Secured Transactions Flashcards
What is a secured transaction?
A transaction between a debtor and a creditor with a “security interest,” i.e. property of the debtor claimable by the creditor if the debtor defaults
Which part of the Uniform Commercial Code governs secured transactions?
Article 9 – it applies to any transaction intended to create a security interest, whether the collateral is tangible or intangible
To what transactions does UCC Article 9 NOT apply?
Transactions involving real estate, timber and minerals which are not contracted to be removed from their land, employee wages/salary, insurance policies, and others
What is a BOC?
Buyer in the Ordinary Course of Business – a buyer who purchases an item in good faith from someone whose ordinary business involves selling such items
What counts as tangible collateral?
Goods which are movable at the time of attachment or which are fixtures
Classified according to use (e.g. equipment, consumer goods)
What are pure intangibles for collateral?
Rights to receive property (e.g. accounts receivable, payment streams), general intangibles (e.g. goodwill, patents, copyrights)
What are documentary intangibles for collateral?
Property where the ownership rights are embodied in writing (e.g. negotiable instruments, securities, documents of title)
What is chattel paper?
A documentary intangible which represents both a monetary obligation (usually as a negotiable instrument) and a security interest
What can the debtor request of the creditor to keep track of his debt?
An accounting of the unpaid debt and the related collateral
A creditor must fulfill this request for free once every six months during the course of the debt
What is a financing statement?
A document filed by a creditor outlining the arrangement between him and the debtor
Must contain description of collateral and debtor’s signature
What are fixtures?
Goods fixed to real estate, categorized as real property
Excludes building materials used for an improvement on the land
What are accessions?
Related to fixtures, accessions are personal property which are installed to become a part of real property (or other personal property)
What is attachment?
When a security interest becomes enforceable against the debtor
What are the three requirements for attachment to occur?
(1) Secured party (creditor) gives value
(2) Debtor has rights in the collateral
(3) Either (a) debtor and creditor create a security agreement, signed by the debtor (or “authenticated,” if electronic), or (b) the creditor possesses the collateral
What is a purchase money security interest (PMSI)?
Collateral for a debt, the funds of which were used to purchase the collateral item itself
E.g. if a debtor borrows from a bank to buy a machine, and uses that machine as collateral for the loan
Is it possible to have future property serve as collateral?
Yes – this would be an “after-acquired interest”; e.g. a debtor can say that certain accounts receivable which arise in the future will be collateral
The security interest will not attach until the property comes into existence, however
Are there limits to after-acquired security interests?
Yes: after-acquired interests generally cannot attach to consumer goods, unless those goods are accessions
Exception: if the debtor acquires the goods within 10 days after receiving value from the creditor, then it is fine
What are future advances?
Value given by the creditor in the future though secured by present collateral
If a debtor is in possession of the collateral, can he sell it to someone else?
Yes, so long as the signed security agreement does not prohibit doing so
Does the creditor retain an interest in the collateral if the debtor sells it?
Yes, unless the sale was authorized in the security agreement, or if it was made to a BOC
How do proceeds from the sale of collateral affect the creditor’s security interest?
Unless the security agreement says otherwise, the creditor retains an interest in the proceeds from the sale of collateral, including any later sales of the proceeds themselves
If a creditor is in possession of collateral and does not show reasonable care in holding and preserving it, does he lose his security interest?
No, although he is liable for any harm caused
If a creditor is in possession of collateral, for what types of expenses is the debtor still responsible?
(a) reimbursing creditor for reasonable expenses to hold and maintain it
(b) paying for accidental loss (insofar as creditor’s insurance doesn’t)
If a creditor is in possession of collateral, can he use it as collateral to a different creditor?
Yes, so long as he does not hurt the debtor’s right to redeem it
What is the perfection of a security interest?
The publicly available proof that the creditor has interest in the collateral
Very important for placing a creditor’s interest in collateral higher than others
What are three ways a security interest can be perfected?
(1) filing a financing statement
(2) creditor taking possession of collateral
(3) automatically by law
What is field warehousing?
Collateral is placed on the property of the debtor under the supervision of an independent warehouseman
What is the main risk of field warehousing?
The risk that the debtor fraudulently misrepresents the collateral
Safeguards: segregating the collateral, warehouseman should have clear control and be independent
What is the most common way to perfect security interests?
Filing a financing statement – must be done with a filing officer, often a recorder of deeds
How do filing requirements differ for a purchase money secured creditor?
He has 20 extra days to file the financing statement, and when he files, the date of the purchase becomes the effective date of filing
Which collateral is required to be perfected by filing?
Pure intangibles
Almost all other collateral can be perfected by filing
How long does a financing statement keep a security interest perfected?
Five years, though it can be renewed
How can a financing statement filing be renewed?
By filing a continuation statement – filed at the same place as the financing statement, and within six months of the expiration date for the five years
What is a termination statement?
Statement that the creditor no longer has a security interest – if the debtor demands it, the creditor must send this to the debtor and to the filing officer(s) after the debt is discharged
How is the jurisdiction for the filing location of a financing statement determined?
By the location of the debtor (not the creditor or the collateral) – where “location” = place of residence, not business
For filing purposes, what is the jurisdiction if the debtor is a company or resides outside the U.S.?
If a company (e.g. corporation), jurisdiction is the state of organization
If the debtor’s location is outside the U.S., the location is deemed to be the District of Columbia
What must be included in a financing statement?
(1) debtor’s name and mailing address
(2) creditor’s name and mailing address
(3) description of collateral
(4) debtor’s signature (this can be waived if the debtor is unavailable or if there are multiple filings)
What is a main way in which perfection by possession differs from perfection by filing?
Perfection by possession does not require a security agreement
Which collateral is required to be perfected by possession?
Money, instruments (negotiable or not), nonnegotiable documents of title
Which collateral can be perfected by possession or by filing?
(1) goods
(2) chattel paper
(3) letters and advances of credit
(4) negotiable documents of title
When automatic perfection occurs for a security interest, at what point does it occur?
At the point of attachment
What are different reasons why a security interest might be automatically perfected?
(1) to give the creditor time to take possession of the collateral
(2) to retain perfection if the creditor must give collateral into the debtor’s possession
(3) to retain perfection for collateral that is the proceeds of perfected collateral
(4) if the creditor has a purchase money security interest (PMSI) in consumer goods
(5) if the creditor gains an interest in an insignificant amount of the debtor’s accounts receivable on an infrequent basis
How does automatic perfection work to give the creditor time to take possession of the collateral?
A security interest in instruments or negotiable documents of title becomes perfected (upon attachment) for 20 days
How does automatic perfection work if the creditor must give collateral into the debtor’s possession?
Perfection lasts for 20 days, and is subject to these conditions:
- if the collateral is an instrument, it had to be given to the debtor for sale, presentment for payment (as a negotiable instrument), or collection
- if the collateral is a document of title, it had to be given for sale, transshipment, or manufacturing
How does automatic perfection work to retain perfection for collateral that is the proceeds of already-perfected collateral?
Grants the creditor 20 days to fully protect (i.e. perfect) the collateral which is the proceeds of perfected collateral
If filing a financing statement for the proceeds, the creditor does not need to mention “proceeds” unless they are substantially different from the original collateral, or not identifiable with it, or filed in a separate place
How does automatic perfection work if the creditor has a PMSI in consumer goods?
He automatically acquires permanent perfection, subject to these conditions:
- doesn’t apply if the collateral is controlled by a title statute (e.g. a car)
- doesn’t apply at the point the good becomes a fixture
- the creditor’s claim to the collateral is not good against a BFP, unless he has filed a financing statement for the collateral
How does automatic perfection work if the creditor gains an interest in an insignificant amount of the debtor’s accounts receivable on an infrequent basis?
He automatically acquires permanent perfection – again, so long as the creditor is not assigned the debtor’s accounts on a frequent basis
What is the UCC’s purpose concerning priority among creditors’ claims?
To have a balance between creditors’ secured interests and the free flow of goods in the market
Covered in UCC Article 9 (the details of which are all in the previous cards)
Who are different parties that can compete for a debtor’s property?
Unsecured creditors, purchasers of collateral (either in the ordinary course of business, or not), secured creditors, lien creditors
How does an Article 9 creditor’s claim compare with an unsecured creditor’s?
Even if unperfected, the Article 9 creditor’s security interest would give him a better claim to that particular collateral than any unsecured creditor
How does an Article 9 creditor’s claim compare with a BOC’s?
Generally, even if it is perfected, and even if the BOC is aware of the Article 9 creditor’s claim, the BOC has a superior claim to that collateral
Remember, a BOC is one who has purchased the collateral from the debtor in the ordinary course of business
When does an Article 9 creditor’s claim surpass a BOC’s?
If the BOC knows the collateralized goods should not be sold (e.g. if the goods are stolen), or if he is a BOC of farm products
How does an unperfected Article 9 security interest fare against (1) a buyer who is not in the ordinary course of business, (2) a bulk transferee, or (3) a BOC of farm products?
The other party prevails if the buyer:
(a) gives value for the collateral,
(b) takes delivery of it (if tangible), and
(c) is ignorant of the security interest
How does a perfected Article 9 security interest fare against a buyer who is not in the ordinary course of business?
His claim is generally superior, with a few exceptions
How could two Article 9 creditors compete for the same collateral without fraud on the debtor’s part?
If the debtor gives a secured interest to one creditor for a certain amount (e.g. $500,000 in inventory) and another to another creditor (e.g. $450,000 in inventory), and then the total amount of collateralized goods reduces (e.g. below $950,000), then the legitimate creditors will compete for the collateral
What is the general rule for two Article 9 creditors competing for the same collateral?
A perfected interest prevails over an unperfected one
If both are perfected, then whoever perfected first; if both are unperfected, then whoever had attachment first
What is the general rule for resolving Article 9 creditors’ and lien creditors’ claims?
First in time prevails
How does an unperfected Article 9 security interest fare against an owner of real estate to which the collateral is affixed?
The Article 9 interest generally loses unless:
- the owner has consented in writing to the interest or disclaimed his own interest, OR
- the debtor has the right to remove the collateralized goods
How does a perfected Article 9 security interest fare against an owner of real estate to which the collateral is affixed?
The Article 9 interest generally wins if:
- the security interest is perfected by filing before the owner’s interest is recorded, AND
- it is a PMSI perfected by filing in real estate records within 20 days of the goods becoming fixtures
How does an unperfected Article 9 security interest fare against someone who owns personal property to which the collateral is affixed?
The Article 9 interest generally wins if the interest exists before the property becomes affixed and if the owner presently has a claim to the whole property
How does a perfected Article 9 security interest fare against someone who owns personal property to which the collateral is affixed?
The Article 9 interest generally wins, whether over current or later owners of the personal property
Does a secured creditor require judicial process to seize collateral?
No, not if seizure can be done without breaching the peace
If a secured creditor with a perfected interest acquires a lien by submitting his collateral claim to judgment, what is the effective date of that lien?
The same date for the perfection of the interest
What is the debtor’s right to redeem collateral?
If the collateral has been taken by the creditor but not yet been disposed, the debtor can redeem it by fulfilling all the relevant duties and paying the relevant expenses (e.g. legal expenses)
If a creditor sells collateral after the debtor defaults, how should the proceeds be applied?
(1) to the expenses of the creditor in holding and selling the collateral
(2) to the debtor’s debt
(3) to satisfy the debtor’s debt to another creditor upon the same collateral
Under what circumstances does a creditor need to apply collateral proceeds to a subordinate creditor’s claim on the same collateral?
If that creditor provides written notice of demand before the proceeds are applied
Is the debtor always entitled to surplus from collateral proceeds and liable to repay any shortage?
Not necessarily – for sales of accounts and chattel paper, the security agreement must provide that he is so entitled or liable
When selling collateral, what must the creditor tell the debtor?
The time and place for a public sale, time for a private sale
Must also tell other secured creditors (who have given written notice)
What is the special rule for selling collateral under a PMSI?
If the debtor has paid 60% of the cash price, the creditor must sell the collateral within 90 days after obtaining it
Also applies for a loan with a secured interest in consumer goods
Is a secured creditor required to sell the secured collateral?
No, he can simply retain it to satisfy the debtor’s obligations – though he needs to notify the debtor and any other secured creditors (who have notified him)
What happens if a secured creditor wishes to keep the collateral, but other secured creditors object?
If they object within 20 days, the creditor must sell the collateral
