Secured Transactions (DONE) Flashcards

Question

What is required of the contract proving the security agreement necessary for attachment?

Answer 1

Methods proving the security agreement: 1) Oral agreement 2) Authenticated record 3) Control

Answer 2

Security agreements may be oral only if the collateral is in the creditor's possession. Often referred to as a "pledge". The creditor has a duty to take reasonable care of collateral in the creditor's possession.

Answer 3

1) Evidence of record | 2) Description of collateral (must reasonably identify the property - minor errors can still be reasonable)

Answer 4

The security agreement may be demonstrated why control if the collateral is nonconsumer deposit accounts, electronic chattel paper, or investment property. Control basically means the creditor has the right to sell or cash in the collateral without further action from the debtor. Control applies to INTANGIBLE items.

Answer 5

A debtor cannot give a security interest in property without having rights in the property such as ownership or identification to a contract. Debtor cannot use another's person's property as collateral without that person's permission.

Answer 6

1) Using new property as collateral for an old loan: The debtor can agree that new acquisitions of property will serve as additional collateral for an OLD loan. ("Floating Lien") 2) Consumer good exception: An after-acquired property clause will only work for consumer goods acquired 10 days of the creditor giving value. 3) Commercial Tort Claim exception: After-acquired property clauses will NEVER work with commercial tort claims.

Answer 7

Debtor can agree that the collateral will serve as collateral for NEW loans, as well as the current loan. This creates a line of credit arrangement.

Answer 8

Perfection is relevant if the fight is between the creditor and a third party claiming the same collateral. Perfection is the process by which the creditor protects the security interest from most other claimants to the same collateral.

Answer 9

1) Attachment: Creditor gives value, Contract proving security agreement, Debtor has rights in collateral 2) Act of perfection: depends on the type of collateral involved.

Answer 10

1) Possession of collateral by creditor 2) Filing of financing statement by creditor 3) Automatic permanent - attachment alone is sufficient 4) Automatic temporary - attachment alone sufficient for short period of time 5) Control 6) Notation of security interest on certificate of title 7) Special rules for proceeds 8) Multi-state transactions

Answer 11

Almost all collateral may be perfected by possession. This places the WORLD on notice that creditor has possession of collateral.

Answer 12

The following types of collateral may NOT be perfect by possession: 1) accounts 2) deposit accounts 3) nonnegotiable documents 4) electronic documents 5) electronic chattel paper 6) general intangibles (mostly intangible things)

Answer 13

If the creditor no longer has possession of the collateral, perfection is lost.

Answer 14

Almost all collateral may be perfect by filing. Requirements: 1) Names of debtor and creditor 2) Addresses of both 3) Debtor's authorization in an authenticated record (authorization automatic debtor authenticated the underlying security agreement) 4) Description of the collateral 5) Description of the land if the collateral is timber, minerals, fixtures, or crops

Answer 15

Minor errors that are not seriously misleading are excused.

Answer 16

Very important as the financing statement is filed under the debtor's name. 1) Individual = individual's name 2) Registered organization = name under which entity is organized 3) Trade Name = not sufficient, unless extremely similar to the debtor's name

Answer 17

If the changed name renders the name on the financing statement seriously misleading, the financing statement is effective only against collateral acquired by the debtor BEFORE the name became insufficient and within FOUR MONTHS after. For collateral acquired after the four-month period, the secured party must refile using the debtor's correct name.

Answer 18

General Rule = Secretary of State's office in Austin For fixtures, minerals, and timber to be cut = County where mortgage on real estate would be filed.

Answer 19

Effective for five years from the date of filing. Exception: Recorded real property mortgage covering FIXTURES continues until the mortgage is released or satisfied.

Answer 20

By filing a continuation statement within 6 months prior to the expiration date and before the 5 years expires.

Answer 21

The creditor must file a termination statement in a timely manner, the earlier of: 1) within 20 days after the debtor's written demand; or 2) within 1 month after there is no outstanding secured obligation or commitment to make advances, even without a demand from the debtor.

Answer 22

Only upon the debtor's request. Creditor must provide the debtor with a termination statement within 20 days of written demand. The debtor has the responsibility of filing the termination statement and must incur the cost.

Answer 23

A person may not file a financing statement the person knows is forged, contains a material false statement, or is groundless. Minimum penalty = $5000 plus court costs and reasonable attorney's fees.

Answer 24

1) PMSI in Consumer Goods 2) Assignment of Insignificant Amount of Debtor's Accounts 3) Sale of Promissory Notes

Answer 25

When there's a PMSI in collateral, the security is automatically perfected without having to file a financing statement, assuming the money is actually used to buy the collateral. WARNING: This special purchase-money security interest is only for CONSUMER GOODS that are NOT either certificate of title items or fixtures.

Answer 26

1) Proceeds 2) New value for instruments, negotiable documents, and certified securities 3) Delivery of those three to debtor for 20 days for certain purposes.

Answer 27

Proceeds are automatically perfect for 20 days from the debtor's receipt of the proceeds.

Answer 28

Creditor is automatically perfected for 20 days (a grace period to perfect using normal methods) from time of attachment if the creditor gave new value. Must file or take possession within 20 days or its security interest will become unperfected.

Answer 29

If a creditor gives the debtor these documents for certain purposes (such as for proof of security to other parties), then the creditor has "temporary perfection" for 20 days following its surrender. If the creditor does not regain possession of the notes before the expiration of the 20 days, perfection is lost.

Answer 30

Basically means the creditor has the right to sell or cash in the collateral without further action from the debtor.

Answer 31

1) Motor vehicles 2) Boats 3) Manufactured Housing Physical notice is required of security interest on certificate of title e.g., Perfection is not automatic when using a consumer good as collateral. The creditor must note its security interest directly on the title of the collateral.

Answer 32

Perfection continues for 20 days.

Answer 33

1) "Same Office" - Original security interest perfected by filing and a financing statement covering the proceeds would be filed in the same place as the original collateral. 2) "Identifiable Cash Proceeds" - As long as the case remains identifiable from the sale of the proceeds, the security remains perfected. 3) "Proceeds Perfected Within the 20-day Period" - The perfection could occur without further action on the creditor's part or the creditor might need to take action to perfect.

Answer 34

General Rule: Law of the state where the DEBTOR is located. 1) For an individual: principal residence 2) Registered organization: Law of state where organized 3) Unregistered organization: Place of business, but if more than one, chief executive office.

Answer 35

Creditor must follow the law of the collaterals location when: 1) Security interests perfected by possession 2) Fixtures 3) Timber 4) Agricultural liens = law of state where farm product covered by the lien is located

Answer 36

Law of the state which issued most recent certificate of title.

Answer 37

Law of state in which bank has its chief executive office.

Answer 38

General rule: If debtor moves, perfection continues for FOUR months. For perfection by possession cases, perfection continues as long as perfected under new state's laws. For certificate of titler items, perfection continues for as long as it would under the original certificate of title.

Answer 39

SECURED CREDITOR prevails. Perfected status of secured creditor is irrelevant. (general creditor has no interest in the property / no collateral) Example: Debtor granted Bank a security interest in Debtor’s computer. Debtor has financial difficulties and quits paying both Bank and Debtor’s American Express account. Bank has priority in the computer regardless of Bank’s perfected status because American Express is UNSECURED.

Answer 40

1) Both perfected = First to ATTACH prevails 2) One creditor perfected = PERFECTED creditor prevails 3) Both creditors perfected = special rule (see other slide) Example: In 2013, Debtor granted Octopus National Bank a security interest in its equipment. ONB did not file a financing statement or otherwise perfect its interest. In 2014, Debtor granted Shark National Bank a security interest in the same equipment. Debtor told SNB that it had already granted ONB a security interest in the equipment. SNB properly perfected. Debtor stops paying both ONB and SNB. SHARK prevails because it is perfected.

Answer 41

General rule = First creditor either to 1) FILE or 2) PERFECT. First creditor to do the first of filing or perfecting prevails (not both) Doesn't matter which creditor first had a security agreement with the debtor. Doesn't matter with creditor attached first. Doesn't matter which creditor perfected first if one creditor filed before that perfection. Knowledge of Creditor A who filed first that Creditor B has subsequently filed and perfected, but before Creditor A perfects, is irrelevant. Example: Bank A had Debtor sign a security agreement and a financing statement on May 10. Bank A properly filed the financing statement on May 10, but neither lent the money nor made a commitment to do so. Bank B lent Debtor money and took a security interest in the same collateral by taking possession on May 11. On May 12, Bank A lent Debtor the money with full knowledge of the transaction with Bank B. Bank B was perfected on May 11, but Bank A did not perfect until May 12 because perfection cannot occur until all the elements of attachment are satisfied (the final element here was Bank A giving value on May 12). However, Bank A has priority because it was the first creditor who either filed or perfected. The policy behind this rule is to promote reliance on the filing system so that creditors in the position of Bank A can check to see that the debtor’s assets are unencumbered, file a financing statement, and then loan the money with confidence that it has priority without having to continuously recheck the records.

Answer 42

The PMSI creditor prevails (even though second) if it is perfected: 1) At the time the debtor receives possession of the collateral, or 2) Within 20 days of when the debtor received possession of the collateral. Example: On June 1, Debtor gave a security interest in all of his office equipment now owned and after-acquired to Bank A. Bank A filed a financing statement and lent Debtor the money on the same day. Later, Debtor bought a new copying machine from B.I.G. Machines, Inc. which took a security interest therein to secure the payment of the purchase price. B.I.G. Machines gave Debtor possession of the machine on October 10. Although second to file or perfect, B.I.G. Machines will have priority over Bank A if it perfects by OCTOBER 30.

Answer 43

PMSI creditor prevails if: 1) PMSI creditor perfected at time debtor receives possession of the inventory, and 2) Proper notice to holders of conflicting security interests Example: Owl Bookstore granted Last National Bank (LNB) a security interest in its inventory now owned and after-acquired, which LNB perfected by filing a financing statement in the proper place. Thereafter, Owl decided to buy more books on credit for its inventory from Book Wholesalers. Book Wholesalers wants to claim a purchase money security interest in the books. To have priority in them over LNB, it must give LNB a written notice of its intentions BEFORE delivering the books to Owl. In addition, Book Wholesalers must perfect (e.g., file a financing statement) BEFORE delivery (there is no 20-day grace period). When the books are delivered, LNB’s floating lien will attach to the books. But, if Book Wholesalers has followed this procedure, it will have a priority claim to these books.

Answer 44

Same rules as a PMSI in inventory.

Answer 45

Secured party with CONTROL prevails

Answer 46

Secured party who has CONTROL over investment priority over a secured party who does not have control (e.g., a secured party who perfected by filing.) Example — Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor’s investment property. At that time, Debtor owns 1,000 shares of XYZ Co. stock for which Debtor has a certificate. Alpha perfects by filing. Later, Debtor borrows from Beta and grants Beta a security interest in the 1,000 shares of XYZ Co. stock. Debtor delivers the certificate, indorsed in bearer form, to Beta. Alpha and Beta both have a perfected security interest in the XYZ Co. stock. Beta has CONTROL because of the delivery of the properly indorsed certificate and hence Beta has priority over Alpha.

Answer 47

if the debtor makes a gift of the collateral to a donee, the collateral remains subject tot he security interest in the donee's hands. Example: Larry Lawyer grants Bank a security interest in his office computer. He uses the loan proceeds to pay his office bills. Several months later, Larry gives the computer to Sarah as a birthday present. Larry then stops making payments on the loan. The computer IS subject to the security interest and Bank may repossess the computer from Sarah.

Answer 48

General Rule = Secured party prevails | see special rules

Answer 49

If debtor has permission to sell, PURCHASER prevails

Answer 50

General rule = Purchaser wins if: 1) Buyer gives value 2) Buyer receives delivery of the item, and 3) Buyer has no knowledge of security interest at time of delivery. PSMI Exception: If PMSI creditor perfects within 20 days after debtor receives the collateral but after debtor sells collateral to purchase, creditor will prevail over the gap purchaser. Example: On May 1, Debtor grants Bank a security interest in Machine A and Machine B. Debtor already owned Machine A and uses a portion of the loan proceeds to purchase Machine B. On May 10, Debtor sells both machines to Paula. Paula immediately takes delivery of the machines and has no knowledge about Bank’s security interests. On May 15, Bank properly perfects its interests in both machines. Later, Debtor stops making loan payments. Paula may keep Machine A because Bank was UNPERFECTED when she took delivery. However, Bank may repossess Machine B because Bank had a 20 DAY grace period to perfect its purchase-money security interest in Machine B.

Answer 51

A buyer in the ordinary course of business can prevail over a perfected creditor if the following requirements are satisfied. 1) Good faith: Honesty in fact and observance of reasonable commercial standards 2) Without knowledge of a security interest violation 3) Purchaser of goods that are not farm products 4) Ordinary purchase (must be from a person selling goods of the kind) 5) Security interest created by the seller 6) Creditor not perfected by possession Example: Big Department Store granted a security interest in all its inventory to Octopus National Bank which ONB properly perfected. Nonetheless, buyers of the inventory items (the customers coming into the store) will purchase FREE of ONB’s security interest, as long as they meet the requirements of a buyer in the ordinary course of business.

Answer 52

Purchaser prevails if: 1) Consumer goods in seller's hands 2) Consumer goods in buyer's hands 3) Buyer has no knowledge of security interest 4) Buyer pays value 5) Creditor not perfected by possession 6) Creditor's interest is unfixed prior to purchase e.g., Debtor selling the good he bought on credit to another before paying it off - the second purchaser takes free of the security interest if she didn't have notice Example: Carl Consumer bought a television set on credit from Big Department Store, which took a purchase money security interest therein. Before the television was paid for, Carl sold it to his sister. If the sister buys without notice of the store’s interest (and the store has not filed a financing statement), the sister takes FREE of the store’s security interest.

Answer 53

The creditor gives more money to the debtor based on collateral that the debtor has already sold to a purchaser show does not qualify as a buyer in the ordinary course of business. A non-buyer in the OCOB can prevail over a secured creditor for future advance amounts made after the first of these events occurs: 1) Secured creditor obtains knowledge of the purchase, OR 2) 45 days have elapsed from the date of purchase. Example: Adam Attorney sells his office computer to Paula on May 1. Unbeknownst to Paula, Adam had granted Bank a security interest in the computer and had received a $500 loan. On September 1, Bank loans Adam $250 under a future advance provision in the original security agreement. Adam stops making payments to Bank. Paula CANNOT qualify as a buyer in the ordinary course of business because she did not buy the computer from a person in the business of selling computers. Likewise, the consumer purchaser of consumer goods exception does not apply because Paula purchased equipment, not consumer goods. Thus, the computer is still subject to the original $500 loan. However, Paula takes FREE of the $250 future advance because it was made more than 45 days after she purchased the computer.

Answer 54

A holder in due course will PREVAIL over earlier perfected interests in the negotiable instrument.

Answer 55

General (unsecured) creditors who have acquired a judicial lien by a levy by the debtor's property. The term also includes the bankruptcy trustee.

Answer 56

General rules: 1) If secured creditor is unperfected at time lien attached = LIEN CREDITOR prevails 2) If secured creditor is perfected at time lien attached = SECURED CREDITOR prevails. Example: Antitrust National Bank loaned Debtor $10,000, and made the debtor sign a security agreement giving the bank a security interest in Debtor’s business equipment. Antitrust National never filed a financing statement. A few weeks later, one of Debtor’s other creditors recovered a judgment against Debtor and had the sheriff seize the business equipment. This seizure created a judicial lien on the property and the judicial lien creditor is entitled to be paid first when the equipment is sold because Antitrust’s interest was unperfected. Antitrust National would have been superior to the judicial lien creditor only if it had filed a financing statement in the proper place before the sheriff’s levy.

Answer 57

If a PMSI secured creditor perfects by FILING within 20 days after the debtor receives possession, the creditor will defeat lien creditors who obtained their liens in the gap period. Example: Barbara bought a typewriter for her law office on credit on July 10, giving Seller (creditor) a security interest in the machine. On July 12, another creditor obtained and levied on a judgment against her. On July 14, Seller properly filed a financing statement. Although the judicial lien came prior to Seller’s perfection, Seller prevails because of the 20 day grace period for purchase money security interests which allows the perfection to occur within 20 days of the debtor receiving possession of the collateral.

Answer 58

The secured creditor will lose priority to a lien creditor for future advances after BOTH of the following two things occur: 1) The secured creditor obtains KNOWLEDGE of the lien, and 2) 45 days elapse from the date of the lien.

Answer 59

Statutory Lien prevails if the following conditions are satisfied: 1) Person furnished services or materials with respect to the goods covered by the security interest. 2) Furnishing was in ordinary course of business 3) Collateral is in the possession of the statutory lien holder Example: Antitrust National Bank (ANB) had a perfected security interest in Karla Consumer’s car. When the car broke down, she took it to George’s Garage and had it repaired. George’s statutory mechanic’s lien has priority over ANB’s security interest as long as George retains POSSESSION of the car, unless the statute creating the mechanic’s lien expressly states otherwise.

Answer 60

Priority for the proceeds is the same as the priority in the original collateral as long as the security interest in the proceeds is perfected.

Answer 61

A creditor with security interest in these ordinary building materials LOSE its security interest once construction really occurs. General Rule: Secured party may win if: 1) Perfected BEFORE real estate interest is recorded, and 2) Perfected with a FIXTURE FILING. Fixture filing requires: a) description of the real property b) filed in office where a mortgage on the real property would be recorded

Answer 62

PMSI creditor, even though perfect after real property interest is of record, can prevail if: 1) PMSI perfected before fixture filing 2) Perfected within 20 days of good becoming a fixture, and 3) Competing real estate interest is not a construction mortgage Example: In 2010, Happy Homeowner purchased a used house and granted Bank a mortgage covering the house and its fixtures. Bank immediately filed the mortgage. A few years later, Happy’s air conditioner needed replacement and he did not have the funds. But, his credit was good so he granted We R Cool a security interest in the new air conditioner they installed on May 1. We R Cool properly filed a fixture filing on May 15. Although We R Cool’s security interest was not perfected before Bank’s mortgage was recorded, We R Cool prevails because it perfected within the 20 days of the INSTALLATION of the air conditioner.

Answer 63

If the good is READILY REMOVABLE, it will be treated as a regular good, rather than a fixture, and thus may be perfected without a fixture filing. (e.g., refrigerator)

Answer 64

A security interest that is perfected in any manner PREVAILS over a later-acquired judicial lien, even if the perfection was not done via a fixture filing. Example: Big Business granted Bank a security interest in specified fixtures of its main manufacturing plant. Bank filed a traditional financing statement rather than a fixture filing. Later, Palsgraf, who was injured on Big’s property, recovered a judgment against Big and obtained a judicial lien. Bank has priority over Palsgraf even though Bank did not perfect with a fixture filing.

Answer 65

A perfected security interest in crops has priority over a conflicting interest in the land on which the crops are growing. It does not matter who filed or perfected first.

Answer 66

Bankruptcy of the debtor may change the normal priority rules. Check preferences in bankruptcy law.

Answer 67

Not paying on the security interest, but the terms may include other things specified in the agreement such as taking the collateral out of the state without permission or not keeping the collateral insured.

Answer 68

1) Upon default, creditor may repossess 2) No judicial process needed (self-help remedy) 3) Creditor need not give debtor notice 4) Limitations on repossession (no breach of peace)

Answer 69

Creditor CANNOT delegate duty not to breach the peace. Thus, if the repo person breaches the peace, the creditor is STRICTLY LIABLE even if the repo person is an independent contractor. This liability could be conversion of the repossessed item, actual damages, and even punitive damages.

Answer 70

1) Resell collateral - sue for deficiency, and give surplus to debtor 2) Strict foreclosure - keep collateral and call things square

Answer 71

1) Notice of sale (required) 2) Debtor's right to redeem 3) Standard of care 4) Ability of creditor to purchase at resale 5) Title of purchaser at resale (warranties) 6) Application of resale proceeds 7) Deficiency liability for creditor 8) Penalty for not complying with resale requirements 9) Special rules for if collateral is accounts or instruments

Answer 72

1) Perishable collateral 2) Collateral threatening to decline speedily in value 3) Collateral is customarily sold on a recognized market

Answer 73

1) Description of debtor and secured party 2) Description of the collateral 3) Method of sale 4) Statement that debtor is entitled to an accounting and the charge, if any. 5) Time and place of public sale time after which a private sale will be made (earliest date of sale) 6) If the collateral is consumer goods, the notice must also - --- explain that debtor is liable for deficiency - --- telephone # of person from whom debtor can obtain amount needed to redeem the collateral - --- telephone # or address from which debtor can get additional information about the sale

Answer 74

Notice must be sent a reasonable amount of time before the sale. It is a fact question as to what is a reasonable amount of time, but in a nonconsumer transaction, 10 days or more before the sale is considered unreasonable.

Answer 75

1) Debtor - unless debtor has waived notice in an authenticated agreement made after default 2) Sureties 3) If collateral is not consumer goods - notice to creditors who have perfected by filing, notation on certificate of title, or who have given notice to reselling creditor

Answer 76

Debtor has the ability to cure the default and regain the collateral if certain requirements are satisfied: 1) Creditor has not yet sold or entered into a contract to sell collateral 2) Strict foreclosure has not yet occurred 3) Debtor has not waived the right to redeem after default 4) Debtor must tender fulfillment of all obligations secured by the collateral - --- not enough to just tender the late payments/watch out for acceleration clauses. 5) Debtor must tender creditor's reasonable expenses (e.g., expenses of repossession)

Answer 77

Method, manner, time, place, and terms of the sale must be commercially reasonable. (fact question) Merely because a better price could not be obtained is not enough to make a sale unreasonable, but if the difference in price is substantial, the sale will be scrutinized. Burden of proof is on the CREDITOR to show commercial reasonableness of the sale in a deficiency suit.

Answer 78

a) Public sale (auction) = YES b) Private sale = only if: - --- collateral is customarily sold in a recognized market, or - --- collateral is subject to widely distributed standard price quotations.

Answer 79

The reselling creditor warrants TITLE, POSSESSION, and QUIET ENJOYMENT of the collateral by the purchaser unless the creditor takes steps to disclaim the warranties.

Answer 80

Payment goes to: 1) Reasonable exposes of reselling creditor 2) Satisfaction of debt 3) Satisfaction of subordinate creditors 4) Surplus, if any, to debtor

Answer 81

The creditor is liable for the deficiency amount.

Answer 82

1) Creditor liable for actual damages 2) For consumer goods: The creditor is automatically liable for amount equal to finance charge plus 10% of the principal 3) Effects creditor's ability to recover deficiency

Answer 83

1) In consumer transactions, creditor cannot sue to recover deficiency 2) In nonconsumer transactions, there is a rebuttable presumption that the value of the collateral was equal to the amount of debt (Secured creditor may prove otherwise and still recover a deficiency)

Answer 84

The creditor directs the obligor to make payments directly to the creditor, rather than to the debtor.

Answer 85

The creditor retains the collateral in total satisfaction of the debt. In nonconsumer situations, the creditor may retain the collateral in total or partial satisfaction of the debt.

Answer 86

1) The debtor consents 2) Creditor send authenticated notice to retain collateral 3) There is no timely objection

Answer 87

1) Express: The debtor agrees in an authenticated record made after defaults, or 2) Implied: The debtor fails to object to the creditor proposal to strictly foreclose within 20 days of when the creditor sent notice.

Answer 88

1) Debtor: Unless the debtor has waived notice in an authenticated agreement made after default 2) If collateral is not fore consumer goods, notice to creditors who have perfected by filing, have a notation on certificate of title, or who have given notice to creditor.

Answer 89

If the debtor or another creditor objects in writing within 20 days, the creditor may not keep the collateral and must conduct a resale.

Secured Transactions (DONE) Flashcards

(113 cards)