Secured Transactions Flashcards
What are secured transactions/what is this essay topic about?
Secured transactions involve credit transactions, usually when the debtor buys something on credit from another party but does not pay immediately. To ensure payment, creditor takes a security interest in specific personal property of the debtor.
See Article 9.
What are a potential creditor’s options?
A potential creditor can outright refuse to lend money or goods/services on credit, obtain the promise to pay (unsecured or general), obtain surety, or obtain collateral (property).
How should secured transactions essays be approached (6 steps)?
- Is the transaction within Article 9?
- What’s the collateral at issue?
- Is there a security interest and has it been attached?
- Has the security interest been perfected?
- Who is making claims to the collateral?
- Apply proper priority rules and rules regarding default and repossession.
What transactions are within the scope of Article 9?
(a) contractual security interests, aka interests in personal property or fixtures that secure payment or performance of an obligation
(b) sales of accounts, chattel papers, payment intangibles, and promissory notes
(c) commercial consignments of goods at least $1,000 to people who (i) deal in goods of that kind in a name other than consignor’s, (ii) aren’t auctioneers, and (iii) aren’t generally known by their creditors to be substantially engaged in selling the goods to others
(d) agricultural liens (perfection + priority covered), which include non-possessory liens on farm products
(e) disguised sales/aka not true leases
(f) seller’s retention of title to delivered goods (treated as security interest for price)
How does a purchase money security interest (PMSI) arise?
It arises when either:
(i) creditor sells the goods to debtor on credit, retaining a security interest in goods for purchase price or
(ii) creditor advances debtor the funds used to buy goods and creditor takes a security interest in the goods
How do non-consumer purchase money security interest (PMSIs) retain their status as PMSIs?
Non-consumer PMSIs do not lost their status as PMSIs if:
(a) security interest is secured by property that was not purchased with loan $ or credit;
(b) collateral secures advances that were not made for purchase of the collateral; OR
(c) PMSI has been refinanced, consolidated, etc.
How is collateral classified, broadly?
- Tangible collateral
(a) consumer goods
(b) inventory
(c) farm products
(d) equipment - Intangible or Semi-Intangible Goods
(a) instruments
(b) documents
(c) chattel paper
(d) accounts
(e) deposit accounts
(f) investment property
(g) commercial tort claims
(h) general intangibles - Proceeds
What are the classifications of tangible collateral?
After determining that this concerns Article 9, determine what type of collateral is at issue. Of tangible collateral, there are:
(a) consumer goods = personal, family, or household purposes
(b) inventory = held for sale or lease in ordinary course of business, raw material and work in progress, or consumed materials (used in process of doing business)
(c) farm products = crops and livestock; must be in possession of farmer engaged in farming operations AND in an unmanufactured condition
(d) equipment = for business purposes, whether it is a firm or government. Default category.
T/F: Any particular item can only be one type of collateral.
True. But a creditor will likely protect against multiple types of collateral in case there is possible confusion as to what category the item be in from debtor’s possession.
Standing tinder (trees), growing crops, and unborn young of animals are what type of collateral?
These collateral are considered goods, likely all would fall under farm products.
What is excluded from Article 9?
- rights governed by federal law
- real property (except fixtures)
- tort claims (except commercial tort claims)
- deposit accounts in consumer transactions
- statutory liens (e.g. MMLs)
- wage assignments
What are the classifications of intangible collateral?
After determining that this concerns Article 9, determine what type of collateral is at issue. Of intangible collateral, there are:
(a) instruments: notes, drafts, and negotiable certificates of deposit; $
(b) documents: written or electronic representation of goods (documents of title), like warehouse receipts, bill of lading (goods in transit)
(c) chattel paper: writing shows monetary obligation (e.g. promissory note) + security interest in or lease of goods (e.g. written security agreement)
(d) accounts: any right to payment of $ for goods sold or leased for services rendered not evidenced by instrument or chattel paper. Typically, accounts receivable of a business.
(e) deposit accounts: non-consumer only OR consumer deposit accounts that are claimed as proceeds of other collateral
(f) investment property: stocks, bonds, mutual funds, etc.
(g) commercial tort claims: claims that do not involve personal injury
(h) general intangibles = other types of personal property like IP rights
How are proceeds classified?
Proceeds are a type of collateral and are whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.
Which of the following collateral is consumer goods?
A - A razor kept at an office for grooming prior to business meetings.
B - A razor sold at a store.
C - A razor kept at home.
D - A sharp tool on a farm used to harvest corn.
A razor kept at home is considered to be a consumer good because it is used for personal, family, or household purposes.
If a debtor maintains razor in his or her office for business purposes, it is equipment. If a debtor opens a store and puts the razor in stock to sell, it is considered inventory. Supplies used or produced in farming operations are considered farm products. The category into which the collateral is placed depends on the primary use of that collateral.
T/F: A pre-existing debt is sufficient in certain instances to create the value required for the attachment of a security interest.
True. Value must be given by the secured party before a security agreement will be effective to create a secured interest. Any consideration sufficient to support a simple contract will suffice. Pre-existing debt normally is not consideration, but it is considered to be value given if the security interest is intended as security for the pre-existing debt.
At which point does a security interest attach?
(1) when secured party or creditor gives value or consideration;
(2) when the parties create a security agreement; and
(3) when the debtor has rights in the collateral.
What is a floating lien?
The security interest will attach to the after-acquired property as soon as debtor acquires an interest in the property. Such an interest may be created only by specifically including an after-acquired property clause, such as “this agreement is secured by the debtor’s inventory now owned and after-acquired.”
Any transaction which is intended to create a security interest in personal property or a fixture is considered a collaterized transaction. If the property used as collateral is to be acquired with a loan, it is then considered to be a purchase-money security interest (PMSI).
Within which time period must a secured party refile a financing statement in the event of a debtor name change, to perfect their secured interest in debtor’s after-acquired collateral?
4 months. Perfection of a secured interest may be achieved by filing a financing statement. Financing statements are indexed under the debtor’s name, and the statement must not contain seriously misleading errors, such as an incorrect name.
If the debtor’s name as indicated on a filed financing statement becomes insufficient, such as due to the debtor’s name change, the financing statement is effective only against collateral acquired by the debtor before the name became insufficient and within 4 months after. The secured party must refile using the debtor’s new and correct name to perfect a security interest in collateral acquired after the 4-month period.
T/F: The description of the collateral in a financing statement, however, may be broader in terms than the security agreement, and may include descriptions such as “all assets” or “all of debtor’s personal property.”
True.
Security interests in which of the following collateral may NOT be perfected by possession?
A - Consumer Goods.
B - Inventory.
C - Electronic documents.
D - Equipment.
Electronic documents cannot be perfected by possession. Accounts, deposit accounts, non-negotiable documents, electronic documents, and general intangibles cannot be perfected by possession.
How are security interests in money perfected?
Perfected by possession. Security interests in money, other than proceeds, can be perfected only by taking possession. Perfection by any other method is ineffective and loss of possession equates to loss of perfection.
T/F: A purchase money security interest (PMSI) in consumer goods is perfected as soon as it attaches.
True.
T/F: A perfected creditor always prevails over an unperfected creditor.
True.
T/F: Priority goes to whichever party first filed or first perfected.
True.
Within which time period must a Purchase Money Security Interest (“PMSI”) creditor in goods, other than inventory or livestock, perfect her security interest once the debtor takes possession of the collateral?
20 days
Which statement correctly categorizes the collateral described?
A - TVs in the debtor’s office lobby are consumer goods.
B - Eggs at the debtor’s poultry farm are inventory.
C - Computer terminals in the debtor’s Internet café are equipment.
D - Bags of manure sold by the debtor’s agricultural supply depot are farm products.
C. Computer terminals in the Debtor’s Internet cafe are equipment.
Equipment is goods that are not consumer goods, farm products, or inventory, e.g., durable goods used in business or paintings on an office wall. TVs and computer terminals are equipment.
Consumer products are goods bought for personal, family, or household purposes.
Farm products are crops, livestock, un-manufactured products of livestock, e.g., eggs, and supplies used or produced in farming operations or in the possession of or used by a farmer. Here, the eggs fall under this.
Inventory includes goods held for sale or lease, goods furnished under a contract of service, supplies used in manufacturing, materials consumed in a business, and work in progress. Bags of manure are inventory.
What is attachment?
Attachment is the process by which a security interest is created and becomes enforceable against a debtor.
Three elements: V(alue), C(contract - security agmt), and R(ights)
After determining that the transaction falls under Article 9 and classifying the collateral at issue, you should determine if there is a security interest (attachment has occurred). Then you would look to see if the security interest has been perfected, who is making claims on the collateral, and apply the proper priority rules and rules regarding default and repossession.
What are the elements of attachment?
V: value has been given; lending $ or goods on credit
C: contract (security agreement is agreed to orally, an authenticated record, or demonstrated by control)
R: rights in collateral
What is a security agreement?
A security agreement is a contract between the debtor and creditor, and gives the creditor a security interest in the collateral. For attachment to occur, there must also be value given and rights in the collateral.
A security agreement can be oral, an authenticated record, or demonstrated by control.
Can a security agreement be oral?
Yes, but only if the collateral is in the creditor’s possession. This is referred to as a pledge.
What is an authenticated record?
An authenticated record is a written or electronic record (signed or marked electronically) with present intent to identify the debtor and adopt the agreement. The description must reasonably identify the property and make clear what property the creditor can repossess.
T/F: Consumer goods and commercial tort claims cannot be described by type alone; the description in the authenticated record must be more specific.
True.
Can a security agreement be demonstrated by control?
Yes, if the collateral is non-consumer deposit accounts, electronic chattel paper, or investment properties.
Control means that the creditor has the right to sell or cash in the collateral without debtor’s input.
Can a debtor use new property as collateral for an old loan?
Yes, this is referred to as a floating lien and is very common with inventory. The debtor can agree that new acquisitions of property will serve as additional collateral for an old loan.
Bank loaned Store $50,000 and took a security interest in Store’s inventory. The parties signed a security agreement which described the collateral as “all inventory now owned and after-acquired.”
Has the inventory been attached?
Bank’s security interest will not attach until Store actually buys the inventory. Until then, the security interest cannot attach because Store, the debtor, will not have any rights in the collateral.
Attachment requires: value given (in current inventory), contract (security agreement signed), but there are no rights in the not-yet-acquired inventory.
Loan Co. loaned Consumer $5,000 and made her sign a security agreement giving Loan Co. a security interest in Consumer’s TVs “now owned or after-acquired.” A month later, Consumer purchased a big screen TV with their income tax refund.
If Consumer fails to make a payment on the loan, can Loan Co. repossess the new TV?
No. The security interest has not attached because the new TV was not acquired by the Consumer within 10 days after the loan. This is a consumer good exception - limits creditor from giving value after 10 days.
T/F: After-acquired property clauses will apply to commercial tort claims.
False. After-acquired property clauses do not apply to commercial tort claims.
What is a line of credit arrangement?
The debtor agrees that the collateral will serve as collateral for new loans, as well as the current loan.
Is having rights in collateral the same as having title to the collateral?
No. Having title to goods matters only for consignments. For attachment, a limited right in collateral (e.g. right to possession) is sufficient.
A credit can obtain control over what kind of collateral?
- non-consumer deposit accounts
- electronic chattel paper
- electronic documents
- investment property
Control means that the creditor has the right to sell or cash in the collateral without debtor’s input. This can evidence the “contract” (security agreement) element of VCR needed for attachment.
