What is a secured transaction?
A security interest in personal property or fixtures, generally involving a sale on credit or a loan in which the lender obtains a lien on some or all of the debtor's property. Look for a credit transaction (NOT A CREDIT CARD) and an agreement that creates a lien in favor of the creditor in the debtor's personal property to secure the debt.
In secured transactions, what does default mean?
The default is the secured party's interest in the debtor's collateral which is the subject of the secured transaction.
Define purchase money security interest. (PMSI)
Two ways to create: the secured party sells a debtor collateral on credit and retains a security interest in the item sold. This is a seller financed PMSI.
An enabling loan that allows a debtor to obtain collateral and the creditor takes a security interest in the specific collateral. The credit or loan proceeds must actually be used to acquire the collateral. This is the financor-finance PMSI.
Creditors MAY obtain after-acquired property, may also obtain a future-advance clause (any loan in the future, also may use the collateral).
In order to obtain a security interest as a PMSI, a creditor is not a secured creditor until ______
Attachment. This gives the creditor rights against the DEBTOR.
In order to obtain an interest in collateral as against the world, the secured creditor must obtain ______
Perfection. This is where the creditor gives public notice of the security interest to the world. This is accomplished with the financing statement.
Define goods as collateral.
Tangible, moveable, personal property. It must be consumer goods, equipment, inventory, or farm products. *Look to see how the debtor is using the collateral.*
Define consumer goods.
A consumer good is a good used or bought for use primarily for personal family or household purposes.
Define equipment as goods.
Goods used or bought for use primarily in business. This is the default category for goods.
Define farm products as goods.
Crops, livestock, or supplies used or produced in farming operations or products of crops or livestock.
Goods held for sale or lease, or furnished under service contracts, or materials used/consumed in a business in a short period of time.
Define non tangible property.
Instruments (promissory notes alone, checks, drafts), documents (docs in the regular course of business), chattel paper (promissory notes+security instruments, electronic chattel paper), investment property (stocks, bonds), accounts (right to pmt for goods/services, NOT BANK ACCOUNTS), deposit accounts (bank accounts for NONCONSUMERS), commercial tort claims (no personal injury death claims, business claims only), **general intangibles (default category, patents, trademarks)
What is the scope of Article 9?
General - any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract, or, a secured sale disguised as a lease.
Attachment: how do you create a valid Article 9 security interest via attachment, what are the steps?
CREATE A SECURITY AGREEMENT. Security agreement, value has been given, debtor has rights in the collateral.
Discuss security agreements.
Should be in writing, but may have an oral security agreement IF the creditor is in possession of the collateral. (I'll keep your watch until you pay me $50).
> Form of the written security agreement: must show an intent to create a security interest (any language sufficient), authenticated by debtor, must contain a *reasonable description* of the collateral.
> Secured party must have given value. Even a promise or past consideration is enough.
> Debtor must have rights in the collateral.
The instant that the last of any of these requirements occurs, regardless of order, security interest attaches to the collateral.
What is the scope of the security interest?
May be debt secured by future advances, after acquired property, property to include proceeds, security interest in the collateral may also be a security interest in the supporting obligation for that collateral.
Does after acquired property need to be explicitly stated on a contract?
Yes. The right to collateral in after acquired property arises out of the parties' contractual obligation in their security interest. Therefore, the intent of the parties controls, and the parties generally must evidence their intent regarding future acquired property. However, courts will allow an exception where the collateral is of a type that is rapidly depleted and replenished, as in inventory or accounts. If the collateral is consumer goods, no after-acquired unless obtained by the consumer within 10 days after the secured party gives value. No after acquired in commercial tort claims.
**Does secured property include proceeds?
Yes. Proceeds include whatever is received on the disposition of collateral or proceeds received. In other words, if the debtor sells the collateral and then uses the proceeds to purchase another good, that is now the collateral. Unless otherwise agreed, a security interest automatically gives the secured party a right to identifiable proceeds. Identifiable proceeds means that the creditor can prove that those proceeds came from its collateral.
Watch for commingled cash proceeds. To determine which part is identifiable, apply the lowest intermediate balance test. - look at the balance when deposited & the time applying the test, and the lowest balance is the cash proceeds (but cannot exceed the value of the case proceeds originally deposited).
What is a supporting obligation for collateral?
A guarantee - a surety.
How do you perfect a security interest?
Not necessary to create a secured interest between the creditor and debtor. This creates rights against 3rd parties. ATTACH, CREATE A FINANCING STATEMENT, and one of 5 methods:
1. Purchase Money Security Interest in consumer goods (always automatic).
2. Perfection by Control
3. Possession of Collateral by the Secured Party
4. Notation of lien on certificate of title
5. Filing a financing statement
Note - you can have an entirely perfected security interest without a written document. Look to the type of property to determine.
Discuss PMSI in consumer goods and perfection requirements.
Borrowing money from a creditor to purchase a consumer good, and the creditor take a security interest. The buyer is using the creditor's money to buy the goods, and the perfection is automatic upon attachment.
What effect does possession of collateral have on perfection?
Simply taking possession of the collateral by the secured party perfects collateral. Goods are the most frequent.
Discuss perfection by control.
*Security interests in non-consumer deposit accounts can ONLY be perfected by control. Either it is the bank w/the account, or, the account is put into the secured party's name, or, agreed in a signed record that the bank will follow the secured party's orders without further consent by the debtor.* Security interests in investment property and electronic chattel paper may be perfected by control - look to see if the secured party has taken steps so that she may sell the property without further action of the owner, if so, she has control.
Notation of a lien on certificate of title - discuss
Cars: only way to perfect security interest in a car is to note its lien on the certificate of the title.
Discuss the requirements of a financing statement.
May also be called UCC1
>Notice: statement must indicate that a person may have a security interest in the collateral indicated.
> Debtor's name (partnership name, corp name); NEVER trade names. Errors: *okay so long as not seriously misleading, depends on the search logic and the returns* Name change - still good for 4 months, otherwise, modify financing statement.
> Description of collateral - must reasonably identify even super generics such as all assets is okay here, unlike security agreement.
> secured party's name
> Real property related financing statements
> No signature required, although the debtor must authorize the filing statement; if the debtor automatically authorizes the security agreement, she has authorized the financing statement
Where to file a financing statement?
Department of Financial Institutions for everything but real estate.
Real estate? County filing.
Multiple state transactions, whose law applies?
General rule is that you file in the state where the debtor is located. If the debtor is an individual, she is located at her principal place of residence. If a registered organization, she is located in the state where the registered organization is organized. If partnership, debtor is at place of business, if more than one, chief exec office. Debtor moves to new state? Must file in new jx, only get 4 months to do so. Collateral moves to new state? You get 1 year to file new financing statement in new jx.
How long is a financing statement effective?
5 years, unless you file a CONTINUATION statement within 6 months of the 5 year life, then get another 5 years, so on, so forth.
If a secured party perfected a security interest in collateral, they automatically have a perfected security in whatever proceeds the debtor receives in those proceeds for _____ days, to remain longer, must take new action unless _______ or __________________________
20, proceeds are identifiable cash, same office rule
Priority: perfected secured v perfected secured?
First to file or perfect.
Priority: unperfected v. unperfected?
First to attach.
Priority: perfected secured v. unperfected secured?
PMSI's in equipment have ________ a conflicting security interest in the same goods or proceeds, if ______
priority over, perfected when debtor obtains possession or within 20 days
Priority rules for deposit accounts, order of priority:
Secured party, account in own name
Bank who has control b/c account at bank
Control over proceeds
Control, first to control
Secured creditor v buyer, and the secured creditor authorizes, does the purchaser take free of the security interest?
Yes. Inventory sales are implicitly authorized, even if expressly stated otherwise, not taking action can imply authorization.
Buyers in an ordinary course take goods _____ of security interest, if the buyer bought ________________ and in _________________ from a person ________________ goods of that kind.
free, good faith, ordinary course, selling
Consumer to consumer - the garage sale exception, does buyer take free of the security interest?
So long as buyer does not know of the security interest, she takes free.
Priority: secured party v. judgment lien holders?
Before secured party perfects, lien holder has priority when sheriff levies, if perfected by secured party, they have priority.
Priority: secured party v. statutory lien statutes
Statutory liens beat perfected security interests
Default: the right to seize secured property, may do so as long as does not breach the peace, which means:
any conduct by the secured party that has the potential to lead to violence, physical presence plus verbal objection equals breach of peace
Every ______________ of a foreclosure sale must be _________
aspect, commercially reasonable