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Law exam 2 Everything but first two chapters
Terms in this set (38)
UCC Revised article 9
How do lenders protect themselves against borrowers who are unable or unwilling to repay debts?
-Debtors consent to provide lender with security for the debt
What doesn't Article 9 Apply to?
Covers debtors consenting to provide lenders with security interest in personal property
-Does not apply to landlord liens, mortgages, wage claims, statutory liens, and security interest involving a governmental entity.
Secured Transactions Definitions
Creditor who has security interest in debtors collateral
Secured transactions definitions
Person who has interest in collateral (not security interest) or seller of accounts
person who owes payment on obligation secured by security interest.
Interest in collateral that secures payment or performance of an obligation
Property subject to security interest
- Proceeds to which Security interest attaches
- Accounts, chattel paper, payment
-Intangibles, and promissory notes that have been sold; and goods such as asset.
Ex. I own a sheep, if i want to borrow 100 dollars I can put my sheep up for collateral. If they wole the sheep a creditors interest can continue in proceeds and the proceeds of proceeds.
agreement that creates or provides for a security interest.
Record(s) of financing statement.
totally different than financial statement, if you call it this on a test you will lose points on written part of exam
3 Major concepts to understand
1. Pertains to a creditor enforcing security interest against debtor
---To be effective against any party, the security interest must attach to the collateral
2. Puts other creditors on notice that a creditor has a security interest in the collateral.
---Party may complete steps for perfection before attachment; if so, security agreement perfected when it attaches
---When more than one creditor has loaned money to the debtor and has rights to the same collateral who is entitled to the collateral?
Purchase money security interest
Creditor with a PMSI has a favorable position relative to other creditors with interest in the same collateral
Ex. Borrow money for a car. Take proceeds for a car and put up the car for collateral. Purchase money security interest in debtors collateral.
What is the holder of PMSI
Seller of goods retains security interest in them or a
- lender who advances money to enable debtor to purchase goods and retains a security interest in the goods.
PMSI Farm example
E.g Farm implement dealer sells a combine to a farmer. framer borrows money from credit company to pay for it. farmer (obligor/debtor) gives the credit company (secured party) a security interest in the combine.
Farmer goes to credit company who gives him the money but takes PMSI in combine. Farmer then has money to buy combine from dealer.
Note: Piece of equipment non inventory must perfect purchase security interest by performing a financing statement with des moines secretary of state in des moines within a 20 day grace period only equipment is 20 days.
What if farmer who bought combine already has an earlier farm loan with local bank which includes a security agreement covering:
First security on all accounts, contract rights, general intangibles, and the proceeds arising therefrom; furniture, inventory, machinery and equipment now owned and hereafter acquired by the debtor including all products of additions to and replacements thereof and all accessories, accessions, parts and equipment now or hereafter affixed thereto or used in connection therewith and the proceeds of all property(ies) set forth above.
If the farmer goes bankrupt, which creditor is entitled to the combine?
First goes to the payment of the combine then it goes to the PMSI and then to other creditors.
What types of collateral can lenders take an interest in under article 9?
- Need to know how to classify collateral so you can determine how to perfect it.
Ex. If it is a consumer good it perfects automatically
Goods (form of collateral)
1. Consumer goods
----Personal, family or household use.
----Note: Creditors can't take SA in consumer's household goods except PMSI's or pledges. -Promissorys not creditors interest perfect automatically
2. Farm Products including growing crops
----Goods held for sale or lease, raw materials
----Including office library, copier, machinery, etc.
If good is affixed to real estate, then fixture- you can take a security interest in a fixture.
Examples - How would you classify the good?
A DVD with the IRS code on it for an accountant's office
A recreational vehicle used by a country and western singer to tour the country when she performs shows in various cities.
How do federal regulations protect consumers?
From granting lenders a non-PMSI in most household goods, including clothing, furniture, appliances (e.g. refrigerator), wedding rings, family photographs, the family bible, pets, personal papers, 1 TV, and 1 radio.
----You can put up works of art, electronic equipment(> 100 years) or jewelry (except wedding rings) as collateral
What is dispensable paper?
----Negotiable instruments, stocks, bonds, and other investment securities.
Documents of title
----E.g. including warehouse receipts.
----Right to receive payment for goods or services
----Right to receive payment under contract
----Goodwill, literary rights, copyrights, trademarks, patents
Whatever debtor gets from selling or otherwise disposing of collateral
1. Secured party gives value;
2. Debtor acquires rights in the collateral;
3. Security agreement evidence by either
1. Generally, creditor agrees to extend credit or has extended credit in past. (Creditor makes loan)
2. Debtor owns or is acquiring collateral (Debtor must have asset in his name)
3. Written or authenticated record of the security agreement or
Pledge (creditor takes possession or gains control over collateral) - Does not have to be in writing or have authenticated record. - You can not pledge inventory
Written or authenticated record of the security agreement
Should describe the collateral
--- all debtors property or assets doesn't count as description
---E.g. Computer record stored on electronic medium that is retrievable
Debtor needs to sign or authenticate record of security agreement
5 things for perfection
1. Filing of financing statement
2. Taking possession of collateral - pledge
3. Automatic perfection - consumer goods.
5. Temporary perfection
Perfecting by filing
File a financing statement to give notice.
1. Name and mailing address of debtor and secured party
2. Description of collateral (can be broad)
3. If collateral related to real property, description of real property
Debtor must authorize financing statement in an authenticated record.
Security agreement may be filed as the financing statement
File financing statement with secretary of state's offic unless collateral related to real property; then file in county recorder's office.
Should not use this method to perfect instruments.
Financing statement is good for 5 years and you can continue another 5 when it is ending.
Financing statement used to perfect collateral but real property must file financing statement in the county.
Perfecting motor vehicles
Titled motor vehicles
----Do not file financing statement for titled motor vehicles. Instead perfect by putting a notation on the certificate of title.
Auto Dealer's inventory
----File a financing statement
Perfection by possession (may be called a pledge)
Secured party can perfect by taking possession of collateral.
----Cannot perfect accounts and general intangibles this way.
----Often used for jewelry, stocks, bonds, negotiable instruments
Perfection by possession is not the only way to perfect instruments but is the best way to get it out of debtors hands as collateral.
---Could file a financing statement but this is not the smartest idea.
-------Secured party may temporarily perfect instruments for 20 days. However, the debtor sells negotiable instrument you are no longer a secure creditor if the debtor files bankruptcy
Perfection by Control
Creditor may perfect investments by control. Means creditor can sell investments without authority of debtor
Automatic perfection upon attachment
Example: PMSI in consumer goods (not vehicle) automatically perfected upon attachment
No need to file financing statement
Automatically perfection upon attachment example
I buy a TV at a retail store for use in my home on credit
I grant the retail store a security interest in the TV by signing a security agreement
once i sign the security agreement the store's security interest attaches and is automatically perfected
The store would be in a stronger position relative to third parties if it had filed a financing statement because third parties would then have notice that the store has a security interest in my TV - do not have to
PMSI in inventory
Should be filed (no automatic perfection for PMSI in inventory) on or before debtor receives inventory
Send authenticated notification to all holders of conflicting security interest
Must include description of inventory.
PMSI in non- inventory
Perfect within 20 days of debtor receiving possession of collateral No requirement to send notification to holders
Proceeds must be perfect for 20 days from debtors receipt.
Generally statute will allow perfection to continue for longer period as a practical matter.
Security interests in negotiable instruments - automatically perfected for 20 days from the time they attach.
Better for secured party to take possession because HDC will prevail over security interest.
Example: John signs security agreement for a $100,000 loan and puts up his machinery as security. Bank takes and perfects a security interest. Agreement provides that John can borrow up to $750,000 using the same machinery as collateral.
A security agreement can cover future advances made under a line of credit. (Does not need to be seperate)
After acquired property
After acquired property can be covered by existing security agreement
eg, Debtor buys new inventory to replace sold inventory.
Priorities: If debtor defaults, which creditor with rights in the collateral wins?
1.BOCB of inventory; HDCs of negotiable instruments
2. Creditor with PMSI - only if you timely and appropriately perfect a PMSI
---Exception for consumer buying from consumer unless secured party filed to perfect.
3. Creditor with perfected security interest prevails against creditor with unperfected security interest
4. Creditor with unperfected security interest
The furniture store has granted its lender a security interest in its inventory.
You walk into this store and purchase a chair.
If the furniture store goes into default on its payments to its lender, can the lender repossess the sofa from you?
No consumer good diifjidjisjiifsjij
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