Secured Transactions Flashcards
Financing Statement
Secured Party files financing statement at Secretary of State’s Office or other appropriate state filing office.
An effective financing statement MUST:
1) name of the debtor
-if debtor is a company, it has to be name they filed their articles of incorporation under in state’s business directory website.
-if human debtor → name on their driver’s license
-if debtor is an organization, must provide official registered name
-most impt bc whole point is to put ppl on notice of your security interest. every statement is indexed by debtor’s name so if you mess it up, you defeat the whole purpose.
-if error in debtor’s name is seriously misleading, it will be an improper filing statement. UNLESS it can be saved by a safe harbor provision like the standard search logic of the filing office would have still found it if debtor’s name was incorrect, then seriously misleading error is rendered harmless & financing statement is saved.
2) Named of secured party
Indicate the collateral
3) Indication of the collateral
-super generic descriptions are allowed
-an indication of collateral in a financing statement is sufficient if it provides notice that a person may have a security interest in the collateral indicated. SO “all assets” in financing statement is ok, just not in security agreement → Purpose of a FS is to begin the inquiry of putting a third person on notice, not end it. Therefore, super-generic descriptions of collateral are sufficient to allow a third party to understand they must dig deeper.”
Perfection
Perfection is giving public notice of a security interest. Deals with rights as b/w the secured party & 3rd parties
Enforcing a Security Interest
Requires: 1) Attachment AND 2) Perfection
1) Attachment → secures the creditor’s rights in the collateral, making it enforceable
2) Perfection → gives notice of the creditor’s rights in the collateral (determines priority of interests)
Attachment
These 3 steps can happen in any order.
[Remember: Ppl have 3 main love languages: Gift Giving, Spending Time, and Physical Touch]
1) Secured party must give VALUE (this generally just means that loaned money is transferred to the buyer but can also be access to a line of credit or even a service.
-Just say “Value was given.”
-Lender can’t give money as a gift instead of a loan and then later try to attach your bicycle. That’s not proper value. UCC wants mutual exchange
2) Debtor actually must have RIGHTS in the collateral. You need ownership or at the very least the right to transfer it.
-can’t attach to other ppl’s property, has to be your own.
3) Finally, the debtor must agree to give the secured party a security interest. Done with a SECURITY AGREEMENT
Lender needs to give me a loan with value. I need to have rights in what I’m going to collateralized my loan, and now I need to sign a security agreement.
Types of Collateral
-Goods → tangible, movable property
-Semi-Intangible and Intangible Property
Tangible Collateral
4 Classification of Goods
1) Consumer Goods - goods used or bought for use, primarily for personal, family or household purposes
2) Equipment - good used or bought for use in business (***DEFAULT category for goods)
-distinguish difference b/w equipment (equipment is used) v. inventory (inventory is actually sold)
3) Farm Product - Goods unique to farming operations. Crops or livestock or supplies used or producing in farming operations or products of crops or livestock in their remanufactured states if they are in possession of a debtor engaged in farming operations
4) **Inventory **- goods held by debtor for sale or lease (or goods that are to be furnished under service contracts, and materials used or consumed in a business in a short period of time like raw materials or consumable)
5) Fixtures - something attached to a building in such a permanent way that it is considered part of the real property. (ex: built in brick oven at pizza shop). Law has decided an ownership interest in the “property” like a mortgage is superior to an ownership interest in “fixtures” unless you file a “fixture filing.”
Semi-Intangible and Intangible Collateral
1) Accounts Receivable - unpaid invoices, money owed from customers to the business. A right to payment for property sold or services rendered
2) Chattel Paper - basically when trying to buy something like furniture or jewelry & have to make a bunch of smaller payments but still get to keep it. Record that evidences both 1) a monetary obligation and 2) security interest in or a lease of specific goods
3) Deposit Accounts - checking account, savings account (bank account, non-consumer deposit account like business bank account)
4) Investment Property - includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items
5) Instruments - pieces of paper representing the right to be paid money like promissory notes, checks, and certificates of deposits
6) Commercial Tort claim - tort claim where 1) claimant is an org or 2) claimant is an individual, claim arose out of claimaint’s business or profession, and claim does not include damages for personal injury or death of an individual
7) General Intangibles - any personal property not coming within the scope of other definitions, IP etc (***DEFAULT category for intangibles)
Requirements of Written Security Agreement
1) Record showing intent to create security interest (must be language creating or providing for security interest, but no magic language is required)
2) Describe collateral - security agreement must create description of collateral & description must “reasonably identify” the collateral. General vocab works & Article 9 collateral categories such as “inventory works” BUT NOT: “all debtor’s property or “all debtor’s assets”. “All equipment” would be ok.
3) Authenticated by debtor - debtor must sign security agreement (any symbol, “x” or “:)” works, regular or electronic signatures (fingerprint, initials, some strange mechanically generated hologram all work).
-“After-Acquired” Property Clause → can include this ins security agreement to allow you to have an interest in inventory the debtor acquires AFTER the signing of the agreement.
-If debtor tries to sell the collateral or transforms it somehow → debtor gets automatic perfection for 20 days in whatever he transformed it into. But it becomes unperfected on the 21st day unless you file a financing statement. It’s called proceeds.
5 Perfection Methods
1) Automatic Perfection - PMSI in consumer goods are automatically perfected upon attachment
2) Possession - works for: Goods, consumer, goods, equipment, farm products, inventory
3) Control - security interests in investment property, nonconsumer deposit account, and electronic chattel paper may be perfected by control.
-Control of Non-Consumer Deposit Accounts: 3 diff ways of perfecting by control: 1) automatic control by bank maintaining account, 2) putting account in secured party’s name (you put as owner of bank account the secured party) and 3) Control agreement - contract w/ debtor, creditor and bank where bank account is. Gives bank permission, that if you give notice from creditor saying I’ve defaulted, you have permission to give creditor my bank account.
4) Notation on Certificate of Title -only way to perfect a security interest in an item covered by a certificate of title statute is for secured party to get the relevant governmental authority to note the secured party’s lien on certificate of title (use for cars & trucks, EXCEPTION: if debtor is holding the car or trucks as inventory aka Car dealers, then secured party must perfect by filing a Financing Statement against inventory.
5) Filing a Financing Statment
PMSI v. Perfected/Unperfected Interest
-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 priority rule depending if interest was perfected or unperfected.
Original Use Test
Under the original use test, a debtor’s original intended use of collateral governs the collateral’s classification
Perfected Interest v. Unperfected Interest
Perfected interest has priority over a conflicting unperfected interest
Unperfected Interest v. Unperfected Interest
The first creditor to attach will prevail
Perfected Interest v. Perfected Interest
Rule of “first in time, first in right” control → first secured party to file or perfect has priority.
PMSI v. Perfected/Unperfected Interest
A PMSI in consumer goods enjoys automatic perfection, so it has priority.
PMSI’s is non-consumer goods require filing a financing statement to be perfected → so apply the appropriate priority rule above (depending if interest was perfected or unperfected)
