Introduction and Scope of A9 Flashcards
governing rule of when A9 applies
governing rule: A9 applies to a transaction, regardless of its form, that creates a SI:
> > > PP or fixtures by contract,
> > > an agricultural lien,
> > > a sale of accounts, chattel paper, payment intangibles, or promissory notes; and consignments
“regardless of its form”: ultimately it is the reality of the transaction that matters, not what you call it
»> so the economic substance of the transaction determines its characterization; the subjective intent of the parties is irrelevant
four classifications of goods
Goods (tangible, moveable personal property):
o consumer (personal/family/household purposes)
o equipment (anything other than inventory or consumer goods) >>> your catchall category
o inventory (ppty held for lease or sale) >>> **distinguish from equipment – inventory can be used/consumed by a business just the same, but it usually has a shorter lifespan (so the pens used by Staples employees day-to-day could technically be INVENTORY)
o farm products: exactly what they sound like - look for the FARMER
o (goods can be all these in their lifetime – key is to look at HOW THE PPTY IS BEING USED by the debtor! – you can’t have multiple designations at the same time)
receivables as collateral (types, key notes)
• receivables: sale of accounts, chattel paper
o **whether you see it as a true sale or a financing transaction, it will ALWAYS be considered an A9 transaction (remember, we look to what it is, not what it is called)
»> so you need to follow A9 steps to secure your interest (even if you say you own it – “it was a sale!”)
o note that perfection methods differ here
what is a consignment
**unlikely tested
• consignments (where you own something but have someone else sell it for you – they get a cut of the sale)
**will be considered an A9 transaction, with the consignor as SP IF following reqs met:
9-102(a)(20) defines a consignment as a transaction, regardless of form, where goods are delivered to a merchant for sale, and:
• The merchant is as defined
• Goods delivered exceed aggregate value of $1,000
• **Goods are not consumer goods, AND
• Transaction does not create a security interest in the property
lien creditor vs judgment creditor
o lien creditor: includes judgment lienholders (creditors that originally obtained a money judgment in court) and a trustee in bankruptcy from the date of the filing of the petition
**distinguish simple judgment creditor from lien creditor: judgment lienholders need both a judgment and a writ from the sheriff to seize the property (also called abstract, execution, levy, attachment, replevin, and garnishment)
when does something called a lease become a SI
**unlikely tested
• per se test for determining when a lease is essentially a sale with a SI
o step 1: the lessee cannot have the option to cancel the lease early and get out of paying more rent – its stuck for the duration
o step 2: the transaction must fit into one of these four alternative tests MEASURED AT TIME PARTIES ENTERED INTO THE TRANSACTION:
> > > Original term is equal or greater than “remaining economic life” of the goods;
> > > Lessee required to renew goods for remaining economic life of the goods;
> > > Option to renew lease for remaining economic life for no or nominal consideration; OR
> > > Option to own the goods for no additional or nominal consideration
• plain English: if goods are being leased to the lessee to the point where lessee will have them for so long that there will be no residual interest after the lease term, this is, in effect, a sale, and A9 applies – Section 1-203 looks at it as “the lessor has in fact sold the goods to the lessee, and merely reserved a SI until all payments are made under the lease”
rules for sales of payment intangibles (accounts/chattel paper/instruments, etc.)
a debtor can pursue two financing avenues for (lets call all of these) accounts:
- (1) D can secure a loan where he borrows money and gives C a SI in the accounts, OR
- (2) D can straight up sell the accounts
• **key point: in BOTH situations, A9 will apply – even to the sale where the parties did not consider it to be a loan and SI situation
»> so C is treated like a secured party and will need to perfect in order to get first rights to those accounts over D’s other creditors
• also note that if D secured a loan, any excess in the accounts after the loan was paid off would go back to him, BUT if D sold the accounts, any excess (as compared to the sale price) will go to C
two situations where consignment becomes a ST
why this matters
rule: if a “true” consignment, Article 9 rules for security interests apply
rule: if transaction is inventory financing, then it’s a secured transaction subject to Article 9, section 9-102(a)(20)(D)]
**the purpose of this rule is to protect consignee’s creditors that don’t necessarily know that their debtor is selling someone else’s goods – it requires the consignor to file and put the world on notice of their ownership (technically now a SI) in the goods – if consignor does not file, his interest in his consigned goods could be usurped by the claims for the consignee’s creditors (who get to treat it like the consignee’s own inventory)
what is a merchant for consignment purposes
Merchant must meet the following reqs:
- Deal in goods of that kind
- Under a name other than the person delivering goods
- Is not an auctioneer, AND
- Is NOT generally known by it’s creditors
- To be substantially engaged in selling
- Goods to others
what is a PMSI
o purchase money obligation: one incurred as all or part of the price of the collateral to enable the debtor to acquire rights or use in the collateral [9-103]
the creditor has up to 20 days after debtor’s receipt of PMSI collateral to PERFECT its security interest, with RELATION BACK to date of receipt [9-324(a), 9-317(e)]
o plain english: the value that is granted (the loan) is being used to secure the goods (i.e. D gets loan from C to purchase CL, and then D gives C a SI in that same CL)
o **key note: for a loan to be a PMO, the purpose of the loan must have been specifically to enable D to purchase the goods – if the loan isn’t earmarked for the purchase of specific items, and instead D can do anything he wants with the loan funds, the loan isn’t a PMO, even if D happens to purchase goods with the money
a loan for a business’s “general operating purposes” is likely insufficient to satisfy the PMO definitional requirements
where does purchase money obligation come from (and what is it)
o PMO (i.e. the loan) can be obtained from the seller of the goods (i.e. direct financing) or a 3p to allow you to purchase the goods
the PMO must in fact be DIRECTLY used to purchase those goods – if D turns around and purchases something else not agreed upon with the 3p financing, or puts the money in his bank account for later, it is NOT a PMSI
how does A9 apply to PMSIs
o **A9 only applies to PMSI in goods and software
o **automatic perfection for PMSI in CONSUMER goods
what are proceeds generally; 3 types; what is their A9 rule?
o proceeds defined in 9-102(a)(64) – generally WHATEVER is acquired upon the sale, lease, license, exchange or other disposition of the collateral
»> so if the CL was stolen, the money you receive from the insurance claim would also be considered “proceeds”
»> could take the form of cash, check, account, chattel paper, etc.
o Three types of analysis depending on whether proceeds are:
(1) IDENTIFIABLE cash proceeds
»> burden generally on CREDITOR to trace
»> lowest intermediate balance test: if cash proceeds have been commingled, creditor gets amount of bank account at its lowest value since the deposit, not to exceed the amount of the loan
(2) Non-cash proceeds (accounts, equipment, chattel paper, inventory)
(3) Non-cash proceeds obtained with identifiable cash proceeds
o general rule: unless otherwise agrees, SI CONTINUES in the CL and the proceeds thereof upon a disposition (sale/lease)
»> 9-315 – security interest continues in collateral “notwithstanding sale, lease, license, exchange or other disposition of the collateral” unless otherwise released by the secured party
rule for second level proceeds
proceeds obtained by identifiable cash proceeds (i.e. second level proceeds):
> > > **rule of continued PERFECTION for cash proceeds DOES NOT APPLY to other proceeds (i.e. whatever is then purchased with the cash) acquired by cash proceeds, UNLESS the original financing statement covers the type of collateral purchased with the cash proceeds
> > > if the filed financing statement does not include the type of collateral purchased with the identifiable cash proceeds, the perfection in those proceeds does not extend beyond 20 days - so you would need to AMEND
> > > must be able to show IDENTIFIABLE cash proceeds
• **so now the question is not “is the OG CL ID’d by the FS?” (like non-cash proceeds), but rather, “is the CL bought with the proceeds covered by the FS?”
> > > the SP wants to OVER DESCRIBE the CL in the FS (as compared to SA), because if you do something like add “and proceeds” in the FS, you cover that base should the CL be sold
what is chattel paper and what are the three situations in which it arises
Defined as a record that evidences “both a monetary obligation and a security interest in specific goods”
> > > so it is promissory note + security agreement
> > > will most commonly be a RETAIL INSTALLMENT SALES CONTRACT (credit sale)
Chattel paper can arise in several Article 9 transactions:
(1) As original collateral
(2) Sale of chattel paper, or
(3) As proceeds of inventory
