Secured Transactions Flashcards
Definition of a Secured Transaction
Governed by Article 9 of the UCC, a secured transaction is a transaction intended to create a security interest in personal property or fixtures.
Collateral
Property in which the secured interest is created, and it extends to identifiable proceeds from the property
Types of collateral
- Goods - all things that are movable at the time the security interest attaches
- Consumer Goods: used or bought for use primarily for personal, family or household purposes
- Equipment: used or bought for use primarily in business other than inventory
- Farm products: crops or livestock or supplies used or produced in farming operations (unborn chickens).
- Inventory: goods held by a person who holds them for sale or lease or furnished under service contracts. Materials consumed in a business in a short period of time, usually seen in a retail setting (not for repair).
- Semi-intangible
- Tangible
- Proceeds
How to determine the type of collateral
Depends on the primary use to which the debtor puts the collateral at the time the interest attaches.
Semi-intangible collateral
Collateral that is a right evidenced by a writing. For example: (1) chattel paper (note plus security agreement, equipment lease) (2) negotiable instruments (promissory note, check, CD) (3) documents that represent a right to receive payment (bills of lading, receipts). [Don’t Ingest Coke]
Intangible collateral
Collateral that is a right where a writing is not needed
-Examples include (1) accounts receivable (2) non-consumer deposit accounts (3) commercial tort claims (4) general intangibles (software, patent, trademarks, goodwill) (5) investment property (stocks, bonds)
• Account: right to payment for goods, services, etc., not evidenced by an instrument or chattel paper
Proceeds
Any collateral that has changed in form from when it was received. S.i. attaches whether or not specifically stated in agreement. Can go thru several transformations. If the proceeds have been commingled, then use Lowest Intermediate Balance Test (lowest balance in account from time of deposit).
Purchase Money Security Interest (PMSI)
Exists when a creditor sells the goods or advances funds that are used by the debtor to purchase specific goods – must actually be used to purchase goods.
Dual status rule – PMSI remains even if collateral also secures a non-purchase $$ obligation, or other collateral secures purchase $$ obligation (N/A to consumer goods).
On an essay, what steps should you go through to analyze a secured transaction
- Define security interest
- Identify type of collateral
- Determine whether there has been attachment
- Determine whether the s.i. has been perfected
- Determine whether there has been continuation OR
- Determine Priorities
- Determine Default/Remedies
What is required for a valid Attachment
- Valid security agreement
- Debtor possesses ownership rights in the collateral (doesn’t have to be 100% rights in collateral) and
- Creditor extends value to the debtor
These three requirements must co-exist before security interest attaches
Three types of security agreements
- Written
- Possession
- Control
Written security agreement
Must:
(1) be authenticated by the debtor (2) show an intent to create a security interest and (3) must contain a reasonably identifiable description of collateral (“all property” = too generic, but can describe by type). [AIR]
Requirements When Creditor is in Possession of Collateral
Security Agreement need not be in writing. Creditors:(i) have a duty to use reasonable care; (ii) have a right to reimbursement for expenses; (iii) may repledge collateral.
Risk of loss remains with debtor. Creditor must account for profits - either give to debt, or apply against secured obligation.
Control as evidence of Security Agreement
Control:
• Non-consumer deposit accounts – by bank automatically or by putting acct in creditor’s name or instructing bank to comply with secured party’s orders.
• Chattel paper: something that reliably establishes that creditor is assignee of interests.
• Investment property: when creditor takes steps to permit it to sell property w/o further instruction from owner.
Creditor required to account for propfits
Can creditor repledge collateral over which it has control?
Yes
When does Creditor relinquish control
If debtor no longer owes money, creditor within 10 days of demand must relinquish control
Value - for purposes of attachment
Any consideration is sufficient, even past consideration (like a preexisting debt if s.i. is intended as security for preexisting debt); can be a binding obligation to perform. Usually the loan.
Debtor’s rights - for purposes of attachment
Debtor must have rights in collateral; does not matter who holds title.
Default - title passes to buyer on delivery
Can collateral secure a future advance?
A security agreement may provide that collateral secures future advances, whether or not the advances are mandatory, so long as the security agreement specifically includes a future advances clause.
Can a security interest attached to After Acquired Property?
Yes if security agreement contains an after acquired property clause.
Security agreement attaches to proceeds, whether or not the agreement so provides.
With floating inventory (e.g. tv’s at Best Buy), security interest automatically attaches, don’t need to specify in agreement.
Exceptions to After Acquired Property Rule
Does not apply to consumer goods unless the goods are acquired in 10 days.
N/a to commercial tort claims
Consignments
In cases where consignor (manufacturer) consigns goods to consignee (retailer) for sale, the manufacturer must comply with Article 9 if:
- the goods are wirth $1,000 or more
- The consignor did not use the goods for personal, family or household purposes.
- The consignee is not a consignment store or auctioneer, and generally deals in goods of that kind.
Does Article 9 apply to agricultural liens?
Yes
Are insurance payments and claims for damage proceeds?
Yes, up to the value of the collateral, unless it is payable to someone other than the debtor.
How is a security agreement authenticated?
Signed, or, with the present intent to adopt it, attached to or associated with an electronic sound, symbol or process.
Collateral that cannot be described by type alone in a security agreement
-commercial tort claims
-consumer goods
-consumer security accounts
They must be described more specifically.
Perfection -in general
-cannot happen until attachment is completed.
Standard of care a secured party must use in the custody and preservation of collateral in his possession?
Reasonable care
Accessions
An accession is collateral that DOES NOT lose its identity when commingled with other goods (e.g., engine serving as collateral and installed into car).
A s.i. may be created in accession property.
Commingled Goods
Loses its identity when commingled with other goods. S.i. attaches to product that results.
Eg. s.i. in 100 lbs flour becomes cake
Six methods of perfection
- Filing
- Taking possession
- Automatic Perfection
- Control
- Temporary
- Certificate of title
Filing does not apply to
Deposit accounts of $$
Where do you file a financing statement in Florida?
Financing statements must be filed with the Florida Secured Transaction Registry
What does a financing statement contain?
- Debtor’s name (from driver’s license) - name change, must refile the financing statement or collateral is only covered for 4 months
- secured party’s name
- Adequate description of collateral - can be general and say “All assets”
- Filing fee
Minor errors do not invalidate financing statement
Financing statement for real property related collateral
Must indicate that it is also filed in real property records, describe the real property and identify record owner
How long is the financing statement valid?
5 years, except transmitting utilities and real property mortgage covering fixtures, manufactured home
How do you extend the financing statement
File a continuation statement - but must be filed within 6 months before expiration of 1st statement
Does financing statement need to be signed by debtor?
No, but debtor must “authorize” filing in an authenticated record (may not be oral) - authenticating security agreement is enough.
Does financing statement need to mention after acquired property?
No s/l/a description in financing statement is broad enough to cover after acquired property.
Financing statement may not be seriously misleading - how to determine
It is not seriously misleading if it would be discovered in a filing office search under the debtor;s correct name using filling office’s standard search logic.
Can authenticated security agreement be filed instead of financing statement
Yes, s/l/a it contains everything a financing statement needs to contain.
Is there a duty to terminate a financing statement?
Generally, no duty to terminate.
Exceptions:
- if there is no outstanding obligation of debtor, and no future advances, OR
- if debtor did not authorize filing of financing statement, then
secured party must, on DEMAND of the debtor within 20 days, file a termination statement or provide one to debtor.
*If debtor pays debt and then reborrows money, creditor does not need to refile s/l/a they did not terminate the financing statement
How is a security interest perfected in the case of a motor vehicle?
S.i. against user - Notation on title. Neither filing nor possession are effective.
s.i. against dealer - file financing statement
Perfection by possession
May perfect a s.i. in a negotiable instrument, goods, or money.
N/a to accounts receivable, non-negotiable documents or general intangibles
Perfected upon taking possession, or if held by bailee, when bailee authenticates a record acknowledging that it is holding collateral. Can have attachment and perfection at the same time.
Termination of financing statement - consumer goods
creditor must file financing statement w/in one month after the debt is paid, or w/in 20 days of demand.
Perfection by control
Applies to investment property, non-consumer deposit accounts, and electronic chattel paper (so mainly bank, securities)
Automatic Perfection
- Upon attachment of a PMSI in consumer goods (Best Buy,);
- sale of notes or other documents for payment of $$; —small scale assignment of accounts.
- assignment of beneficial interest in decedent’s estate
Temporary Perfection of proceeds
Secured interest in proceeds received from the sale of collateral is effective for 20 days. To remain perfected in those proceeds beyond 20 days the secured party must take new action to perfect its interest (file new financing statement or amend the old one) unless (i) the proceeds are identifiable cash proceeds; (ii) Same Office Rule.
Same Office Rule
where s.i. in original collateral was filed and the proceeds would be filed in the same place, no need to reperfect s/l/a the “proceeds” were not purchased with cash proceeds of the original collateral
Temporary perfection where secured party advances new value
A creditor who advances new value under an authenticated security agreement obtains a 20-day temporary perfection period even if he doesn’t file a financing statement or take control.
Priorities
Determines secured parties’ rights against each other and against third parties
Priority - secured vs. secured
Both unperfected
First to attach has priority
Priority - secured vs. secured
One perfected
Perfected has priority
Priority - secured vs. secured
Both perfected
First to either file or perfect. So if you file first, and the other lien is perfected, you win even if you didn’t perfect.
If collateral is not subject to filing, its first to perfect.
Priority in Investment Property
A security interest perfected by control has priority over a security interest perfected by any other method
Priority for PMSI
Generally has priority over perfected security interests if the PMSI is properly executed
Super Priority for Perfected PMSI in Inventory
A PMSI in inventory collateral has priority over another s.i in the same collateral if the PMSI is perfected at the time the debtor receives the collateral and notice is provided to creditors.
Unperfected PMSI vs. Perfected SI
Perfected S. I. has priority over PMSI
Lien creditor vs. Secured Party
FIRST IN TIME - If a party becomes a lien creditor before a secured party files or perfects, it will have priority. Priority extends to future advances secured before the lien arose, within 45 days of the lien, or without knowledge of the lien.
Super Priority for Perfected PMSI in Goods other than Inventory and Live Stock
PMSI will have superpriority only if it is perfected when debtor receives collateral, or w/in 20 days after debtor receives possession (no notice req’d)
Remember - consumer goods have automatic perfection
Conflicting PMSIs in same collateral
Seller has priority over lender. Otherwise, first party to file or perfect prevails.
Continuation fact pattern - Buyers in the Ordinary course of business - priority
Buyer in ordinary course (from merchant) takes free of security interest even if he knows of s.i. , (no good faith req’t)
- unless buyer knows that the sale violates the terms of the security agreement
- only protects buyer where SELLER is the one that created the security interest.
Bank has s.i. in Mary’s ring. Mary sells ring to jeweler. Jeweler takes subject to s.i., Jeweler sells to John, John takes subject to security interest - he is not a BIOC.
*buying a boat from the marina**
Priority in Proceeds
A perfected s.i. in proceeds will have the same date of priority as the s.i. in the collateral (s/l/a s.i. remains perfected).
Fixture S.I. vs. Real Property S. I. - when a fixture s.i. is not valid against real property
A s.i. in fixtures is generally not valid against someone with a conflicting real property interest unless:
- s.i. was perfected by making a fixture filing and
- real property interest arose after either goods were affixed to property or s.i. was perfected, whichever occurred later.
Continuation fact pattern - Consumers Buying From Consumers - priority
A buyer of consumer goods takes free of a security interest, even if perfected, if the buyer buys
-without knowledge of security interest;
-for value
-primarily for personal, family or household purposes and
-before the filing of a financing statement covering the goods.
Remember a PMSI in consumer goods perfects automatically - no filing
** Tom buys computer from best buy and then sells it to John.
Shelter Principle
Buyer in the Ordinary Course may sell purchase collateral to a third party free of the secured party’s interest
When does a Fixture S.I. have Priority over S.I. In Real Property
A perfected security interest in fixtures has priority when:
- The perfect s.i. was perfected pursuant to Florida’s certificate of title law (mobile home);
- The s.i. was created in a manufactured home transaction; or
- The party with the real property interested consented or disclaimed.
Secured Party’s Rights on Default
- Right to Repossess
- Right to Dispose of Collateral
- Right to Collect Directly
- Reight to retain collateral
Right to Repossess
After default the secured party is entitled to take possession of the collateral without judicial process if
this can be done without “breach of the peace.” Alternatively, the secured party can get sheriff to levy the property (replevin)
Resale of collateral
after default, the secured party may sell, lease, or license the collateral to satisfy the debt. The secured party must give notice IN WRITING to the debtor, other creditors, and any sureties within a reasonable time (10 days in nonconsumer transaction) before the sale. Every aspect of the sale must be commercially reasonable.
o If the secured party fails to comply with resale requirements, they forfeit their right to a deficiency judgment.
Retention of Collateral
Debtor consents to full strict foreclosure if he fails to make an authenticated objection within 30 days after the secured party sends the notice.
In consumer transactions, this notice must state that the debtor will be deemed to have consented if he does not object.
Debtor’s Right to Redeem
Any time before secured party has resold collateral or entered into sales contract, or the obligation
has been discharged by the secured party’s retention of the collateral
o Note: need to also satisfy acceleration if applicable, and pay costs of repossession, including reasonable attorneys fees.
Secured Party’s Right to Collect Directly
Upon default, secured party has the right to collect directly from the debtor. Send an authenticated notification to the account debtor (the person who owes the debtor on the account). Secured party must send authenticated notification to the account debtor informing them that the amount due has been assigned to them and that payment should be made directly to the assignee. Upon receipt of proper notification, the account debtor may discharge its payment obligation ONLY by payment to the assignee
What are debtor’s rights if Secured Party Makes a Non-complying disposition of collateral?
Debtor may recover:
- actual damages (put him in position he would have been in had no violation occurred)
- statutory damages
- judicially mandated disposition of collateral - redeem collateral, enjoin, conduct public sale
Statutory Damages
consumer goods - minimum is credit loan interest amount plus 10% of loan’s principal amount
$500 per statutory violation
What happens to Surplus/Deficiency after Disposition of Collateral
Surplus - paid to debtor
Deficiency - obligor is liable.
Rebuttable Presumption Rule
If secured party violates Article 9 default rules, the value of the collateral is presumed to equal the amount of the debt unless the secured party proves otherwise.
When is perfection complete?
At the later of filing or attachment
General Rule of Continuation
A PERFECTED security interest will continue even if collateral is sold to buyer unless an exception applies
Continuation rules when s.i. is not perfected - how can a buyer take free of the unperfected s.i.
A buyer takes free of unperfected s.i. if buyer:
- gives value;
- receives delivery of the collateral and
- takes without knowledge of the s.i.
Exceptions to general rule of continuation
- Buyer in Ordinary Courts of Business
- Consumer to consumer
- Secured party consents
Grace period for PMSI when buyer purchases collateral
If secured party ATTACHES a PMSI before buyer w/o knowledge pays value and receives delivery, he will have priority if she FILES financing statement w/in 20 days after debtor receives collateral
Priority between secured party and HIDC
HIDC always wins
