Secured Transactions Flashcards
1
Q
What is a secured transaction
A
An agreement (k law) b/w a debtor and a creditor that the debtor’s personal prop will serve as collateral for a loan. If the debtor defaults on the loans the creditors will have the right to repossess the collateral and use it to satisfy the debt.
2
Q
What is an attachment
A
A security interest that is enforceable against the debtor with respect to the collateral is said to have “attached” to the collateral.
3
Q
What is perfection
A
Notice of the security interest to establish a claim superior to other parties who may wish to claim the same collateral.
Rule: In order for the security interest to be perfected, it must first attach to the collateral.
4
Q
What is a security interest
A
It’s the interest in personal property (not real estate) or fixtures that secures payment or performance of an obligation
5
Q
Who is the secured party
A
The creditor who obtains a security interest in the debtors property
6
Q
Who is an obligor
A
A party that must pay or peform the obligates that the collateral secures (ex: co-signor)
7
Q
Sales of which type of collateral are treated like secured transactions?
A
- Chattel Paper
- Promissory Notes
- Accounts and payments intangibles
“Chicago Police Patrol Noteworthy Alleys; Prevent Incidents”
8
Q
For secured transactions, what are goods?
A
Anything movable at the time the security interest attaches. Also includes some collateral that is not technically moveable:
- Fixtures
- Standing timbers
- Unborn animals
- Growing or unharvested crops, and
- Manufactured homes
9
Q
What are the subcategories of goods
A
- Consumer goods (used for personal, fam, household purposes)
- Farm Products: crops, livestock, supplies, used or produced (Eggs) in farming
- Inventory: items on the shelf at store
- Equipment: Goods that dont fit into any other category (machinery, trucks, )
*as collateral passes from debtor to debtor the principal purpose use and classification can change
Example: Chandelier -consumer good. When it gets attached to real property= fixture/ Eggs on farm=farm product, but when purchased at Publix=Inventory
10
Q
What is a “right to payment” type of collateral?
A
Debtor has the right to be paid by a 3P and debtor uses that right to payment as collateral for a loan
11
Q
What are the 4 types of rights to payments
A
- Instruments (promissory notes, checks)
- Chattel Paper: A record w/ 2 parts:
(a) Monetary obligation; and
(b) Security interest or lease - Accounts: right to payment of $ obligation for goods sold, leased, or licensed. Or services rendered. (Right to be paid under ins policy, accounts receivable)
- Payment intangibles= “catch all”
12
Q
What are the 3 requirements for attachment?
A
- Value given by secured party
- The debtor has rights in the collateral
- There is an agreement which either:
(A) authenticates the security agreement that describes the collateral, OR
(B) The secured party has possession or control of the collateral pursuant to an oral or unauthenticated security agreement
13
Q
Value can be given by providing the same ____________ needed for a contract. No _______ needs to be given (past consideration is fine)
A
Consideration; new value
14
Q
A binding _______ to extend credit is value
A
Committment
15
Q
What is the rule for after acquired property used as collateral?
A
Security agreements can provide for afteR acquired title but attachment does not occur until the debtor obtains rights in the collateral.
16
Q
What are the 3 components to a security agreement
A
- A record (no need to be written on paper but must be stored in a tangible medium so others can look it up- like a voicemail or other media)
- Record must be authenticated by the debtor
(A) signed or other symbol that shows INTENT of the debtor to be bound - Describes the collateral enough to reasonably identify it
- (i.e all debtors inventory)
- Exception: for consumer goods or commercial tort claims, collateral must be described with particularity
- Super generic descriptions aren’t good enough for attachment, but its good enough for a financing statement
17
Q
What are the alternatives to authenticating the record for attachment
A
If there is no authenticated record that describes the collateral or the agreement is oral, the secured party’s POSSESSION or CONTROL of the collateral pursuant to a security interest can also be sufficient for the security agreement requirement to attach
18
Q
What are the secured parties rights and duties when he gets possession or control of collateral to satisfy attachment?
A
- Act with reasonable care with the collateral
- Keep collateral identifiable; and
- Relinquish the collateral once the obligation has been satisfied
- May charge the debtor for expenses for storing and maintaining the collateral.
19
Q
Who is a debtor
A
A person who has an interest other than a security interest in the collateral (usually, the debtor owns the collateral)
20
Q
A secured transaction must involve what kind of property?
A
Personal property or fixtures. Not real estate.
21
Q
In sales of the right to payment, the _____ is the secured party and the ______ is the debtor
A
Buyer is the secured party. Seller is the debtor (only in these cases)
22
Q
Sales of which types of collateral are treated as secured transactions?
A
- Chattel Paper
- Promissory Notes
- Account and payment intangibles
*Chicago Police Patrol Noteworty Alleys Prevent Incidents”
23
Q
Define Collateral
A
Property that is subject to a security interest.
- The classification of collateral affect which priority rules apply*
- Classification can change: (Ex: Eggs in farm=farm products/ Eggs purchased at grocery store= consumer goods
24
Q
What is a “Right to Payment” type of collateral?
A
A debtor has the right to be paid by a 3P and the debtor uses that right to payment as collateral for a loan
25
Because a security interest only attaches to the collateral described in the security agreement, a creditor that wants to have a security interest in property acquired by the debtor after the agreement is authenticated, the lender must include an ___________
After Acquired Property Clause. Otherwise, the security interest attaches to the collateral that exists at the time the security interest was executed.
Exception: Inventory and accounts. Presumption that after acquired inventory and accounts are included (ex: grocery store puts their inventory as collateral. Thats perishable food. If food rots, after acquired food for their inventory is included
26
If a security interest attaches to the original collateral, it attaches to the proceeds ________ whether or not the security agreement state that it covers the proceeds
Automatically
27
What is a PMSI
“Purchase Money Security Interest” meaning you get money to purchase the very thing that the lender is going to have a security interest on. Only for goods and software.
GOODS=
A secured party gave value (a loan) to the debtor and debtor incurred an obligation which allowed debtor to have rights in or use goods. OR Secured party sold goods to debtor and debtor incurred the obligation to pay Secured Party back (credit)
SOFTWARE=
When debtor acquires his interest in software in an integrated transaction in which the debtor also acquired an interest in good (the computer) but the software was the principal purpose. Security interest in the software must also secure an obligation with respect to the goods.
28
What is a Seller PMSI
Goods bought on credit
Dealer says: “Here is a car, pay for it over time” Buyer signs security agreement granting dealer a security interest in the car.
29
What is a Lender PMSI
“Here is the MONEY. Buy the car with it and pay us the money back”
30
What are the 5 methods for perfection?
“Famous People Can’t Avoid Attention”
1. Filing (most common)
2. Possession
3. Control
4. Alternative perfection systems (ex: a state certificate of title law for car/motorcycle.
5. Automatic Perfection (can b temp or perm)
31
How do you perfect a security interest by filing?
Filing a financing statement in the Central Filing Office of the state the debtor is located (often the sec of state office). Debtor must authorize it first before filing. (Signature not needed)
NOT APPLICABLE FOR:
1. Deposit Accounts,
2. Money,
3. Letters of credit,
4. Collateral subject to other perfection methods (i.e: state certificate title laws (CARS)
32
What is the purpose of filing a financing statement?
Puts others on notice that there may be a security interest on the particular collateral
33
For purposes of filing a financing statement for perfection, where is the appropriate state to file it in?
<> Corporations=state of incorp.
<> Biz that’s not a registered org= state where biz operates,
<> Individual- state of principal residence
<> Security interest in real prop *related* collateral (promissory note)= in local prop records of county prop is located. (Includes oil, gas, timber)
*Filed in wrong location= no perfection
34
What is the info that is required to be included on a financing statement
*Essential info. If any missing =no perfection*
1. Debtors correct legal name
-(important 4notice. ppl search UCC filings by name. Maj=DL only/Min=others like BC)
2. Name of the secured party
3. Description of the collateral.
*Addt’l req’s 4 real prop related collateral
(A) Statement must indicate it covers the real prop RELATED collateral
(B) note that its to be filed in the local real prop records
(C) describe the real property to which the collateral relates
(D) Name the record owner of the real prop
35
What is the info that is required to be put on the financing statement, but that is not essential. Meaning, *IF* IT’S ACCEPTED without this info it will still perfect the security interest?
1. Addresses for both debtor and secured party
| 2. Whether debtor is individual or organization
36
What are the consequences to a secured party if the debtor fails to authorize a financing statement BEFORE the secured party files it?
Because the debtor’s authentication is what authorizes the secured party to file a financing statement, it can result in the secured party being liable for actual and statutory damages.
37
In the financing statement, if the debtor is a corporation, what name do you use?
The name on the Articles of Incorporation or last public organic record filed with the state.
CANNOT USE TRADE NAME
38
How is a security agreement authenticated
Debtor signs/executes the record that evidences the security agreement. Complete signature not required. The test is:
WHETHER THE SYMBOL WAS EXECUTED OR ADOPTED BY THE DEBTOR WITH THE PRESENT INTENT TO ADOPT/ACCEPT THE RECORD
39
The general rule is that *minor* errors in a financing statement do not affect perfection unless.....
They make the financing statement seriously misleading.
Seriously misleading= no perfection.
<> Errrors in the debtors name almost ALWAYS seriously misleading
*BUT(
If a search for the correct name of the debtor would still bring up the financing statement w/ the error, not seriously misleading
40
What is the duration of a financing statement
5 years after date of filing, unless continued by filing a continuation statement within 6 months BEFORE the financing statement lapses.
41
What happens when the financing statement lapses? (End of duration)
Secured party loses perfection. May file a new financing statement but may lose its place in priority if someone beat him to it.
42
How do you perfect security interest money?
Possession
43
What is the only way to perfect security interest in both deposit accounts and letters of credit rights?
Control.
So if the lender files a financing statement to perfect a deposit account or letter of credit right, the filing is ineffective. Lender is unperfected unless he gets control.
44
What is perfection by alternate perfection systems?
When another state governs how a security interest is perfected, you must follow that statute.
(Certificate of title statute. Applicable to cars, motorcycles, other vehicles.)
45
How do you get perfection with an alternate perfection system?
By noting a security interest on the certificate of title when filing the financing statement.
(Ex: security interest in a delivery truck. List in financing statement that the collateral is the certificate of title on the truck. Saying “all the trucks” isn’t enough)
46
How are consumer goods perfected?
Automatically. No filing, possession, or control is required.
Exception: if a certificate of title statute governs, you need perfection and note that the interest is on the certificate of title.
47
What does the secured party have to do if the debtor name is changed and it causes the financing statement to be seriously misleading?
The secured party has window 4 MONTHS, where he will be temporary perfected, to allow him time to discover the change and file an amendment to the financing statement listing the debtors new name.
48
What happens if a secured party FAILS to amend their financing statement after a debtor changes his name and causes the financing statement to be seriously misleading?
<> Collateral that is acquired AFTER the 4 month period given to the SP to discover the change to amend the financing statement is NOT COVERED by the financing statement.
<> Everything before the name change and WITHIN 4 months after the name change REMAINS PERFECTED under the original financing statement.
49
What happens to a security interest if the debtor moves out of state?
It remains perfected for 4 MONTHS after the move.
<> The filed financing statement will cover collateral purchases within the 4 month window after the move.
<> SP must re-file in the NEW STATE within the 4 month window to remain continuously perfected.
50
What happens to the security interest when the COLLATERAL moves out of state?
<> If debtor stills owns the collateral, no refilling necessary
<> if the collateral was transferred to a NEW DEBTOR who lives out of state, the secured party has ONE YEAR to file a financing statement listing in the new debtor.
51
What happens to the security interest when the collateral is sold, leased, licensed, or otherwise disposed of?
Temporary automatic perfection for 20 days after its sold. After that, perfection lapses unless SP amends financing statement or the original financing statement is broad enough to include the proceeds.
If the proceeds are CASH, perfection continues forever as long as it remains identifiable (segregated in bank acc)
52
How can an unsecured creditor obtain rights in the property?
They have contract rights against the debtor. They can get a security interest or get a LIEN on the collateral (Liens can be by court or statute)
53
In a dispute between a Perfected Security Interest v. Perfected Security Interest who has priority?
The first in time to file or perfect. (Not attach)
54
In a dispute between Perfected Security Interest v. UNperfected Security Interest
Perfected beats unperfected
55
How do you resolve a priority dispute between two unperfected interests?
The first security interest to ATTACH or become effective takes priority.
56
Who have priority between a Perfected Security Interest and a Lien Creditor?
The perfected security interest wins
57
Who has priority between an UNperfected Security Interest holder and a Lien Creditor
Lien Creditor will take priority UNLESS the “unattached security interest exception” applies which means the debtor has authenticated a security agreement listing the collateral AND filed a financing statement BUT the secured party has not yet given value (value=attachment). In this case the lien creditor loses.
58
Priority between a Security Interest v. Statutory Lien
Statutory Lien has priority over a security interest *even if unperfected* as long as:
1. The effectiveness of the lien depends on the lien holders possession of goods;
AND
2. The lien secures payment or performance of an obligation for services or materials furnished in the ordinary course of the persons biz (mechanics lien)
59
Secured party v. Secured party over dispute over future advances
Priority goes to the first party to file or perfect with respec to the future advances EVEN if that secured party has knowledge of the competing security interest when the future advance is made.
60
Priority between Secured Party v. Lien Creditor over Future Advances
<> If a secured party’s advance is made within 45 days of the lien creditors lien arising, the secured party has priority
<> If the advances are made more than 45 days after the lien then the secured party is subordinate UNLESS:
- advance is made without knowledge of the lien
OR
- The advance is made pursuant to a commitment entered into without knowledge of the lien.
61
If there is a dispute between a SP and a buyer of the collateral over the said collateral, how would you phrase the issue statement in an essay?
Does the buyer take the collateral free of the security interest or subject to it?
62
Who prevails over a dispute collateral between Buyer v. PERFECTED Security Interest
Unless secured party authorizes the sale free and clear of its security interest, the buyer takes subject to a security interest even if perfected.
<> Exception 1: B in ordinary course of biz take free of S.I even if that S.I is perfected and even if B knows of the existence of it IF:
1. B buys goods from Merchin biz of goods of that kind (not pawn broker)
2. In ordinary course of merch’s biz
3. B acts in GF and w/o Actual Notice that the sale violates of another
<> Exeption 2: Consumer to Consumer v. Secured parties (garage sale). B of consumer goods takes free of S.I, even if perfected IF:
1. B buys consumer goods for value
2. For own personal, fam, house use
3. From consumer seller
4. W/O knowledge of S.I
UNLESS: Sec party filed financing statement covering the goods b4 the purchase
63
Buyer v. UNperfected Security Interest
Unless the secured party authorizes the sale free and clear of the S.I the buyer takes subject to a S.I.
<> Exception: B will take free and clear of an unperfected S.I IF:
1. Gives value
2. Receives delivery of the collateral, and
3. Without knowledge of the pre-existing interest.
64
When is a PMSI in consumer goods perfected?
Automatically perfected as long as the collateral is not subject to a certificate of title
For PMSI’s that are NOT in consumer goods, the secured party must file a financing statement or take possession of the collateral in order to perfect.
65
Priority for PMSI v. Lien Creditor
Same as Creditor v. Security interest EXCEPT PMSI’s have a 20 day grace period to perfect starting when the debtor receives possession of the collateral. If PSMI does this they have priority.
66
What is the PMSI priority for goods other than inventory?
PMSI has “Super Priority”in goods other than inventory or livestock takes priority over ALL OTHER SECURITY INTEREST, no matter when they are perfected, if the secured party perfects within 20 days of the debtor receiving the goods.
67
What is a PMSI’s priority status for inventory
Super Priority. A PMSI in inventory or livestock will have priority over all other security interests in that same inventory if the secured party:
1. Perfects b4 the inventory is delivered to the debtor; and
2. Sends an authenticated notification of the PMSI to other secured parties
If PMSI is perfected but doesnt satisfy the above rules, apply the basic secured party v. Secured party priority rule.
68
What is a PMSI Super-Priority in Proceeds
<> If a PMSI has priority over a competing secured party in GOODS other than inventory, then that super priority will extend to the proceeds of the collateral.
<> If a PMSI has priority over competing secured party in INVENTORY then the priority will only extend to proceeds that are cash down payments for the inventory sold.
69
Who prevails over a Seller PMSI and a LEnder PMSI?
SEller
70
If there is a dispute between a secured party with an interest in fixtures and a party with interest relating to real property and the fixtures are affixed to the property, how can the fixtures secured party get priority?
If he files a fixture filing before the real property interest is recorded.
Fixture filing is a financing statement filed in the local real property records.
71
A PMSI in fixtures have priority over a real property interest IF...
1. Debtor has interest of record in the real property or is in possession of it; and
2. The S.I is perfected by a fixture filing either b4 the goods became fixtures or w/i 20 days after the goods become fixtures.
EXCEPTION: Construction Mtgs v. PMSI. Construction mtg wins over any subsequent S.I in fixtures, including PMSI’s in fixtures if it is recorded before the goods became fixtures and the goods become fixtures b4 completion of the construction.
72
If the debtor defaults, how can a secured party enforce his rights?
Seek possession of tangible collateral and sell or retain it to satisfy obligation owed OR seek court judgment. . Can also pursue other courses that secured party and te debtor agreed upon.
<> Can repossess goods by judicial process or self-help.
<> Cant breach the peace. (Trespassing land to get the prop is not breaching peace
73
After default, secured party take possession of collateral and may dispose (sell, lease, etc) of it as long as its in a commercially reasonable manner. What constitutes commercially reasonable?
1. Sold in usual manner in a recognized market
2. At price current in that market, or
3. Otherwise in conformity with the reasonable commerical practice among dealers in that type of collateral.
* Price along not determinative if commercial reasonable, but a very low price will raise questions.
74
Who does the Secured party have to send notice to in regards to disposition of collateral?
1. Debtor
2. Secondary obligors (co-signers)
3. Secured party
4. Anyone that the secured party has received noice of a claim or interest in teh collaeral.
75
What must a disposition notice include?
1. Names of secured party and debtor
2. Description of the collateral
3. How, when, where it will be disposed
4. Statement that debtor is entitled to accounting for unpaid indebtedness.
* *If its a consumer goods transaction also..
1. Liability for deficiency; and
2. Phone # that the debtor can call to obtain additional info including the $ needed to pay to redeem.
76
In what order are the cash proceeds of a collateral disposition distributed?
1. Reasonable expenses to collect/enforce
2. Debt to foreclosing secured party
3. Subordinate security interests if they made a formal demand for it before distribution
4. Surplus goes to debtor/Obligor pays deficiency
*Senior Security interest survive sale (?)
77
How do you get a PMSI?
The secured party must provide value that enables the debtor to acquire the goods.
Then the goods that the debtor acquires are used as collateral to secure the loan
78
For a PMSI in goods that are NOT consumer goods (i.e: inventory, equipment) to gain priority over previous holders of perfected security interests, perfection must be completed within______
20 days, typically by filing a financing statement.
79
When is a PMSI in consumer goods perfected?
Automatically perfected upon attachment. (Remember you still need attachment first)
80
What happens if a buyer buys goods in the ordinary course of business of the merchant, but those goods have a SI attached to them?
A buyer in the ordinary course of business (BOCB) takes FREE OF A SECURITY INTEREST created by the seller, even if the security interest is perfected and the buyer knows of its existence.
