Secured Transactions Flashcards
What does Article 9 of the UCC govern?
Any transaction, regardless of its form, that creates a security interest.
Substance over form controls (how the parties classify the transaction is immaterial).
Priority: HIGH
When is a transaction labeled a “Lease” deemed a security interest?
1) If a commitment to make payments for a term exists;
AND
2) Either:
a. The original lease term is greater or equal to the
remaining economic life of the goods;
b. The lessee renews the lease for the remaining life
of the goods; OR
c. The lessee has an option to renew or become the
owner for no additional consideration.
Priority: HIGH
Collateral
What is an Account?
A right to payment arising from:
a) Property that has been sold, leased, or disposed of;
b) Services rendered;
c) A policy of insurance issued;
d) A secondary obligation incurred;
e) Energyprovided;
f) The use/hire of a vessel under charter/contract;
g) A debt from a credit card; OR
h) Winnings in a lottery.
Priority: HIGH
Collateral
What is a Deposit Account?
A demand, time, savings, or similar account maintained with a bank.
Does NOT include investment property or accounts evidenced by an instrument.
Priority: Low
Collateral
What does Inventory mean?
Goods which are:
a) Leased by a person as lessor;
b) Held by a person for sale/lease;
c) Givenbyapersonundercontractofservice;OR
d) Consist of raw materials, work in process, or materials
used/consumed in a business.
Does NOT include: Farm products or Goods being held for repair.
Priority: HIGH
Collateral
What does Equipment mean?
Goods other than inventory, farm products, or consumer goods. Goods = all things that are movable when a security interest
attaches.
Priority: HIGH
Collateral
What is a “Certificate-of-Title” Statute?
It requires the security interest to be noted on the title of the vehicle for it to be perfected.
Priority: HIGH
Collateral
What are Consumer Goods?
Goods purchased primarily for personal, family, or household purposes.
Priority: HIGH
Collateral
What do “Proceeds” refer to?
The following property:
a) Anything acquired upon the sale, lease, or disposition of collateral;
b) Anythingdistributed/collectedonaccountofcollateral;
c) Rights arising out of collateral;
d) Claims arising out of the loss, nonconformity, defect, or
interference with the use of collateral; OR
e) Insurance payable by the result of the above.
Priority: HIGH
Collateral
What is Chattel Paper?
A record that evidences both:
1) A monetary obligation; AND 2) Either:
a. Security interest in specific goods (with or without a software license used in the goods); OR
b. A lease of specific goods.
*Monetary obligation = obligation to pay money that is secured by the goods or owed under a lease of goods.
Priority: Medium
Enforcing a security interest depends on what 2 factors?
1) Attachment (secures the creditors rights to the collateral); AND
2) Perfection (gives notice of rights to other parties).
*Perfection is obtained by the creditor filing a financing statement
with the Secretary of State.
Priority: HIGH
What does Attachment require?
1) Creditor extends value to the debtor;
2) Debtor has rights in the collateral; AND
3) One of the following:
a. an authenticated record/security agreement – it must (i) be authenticated by the debtor and (ii) reasonably identify the collateral;
b. collateral is in the secured party’s possession;
c. collateral is a certificated security in registered form and the
security certificate has been delivered to the secured party; OR
d. the secured party has control of certain types of collateral
(deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights).
Priority: HIGH
Perfection is obtained by the creditor filing a Financing Statement.
What must a Financing Statement contain?
To be effective, is must:
1) State the name of the debtor and secured party;
2) Indicate the collateral covered by the statement;
AND
3) Be filed by a person authorized by the debtor in an authenticated record, security agreement, or upon acquisition of the collateral.
*Unless seriously misleading, minor errors DO NOT render the statement ineffective.
Priority: Medium
What is a Purchase Money Security Interest? Why is a PMSI in consumer goods special?
A PMSI occurs when a creditor extends value to the debtor for the purpose of enabling them to acquire rights in the collateral.
A PSMI in consumer goods enjoy AUTOMATIC perfection (there is no need to file a financing statement to prefect).
Priority: HIGH
Interests in proceeds (from the disposition of collateral) will become unperfected on the 21st day after attachment, unless what happens?
a) The proceeds are identifiable cash proceeds;
b) The security interest in the proceeds is perfected when the interest attaches to the proceeds or within 20 days;
OR
c) If all of the following conditions are satisfied:
i. Original collateral was perfected under the general
filing rule;
ii. The proceeds are collateral that may be perfected;
iii. The proceeds are not acquired with cash proceeds.
Priority: HIGH
What is a Consignment?
A transaction in which:
1) A person delivers goods to a merchant for the purpose of sale;
2) The merchant deals in goods of that kind;
3) The aggregate value is $1,000 or more;
4) The goods are NOT consumer goods (before delivery);
AND
5) The transaction does not create a security interest.
Priority: Low
When does a secured party have “control” of a Deposit Account?
If:
a) The secured party is the bank where the account is maintained;
b) The debtor, secured party, and bank all have agreed (in an authenticated record) that the bank WILL comply with the secured party’s instructions for deposit without further consent needed; OR
c) Thesecuredpartybecomesthebank’scustomerwith respect to the deposit account.
Priority: Low
What is the Shelter Principle?
If a buyer acquires property free of a security interest, then any subsequent transfer is also free of the security interest.
Priority: Medium
Who is a Buyer in the Ordinary Course of Business?
A person that:
1) Buys goods in good faith,
2) Without knowledge that the sale violates the rights of
another person in the goods,
3) In the ordinary course from a merchant.
*They take free of any security interest. Priority: HIGH
When do buyers of consumer goods take free of a security interest under the Consumer-to-Consumer Rule?
When the goods are bought:
1) Without knowledge of the security interest;
2) Forvalue;
3) From a consumer who purchased them for personal,
family, or household purposes; AND
4) Before the filing of a financing statement covering the
goods.
Priority: Medium
Priorities
Perfected Interest vs. Unperfected Interest
A perfected security interest has PRIORITY over a conflicting unperfected security interest in the same collateral.
Priority: HIGH
Priorities
Unperfected Interest vs. Unperfected interest
When there are two competing unperfected security interests, the first to attach will prevail.
Priority: HIGH
Priorities
Perfected Interest vs. Perfected Interest
“First in time, first in right” controls – the first creditor to prefect by filing has priority.
Priority: HIGH
Priorities
What is a Possessory Lien?
An interest (other than security) that:
1) Secures payment/performance of an obligation for services/materials furnished by another in the ordinary course of their business;
2) Is created by statute or rule of law in favor of the person;
AND
3) Whose effectiveness depends on theperson’s possession of the goods.
Example = mechanic’s lien Priority: Low
Priorities
When does a Possessory Lien have priority?
It has priority over another security interest UNLESS the lien is created by a statute that expressly states otherwise.
Priority: Low
Priorities
When do Judgment Lien Creditors have priority over conflicting security interests?
If they became a lien creditor BEFORE the conflicting security interest was perfected.
Priority: HIGH
Priorities
An ownership interest in real property has priority over conflicting interests in fixtures.
What are the two exceptions?
Exceptions:
1) AperfectedPMSIinthefixture. 2) Afixturefiling.
Priority: Medium
Priorities
When does a perfected PMSI in fixtures have priority over a conflicting ownership interest in real property?
IF:
1) The debtor has an interest of record or is in possession of the real property;
2) The ownership interest arose before the goods became fixtures; AND
3) The PMSI was perfected before the goods became fixtures or within 20 days thereafter.
Priority: Medium
Priorities
What is a Fixture Filing?
A financing statement that:
1) Covers goods that are/will become fixtures;
2) Satisfiesallgeneralrulesforfinancingstatements;AND
3) States that it covers a fixture, is filed in the real property
records, gives a description of the property, and provides the name of the record owner.
Priority: Medium
What may a secured party do after default?
The secured may:
1) Takepossessionofthecollateral;AND
2) Without removal, render equipment unusable and dispose
of collateral on a debtor’s premises.
*They may proceed with or without judicial process.
Priority: HIGH
What must a secured party do if they want to dispose of collateral?
They MUST send an authenticated notice of the disposition to the debtor (and any secondary obligors), or else they are liable for damages.
Exception – If the collateral:
a) is perishable;
b) threatens to decline speedily in value; OR c) is customarily sold on a recognized market.
Priority: HIGH
What does disposition of collateral at a foreclosure sale do?
It:
1) Transfers all of the debtor’s rights to the transferee for value;
2) Dischargesthesecurityinterest;AND
3) Discharges any subordinate security interests.
Priority: HIGH
What are the damages available to the debtor if a secured party fails to comply with the applicable rules?
A secured party is liable for the debtor’s actual damage for the amount of any loss caused by their failure to comply.
The damages for loss are generally equal to expectation damages, and may include losses resulting from the debtor’s inability to obtain alternative financing.
Priority: HIGH
What is a debtor’s Right of Redemption?
A debtor has the right to repay/reclaim property held by a secured party. To redeem collateral, a debtor must:
1) Fulfill ALL obligations secured by the collateral; AND 2) Pay reasonable expenses and attorney’s fees.
Priority: Medium
Deficiency Judgments Absolute Bar Rule
vs.
Rebuttable Presumption Rule
Absolute Bar Rule: Secured party is barred from collecting any remaining deficiency after the disposition of collateral when they fail to comply with disposition provisions.
Rebuttable Presumption Rule: If the secured party fails to comply, it is presumed that the proceeds from the disposition are equal to the debt owed.
Can be rebutted if the secured party shows the debt owed is greater than the fair market value of the collateral.
Priority: HIGH
Deficiency Judgments
If a debtor places a secured party’s compliance in issue and the secured party fails to prove that the disposition was proper, then what is the amount recoverable in deficiency?
It is limited to an amount by which the total debt exceeds the greater of:
a) The proceeds of the disposition; OR
b) The amount that would have been realized had the
secured party complied with the applicable provisions.
Priority: HIGH
