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Flashcards in Chapter 30 Deck (88)
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1
Q

Security Interest

A

An interest in personal property or fixtures which secures payment or performance of an obligation.

2
Q

Secured Party

A

A lender or seller who obtains a security interest in personal property.

3
Q

Debtor

A

The party owing the obligation to pay money or otherwise perform.

4
Q

Security Agreement

A

An agreement which creates or provides for a security interest in personal property.

5
Q

Collateral

A

Personal property that is subject to a security interest.

6
Q

What are goals of creditors?

A

Can the debt be satisfied through possession and sale of personal property – specific collateral? (Attachment)
Does the creditor have priority over other creditors or buyers who may have rights in the same collateral? (Perfection)

7
Q

Once a creditor has attached a security interest to an item of collateral the creditor is technically called a…

A

secured creditor

8
Q

“Attachment” gives the creditor rights in the item of collateral. But what if other creditors have rights in that item of collateral too?

A

“Perfection” deals with the priority of creditors and purchasers who have rights in the same item of collateral as the secured creditor

9
Q

3 Requirements for Attachment of the Security Interest

A
  1. Either possession or a written/authenticated security agreement
  2. The secured party must give value
  3. Debtor mush have rights in the collateral
10
Q

In what ways can a secured party give value?

A
  1. Loan (lending institutionas, banks, extended loans)
  2. Credit (store)
11
Q

If all 3 requirements are present, there is a secured transaction, and a secured creditor is created.

A

The secured creditor has the rights to the items and in the event the debtor doesn’t pay, the secured creditor can cease the item and sell it.

12
Q

Perfection

A

The legal process by which Secured Parties protect themselves against the claims of third parties who may wish to have their debts satisfied out of the same collateral.

13
Q

What are the three ways to perfect a security interest?

A
  1. Filing a financing statement
  2. Without filing by - possession
  3. Without filing by - attachment
14
Q

Tangible Collateral

A

All things that are movable at the time the security interet attaches or that are attached to land, including timber and crops

15
Q

Intangible Collateral

A

Nonphysical property that exists only in connection with something else

16
Q

Consumer Goods

A

Items bought primarily for personal, family, or household purposes, such as a home theatre system.
(tangible collateral)

17
Q

Equipment

A

Goods bought for or used primarily in business (and not part of inventory or farm products)—for example, a delivery truck.
(tangible collateral)

18
Q

Inventory

A

Goods held by a person for sale or under a contract of service or lease; raw materials held for production and work in progress.
(tangible collateral)

19
Q

Instrument

A

A negotiable instrument—such as a check, note, certificate of deposit, or draft—that evidences a right to the payment of money and is not a security agreement or lease, but rather is a type of instrument that ordinarily can be transferred by delivery.
(intangible collateral)

20
Q

What is the method of perfection for consumer goods?

A

A purchase-money security interest (PMSI) in consumer goods is automatically perfected at the time it is created (except for certain vehicles that must also comply with certificate-of-title statutes). For other consumer goods, general rules of filing or possession apply.

21
Q

What is the method of perfection for equipment?

A

Filing or (rarely) possession by secured party.

22
Q

What is the method of perfection for inventory?

A

Filing or (rarely) possession by secured party.

23
Q

What is the method of perfection for instruments?

A

Normally, filing or possession. For the sale of promissory notes, perfection can be by attachment (automatically on the creation of the security interest).

24
Q

Sheila needs cash to pay for a medical procedure. She obtains a loan for $4,000 from Trent. As security on the loan, she gives him a promissory note on which she is the payee. Even though the agreement to hold the note as collateral was oral…

A

Trent has a perfected security interest. He does not need to file a financing statement, because he has possession of the note. No other creditor of Sheila’s can attempt to recover the note from Trent in payment for other debts.

25
Q

Jeb, a farmer, takes out a loan to finance the purchase of a corn harvester and uses the equipment as collateral. Clearly, the purpose of the purchase would be defeated if Jeb transferred the collateral into the creditor’s possession.

A

For most collateral possession by the secured party is impractical because it would prevent the debtor from using or deriving income from the property to pay off the debt.

26
Q

John Deere tractor company needs to buy more tractors from the manufacturer to buy 100 new tractors. The tractors are collateral from the bank. How are the tractors classified?

A

Inventory

27
Q

Farmer buys a tractor using financing through a store. How is the tractor classified?

A

Equipment

28
Q

Perfection by Filing

A

Filing of a financing statement with the appropriate public office gives constructive notice of the secured interest to other creditors of the Debtor.

29
Q

What are the contents of a financing statement?

A
  1. Signature of the Debtor; The creditor is not required to sign
  2. Names and addresses of the Debtor and the Secured Party; and
  3. Statement specifically indicating the type of collateral or describing the collateral.
30
Q

Whose name is the financing statement filed under?

A

The debtor’s name

31
Q

Where do you file financing statements?

A
  1. Central filing - with state official (Secretary of State)
  2. Local filing - with county official (County clerk’s office)
32
Q

When filing is with a state official, the determination of which state depends upon…

A

the Debtor’s location

33
Q

How is the debtor’s location determied when filing with a state official?

A
  1. Individual debtor – state of debtor’s residence;
  2. Organization like a corporation – state of incorporation or registration; LLC, LP, etc.
  3. Organizations not registered with the state – place of main business operations or chief executive offices. General partnership, sole proprietor
34
Q

The filing of a financing statement is effective for…

A

5 years

35
Q

Renewal of perfection is affected by filing a continuation statement within ______ months of expiration of prior filing.

A

6
But, you can keep renewing as long as it takes to get paid

36
Q

What are the consequences of improper filing?

A

Renders the secured party unperfected and reduces the secured party’s claim in bankruptcy to that of an unsecured creditor

37
Q

What is an example of an unsecured creditor?

A

Credit Card companies

38
Q

If the debtor goes into bankruptcy, what is the likelihood that unsecured creditors are paid?

A

Not likely at all

39
Q

What are examples of improper filing?

A

debtor’s name is inaccurate or collateral is not sufficiently described.

40
Q

Perfection without Filing - Perfection by Possession

A

The Secured Party can perfect a security interest by taking physical possession of tangible or semi-intangible collateral.

41
Q

For most collateral, perfection by possession is …

A

impractical

42
Q

Perfection without Filing - Perfection by Attachment

A

Purchase-Money Security Interest (PMSI) in Consumer Goods

43
Q

Purchase-Money Security Interest (PMSI)

A

The PMSI in consumer goods is created when a person buys goods primarily for personal, family or household purposes, and the seller or lender agrees to extend credit for part or all of the purchase price of the goods.

44
Q

A PMSI in consumer goods is _________ perfected at the time of the credit sale, ie when the PMSI is created.

A

automatically

45
Q

What are the exceptions to the rules for automatic PMSI perfection?

A
  1. consumer goods subject to certificate-of-title statutes, including cars, trailers, boats, mobile homes, and farm tractors – to be perfected the secured party must file a certificate-of-title with the appropriate state office.
  2. PMSIs in non-consumer goods, such as livestock or a business inventory are not automatically perfected.
46
Q

Ben wants to purchase an entertainment center from Best Buy and the purchase price is $5,000. Not being able to pay cash, Ben signs a purchase agreement (promissory note) payable to the order of Best Buy where he agrees to pay $500 down and $200 per month until the balance plus 3% interest is fully paid.

Who is the secured party?

A

Best Buy

Best Buy has retained a security interest in the entertainment center until full payment has been made.

47
Q

Ben wants to purchase an entertainment center from Best Buy and the purchase price is $5,000. Not being able to pay cash, Ben signs a purchase agreement (promissory note) payable to the order of Best Buy where he agrees to pay $500 down and $200 per month until the balance plus 3% interest is fully paid.

Who is the debtor?

A

Ben

48
Q

Ben wants to purchase an entertainment center from Best Buy and the purchase price is $5,000. Not being able to pay cash, Ben signs a purchase agreement (promissory note) payable to the order of Best Buy where he agrees to pay $500 down and $200 per month until the balance plus 3% interest is fully paid.

Is Best Buy a secured creditor after Ben signs the purchase agreement?

A

Yes

49
Q

Ben wants to purchase an entertainment center from Best Buy and the purchase price is $5,000. Not being able to pay cash, Ben signs a purchase agreement (promissory note) payable to the order of Best Buy where he agrees to pay $500 down and $200 per month until the balance plus 3% interest is fully paid.

Is Best Buy a perfected secured creditor after Ben signs the purchase agreement or is Best Buy required to a file a financing statement?

A

Yes, perfected automatically

50
Q

Ben wants to purchase an entertainment center from Best Buy and the purchase price is $5,000. Not being able to pay cash, Ben signs a purchase agreement (promissory note) payable to the order of Best Buy where he agrees to pay $500 down and $200 per month until the balance plus 3% interest is fully paid.

What do we call this type of secured transaction?

A

PMSI

51
Q

Ben wants to purchase an entertainment center from Best Buy and the purchase price is $5,000. Not being able to pay cash, Ben signs a purchase agreement (promissory note) payable to the order of Best Buy where he agrees to pay $500 down and $200 per month until the balance plus 3% interest is fully paid.

Would it change anything if Ben goes to FNB for a loan for the $5,000 to buy the entertainment center from Best Buy?

A

It doesn’t change anything in terms of it being a PMSI. It doesn’t matter if it is at a bank or in the store.

52
Q

Ben wants to purchase an entertainment center from Best Buy and the purchase price is $5,000. Not being able to pay cash, Ben signs a purchase agreement (promissory note) payable to the order of Best Buy where he agrees to pay $500 down and $200 per month until the balance plus 3% interest is fully paid.

Is the purchase agreement negotiable instrument negotiable to a HDC? Subject to FTC rule 433 limitations on HDC status.

A

Yes it is most likely a negotiable instrument. Most likely a promissory note. Consumer credit contract – you don’t ever get the benefit of HDC status, it is less marketable (sure it is negotiable to HDC, but less likely to be bought).

53
Q

Does attachment have to happen before perfection?

A

No. Often at banks, perfection is first. (The debtor should sign the financing statement first. Am I the first or second lien holder? Have they used the boat as collateral before?)

54
Q

Scope of Security Interest

A
  1. Proceeds
  2. After-Acquired Property
  3. Future Advances
  4. The Floating Lien Concept
55
Q

Proceeds

A

A Secured Party has an interest in the proceeds received from the sale, exchange, or other disposition of the collateral. Very broad (anything that comes in, in exchange for something going out)

56
Q

After-Acquired Property

A

A security agreement may cover personal property, such as inventory, that is purchased or otherwise acquired by the Debtor after the execution of the security agreement.

57
Q

Future Advances

A

Continuing Line of Credit - A security agreement may cover advances to be made by a Secured Party in the future.

58
Q

The Floating Lien Concept

A

The security agreement may provide that the Secured Party will have a security interest in the proceeds of the sale, exchange, or other disposition of the collateral and specified after-acquired property of the Debtor and that the same collateral will cover future advances to be made by the Secured Party.

59
Q

Floating Liens usually apply to inventory but also apply to…

A

a shifting stock of goods as the goods are processed, sold and turned into cash, accounts receivable, or chattel paper.

60
Q

Ski Paradise, Inc., a ski equipment dealer, is starting a new business. The owners go to Bank One and enter into a security agreement to finance the new business. The security agreement provides for coverage of proceeds, after-acquired inventory, present inventory and future advances. This security interest is perfected by Bank One when it files the financing statement with the secretary of state. One day, Ski Paradise sells a new pair of skis, for which it receives a used pair in exchange, sells 3 pairs of trick skis on credit and 5 pairs for cash. Later, it purchases two new pairs of skis from a local manufacturer with an additional amount of money obtained from Bank One.
If Ski Paradise Inc. went into default on its loan with Bank One, what collateral does Bank One have rights to?

A

Cash, used pair, and credit arrangement on skis are proceeds. The proceeds clause matters if default by the debtor happens.
2 new skis purchased are covered because of the after acquired property clause.
Additional amount of money = future advances

61
Q

Suppose Ski Paradise, Inc decides to double its inventory and 6 months later goes into default on the loan with Bank One. What are Bank One’s rights to the assets of the business?

A

Bank One still has rights to everything, including double the inventory. The creditor wants to have as broad of rights as possible (so they can have the best chance to getting paid back). Order of proceeds. If there happens to be surplus after everyone gets paid back, the debtor gets the surplus.

62
Q

Who has priority when more than one security interest has been perfected in the same collateral?

A

The first to be perfected (or filed)

63
Q

Who has priority if only one of the conflicting security interests has been perfected?

A

The security interest has priority

64
Q

Who has priority if none of the security interests have been perfected?

A

The first security interest that attaches has priority

65
Q

Rebel Rents, debtor gave Textron Financial Corp a security interest in snorkeling inventory, equipment and proceeds. Later that year General Electric Capital Corp, loaned $25 million to Rebel Rents and took a security interest in all of Rebel’s assets, including inventory and proceeds.

GECC filed financing statement on 1/5/01.

Textron filed financing statement on 1/16/01.

Rebel files for bankruptcy in 2002, but still had income from its business after filing bankruptcy of $430,661. Who gets it? Textron claims it is entititled to the money because its security interest was created first. Is that right?

A

2 secured creditors. GECC: first one to be attached (perfected first). Textron is the second one to be attached. Reorganization of their business (allows the business to stay in business while still paying of creditors). GECC gets the full $430,661.

66
Q

What are exceptions to the general rules of priority?

A
  1. Buyers in the Ordinary Course of Business (BIOCB)
  2. PMSI in Goods Other than Inventory and Livestock
  3. PMSI in Inventory
  4. Buyers of Consumer Goods from Consumers
67
Q

Buyers in the Ordinary Course of Business (BIOCB) is a person who…

A

in good faith and without knowledge that the sale is in violation of the ownership rights or security interest of a third party in the goods, buys the goods from a person who is in the business of selling goods of that kind.

68
Q

A BIOCB will have priority to the consumer goods they purchase, over a secured party, even if…

A

the security interest is perfected and even if the BIOCB knows of its existence

69
Q

A perfected PMSI in inventory has priority over an earlier perfected non-PMSI, IF…

A

the PMSI secured party gives written notice to the non-PMSI secured party before the Debtor takes possession of the inventory.

70
Q

Buyers of Consumer Goods from Consumers

A

A PMSI in consumer goods, which are sold to a buyer for personal, family or household use, is perfected by attachment; the Secured Party may also file a financing statement.

71
Q

A buyer of consumer goods from the Debtor takes free of the PMSI if:

A

1) the buyer does not have knowledge of the security interest;
2) gives value; and
3) purchases the goods for personal, family, or household use; UNLESS
4) the Secured Party properly filed a financing statement.

72
Q

Suzanne is a consumer and she purchases a sub-zero refrigerator from Buddy’s Appliance for $15,000 on credit because she cannot pay the full purchase price.
A written security agreement is entered into, in which Buddy’s takes a PMSI in the refrigerator. Buddy’s doesn’t file a financing statement, (not required… but they will regret this decision) because when a PMSI is taken in consumer goods, perfection occurs automatically.

2 months later, Suzanne is in financial trouble and so she sells the refrigerator to her next-door neighbor, Chris for $5,000. Is Chris a BIOCB?

A

Suzanne is a BIOCB. Chris did not buy the refrigerator form the store, Chris bought it from the BIOCB who was Suzanne. He is a second purchaser. And he probably has no knowledge of Buddy’s security interest in the fridge. Subsequently, Suzanne defaults on payment of the fridge with Buddy’s.

73
Q

Suzanne is a consumer and she purchases a sub-zero refrigerator from Buddy’s Appliance for $15,000 on credit because she cannot pay the full purchase price.
A written security agreement is entered into, in which Buddy’s takes a PMSI in the refrigerator. Buddy’s doesn’t file a financing statement, (not required… but they will regret this decision) because when a PMSI is taken in consumer goods, perfection occurs automatically.

2 months later, Suzanne is in financial trouble and so she sells the refrigerator to her next-door neighbor, Chris for $5,000.

Is Buddy’s security interest in the fridge good against Chris? Can Buddy’s, assuming they find the fridge at Chris’ house, get the fridge back? In other words… who wins in the priority dispute?

A

No. Chris wins. If Buddy’s had filed a financing statement, Buddy would have won. On a big ticket item, it makes sense for the creditor to file a financing statement. If Buddy would have filed the financing statement he would have the option to sue Suzanne or get the fridge back from Chris.

74
Q

Rights and Duties of Debtors and Creditors.

A

Unless the parties otherwise agree in the security agreement, their rights and duties prior to default or termination are determined by Article 9 of the UCC.

75
Q

If security agreement does not provide to contrary, the UCC provides the following:

A
  1. When filing a financing statement, a creditor can ask for a copy.
  2. A prospective creditor can ask for information on possible financing statements of a person they are considering lending to.
  3. A secured party can release collateral and end his security interest or assign the interest to another.
  4. Any amendment to a financing statement must be signed by both parties.
  5. A debtor can ask about the amount of his debt as of a specified date.
  6. When a debt is paid, the secured party must send to the debtor or file a termination statement.
76
Q

What constitutes a default by the Debtor is usually stated in the…

A

security agreement, subject to the UCC good faith requirement and unconscionability doctrine.

77
Q

Default occurs because of a breach of the terms of the security agreement, such as:

A
  1. Failure of Debtor to meet scheduled payments.
  2. Bankruptcy of the Debtor.
  3. Breach of warranty of good title with regard to equipment or warranty that the equipment is free of liens, encumbrances, or other security interests.
78
Q

Basic remedies for default

A
  1. A secured party can take possession of the collateral and retain the collateral in satisfaction of the obligation or sell the collateral applying the proceeds toward the debt
  2. A secured party can relinquish a security interest and then sue the debtor based on the underlying obligation of the debtor, obtain a judgement, and have the judgement enforced by execution and levy
79
Q

Secured Party’s Right to Take Possession

A
  1. The Secured Party must do so without breach of the peace.
  2. Generally, the Secured Party cannot enter the Debtor’s home, garage, or place of business without permission.
80
Q

A Secured Party, who is retaining the collateral in satisfaction of the obligation, must give written notice to the Debtorand other secured parties from whom…

A

the Secured Party has received written notice of a claim of an interest in the collateral.

81
Q

If within 20 days after the notice is sent, the Secured Party (senior lien holder) receives a written objection from a party entitled to receive notification, the Secured Party must dispose of the collateral. If no such objection is received, the Secured Party…

A

may retain the collateral in full satisfaction of the debtor’s obligation.

82
Q

A Secured Party who has a PMSI in consumer goods may not retain the goods if more than 60% of the price, or debt, has been paid by the Debtor, unless…

A

after default, the Debtor signed a written statement renouncing the right to demand the sale of the goods.

83
Q

A Secured Party may dispose of the collateral by sale (public or private), lease, or any other commercially reasonable means. But…

A

notice must be given to the Debtor and other Secured Parties who have given notice of claims so that the Debtor and other secured parties may exercise their rights of redemption, unless the goods are perishable.

84
Q

The order of distribution of the proceeds from disposition:

A
  1. Expenses of sale, possessing, holding, and preparing for sale, including attorney’s fees.
  2. Satisfaction of debt.
  3. Subordinate security interest holders who gave written notification.
  4. Usually, the Debtor is entitled to any surplus.
85
Q

If, after proper disposition of the collateral, the entire amount of the obligation is not collected, the Debtor is…

A

liable for the balance and the Secured Party can obtain a deficiency judgment.

86
Q

If the underlying transaction was a sale of accounts or chattel paper, the Debtor is…

A

liable for the deficiency only if the security agreement so provides.

87
Q

Redemption Rights

A

The Debtor or any other Secured Party (a person who has a “junior” security interest) can redeem the collateral by tendering performance of all obligations that were secured by the collateral and by paying certain expenses to the Secured Party before the Secured Party disposes of the collateral or enters into a contract for the collateral’s disposition; or before the Debtor’s obligation has been discharged through the Secured Party’s retention of the collateral.

88
Q

Redford is a seller of electric generators. He purchases a large quantity of generators from a manufacturer, Mallon Corp., by making a down payment and signing an agreement to make the balance of payments over a period of time. The agreement gives Mallon Corp. a security interest in the generators and the proceeds. Mallon Corp. properly files a financing statement on its security interest. Redford receives the generators and immediately sells one of them to Garfield on an installment contract, with payment to be made in twelve equal installments. At the time of the sale, Garfield knows of Mallon’s security interest. Two months later, Redford goes into default on his payments to Mallon. Discuss Mallon’s rights against Garfield in this situation.

A

Creditor: Mallon Corp
Debtor: Redford
Attached and perfected.
Secured transaction within a secured transaction.
BIOCB: Garfield

Consumer wins a priority dispute. Mallon is not allowed ot take the generator back from Garfield. Mallon has the rights to the proceeds. Installment contract (2 months of payment sitting in A/R at Mallon). Mallon will want a proceeds clause.