Secured Transactions Flashcards
what is a security interest?
an interest in personal property or fixtures that secured payment or performance of an obligation.
what is a security agreement?
a consensual agreement that creates a security interest
what is a debtor and obliger?
a debtor is any dude who has an interest, other than the security interest or other lien, in the colloteral, such as the sole owner. so in secured transactions context really anyone who has a non-debt interest in the collateral.
an obliger is any person who must pay with respect to the obligation that is secured by a security interest in collateral. so for example someone who guarantees a loan might be an obliger without being the debtor.
what is a good? some counterintuitive examples.
anything that is moveable at the time that a security interest attaches. this includes fixtures, standing timber that is to be cut, unborn animals, growing or unharvested crops, and manufactured homes
how many classes of goods are there? can a good be in more than one category of goods?
4; no.
list the four classes of goods.
cosumer goods, farm products, inventory, and equipment
classification of goods is based on…
classification of goods is based on the debtor’s principal use at the time when the security interest attaches
define first class of goods: consumer goods
those goods acquired primarily for personal, family, or household purposes
define second class of goods: farm products
those goods that are crops or livestock, and any supplies that are used or produced in farming.
define third class of goods: inventory
those goods, other than farm products, that are held for sale or lease, are furnished under a service contract, or consist of raw materials, works in process, or materials used or consumed in a business.
define fourth class of goods: equipment
this is a catch-all class. all goods that are not consumer goods, farm products, or inventory.
like normal goods, intangibles are classified in terms of principal use. T/F
F
what is a quasi-intangible good?
a good that is tangible enough to be physically possessed but does not constitute a “good”. usually a writing, like contracts or NIs
main types of quasi-intangible property
documents, instruments, investment property (like stocks and bonds), and chattel paper
what is a document in context of quasi-intangible property?
a document of title, which confers on the holder ownership rights in goods
what is an instrument, in the context of quasi-intangible property?
negotiable instruments, such as promissory notes and checks, and non-negotiable instruments that evidence a right to the payment of a monetary obligation and are transferred in the ordinary course of business by delivery, such as a certificate of deposit from a bank.
what is investment property, in the context of quasi-intangible property?
includes both certificated securities (attached to a certificate) and uncertificated securities (like stuff recorded electronically w/o certifcate), such as stocks and bonds
what is chattel paper in context of quasi-intangible property?
chattel paper consists of one or more records that evidences both (1) a monetary obligation and (2) a security interest in specific goods or a lease of specific goods. e.g. a security agreement that also shows the amount due
what are the main cateogries of true intangible goods and what are they?
- accounts. NOT CHECKING ACCOUNT, but the right to payment of a monetary obligation like accounts receivable
- deposit accounts. incldues checking, savings, passbook, time, or demand account maintained with a bank
- commercial tort claim. tort claims possessed by an organization, or by an individual that arose in the cousre of the individual’s business.
- general intangibles. catch-all category of personal property that is not included in the other types of collateral
are personal tort claims covered in the tort category of intangible goods?
no
Article 9 covers any transaction that…
creates, by contract, a security interest in personal property or a fixture.
Does article 9 cover leases?
if a true lease, then no. but if really a disguised sale with a security interest, then yest.
test for when a lease is actually a disguised sale
it is a disguised sale if lessee must pay consideration to lessor and the payment obligation cannot be terminated by the lessee, AND at least one of the following conditions is met:
- the original term of the lease is equal to or greater than the remaining economic life of the goods
- the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become owner of the goods
- the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal addiitonal consideration upon completion of the lease
- the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon completion of the lease
some consignments may fall within the scope of Article 9 as a…
purchase-money security interest in the consigned inventory
in order for a consignment to be subjet to Article 9, the following must be met:
- a person (i.e.the consignor) must deliver goods to a merchant, who deals in the goods of that kind, for the merchant to sell (and who does not operate under the same name as the consignor);
- the merchant is not generally known by its creditors to be substantially engaged in selling goods for others or is not an auctioneer;
- the value of the goods delivered in each delivery must be at least $1000; AND
- the goods must not be consumer goods immediately before the delivery
Note: to protect their interests, consignors must perfect their interests like any other security interest
statutory liens in services and materials (mechanic’s liens) are/are not subject to Article 9
are not
agricultural liens are/are not subject to Article 9
are
agricultural liens include…
interests in farm products that secure payment for either
- goods or services furnished with respect to the debtor’s farming operation (like livestock feed sold to a cattle rancher); or
- rent on real property leased by a debtor in connection with a farming operation
which kinds of sales of receivables are included under Article 9? what would not be considered a sale of a receivable?
receivables under Article 9:
payment intangibles, chattel paper, accounts, promissory notes (PICPAPN)
Art. 9 does not apply to sales and assignments that by their nature do not concern commercial financing transactions. two notable examples are if the receivables is part of the the sale of a whole business (this would be consdiered a true sale) or assignment of a single receivable in satisfaction of a preexisting debt.
are real property transactions subject to Art. 9?
real property transactions are not governed by Art. 9, but transactions that use real property to secure an Art. 9 receivable are.
e.g. A lends B $300k to buy a home secured by a mortgage. A then gets a loan from C for $100k and signs a promissory note for that amount and secures the note with the mortgage from B. The morgage between A and B is not governed by Art. 9, but the transaction between A and C is.
What is the Texas law re: assignment of rents and what is it called?
Under the Texas Assignment of Rents Act, an assignment of rents arising from real property creates a presently effective security interest in the accured and unaccrued rents.
What the hell is this attachment thing anyway?
A security interest that is enforceable against the debtor with respect to the collateral is said to have “attached” to the collateral.
what are the conditions that must be met for attachment?
- value has been given;
- debtor has rights in the collateral; AND
- debtor has authenticated with a description of the colateral OR the secured party has possession or control of the collateral pursuant to the security agreement
elaborate on the 1st requirement of attachment: value has been given
the same threshold of consideration needed to make a K valid, but unlike normal K law, past consideration will suffice if seucring something that already had consideration given. in other words no new value needs to be given.
for example if A loans B $100, and later realizes he should have secured the loan, he can go back to B and get B to sign a security agreement taking an interest in B’s rare farts collection. A does not need to make a new loan/give new consideration for him to get the security interest in the precious farts.
does attachment happen to the entire collateral or only the interest/rights the debtor has in the collateral?
only the rights the debtor has in the collateral.
to be enforceable, the security interest must have these three things; explain
- record (*see exception)
- description of the collateral
- authentication by debtor
- record - can be any tangible medium or electronic form. possession (for tangible) or control (for certain intangible) is an alternative to the requirements of a tangible record, as long as still pursuant to a security agreement (so e.g. an oral agreement)
- description - must reasonably describe the collateral, even if by class, but cannot be super generic (so e.g. “all A’s equipment” is fine but “all A’s assets” is not)
- authentication - normally a signature but can be any symbol adopted by the debtor (such as an email moniker)
if secured party opts for possession or control, they owe these duties
duty of reasonable care and duty to keep the collateral identifiable and to relinquish the colalteral once the underlying obligation has been satisfied.
PMSI stands for..
purchase money secured interests
PMSI only applies to
goods and software
How does a lender’s PMSI arise?
a secured party gives value to the debtor in order to enable the debtor to acquire rights in or use the goods, and the value given is so used
e.g. A loans B $100 to buy a pachooga (and the loan is secured by the pachooga). B actually uses the money to buy the pachooga. Then, A would have a PMSI in the pachooga.
How does a seller’s PMSI arise?
a secured party sold goods to the debtor, and the debtor incurs an obligation to pay the secured party all or part of the purchase price.
e.g. A sells a pachooga to B for $100 on credit, pursuant to a security agreement under which A retains a security interest in the pachooga. A has a PMSI in the pachooga.
PMSI’s are an exception to the attachment requirement for enforcement. T/F
F, the security interest must attach before a PMSI is created
a consignment of goods creates…
a PMSI in the inventory.
e.g. A gives B a bunch of pachoogas with an agreement that B only has to pay for the pachoogas he sells and must return the rest. under this agreement, A has a PMSI in the inventory of pachoogas he supplied to B
when does a PMSI in software exist?
only when the debtor acquired its interest in the software in an integrated transaction in which the debtor also acquired an interest in goods (e.g. some computers), and the debtor acquired that interest in the software for the principal purpose of using the software in the goods. the security interest in the software must secure an obligation with respect to the goods.
what are dual-status PMSIs?
in non-consumer goods transactions, collateral can have PMSI status even if:
- it also secures another obligation;
- the underlying obligation is also secured by other non-PMSI collateral; or
- the underlying obligation has been renewed, refinanced, or restructured
what are accessions? what are commingled goods?
accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost
commingled goods are goods that are physically united with other goods in such a manner that their identify is lost in a product or mass
what is the effect of collateral becoming a an accession vs a commingled good?
if collateral becomes an accession, that does not destroy the security interest in the collateral. if becomes commingled, the security interest now attaches to the product or mass.
explain how art 9 treats after-acquired property
a security interest only attaches to the described collateral, so if a creditor wants to have an interest attach to stuff acquired after the agreement, the creditor must include an after-acquired property clause.*
e. g. just describing the collateral as “all of B’s equipment” would only attach to the equipment at the time of agreement, so must say something like “all of B’s currently owned and subsequently acquired equipment” to get the subsequent equipment.
* Exeption: a majority of courts find that the simple description of “inventory” implies that it includes after-acquired inventory due to the high turnover inherent in inventory
“Proceeds” are defined broadly by UCC as:
- whatever is acquired uppn the sale, lease, license, exchange, or other disposition of collateral;
- whatever is collected on, or distributed on account of, collateral;
- rights arising out of collateral (so super broad);
- legal claims arising out of the collateral; or
- insurance claims arising out of the collateral
in order to receive proceeds of the collateral in addition to the collateral, debtor must include a proceeds clause. T/F
F, no addiitonal clause in the security agreement is necessary to reach proceeds as attachment of collateral gives the secured party the rights to proceeds automatically
what is the different between attachment and perfection
attachment dsecribes the process by which a security interest becomes enforceable against the debtor while perfection generally gives the secured party superior rights in the collateral to an unperfected secured party (and possibly priority over other secured parties)
in order for a secured interest to be perfected, it must be attached. T/F
T
so ask (1) was the interest attached?, and then (2) was the interest perfected?
perfection requires one of the following:
- filing a financing statement;
- possession of the collateral;
- control over the collateral; or
- can also be automatic upon attachment in some circumstances
the thing you have to file if you want to perfect through filing is called the
financing statement
filing is sufficient for perfecting any collateral except:
desposit accounts, money, letter-of-credit
notice, this list does not include normal account like accounts receivable, so that can be perfected through filing
financing statments must have this information
- debtor’s name
- secured party’s name
- a description of the collateral
additional stuff that is technically required but errors will not make the financing statement ineffective PLUS even leaving blank is fine if the filing office nonetheless accepts with blanks:
- address of both the debtor and secured party
- identify whether the debtor is an individual or organization
additional information is required for real-property related collateral such as fixtures, extracted collateral such as oil, and timer to be cut. for such collateral, you need this additional info:
- an indication that it covers this type of collateral
- an indication that it is to be filed in the real property records
- a description of the real property to which the collateral relates, and
- name of a record owner of the real property if the debtor does not have an interest of record in the real property
on a financing statement, the debtor’s name must be _____ and connot be ____
the debtor’s name must be its correct legal name and connot be seriously misleading. what is and is not seriously misleading is further elaborated by rules
when is an individual debtor’s name considered correct on a financing statement?
if an individual debtor has a state-issued, current (i.e. unexpired) driver’s license or ID, then the financing statement is only correct (in other words, not seriously misleading) if it provides the name on the license/ID (most recent if multiple issued). if no license/ID, then must contain either the legal name or the surname and first personal name.
this is what is must be to be “correct” but this is still subject to safe harbor that makes it not seriously misleading
when is a corporation or registered org’s name considered correct in a financing statement?
if the debtor is a registered organization, then the name on financing statement is the name shown on the “public organic records” (this includes the articles of inc or other formation records filed to create a business entity, the record initially filed by a business trust, the legislation that creates an organization, the government-issued charter that forms an organization, etc.). So filing only under the organization’s trade name is insufficient and if statement shows registered name but not trade name, that is fine–it’s only the registered name that matters.
if debtor’s name on financing statement is incorrect, what happens?
normally the financing statement must have the debtor’s legal name and cannot be seriously misleading. otherwise could be voided. however, there is a safe harbor if a search for the correct legal name in the filing office would uncover the misleading financing statement.
