Secured Transactions Flashcards
(30 cards)
Applicable law; put this in every essay
Article 9 of the UCC governs any transaction (regardless of its form) that creates a security interest.
− Includes → security interests in personal property, consignments, sale of accounts, chattel paper, & promissory notes.
Scope of UCC Art. 9 + lease vs security interest
Substance over form controls, as to whether a security interest is created.
− How the parties classify the transaction is immaterial.
Title to Collateral is Immaterial – UCC Art. 9 applies to a security interest regardless of whether title to the collateral is in the name of secured party.
− Seller CANNOT retain or reserve title to goods that have been delivered or shipped. Any attempt to retain/reserve title is limited to a reservation of a security interest.
Lease vs. Security Interest – Courts look at the economic reality to determine if a lease is actually a security interest.
A “lease” will be deemed a security interest if:
1) A commitment to make payments for a term exists; AND
2) Either: a) The original term is equal to (or greater) than the remaining economic life of the goods; b) Lessee must renew the lease for the remaining economic life of the goods (or is forced to take ownership); c) Lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration; OR d) Lessee has the option to become the owner of the goods for no additional consideration
type of collateral; accounts
Account = A right to payment of a monetary obligation (whether or not earned by performance). − Includes → (1) property that has been (or is to be) sold, leased, or disposed of; (2) services rendered; (3) policy of insurance; (4) secondary obligation incurred; (5) energy provided; (6) use or hire of a vessel under a charter/contract; (7) credit card debt; and (8) lottery winnings.
type of collateral; deposit account
Deposit Account = An demand, time, savings, or similar account maintained with a bank (can only be perfected by control).
− DOES NOT include investment property or accounts evidenced by an instrument.
Type of collateral; inventory
inventory = Goods that are:
a) Leased;
b) Held for sale/lease or to be given under a contract of service;
c) Given under a contract of service; OR
d) Consisting of raw materials, work in process, or materials used/consumed in a business.
*Inventory DOES NOT include farm products or goods held only for repair.
Equipment; type of collateral
Equipment = Goods other than inventory, farm products, or consumer goods.
− Goods = all things movable when the security interest attaches (including fixtures, timber, unborn young of animals, crops, and manufactured homes)
“Certificate of Title” Statute – Some States require that a security interest on a motor vehicle be noted on the title inorder to be perfected.
Consumer goods
Consumer Goods = Goods purchased primarily for personal, family, or household purposes.
Proceeds
= The following types of property:
a) Acquired upon the sale, lease, or other disposition of collateral;
b) Collected/distributed on account of collateral;
c) Rights arising out of collateral;
d) Claims arising out of the loss, nonconformity, defect, or interreference with the use of collateral; OR
e) Insurance payable by loss of collateral.
* A check given in exchange for collateral is “cash proceeds”.
Chattel Paper
A record that evidences:
1) a monetary obligation; AND
2) either (a) a security interest in specific goods, (b) a lease of specific goods, or (c) a security interest in specific goods with software (or a software license used in the goods).
Monetary Obligation = An obligation to pay money that is: a) secured by the goods; OR b) owed under a lease of the goods
Attachment and Perfection
Attachment & Perfection – Enforcing a security interest depends on two factors: (1) Attachment; AND (2) Perfection.
− Attachment → secures the creditor’s rights in the collateral, making it enforceable.
− Perfection → gives notice of the creditor’s rights in the collateral (determines priority of interests).
*A security interest CANNOT be perfected, unless it’s first attached.
Attachment requires:
1) That creditor extends value to the debtor;
2) Debtor must have rights in the collateral; AND
3) One of the following:
a. An authenticated record or security agreement (authenticated by debtor + reasonably identify the collateral);
b. Secured party has possession of the collateral;
c. Certificated security in registered form + security certificate delivered to the secured party; OR
d. Control for deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights.
Perfection is obtained by:
a) Filing a financing statement with the Secretary of State (must identify the collateral and security
interest) ; OR b) Taking possession or control of the collateral
Financing Statement
– An effective financing statement MUST:
1) Provide the name of the debtor and secured party (if debtor is an organization, must provide official registered name);
2) Reasonably identify the collateral; AND
3) Be filed by a person authorized by the debtor.
Substantial compliance with the above is required.
− Minor errors/omissions are ok UNLESS it makes the statement seriously misleading.
− Insufficient name of debtor → is seriously misleading UNLESS the statement is discoverable in a search of the records of the filling office under debtor’s correct name
Purchased Money Security Interest (PMSI)
a PMSI is created when a creditor extends value to the debtor for the purpose of enabling the debtor to acquire rights in the collateral.
− PMSI for Consumer Goods → automatic perfection.
− PMSI for Non-Consumer Goods → takes priority if the creditor files a financing statement before/within 20 days after debtor receives delivery of the collateral
Payment Right Sold & Rights/Title of Creditors &Purchasers
Payment Right Sold & Rights/Title of Creditors & Purchasers – A debtor that has sold an account, chattel
paper, payment intangible, or promissory note DOES NOT retain an interest in the collateral sold.
− BUT, when determining the rights of creditors/purchasers of an account or chattel paper sold by a debtor, the debtor is deemed to have rights in such collateral while the buyer’s security interest is unperfected.
Automatic Perfection for Certain Assignment of Accounts
Automatic Perfection for Certain Assignment of
Accounts – A security interest is automatically perfected upon attachment of an assignment of accounts IF IT DOES NOT transfer a significant part of the outstanding accounts of the assignor.
Security Interest in the Sale of Collateral & Identifiable Proceeds
A security interest will continue despite any sale, lease, or other disposition of the collateral.
− UNLESS the secured party authorizes a transfer free of the security interest.
A perfected security interest will attach to any identifiable proceeds from the disposition of collateral.
− HOWEVER, that interest will become unperfected on the 21st day after attachment UNLESS:
a) Proceeds are identifiable cash proceeds;
b) a Security interest is perfected when it attaches to the proceeds or within 20 days; OR
c) If ALL of the following are satisfied: (I) original collateral was perfected under the general filing rule; (ii) proceeds are collateral that may be perfected by filing; and (iii) proceeds are not acquired with cash proceeds
Consignment
Treated like a PMSI in inventory.
A consignment is a transaction in which:
1) A person delivers goods to a merchant for the purpose of sale;
2) Merchant deals in goods of the kind, is not an auctioneer, and is generally not known by his creditors to be substantially engaged in selling goods of others;
3) Value of goods is $1,000 or more at the time of delivery;
4) Goods are not consumer goods immediately before delivery; AND
5) Transaction does not create a security interest.
Control of a Deposit Account
Control of a Deposit Account – a deposit account can only be perfected by control.
A secured party has “control” if:
a) The secured party is the bank where the account is maintained;
b) The debtor, secured party, and bank have agreed as such in an authenticated record; OR
c) The secured party becomes the bank’s customer with respect to the deposit account.
Future Advances and After Acquired Property
Future Advances – A security agreement may provide that the collateral secures future advances (whether or not the advances are mandatory).
After-Acquired Property – A security agreement may create (or provide for) a security interest in after-acquired collateral.
− Exceptions → (a) commercial tort claim; OR (b) consumer goods (other than accessions given as additional security) unless the debtor acquires rights within 10 days
Protection of a Buyer of Goods; Transfers of Collateral - Shelter, BIOC, C2C
A buyer receives ALL of the rights the seller had upon the transfer of goods. Thus, a seller who did not have title to goods CANNOT transfer title to a buyer (unless an exception applies).
− Exceptions → (1) Shelter Principle, (2) Buyer in the Ordinary Course of Business, (3) Consumer to-Consumer Rule.
The Shelter Principle → If a buyer acquires property free of a security interest, then any subsequent transfer is also free of the security interest
Buyer in the Ordinary Course of Business – takes free of a security interest.
Buyer in the Ordinary Course of Business = a person:
1) that buys goods in good faith,
2) without knowledge that the sale violates the rights of another person, AND
3) is in the ordinary course from a merchant (a person in the business of selling goods of that kind).
Example → If a person entrusts goods to a merchant who deals in goods of that kind, then that merchant has the power to transfer title to a buyer in the ordinary course of business (even though the merchant seller did not have title to the goods).
Consumer-to-Consumer Rule – Buyers of consumer goods take free of a security interest if the goods are bought:
1) without knowledge of the security interest;
2) for value;
3) from a consumer who primarily bought the goods for personal/family/household purposes; AND
4) before the filing of a financing statement covering the goods
Priority of Perfected & Unperfected Interests
Perfected Interest vs. Unperfected Interest → Perfected interest has priority over a conflicting unperfected interest.
Unperfected Interest vs. Unperfected Interest → The first creditor to attach will prevail.
Perfected Interest vs. Perfected Interest → Rule of “first in time, first in right” controls – first creditor to perfect has priority.
PMSI vs. Perfected/Unperfected Interest → A PMSI in consumer goods enjoys automatic perfection, so it has priority.
− PMSI’s in non-consumer goods require filing a financing statement to be perfected → so apply the appropriate priority rule above (depending if the interest was perfected or unperfected
Priority of Liens Arising by Law
A possessory lien on goods has priority over a security interest in goods.
− UNLESS the lien is created by a statute that states otherwise
A Possessory Lien is an interest that:
1) Secures payment/performance of an obligation for services or materials furnished by a person in the ordinary course of business;
2) Is created by statute or rule of law in favor of the person; AND
3) Whose effectiveness depends on the person’s possession of the goods.
Example → mechanic’s lien.
Judgment Liens
Judgment lien creditors have priority over conflicting security interests ONLY IF the person became a judgment lien creditor before the security was perfected.
− Priority also extends to future advances secured more than 45 days after the person became a lien creditor UNLESS the advance is made without knowledge of the lien.
▪ BUT, this rule DOES NOT apply to a buyer of accounts or a consignor
Fixtures
An ownership interest in real property has priority over conflicting security interests in fixtures. − BUT, see exceptions below.
Exception #1 → Perfected PMSI in a Fixture has priority if:
1) Debtor has an interest of record or is in possession of the real property;
2) Ownership interest arose before the goods became fixtures; AND
3) PMSI was perfected before the goods became fixtures (or within 20 days thereafter).
Exception #2 → Fixture Filing – requires:
1) Filing a financing statement that covers goods that are or will become fixtures;
2) Satisfy the general rules for financing statements (names of debtor, name of secured party/representative, and indicate collateral); AND
3) Satisfy real property filing rules: (i) state that it covers a fixture; (ii) filed in real property records; (iii) sufficient description of the real property; and (iv) provide the name of a record owner (if the debtor does not have an interest of record in the real property).
Accessions & Commingling
Accessions → Goods that are physically united with other goods, but still retain their separate identity.
− Security interest in the separate goods continues in the accession collateral.
− If perfected when the collateral became an accession, the interest remains perfected.
Commingling → An accession (combining) of two goods that are each subject to a different security interest.
− General priority rules govern EXCEPT when an interest is perfected by compliance with a Certificate-of-Title Statute (that takes priority over all other interests).
