Secured Transactions Flashcards
What law governs secured transactions? Is it a state or federal law?
Article IX of the UCC
State law
What is a secured transaction?
A transaction intended to create a security interest in a personal property or fixtures
Sale on Credit
Where the buyer does not pay full purchase price at the time of the sale
Signs that a problem is a secured transactions problem
1) A credit transaction (sale on credit or a loan); and
2) An agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt
Debtor
The person who owes payment or performance of the obligation secured
Secured Party
A lender, seller, or other person in whose favor there is a security interest
Security Agreement
The agreement between the debtor and the secured party that creates the security interest
Security Interest
An interest in personal property or fixtures which secures a payment or performance of an obligation
When the contingency, which is default, occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral
Collateral
The property subject to a security interest
Property that the secured party can repossess upon default to insure that the debt is paid
Purchase Money Security Interest (PMSIs) (2)
Special types of security interests
1) Secured party sells debtor collateral on credit and retains a security interest in the item sold
2) An enabling loan; a loan to a debtor for the purpose of enabling the debtor to buy specific collateral, and the creditor takes a security interest in the specific collateral
Enabling Loan
Type of PMSI
A loan to a debtor for the purpose of enabling the debtor to buy specific collateral, and the creditor takes a security interest in the specific collateral
After-Acquired Property Clause
A secured party often will want to obtain a security interest not only in debtor’s present property, but also in property that the debtor will obtain in the future
This is permissible (security agreement = K)
Typically contained in security agreements
Future-Advance Clause
A secured party often contemplates making future loans to the debtor and wants to secure these future advances in the present security agreement
This is permissible (security agreement = K)
Typically contained in security agreements, in which case a new security agreement is not needed when a future advance is made
Attachment
“The security interest has been created”
Occurs when the collateral becomes an enforceable part of the transaction only AFTER the security agreement meets certain requirements
“Deals with those steps legally required to give the secured party interest in the collateral that is effective AS AGAINST THE DEBTOR”
Once the interest attaches, it is effective against the debtor and the creditor has all of the rights of a secured creditor under Article IX
Requirements for a Security Agreement Before Collateral May Attach (6)
1) Contain an express agreement between the debtor and secured party;
2) Be in writing;
3) Be signed by both parties;
4) Contain a description of the collateral that will attach;
5) Contain express language granting the security interest; and
6) Give something of value from the secured party to the debtor
Perfection
Deals with those steps legally required to give the secured party an interest in the collateral that is effective AS AGAINST THE WORLD
In general, it is the process of giving public notice of the security interest to the world
Financing Statement
Document generally used to provide public notice of the security interest, and so to perfect the security interest
Types of Collateral (Per Article IX)
1) Goods
2) Semi-tangible and intangible property (8 types)
When does a creditor become a secured creditor?
At attachment
What is your mnemonic for collateral for semi-tangible and intangible property? What do the words present?
“I don’t care that Paddy ate David’s gherkin.”
I - INSTRUMENTS D - DOCUMENTS C - CHATTEL papers T - commercial TORT claims P - investment PROPERTY A - ACCOUNTS D - DEPOSIT accounts G - GENERAL intangibles
Definition of Goods
Type of collateral
Tangible, movable, personal property
Includes all things which are movable at the time the security interest attaches, and includes the unborn young of animals and growing crops
Also include fixtures
Classification of Goods Under Article IX
1) Consumer goods;
2) Equipment;
3) Farm products; or
4) Inventory
Test: In classifying collateral, look to see how the DEBTOR is using the collateral. What is the collateral in the hands of the debtor?
Approach to Classifying Collateral (Test)
In classifying collateral, look to see how the DEBTOR is using the collateral. What is the collateral in the hands of the debtor?
Consumer Goods
Classification of collateral goods
Used OR bought for use primary for personal, family, or household purposes
Equipment
Classification of collateral goods
Used or bought for use in business
[Default, or catch-all, category] for goods per Article IX of UCC
For when goods don’t fit in any of the other categories; doesn’t matter if it doesn’t really fit the definition of equipment
Inventory
Classification of collateral goods
[Held by a person who holds them for sale or lease] or to be furnished under service contracts; materials used or consumed in a business in a short period of time (like raw materials)
Instruments
Classification of collateral semi-tangible and intangible property
[Negotiable instruments] and any other writing which evidences a right to the payment of a monetary obligation, AND which are in the ordinary course of business transferred by delivery with any necessary endorsement or assignment (does NOT include investment property)
(i.e.: checks, promissory notes, drafts; NOT musical instruments)
Answering a Question re: Type of Collateral
1) State what type of collateral you think it is (i.e.: consumer goods)
2) Define that type of collateral (i.e.: goods used or bought for use primarily for personal, family or household purposes)
3) State why you think it is that type of collateral (i.e.: “I think this is a consumer good because…insert fact to show why it fits that category…”)
Documents
Classification of collateral semi-tangible and intangible property
A document which in the 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.: bill of lading, warehouse receipt)
(If this appears on exam, document will be bill of lading or warehouse receipt)
Chattel Paper
Classification of collateral semi-tangible and intangible property
A record or records which evidence both a monetary obligation AND a security obligation and a security interest in a lease of specific goods
(Chattel Paper = monetary obligation (i.e.: promissory note) + security interest/lease)
A “record” is information that is stored in either a tangible medium (e.g.: written on paper), or an intangible medium (e.g.: electronically stored)
Chattel paper stored in electronic medium also called “electronic chattel paper”
What is a “record” in terms of collateral?
A “record” is information that is stored in either a tangible medium (e.g.: written on paper), or an intangible medium (e.g.: electronically stored - called “electronic chattel paper”)
A record or records which evidence both a monetary obligation and a security obligation and a security interest in a lease of specific goods are classified as Chattel Paper Collateral for semi-tangible and intangible property
Investment Property
Classification of collateral semi-tangible and intangible property
Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items
Accounts
Classification of collateral semi-tangible and intangible property
A right to payment [not evidenced by an instrument or chattel paper]:
[1) For property sold;
2) For services rendered;]
3) For a policy of insurances issued or to be issued;
4) For a secondary obligation incurred or to be incurred;
5) For energy provided or to be provided;
6) For the use or hire of a vessel;
7) Arising out of the use of a credit card;
8) As lottery winnings
Health care insurance receivables are included
A K obligation arising from a loan of money is NOT an account, it is a general intangible
Accounts receivable (not personal bank accounts) On exam, usually only looking at [property and services]
Types of Accounts (8)
1) For property;
2) For services;
3) For a policy of insurances issued or to be issued;
4) For a secondary obligation incurred or to be incurred;
5) For energy provided or to be provided;
6) For the use or hire of a vessel;
7) Arising out of the use of a credit card;
8) As lottery winnings
What is your mnemonic for the different types of accounts under semi-intangible and intangible collateral? What do the words present?
“Valentino could stay put or escape isolation.”
V - for the use or hire of a VESSEL
C - arising out of the use of a CREDIT CARD
S - for SERVICES
P - for PROPERTY
O - for a secondary OBLIGATION incurred or to be incurred
E - for ENERGY provided or to be provided
I - for a policy of INSURANCES issued or to be issued
Deposit Accounts
An account maintained with a bank
1) NONCONSUMER DEPOSIT ACCOUNTS; and
2) Deposit accounts that are claimed as proceeds of other collateral (think BUSINESS bank accounts)
Commercial Tort Claims
A claim arising in tort with respect to which
1) the claimant is an ORGANIZATION (e.g.: partnership or corporation), or
2) the claimant is an INDIVIDUAL and the claim AROSE in the claimant’s BUSINESS or profession AND does not include DAMAGES for personal injury or the death of an individual
General Intangibles
Any personal property not coming within the scope of other definitions (e.g.: software, patent and trademark rights, copyrights, goodwill)
A general intangible under which the account debtor’s principal obligation is a monetary obligation is a PAYMENT INTANGIBLE
Kind of a catch-all
Most common examples are patent-related
Payment Intangible
A type of general intangible where the debtor’s principal obligation is a monetary obligation
Article IX Applies to… (5)
[1] ANY transaction, regardless of its form, that creates a security interest in personal property or fixtures by K;
2) An agricultural lien;
3) A SALE of accounts, chattel paper, payment intangibles, or promissory notes (unless the sale is for the purpose of collection only, or the sale is part of a business);
4) Certain consignments;
[5] A secured sale disguised as a lease
How to Distinguish Between “True Lease” and “Secured Sale Disguised as a Lease”
First, determine if the transaction, in substance, is a lease or a sale
Ask, at the time the parties entered into the transaction, was it reasonably likely that the “lessor” would get the item back when it still had meaningful economic value?
If yes, it is a “true lease”
If no, it is a sale with a security interest in substance and it is governed by Article IX
In a lease, the lessor is going to receive the item back at the end of the lease term when the item still has meaningful economic value
In a sale, the buyer is the owner and is generally going to drain all the economic value from the item
Writing Requirement for a Security Agreement
Unless collateral in possession or control of secured party pursuant to an agreement, a WRITTEN (or electronically stored) security agreement is REQUIRED
Most often, debtor wants possession of collateral, so a writing is necessary
Control of Collateral
If the collateral is a nonconsumer deposit account, electronic chattel paper, or investment property, the security agreement may be evidenced by control
Method by which control may be obtained depends on the type of collateral involved
Possession of Collateral
If the collateral is in the POSSESSION of the SECURED party pursuant to an ORAL security agreement, this will meet the “security agreement” requirement
Called a PLEDGE
Requirements for Attachment (3)
1) Security agreement;
2) Value must be given; and
3) Debtor has right in collateral
Need ALL THREE
MEMORIZE
Pledge
When the collateral is in the POSSESSION of the SECURED party pursuant to an ORAL security agreement, it will meet the “security agreement” requirements and is referred to as a “pledge”
Requirements in Form of the Security Agreement (when written)
a) The agreement must be evidenced by a record (written or electronically stored information) and must show an INTENT TO CREATE A SECURITY INTEREST (no “magic language” necessary)
b) The agreement must be “AUTHENTICATED” by the debtor. This usually means “SIGNED” by the DEBTOR. ANY symbol, including an electronic symbol, that is made with the present intent to authenticate the record will work
(e. g.: an “X”, a smiley face)
c) The agreement must contain a DESCRIPTION OF THE COLLATERAL (and if the security interest covers timber to be cut, a description of the land concerned)
The Code says the security agreement must “reasonably identify” the collateral
Language Accepted to “Reasonably Identify” Collateral
1) Normal vocabulary works (i.e.: television)
2) Article IX categories work as well (i.e.: equipment)
When is value sufficient for attachment?
One of three requirements for attachment
Very liberal definition
ANY consideration sufficient to support a simple K is enough (a promise is sufficient)
Even PAST consideration is enough
The debtor always gives value because the debtor, at a minimum, promises to pay. Question is whether secured party gave value.
Does a debtor have to give value?
A debtor ALWAYS gives value because the debtor, at a minimum, promises to pay.
Question is whether the secured party gave value
Why must the debtor have rights in the collateral for attachment to occur?
One of three requirements for attachment
Debtor must have rights in the collateral because the debtor CANNOT GRANT a contingent property interest in a property that it DOES NOT OWN
General Rule for After-Acquired Property
Without an explicit after-acquired property clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement
Important - usually on exam
Exceptions to the General Rule for After-Acquired Property (3)
1) Even without an explicit after-acquired property clause, the courts will often imply an after-acquired property clause when the collateral is of a TYPE THAT IS RAPIDLY DEPLETED AND REPLENISHED (i.e.: [inventory or accounts] [EXAM uses these two])
The courts assume the parties must have meant to cover after-acquired property, or the security interest will reach nothing.
2) A security interest does NOT attach under an after-acquired property clause to CONSUMER goods UNLESS the debtor acquires rights in them within 10 DAYS after the secured party gives value
3) An after-acquired property clause is INEFFECTIVE as to COMMERCIAL TORT claims
Proceeds from Property Secured
Includes WHATEVER is received upon the sale, exchange, collection, or other disposition of collateral or proceeds
If collateral is insured and money is received from the insurance company on account of loss or damage to the collateral, the money is a proceed of the collateral (up to the value of the collateral) unless it is payable to someone other than the debtor or the secured party
Any claims arising out of the loss of, defects in, or damage to collateral are proceeds of the collateral (up to the value of the collateral)
UNLESS otherwise agreed, a SECURITY INTEREST automatically gives the secured party a right to IDENTIFIABLE PROCEEDS
Identifiable Proceeds
Proceeds that the secured creditor can prove that can be traced back to the creditor’s original collateral
Test to Determine Identifiable Proceeds in Co-mingled Cash
Test: Lowest Intermediate Balance Test
Look at the balance in a co-mingled (proceeds and non-proceeds) bank account starting at the time the proceeds are deposited and ending at the time you are applying the test
The law deems that the LOWEST balance during that time period is the secured party’s identifiable proceeds
(CANNOT EXCEED the value of cash proceeds originally deposited)
Supporting Obligation
Guarantee or a surety
A promise to pay the debt of another
Attachment of a security interest in collateral also is an attachment of a security interest in a supporting obligation for that collateral
Methods of Perfection (5)
1) Automatic perfection
2) Possession of collateral by secured party
3) Perfection by “control”
4) Notation of lien on certificate of title
5) Filing a financing statement
Automatic Perfection
Method of perfection
As soon as a security interest attaches it is perfected with no additional steps (e.g., filing or possession) necessary
The most common type is PMSI in Consumer Goods
Purchase Money Security Interest in Consumer Goods (PMSI in Consumer Goods)
Most common type of [automatic perfection]
Purchase Money Security Interest (PMSI)
PMSI can only arise in CONSUMER GOODS
A PMSI in consumer goods is [automatically perfected upon attachment]
You can acquire a PMSI as a seller OR as a lender through an enabling loan
What is the requirement for proceeds under automatic perfection?
Only requirement is that the proceeds be IDENTIFIABLE and traceable to the collateral
What is Temporary Perfection?
If the security interest in the original collateral is perfected, the security interest in the proceeds is perfected for at least 20 days
Possession of Collateral by Secured Party
Method of possession
Perfection attached when the secured party takes POSSESSION of the collateral
ONLY way to perfect if security interest is in MONEY
Security interest is perfected from the moment of possession WITHOUT relation back to the time of attachment
Not very practical because debtor usually wants possession
Perfection continues so long as possession is retained
When is perfection by Possession of Collateral by Secured Party impossible?
When the goods cannot be possessed
i.e.: general intangibles, accounts, deposit accounts
Perfection - In General
Deal with rights as between the secured party and third parties
Perfection is not necessary to create a valid, enforceable SI as between the debtor and secured party
Perfection by “Control”
Method of Perfection
SI in [investment property] and [electronic chattel paper] may be perfected by control
ONLY WAY TO PERFECT SI IN [NONCONSUMER DEPOSIT ACCOUNTS]
Nonconsumer deposit account i.e.: business bank account
Perfection of Investment Property
Type of perfection by “control”
Secured party has control of an item of investment property when the secured party has taken whatever steps are necessary to be able to have the investment property sold WITHOUT FURTHER ACTION from the owner
Perfection of Electronic Chattel Paper
Type of perfection by “control”
Party has control over electronic chattel paper when a system showing the transfer of interests in chattel paper RELIABLY ESTABLISHES the secured party as the assignee
i.e.: When the secured party has the AUTHORITATIVE COPY of the records constituting the electronic chattel paper (e.g.: a computer file), that copy identifies the secured party as the assignee of record, and any other copy of or amendments to the records are marked as such
Perfection of Nonconsumer Deposit Accounts
Type of perfection by “control”
ONLY way to perfect nonconsumer deposit accounts is through control
1) The bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account (co-owner)
2) If the secured party is not such a bank, it can obtain control over the deposit account by either:
a) putting the deposit account in the secured party’s name, or
b) agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will follow the secured party’s orders without further consent by the debtor (CONTROL AGREEMENT)
- Likely to be on exam!!!*
- *MEMORIZE!!!**
Notation of Lien on Certificate of Title
Method of perfection
ONLY way to perfect security interest in an item covered by a certificate of TITLE STATUTE (e.g.: cars, trucks) is for the secured party to get the relevant GOVERNMENTAL authority to NOTE the secured party’s LIEN on the certificate of title
Generally the only way to perfect SI in an automobile. Must be noted by the DMV.
Inventory Exception to Notation of Lien on Certificate of Title
Method of perfection
If the debtor is holding the car or truck as INVENTORY (i.e.: if the debtor is a dealer), then a secured party MUST perfect by FILING A FINANCING STATEMENT against inventory
Noting its lien on the certificate of title will not work
Notice Filing
Method of perfection under filing a finance statement
Statement premised on the concept of “notice filing”
Notice must indicate merely that a person
Filing a Financing Statement
Method of perfection
Legal form that a creditor files to give notice that it has, or may have, an interest in the personal property of a debtor
Called a [form UCC-1]
MOST LIKELY TO BE ON EXAM
Contents of a Financing Statement
1) Debtor’s name
2) Description of collateral
3) Secured party’s name
4) For [Real-Property-Related] financing statements, must [reasonably identify the realty + indicate that it is to be filed in the RP records)
5) No signature required, but debtor must authorize filing
6) Authenticated security agreement (must contain all elements)
Debtor’s Name for Financing Statements
Financing statements are INDEXED by the debtor’s name (important)
Debtor is an individual = INDIVIDUAL’S NAME
Debtor is a corporation = CORPORATE NAME
Debtor is a partnership = PARTNERSHIP NAME
Control Agreement
Type of perfection under “control” for nonconsumer deposit accounts
An agreement between the debtor, the creditor, and the bank where bank account is
Essentially: “Hey bank where the account is, I’m the debtor and also your customer, if you hear from the creditor and you hear I’ve defaulted, you have my permission to give them my bank account.”
Debtor’s Name When Debtor is an Individual
Majority rule is if the debtor has an UNEXPIRED DRIVER’S LICENSE issued by the state where the financing statement is to be filed
Financing statement must include the name AS INDICATED ON THE LICENSE
If debtor does NOT have such a license, then the financing statement may include the debtor’s name (Article IX does not define), or the debtor’s personal name and surname
Financing statements are indexed by debtor’s name
NOTE: Financing statement with only the debtor’s TRADE name does NOT sufficiently provide the name of the debtor (trade name = non-legal name used by a business)
Test to Determine if Name Error is Seriously Misleading
Check whether a search under the DEBTOR’S CORRECT NAME, using the filing office’s standard search logic, would retrieve the erroneous finance statement
If YES = NOT seriously misleading
If NO = seriously misleading
Filing Under Creditor Accidentally - Finance Agreement
If the filing officer mistakenly files the financing statement so that the index shows the secured party as the DEBTOR, the filing is still EFFECTIVE because the secured creditor is not responsible for filing office errors
Debtor’s Name Change - Finance Agreement
Debtor changes her name so that a filed financing statement becomes seriously misleading, the financing statement is EFFECTIVE to PERFECT a security interest in COLLATERAL acquired by the DEBTOR before or within 4 MONTHS after the change
Not effective to perfect more than 4 months after name change (unless amended financing statement is filed within the 4 months that renders the financing statement not seriously misleading)
Description of Collateral for Financing Statement
SAME TEST as security agreement
The description must “REASONABLY IDENTIFY” the collateral
Normal vocabulary and Article IX categories (e.g.: inventory, equipment) work
DIFFERENT from security agreement because description of “all assets” or “all personal property” will be valid in a financing statement (not valid in a security agreement)
Secured Party’s Name for Financing Statement
Searches indexed under DEBTOR’S name, so error in the name of the secured party will not be seriously misleading
COULD potentially give rise to an estoppel in favor of a particular holder of a conflicting claim to the collateral
Real-Property-Related Financing Statements
Real-property-related collateral (i.e.: minerals, timber to be cut, or fixtures), financing statement must also INDICATE that it is to be [FILED IN THE REAL PROPERTY RECORDS + a DESCRIPTION OF THE REAL PROPERTY] to which the collateral is related
IF the property belongs to [someone OTHER than the debtor], also need to name the RECORD OWNER
The description must [reasonably identify] the real estate
Does not require metes and bounds description
Signature Requirement for Financing Statement
No signature required, though debtor must AUTHORIZE filing
Authorization may be in ANY signed writing
(can sign the financing statement, a napkin, whatever)
Debtor AUTOMATICALLY authorizes the financing statement is she authenticates a SECURITY agreement covering the SAME collateral (ipso facto authorization)
this is what they’ve been testing on
Financing Statement - Authenticated Security Agreement
An authenticated security agreement ITSELF may be filed, but it MUST contain all the other elements
Elements:
1) Debtor’s name
2) Description of collateral
3) Secured party’s name
4) Real-property requires description + intent to file RP (maybe also record owner, if debtor not possessor of property)
5) AUTHORIZATION by debtor
Where to File a Financing Statement
General Rule: Except as otherwise specifically provided in a state’s Article IX, the financing statement is ordinarily filed with the SECRETARY OF STATE (need to determine which law governs)
rarely tested on real-estate-related collateral
Real-estate-related collateral MUST be filed in the OFFICE where a mortgage on the real estate would be filed or recorded where the collateral is TIMBER to be cut or AS-EXTRACTED collateral (i.e.: minerals), OR where the financing statement is filed as a fixture filing and the collateral is for goods which are or are to become fixtures
These real-estate-related filings are usually filed in the REAL ESTATE records of the county where the real property is located
Ipso Facto Authorization
Debtor AUTOMATICALLY authorizes the financing statement is she authenticates a SECURITY agreement covering the SAME collateral
likely to be tested
Multiple State Transactions - Where to File?
File in state where DEBTOR is located
Individual = principal residence Registered organization (e.g.: corporation, LLC) = where organized Unregistered organization (e.g.: general partnership) = a) Only one place of business? = at that place of business b) More than one = at it's chief executive office
Financing Statement Filed - Debtor Switches States
Secured party will become UNPERFECTED 4 MONTHS after the debtor’s move, UNLESS it files a financing statement in the new jurisdiction before that 4 month period is up
Financing Statement Filed - Collateral Switches States to New Debtor
Secured party will become UNPERFECTED 1 YEAR after the collateral moves, unless it files a financing statement in the new jurisdiction before that 1 year period is up
Where is an agricultural lien filed?
Perfected in the state where the farm products are located
Financing Statement - Effectiveness
Effective for 5 YEARS from the DATE OF FILING
Can be extended by filing a CONTINUATION STATEMENT
Continuation Statement
Statement used to extend a financing statement beyond 5 years
Form UCC-3
MUST be filed in the LAST 6 MONTHS of the 5 year “life” of the financing statement (between 4.5 and 5 years)
Filed early, filed late, filed financing statement = DEAD financing statement
When there is no outstanding obligation of the debtor, and no commitment on the part of the secured party to make further advances, the secured party, upon ________________, must within __________ provide the debtor with a termination statement to the effect that the _____________.
receiving an AUTHENTICATED demand by the DEBTOR;
20 days;
secured party no longer claims a security interest under the financing statement
Once the debt is paid off, the debtor is allowed to DEMAND that the creditor file a termination statement in the public record
Termination statement says creditor no longer claiming a SI in debtor’s collateral
If a financing statement covers ___________, then within _________ after there is no outstanding obligation, or within __________ of receiving an ___________, a __________ must be filed by the _______ party.
The ________ party is liable to the ______ for ______ and for ____________ caused to the debtor for failure to comply with the above.
consumer goods; 1 month; 20 days; AUTHENTICATED demand from the DEBTOR; termination statement;
secured;
debtor;
$500;
any loss
Can you file a financing statement BEFORE a security agreement is entered into?
Yes
Perfection as to Proceeds - General Rule
If a secured party has a perfected SI in collateral, a secured party AUTOMATICALLY has a perfected SI in WHATEVER proceeds the debtor receives in exchange for that collateral FOR 20 DAYS
To remain perfected in those proceeds beyond 20 days, secured party must take NEW ACTION to perfect its interest
Perfection as to Proceeds - Exceptions to New Action Requirement
To remain perfected in those proceeds beyond 20 days, secured party must take NEW ACTION to perfect its interest, UNLESS:
1) the proceeds are identifiable CASH proceeds; or
2) the SI in the [original collateral was perfected by filing a financing statement], a SI in the type of collateral constituting proceeds would be perfected by [filing in the SAME PLACE as the financing statement for the original collateral], and the proceeds were NOT purchased with cash proceeds of the collateral (sometimes called the “SAME OFFICE” rule)
* “Same Office Rule” has been tested before!*
Perfection as to Change in Use of Collateral
If debtor changes use of collateral (e.g.: equipment to inventory), the filed financing statement (e.g.: still says equipment) REMAINS EFFECTIVE TO PERFECT THE SECURITY INTEREST
Secured creditor has NO duty to MONITOR the collateral or AMEND the financing statement, [EVEN IF it knows that the description is seriously misleading]
When is priority an issue?
When there is a situation where the secured party and some third party are claiming the same collateral
Priority - Secured Party v. Secured Party
As between two perfected secured creditors, the FIRST TO FILE or PERFECT (whichever occurs first) has priority
Priority - Unsecured Party v. Unsecured Party
As to between two unperfected secured creditors, the first to ATTACH has priority
Priority - Secured Party v. Unsecured Party
As between a perfected secured creditor and an unperfected secured creditor, the PERFECTED secured creditor has priority
Priority - Special Rules
a) PMSI in goods other than inventory or livestock
b) PMSI in inventory or livestock
c) Conflicting PMSIs
d) Special priority rules for investment property
e) Special priority rules for deposit accounts
f) Purchaser of new chattel paper
g) Purchaser of instruments
Priority - PMSI in Goods Other Than Inventory or Livestock
PMSI in such goods has priority OVER a conflicted SI in the same goods or its identifiable proceeds IF the PMSI is perfected at the time the debtor received POSSESSION of the collateral, or within 20 days thereafter
Priority - PMSI in Inventory or Livestock
PMSI here has priority OVER a conflicting SI in the SAME inventory or livestock (as well as proceeds that are chattel paper, instruments, and identifiable cash proceeds) IF, BEFORE the debtor receives POSSESSION of the inventory or livestock, the secured party (i) PERFECTS, and (ii) sends an AUTHENTICATED NOTIFICATION to holders of previously filed conflicting security interests in the collateral
Holder of conflicting interest must receive NOTICE within 5 YEARS BEFORE debtor receives POSSESSION of the inventory (i.e.: the notification is effective for deliveries of the same type of collateral for 5 years)
Priority - Conflicting PMSI
The Code says that a SELLER financed PMSI has PRIORITY OVER a FINANCER financed PMSI
Special Priority Rules for Investment Property (4)
1) A SI perfected by CONTROL has priority over an SI perfected by ANY other method (filing or automatic)
2) If conflicting PMSIs EACH were perfected by control, they rank according to the TIME of obtaining control
3) A SI granted to a debtor’s INTERMEDIARY has priority over a SI granted by the debtor to ANOTHER secured party (unless the intermediary agrees otherwise)
4) Except as provided in 1, 2, or 3 above, the FIRST to FILE or PERFECT rule governs priority questions
Special Priority Rules for Deposit Accounts (4)
1) A SI perfected by CONTROL has priority over a SI perfected via PROCEEDS
2) If conflicting interests EACH were perfected by control, they rank according to the TIME of obtaining control
3) A secured party who has obtained control by putting the deposit account IN ITS OWN NAME has priority over ALL other secured parties with control
4) A BANK that has CONTROL because it maintains the deposit account has priority over ALL other secured parties with control, EXCEPT as a secured party who has obtained control by putting the deposit account in its name (i.e.: 3 above)
Note - If a debtor transfers money or deposit account funds (e.g.: by check, electric funds transfer), the transferee of the funds takes free of a SI in the funds, UNLESS the transferee acts in COLLUSION with the debtor in violating the rights of the secured party
Priority - Purchaser of Chattel Paper
If a purchaser of chattel paper in good faith gives a NEW VALUE and takes POSSESSION in the ordinary course of business (or takes control of electronic chattel paper), the purchaser will have priority over:
1) a SI in chattel paper that arises merely as PROCEEDS OF INVENTORY (as long as the chattel paper does not indicate that it has been assigned to anyone other than the purchaser); and
2) ANY other SI in the chattel paper, as long as the chattel paper purchaser acquired its interest WITHOUT KNOWLEDGE that its purchase violated the rights of the secured party
Priority - Purchaser of Instruments
A purchaser of an instrument has priority OVER a PERFECTED SI in the instrument IF the purchaser gives VALUE and takes POSSESSION of the instrument in good faith and WITHOUT KNOWLEDGE that the purchase violates the rights of the secured party
Priority - Secured Party v. Buyer of the Collateral
General Rule: If you buy something with a SI on it, the SI stays on it
Priority of Authorized Sales
Secured Party v. Buyer of Collateral
Exception to the general rule
If the sale is AUTHORIZED by the SECURED party FREE of the SI, the buyer takes it free of the SI
Authorization may be express or implied from type of sale or from seller’s conduct
Priority of Unauthorized Sales
Secured Party v. Buyer of Collateral
Exception to general rule
A buyer in the ordinary course of business (other than a person buying farm products from a person engaged in farming operations) takes FREE of an SI CREATED BY HIS SELLER, even though the SI is perfected and even though the buyer KNOWS of its existence
Buyer in the Ordinary Course of Business
A person who buys goods in good faith, WITHOUT knowledge that the sale violates the rights of another person (usually the secured party) in the goods, and in the ordinary course from a person in the business of SELLING goods of that kind
Buyers Not in the Ordinary Course of Business
Take subject to PERFECTED security interests
Take free from UNPERFECTED security interests (and unperfected agricultural liens), UNLESS they KNOW of the security interest
Special Rule - Consumer-to-Consumer Sales
In the case of consumer goods, a buyer takes FREE of a SI even though it is perfected IF he buys WITHOUT KNOWLEDGE of the SI, for value, and for his own personal family, or household purposes, UNLESS prior to the purchase the secured party has filed a FINANCING STATEMENT covering such goods
Goods must be CONSUMER GOODS in the hands of BOTH the BUYER and the SELLER
Priority - Secured Party v. Judgment Lien Holders
Unperfected SI is SUBORDINATE to the rights of a person who becomes a LIEN CREDITOR BEFORE THE SI IS PERFECTED
If the SI is perfected BEFORE the person becomes a lien creditor, the SI HAS PRIORITY
Lien Creditor
Defined by Article IX as a “creditor who has acquired a lien on the property involved by attachment, levy or the like.”
Lien obtained by judicial proceedings must ATTACH TO THE COLLATERAL
An UNSECURED creditor who has obtained a JUDGMENT and has levied on that judgment is a “LIEN CREDITOR”
Key - Look at the time of perfection of the SI and the time of the levy by the sheriff. If SI perfected before sheriff levies, SI has priority. If levy precedes perfection of the SI, the judicial lien has priority
Priority Rule for Secured Party v. Judgment Lien Holder
Secured party has priority (i) if the secured party PERFECTED before the judgment lien holder; OR (ii) if the secured party obtained a security AGREEMENT and filed a FINANCING STATEMENT before the judgment lien holder got its lien
Special Rule - PMSI v. Lien Creditor
If the secured party files with respect to a PMSI within 20 days AFTER the debtor receives POSSESSION of the collateral, he takes priority over the rights of a lien creditor which ARISES BETWEEN the time the SI ATTACHES and the TIME OF FILING
Priority for Future Advances
A security agreement can secure present and future advances IF the [security agreement contains a FUTURE ADVANCE CLAUSE]
A future advance by a secured creditor has priority over a lien creditor if the future advance is made (i) WITHOUT KNOWLEDGE of the lien, OR (ii) within 45 DAYS of the lien arising, OR (iii) pursuant to a COMMITMENT entered into WITHOUT KNOWLEDGE of the lien
Default - Definition
Article IX doesn’t define it
Typically, grounds of default are [SPECIFIED in the security AGREEMENT] (e.g.: failure to make payment when due, selling collateral without the secured party’s permission, failing to keep the collateral insured)
In the ABSENCE of specification, default restricted to FAILURE TO PERFORM or PAY the obligation when it is due
1) Look for late or missed payments
2) Also look for a possible [waiver] by the secured party of late or missed payments
When is the right of the secured party to proceed against collateral normally triggered?
Triggered by DEFAULT
Self-Help Repossession
After default, the secured party entitled to take possession of the collateral [WITHOUT judicial process IF this can be done WITHOUT “breach of the peace”]
Secured party that breaches the peace LOSES AUTHORIZATION to repossess, may be SUED for conversion (and possibly assault, battery, trespass, etc.), and is LIABLE for actual (and frequently punitive) DAMAGES
What constitutes a “breach of the peace?”
ANY conduct by the secured party that has the POTENTIAL to lead to VIOLENCE is a breach of the peace
Generally, PHYSICAL presence by the DEBTOR (or a representative of the debtor) + VERBAL OBJECTION is enough to create a breach of the peace
What can a secured party do if self-help is unavailable?
It may use judicial process (e.g.: replevin) to get the goods
OR
Without removal, the secured party may also make EQUIPMENT unusable and dispose of it on the DEBTOR’S property IF she can do so without a breach of the peace
(Directed toward problem of taking possession of heavy, bulky equipment that is not easily movable)
Self-Help in Accounts
If the debtor defaults and the collateral is accounts, the secured creditor can NOTIFY (in a SIGNED WRITING) the persons owing money to the debtor (i.e.: the account debtors) to make payment to the secured party RATHER than to the debtor
Upon notification, the account debtor must pay the secured creditor rather than the debtor. Payment to the debtor WILL NOT discharge the obligation
Retention of Collateral (Strict Foreclosure)
After default and repossession, the secured party may propose retaining the collateral in full or partial satisfaction of the debt
Retention of Collateral (Strict Foreclosure) - Requirements
1) A secured party wishing to retain the collateral must send its PROPOSAL to ANY other secured party whom the foreclosing party has received NOTICE of a claim to the collateral, and ANY OTHER secured party who has PERFECTED a SI in the collateral by filing a FINANCING STATEMENT or NOTING its SI on a certificate of title
If a notified party OBJECTS within 20 DAYS AFTER the secured party sent notice, the collateral must be DISPOSED of by sale
2) A secured party wishing to retain the collateral also must obtain the DEBTOR’S CONSENT. The debtor consents by either: (1) AGREEING in an AUTHENTICATED record after default, or (2) in the case of a FULL strict foreclosure, FAILING to make an authenticated OBJECTION within 20 DAYS AFTER the secured party sent notice (a debtor cannot consent to partial disclosure in this manner)
Resale of Collateral
After default, secured party may sell, lease, license, or otherwise dispose of the collateral in its condition when repossessed or after reasonable preparation
Sale may be public (auction) or private, and may be by one or more Ks
Sale DISCHARGES the SI interest under which the sale is being made and ALL subordinate security interests
PURCHASER is still SUBJECT TO SUPERIOR security interests
Resale of Collateral - Reasonable Notification
Reasonable notice that is AUTHENTICATED by the secured party (cannot be oral) must be given to the debtor and any sureties on the debt, AND (except in the case of consumer goods) to any other secured parties who have NOTIFIED the secured party of the interests, and any secured parties who have perfected by filing a FINANCING STATEMENT or making a NOTATION on a certificate of title
Notice NOT necessary when collateral is PERISHABLE or threatens to DECLINE RAPIDLY in value or is a kind ordinarily sold in a REORGANIZED MARKET (e.g.: stock)
Debtor or the surety may, AFTER DEFAULT, in an AUTHENTICATED agreement WAIVE the right to notice
Reasonable Notification - Timeliness
Notice must be sent within a reasonable time BEFORE the sale (question of fact)
In NONCONSUMER transactions, notice is determined to be sent within a reasonable time if it is sent 10 DAYS OR MORE BEFORE the time of sale
Reasonable Notification - Content
The content of the notice depends on the type of sale and type of collateral
1) The statute provides “safe harbor” notice forms
2) For a PUBLIC sale, notice of the TIME and PLACE of sale is required
3) For a PRIVATE sale, notice of the time AFTER which the sale will occur must be given (e.g.: the car will be sold at a private sale after Jan. 1, 2017)
Resale of Collateral - Commercially Reasonable Sale
EVERY aspect of the sale (including the method, manner, time, place, and terms) must be COMMERCIALLY REASONABLE
Resale of Collateral - Secured Party Buying Collateral
The secured party may buy at ANY PUBLIC SALE, but may only buy at a PRIVATE SALE if the collateral is of a type customarily sold in a RECOGNIZED MARKET or is of a type which is the subject of WIDELY DISTRIBUTED STANDARD PRICE quotations
Resale of Collateral - Compliance with Resale Requirements
Secured party’s right to deficiency
Money from a foreclosure sale goes FIRST to repay the costs of the repossession and sale, THEN to pay off the debt on the FORECLOSING CREDITOR, and then to pay off the debt of creditors with LOWER priority than the foreclosing creditor
If any money is leftover, the debtor gets this surplus
Creditors with HIGHER priority than the foreclosing creditor receive NO money from the sale because they DO NOT LOSE THEIR LIENS as a result of the foreclosure sale
Debtor = consumer AFTER the sale, secured creditor must SEND debtor an EXPLANATION of the calculation of any debt still owed (the deficiency) or the money the debtor will receive (the surplus)
Resale of Collateral - Compliance with Resale Requirements - Explanation of Deficiency or Surplus
Debtor = consumer AFTER the sale, secured creditor must SEND debtor an EXPLANATION of the calculation of any debt still owed (the deficiency) or the money the debtor will receive (the surplus)
Resale of Collateral - Failure to Comply with Resale Requirements
A secured party is LIABLE for the ACTUAL DAMAGES caused by failure to follow ANY of the Code’s rules
If the collateral is consumer goods and the secured creditor violates Code rules, the debtor is entitled to a MINIMUM OF 10% of the cash price of the goods PLUS an amount equal to all the INTEREST CHARGES to be paid over the LIFE of the loan
If the secured party fails to conduct a COMMERCIALLY REASONABLE SALE, there is a rebuttable presumption that the sale proceeds EQUALS the amount of the debt - in other words, the secured party presumptively LOSES any deficiency
Resale of Collateral - Minimum Recovery for Consumer Goods
If the collateral is CONSUMER GOODS and the secured creditor violates Code rules, the debtor is entitled to a MINIMUM OF 10% of the cash price of the goods PLUS an amount equal to all the INTEREST CHARGES to be paid over the LIFE of the loan
Debtor’s Right to Redeem
ANY TIME BEFORE the secured party has resold the collateral or has entered into a K for its disposition, or the obligation has been discharged by the secured party’s retention of the collateral, the DEBTOR MAY REDEEM THE COLLATERAL
Debtor’s Right to Redeem - Requirement
Debtor must tender fulfillment of ALL obligations secured by the collateral
Most security agreements contain an acceleration clause, debtor typically must tender the ENTIRE balance in order to redeem
(Acceleration clause gives the creditor the option to declare the ENTIRE LOAN BALANCE due when there is ANY default)
What is the function of an acceleration clause?
It gives the CREDITOR the option to declare the ENTIRE LOAN BALANCE due when there is ANY default
Fixtures - Definition
Code defines “fixtures” as GOODS that have become SO RELATED to a particular REAL PROPERTY that an interest in them arises under real property law
Personal property attached to real estate with the INTENT that it become a PERMANENT part of the real estate is a fixture (e.g.: central A/C, elevators, etc.)
Interests in a fixture may arise under BOTH the Code AND under the law of real estate
Note - No SI can exist in ordinary building materials (e.g.: bricks, lumber, shingles, etc.) incorporated into an improvement on land
Perfection of a Fixture
Must make a “FIXTURE FILING” in the OFFICE where a mortgage on the real estate would be filed
In addition to the usual requirements for a financing statement, a fixture filing financing statement must REASONABLY IDENTIFY the real estate AND show the NAME of the OWNER (if the debtor does not have an interest of record in the real estate)
Rights on Default of a Fixture
Subject to the other provisions of the Code section 9-604, if a secured party holding a security interest in fixtures has priority over all owners and encumbrancers of the real property, the secured party, after default, may remove the collateral from the real property
Example - S sells and installs central heating in a home. S sells on credit, and retains a security interest. If homeowner defaults, can S repossess even if it is February and the home will be uninhabitable?
Yes
Priority of Fixtures (3)
1) Secured party v. subsequent real estate interest
2) Secured party v. prior real estate interest
3) When fixture filing unnecessary
Priority of Fixtures - Secured Party v. Subsequent Real Estate Interest
A SI in fixtures has priority over ANY real estate interest that arises SUBSEQUENT to the PERFECTION of the SI by fixture filing
Priority of Fixtures - Secured Party v. Prior Real Estate Interest
A prior real estate interest that is PROPERLY RECORDED has priority over a SI that SUBSEQUENTLY arises
EXCEPTION - A PMSI takes priority over an EARLIER IN TIME realty interest IF it is PERFECTED by a fixture filing BEFORE the goods become fixtures, or WITHIN 20 DAYS thereafter
Priority of Fixtures - Secured Party v. Prior Real Estate Interest - Exception to the General Rule
A PMSI takes priority over an EARLIER IN TIME realty interest IF it is PERFECTED by a fixture filing BEFORE the goods become fixtures, or WITHIN 20 DAYS thereafter
Note - a CONSTRUCTION MORTGAGE takes priority over a subsequent PMSI in fixtures EVEN IF the SI is perfected by a fixture filing within 20 DAYS of affixation
Priority of Fixtures - When Fixture Filing Unnecessary
A secured party need not fixture title as to READILY REMOVABLE
(i) factory or office MACHINES; or
(ii) EQUIPMENT that is NOT primarily used in the operation of real estate; or
(iii) REPLACEMENTS of domestic appliances which are CONSUMER GOODS
Any method of perfection BEFORE SUCH GOODS BECOME FIXTURES entitles the secured party to priority
A secured party does not need to perfect AT ALL to. . .
(i) have priority if the ENCUMBRANCER or OWNER of the real estate CONSENTED to the SI or has DISCLAIMED AN INTEREST in the goods as fixtures, or
(ii) if the DEBTOR has a RIGHT TO REMOVE the goods against the real estate claimant
Accessions - Definition
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 a car)
Accessions - Perfection
If a SI is perfected when the collateral becomes an accession, the SI remains perfected in the collateral
Accessions - General Rule as to Priority
Rules for priority (e.g.: first to file or perfect, special PMSI rules) apply to accessions
Accessions - Special Priority Rule
A SI in an accession is SUBORDINATE to a SI in the which the whole is perfected by COMPLIANCE with the requirements of a CERTIFICATE-OF-TITLE STATUE
Accessions - Removal and Reimbursement for Physical Injury
A secured party may REMOVE an accession from other goods IF the SI in the accession has PRIORITY over the claims of EVERY PERSON having an interest in the whole
The secured PARTY REMOVING the accession is responsible for the COST of repair of any PHYSICAL injury to the whole or the other goods
A person entitled to reimbursement MAY REFUSE permission to remove UNTIL the secured party gives adequate assurance for the performance of the obligation to reimburse
Same Office Rule
If one were to perfect the same security interest by filing, one would file in the SAME OFFICE where one actually filed to perfect the security interest in the inventory.
Since the hypothetical filing against accounts would be in the same office where I perfected against the inventory, I am perfected beyond the 20‐day period.
Exception—intervening CASH proceeds: if the collateral is acquired with cash proceeds, then the same office rule does not apply
This has been tested!
