UCC Flashcards
Lease
Art. 2A covers leases and subleases of goods (NOT REAL PROPERTY), defined as a transfer of the right to possession and use of goods for a term in return for consideration
Lease vs. Disguised Sale on Credit
A contract is a disguised sale on credit if the “lessee” has no right to terminate his obligation to pay during the lease term and:
- The lease term is equal to or greater than the entire economic life of the goods or gives the “lessee” an option ot renew for the rest of the economic life for nominal or no additional consideration
- The lease provides that the “lessee” will become the owner of the goods or has an option not purchase the goods for nominal or no consideration
Factors that do not indicate a sale
- The lessee pays consideration equal to or grteater than the fair market value of the leased goods (as long as the lease does not cover the total economic life of the goods)
- The lessee has an option to renew or become th eowner of the goods
- The lessee assumes major duties (e.g., paying taxes, assuming the risk of loss, etc.) as to the goods)
Statute of Frauds: Leases
A lease must be in writing if the total of payments under the lease will be $1,000 or more. The writing must be signed by the party against whom enforcement is sought, describe the leased goods and lease term, and indicate that a lease contract has been made between the parties. Lease must specify the quantity of leased goods.
Battle of the Forms
Art. 2A has no battle of the forms provision
Consumer Protection
If lessee is consumer, a consumer lease arises and the following special rules apply:
- Option to accelerate at will - If lease allows acceleration of the entire lease obligation at the lessor’s will, the option is enforceable only if exercised in good faith
- Unconscionability
a. Substantive Unconscionability Not Required - Art. 2A does not require both procedural and substantive unconscionability. It is a defense that a consumer lease was induced by unconscionable conduct even if the lease terms are fair.
b. Attorney’s Fees - In consumer lease litigation, successful consumer may recover attorney’s fees, but a consumer who knowingly brings a groundless suit can be held liable for the lessor’s attorney’s fees
Lease Warranties
Finance Lease (e.g., bank buys car and leases to consumer) Warranties - Any warranties made by supplier to lessor are passed on to lessee, so lessee may sue the supplier
Lessee can refuse to pay lessor on nonconsumer finance lease when goods are not accepted
Hell or High Water Clause - Imposes absolute obligation on lessee to make payments no matter how badly the leased goods perform or break down. DOES NOT APPLY TO CONSUMER LEASES.
Remedies
Default by Lessor - Same as Art. 2: Accept the goods and recover damages or reject goods and cover or seek market price-lease differential)
Default by Lessee - Lessor may cancel lease contract, withhold delivery, take possession of previously delivered goods, stop delivery of goods by a bailee, dispose of or retain the goods and recover damages, recover rent, or exercise any other rights or pursue any other remedies specifically provided for in the lease contract
Damages are limited to actual damages caused by the breach except for lost volume sellers
Ability to Sublease
Subleasing is allowed, even despite an agreement to the contrary. But if the transfer is a material violation of the prime lease, it is grounds for a default
Sublessee entitled to same rights
Assignment of Right of Payment Allowed
When lessor has no remaining significant affirmative duties (“non-operating lease”) the right to payment may be transferred despite agreement to the contrary, even if it would otherwise be grounds for default
Basic Approach for Commercial Paper Issues
- ID type of paper
- ID parties
- Determine if instrument is negotiable
- Determine if instrument was properly negotiated
- Determine if transferee is a holder in due course
- Determine P’s cause of action, such as contract, warranty, tort, or not properly payable
- Determine D’s defenses
- If D is held liable, may D pass liability onto another party?
Note
A promise to pay money made from a maker (promisor, obligor) to a payee (promisee)
A note issued by a bank is called a Certificate of Deposit
Draft
Order to pay (3-party instrument) involving the drawer (person ordering payment), drawee (person to make the payment; payor in check context), and payee (person who receives the payment)
Checks
Requirements: Bank is drawee and payable on demand
Types of Checks:
- Ordinary check
- Certified Check - Ordinary check which bank has accepted
- Cashier’s Check - Drawer and drawee are the same bank; person buying the check is the remitter
- Teller’s Check - Check drawn by one bank on another bank
- Travelers Check - Demand instrument requiring countersignature by a person whose signature already appears on the instrument
Remotely-Created Item
A draft not signed by the drawer but created with drawers authority so that a third party can get paid from the drawers account at a bank
Third party is usually a seller in an internet transaction or when you pay bills over the telphone by giving creditor your checking account number
Negotiability
Refers to the form of the instrument
If paper is negotiable, and reaches the hands of a Holder in Due Course (HDC), HDC obtains better rights than transferor and thus can get paid from obligor even though the obligor (maker or drawer) has defenses under contract law
Non-negotiable instruments are just regular contracts
Elements of Negotiability
A. In writing.
B. Signed by maker or drawer. Any symbol intended to authenticate will do.
C. Unconditional promise or order to pay (IOU not enough)
D. Fixed Amount. Must be able to look at instrument and determine principal amount do.
E. In Money. (Words v. Figures = Words prevail)
F. No other undertaking or instruction
G. Payable on demand or at a definite time
H. Contains words of negotiability
Items that DO NOT make a promise or order conditional
a. Statement of consideration
b. Reference to another record that is not conditioned on that record (e.g., “as per” or “in accordance with”
c. Incorporation by reference of items that would not hurt holder
1 Rights regarding collateral
2. Prepayment
3. Acceleration
d. Limitation of payment to a particular fund or source
e. Countersignature
f. Consumer protection language (but this will prevent holder from being a holder in due course
Negotiability Elements: Unconditional Promise or Order to Pay
- Presumption of Unconditional Promise or Order
- Items that make promise or order conditional (and thus non-negotiable) include:
a. Express condition to payment
b. Promise or order “subject to” or “governed by” another record
c. Incorporation by reference - Rights or obligations re. the promise are stated in another record
Negotiability Elements: No Other Undertaking or Instruction
Exceptions: Promises concerning collateral and waiver of law meant to benefit the obligor
Negotiability Elements: Payable on Demand or at a Definite Time
On Demand - A note is payable on demand if an express statement is used providing for payment “on demand” or “at sight” or if the instrument does not state the date it is due
At a Definite Time - Can be on a specified date, a fixed period after sight or acceptance, or at a time readily ascertainable at the time the promise or order is issued
These do not prevent instrument form being payable oat a definite time:
a. Prepayment of Instrument (right of obligor to pay early)
b. Acceleration of Due Date
c. Provisions Extending the Due Date
- -By holder = to any time
- -By obligor = to a later definite time stated in the instrument
- -Automatically upon condition stated in instrument = to a later definite time stated in the instrument
Negotiability Elements: Words of Negotiability
- Bearer Language (e.g., payable to bearer, payable to the order of bearer, indication that possessor entitled to payment, no payee stated, to cash or to order of cash, not payable to identified person)
- Order Language (e.g., to the order of)
- If both Order Language and Bearer Language, Bearer controls
- Exception for Checks - If this is the only element of negotiability missing from a check, the order or bearer language requirement is waived
Negotiation: Holder Status
Achieved when the payee transfers the instrument to a third party rather than just getting the money.
Requirements:
- Physical possession of negotiable instrument, and
- Good Title (For bearers good title only requires possession. For Order Language, good title requires possession plus necessary indorsements)
Blank Indorsements***
Created with payee’s signature on a negotiable instrument.
Effect: Creates bearer paper. Further negotiations achieved by possession only
Special Indorsements***
Created with payee’s signature plus designation of new person to whom instrument is payable
Effect: Creates order paper. Thus, further negotiations will require the indorsement of the person to whom it was made payable
Restrictive Indorsement
Limits what may be done with the instrument
E.g., “For deposit in my Bank of America account #395482302 only.”
Identification of Payee
- Intent of issuer determines initial payee
2. Multiple Payees (and/or)
Misc. Endorsement Issues
- Transferee’s Right to Transferor’s Endorsement: If instrument is transferred for value, transferee has specifically enforceable right to transferor’s endorsement
- Depositary Bank Becomes Holder Without Transferee’s Signature: Depositary bank becomes a holder even if payee deposits check in payee’s account without indorsing it
- Payee May Indorse with Incorrect or Real Name
- Payee Lacking Capacity May Effectively Indorse
Rights of Mere Holder
Most important: Right to enforce payment
When Is HDC Status Relevant
When obligor raises a defense to payment
Elements of HDC Status***
- Negotiable Instrument
- Holder
- Authenticity Not Apparetnly Questioned
- Holder Must Pay Value
- Good Faith (honesty in fact (subjective), observance of reasonable commercial standards of good faith and fair dealing (objective))
- Without Notice of Defense at Time of Instrument Acquisition
- Shelter Rule (transfer of instrument vests in the transferee the rights the transferor)
- Burden of Proof on Person Seeking HDC Status
Notice at Time of Instrument Acquisition Means:
- Actual knowledge (subjective test)
- Receipt of a notices coupled with a reasonable time to act on it
- From all the facts and circumstances known to the person at the time in question, the person has reason to know it exists
- Merely filing in the public records does NOT put a person on notice
Circumstances That Give Notice
- Instrument (principal) Overdue
- Instrument Dishonored (e.g. insufficient funds)
- Uncured default with respect to payment of another instrument issued as part of the same series
- Unauthorized signature
- Alteration
- Any defense or claim in recoupment (obligor’s claim against payee arising from the transaction giving rise to the paper)
Shelter Rule
Transferee has rights of a transferor.
- Even if a holder does not qualify as an HDC (e.g., because he did not pay value or had notice the note was overdue), he may still have rights of HDC by shelter
- Exception: Person who was a party to fraud or illegality affecting the instrument cannot get HDC rights by shelter
Real Defenses
- Infancy (to the extent it is a defense in contract law)
- Duress
- Lack of Legal Capacity Making Obligation Void
- Illegality Making Obligation Void
- Fraud in the Execution
- Discharge in Bankruptcy
- Omission of Required Consumer Protection Language
- Statute of Limitations
- Payment to Former Holder
- Alteration
- Unauthorized Signatures & Forgeries
Real Defenses: Fraud in the Execution
Also called Fraud in the Factum
a. Signer lacked knowledge of the instrument’s character or essential terms and
b. Signer lacked reasonable opportunity to learn of the instrument’s character or essential terms
Real Defenses: Statute of Limitations
a. Note: 6 years from due date
b. Unaccepted Draft: Earlier of 3 years after dishonor or 10 years after issue
c. Mortgage Note: 4 years
Real Defenses: Payment to Former Holder
Unless the obligated party received proper notice that the note was transferred and that payment is to be made to the new holder
Notification is adequate only if it is signed by the transferor or transferee, reasonably identifies the transferred note, and provides an address at which payments subsequently are to be made
HDC Protected from “Personal Defenses”
Including, without limitation:
- Failure of consideration
- Breach of warranty
- Fraud in the inducement
HDC and Claims of Others to the Instrument
NO claimant can take an instrument from HDC; HDC is a “perfect defendant”
Basis of Contract Liability
Primary basis is a person’s signature
Contract Liability: Binding by Agent***
Follow general law. Assume agent signs agent’s name and principal is bound.
Agent escapes personal liability if:
- Principal identified in instrument
- Signature unambiguously shows it was made on behalf of principal
If these two elements are not satisfied:
a. Agent liable to HDC unless agent can prove the HDC had notice of the representative nature of agent’s signature
b. Agent liable to non-HDC unless agent can prove the original parties did not intend the agent to be liable
c. Special rule for checks–no liability if principal’s name on check
If agent is not authorized, it is a forgery and agent is bound but not principal
Contract Liability for Maker of Note
- Maker must pay instrument when it is due according to its terms at the time it was issued
- Maker liable to holder or indorser who paid instrument
- Maker may raise defenses, but effectiveness depends on status of holder
Contract Liability: Drawer of Draft
- Drawer may not disclaim liability on a check, but may disclaim liability on other drafts
- Drawer only liable after two conditions are satisfied:
a. Presentment to drawee within 30 days
b. Dishonor (drawee refuses to pay upon proper presentment)
Contract Liability: Indorser of Note or Draft
- Liability of Disclaimer Allowed - (e.g., “without recourse, Paul Parsons” prevents incurring contract liability and merely passes title)
- Order of Liability*** - Indorsers liable to each other in order of signatures
- Secondary Liability - Indorser liable only after:
a. Presentment
b. Dishonor
c. Notice of dishonor within 30 days
Contract Liability: Drawee (Bank)
- General Rule: A drawee makes no negotiable instruments contract
- Acceptance or Certification - Drawee may agree to pay the draft by signing the draft
Drawee has no obligation to accept a draft and cannot be sued for failing to accept.
Certification discharges the drawer and all prior endorsers.
- Final Payment - Once a drawee bank finally pays a check, contract actions may no longer be pursued and drawee bank may not recover on the check from the persons it paid unless there is a breach of presentment warranty
- Conversion liability if drawee receives delivery and pays on a forged indorsement
Payment of Checks After Drawer’s Death
a. Bank may continue to pay checks until it knows the drawer has died and has a reasonable opportunity to act on that knowledge
b. Drawee bank may pay for no more than 10 days after drawer’s death. Must comply immediately with requests to stop payment by someone claiming an interest in the account.
Accommodation Parties
Definition - A person who signs an instrument to lend his or her credit to another party but does not receive any direct benefit (e.g., co-signers, sureties, and guarantors)
Contract Liability: Accommodation Parties
- Liable only in capacity in which accommodation party signs
- May limit liability to collection only with express language
- Entitled to reimbursement from accommodated party
- May demonstrate accommodation by express language or anomalous indorsement (i.e., an indorsement outside the chain of title)
Warranty Liability: Generally
Implied warranties arise automatically
Warranty liability arises from the instrument, since warranties are created by the transfer or presentment, not indorsement
Possession of the instrument is not needed to take advantage of the warranty
Warranty liability survives the final payment
Transfer Warranties: To Whom
Transferor must receive consideration
Warranties made to immediate transferee and subsequent transferees if transferor indorsed
Drawee and maker cannot sue for breach of transfer warranty
Transfer Warranties
a. Warrantor is entitled to enforce the instrument (warranty of good title)
b. All signatures authentic and authorized
c. No alteration
d. No good defenses against transferor (perfect plaintiff warranty)
e. No knowledge of insolvency proceedings against relevant parties (only warranty where warrantor’s lack of knowledge is relevant)
f. If remotely-created item, the person identified as the drawer authorized the item
Disclaiming Warranties
Checks: Cannot disclaim
Non-Checks: Can disclaim (“without warranties”)
Presentment Warranties
Mutually exclusive with transfer warranties. A P can only have one of theses warranty causes of action although a person might make both warranties
Made by presenter and previous transferors
Made to parties who pay in good faith (e.g., maker, drawee acceptor (plaintiff))
Warranties When Unaccepted Draft Presented to Drawee
a. Warrantor entitled to enforce draft or obtain payment
b. No alteration
c. No knowledge of unauthorized signature
d. If remotely created item, that person identified as the drawer authorized the item
Warranty Liability vs. Indorser’s Contract Liability
If P Is Holder: If payor has not paid the instrument (e.g., check bounces) then holder will sue indorser on the indorser’s contract
If P is Payor: If payor has paid and alter discovers the payor should not have paid (e.g., check was forged or note was altered), then payor will attempt to sue the indorser for breach of warranty
Discharge by Holder
Holder may discharge obligation by surrendering instrument to obligor, destroying it, canceling it, etc.
Effect of Instrument on Underlying Obligation
- Payment by Cert. Check, Cashier’s Check, or Teller’s Check - Underlying obligation discharged as if person was paid in cash
- Uncertified Checks and Notes - Underlying obligation suspended. If check or note is dishonored, holder may sue on either instrument or underlying obligation
Failure to Produce Original Instrument
- Enforcement by Person Not in Possession:
a. Person entitled to enforce when loss occurred,
b. Loss not due to transfer or lawful seizure, and
c. Person cannot reasonably obtain original - Protection for payor (e.g., security or bond) required
Post-Dated Checks
Banks may pay postdated checks unless customer gives bank notice that describes the check with reasonable certainty
Stop Payment Orders
Can only be made by Drawer (bank customer)
Unenforceable in TX without dated, signed writing, describing the item with certainty
Valid for 6 months but can be renewed
For cashier’s checks, remitter cannot stop payment but bank can
Bank’s Defenses to Paying Over a Stop Payment Order
a. Order did not comply with requirements
b. No loss (customer would have to pay the check even if payment had been stopped)
Wrongful Dishonor
Def. - Drawee dishonoring a properly payable check
Drawer can bring action against drawee, payee cannot
Drawer may recover all damages resulting from wrongful dishonor
Drawee Bank’s Defenses to Wrongful Dishonor
a. Payment would overdraw account
b. Check is more than 6 months old (may be honored in good faith)
Payment in Full Check
A check or accompanying communication on which the drawer conspicuously indicates that cashing the check acts as payment in full of existing obligation that is unliquidated or subject to a bona fide dispute
Effect: Operates as an accord and satisfaction if cashed by payee
Exceptions:
a. Payee returns money within 90 days
b. Payee is an organization and had previously notified the drawer of a particular person or address to send payment in full checks
Forgery & Alteration: Essential Determination
Whose signature was forged?
Different rules apply based on the identity of the victim
Forged Maker’s Signature
- Alleged maker not liable, but conduct may ratify the forgery
- Forger is liable
Forged Drawer’s Signature
- Alleged drawer not liable
- Drawee bank must recredit alleged drawer’s account as check was not properly payable unless drawee bank has defense
- Bank unable to pass on loss unless breach of presentment warranty
Drawee takes risk that drawer’s signature was unauthorized unless presenter knew it was unauthorized
Bank’s Defenses to Recrediting (defenses to alleged drawer’s not properly payable action)
a. Drawer’s negligence
b. Banks Statement Rule – Duty to Inspect Statement
Bank Statement Rule
General Rule: Customer has duty to inspect bank statement and cancel checks in a timely manner, and to report forgeries to bank.
If customer does not and bank can prove a loss beyond original mistaken payment, customer precluded
Forged signatures must be reported to bank within 1 year
Repeat Offender Rule
If same person is forging a series of checks, the drawer must report the forgeries within 30 days of when statement was available. If the drawer does not do so, the bank will not recredit the account for the subsequent forgeries by the same person
Forged Indorsements: Effect of Forgery of Payee’s Name
a. Bearer Paper - Since indorsement is not necessary to negotiate bearer paper, forgery is irrelevant
b. Order Paper - Forgery breaks chain of title and check is not properly payable. Accordingly, the drawer may demand that the drawee bank recredit the drawer’s account.
When is a party precluded from asserting forgery of payee’s name?
a. Impostor Rule - Issuer, maker or drawer will be estopped from denying the validity of a forged indorsement when deemed to have acted carelessly in issuing the check and thus to have contributed to the forgery
b. If employer entrusts employee with responsibility with respect to an instrument and the meployee makes a fraudulent indorsement, the indosement is effective
(e. g., drawee does not verify the payee’s true identity, verify the nature of payee’s authority, does not supervise its employees/agents, etc.)
Forged Indorsements: Liability of Drawee
a. Conversion liability to payee, OR
b. Drawer of check can sue payor/drawee bank since a check with a forged payee’s name is not properly payable
No double liability
Bank’s Defenses to Forged Indorsements
- Impostor Rule
- Fraudulent indorsement by employee entrusted with check
- Drawer’s negligence
- Failure to timely sue (3 years)
Forged Indorsements: Liability of Presenter
Drawee bank can sue presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce (forged indorsement broke the chain of title so no one could become a holder)
Forged Indorsements: Liability of Transferee
Presenter who loses to payor for breach of presentment warranty of good title may sue entities further up the chain for breach of the various transfer warranties of
- Entitled to enforce,
- All signatures authentic or authorized, and
- No good defenses
Alteration: Types
Change in Obligation (e.g., amount, name of payees or interest rates)
Unauthorized Completion
(Altered check is not properly payable)
Alteration: Effect on HDC
Change in Obligation - Holder in due course may enforce for original amount, but not enhanced amount
Unauthorized Completion - HDC may enforce as completed
Alteration: Effect on non-HDC
Fraudulently Made by Holder - Total discharge of obligor
Not Fraudulently Made - Obligor liable under original terms
Bank’s Defenses to Alteration
- Negligence of drawer
- Bank Statement Rule (alterations must be reported within 1 year)
Remedy: Drawer bank can sue up the chain of banks for breach of presentment warranty of no alteration and the presenting bank may sue up the chain for breach of the transfer warranty of no alteration.
Basic Approach For Secured Transactions (Art. 9)
- Is the transaction within the scope of Art. 9?
- Classify the collateral
- Determine if a security interest has been created, that is, has attachment occurred?
- Determine if the security interest has been properly perfected
- Determine the persons who are making claims to the collateral
- Apply proper priority rules and rules regarding default and repossession
Article 9 Scope: Collateralized Transaction
Any transaction which is intended to create a security interest in personal property or fixtures.
Collateral Property may be:
a. Already owned by debtor
b. To be acquired with a loan, that is, a Purchase Money Security Interest (PMSI)
c. After-Acquired
Art. 9 Scope: Sales of Receivables
The outright sale of accounts, chattel paper, payment intangibles, and promissory notes are covered by Art. 9
Art. 9 Scope: Consignments
A consignment is a bailment by the owner/bailor/consignor under which the bailee/consignee has authority to sell.
To the world, consignee appears to own the goods and thus the true owner (consignor) may be required to comply with Art. 9 to gain protection over consignee’s other creditors
Consignments Which Must Comply with Art. 9
a. Consigned goods worth $1,000 or more
b. The consignor did not use the goods for personal, family, or household purposes, and
c. Potentially deceptive consignee
(e.g., consignee is in a position to deceive potential creditors because he deals with goods of that kind under a name other than the consignor’s name, consignee is not an auctioneer, and consignee is not generally known by consignee’s creditors to be substantially engaged in selling consigned goods)
Art. 9 Scope: Agricultural Liens Created by Statute
Art. 9 covers agricultural liens, that is, nonpossessory liens on farm products such as crops and livestock created by state law in favor of a person who provides the goods to the farmer
Art. 9 Scope: Lease-Purchase Agreement
Art. 9 does not govern true leases of personal property in any manner. Thus, when the lease term is over, lessor can recover the leased property without complying with Art. 9 free of lessee’s creditors.
But leases that are actually installment sales are covered.
Evidence of an Art. 9 Secured Transaction (Lease Purchase Agreement)
Lessee cannot terminate lease and:
a. Lease term is equal to or greater than remaining economic life of the goods, or
b. Lessee owns property at end of lease term, or
c. Lessee has option to buy for nominal consideration at end of lease term
Exclusions from Art. 9
- Rights governed by federal law
- Real property (except fixtures)
- Tort claims (but commercial tort claims are covered. e.g., unfair competition)
- Deposit accounts in consumer transactions
- Statutory liens (e.g. landlord’s lien, mechanic, storage dry cleaner)
- Wage Assignments
Classification of Collateral
Many rules regarding perfection, priority, repossession, resale, etc. depend on the type of collateral involved
Overview:
Mutually Exclusive - Any particular item can only be one type of collateral
Debtor’s Use Determinative - Classify collateral from the debtor’s perspective
Classification of Collateral: Goods
a. Movable items and fixtures
b. Specific Inclusions: Standing timber, growing crops, unborn young of animals
c. Specific Exclusions:
1. Money
2. Minerals before extraction
3. Collateral that fits other categories
Classifications of Collateral: Goods Classifications
a. Consumer Goods - Personal, family, or household purposes
b. Equipment - Business purposes (default category)
c. Inventory - Goods held for sale or lease in the ordinary course of business
d. Farm Products (e.g. crops and livestock)
- Must be in possession of farmer and in an unmanufactured condition
e. If multiple uses, principal use is determinative
Classification of Collateral: Semi-Tangible and Intangible Collateral
- Instruments - Represent money (e.g., promissary notes, drafts, checks)
- Documents - Written or electronic representations of goods, that is, docs of title under Art. 7 (e.g., warehouse receipt for goods in storage or bill of lading for goods in transit)
- Chattel Paper - Single writing or group of writings evidencing two things: a) Monetary obligation (e.g., promissory note), plus b) security interest in or lease of goods
- Account - Any right to payment of money for goods sold or leased or for services rendered not evidenced by an instrument of chattel paper (e.g., the typical accounts receivable for a business, contract rights not yet earned by performance, computer software license fees and credit card receivable)
- Deposit Accounts
- Investment Property (e.g., stocks, bonds, mutual funds, etc.)
- Commercial Tort Claims
- General Intangibles
Proceeds
Proceeds are whatever is received upon the disposition of collateral
Proceeds may include collateral a creditor could not have a security interest in if originally used as collateral, such as cash
Attachment
Attachment is the process by which a security interest is created and becomes enforceable against the debtor so the creditor can repossess the collateral if the debtor does not pay
Attachment: Elements
- Creditor gave value
- Contract (Security Agreement)
- Debtor has rights in collateral
No attachment until all elements are satisfied
Attachment Elements: The Security Agreement
The contract between the debtor and creditor in which the debtor gives the creditor a security interest in the collateral
- Oral: Security may be oral only if collateral is in creditor’s possession (this is a ‘pledge’). Creditor has duty to take reasonable care of collateral
- Authenticated Record
- Control: Creditor has right to sell or cash in the collateral without further action from the debtor
Requirements of an Authenticated Record
a. Evidence of Record - Record may be written or electronic as long as it is signed or marked electronically with present intent to identify the debtor and adopt the agreement
b. Description of Collateral - Must reasonably ID the property
Attachment Elements: Debtor Rights in Collateral
A debtor cannot give a security interest in property without having rights in the property such as ownership or identification to a contract.
Debtor cannot use another person’s property as collateral without that person’s permission.
Attachment: After-Acquired Property (special rules)
- Using New Property as Collateral for Old Loan - Debtor can agree that new acquisitions of property will serve as additional collateral for an old loan. (this is a floating lien and is common with inventory)
- Consumer Good Exception - An after acquired property clause will work only for consumer goods acquired within 10 days of the creditor giving value
- Commercial Tort Claim Exception - After-acquired property clauses will not work with commercial tort claims
Attachment: Future Advances (special rules)
Debtor can agree that the collateral will serve as collateral for new loans, as well as the current loan. A line of credit arrangement.
Perfection: Overview
Perfection is the process by which the creditor protects the security interest from most other claimants to the same collateral
If the fight is between the debtor and creditor, go to the default analysis. The creditor will usually prevail if the creditor has attached.
If fight is between the creditor and a third party claiming the same collateral, perfection is relevant
Elements of Perfection
- Attachment
- Appropriate act of perfection. Depends on type of collateral.
a. Possession of collateral by creditor
b. Filing of financing statement by creditor
c. Automatic Permanent - Attachment alone is sufficient
d. Automatic Temporary - Attachment alone is sufficient for short period of time
e. Control
f. Notation of Security Interest on Certificate of Title
Perfection by Possession
Almost all collateral may be perfected by possession
Exceptions:
a. Accounts
b. Deposit accounts
c. Nonnegotiable documents
d. E-documents
e. E-Chattel Paper
f. General Intangibles
Loss of Possession
General Rule: Perfection is lost
But, 20-day exception for instruments, negotiable docs, and certified securities
Perfection: Filing the Financing Statement UCC-1
Almost all collateral may be perfected by filing
Exceptions:
a. Deposit accounts
b. Money
Requirements of Financing Statement
- Names of debtor and creditor
- Addresses of debtor and creditor
- Debtor’s authorization in an Authenticated Record (cannot be oral)
d. Description of collateral - Description of the land if collateral is timber, minerals, fixtures, or crops
Authorization of the financing statement is automatic if the debtor authenticated the underlying security agreement
Minor Errors that are not seriously misleading are excused
Perfection: UCC-1 Designation of Debtor
a. Individual’s name
b. Registered organization - Name under which entity is organized (must be an exact match with the public record)
c. Trade Name must be extremely similar to debtor’s name
If debtor undergoes name change, perfection continues as long as debtor has collateral at the time or acquires it within 4 months of change. Perfection ends unless refiled under new name within 4 month period
Perfection: UCC-1 Place of Filing
Generally, with Secretary of State
Fixtures, minerals, and timber to be cut in the county where a mortgage on the real estate would be filed
Perfection: UCC-1 Duration
A financing statement is effective for 5 years
Exception: A recorded real property mortgage covering fixtures continues until the mortgage is realized or satisfied
Continuation can be filed within 6 months to extend a filing
Perfection: UCC-1 Termination Statement
a. Required for Consumer Goods - Creditor must file a termination statement in a timely manner. (within 20 days after debtor’s written demand or 1 month after there is no outstanding secured obligation
b. Required upon debtor’s request for non-consumer goods (within 20 days)
Perfection: Automatic Permanent Perfection
- PMSI in Consumer Goods - This rule is only for consumer goods that are not certificate of title items or fixtures
- Assignment of Insignificant Amount of Debtor’s Accounts
- Sale of Promissory Notes
Perfection: Automatic Temporary Perfection
- Proceeds (20 days)
- New Value for Instruments, Negotiable Documents, and Certified Securities (20 days)
- Delivery of Instrument, Negotiable Document, or Certified Security to Debtor (20 days for certain purposes)
Perfection: Control
- Investment Property, Nonconsumer Deposit Accounts, Electronic Documents, and Electronic Chattel Paper
- Defined: Control means the creditor has the right to sell or cash in the collateral without further action from the debtor (e.g., deliver stocks and bonds endorsed)
If a deposit account, secured party has control if it is the bank in which the deposit account is maintained
Perfection: Notation on Certificate of Title
Covers motor vehicles, boats, and manufactured housing
If collateral consumer goods or equipment, notation on certificate of title
- Perfection if collateral inventory = file or take possession
Perfection: Special Rules for Proceeds
Perfection continues automatically for 20 days
a. Same Office - Original security interest perfected by filing. A financial statement covering the proceeds would be filed in the same place covering the original collateral
b. Identifiable Cash Proceeds
c. Proceeds Perfected Within the 20-Day Period
Perfection: Multi-State Transactions
General Rule: Use version of UCC from state where debtor is located (principal residence for individuals, law of state where organized for a registered business, and place of business for unregistered business)
Follow law of collateral’s location for:
a. Security interests perfected by possession
b. Fixtures
c. Timber
d. Agricultural liens (state where farm product is located)
Certificate of Title Items - Law of state which issued most recent certificate of title
Deposit Accounts - Law of state in which bank has its chief executive office
Perfection: Debtor or Collateral Changes States
General Rule: If debtor moves, perfection continues for 4 months
Perfection by Possession - Perfection continues as long as perfected under new state’s law
Certificate of Title Items - Perfection continues for as long as it would have under the original certificate of title
Priorities
Two-Step Process:
- Classify persons claiming collateral
- Determine who prevails
Subordination - By contract, the competing parties may agree to a priority order different from the normal rules
Priorities: Secured Creditor vs. Unsecured Creditor
Secured creditor prevails.
Perfected status of secured creditor is irrelevant.
Priorities: Secured Party vs. Secured Party***
- Both creditors unperfected: First to attach prevails
- One creditor perfected: Perfected creditor prevails
- Both creditors perfected:
a. General Rule - First to either 1) file OR 2) perfect
c. Exception if one creditor has PMSI in inventory, PMSI creditor prevails if:
(1) PMSI creditor perfected at time debtor receives possession of the inventory, and
(2) Proper notice to holders of conflicting security interests
Priorities: Exception If One Creditor has PMSI in Goods Other Than Inventory and Livestock
PMSI prevails if interest is perfected at the time debtor receives possession of the collateral or within 20 days of that time
Priorities: Exception if One Creditor Has Purchase-Money Security Interest in Inventory
PMSI creditor prevails if:
- PMSI creditor perfected at time debtor receives possession of teh inventory, and
- Proper notice to holders of conflicting security interests
- -Authenticated notification to all creditors who have already filed with respect to the collateral. Notice must explain the creditor is obtaining a PMSI in inventory, describe the collateral, and be given before the debtor receives possession of inventory
Notice is effective for deliveries of the same type of collateral for 5 years
Priorities: Exception if One Creditor Has a PMSI in Livestock
Same rules as PMSI in inventory
Priorities: Exception for Deposit Accounts
Secured party with control prevails
Priorities: Exception for Investment Property
Secured party with control over investment property has priority over secured party who does not have control (e.g., a secured party who perfected by filing)
Priorities: Secured Party vs. Donee
If a debtor makes a gift of the collateral to a donee, the collateral remains subject to the security interest in the donee’s hands
Priorities: Secured Party vs. Purchaser Generally
- General Rule: Secured party prevails
2. Debtor has permission to sell: Purchaser prevails
Priorities: Secured Party vs. Purchaser if Secured Party Unperfected at Time of Purchase
a. General Rule - Purchaser wins if:
(1) Buyer gives value
(2) Buyer receives delivery of the item, and
(3) Buyer has no knowledge of security interest at time of delivery
b. PMSI Exception - If PMSI creditor perfects within 20 days after debtor receives the collateral but after the debtor sells collateral to purchaser, creditor will prevail over the “gap” purchaser
Priorities: Secured Party vs. Purchaser for Buyers in the Ordinary Course of Business
A BIOCB can prevail even over a perfected creditor if the following requirements are satisfied:
a. Good faith
b. Without knowledge of a security interest violation
c. Purchase of goods that are not farm products
d. Ordinary purchase (e.g., computer from electronics store)
e. Security interest created by the seller
f. Creditor not perfected by possession
Priorities: Secured Party vs. Purchaser for Consumer Purchasers of Consumer Goods
Purchaser Prevails if:
a. Consumer goods in sellers hands
b. Consumer goods in buyers hands
c. Buyer has no knowledge of security interest
d. Buyer pays value
e. Creditor not perfected by possession
f. Creditor’s interest is unfiled prior to purchase
Priorities: Secured Party vs. Purchaser For Buyers NOT in the Ordinary Course of Business vis-a-vis Future Advances
The creditor gives more money to the debotr based on collateral that the debtor has already sold to a purchaser who does not qualify as a buyer in the ordinary course of business.
A non-buyer in the ordinary course of business can prevail over a secured creditor for future advance amounts made after the first of these events occurs:
a. Secured creditor obtains knowledge of the purchase, or
b. 45 days have elapsed from date of the purchase
Priorities: Secured Party vs. Purchaser for HDC of a Negotiable Instrument
HDC will prevail over earlier perfected interests in teh negotiable instrument
Priorities: Secured Creditor vs. Lien Creditor
“Lien Creditors” includes creditors who have acquired a judicial lien by a levy on the debtor’s property and bankruptcy trustee
General Priority Rules
a. If secured creditor unperfected at time lien attached - Lien Creditor Prevails
b. If secured creditor perfected at time lien attached - Secured Creditor Prevails
PMSI exception when PMSI creditor files within 20 days of debtor’s receiving possession
Future Advances - Secured creditor will always lose priority to a lien creditor for future advances after both of the following things occur:
- Secured creditor obtains knowledge of the lien, and
- 45 days elapse from the date of the lien
Priorities: Secured Creditor vs. Statutory Mechanic’s Lien
Statutory Lien prevails if following conditions are satisfied:
1. Person furnished services or materials with respect to the goods covered by the security interest
2. Furnishing was in ordinary course of business, and
Collateral is in the possession of the statutory lien holder
Priorities: Proceeds
Priority for proceeds is the same as the priority in the original collateral as long as the security interest in the proceeds is perfected
Priorities: Priority for Fixtures Between Secured Party vs. Holder of Real Property Mortgage
Secured party may win if:
a. Perfected before Real Estate Interest Recorded, and
b. Perfected with a fixture filing (financing statement that meets two additional requirements: 1) Describes the real property, and 2) filed in office where a mortgage on the real property would be recorded)
PMSI exception if:
a. PMSI Creditor perfected by fixture filing
b. Perfected within 20 days of becoming a fixture (installation), and
c. Competing real estate interest is not a construction mortgage
A security interest in fixtures that is perfected in any manner prevails over a later-acquired judicial lien, even if the perfection was not done via a fixture filing
Priorities: Crops
A perfected security interest in crops has priority over a conflicting interest in the land on which the crops are growing regardless of who filed or perfected first
Priorities: Impact of Bankruptcy*****
Bankruptcy of the Debtor may change the normal priority rules.
LIKELY AREA FOR CROSSOVER ISSUE
Remedies: Trigger
Remedies triggered by debtor’s default. Default clearly means not paying, but may also include other things specified in the security agreement
Remedies: Repossession
- Upon default, creditor may repossess
- No judicial process needed
- Creditor need not give debtor notice
- Limitation on repossession–No breach of the peace (if repo person breaches peace, creditor is strictly liable, possibly for conversion, actual damages, and even punitive damages)
After proper repossession, creditor has option to resell collateral and sue for deficiency or strictly foreclose
Remedies: Sale of Collateral By Creditor
- Notice Required
- Debtor generally has right to redeem
- Commercially reasonable standard of care for all aspects of the sale, including method, manner, time, place, and terms
- Creditor may be able to purchase at resale
Sale of Collateral By Creditor: Notice Exceptions
No notice required for:
- Perishables,
- Items threatening to decline speedily in value, or
- Collateral customarily sold on a recognized market
Sale of Collateral By Creditor: Contents of Notice
- Description of debtor and secured party
- Description of collateral
- Method of sale
- Statement that debtor is entitled to accounting and the charge, if any
- Time and place of public sale; time after which a private sale will be made (earliest date of sale)
- If collateral is for consumer goods, notice must also explain debtor is liable for deficiency, provide phone number of person from whom debtor can obtain amount needed to redeem the collateral, and phone number or address from which debtor can get additional info about the sale
Notice must be sent a reasonable time before the sale (for consumer goods 10 days is reasonable)
Debtor, sureties, and other creditors entitled to notice
Sale of Collateral by Creditor: Debtor’s Right to Redeem
Debtor has ability to cure default and regain collateral if these requirements are satisfied:
a. Creditor has not yet sold or entered into a contract to sell collateral
b. Strict foreclosure has not yet occurred
c. Debtor has not waived the right to redeem after default
d. Debtor must tender fulfillment of all obligations secured by the collateral
e. Debtor must tender creditor’s reasonable expenses
Sale of Collateral by Creditor: Can Creditor Purchase at Resale?
a. Public Sale: Yes
b. Private Sale: Only if:
1. Collateral is customarily sold in a recognized market
2. Collateral is subject to widely distributed standard price quotations
Sale of Collateral by Creditor: Title of Purchaser at Resale
The reselling creditor warrants title, possession and quiet enjoyment of the collateral by the purchaser unless the creditor takes steps to disclaim warranties
Sale of Collateral by Creditor: Application of Resale Proceeds
- Reasonable expenses of reselling creditor
- Satisfaction of debt
- Satisfaction of subordinate creditors
- Surplus, if any, to debtor
Creditor is unsecured for deficiency amount
Sale of Collateral by Creditor: Penalty for not complying with resale requirements
a. Creditor liable for actual damages
b. For consumer goods, creditor automatically liable for amount equal to finance charge plus 10% of the principal even without proof of damages
c. Effect on Creditor’s ability to Recover in Deficiency
1) Consumer Transactions - Absolute bar
2) Nonconsumer Transactions - Rebuttable presumption that value of collateral was equal to amount of debt
Strict Foreclosure***
- Creditor retains collateral
- Requirements to use strict foreclosure:
a. Debtor consents (express or implied by debtor’s failure to object within 20 days of notice)
b. Creditor sends authenticated notice to retain collateral to:
- -Debtor
- -If collateral not consumer goods: Notice to creditors who have perfected by filing, notation on certificate of title, or who have given notice to creditor
c. No timely objection (20 days) - Exception for High Equity (debtor has paid 60% of total price) Consumer Goods - Resale necessary within 90 days of repossession
