Secured Transactions Flashcards
(193 cards)
1
Q
What, generally, does it mean to have a security interest that is enforceable against the debtor?
A
The security interest is said to have “attached” to the collateral.
2
Q
The “filed but unattached” security interest exception applies with regard to a contest between?
A
A judicial lien creditor and the holder of an unperfected security interest.
3
Q
What does attachment require?
A
(1) value has been given by the secured party,
(2) the debtor has rights in the collateral, and
(3) the debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement.
4
Q
What does inventory include?
A
Goods, other than farm products, that are held for sale or lease.
5
Q
What is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties?
A
Perfection of a security interest.
6
Q
Does a buyer of collateral subject to a perfected security interest generally take the collateral subject to that interest or free from that interest?
A
Subject to.
7
Q
Does a buyer in the ordinary course of business (BOCB) take free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence?
A
Yes!
8
Q
Who is a BOCB?
A
A person who:
(1) buys goods,
(2) in the ordinary course of business,
(3) from a merchant who is in the business of selling goods of that kind; and
(4) in good faith; and
(5) without knowledge that the sale violates the rights of another in the same goods.
In order to qualify as a buyer, the purchaser must give NEW VALUE, which in addition to paying cash for goods includes purchasing the goods on credit.
9
Q
If a buyer obtains goods under the BOCB exception free of the security interest in the goods created by the buyer’s seller… what happens if the buyer then sells the goods to a second buyer?
A
that second buyer would also take the goods free of that security interest regardless of whether the second buyer qualifies as a BOCB (kind of like the shelter rule).
10
Q
What does it mean when there is retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer?
A
It is limited in its effect to a reservation of a security interest. If the substance of the transaction is the creation of a security interest, Article 9 applies regardless of the form of the transaction.
11
Q
When does a PMSI in goods exist?
A
when a secured party sells goods to the debtor and the debtor incurs an obligation to pay the secured party all or party of the purchase price.
12
Q
When is a PMSI in consumer goods automatically perfected?
A
Upon attachment.
13
Q
What are consumer goods?
A
Goods acquired primary for personal, family, or household purposes.
14
Q
What is the garage sale rule?
A
A consumer buyer of consumer goods takes free of a security interest, even if perfected, unless prior to the purchase the secured party filed a financing statement covering the goods. A consumer buyer is a person who (1) buys consumer goods for value, (2) for his own personal, family, or household use, (3) from a consumer seller, and (4) without knowledge of the security interest.
15
Q
What are proceeds?
A
whatever is acquired upon the sale of collateral.
16
Q
When does a security interest in collateral attach to identifiable proceeds?
A
automatically.
17
Q
What if the proceeds are identifiable cash proceeds (which includes checks) and the security interest in the original collateral is perfected?
A
the perfected security interest in the proceeds continues indefinitely.
18
Q
As a general rule, a security interest in fixtures has priority over an interest in the real property with which the fixtures are associated if the security interest in the fixtures is perfected by a fixture filing_______
A
before the real property interest is recorded.
19
Q
The “filed but unattached” security interest exception applies with regard to a contest between _____
A
a judicial lien creditor and the holder of an unperfected security interest.
20
Q
What is equipment?
A
Anything that is not consumer goods, farm products, or inventory.
21
Q
What is a purchase money security interest (PMSI)?
A
a special type of security interest that has different rules regarding perfection and priority. A PMSI in goods exists when secured party sold goods to the debtor and the debtor incurs an obligation to pay the secured party ll or party of the purchase price. A PMSI in goods other than inventory or livestock prevails over all other security interests in the collateral, even if they were previously perfected, if the security interest is perfected when the debtor receives possession of the collateral or within 20 days.
22
Q
Does a true lease of goods create a security interest?
A
No
23
Q
May a transaction that appears to be in the form of a lease actually be a secured transaction, creating a security interest? If so…what are the requirements?
A
Yes….the transaction may be categorized as a secured transaction if the lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease, the payment obligation cannot be terminated by the lessee, and one of the four conditions is also met, including when the lessee has an option to become the owner of the goods, for no additional consideration or nominal consideration, upon completion of the lease.
24
Q
6 steps to approaching a priority problem
A
1) determine that you have a secured transactions problem
2) identify and classify the property at issue
3) determine which parties have or claim an interest in the collateral
4) at least one will be a secured party with a secured interest…for each security interest, assess attachment (has the security interest attached, to which collateral, and when) & perfection (has the secured party perfected its security interest? when? how? has anything happened that might cause the secured party to lose perfection?)
5) use this information to find the appropriate priority rule
6) apply the priority rule to the facts and resolve the dispute.
25
What is a security interest?
an interest in personal property or fixtures that secures payment or performance of an obligation.
26
what is a security agreement
a K that creates a security interest
27
who is the secured party?
a creditor who obtains a security interest in the debtor's property
28
who is the obligor?
a party that must pay or perform the obligation that the collateral secures
29
Who is the debtor
the person who has an interest, other than a security interest, in the collateral (owner) (often the same person as the obligor but they can be different people)
30
What does article 9 of the UCC govern?
Governs transactions, regardless of form, that create a security interest in personal property or fixtures by contract. Also governs certain consignments.
31
Do secured transactions have to be consensual?
Yes
32
Can secured transactions involve real estate?
Nope...they involve personal property or fixtures but not real estate.
33
What is an agricultural lien?
an interest in farm products that secured payment or performance of an obligation for: (1) goods or services furnished with respect to a farming operation; or (2) rent on real property in connection with a farming operation.
34
Sales of which types of collateral are treated like secured transactions? (Mnemonic: Cruel Poodles Poking Needs At Peaceful Iguanas)
1) Chattel Paper
2) Promissory Notes
3) Accounts
4) Payment Intangibles.
35
What is collateral?
Property subject to a security interest.
36
How to properly classify collateral?
Look at the debtor's principal use at the time the security interest is created.
37
What are goods?
Anything moveable at the time a security interest attaches. Also includes some collateral that is not technically "moveable":
1) fixtures
2) standing timber
3) unborn animals
4) growing or unharvested crops
5) manufactured homes
38
What are the 4 mutually exclusive sub-categories of goods? (mnemonic: Champion Gecko Facing Poodles; Iguanas Escaped)
1) Consumer goods
2) Farm Products
3) Inventory
4) Equipment
39
What are consumer goods?
goods acquired primarily for personal, family, or household purposes (electronics, furniture, boats, and home appliances)
40
What are farm products?
crops, livestock, supplies used (animal feed, fertilizer) or produced (eggs, vegetables) in farming operations. Farming equipment such as tractors and combines are NOT farm products.
41
Can the classification of collateral change?
Yes! as collateral passes from debtor to debtor, or the principal use changes, the classification of a piece of collateral can change. For example, beets on a farm are farm products...but when they are purchased by a grocery store and held for sale, they are inventory. If you buy the beets and take them home, they are consumer goods.
42
What are fixtures?
Goods can also qualify as fixtures if they are attached to real property in such a way that an interest arises in them under real property law.
43
What are rights to payment...and what are the 4 types of rights to payment (Mnemonic: Impatient Cow pushes Adorable Pony Inside)
The right to be repaid money by a third party that the debtor then uses as collateral for a loan.
1) Instrument
2) Chattel paper
3) Accounts
4 Payment Intangibles
44
Examples of an instrument?
promissory notes, checks, and drafts governed by article 3 of the UCC
45
What is chattel paper?
a record (paper or electronic) with two components: (1) a monetary obligation, and (2) a security interest or lease.
46
What are accounts?
a right to payment of a monetary obligation for property that is sold, leased, or licensed or for services rendered (includes a company's accounts receivable, the right to be paid under insurance policies, and amounts owing on credit cards). Accounts does NOT include rights to be rapid loans of money.
47
What are payment intangibles?
our "catch all" of rights to payment (example: a right to be repaid a loan of money that does not itself qualify as an instrument or chattel paper is a payment intangible).
48
Attack outline for rights to payment
(1) look for a transaction in which a third party (known as an account debtor) (2) owed money to your debtor, and (3) your debtor uses that money (that right to payment or expectation of repayment) as collateral for the loan.
When classifying rights to payment, start first by determining whether it is chattel paper or instruments because those are easiest to spot. If the collateral is neither of those, chances are it is going to be an account. But accounts don't encompass the right to be repaid a loan of money. So if you have a loan of money, and you are sure it is not chattel paper or an instrument, then and only then consider payment intangibles.
49
What are documents (another type of collateral)
documents of title that generally give the holder ownership rights in goods held by a bailee.
50
What is investment property?
certificated and uncertificated securities, such as stocks and bonds.
51
What are deposit accounts?
these are bank accounts. Examples: savings, passbook, time, or demand account made with a bank.
52
Difference between account and deposit account
account = right to payment for goods sold or services rendered.
deposit account = a bank account.
53
Are commercial tort claims a type of collateral?
Yes! They are claims possessed by an organization or individual that arose in the course of the organization or individual's business. Do not include claims for personal injury or death.
54
What are letter of credit rights?
a right to payment or performance under a letter of credit.
55
What are general intangibles?
A residual category...anything that doesn't fit in any of the categories above. Examples include: blueprints, copyrights, trademarks, and software.
56
What is needed for a secured party to have a valid interest in the collateral?
It must first attach
57
What is attachment?
Attachment is an arrangement linking a debt to a particular piece of collateral. Upon attachment, the security interest becomes enforceable against the debtor's collateral.
58
3 requirements for attachment (Mnemonic: Violet Roses Smell Amazing)
1) Value: secured party must give value
2) Rights in the collateral: Debtor must have rights in the collateral (some property interest)
3) Security Agreement: there must be a security agreement meeting one of the following requirements: (1) there is an authenticated security agreement that describes the collateral, OR the secured party has possession or control of the collateral pursuant to an oral or unauthenticated security agreement.
59
How to meet the value requirement of attachment?
Value can be given by providing the same consideration needed for a K. No new value needs t be given. A binding commitment to extend credit is value. A security agreement may provide that the collateral secures future advances.
60
What does the security interest attach to? (rights in the collateral element)
Only to the rights the debtor has in the collateral (leasehold, joint tenancy, full ownership).
61
Can thieves grant security interests in stolen goods?
No, because they do not have rights in the collateral.
62
Can a debtor create an enforceable security interest if the debtor has voidable title but could transfer full title to a good faith purchaser for value?
Yes
63
3 components of a security agreement (Mnemonic: security agreements are RAD)
R- a record: need not be written on paper, but must be stored in a record - something that others can retrieve.
A - authenticated: the record must be authenticated by the debtor (need a signature or other symbol that shows the intent of the debtor to be bound)
D - Description: the security agreement must describe the collateral. The description must reasonably identify the collateral (exception for consumer goods and commercial tort claims, the collateral must be identified with more particularity).
64
Is a super generic description, such as "all of the debtor's assets" or "all of the debtor's personal property" a reasonable identification of collateral for attachment?
Nope... however, remember that super-generic descriptions WILL be adequate to perfect a security interest when described in a financing statement...but security agreement must be more specific.
65
If there is no authenticated record that described the collateral, what else is sufficient for the "security agreement" requirement of attachment?
the secured party's possession or control of the collateral pursuant to a security agreement.
66
What types of collateral can be attached by possession pursuant to a security agreement?
consumer goods, equipment, farm products, chattel paper, tangible documents, certified securities, instruments, and money. Basically....if you can hold it in your hands, a creditor can attach by possession.
67
What types of collateral can be attached by control pursuant to a security agreement?
electronic chattel paper, investment property, letter of credit rights, and deposit accounts...basically if you can't hold it in your hands, a creditor might be able to attach by control.
68
what must attachment by possession or control be pursuant to?
an oral or unauthenticated security agreement.
69
Rights and duties of the secured party in possession
1) the secured party must act with reasonable care with respect to the collateral;
2) must keep the collateral identifiable; and
3) must relinquish the collateral once the obligation has been satisfied
4) may charge the debtor for reasonable expenses for storing and maintaining the collateral.
70
If a creditor wants to have a security interest in property acquired by the debtor after the agreement is authenticated, what is needed?
An after-acquired property clause...if there is no reference to after-acquired property, the security interest only attaches to the collateral that existed at the time the the security agreement was executed. However, there is an exception if the security agreement describes inventory or accounts because then there is a rebuttable presumption that the description includes after-acquired inventory or accounts.
71
What is an accession? If collateral becomes an accession, is a security interest in that collateral lost?
goods that are physically united with other goods so that the identity of the original goods is NOT lost. The security interest in that collateral is not lost and the security interest continues in the accession.
72
What are commingled goods?
Goods that are physically united with other goods to the point that there identity is lost in a product or mass. A security interest does not continue in the original goods that have been commingled, but it will attach to the larger product or mass that results.
73
What are proceeds?
whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of.
74
Attachment rule for proceeds
If a security interest attaches to the original collateral, it also attaches to the proceeds automatically whether or not the security interest states that it covers proceeds.
75
In general, what are Purchase Money Security Interests? What are the two components?
A PMSI is a special type of security interest subject to its own perfection and priority rules. A security interest qualifies as a PMSI only if the collateral is goods or software. A PMSI has two components: (1) the value given allows the debtor to acquire the goods or software; and (2) the goods or software acquired secure the loan.
76
Lender PMSI
the lender loans money to the debtor so that the debtor can acquire goods. The value is actually used to acquire the goods. The lender takes a security interest in those same goods to secure the loan.
77
Seller PMSI
where goods are bought on credit.
78
How is an article 9 consignment treated?
As a PMSI in inventory
79
What is the dual-status rule?
For non consumer goods transactions (business transactions), partial PMSI's are permitted. The UCC does not specify a rule for consumer goods-transactions, so courts can either apply the dual status rule or conclude that there is no PMSI.
80
What is perfection?
The process that stakes the secured party's claim, so that the secured party might have priority over a later party. The focus is on the relationship between the creditor and anyone else (such as secured parties, buyers, and lien creditors) who may have or claim an interest in that collateral. For a security interest to be perfected it must first attach to the collateral, so be certain to go through the attachment analysis before perfection.
81
6 methods of perfections (once attached) (mnemonic: Famous People Can't Avoid Attention)
F - filing a financing statement
P - possession
C - control
A - alternate perfection systems (sometimes property is subject to state's certificate or title law such as for a car or motorcycle)
A - automatic perfection (can be temporary or permanent)
82
Perfection by filing
File a financing statement in the central filing office of the appropriate state.
83
What can't you perfect via filing?
perfection by filing is applicable to perfect security interests in all collateral except deposit accounts, money, letters of credit, and collateral subject to other perfection methods (like state certificate of title laws).
84
Can cars that are inventory be perfected by filing?
Yes...however, if you see a financing statement filed to perfect a security interest in cars or deposit accounts, it is ineffective unless the car is inventory.
85
Where to file a financing statement?
In the central filing office, often the secretary of state's office in the state where the debtor is located. A corporation is located in its state of incorporation, whereas a business that is not a registered organization is located in the state in which it operates its business. If that is multiple states, the state where the CEO is located. Individuals are located in the state of their principal residence.
There is an exception for security interests in real-property-related collateral...for that collateral, file in the local real property records in the county where the property is located (this includes fixtures, as extracted collateral, including oil and gas, and timber to be cut).
86
Information required in a financing statement
1) name of the debtor
2) name of the secured party
3) description of the collateral.
If any element is missing, the secured party is NOT perfected.
87
Additional requirements for financing statements for real-property related collateral
1) the financing statement must indicate that a security agreement covers this type of collateral
2) it must note that it is to be filled in the local real property records
3) describe the real property to which the collateral relates
4) name the record owner of the real property, if the debtor is not the person who has an interest in the real property.
Note: recording the montage in the local real property records can satisfy the financing-statement requirements if it contains the information listed above. (It need not note that it is filed in the local real property records).
88
What is required but non-essential information for a financing statement?
a filing office will refuse to accept a financing statement that does not include the following:
- addresses for both the debtor and the secured party, and
- an indication of whether the debtor is an individual or an organization.
If a financing statement is accepted without this non-essential information, it is still effective to perfect a security interest.
89
Authorization requirement for financing statements
1) the debtor must authorize a financing statement in an authenticated record.
2) the debtor does not have to sign the financing statement
3) if the debtor authenticates a security agreement, that authentication authorizes the secured party to file a financing statement
4) failure to obtain authorization before filing a financing statement can result in the secured party being liable for actual and statutory damages.
90
Must financing statements contain the debtor's legal name? What if it is a registered organization debtor?
Yes, financing statements must contain the debtor's legal name. If it is a registered organization debtor, then use the name on the articles of incorporation, or last public organic record filed with the state. Cannot file under the trade names (i.e., no d/b/a).
91
Where to find an individual debtor's legal name? (majority v minority rule)
Majority rule: if the debtor has a non-expired driver's license (or state issued I.D.), use that name. (If the debtor does not have a valid state-issued I.D., use legal name.
Minority rule: Driver's license/state I.D. is a safe harbor, but other legal names may be sufficient to perfect.
92
Is a statement that the financing statement covers "all assets" or "all personal property" effective to perfect a security interest?
Yes! Unlike a security agreement, a financing statement can have a super generic description.
93
Does a financing statement need to mention proceeds or indicate that it covers after-acquired property or future advances?
No, it does not need to mention these things.
94
When do errors in a financing statement affect perfection?
The general rule is that minor errors in a financing statement do not affect perfection unless they make the financing statement SERIOUSLY MISLEADING. If the mistake is seriously misleading, then the security interest is NOT perfected.
95
Are errors in a debtor's name seriously misleading?
Almost always...however, there is an exception that if the search for the correct name of the debtor would uncover the financing statement with the error, the error is not seriously misleading.
96
When should a filing office refuse a financing statement?
When it lacks the information specified in 9-516(b) or if the creditor fails to tender the fee or if the creditor submits the financing statement in an improper manner.
97
If the filing office refuses the financing statement and was not justified in doing so, then how is the financing statement treated?
It is treated as having been filed. There is an exception though that it will be ineffective against a purchaser or secured party who gave value in reasonable reliance upon the absence of the record from the files.
98
Is there any effect on perfection if the filing office indexes the financing statement incorrectly?
Nope
99
What is the duration of a financing statement?
Financing statements lapse 5 years after the date of filing, unless continued. To continue a financing statement, you file a continuation statement within 6 months before the financing statement lapses.
100
What happens if a financing statement lapses?
The secured party loses perfection (unless it is perfected by some other means). The secured party may file a new financing statement to re-perfect, but might lose its place in a priority contest.
101
What happens if the obligation is paid back?
a termination statement void the financing statement
102
What security interests may be perfected by possession?
Security interests in tangible collateral may be perfected if the secured party takes possession of the collateral. The following collateral can be perfected by possession:
1) money
2) goods
3) instruments
4) negotiable documents
5) tangible chattel paper.
103
What is the ONLY way to perfect a security interest in money
possession
104
For possession, when is the interest perfected? How long does it remain perfected? Any exceptions?
As soon as the secured party has possession. The interest remains perfected as long as the secured party retains possession. There are exceptions that allow a secured party to remain temporarily perfected even after it gives up possession.
105
What types of collateral may be perfected by control?
A secret party may perfect a security interest in specific intangible collateral by taking control of that collateral. The following collateral can be perfected by control:
1) deposit accounts
2) investment property
3) electronic documents
4) electronic chattel paper
5) letter of credit rights
106
Control is the exclusive method for perfecting a security interest in which types of collateral?
Deposit accounts and letter of credit rights.
107
If a lender files a financing statement to perfect a security interest in a deposit account or letter of credit right, the filing will be what?
The filing will be ineffective. You treat the lender as unperfected unless the lender obtains control of the collateral.
108
How can control be obtained over a deposit account?
Control can be obtained in one of three ways:
1) the secured party is the bank that has the deposit account (lender and the bank are the same party)
2) the secured party, the bank and the debtor agree in an authenticated record that the lender (secret party) has control over the deposit account (deposit account control agreement)
3) the secret party can become the bank's customer with respect to the deposit account.
109
What rules should you follow if another statute (non article 9) governs how a security interest is perfected?
you must follow the rules of that statute.
110
Perfection under a state certificate of title statute
Applicable to cars, motorcycles, or other vehicles that have a title.
Filing, possession of the car, or possession of the title are insufficient to perfect in most cars. You perfect by noting a security interest on that certificate of title.
111
What is the exception for perfection of cars under certificate of title statute?
Cars that are inventory can be perfected by other means (e.g., if you purchase a new car, that car likely didn't have title when purchased so there was no title on which to note the lien - so filing works when the cars are inventory).
112
What is automatic perfection?
Some types of collateral will automatically perfect when a security interest attaches with no filing, possession, or control required. The most common example is a purchase money security interest in consumer goods.
113
Do PMSIs in inventory, equipment, or farm products automatically perfect?
Nope...just applies to PMSIs in consumer goods.
114
What are some other automatic perfection rules?
1) casual or isolated assignments of accounts that do not transfer a significant part of the outstanding accounts receivable.
2) sales of payment intangibles or promissory notes.
115
Does article 9 allow the secured party a window of time to discover that a change has occurred and to preserve its right by amending the financing statement or re-filing if necessary?
Yes it often does.
116
If a name change causes the filed financing statement to become seriously misleading, how much time does the secured party have to discover the change and file an amendment to the financing statement listing the debtor's new name?
4 months
117
If a secured party fails to amend after the 4 month window, what happens?
collateral that is acquired after the 4 month period expires is not covered by the financing statement. Everything before the name change and within 4 months after the name change remains perfected under the original financing statement.
118
If a debtor moves out of state, how long will a perfected security interest remain perfected?
4 months after the debtor moves out of state, unless the financing statement lapses earlier. The filed financing statement will cover collateral purchased within the 4-month window after the move. The secured party must re-file in the new state within that four-month window to remain continuously perfected.
119
What happens if the collateral moves out of state...how does that affect perfection?
If the debtor still owns the collateral, no refiling is necessary. If the collateral is transferred to a new debtor who lives out of state, the secured party has one year to file a financing statement listing the new debtor. If the secured party fails to file a financing statement within either the four-month or one year period then the security interest ceases to be perfected in the collateral. Perfection is lost prospectively, and against another secured party or purchaser for value, the security interest is deemed never to have been perfected.
120
What happens if the secured party that perfected by possession gives the collateral back to the debtor?
the secured party is only perfected so long as it has actual physical possession of the property...however, there is a limited exception that involves temporary automatic perfection. If a security interest is perfected by possession in an instrument, negotiable document, certificated security, or goods stored with a bailee, the secured party can give the collateral back to the debtor for limited purposes:
(1) to sell it
(2) exchange it
(3) to enforce the debtor's rights in the collateral
The secured party is temporarily perfected for 20 days. The secured party needs to either file a financing statement or repossess the collateral within this 20 day period to remain continuously perfected.
121
Proceeds definition
Proceeds arise when collateral is sold, leased, licensed, or otherwise disposed of.
122
Does the security interest attach to the proceeds of collateral?
Yes, the security interest attaches to proceeds automatically, whether or not the security agreement lists proceeds.
123
Perfection and proceeds
a security interest in proceeds is initially perfected for 20 days, and may be perfected after the 20 day period in some circumstances.
124
Priority and proceeds
A secured party with an interest in proceeds will have priority dating from the time of perfection of the original collateral if the secured party has remained continuously perfected.
125
Beyond the 20 day automatic perfection period, perfection will lapse unless one of the following circumstances is present:
1) amend: the secured party takes steps necessary to amend the financing statement (or the original financing statement is broad enough to encompass the proceeds)
2) cash proceeds rule: if collateral is sold, licensed, leased, or otherwise disposed of, and generates cash proceeds, perfection continues indefinitely in cash proceeds so long as they are identifiable.
3) same office rule: a security interest in proceeds will be perfected (as long as the original financing statement remains effective) when: (a) the financing statement covers the original collateral; (b) the proceeds are collateral in which the security interest may be perfected by filing in the same office as the original financing statement; and (c) the proceeds are acquired with cash proceeds.
126
What is the measure of the secured party's status for priority in proceeds?
If the secured interest is perfected in proceeds and has been continuously perfected (no gap in perfection), then measure the secured party's status based on the time of filing or perfection as to the original collateral.
There are exceptions for (1) proceeds of PMSIs in inventory and (2) proceeds of non-filing collateral.
127
If collateral is of the type that is typically perfected other than by filing, priority continues in the proceeds provided that....
(1) the security interest in proceeds is perfected; and
(2) the proceeds are either cash proceeds or the same type of collateral as the original collateral.
128
what is an unsecured creditor?
creditors without a security interest in the debtor's collateral. Unsecured creditors have no rights against the property. They likely do have K rights against the debtor. They can obtain rights in the property either by getting a security interest by agreement or a lien in the collateral. If you see an unsecured creditor obtain a judgment against the debtor and execute/levy/get a lien on particular property of the debtor, that execution makes that party a lien creditor.
129
What is a lien creditor?
Liens can be judicial or statutory.
example of judicial lien creditor: Phyllis obtains a judgement against Store and levies on Store's inventory.
Example of statutory lien creditor: Phyllis takes her car in to be repaired. Under her state's mechanics' pr artisians' lien statute, her mechanic has a statutory lien on the car and can hold the car until Phyllis pays for the repairs.
130
Purchases of chattel paper, promissory notes, accounts, or payment intangibles are treated as what?f
secured transactions...
you treat the purchaser as a secured party with an attached security interest. Look to see whether the purchaser has perfected (and pay attention to automatic perfection rules discussed prior).
131
Who gets priority: perfected security interest v perfected security interest (neither is a PMSI)
first in time to file or perfect takes priority...this rule rewards an earlier filer, even if subsequently the competing secured party is first to attach, or even first to perfect.
132
who gets priority: perfected security interest v. unperfected security interest (neither is a PMSI)
perfected security interest beats unperfected security interest.
133
Unperfected security interest v unperfected security interest (neither is a PMSI)
the first security interest to attach or become effective takes priority.
134
perfected security interest v. lien creditor
a perfected security interest takes priority over a lien creditor
135
unperfected security interest v. lien creditor
lien creditor will take priority over an unperfected security interest... there is an exception though for a filed but unattached security interest. If the debtor has authenticated a security agreement listing the collateral and a financing statement is on file, but the secured party has not yet given value, the secured party ill take priority over a lien creditor.
136
security interest v statutory lien
A statutory lien is a lien created by statute, and it has priority over a security interest (even if it is perfected) as long as:
1) the effectiveness of the lien depends on the lien holder's possession of the goods;
2) the lien secures payment or performance of an obligation for services or materials furnished in the ordinary course of the person's business (mechanics liens); and
3) the statute doesn't provide otherwise.
137
Secured party v secured party over future advances
Article 9 gives priority to the first party to file or perfect with respect to future advances, even if that secured party has knowledge of the competing security interest when the future advance is made.
138
Secured party vs lien creditor over future advances
If a secured party's advance is made within 45 days of the lien creditor's lien arising, the secured party has priority.
Advances made more than 45 days after the person becomes a lien creditor are subordinate to the lien creditor unless:
(1) the advance is made without knowledge of the lien, OR
(2) the advance is made pursuant to a commitment entered into without knowledge of the lien.
139
When you see a dispute between a buyer and a SP, how should you phrase the priority question?
did the buyer take the collateral free of a security interest or subject to a security interest?
140
Generally, does a buyer take subject to or free and clear of a perfected security interest?
Unless the secret party authorizes the sale free and clear of its security interest, a buyer takes subject to a perfected security interest. However there are some exceptions.
141
Buyer in the Ordinary Course of Business exception
A BIOCB takes free of a security interest created by the buyer's seller even if that security interest is perfected and even if the buyer knows of the existence of the security interest if:
(1) the buyer buys goods from a merchant
(2) in the ordinary course of the merchant's business
(3) the buyer acts in good faith and without knowledge that the sale violates the rights of others in the same goods.
(4) the seller is engaged in the business of selling goods of this kinda nd the seller is not a ponbroker.
142
The "garage sale exception" (consumer to consumer exception)
A buyer go consumer goods will take free of a security interest, even if it is perfected if:
(1) the buyer buys consumer goods for value
(2) for their own personal, family, or household use
(3) from a consumer seller and
(4) without knowledge of the security interest, and
(5) unless the secured party has filed a financing statement covering the goods before the purchase occurred.
143
How can secured parties avoid the garage sale exception?
By filing a financing statement covering the goods.
144
Buyer v unperfected security interest
General rule: unless a SP authorizes the sale free and clear of the security interest, the buyer takes subject to a security interest.
Exception: a buyer will take free of an unperfected security interest if the buyer:
1) gives value
2) receives delivery of the collateral, and
3) without knowledge of the preexisting interest.
145
What happens if a buyer takes subject to a security interest according to the rules above, and after the sale the secured party makes a future advance to the debtor/seller?
the buyer will take free of that future advance if:
(1) the secured party had knowledge of the buyer's purchase when it made the advance, or
(2) the future advance is made 45 days or more after the purchase.
146
Purchasers of chattel paper and instruments
Sales of chattel paper and promissory notes are treated as secured transactions.
Attachment: assumed
Perfection: often by possession with this type of collateral.
Priority rule oversimplification: purchaser/secured parties who take possession of chattel paper and instruments of the collateral without knowledge of the competing security interest will often have priority over competing secured parties.
147
Does a transferee of money or funds from a deposit account take free of security interests?
yes, unless the transferee acts in collusion with the debtor to violate the rights of a secured party.
148
security interests v. buyers' and sellers' article 2 security interests
If a buyer or seller has a security interest arising under Article 2 of the UCC, that interest has priority over an article 9 security interest, as long as the buyer or seller retains possession of the goods.
149
PMSI v. lien creditor
Follow the general priority rule for lien creditors v security interest...except that PMSIs have a 20 day grace period starting when the debtor takes possession of the collateral, to perfect. If the purchase money secured party perfects within 20 days of the debtor receiving possession of the collateral, the PMSI will take priority over a lien that arise during that 20-day period.
150
PMSI v security interests
PMSI super priority for goods other than inventory:
- PMSI in goods other than inventory or livestock takes priority over all other security interests, no matter when they are perfected, if the secured party perfects within 2- days or of the debtor receiving the goods. If the purchase money secured party fails to perfect within 20 days, apply the SP v SP priority rules (first in time to file or perfect).
Since a PMSI in consumer goods is automatically perfected, this 20-day rule will always be met for consumer goods.
151
PMSI Super-priority for Inventory
A PMSI in inventory or livestock will have priority over all other security interests in that same inventory if a secured party:
- perfects before the inventory is delivered to the debtor; and
- sends an authenticated notification of the PMSI to other secured parties (one notification is effective for 5 years). For a PMSI that is perfected but does not satisfy these two super-priority rules, apply the basic secured party v secured party priority rules.
152
PMSI Super-Priority in Proceeds
If a PMSI has priority over a competing secured party in goods other than inventory, then that super priority will extend to the proceeds of the collateral. If a PMSI has priority over a competing secured party in inventory, then the priority will only extend to proceeds that are up-front cash payments for the inventory sold.
153
PMSIs v. PMSIs
A seller PMSI beats a lender PMSI. Otherwise, apply the first to file or perfect rule.
154
What to do if there are two competing article 9 interests in fixtures?
apply the general priority rules.
155
Fixtures v. Real Property Interests general rule
a security interest in fixtures has priority over an interest in real property if the secured party filed a fixture filing before the real property interest is recorded. (Fixture filing = a financing statement filed in the local real property records)
156
Fixtures v. real property interest...PMSI rule
A PMSI in fixtures has priority over a real property interest if:
(1) the debtor has an interest of record in the real property or is in possession of the real property; and
(2) the security interest is perfected by a fixture filing, either before the goods become fixtures or within 20 days after the goods become fixtures.
157
Exception: construction mortgage v. PMSI:
A construction mortgage has priority over any subsequent security interest in fixates, including PMSIs in fixtures, if it is recorded before the goods become fixtures and the goods become fixtures before completion of the construction.
158
Article 9 and leases
Article 9 does not apply to a true lease but it will apply if the economic reality of the transaction is that the transaction is actually a secured transaction.
159
Bright line test for whether the economic reality of a lease is actually that it is a secured transaction?
(1) the "lessee" of the property is obligated to pay the full obligation under the lease, whether or not they terminate the lease early (K may not be terminated early), and
(2) one of the following outcomes is present (essentially trying to determine whether the lessor gets anything meaningful back at the end of the lease term):
(a) the original term of the lease is equal to or greater than the remaining economic life of the goods (goods are used up during the lease term. Nothing of value is going back to the lessor).
(b) the lessee is bound to renew the lease for the remaining economic life of the goods (the lessee is obligation to extend the lease until the goods are used up. Nothing of value is going back to the lessor).
(c) The lessee has the option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration (the lessee would be crazy not to renew the lease until the goods are used up).
(d) the lessee has the option to become the owner of the goods for no or nominal additional consideration (the lessee would be crazy not to buy the goods at the end of the lease term).
If the bright line test is met, article 9 will govern the transactions. That means the lessor will be treated as the secured party and needs to file or otherwise perfect his interest in the goods.
160
What if the bright line test for leases is not met?
courts will determine whether a "lease" is actually a secured transaction by looking at the facts of the case.... ask yourself "does the lessor get something of value back at the end of the lease?" If the lessee uses up the goods or keeps the goods at the end of the lease term, it is likely to be a secured transaction.
161
Consignment definition & risk with consignments
A party (the consignor) has ownership of goods but gives possession of the goods to another party (the consignee) for the purpose of allowing the consignee to sell the goods. The risk is that a consignee's lenders may be misled into thinking that consigned inventory is actually owned by the consignee, rather than by the consignor. Article 9 treats consignments that carry this risk as article 9 secured transactions to facilitate public notice.
162
Article 9 consignment treatment
the consignor is treated as the secured party and must perfect its security interest in the consigned inventory. Apply he rules applicable to a PMSI in inventory (consignor will have PMSI super priority in consigned goods if consignor perfects by filing before consignee receives possession of the items and consignor properly notifies any secured parties with conflicting security interests in consignee's inventory.
163
Requirements for a consignment to be subject to article 9 (when consignors have to file a financing statement to protect their interests):
(1) the consignor must deliver goods to a merchant who deals in goods of the kind, for the merchant to sell;
(2) the merchant is not generally known by its creditors to be substantially engaged in the business of selling the goods of others (because if merchant is in that business we don't need financing statements to put parties on notice);
(3) the value of the goods must be at least $1,000 in each delivery; and
(4) the goods must not be consumer goods immediately before delivery.
164
What is a prerequisite for repossession rights or rights to enforce a security interest?
attachment
165
How do determine what is a default
Default is not defined in article 9 so refer to the security agreement and applicable contract law to determine what constitutes a default.
166
When are article 9 enforcement rights triggered?
At default...these rights are cumulative and may be exercised simultaneously.
167
What can a secured party do in the event of default?
1) seek possession of tangible collateral and either sell or retain it in satisfaction of the obligation owed.
2) abandon its article 9 rights and instead obtain a judgment against the debtor or obligor on the obligation.
3) pursue other courses of action to which the debtor and secured party have agreed.
168
Repossession of goods and other tangible collateral
Once there has been a default, the SP can repossess the collateral in one of two ways:
(1) by using the judicial process (by filing a replevin action) or
(2) by using self help repossession (when using self-help repossession, the SP cannot breach the peace).
169
Repossession of large equipment
Equipment that is hard to repossess can be rendered unusable in lieu of repossession (and then can be sold on sight).
170
After repossession, what can the SP do?
either dispose of the collateral in an article 9 disposition sale or can accept the collateral in satisfaction of all or part of the obligation.
171
What is a requirement for the sale, lease, license, or disposal of collateral following the SP's repossession of collateral after default?
Once a SP takes possession of the collateral after default, that party may sell, lease, license, or otherwise dispose of the collateral, so long as everything about the disposition is commercially reasonable.
172
When is a disposition commercially reasonable as a matter of law?
When it is:
(1) sold in the usual manner in a recognized market;
(2) sold at the price current in that market; or
(3) otherwise in conformity with the reasonable commercial practices among dealers in that type of collateral.
(think of these elements as safe harbors....a disposition that does not fit within any of these safe harbors might still be commercially reasonable. it is a question of fact).
173
Is price determinative of whether a sale is commercially reasonable?
No...price alone is not. However, a very low price will trigger increased scrutiny by a court.
174
Public vs Private disposition sale
A secured party can buy the collateral at a public sale but not at a private sale UNLESS the price of the collateral is fixed or subject to widely distributed standard price quotes. There is no specific timetables for the sale but every aspect of timing must be commercially reasonable under the circumstances.
175
Who must a secured party send authenticated notice of the disposition to?
1) the debtor
2) secondary obligors (co-signors, guarantors)
3) other secured parties, and
4) anyone else from whom the secured party has received notice of a claim or interest in the collateral.
176
When is notice of the disposition not required?
If:
(1) the collateral is perishable or threatens to decline speedily in value;
(2) the collateral is sold on a recognized market; or
(3) notice is waived after default.
177
When must notice of the disposition be given?
Everything about the notice must be commercially reasonable...must give the notified party time to act.
"Safe harbor" for noncommercial transactions: reasonable if sent at least 10 days before the disposition sale.
178
What must notice of the disposition include?
1) the secured party and the debtor's names
2) a description of the collateral
3) how, when, and where the collateral is to be disposed of; and
4) a statement that the debtor is entitled to an accounting for the unpaid indebtedness.
- Additional consents for consumer goods transactions:
(a) describe any liability for the deficiency; and
(b) give a telephone number that the debtor can call to obtain additional information, including the amount they would need to pay to redeem the collateral.
179
How are cash proceeds of a disposition distributed? What order?
1) reasonable expenses for collection and enforcement;
2) pay the debt to the foreclosing secured party;
3) pay subordinate security interests, provided the subordinated party makes a formal demand prior to the distribution of the proceeds;
4) an surplus will be returned to the debtor.
180
What happens to senior (superior) security interests after disposition of the collateral?
They survive the sale...whoever purchases the collateral takes it subject to the senior, or superior, security interests.
181
What happens if there is not enough money received from the disposition of the collateral to satisfy the debt?
The SP can seek a deficiency judgment against the obligor for the remaining amount.
182
Acceptance of collateral ("strict" foreclosure)
A secured party may accept the collateral in full or partial satisfaction of the debt, so long as certain conditions are met.
183
Acceptance of collateral in full satisfaction requirements
(1) the debtor must consent after default to the acceptance in an authenticated record
(2) acceptance by silence is permitted if the debtor does not object to the secured party's proposal to accept the collateral within 20 days after the proposal is sent.
Additional requirements for consumer goods transaction:
(1) the secured party can only accept the collateral in full satisfaction of the obligation.
60% rule: if the goods are consumer goods and the debtor has paid back 60% or more of the debt or the value of the collateral, then the goods must be sold. Acceptance is not permitted (A debtor can waive this rule after default in an authenticated record).
184
Acceptance of collateral in partial satisfaction requirements:
(1) the debtor must consent after default to the acceptance in an authenticated record.
(2) consent by silence is NOT permitted
(3) remember, acceptance in partial satisfaction will not work in consumer transactions.
185
Redemption rights
a debtor, secondary obligor, or other secured party may redeem the collateral by paying the entire secured obligation and expenses (including attorney's fees) incurred in repossessing and preparing the collateral for sale.
Redemption must occur before the secured party has sold the collateral or accepted the collateral in satisfaction of the debt. The debtor cannot waive her right to redemption before default.
186
special enforcement rules for fixtures
If a SP has priority, the SP ma remove the fixture from the real estate. SP will be liable for the cost of repairing damage to the real estate, but not diminution resulting from the removal.
187
Can a SP with priority in the accession remove the accession?
Yes, they are allowed to remove the accession from the other goods.
188
What can an SP do to collect amounts owing to the debtor by third parties (account debtors)?
Can step into the debtor's shoes. Once the account debtor receives proper notice from the SP, she cannot discharge her debt by paying the debtor directly (must pay SP). The account debtor may raise defenses she had against the debtor against the secured party.
189
do rules regarding surplus and deficiency apply if the underlying transaction is a sale of accounts, chattel paper, promissory notes or payment intangibles (treated as article 9 security interests)?
Nope
190
What is a SP does not comply? What damages can be sought?
1) injunctive relief: if the failure to comply is ongoing, the debtor or another SP can ask the court to halt the improper enforcement activity.
2) actual damages: a debtor or SP can be compensated for loss resulting from the SP's violations.
3) Statutory damages: minimum damages in consumer goods transactions for specific violations of article 9.
191
When a secured party has violated its obligations under article 9, the code may also prevent the SP from claiming what?
a deficiency
192
If the secured party did not sell the goods in a commercially reasonable manner, what is the rebuttable presumption rule for commercial transactions?
they are not entitled to a deficiency, unless they can prove a sale that complied with article 9 would have created a deficiency. Some courts follow an absolute bar rule, which states that a SP who fails to comply with article 9 cannot recover a deficiency.
193
A SP that improperly repossess collateral may be liable for which tort?
conversion.
