Secured Transactions Essay Rules Flashcards
Memorize Rules of Secured Transactions (24 cards)
Inventory under Article 9
Inventory under UCC Article 9 includes goods, other than farm products, that are held for sale or lease. Inventory also includes raw materials, works in process, or materials used or consumed in a business.
Attachment of a security interest (How does a security interest become enforceable?)
A security interest that is enforceable against the debtor with respect to the collateral is said to have attached to the collateral and three conditions must exist: (1) the secured party must give value, (2) the
debtor must have rights in the collateral, and (3) the debtor must authenticate a security agreement that describes the collateral or else the secured party retains possession or control of the collateral pursuant to an oral or written security agreement. The security interest can attach to collateral that the debtor acquires in the future.
Buyer of collateral subject to a perfected security interest
A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that
interest, unless the secured party has authorized its sale free of the security interest.
Buyer in the Ordinary Course of Business (BCOB)
A buyer in the ordinary course of business (BOCB) takes 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 BOCB is a buyer who (i)
buys goods, (ii) in the ordinary course of business, (iii) from a merchant in the business of selling goods
of that kind, (iv) in good faith, and (v) without knowledge that the sale violates another’s rights in the same goods. In order to qualify as a buyer, the purchaser must give new value, which in addition to paying cash for the goods includes purchasing the goods on credit. If a buyer obtains goods under the BOCB exception free of the security interest in the goods created by the buyer’s seller, the buyer may, in turn, sell the goods to a second buyer who also takes the goods free of that security interest. The second buyer is not required to qualify as a BOCB.
Purchase Money Security Interest (PMSI) * sale on credit
A purchase‐money security interest (PMSI) is a special type of security interest that exists when 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 price (a sale on credit).
PMSI in consumer goods
A PMSI in consumer goods is automatically perfected upon attachment.
Consumer Good
A consumer good is acquired primarily for personal, family, or household purposes.
Consumer Buyer of Consumer Goods
A consumer buyer of consumer goods takes free of a security interest, even if perfected, unless, prior to the purchase, the secured party has filed a financing statement covering the goods. A consumer buyer is a person who: (i) buys goods for value, (ii) for his own personal, family, or household use, (iii) from a consumer seller, and (iv) without knowledge of the security interest. This is often referred to as the “garage sale” rule.
Perfection of a Security Interest
Perfection of a security interest is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties. A security interest is perfected when the collateral attaches (becomes enforceable) and the secured party complies with one of the methods of perfection. Those methods include filing a financing statement, having possession or control of the collateral, or it can be automatically perfected.
When does Article 9 apply?
If the substance of the transaction is the creation of a security interest, then Article 9 applies regardless of the form of the transaction. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer is limited in effect to a reservation of a security interest.
Consumer Seller (Element of consumer buyer of consumer good)
Someone not in the business of selling the goods.
Identifiable cash proceeds and Perfected Security Interests
Proceeds include whatever is acquired upon the sale of collateral. A security interest in collateral automatically attaches to identifiable proceeds. If the proceeds are identifiable cash proceeds (which includes checks) and the security interest in the original collateral is perfected, the perfected security interest in the proceeds continues indefinitely.
4-Step Approach to Secured Transaction Essays
- Attachment - Steps necessary to make a security interest enforceable against the debtor
- Perfection - Notice of a security interest needed to establish a claim superior to others who may claim an interest in the same collateral
- Priority - Rules for resolving priority disputes between multiple claimants to the same collateral
- Enforcement - Rights and duties of a secured party that enforces its interest in the collateral after default.
Equipment (Classification of Goods)
Equipment is a catch-all class of collateral that consists of goods that are not consumer goods, farm products, or inventory. It typically refers to goods that are used in a business, such as machinery used in manufacturing.
Priority Between two or more Perfected Secured Parties (Rights in the same collateral)
When there are two or more perfected secured parties with rights in the same collateral, the first to file or perfect its security interest has priority. If both security interests are perfected, then priority dates from the time of filing or perfection, whichever occurs first.
PMSI in goods other than inventory or livestock (Priority)
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.
Transaction in the form of a lease
A true lease of goods does not create a security interest. However, a transaction that appears to be in the form of a lease may actually be a secured transaction, creating a security interest. 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 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 additional consideration, upon completion of the lease agreement.
Priority (perfected security interest vs. unperfected security interest)
If only one security interest in the same item of collateral is perfected and the other is not, then the perfected interest has priority over the unperfected interest. A secured party’s knowledge of another security interest in the same collateral does not affect the secured party’s priority.
Lessor unsure about secured transaction status (Priority)
A lessor who is unsure if it is a true lease or secured transaction will want to take steps to comply with the necessary filing rules and by making such a protective filing, the lessor is not prevented from asserting that the transaction constitutes a lease, but he will be accorded perfected status in the event that a court later determines that it is not.
Proper Authentication of a Security Agreement
To be enforceable, a security agreement must be authenticated, meaning that the debtor executed or adopted the signature or symbol that is attached to or logically associated with the record with the present intention to do so.
Sufficient Description of Collateral (Security Agreement)
The security agreement must provide a sufficient description of the collateral that reasonably identifies the collateral. A description that identifies the collateral by category or by type of collateral reasonably identifies the collateral. (“all equipment”). A description of the collateral as “all the debtor’s assets” or “all the debtor’s personal property” does not reasonably identify the collateral under the UCC.
Judicial Lien Creditor
A judicial lien creditor is a creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law. A judicial lien creditor takes the collateral subject to an existing perfected security interest, but generally has priority over an unperfected security interest.
Accounts
“Accounts” include the right to payment for goods sold, property licensed, or services rendered.
What is a Purchase-Money Security Interest?
A PMSI is a special type of security interest in goods that has priority over other security interests in the same goods. It arises when a creditor sells goods to a debtor on credit and retains a security interest in those goods, or the creditor advances funds, which are then used to purchase the goods and the creditor reserves a security interest in those goods.
