Secured Transactions Flashcards
Options of the Potential Creditor
- Outright Refusal
- Obtain promise to repay: This type of creditor is called an unsecured or general. IF the debtor fails to pay the creditor must bring suit, get a judgment, and have the sheriff seize enough of the debtors non-exempt property to satisfy the judgment. This is expensive and time consuming
- Obtain Surety: have someone promise to pay the debt if debtor does not
- Obtain Collateral (secured creditor: The creditor might require the debtor to place some of the debtors property at risk so that if the debtor does not pay, the creditor may take the property
- Real Property: the creditor may obtain a mortgage or deed of trust over the land
- Personal Property: The creditor may obtain a security interest in debtors personal property under Article 9 of the UCC
Article 9 Approach
- Is the transaction within the scope of Article 9?
- Classify the collateral
- Determine if a security interest (between debtor and creditor) has been created, that is, has attachment occurred.
- Determine if the security interest has properly perfected
- Determine the persons who are making claims to the collateral
- Apply priority ruels and rules regarding repossession
Scope of Article 9 C
- Collateralized Transaction
- Sales of Receivables
- Consignments
- Agricultural Liens Created by Statute
- Lease-Purchase Agreements
Colatteralized Transaction / Scope of Article 9
Subject matter of Article 9
1. Collateralized Transaction
Any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures
Property used as collateral may be:
A. Already owned by the debtor
B. To be acquired with loan (purchase money security interest)
- Item your buying with the loan. Lender and Seller can either be the same person or they can be different. IF they are different the lender must be able to trace the exact money it lent to the debtor into the collateral
- PMSI often have special, better rules than other types of security interest
C. After-Acquired: property you buy in the future
Sales of Receivables/ Scope of Article 9
The outright sale of accounts, chattel paper, payment intangibles and promissory notes
Ex: sell the bank your outstanding accounts, as the accounts come due have to collect them and give them to bank. Even though this is a sale and not a secured loan, Article 9 applies and the bank must comply with article 9 just as if it were a collateralized loan
- Consignments / Scope of Article 9
A Consignment is a bailment by the owner/bailor/cosignor under which the bailee/consignee has authority to sell
- To the world the consignee appears to own goods and thus the true owner (consignor) may be required to comply with article 9 to gain protection over consigness other creditors
Consignments which must comply with Article 9:
A. Consigned goods are worth a total of $1,000 or more and
B. The consignor did not use the goods for personal, family, or household purpose
C. Potentially Deceptive Consignee
- Consignee deals with goods of that kind under a name other than the consigner name (not name of true owner)
- Consignee is not an auctioneer and
- Consignee is not generally known by consignees creditors to be substantially engaged in selling consigned goods ex: shop named Fred’s consignment won’t count
- Agricultural Liens Created by Statute/ Scope of Article 9
Article 9 covers agricultural liens, that is, nonpossesory liens on farm products such as crops and livestock created by state law in favor of a person who provides goods or services to a farmer
Lease-Purchase Agreements/ Scope of Article 9
Article 9 does not govern true leases of personal property in any manner. When lease term is over, lessor can recover the leased property without complying with Article 9 free of lesees creditors
BUT a lead which is actually an installment sale is covered
Ex: 5 year car loan (vs. 3 day)
Lessee cannot terminate lease early without being in breach and
- Lease term is equal to or greater than remaining economic life of goods or
- Lessee owns property at end of lease term or
- Lessee has option to buy for nominal consideration at end of lease term
Exclusions from Article 9
- Rights governed by federal law
- Real property (except fixtures)- Mortgages, leases, rent
- Tort claims (except commercial tort claims)
- Deposit Accounts in Consumer Transactions
- Statutory Liens- Landlords lien, mechanics lien
Classifaction of Collateral
- Rules regarding perfection, priority, repossession ,resale etc depend on type of collateral involve
Mutually exclusive: any particular item can be only one type of collateral
Debtors use determinative: classify collateral from the debtors prospective (how the debtor is using the collateral)
Goods
Goods
Moveable Items & Fixtures
Inclusions: Standing Timber (trees), Growing Crops, Unborn young of animals
Exclusions: Money, Minerals before extraction (considered real property still), Collateral that fits other categories
Classification of Goods
1. Consumer Goods: Personal, Family, Household Purposes
Ex: car, couch, tv
2. Equipment: Business purposes
- Goods used or bought for use primarily in business (including farming or profession)
- Includes goods brought by a nonprofit organization or a governmental subdivision or agency
- Equipment is the default category if a good does not fit within the other three categories, then it is deemed to be equipment
3. Inventory:
-Goods held for sale or lease in the ordinary course of business
- Raw Material & Work in progress
- Consumed Materials (Ex: pens, paper,)
4. Farm Products
Ex: Crop or Livestock
- To be a farm product must be in possession of the farmer engaged in farming operations and in an unmanufactured condition
- Distinction between manufactured and unmanufactured is a fact question (ex: pasteurizing milk probably not but making ice cream probably)
5. Multiple Uses: If item used for multiple things categorized by its principal use
Semi- Tangible and Intangible Collateral
Semi-Tangible and Intangible Collateral
1. Instruments: Represent money
Ex: Promissory Note, Check, Drafts etc
2. Documents: Written of electronic representation of goods, that is, documents of title
- Warehouse Receipt: goods in storage
- Bill of Landing: Goods in transit
3. Chattel Paper: Single writing or group of writings evidencing monetary obligation (ex: promissory note) plus security interest in or lease of goods
- If chattel paper stored on paper called tangible chattel paper
- If chattel paper stored electronically called electronic chattel paper
4. Account: Any right to the payment of money for goods sole or leased or for services rendered not evidenced by an instrument or chattel paper
- Typical accounts receivables of a business: what your clients owe you
- Includes contract rights which have not yet been earned by performance
- Includes computer software license fees and credit card receivables
5. Deposit Accounts: accounts with a financial institution
Ex: checking account, savings account. NOT Cd’s
6. Investment Property
Ex: Stocks, Bonds, Mutual funds
7. Commercial Tort Claims: business tort claims that do not involve personal property
Ex: Unfair competition
8. General Intangibles: any other type of personal property except money
Ex: good will of business, liquor license, intellectual property
Proceeds Classification Generally
Proceed are whatever is received upon the sale, exchange, collection or other disposition o collateral or proceeds
Ex: used truck and computer as collateral for loans. Traded truck for motorcycle and sold computer for cash. The motorcycle and cash are proceeds of the original collateral
- Proceeds may include collateral a creditor could not have a security interest in if originally used as collateral such as the money in example above
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
3 Elements (VCR): Creditor gave value, Contract (the security agreement), Debtor has rights in the collateral
- The Elements can occur in any order
- No attachment until all elements satisfied
Attachment/ Creditor Gave Value
- Creditor gave value
Ex: Lending money, giving goods on credit
Attachment/ Contract (security agreement)
- Contract- The Security Agreement
The contract between the debtor and creditor in which the debtor gives the creditor a security interest in the collateral
- Methods of Proving Security Agreement
A. Oral
The security agreement may be oral only if the collateral is in the creditors possession (often referred to as a pledge)
Creditors has a duty to rake reasonable care of collateral in the creditors possession
B. Authenticated Record
Requirements
- Evidence of Records: 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
- Description of Collateral: Description of collateral must reasonably identify the property, that is, make it clear what property the creditor may repossess if the debtor defaults
EX: “my computer” is sufficient if debtor owns 1 computer, but inadequate if debtor owns many computers
EX: If there is a slight error on serial numbers description is sufficient if it still reasonably identities the computer even though there is an error
EX: “all my equipment” ok because description may be by category or type quantity, computational formula or any other method with is objectively determinable.
Exception: Consumer goods and commercial tort claims may not be described by type alone, description must be more specific (“all my consumer goods” not sufficient)
EX: Super generic descriptions are not allowed (ex: all my personal property)
C. Control
The security agreement may be demonstrated by control if the collateral is nonconsumer deposit accounts, electronic chattel paper, or investment property
- Control basically means the creditor has the right to sell or cash in the collateral without further action from the debtor
Attachment/ Debtor has rightsin teh 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 persons property as collateral without that persons permission
After-Acquired Property and Attachment
- Using new property as Collateral for Old Loan
The debtor can agree that new acquisitions of property will serve as additional collateral for an old loan
- Situation is often referred to as a floating lien and is very common with inventory and equipment
- Security interest does not attach in the after acquired property until debtor actually buys it because until then debtor has no rights in collateral - Consumer Goods Exception: 10 day limitation from creditor giving value
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
Future Advances/ Attachment
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
Perfection is the process by which the creditor protects the security interest from most other claimants to the same collateral
Elements of Perfection
Attachment and Act of Perfection
- Attachment
- Creditor gives value, contract (security agreement), Debtor has rights in the collateral - Act of Perfection
Appropriate act of perfection depends on type of collateral. May be just one method or several
- 6 methods
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 sufficient for short period of time
E. Control
F. Notation of Security Interest on Certificate of Title.
Perfection by Possession
Almost all collateral can be perfect by possession except: accounts, deposit accounts, nonnegotiable documents, electronic documents, electronic chattel paper, general intangibles
Lost of Possession: If the creditor has possession of the collateral, perfection is lost
- 20 Day exception for instruments, negotiable documents and certificated securities
Perfection by Filing a Financing Statement
Almost all collateral can be perfect by filing except: deposit accounts and money
Requirements of financing statement:
1. Names of debtor and creditors
2. Addresses of debtor and creditors
-Exception: waived if financing statement is accepted by filing office
3. Debtors authorization in an authenticated record
- Cannot be oral
Authorization of the financing statement is automatic if the debtor authenticated the underlying security agreement
Ex: debtor signed a valid security agreement, can then file financing statement without debtors signature.
4. Description of the collateral
- Can be in broader terms then security agreement such as “all assets”
- After acquired property covered by the security agreement that fits within the description is automatically included
5. Description of the land if the collateral is Timber, Minerals, Fixtures or Crops
Almost all collateral can be perfect by filing except: deposit accounts and money
Requirements of financing statement:
1. Names of debtor and creditors
2. Addresses of debtor and creditors
-Exception: waived if financing statement is accepted by filing office
3. Debtors authorization in an authenticated record
- Cannot be oral
Authorization of the financing statement is automatic if the debtor authenticated the underlying security agreement
Ex: debtor signed a valid security agreement, can then file financing statement without debtors signature.
4. Description of the collateral
- Can be in broader terms then security agreement such as “all assets”
- After acquired property covered by the security agreement that fits within the description is automatically included5. Description of the land if the collateral is Timber, Minerals, Fixtures or Crops
- Description of the land if the collateral is Timber, Minerals, Fixtures or Crops
Errors in Financing Statement: ok if errors are minor and not seriously misleading
Desingation of Debtor in Financing Statement
Very Important as the financing statement is filed under the debtors name
- Individual Name= name of drivers license
- Registered Organization (corporation, partnership) = name under which entity is organized
- Trade Name (doing business as)= not sufficient unless extremely similar to the debtors name
- A trade name will work only if the name is so similar to the debtors name that the financing statement would be discovered in a search of the secretary of states records in response to a request using the debtors name
Change in Debtors Name for Financing Statement
Change in Debtors Name
- Collateral debtor has at the time of the name change: Perfection Continues
- Collateral debtor obtains within four months of name change: Perfection continues
- Collateral debtor obtains after four months of name change: Perfection ends unless refilled under new name within the four month period
Place of Filing Financing Statemetn
Place of Filing: Secretary of State’s office in Austin
Exception: Fixtures, Minerals and Timer to be cut= county where mortgage on real estate would be filed
Duration of Financing Statement
Duration
A financing statement is effective for 5 years from the date of filing
Exception: A recorded real property mortgage covering fixtures continues until the mortgage is released or satisfied
