Secured Transactions Flashcards
Scope of Article 9
Governs transactions that Create security interest in personal property or fixtures May include agricultural liens Goods or services for farming operation Rent OR certain rights to payments: Chattel paper Promissory notes Accounts Intangibles
Secured Transaction
Consensual agreement between
Debtor and creditor that
Debtor’s personal property will serve
As collateral for loan
Leases under Article 9
When transaction in economic reality or
Substance a secured transaction determined on
Case-by-case basis
Test for Article 9 covering Leases
Lessee is obligated to pay
Full obligation regardless if
Lease terminated early AND
One of following present:
Original term of lease equal to or
Greater than remaining life of goods,
Lessee bound to lease for remaining economic
Life of goods,
Lessee has option to renew lease for remaining
Economic life of goods for no additional OR
Nominal additional consideration, or
Lessee has option to become owner for no or
Nominal additional consideration
Circumstantial Test if Lease Test Fails
Facts of case
When in doubt, FILE financing statement
Test for Article 9 covering Consignments
Owner delivers goods to merchant for
Merchant to sell,
Merchant deals in goods of kind
Not operate under name of consignor
Not be generally known by creditors to
Be substantially engaged in selling goods of others
Not be an auctioneer,
Each delivery must be valued at least $1,000
At time of delivery, and
Not be consumer goods immediately before delivery
Consignment
When party has ownership of goods but
Gives possession of goods to another
Party for purpose of allowing consignee to sell goods
Security Interest
Interest in personal property or fixtures that
Secures payment or performance of obligation
Secured Party
Creditor who obtains security interest in
Debtor’s property
Usually person who loaned money or
Extended credit to obligor
Obligor
Party that must pay or perform on
Obligation secured by collateral
Debtor
Person who has interest, other than
Security interest or other lien, in collateral
Usually also obligor (but not required)
Collateral
Property subject to security interest,
Characterization of which can affect validity of
Security interest, and way it can be perfected, and
Rights of third parties in collateral
Tangible Goods
Movable at time secured interest attaches Determined by debtor’s principal use at Time security interest attaches: Consumer goods Farm products Inventory Equipment PMSI Software
PMSI Tangible Goods
Only exists in goods
Consumer Goods Tangible Goods
Goods acquired primarily for
Personal, family, or household purposes
Farm Products Tangible Goods
Crops Livestock Supplies used Things produced (i.e. eggs) in farming operations BUT NOT farm equipment
Inventory Tangible Goods
Goods held for sale or lease But not farm products, including: Goods furnished under service contract Raw materials Works in progress Materials used or consumed in business
Equipment Tangible Goods
Not consumer goods, farm products, or inventory
Usually goods used primarily in business
I.e. machinery, delivery vans, office equipment
Fixtures Tangible Goods
Attached to real property in such way that
Interest arises in them under real property law
Software Tangible Goods
Software embedded in goods
Diagnostic computer program
Treated as part of goods in which embedded
Intangible Collateral
Chattel paper Document Instruments Investment property Accounts Commercial tort claims Deposit account Letter of credit right General intangibles
Accounts Intangible Collateral
Right to payment for goods sold Property licensed, or Services rendered, OR Issuance of insurance policy, Use of credit or charge back, or Winning lottery
Deposit Account Intangible Collateral
Savings, passbook, time, or demand account
Maintained with bank
Commercial Tort Claims Intangible Collateral
Claims possessed by org or an individual that
Arose in course of org or individual’s business but
Does not personal injury or death
Investment Properties Intangible Collateral
Certified and uncertified securities
Stocks and bonds.
Chattel Paper Intangible Collateral
Obligations for goods sold on credit, Rental payments from lease agreement Requires: Monetary obligation Security interest or lease
Letter of Credit Intangible Collateral
Right to payment or performance under letter of credit
Payment Intangibles Collateral
Catch-all for rights to payment, where
One party under obligation to another (debtor) but
No promissory note
General Intangibles Collateral
Residual category and includes anything
Not fit in any other category
Change in Classification Collateral
As collateral passes from debtor to debtor or the principal use changes, the classification may also change.
Attachment
Required for security interest to be enforceable
Value given by secured party
Debtor has rights in collateral
Debtor has authenticated security agreement that
Describes collateral or secured party has
Possession or control of collateral
Value Attachment
Consideration sufficient to form contract,
Extending credit, accepting delivery under
Pre-existing contract, or in satisfaction of
Pre-existing claim
No new value needs to be given and no
Money needs to exchange hands
May provide collateral that secures future advances
Rights in Collateral Attachment
ONLY attaches to rights debtor has
Including limited rights
Thieves cannot grant security interests in stolen
Goods because no rights in collateral
After Acquired Property Attachment
Attachment does not occur until
Debtor obtains rights in collateral
Security Agreement
Must satisfy Statute of Frauds
Required to attach
Authentication Record Security Agreement
Be in a record
Contain description of collateral
Be authenticated by debtor
Record Security Agreement
Tangible medium but
No need of writing
Includes electronic records
Description Security Agreement
Described in sufficient detail to make
Possible to reasonably identify
Generic description “debtor’s entire inventory” sufficient
Exception to Description Security Agreement
Consumer goods or commercial tort claims
Identified with particularity
Super Generic Description Security Agreement
Descriptions such as “all the debtor’s assets” or
All the debtor’s personal property not sufficient
Authenticated by Debtor Security Agreement
Authenticated by party against whom enforced
Signature of debtor or execution of record
Possession of Collateral Security Agreement
Possession satisfy authentication: Consumer goods Equipment Farm products Chattel paper Tangible documents Certified securities Instruments Money
Control of Collateral Security Agreement
Control satisfies authentication: Electronic chattel paper Investment property Letter of credit rights Deposit accounts
After-Acquired Collateral Security Agreement
If original agreement states applies to
After-acquired property i.e.
All of debtor’s existing and after-acquired collateral
Exception to After-Acquired Collateral Security Agreement
Not effective if consumer goods, UNLESS
Debtor acquires within 10 days after value, or
Commercial tort claim
Proceeds Security Agreement
Automatically attaches to identifiable proceeds
When sold, leased, exchanged, etc.
Duties of Secured Party in Possession
Duty of Care
Duty to Keep Collateral Identifiable
Duty to Relinquish Possession
Duty of Care Secured Party in Possession
Act with reasonable care with respect to collateral
Duty to Relinquish Possession Secured Party in Possession
Once satisfied, must relinquish control
Charge for Expenses Rights of Secured Party in Possession
Right to charge debtor reasonable expenses
Purchase Money Security Interest (PMSI) Attachment
Secured party retains interest in goods sold
Only collateral in goods or software
Components of Purchase Money Security Interest (PMSI) Attachment
Value given by secured party to debtor and
Debtor incurred obligation to enable debtor to
Acquire rights in goods or
Secured party sold goods to debtor, and
Debtor incurs obligation to pay secured party
All or part of purchase price
Dual Status Purchase Money Security Interest (PMSI) Attachment
Secured interest taken in goods as PMSI
Then later, secured party extends more credit
Non-PMSI interest in later extended credit
Accessions Attachment
Physically united with other goods in such
Manner identity of OG goods not lost
I.e. tires installed on car.
Security interest in accession not lost
Commingled Goods Attachment
Physically united with other goods to
Point identity lost in product or mass
No security interest in commingled goods
Perfection Secured Transactions
Gives rights in collateral superior to Any rights claimed by third parties Filing finance statement Possession Control Automatic perfection
Financing Statement Perfection
Debtor’s name
Name of secured party or rep
Collateral covered by financing statement
Application of Financing Statement Perfection
Filing statements perfect for all collateral EXCEPT: Deposit accounts Money Letters of credit Collateral subject to other methods (i.e. certificate of title laws).
Filing of Financing Statement Perfection
Filed in central filing office/secretary of state
Where Debtor located
Exception to Financing Statement Perfection
Real property related collateral must file in
County where real property located including
Fixtures, extracted collateral, oil/gas, and timber
Debtor Name Financing Statement
Full debtor’s correct legal name
Individual Debtor Name Financing Statement
Maj: driver’s license or state issued ID
If no current ID, only correct legal name
Minority of Individual Debtor Name Financing Statement
Min: safe harbor for using “individual’s name,”
Driver’s license name, or
Surname and first personal name
Name Change Debtor Name Financing Statement
If changed by debtor, then secured party has
Four months to file amended financing statement
Errors Financing Statement
If seriously misleading, then fails
Description of Collateral Financing Statement
Use description in security agreement or
Use generic description
Errors of Description of Collateral Financing Statement
Debtor may demand secured party Prepare termination statement with Respect to erroneous collateral to file Consumer goods: Secured party must file termination statement
Duration of Collateral Financing Statement
Effective for five years and effective upon
Delivery to filing office and tender of filing fee
Possession Perfection
Taking possession of collateral
Only remains secure while retains possession
Casual or isolated assignments that
Don’t transfer significant part of accounts
Receivables does not count
Money Possession Perfection
ONLY way to perfect in money
Control Perfection
Taking control of collateral
Only remains secure while secure party retains control
Casual or isolated assignments that
Don’t transfer significant part of accounts
Receivables does not count
Deposit Account Control Perfection
ONLY way to perfect by:
Secured party bank where deposit account maintained Agreed writing with instructions of secured party, or
Secured party becomes bank’s customer with
Respect to deposit account
Automatic Perfection
Under certain circumstances, security interest
Automatically perfected
PMSI Automatic Perfection
PMSI in consumer goods automatically
Perfected upon attachment
Other Automatic Perfection
Casual or isolated assignment of accounts or
Payment intangibles that does not transfer
Significant part of assignor’s outstanding
Accounts or payment intangibles AND
Sale of payment intangible or promissory note
Temporary Automatic Perfection
When change to collateral or debtor
Name Change Temporary Automatic Perfection
Name change, secured party has
4 months to file amended financial statement
Moves out of State Temporary Automatic Perfection
Remains perfected for 4 months unless
Financing statement lapses earlier
Collateral Move out of State Temporary Automatic Perfection
Debtor still owns collateral, no refiling necessary
Collateral transferred to new debtor out of state,
Secured party one year to file listing new debtor
Proceeds Perfection
Interest in proceeds granted temporary
Perfection status for 20 days BUT
Must amend financing statement to retain priority
Automatic Perfection Proceeds
Proceeds used to purchase same
Type of identifiable collateral,
Same office rules, or
Cash proceeds
Cash Automatic Perfection Proceeds
Perfection continues indefinitely so long as
Cash proceeds identifiable
Same Office Rules Automatic Perfection Proceeds
Financing statement covers original collateral
Proceeds can be perfected in same central filing office
Proceeds not acquired with cash proceeds
Vehicles Perfection
Covered under certificate of title statutes and
Follow appropriate state statute for attachment and
Perfection, NOT PMSI
Failure to Perfect
If buyer of accounts does not perfect its interest,
Seller continues rights in those accounts
I.e. can perfect in already attached collateral
Priorities Secured Transactions
Article 9 prioritizes claims and pays them in order
Identify status of each claimant, and
Apply appropriate priority rule
Secured Creditors
Hold security interest in collateral Determine: Whether and when interest attached, Whether and when interest perfected, and Whether it is PMSI
Unsecured Creditors
No security interest in collateral No rights against property but Contract rights against creditor and Can obtain rights in collateral by Getting security interest or lien
Lien Creditors
Judicial
Statutory
Other Secured Creditors
Purchasers of chattel paper, Promissory notes, accounts, or Payment intangibles treated as secured Transactions with attached interest Determine if perfected
Perfected Secured vs. Perfected Secured (neither PMSI)
First in time to file or perfect takes priority
Perfected Secured vs. Unperfected Secured
Perfected wins
Unperfected Secured vs. Unperfected Secured
First to attach or become effective takes priority
PMSI for Goods Other than inventory vs. Secured (not PMSI)
PMSI if secured party perfects within
20 days of debtor receiving goods
Otherwise, first in time to file or perfect takes priority
Proceeds PMSI for Goods Other than inventory vs. Secured (not PMSI)
Priority will extend to proceeds
PMSI for Inventory vs. Secured (not PMSI) or Lien
PMSI takes priority if:
Perfected before inventory delivered to debtor
Secured party sends authentication notice to
Conflicting security interests before
Debtor receives good
Otherwise, first in time to file or perfect takes priority
Proceeds PMSI for Inventory vs. Secured (not PMSI) or Lien
Priority only extend to identifiable cash
Proceeds received on or before
Delivery of inventory
PMSI vs. PMSI
If one PMSI secures price of collateral For seller while other secures loans Enabling purchase (buyer), then Seller’s PMSI takes priority Otherwise, first in time to file or Perfect takes priority
Perfected Secured vs. Lien
Perfected security takes priority
Unperfected Secured vs. lien
Lien creditor priority UNLESS
Secured interest filed financing statement
But not yet given value, then
Secured interest will take priority
Secured vs. Statutory Lien
Statutory lien priority over Security interest so long as: Effectiveness of lien depends on Lien holder’s possession of goods and Lien secured payment or performance of Obligation for services/materials furnished in Ordinary course of person’s business I.e. mechanic’s liens
Secured Party vs. Secured Party of Future Advances
First in time to file or perfect has priority
Secured Party of Future Advances vs. Lien Creditor
If advance made within 45 days of Lien creditor’s interest arising, Secured party has priority If advance made MORE than 45 Days after lien arises, advances Subject to lien creditor UNLESS Advance or commitment made without Knowledge of lien
Fixtures Secured Interest vs. Real Property
Security interest priority if security interest
Perfected by fixture filing before
Real property interest recorded
Fixture Filing
Provides description of real property related to fixture
Fixtures PMSI vs. Real Property
PMSI has priority if perfected if:
Debtor has interest of record in real property and
Fixture filing before goods become fixtures or
Within 20 days thereafter
Exception Fixtures PMSI vs. Real Property
Construction mortgage priority over Subsequent security interest if recorded BEFORE Goods become fixtures AND only covers Goods became fixtures before Completion of construction
Transferee (not Buyer) vs. Secured Interest
Security interest continues unless
Secured party authorized transfer free
Buyer vs. Unperfected Security Interest
Buyer of goods, tangible chattel paper, Tangible docs, takes free of Security interest if buyer: Gives value, Receives delivery of collateral, and No knowledge of existing security interest
Buyer vs. Perfected Security Interest
Buyer generally takes subject to interest
UNLESS secured party authorized
Sale free of security interest
BOCB Exception Buyer vs. Perfected Security Interest
Buyer in ordinary course of business takes free if:
Buys goods,
In ordinary course,
From seller in the business of selling goods of kind
Does not include pawn broker or farming products
In good faith, and
No knowledge sale violates rights of another
Consumer Buyer Exception (“Garage Sale”) Buyer vs. Perfected Security Interest
Consumer buyer takes free if buyer: Buys consumer goods for value, For own personal, family, or household use, From consumer seller, and No knowledge of security interest
Exception Consumer Buyer Exception (“Garage Sale”) Buyer vs. Perfected Security Interest
Secured party filed financing statement
Covering goods prior to purchase,
Consumer buyer takes subject to security interest
Chattel Paper Purchaser vs. Security in Proceeds of Inventory
Purchaser has priority if: Purchaser gives new value and takes control Purchase made in good faith, and Does not indicate has been Assigned to other than purchaser For all other security interests Changed to without knowledge
Negotiable Instrument or Document Priority
Purchaser has priority if: They give value Take possession, and With good faith and no knowledge it Violates rights of secured party
Buyer and Future Advances Priority
If buyer takes subject to security interest AND
After sale secured party makes future advance
Buyer takes free of that advance if:
Secured party has knowledge of buyer’s
Purchase at time of advance OR
Future advance made at least 45 days after purchase
Default Secured Transaction
Not defined in Article 9
Look to security agreement and k law
All remedies cumulative meaning
Exercised simultaneously
Enforcement Rights Default
Seek possession of collateral and either (a) sell or (b) Retain in full or partial satisfaction
Initiate judicial action
Subject to statutory limitations, pursue any
Course of action agreed upon
Repossession Default
Take possession by judicial process or
By self-help BUT ONLY if secured party can
Do so without breaching peace
Breach of Peace Repossession Default
Bringing officer to repossession Breaking into debtor’s home or garage Committing criminal act Some physical confrontations Some forms of deception or trickery
Not Breach of Peace Repossession Default
Trespass or repossession without confrontation
Not constitute breach of peace
Oral Protest Repossession Default
Split: some breaches peace, some not
Large Equipment Repossesion
If hard to repossess, secured party may
Render it unusable, allowing disposal of
Collateral at debtor’s premises
Disposition Secured Transactions
Sell, lease, license, or otherwise dispose of
Collateral so long as commercially reasonable
Commercially Reasonable Disposition Secured Transactions
Sold in usual manner recognized in market
At price recognized by market at time of disposition
Otherwise in conformity with reasonable commercial
Practices among dealers in type of collateral
Type of Disposition Secured Transactions
Public or private
Secured party can only purchase collateral
At public sale
Can only purchase at private sale if price
Fixed (i.e. stock exchange) or set by
Standard price quotes in recognized market
Notice Disposition Secured Transactions
Send authenticated notification of disposition
UNLESS:
Collateral perishable or threatens to decline speedily value
Type customarily sold on recognized market
Persons entitled to notification waive right
Who Notice Disposition Secured Transactions
Debtor
Secondary obligors (co-signers)
Other secured parties
Anyone else whom secured party has received
Notice of claim or interest in collateral
What Notice Disposition Secured Transactions
Description of debtor and secured party
Description of collateral
Method of disposition
Statement debtor entitled to accounting of unpaid indebtedness
Time and place of public disposition or time after which
Private disposition made
When Notice Disposition Secured Transactions
Reasonably timely i.e.
10 days prior to earliest time for disposition set
Forth in notification
Cash Application of Proceeds
Reasonable expenses for collection and enforcement
Pay off debt to foreclosing secured party
Subordinate interests provided make formal demand prior to distribution
Any surplus to debtor
Senior Interests Cash Application of Proceeds
Survive sale
Deficiency Cash Application of Proceeds
If funds not enough to satisfy debt foreclosed
Can seek deficiency judgment against debtor/obligor
Non-Cash Application of Proceeds
Apply or pay for application non-cash proceeds
Only if failure would be commercially unreasonable. After all required payments and applications made
Remainder goes to debtor
Acceptance of Collateral (Strict Foreclosure)
Accepts the collateral in full or partial satisfaction
Full Acceptance of Collateral (Strict Foreclosure)
Debtor consents, after default, to acceptance
In authenticated record OR
Debtor does not object to proposal within 20 days
After proposal SENT
Exception to Full Acceptance of Collateral (Strict Foreclosure)
Debtor has paid back 60% of debt or value
Goods MUST be sold
Debtor can waive after default in authenticated record
Partial Acceptance of Collateral (Strict Foreclosure)
Debtor consents, after default, in authenticated record
Consent by silence not permitted
Redemption Default
Paying entire secured interest and expenses
Prior to sale
Debtor CANNOT waive right
Fixtures Default
If secured party has priority over fixture
May be removed from real estate BUT
Will be liable for cost of any damages resulting
But NOT diminution in value by removing
Accessions Default
Secured party with priority allowed to remove
Accession from other goods
Injunctive Relief Remedies for Non-Compliance
If failure to comply ongoing, debtor or
Another secured party may ask court for injunction
Remedies for Non-Compliance Default
Injunctive Relief
Actual Damages
Deficiency Judgments
Improper Repossession
Commercial Transactions (Rebuttable Presumption) Deficiency Judgment Default
Secured party did not sell goods in commercially
Reasonable manner, not entitled to deficiency
Unless prove sale that complied with Article 9
Would have created deficiency
Consumer Transactions Default
Some courts follow rebuttable presumption rule but
Others treat as conversion barring
Recovery to deficiency
Improper Repossession Default
May result in liability under tort action
