someone who becomes bound by the security agreement) who is located in a different state?
The security interest will remain perfected until one year after the sale of the collateral or until perfection in the first state lapses, whichever is first
A security interest in collateral a new debtor acquired before or within four months after becoming bound by the original debtor’s security agreement is temporarily perfected for four months by a corresponding financing statement filed in the original debtor’s jurisdiction
