Secured Transactions Flashcards
Consumer goods
used or bought for use primarily for personal, family, or household purposes
Equipment
Used or bought for use in business.
Default/catch-all category for goods
Farm Products
Crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk and eggs) if they are in possession of a debtor engaged in farming operations
Inventory
Held by a person who holds them for sale or to be furnished under service contracts; materials used or consumed in a business in a short period of time (raw materials)
8 Types of Semi-Intangible and Intangible Property
(1) Instruments
(2) Documents
(3) Chattel paper
(4) Investment property
(5) Accounts
(6) Deposit Accounts
(7) Commercial tort claims
(8) General intangibles
Instruments
Negotiable instruments and any other writing which evidences a right to payment of a monetary obligation, and which are in the ordinary course of business transferred by delivery with any necessary indorsement or assignment (does not include invested property)
Checks, drafts, promissory notes
Documents
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 documents and the goods it covers (e.g. bill of lading, warehouse receipts, etc).
Chattel Paper
A record or records which evidence both a monetary obligation and a security interest in a lease of specific goods.
A “record” is information that stores in either a tangible medium (e.g. written on paper) or an intangible medium (e.g. electronically stored).
Chattel paper stored electronically= “electronic chattel paper”
Investment Property
Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items
Accounts
A right to payment (not evidenced by an instrument or chattel paper)
(1) for property
(2) for services
(3) for a policy of insurance 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 or
(8) as lottery winnings.
Health care insurance receivables are included.
Deposit Accounts
An account maintained with a bank.
NOTE: Article 9 only applies to NONCONSUMER DEPOSIT ACCOUNTS and deposit accounts that are claimed as proceeds as other collateral.
Commercial Tort Claims
A claim arising in tort w/r/t which
(1) the claimant is an organization (e.g. a partnership or corporation)
(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 w/in the scope of the 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.
Scope of Article 9
Applies to
(1) ANY transaction regardless of its form, that creates a security interest in personal property or fixtures by contract
(2) an agricultural lien
(3) a SALE of accounts, chattel paper, payment intangibles, or promissory notes (unless the sale is for the purposes of collection only, or the sale is part of the sale of the business)
(4) certain consignments
(5) a secured sale disguised as a lease
Retention of Title
if a seller and a buyer of goods agree that the seller will retain title to the goods after they are delivered until the buyer has paid for them, the agreement will be treated as seller’s retention of a security interest
Typical Consignment
Consignor (i.e. the owner of the goods, such as a manufacturer or wholesaler) retains title to the goods and delivers them to the consignee (e.g. a retailer) for sale to the public.
If goods are not sold, consignee may return to consignor.
Where a creditor of a consignor would have difficulty distinguishing inventory that a consignee is selling on consignment from inventory that the consignee actually owns, Art. 9 considers the consignment to be a security interest, and requires the consignor to comply with the provisions of Article 9 and give notice to the consignee’s creditors.
Leases and Article 9
True lease is not covered by Article 9.
A lease that is really a sale with a security interest is covered by Article 9 (disguised sale)
Relevant question: at the time that 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– true lease.
Creation of An Article 9 Security Interest (Attachment)
3 Requirements
(1) Security Agreement
(2) The secured party must have given value
(3) the debtor must have rights in the collateral
Security Agreement
Unless the collateral is in the possession or control of the secured party, pursuant to an agreement, a written (or electronically stored) security agreement is required.
*Most often the debtor wants possession of the collateral, so a writing is necessary
Possession
If the collateral is in the possession of the secured party pursuant to an ORAL security agreement, the “security agreement” requirement is satisfied.
This is called a “pledge.”
Control
If collateral is a non-consumer deposit account, electronic chattel paper, or investment property, the security agreement may be evidenced by control.
The method by which control may be obtained depends on the type of collateral involved.
Form of the Security Agreement (When Written)
3 Requirements
(1) Agreement must be evidenced by a record (written or ESI) and must SHOW AN INTENT TO CREATE A SECURITY INTEREST
(2) Agreement must be AUTHENTICATED by the debtor , usually signed, but any symbol made with present intent to authenticate record works
(3) Agreement must contain A DESCRIPTION OF THE COLLATERAL that must REASONABLY IDENTIFY the collateral (if timber, a description of the land concerned)
Reasonably Identify
(1) Normal vocabulary works
(2) Article 9 categories work
(3) Supergeneric descriptions INVALID
The Secured Party Must Have Given Value
Any consideration sufficient to support a simple contract is enough.
Even past consideration is enough.
The debtor ALWAYS gives value, because the debtor, at a minimum, promises to pay
Real question: did the SECURED PARTY give value
The Debtor Must Have Rights in the Collateral
The debtor must have rights in the collateral b/c the debtor cannot grant a contingent property interest in property it does not own
Scope of the Security Interest
- Debt secured may include future advances
- Property secured may include after-acquired property
- Property secured generally includes proceeds
- The attachment of a security interest in collateral also is an attachment of a security interest in a supporting obligation for that collateral
After-Acquired Property General Rule
W/o 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
After-Acquired Property Exception # 1
Inventory or Accounts
Even when there is not 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 (e.g. inventory or accounts)
Courts assume that the parties must have meant to cover after-acquired property, or that the security interest will reach nothing.
After-Acquired Property Exception # 2
Consumer Goods
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
After-Acquired Property Exception # 3
Commercial Tort Claims
An after-acquired property clause is ineffective as to commercial tort claims
Proceeds
Includes whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds
Unless otherwise agreed, a security interest automatically gives the secured party a right to identifiable proceeds
“Identifiable” means that the secured creditor can prove that the proceeds can be traced to creditor’s original collateral
“Proceeds” and Insurance
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 claiming it.
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)
To Determine Which Part of a Commingled Mass of Cash if Identifiable
Apply the lowest intermediate balance test.
Look at the balance in a commingled bank account starting at the time the bank proceeds are deposited and ending at the time you are applying the test.
Lowest balance during that time period= secured party’s identifiable proceeds (but cannot exceed value of cash proceeds originally deposited)
Supporting Obligation
Guarantee/surety
Promise to pay the debt of another
5 Methods of Perfection
(1) automatic perfection
(2) possession of collateral by secured party
(3) perfection by control
(4) notation of a lien on certificate of title
(5) filing a financing statement
Automatic Perfection
in certain situations, a security interest is automatically perfected upon attachment.
Most common: a PMSI in CONSUMER GOODS is automatically perfected upon attachment
Possession of Collateral by Secured Party
Take possession of collateral.
Security interest perfected from moment of possession w/o relation back to time of attachment.
Continues only so long as possession is retained.
Impossible with items you can’t take possession of (accounts, deposit accounts, general intangibles).
Most often, not very practical.
Perfection by Control
Security interests in investment property and electronic chattel paper MAY be perfected by control
Security interests in NONCONSUMER DEPOSIT ACCOUNTS can only be perfected by control
Perfection by Control: Investment Property
A 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 by Control: Electronic Chattel Paper
A party has control over electronic chattel paper when a system showing the transfer of interest in chattel paper RELIABLY ESTABLISHESthe secured party as the assignee.
Ex: a system where secured party has the authoritative copy of the records constituting the electronic chattel paper, that party identifies the secured party as the assignee of record and any other copy of or amendments to the record are marked
Perfection by Control: Nonconsumer Deposit Accounts
(1) the bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account
(2) if the secured party is not such a bank, it can obtain control over the deposit account by either
- putting the deposit account in the secured party’s name or
- agreeing in an authenticated record that the bank in which the deposit account in maintained that the bank with follow the secured party’s order without future consent by the debtor
Notation of Lien on the Certificate of Title
ONLY way to perfect a security interest in an item covered by a certificate of title statute is for the secured party to get the relevant governmental authority to note the secured party’s lien on the certificate of title
Notation of Lien on Certificate of Title: EXCEPTION
If the debtor is holding the car or the truck as inventory (ie 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
Filing a Financing Statement: Notice Filing
AKA Form UCC 1
Financing statement is premised on concept of “notice filing.”Notice must indicate merely that a person MAY have a security interest in the collateral indicated.
Further inquiry from the parties concerned will be necessary to disclose complete state of affairs
Contents of Financing Statement
(1) Debtor’s name
(2) Description of collateral
(3) Secured party’s name
(4) Real-property related financing statements
(5) No signature required, though debtor must authorize filing
(6) Authenticated security agreement itself may be filed
Contents of Financing Statement: Debtor’s Name
Financing statements are indexed by the debtor’s name
If debtor is an individual: individual’s name
If debtor is a corporation: corporate name
If debtor is a partnership: partnership name
Individual: unexpired drivers license of state where financing statement is to be filed. If not, their “name.” NOT trade name
Name Errors on Financing Statement
As long as error is not seriously misleading, financing statement is effective
Check whether a search under the debtor’s correct name using the filing officer’s standard search logic would retrieve the erroneous filing statement.
If it does–> not seriously misleading
If it does not–> seriously mislead
Name Errors on Financing Statement: Filing Office Errors
Filing Effective
secured creditors are not responsible for filing office errors
Debtor’s Name Change
If debtor so changes its name 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 a security interest in collateral acquired by the debtor more than 4 months after the change unless an amended financing statement is filed within 4 months
Contents of Financing Statement: Description of Collateral
“Reasonably identifies” collateral
Normal vocab okay
Art. 9 categories okay
Supergeneric descriptions okay
Contents of Financing Statement: Secured Party’s Name
Error in the name of the secured party will NOT be seriously misleading
(Though, in an appropriate case, this type of error may give rise to an estoppel in favor of a particular holder of a conflicting claim to the collateral)
Contents of Real-Property-Related Financing Statements
Must also indicate that it is to be filed in the REAL PROPERTY RECORDS (s that the filing officer see that its gets to the right place), provided a DESCRIPTION OF THE REAL PROPERTY to which the collateral is related (must “rxbly identify” the real estate) and name the record owner if the property belongs to someone other than the debtor
No Signature Required, Though Debtor Must Authorize Filing
Authorization may be in any signed writing
In addition, debtor automatically authorizes the financing statement if she authenticates a security agreement– covering the same collateral (ipso facto authorization)
Authenticated Security Agreement Itself May be Filed
If it is filed, it must contained all of the elements discussed above (debtor’s name, description of collateral, secured party’s name, debtor authorization of filing, extra requirements for real-property related financing statements).
Where to File a Financing Statement: General Rule
Except as otherwise specifically provided in a state’s Art. 9, the financing statement is ordinarily filed with the Secretary of State
