Secured Transactions Flashcards
What law governs secured transactions? Is it a state or federal law?
Article IX of the UCC
State law
What is a secured transaction?
A transaction intended to create a security interest in a personal property or fixtures
Sale on Credit
Where the buyer does not pay full purchase price at the time of the sale
Signs that a problem is a secured transactions problem
1) A credit transaction (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
Debtor
The person who owes payment or performance of the obligation secured
Secured Party
A lender, seller, or other person in whose favor there is a security interest
Security Agreement
The agreement between the debtor and the secured party that creates the security interest
Security Interest
An interest in personal property or fixtures which secures a payment or performance of an obligation
When the contingency, which is default, occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral
Collateral
The property subject to a security interest
Property that the secured party can repossess upon default to insure that the debt is paid
Purchase Money Security Interest (PMSIs) (2)
Special types of security interests
1) Secured party sells debtor collateral on credit and retains a security interest in the item sold
2) An enabling loan; a loan to a debtor for the purpose of enabling the debtor to buy specific collateral, and the creditor takes a security interest in the specific collateral
Enabling Loan
Type of PMSI
A loan to a debtor for the purpose of enabling the debtor to buy specific collateral, and the creditor takes a security interest in the specific collateral
After-Acquired Property Clause
A secured party often will want to obtain a security interest not only in debtor’s present property, but also in property that the debtor will obtain in the future
This is permissible (security agreement = K)
Typically contained in security agreements
Future-Advance Clause
A secured party often contemplates making future loans to the debtor and wants to secure these future advances in the present security agreement
This is permissible (security agreement = K)
Typically contained in security agreements, in which case a new security agreement is not needed when a future advance is made
Attachment
“The security interest has been created”
Occurs when the collateral becomes an enforceable part of the transaction only AFTER the security agreement meets certain requirements
“Deals with those steps legally required to give the secured party interest in the collateral that is effective AS AGAINST THE DEBTOR”
Once the interest attaches, it is effective against the debtor and the creditor has all of the rights of a secured creditor under Article IX
Requirements for a Security Agreement Before Collateral May Attach (6)
1) Contain an express agreement between the debtor and secured party;
2) Be in writing;
3) Be signed by both parties;
4) Contain a description of the collateral that will attach;
5) Contain express language granting the security interest; and
6) Give something of value from the secured party to the debtor
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, it is the process of giving public notice of the security interest to the world
Financing Statement
Document generally used to provide public notice of the security interest, and so to perfect the security interest
Types of Collateral (Per Article IX)
1) Goods
2) Semi-tangible and intangible property (8 types)
When does a creditor become a secured creditor?
At attachment
What is your mnemonic for collateral for semi-tangible and intangible property? What do the words present?
“I don’t care that Paddy ate David’s gherkin.”
I - INSTRUMENTS D - DOCUMENTS C - CHATTEL papers T - commercial TORT claims P - investment PROPERTY A - ACCOUNTS D - DEPOSIT accounts G - GENERAL intangibles
Definition of Goods
Type of collateral
Tangible, movable, personal property
Includes all things which are movable at the time the security interest attaches, and includes the unborn young of animals and growing crops
Also include fixtures
Classification of Goods Under Article IX
1) Consumer goods;
2) Equipment;
3) Farm products; or
4) Inventory
Test: In classifying collateral, look to see how the DEBTOR is using the collateral. What is the collateral in the hands of the debtor?
Approach to Classifying Collateral (Test)
In classifying collateral, look to see how the DEBTOR is using the collateral. What is the collateral in the hands of the debtor?
Consumer Goods
Classification of collateral goods
Used OR bought for use primary for personal, family, or household purposes
Equipment
Classification of collateral goods
Used or bought for use in business
[Default, or catch-all, category] for goods per Article IX of UCC
For when goods don’t fit in any of the other categories; doesn’t matter if it doesn’t really fit the definition of equipment
Inventory
Classification of collateral goods
[Held by a person who holds them for sale or lease] or to be furnished under service contracts; materials used or consumed in a business in a short period of time (like raw materials)
Instruments
Classification of collateral semi-tangible and intangible property
[Negotiable instruments] and any other writing which evidences a right to the payment of a monetary obligation, AND which are in the ordinary course of business transferred by delivery with any necessary endorsement or assignment (does NOT include investment property)
(i.e.: checks, promissory notes, drafts; NOT musical instruments)
Answering a Question re: Type of Collateral
1) State what type of collateral you think it is (i.e.: consumer goods)
2) Define that type of collateral (i.e.: goods used or bought for use primarily for personal, family or household purposes)
3) State why you think it is that type of collateral (i.e.: “I think this is a consumer good because…insert fact to show why it fits that category…”)
Documents
Classification of collateral semi-tangible and intangible property
A document which in the regular course of business, is treated as evidencing that the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers
(e.g.: bill of lading, warehouse receipt)
(If this appears on exam, document will be bill of lading or warehouse receipt)
Chattel Paper
Classification of collateral semi-tangible and intangible property
A record or records which evidence both a monetary obligation AND a security obligation and a security interest in a lease of specific goods
(Chattel Paper = monetary obligation (i.e.: promissory note) + security interest/lease)
A “record” is information that is stored in either a tangible medium (e.g.: written on paper), or an intangible medium (e.g.: electronically stored)
Chattel paper stored in electronic medium also called “electronic chattel paper”
What is a “record” in terms of collateral?
A “record” is information that is stored in either a tangible medium (e.g.: written on paper), or an intangible medium (e.g.: electronically stored - called “electronic chattel paper”)
A record or records which evidence both a monetary obligation and a security obligation and a security interest in a lease of specific goods are classified as Chattel Paper Collateral for semi-tangible and intangible property
Investment Property
Classification of collateral semi-tangible and intangible property
Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items
Accounts
Classification of collateral semi-tangible and intangible property
A right to payment [not evidenced by an instrument or chattel paper]:
[1) For property sold;
2) For services rendered;]
3) For a policy of insurances issued or to be issued;
4) For a secondary obligation incurred or to be incurred;
5) For energy provided or to be provided;
6) For the use or hire of a vessel;
7) Arising out of the use of a credit card;
8) As lottery winnings
Health care insurance receivables are included
A K obligation arising from a loan of money is NOT an account, it is a general intangible
Accounts receivable (not personal bank accounts) On exam, usually only looking at [property and services]
Types of Accounts (8)
1) For property;
2) For services;
3) For a policy of insurances issued or to be issued;
4) For a secondary obligation incurred or to be incurred;
5) For energy provided or to be provided;
6) For the use or hire of a vessel;
7) Arising out of the use of a credit card;
8) As lottery winnings
What is your mnemonic for the different types of accounts under semi-intangible and intangible collateral? What do the words present?
“Valentino could stay put or escape isolation.”
V - for the use or hire of a VESSEL
C - arising out of the use of a CREDIT CARD
S - for SERVICES
P - for PROPERTY
O - for a secondary OBLIGATION incurred or to be incurred
E - for ENERGY provided or to be provided
I - for a policy of INSURANCES issued or to be issued
Deposit Accounts
An account maintained with a bank
1) NONCONSUMER DEPOSIT ACCOUNTS; and
2) Deposit accounts that are claimed as proceeds of other collateral (think BUSINESS bank accounts)
Commercial Tort Claims
A claim arising in tort with respect to which
1) the claimant is an ORGANIZATION (e.g.: partnership or corporation), or
2) the claimant is an INDIVIDUAL and the claim AROSE in the claimant’s BUSINESS or profession AND does not include DAMAGES for personal injury or the death of an individual
General Intangibles
Any personal property not coming within the scope of other definitions (e.g.: software, patent and trademark rights, copyrights, goodwill)
A general intangible under which the account debtor’s principal obligation is a monetary obligation is a PAYMENT INTANGIBLE
Kind of a catch-all
Most common examples are patent-related
Payment Intangible
A type of general intangible where the debtor’s principal obligation is a monetary obligation
Article IX Applies to… (5)
[1] ANY transaction, regardless of its form, that creates a security interest in personal property or fixtures by K;
2) An agricultural lien;
3) A SALE of accounts, chattel paper, payment intangibles, or promissory notes (unless the sale is for the purpose of collection only, or the sale is part of a business);
4) Certain consignments;
[5] A secured sale disguised as a lease
How to Distinguish Between “True Lease” and “Secured Sale Disguised as a Lease”
First, determine if the transaction, in substance, is a lease or a sale
Ask, at the time the parties entered into the transaction, was it reasonably likely that the “lessor” would get the item back when it still had meaningful economic value?
If yes, it is a “true lease”
If no, it is a sale with a security interest in substance and it is governed by Article IX
In a lease, the lessor is going to receive the item back at the end of the lease term when the item still has meaningful economic value
In a sale, the buyer is the owner and is generally going to drain all the economic value from the item
Writing Requirement for a Security Agreement
Unless collateral in possession or control of secured party pursuant to an agreement, a WRITTEN (or electronically stored) security agreement is REQUIRED
Most often, debtor wants possession of collateral, so a writing is necessary
Control of Collateral
If the collateral is a nonconsumer deposit account, electronic chattel paper, or investment property, the security agreement may be evidenced by control
Method by which control may be obtained depends on the type of collateral involved
Possession of Collateral
If the collateral is in the POSSESSION of the SECURED party pursuant to an ORAL security agreement, this will meet the “security agreement” requirement
Called a PLEDGE
Requirements for Attachment (3)
1) Security agreement;
2) Value must be given; and
3) Debtor has right in collateral
Need ALL THREE
MEMORIZE
Pledge
When the collateral is in the POSSESSION of the SECURED party pursuant to an ORAL security agreement, it will meet the “security agreement” requirements and is referred to as a “pledge”
Requirements in Form of the Security Agreement (when written)
a) The agreement must be evidenced by a record (written or electronically stored information) and must show an INTENT TO CREATE A SECURITY INTEREST (no “magic language” necessary)
b) The agreement must be “AUTHENTICATED” by the debtor. This usually means “SIGNED” by the DEBTOR. ANY symbol, including an electronic symbol, that is made with the present intent to authenticate the record will work
(e. g.: an “X”, a smiley face)
c) 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 Code says the security agreement must “reasonably identify” the collateral
Language Accepted to “Reasonably Identify” Collateral
1) Normal vocabulary works (i.e.: television)
2) Article IX categories work as well (i.e.: equipment)
When is value sufficient for attachment?
One of three requirements for attachment
Very liberal definition
ANY consideration sufficient to support a simple K is enough (a promise is sufficient)
Even PAST consideration is enough
The debtor always gives value because the debtor, at a minimum, promises to pay. Question is whether secured party gave value.
Does a debtor have to give value?
A debtor ALWAYS gives value because the debtor, at a minimum, promises to pay.
Question is whether the secured party gave value
Why must the debtor have rights in the collateral for attachment to occur?
One of three requirements for attachment
Debtor must have rights in the collateral because the debtor CANNOT GRANT a contingent property interest in a property that it DOES NOT OWN
General Rule for After-Acquired Property
Without an explicit after-acquired property clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement
Important - usually on exam
Exceptions to the General Rule for After-Acquired Property (3)
1) Even without an explicit after-acquired property clause, the courts will often imply an after-acquired property clause when the collateral is of a TYPE THAT IS RAPIDLY DEPLETED AND REPLENISHED (i.e.: [inventory or accounts] [EXAM uses these two])
The courts assume the parties must have meant to cover after-acquired property, or the security interest will reach nothing.
2) A security interest does NOT attach under an after-acquired property clause to CONSUMER goods UNLESS the debtor acquires rights in them within 10 DAYS after the secured party gives value
3) An after-acquired property clause is INEFFECTIVE as to COMMERCIAL TORT claims
Proceeds from Property Secured
Includes WHATEVER is received upon the sale, exchange, collection, or other disposition of collateral or proceeds
If collateral is insured and money is received from the insurance company on account of loss or damage to the collateral, the money is a proceed of the collateral (up to the value of the collateral) unless it is payable to someone other than the debtor or the secured party
Any claims arising out of the loss of, defects in, or damage to collateral are proceeds of the collateral (up to the value of the collateral)
UNLESS otherwise agreed, a SECURITY INTEREST automatically gives the secured party a right to IDENTIFIABLE PROCEEDS
Identifiable Proceeds
Proceeds that the secured creditor can prove that can be traced back to the creditor’s original collateral
Test to Determine Identifiable Proceeds in Co-mingled Cash
Test: Lowest Intermediate Balance Test
Look at the balance in a co-mingled (proceeds and non-proceeds) bank account starting at the time the proceeds are deposited and ending at the time you are applying the test
The law deems that the LOWEST balance during that time period is the secured party’s identifiable proceeds
(CANNOT EXCEED the value of cash proceeds originally deposited)
Supporting Obligation
Guarantee or a surety
A promise to pay the debt of another
Attachment of a security interest in collateral also is an attachment of a security interest in a supporting obligation for that collateral
Methods of Perfection (5)
1) Automatic perfection
2) Possession of collateral by secured party
3) Perfection by “control”
4) Notation of lien on certificate of title
5) Filing a financing statement
Automatic Perfection
Method of perfection
As soon as a security interest attaches it is perfected with no additional steps (e.g., filing or possession) necessary
The most common type is PMSI in Consumer Goods
Purchase Money Security Interest in Consumer Goods (PMSI in Consumer Goods)
Most common type of [automatic perfection]
Purchase Money Security Interest (PMSI)
PMSI can only arise in CONSUMER GOODS
A PMSI in consumer goods is [automatically perfected upon attachment]
You can acquire a PMSI as a seller OR as a lender through an enabling loan
What is the requirement for proceeds under automatic perfection?
Only requirement is that the proceeds be IDENTIFIABLE and traceable to the collateral
What is Temporary Perfection?
If the security interest in the original collateral is perfected, the security interest in the proceeds is perfected for at least 20 days
Possession of Collateral by Secured Party
Method of possession
Perfection attached when the secured party takes POSSESSION of the collateral
ONLY way to perfect if security interest is in MONEY
Security interest is perfected from the moment of possession WITHOUT relation back to the time of attachment
Not very practical because debtor usually wants possession
Perfection continues so long as possession is retained
