UCC Secured Transactions Flashcards
HIGH
SCOPE OF ARTICLE 9
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.
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.
HIGH
SECURED PARTY
The secured party is the creditor who possesses the benefit of the security interest.
HIGH
DEBTOR
The debtor is the party who has an ownership interest or other sufficient interest in the personal property securing the obligation.
HIGH
OBLIGOR
The obligor is the party held responsible for the underlying obligation (usually also the debtor, but could be a type of guarantor).
HIGH
COLLATERAL
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.
HIGH
ARTICLE 9 “GOODS”
Article 9 defines “goods” as all things that are moveable when a security interest attaches.
HIGH
ARTICLE 9 “CONSUMER GOODS”
Article 9 defines “consumer goods” as goods that are used mainly for personal, family, or household purposes.
HIGH
ARTICLE 9 “INVENTORY”
Article 9 defines “inventory” as goods that are kept by a person for sale or lease (does not include goods that are only being held for repair).
HIGH
ARTICLE 9 “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.
HIGH
ATTACHMENT
Attachment is essentially how a security interest is created. A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment. A valid attachment requires that:
- The secured party extends value to the debtor (almost any consideration will suffice);
- The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; AND
- A UCC Sec. 9-203(b)(3) condition is met.
HIGH
PERFECTION
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. Generally, there are three different methods in which a security interest may be perfected:
- The filing of a financing statement or the security agreement with the state by an authorized party;
- Taking mere possession of a security interest in negotiable documents, goods, instruments, or money; OR
- Automatic perfection.
HIGH
AUTOMATIC PERFECTION
The following security interests are perfected automatically when they attach:
- A purchase-money security interest in consumer goods; AND
- An assignment of accounts that does NOT transfer a significant part of the assignor’s outstanding accounts.
CONSIGNMENT
A consignment is a transaction in which a person delivers goods to a merchant for the purpose of sale in which:
- The merchant:
- deals in goods of that kind under a name other than the name of the person making delivery;
- is NOT an auctioneer; and
- is NOT generally known by its creditors to be substantially engaged in selling the goods of others;
- The aggregate value of the goods is $1,000 or more at the time of each delivery;
- The goods are NOT consumer goods immediately before delivery; AND
- The transaction does NOT create a security interest that secures an obligation.
lowest
RIGHTS OF THE CONSIGNOR/CONSIGNEE
Article 9 provides that in order to determine the rights of a consignee’s creditor, the consignee (debtor) has rights and title to the goods identical to those of the consignor. Under a consignment, the consignee possesses the full ownership interest of the consignor in the goods, such that as the security interest of the consignee’s creditor will attach to them.
lowest
FUTURE ADVANCES
A security agreement may provide that collateral secures future advances, whether or not the advances are mandatory, so long as the security agreement explicitly includes a future advances clause.
lowest
DEFAULT CLAUSES
The parties may specifically define what constitutes a default. If left undefined, non-payment generally constitutes a default.
lowest
ACCELERATION CLAUSES
The parties may provide for the acceleration of payments upon the happening of a specified event (e.g., full balance becomes due if payment is 7 days late).
lowest
COVENANTS REGARDING COLLATERAL
The parties may covenant certain things to each other regarding the collateral (e.g., the secured party may require the debtor to maintain insurance covering the collateral property).
lowest
USE OR DISPOSITION OF COLLATERAL BY DEBTOR
A security agreement will NOT be invalid because the debtor possesses a right to use or dispose of the property serving as collateral.
COLLATERAL IN SECURED PARTY’S POSSESSION
A secured party must use reasonable care in the custody and preservation of collateral in the secured party’s possession.
ACCESSIONS
An accession is collateral that does NOT lose its identity when physically united with other goods (e.g., a jet engine serving as collateral does not lose its identity when it is installed into a jet).
A security interest may be created in the property that does not lose its identity and continues in the accession collateral.
lowest
COMMINGLED GOODS
A commingled good is collateral that loses its identity when physically united with other goods (e.g., 100 pounds of flour serving as collateral loses its identity when physically united with other ingredients to form cake products). If collateral becomes commingled with other goods, a security interest attaches to the product that results.
HIGH
PRIORITY OF PERFECTED vs. UNPERFECTED INTERESTS
Generally, a perfected security interest has priority over a conflicting unperfected security interest in the same collateral.
HIGH
PRIORITY OF MULTIPLE PERFECTED CREDITORS
Between multiple perfected creditors, the first to file obtains priority.
Some collateral is not subject to the state filing system or cannot otherwise be filed. In these instances, the first to perfect obtains priority.
Generally, knowledge of a prior unperfected interest will not prevent a potential secured party from filing first to obtain priority
LOW
PRIORITY OF LIEN CREDITORS
Lien creditors possess virtually the same status as perfected secured creditors. Accordingly, if a party becomes a lien creditor before a secured party files or perfects, the lien creditor will enjoy priority over that party.
HIGH
PRIORITY OF BUYERS IN THE ORDINARY COURSE OF BUSINESS
A buyer in the ordinary course of business is a person who buys in the ordinary course from a person in the business of selling goods of that kind. A buyer in the ordinary course of business takes the item free of a security interest created by the buyer’s seller even if the security interest is perfected and the buyer knows of its existence.
Shelter Principle. The protected buyer may sell the purchased collateral to a third-party free of the secured party’s security interest.
MED
PRIORITY OF BUYERS OF CONSUMER GOODS
A buyer of consumer goods take the goods free of a security interest, even if perfected, if the buyer buys:
- Without knowledge of the security interest;
- For value;
- Primarily for the buyer’s personal, family, or household purposes; AND
- Before the filing of a financing statement covering the goods.
HIGH
PRIORITY OF PURCHASE- MONEY SECURITY INTERESTS (PMSIs)
Generally, PMSIs have priority over prior perfected security interests if the PMSI is properly executed. A PMSI is either:
- A security interest held by the seller of collateral to secure payment of all or part of the price; OR
- 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.
PRIORITY OF PURCHASE- MONEY SECURITY INTERESTS IN INVENTORY COLLATERAL
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.
A PMSI in non-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 of the collateral or within 20 days thereafter (i.e., the debtor has a 20-day grace period to file upon receipt of the collateral).
LOW
SECURED PARTY’S RIGHT TO REPOSSESS
Upon default, the secured party may attempt to take possession of the collateral without judicial process so long as they do not commit a breach of the peace.
MED
SECURED PARTY’S RIGHT TO DISPOSE OF COLLATERAL
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.
MED
SECURED PARTY’S RIGHT TO COLLECT DIRECTLY FROM THE ACCOUNT DEBTOR
Upon default, a secured party has the right to collect directly from the account debtor (the person who owes the debtor on the account). To exercise this right, the secured party must send an authenticated notification to the account debtor informing the account debtor that the amount due has been assigned and that the payment is to be made to the assignee. Upon receipt of proper notification, the account debtor may discharge its payment obligation ONLY by payment to the assignee (the secured party).
MED
CREDITOR’S NON-COMPLYING DISPOSITION OF COLLATERAL
When a creditor makes a non-complying disposition of collateral under Article 9, the debtor can:
- Recover actual damages;
- Recover statutory damages; OR
- Be subject to judicially mandated disposition of the collateral.
LOW
DEBTOR’S RIGHT OF REDEMPTION
Generally, a debtor or any secondary obligor has the right to redeem (i.e., reclaim) collateral until the secured party has disposed of it or entered into a contract for its disposition. To redeem collateral, the debtor must:
- Fulfill all obligations secured by the collateral; AND
- Pay the reasonable expenses and attorney’s fees.
MED
SURPLUS AND DEFICIENCY
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.
