Flashcards in Secured Transactions Deck (81)
What does it mean to be secured?
A secured transaction involves a relationship between two parties, typically a debtor and a creditor, where the debtor has given certain assurances in the form of a security interest in specific property to assure that the obligation will be performed.
What is a security interest?
An interest in personal property or fixtures that secures payment or performance of an obligation.
What is a security agreement?
A CONSENSUAL AGREEMENT that creates a security interest.
A person who has an interest, other than a security interest or other lien, in the collateral, such as the sole owner of the collateral.
Who is the obligor?
A person who must pay with respect to the obligation that is secured by a security interest in the collateral.
What is collateral?
Property subject to a security interest - MAY BE TANGIBLE OR INTANGIBLE.
Stewie loans Peter $1,000 and takes a security interest in Peter's guitar. What is Peter? What if Peter sells his guitar to Brian? What if Lois guarantees the loan?
The guitar is the collateral here and Peter is both the obligor and the debtor.
If Peter subsequently sells his guitar to Brian without Stewie's authorization, Peter is still the obligor BUT NOW BRIAN IS THE DEBTOR (not the obligor though).
If Lois guarantees the loan, she becomes an obligor, but not a debtor.
T/F - Classification of goods can affect the validity of a security interest, the way it can be perfects, and the rights of third parties (buyer in the ordinary course of business).
How is the classification of a good made?
Based on the DEBTOR'S PRINCIPLE USE AT THE TIME WHEN THE SECURITY INTEREST ATTACHES.
What are the four different types of goods?
Goods are ANYTHING that is "movable at the time that a security interest attaches." Includes fixtures, standing timber that is to be cut, unborn animals, growing or unharvested crops, and manufactured homes.
1) CONSUMER GOODS - Those acquired primarily for personal, family, or household purposes;
2) FARM PRODUCTS - Goods that are crops or livestock and include supplies that are used or produced in farming;
3) INVENTORY GOODS - Goods, other than farm products, that are held for sale or lease, are furnished under a service contract, OR consist of raw materials, works in process, or materials used or consumed in a business;
4) EQUIPMENT - The catch-all class, consisting of goods that are NOT consumer goods, farm products, or inventory (example: delivery trucks).
Brian is a dairy farmer. He milks his cows and delivers the milk to Family Milk, Inc. which pasteurizes the milk, cartons it and sells it to the local grocery store. Stewie buys the milk to pour on his cereal. What is the milk classified as?
Brian - Farm Product
Grocery Store - Inventory
Stewie - Consumer Good
How are intangible goods classified?
CLASSIFICATION DOES NOT TURN ON MANNER IN WHICH DEBTOR USES THE PROPERTY.
What are goods that are tangible enough to be possessed but aren't goods?
QUASI-INTANGIBLE GOODS - this is property usually defined by a WRITING.
What are the different classes of quasi-intangible and intangible property?
1) Documents - a document of title, which confers on the holder ownership rights in goods;
2) Instruments - Negotiable instruments such as notes and checks AND Non-Negotiable instruments that evidence a right to payment of a monetary obligation and are transferred in the ordinary course of business by delivery, such as a certificate of deposit from a bank (I.O.U).
3) Investment Property - Includes both certificated and uncertificated securities, such as stocks and bonds;
4) Chattel Paper - Consists of one or more records that evidences both: (a) monetary obligation and (b) a security interest in specific goods or a lease of specific goods.
1) Accounts - includes the right to payment of a monetary obligation for goods or services. NOT A CHECKING ACCOUNT! Think Accounts Receivable here;
2) Deposit Account - Includes a savings, passbook, time, or demand account maintained with a bank (such as a checking account);
3) Commercial Tort Claims - Tort claims possessed by an organization, or by an individual, that arose in the COURSE OF THE INDIVIDUAL'S BUSINESS (malpractice is an example). PERSONAL TORT CLAIMS ARE NOT COVERED!;
4) General Intangibles - Residual category of personal property that is not included in other types of collateral (examples: copyrights, trademarks).
What does Article 9 of the UCC govern?
Transactions that create, by contract, a security interest in personal property or a fixture.
What are "true leases" governed by?
Article 2A has priority.
What are disguised sales?
These are NOT "true leases." A lessee must pay consideration to the lessor and this payment obligation CANNOT BE TERMINATED BY THE LESSEE, PLUS one of the following four conditions is also met:
1) The original term of the lease is equal to or greater than the remaining economic life of the goods;
2) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become owner of the goods;
3) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon completion of the lease; OR
4) The lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon completion of the lease.
Do consignments fall under Article 9?
Some do such as a purchase-money security interest in consigned inventory. The following must be true:
1) A person (consignor) must deliver goods to a merchant, WHO DEALS IN GOODS OF THAT KIND, for the merchant to sell (and who does not operate under the same name as the consignor);
2) The merchant is not generally known by its creditors to be substantially engaged in selling goods for others or is not an auctioneer;
3) The value of the goods delivered in each delivery must be AT LEAST $1,000; AND
4) The goods must not be consumer goods immediately before delivery.
NOTE: To protect their interests, consignors must perfect their interests like any other security interest.
Are liens subject to Article 9?
Statutory Liens in services and materials (mechanic's liens) are NOT subject to Article 9. EXCEPTION - The priority provision in Article 9 over other liens.
Agricultural Liens ARE subject to Article 9. These include an interest in farm products that secures payment for either (i) goods or services furnished with respect to the debtor's farming operation (livestock feed sold to a rancher) OR (ii) rent on real property leased by a debtor in connection with a farming operation.
Are sales of receivables covered under Article 9?
1) Chattel Paper;
2) Promissory Notes;
3) Accounts; and
4) Payment intangibles
The buyer of these receivables is the secured party; the seller is the debtor.
HOWEVER, Article 9 is INAPPLICABLE to some sales and assignments that by their nature do not concern commercial financing transactions. Two notable examples that ARE NOT governed by Article 9 are Sales of Business and Assignment of a Single Receivable in satisfaction of a preexisting debt.
Are real property transactions subject to Article 9?
HOWEVER, if an Article 9 receivable is secured by real property, then it will still be subject to Article 9.
What is the Texas Assignment of Rents Act?
Under Texas law, an assignment of rents arising from real property creates a presently effective security interest in the accrued and unaccrued rents.
What is attachment?
A security interest that is enforceable against the debtor with respect to the collateral is said to have ATTACHED to the collateral.
THREE CONDITIONS MUST EXIST:
1) Value has been given;
2) Debtor has rights in the collateral; AND
3) Debtor has AUTHENTICATED a security agreement with a DESCRIPTION of the collateral OR the secured party has POSSESSION OR CONTROL of the collateral pursuant to the security agreement.
What classifies as value?
The same consideration needed for contract to be valid BUT NO NEW VALUE NEEDS TO BE GIVEN.
For instance, if you have a loan, and later want to attach a security interest, you don't need to make another loan to do so.
What is needed to have an enforceable security agreement?
1) Record - can be any tangible medium or in electronic form;
2) Describes Collateral - must REASONABLY describe collateral, such as by class but CANNOT be super generic; AND
3) Authenticated - normally a signature but can be any symbol adopted by the debtor such as an email moniker.
NOTE: Consumer goods CANNOT be described by class - so "all Brian's consumer goods" would not be an acceptable description.
What are the alternatives to a written security agreement?
Possession (for tangible collateral) OR Control (for certain intangible collateral) but BOTH must still be pursuant to a security agreement.
A secured party that opts for possession or control owes a duty of REASONABLE CARE with respect to the collateral as well as a duty to keep the collateral identifiable and to relinquish the collateral once the underlying obligation has been satisfied.
How does a PMSI arise?
LENDER'S PMSI - Secured party gives value to the debtor in order to enable the debtor to acquire rights in or use of the goods, and the value given was so used.
SELLER'S PMSI - A secured party sold goods to the debtor, and the debtor incurs an obligation to pay the secured party all or part of the purchase.
NOTE: In both of the above situations, the security interest MUST still attach BEFORE a PMSI is created.
NOTE: In a CONSIGNMENT OF GOODS, there is a PMSI in inventory.
Explain a PMSI in software.
Exists only where the debtor acquired its interest in software in an integrated transaction in which the debtor also acquired an interest in goods (such as a computer), and the debtor acquired that interest in the software for the principle purpose of using the software in goods.
What are dual-status PMSIs?
In a NON-CONSUMER GOODS transaction, collateral does not lose its PMSI status merely because it:
1) Also secures another obligation;
2) The underlying obligation is also secured by other non PMSI collateral; OR
3) The underlying obligation has been renewed, refinanced, or restructured.