Secured Transactions Flashcards
Scope and Mechanics of UCC Article 9 (66%)
a) Article 9 of the UCC applies to ANY transaction intended to create a security interest in personal property or fixtures (not mortgages on real property). A security interest gives a creditor the right to sell a debtor’s property in order to satisfy a debt.
b) Generally, in an Article 9 transaction, personal property or fixtures secure the payment of a debt or insure performance of a contract obligation with the property serving as collateral.
c) There are three main parties to an Article 9 transaction:
(1) Secured Party. The secured party is the creditor who possesses the benefit of
(2) Debtor. The debtor is the party who has an ownership interest or other sufficient interest in the personal property securing the obligation.
(3) Obligor. The obligor is the party held responsible for the underlying obligation (usually also the debtor, but could be a type of guarantor).
Article 9: Collateral (12%)
Collateral refers to the property in which a security interest is created, and it extends to identifiable proceeds from the property that serves as collateral. Article 9 defines different types of collateral as follows:
(1) Goods. Goods are all things that are movable when a security interest attaches. (2) Consumer Goods. Consumer goods are goods that are used mainly for personal, family, or household purposes. (3) Inventory. Inventory includes goods that are kept by a person for sale or lease (does not include goods that are only being held for repair). (4) Accounts. A security interest in a debtor’s “accounts” covers any right to payment of a monetary obligation, whether or not earned by performance, for property that has been or is to be sold (i.e., accounts receivable). A secured party can collect directly from the person who owes the debtor if the debtor defaults.
Attachment of a Security Interest (50%)
Attachment is essentially how a security interest is created. Once a security interest attaches, it becomes enforceable. A valid attachment requires that:
(1) There is a valid security agreement memorializing the security interest;
(a) Generally, the debtor must authenticate the security agreement by providing the creditor with a reasonable description of the collateral in writing. Signature, thumbprint, initials, mechanical reproductions, etc., are all adequate proof of authentication so long as the debtor possessed the intent to authenticate the writing.
(2) The debtor possesses rights in collateral; AND
(a) The debtor must have rights in collateral beyond mere possession, however the debtor need not possess good title to the property (e.g., the debtor may be a lessee of the property).
(3) The creditor extends value to the debtor (almost any consideration will suffice).
Methods of Perfecting a Security Interest (50%)
a) Once the security interest attaches, it is enforceable. Perfection of the interest only enhances the secured party’s rights to the property serving as collateral (e.g., a perfected interest will obtain priority in a bankruptcy proceeding). However, if the security interest does not attach, then it CANNOT be perfected no matter what the creditor does.
b) Generally, there are three different methods in which a security interest may be perfected:
(1) Filing. The filing of a “financing statement” or the security agreement with the state is the primary method of perfection. The filing MUST be filed by an authorized party (authorization is presumed by the debtor’s authentication of the security agreement). Minor errors will not invalidate the financing statement unless the error makes it seriously misleading. The filing must contain:
(a) The debtor’s name;
(i) If the debtor is a registered organization, the financing statement must provide the official registered name of the organization.
(b) The secured party’s name;
(c) An adequate description of the collateral; AND
(d) The filing fee.
(2) Taking Possession. A secured party may perfect a security interest in negotiable documents, goods, instruments, or money by taking mere possession of such items.
(3) Automatic Perfection. The following security interests are perfected automatically when they attach:
(a) A purchase-money security interest in consumer goods; AND
(b) An assignment of accounts which does NOT by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts.
Priorities: Perfected vs. Unperfected Interests (20%)
A perfected security interest has priority over a conflicting unperfected security interest in the same collateral (even if the unperfected interest is a purchase-money security interest in inventory).
Priorities: Multiple Perfected Creditors (20%)
a) Between multiple perfected creditors, the first to file obtains priority (even if a party files before they perfect for priority purposes).
b) Some collateral is not subject to the state filing system or cannot otherwise be filed. In these instances, the first to perfect obtains priority.
c) Generally, knowledge of a prior unperfected interest will not prevent a potential secured party from filing first to obtain priority.
Exception to Priority Rules: Buyers in the Ordinary Course of Business (18%)
a) Buyers in the ordinary course of business are protected even though their interest in the property is created after the attachment or perfection of a security interest. Buyers in the ordinary course of business take the collateral free of the security interest created by the seller. A buyer in the ordinary course of business is a person who:
(1) In good faith and without knowledge that the sale to him is in violation of the security interest of a third party;
(2) Buys in the ordinary course from a person in the business of selling goods of that kind.
b) Shelter Principle. The protected buyer may sell the purchased collateral to a third-party free of the secured party’s security interest.
Exception to Priority Rules: Purchase-Money Security Interest (22%)
a) Generally, PMSIs have priority over prior perfected security interests if the PMSI is properly executed. A PMSI is either:
(1) A security interest held by the seller of collateral to secure payment of all or part of the price; OR
(2) A security interest of a person that gives value to a debtor so that the debtor may acquire rights in or the use of collateral.
b) Inventory. A PMSI in inventory collateral has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time the debtor receives possession and notice is provided to prior creditors. However, an unperfected PMSI in inventory will NOT have priority over a perfected security interest in the same collateral.
c) Non-Inventory. A PMSI in non-inventory collateral (e.g., regular goods) has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time the debtor receives possession of the collateral or within 20 days thereafter (i.e., the creditor has a 20-day grace period to file upon receipt of the collateral).
d) Consumer Goods. Remember, a PMSI in consumer goods perfects automatically upon attachment (no filing required).
Default
Secured party’s Rights: Right to Dispose of Collateral (10%)
a) Upon default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or in any commercially reasonable manner.
b) Sale (Non-Judicial Foreclosure). Upon default, a secured party may dispose of collateral in its possession by way of a sale so long as it is commercially reasonable as to method, manner, time, place, and terms. Article 9 requires the secured party to send reasonable notification of the time and place of any public sale to the debtor and any secondary obligor in a timely manner such that the debtor and any secondary obligor have sufficient time to take appropriate steps to protect their interests (e.g., by taking part in the sale).
c) Strict Foreclosure (Purchase Rules). Unless otherwise agreed, a secured party may purchase the collateral at a public or private sale ONLY IF the collateral is of a kind that is customarily sold on a recognized market (e.g., stock market) or the subject of widely distributed standard price quotations.
Default
Debtor’s Rights: Non-Complying Disposition of Collateral (10%)
When a creditor makes a non-complying disposition of collateral under Article 9, the debtor can:
(1) Recover actual damages;
(a) Actual damages are those reasonably calculated to put an eligible claimant in the position that it would have occupied had no violation occurred.
(2) Recover statutory damages; OR
(a) If the collateral involved is consumer goods, the amount of minimum statutory damages must be at least: the credit loan interest amount + 10% of the loan’s principal amount.
(b) $500 in statutory damages is also recoverable for each violation of certain Article 9 provisions.
(3) Be subject to judicially mandated disposition of the collateral.
(a) If the creditor is attempting to improperly dispose of collateral, a court may order or restrain collection, enforcement, or disposition of the collateral on appropriate terms and conditions (e.g., the court could order the creditor to allow the debtor to redeem the collateral, conduct a public sale, etc.).
Default
Debtor’s Rights: Non-Complying Disposition of Collateral (10%)
a) Generally, when a secured party sells or disposes of collateral, the amount collected varies from the amount of the obligation. If the sale brings in MORE than the underlying obligation, the secured party must pay the debtor for any surplus. Conversely, when the sale brings in LESS than the underlying obligation, the obligor is liable for any deficiency. However, neither side is liable for any surplus or deficiency if the underlying transaction involves the sale of accounts, chattel paper, payment intangibles, or promissory notes.
b) Article 9 does not expressly address the right of a creditor to recover any deficiency in a consumer goods transaction after violating Article 9. Different jurisdictions have adopted the following two rules to address this issue:
(1) Absolute Defense. Some jurisdictions deny the secured creditor ANY deficiency if they violate Article 9.
(2) Rebuttable Presumption Rule. In some jurisdictions, if the secured creditor violates Article 9, it is presumed that the proceeds from the disposition (i.e., sale) are equal to the debt owed. In order to rebut, the secured creditor then has the burden to show that even at a complying disposition, the collateral is worth less than the amount owed by the debtor.
(a) For non-consumer goods transactions, Article 9 expressly applies the rebuttable presumption rule.
