Secured Transactions Flashcards
Define Secured Transaction
A secured transaction is a transaction intended to create a security interest in personal property or fixtures
To spot a secured transaction, look for (1) a credit transaction (a sale on credit or a loan) and (2) an agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt.
Define Purchase Money Security Interest
A security interest that can arise in two ways:
- The secured party sells the goods to the debtor on credit and retains a security interest in the goods sold, or
- The creditor loans the funds to the debtor to enable the debtor to buy specific collateral, those funds are used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral. The PMSI secures whatever portion of the purchase price still has to be paid.
Define Attatchment
The steps legally required to give the secured party a security interest in the collateral that is effective as against the debtor. Once a security interest attaches, it is effective against the debtor and the creditor has all of the rights of a secured creditor under Article 9. A creditor is not a secured creditor until attachment
Define Perfection
Perfection deals with those steps legally required to give the secured party an interest in the collateral that is effective as against the world. In general, perfection is the process of giving public notice of the security interest to the world
Financing Statement
A financing statement is the document generally used to provide public notice of the security interest, and so to perfect the security interest.
What are the Types of Collateral?
- Tangible Collateral: Goods
- Intangible or Semi-Intangible Collateral
What are the Categories of Goods
Goods are tangible, movable, personal property
- Consumer goods—goods used or bought primarily for personal, family, or household purposes
- Equipment—goods that are used or bought for use in a business. Note: This is also the default category for goods. In other words, if the collateral is a good, and it doesn’t fit the definition of consumer goods, inventory, or farm products, it gets classified as equipment.
- Farm products—crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk, and eggs) if they are in the possession of a debtor engaged in farming operations
- Inventory—goods held for sale or lease, goods that are to be furnished under service contracts, and materials used or consumed in a business in a short period of time
Categories of Intangible or Semi-Intangible Collateral
- Instruments—Pieces of paper representing the right to be paid money, like promissory notes, drafts (for example, checks), and certificates of deposit
- Documents—A document that represents the right to receive goods (for example, a bill of lading, a warehouse receipt)
- Chattel paper—A record or records which evidence both (1) a monetary obligation, and (2) a security interest in or a lease of specific goods. A “record” is information that is stored in either a tangible medium (for example, written on paper), or an intangible medium (for example, electronically stored). Chattel paper that is stored in an electronic medium is also called “electronic chattel paper.”
- Investment property—Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items
- Accounts—Includes a right to payment (that is not evidenced by an instrument or chattel paper) for property sold or services rendered. Note: A contractual obligation arising from a loan of money is not an account—it is a general intangible (see below).
- Deposit accounts—An account maintained with a bank. Note: In general, Article 9 only applies to security interests in nonconsumer deposit accounts and account monies that are claimed as proceeds of other collateral.
- Commercial tort claims—A tort claim where (1) the claimant is an organization (for example, a partnership or corporation), or (2) the claimant is an individual, the claim arose out of the claimant’s business or profession, and the claim does not include damages for personal injury or the death of an individual (note that Article 9 also applies to noncommercial tort claims that are claimed as proceeds of other collateral)
- General intangibles—Any personal property not coming within the scope of the other definitions, such as patent and trademark rights, copyrights, and goodwill. A general intangible under which the account debtor’s principal obligation is a monetary obligation is a payment intangible.
Requisites for Attachment
A security interest is not enforceable unless it has attached. There are three requirements for attachment, which must coexist:
- The parties must agree to create the security interest (that is, they must enter into a security agreement), as evidenced by (1) the creditor taking possession of the collateral, (2) an authenticated security agreement, or (3) the creditor taking control of nonconsumer deposit accounts, electronic chattel paper, and investment property (see Module 4 for the methods of obtaining control), and
- Value must be given by the secured party, and
- The debtor must have rights (for example, ownership) in the collateral
Form of Authenticated Security Agreement
a. Evidenced by a Record The agreement must be evidenced by a record (that is, written or electronically stored information) and must show an intent to create a security interest.
b. Agreement Must Be Authenticated The agreement must be authenticated by the debtor. This usually means that it is signed by the debtor. Any symbol, including an electronic symbol, that is made with the present intent to authenticate the record will work
c. Description of Collateral The agreement must contain a description of the collateral (and if the security interest covers timber to be cut, a description of the land concerned). The description must reasonably identify the collateral. Collateral can be described broadly by category or type (for example, “all of the debtor’s equipment”) or specifically (for example, by serial number or by saying “the debtor’s television” if the debtor has only 1 television).
Methods of Perfection
There are five methods of perfection: (1) filing; (2) taking possession of the collateral; (3) control; (4) automatic perfection; and (5) temporary perfection.
AUTOMATIC PERFECTION—PMSI IN CONSUMER GOODS
In certain situations, a security interest is automatically perfected upon attachment. The most common such situation is a PMSI in consumer goods. A PMSI in consumer goods is perfected as soon as it attaches
PERFECTION BY TAKING POSSESSION (PLEDGE)
Security interests in most types of collateral can be perfected simply by taking possession of the collateral
Security interests in general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, certificate of title goods, and accounts cannot be perfected by possession.
PERFECTION BY CONTROL
Security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by “control.” Note that security interests in nonconsumer deposit accounts can only be perfected by control
Methods of Control on p.30
PERFECTION BY FILING
A secured party may obtain perfection by filing (either in writing or electronically) a financing statement. The financing statement must contain:
- The debtor’s name and mailing address,
- The secured party’s name and mailing address, and
- A description of the collateral covered by the financing statement
For a financing statement to be effective, the debtor must authorize the filing in any signed writing either before or after it is filed. In addition, the debtor automatically authorizes the financing statement if the debtor authenticates the financing statement or authenticates a security agreement covering the same collateral as the financing statement.
