UCC Article 9 - Secured Transactions
Terms in this set (57)
Article 9 applies to
(1) any transaction that creates a security interest in personal property of fixtures by contract.
(2) leases if the lease is for the entire economic life of the item (like a car lease)
Personal property =
everything that isn't real estate
items that start as personal property but become part of real property
Article 9 is not applicable to:
(1) landlord liens
(2) an interest in a lien on real property (leases or mortgages)
(3) assignment of wages
Types of Collateral:
(2) Tangible Intangibles
(3) Intangible Intangibles
(4) Investment property
Four categories of goods:
(1) Consumer goods
(2) Inventory Goods
(3) Farm Products
(4) Equipment (catchall category defined as goods other than "consumer, inventory, or farm products)
a good that is physically inited with another good in such a manner that the identity of the original is not lost.
Example: Custom bike seat is bough to be affixed to a bike.
Comingled goods =
Goods that are physically united with other goods in such a way that their identity is lost in a product.
Example: Flour used to make a cake
Tangible INtangibles =
intangibles that are reduced to written form. Includes:
(1) Negotiable instruments (notes/drafts)
(2) Documents: Bills of lading, warehouse receipts, delivery orders
(3) Chattel paper: paper that is both (1) a promissory note and (2) a security interest in personal property.
Intangible good that may be evidenced by writings, but the writings take on no commercial significance on their own. Includes:
(1) website domain names
(2) intellectual property
(3) Accounts receiveable
Investment Property =
stocks and bonds
money derived from the original collateral.
Example: Store gets a loan and puts down the store's inventory as collateral. When the store sells the inventory, the proceeds from the sale becomes the collateral.
The Security Agreement must:
(1) be in writing and signed by the debtor
(2) contain a "granting clause" which explicitly states that it is creating a security interest - a mere contract to repay alone is not enough to create a security interest.)
(3) contain a description of the collateral (the language of the UCC is per se reasonable)
When is the security agreement enforceable without a writing?
When the secured party has possession of the collateral. (Think pawn shop that has possession of your property. Writing not necessary because the possession is evidence of the agreement).
process by which the security interest is created, which involves a contract between the debtor and the secured party.
Attachment occurs when:
(1) the secured party gives value (i.e. Bank hands the party a check)
(2) the debtor has rights in collateral; AND
(3) The debtor has authenticated a security agreement that sufficiently describes the collateral.
After acquired collateral =
grant of a security interest in property that is not yet owned
A security interest in "inventory" or accounts receivable" always creates:
after acquired collateral
A security interest in after-acquired consumer goods (i.e. using the check from the bank to go buy the car) requires that the debtor acquire the rights in the consumer good within:
10 days of the secured interest giving value.
A security interest in collateral automatically extends to
identifiable proceeds in the collateral.
Example: Finance company has a security interest in BestBuy's accounts receivable; if BestBuy's customers pay their accounts with checks, the finance company automatically has a security interest in the checks.
A secured party's in collateral will continue regardless of sale, lease, or other disposition of the collateral unless:
the secured party authorized its disposition free of the security interest.
Purchase Money Security Interest; when a loan is issued for the purchase of a particular good.
Ex: Car dealership gives you a loan to buy THEIR car.
the process by which the secured party gives notice to the entire world of its security interest. Perfection becomes very important for establishing a secured party's rights against another secured party.
To perfect, a secured party must attach plus:
one other step towards perfection which could be (1) filing
(2) possession or
Financing statement =
the most common way to file a security agreement; Usually files with the secretary of state's officer OR the County clerk's office (for fixtures only) where the debtor is located
(1) if debtor is an individual, file at principle residence
(2) If debtor is a registered organization, file in the state of organization
(3) If debtor is a non-registered organization, file at its lone place of business or chief executive office if multiple offices
Financing statement must include
(1) the name of the debtor,
(2) the name of the secured party
(3) description of the collateral (Why? Because it puts other lenders ON NOTICE of what has already been pledged as collateral.
If a filing statement contains a minor error, it will be effective unless:
the errors make the financing statement "seriously misleading." (in general, failure to sufficiently provide the name of the debtor is seriously misleading unless a normal database search with the wrongly spelled name would still reveal the filing.
If a debtor's name changes, financing statement will only be good for:
A filed financing statement is good for:
5 years after the date of filing; for continuation, lender must file 6 months prior to expiration
Financing statement remains effective even if:
collateral is sold, exchanged, leased, or otherwise disposed of
When is a financing statement not required for perfection?
When the security interest is subject to another law (Example: certificate of title statute for cars will satisfy perfection.
Special rules for fixture filings:
(1) must contain all of the information required in a financing statement;
(2) must indicate that its covering fixtures
(3) must indicate that its being filed in the real estate records of the county
(4) must provide a description of the real property its attached to.
When can possession satisfy perfection of a security interest?
When property is a tangible and the secured party physically takes possession (think pawn shop)
When will control satisfy perfection of a security interest?
Similar to possession, control may satisfy perfection for intangible items (Example, secured party receives a stock certificate or has control over the debtor's deposit account).
A PMSI in consumer goods is:
automatically perfected (except for motor vehicles and fixtures, the PMSI retains permanent perfection).
Once perfected, a security interest in (1) assignment of accounts or payment intangibles or (2) investment property created by a broker receive:
A perfected Security interest in proceeds perfects when the security interest in the original collateral is perfected, BUT
ONLY TEMPORARILY. This is known as automatic temporary perfection. So, if the debtor sells their collateral, secured party has 20 days under the UCC to perfect the proceeds.
Example: Bank gives PMSI to store to purchase a cash register. If bank perfects within 20 days, it will relate back to the date the bank gave the money, effectively making it perfected all along. (This becomes important when creditors are fighting over rights)
Can periods of perfection be tacked together?
Yes. If Security interest is perfected by one method and then later by another, the interest is perfected so long as there is no intermediate period of being unperfected.
What is the general rule regarding priorities of secured interests?
First in time is first in right.
If a security interest is unperfected then
the first security interest to attach will prevail.
As between to perfected Security Interests, who prevails?
The first to file or perfect.
When collateral is an instrument or chattel paper, who wins?
Party who perfects by taking possession will have priority over a party that files.
When the collateral is inventory, even a PMSI has to take additional steps to acquire priority which are:
(1) PMSI must be perfected at or before the time the debtor gets delivery of the inventory AND
(2) notice must be given to the first secured party that the PMSI holder expects to obtain a PMSI in the debtor's collateral. (basically new lender has to go to the original bank and tattle on the debtor who has tried to collateral the same property twice).
If a PMSI is perfected within 20 days
it leapfrogs above anyone else (including lien creditors)
A security interest in an accession is __________________________ to a secutiy interest in the whole
How do you prioritize comingled goods?
If there are multiple security interests, perfected interests will rank equally in proportion to the value of the collateral at the time it became comingled goods.
A security interest survives the sale of the collateral, but what are the exceptions?
(1) the security party authorized the sale free of the security interest;
(2) the buyer is a buyer in the ordinary course of business
(3) garage sale exception: someone buys goods for personal, family, or household use from someone who used the foods for that purpose without knowledge of a security interest
(4) the buyer of chattel paper has priority over other secured interests if buyer buys in good faith and in the ordinary course of business.
How can you tell if a buyer is a buyer in the ordinary course of business?
(1) Did the buyer purchase in good faith, without knowledge that the sale violates the rights of another person?
(2) Did the buyer purchase the good in the ordinary course of business from a person in the business of selling them?
Example: BestBuy financed all of its inventory of HDTVs with a loan from bank. Bank properly perfected its security interest on the HDTVs. Marco buys an HDTV from BestBuy. Marco will take the HDTV free from the bank's security interest , therefore if BestBuy defaults on its loan, the Bank cannot get its collateral back in the form of Marco's TV.
How can a secured creditor obtain priority over a mortgage?
By filing a fixture filing before the mortgage is recorded. However, if the security interest in the fixture is a PMSI, then second in time first in right rule applies as long as the security interest is perfected by a fixture filing within 20 days of becoming a fixture.
Example: If I get a loan from a chandelier maker to purchase his chandelier, then he would get priority over my bank's mortgage if I default.
If a debtor fails to pay an obligation when due, the secured party may:
secured party may reduce claim to judgment, foreclose, or otherwise enforce the claim.
Secured party has the right to repossess collateral so long as:
No breach of the peace (entry to home will always be breach)
if secured party can't recover through repossession, they must bring a replevin action in court (much more expensive/time consuming)
Debtor's right to redeem:
a debtor has right to redeem if they tender to the secured party the TOTAL amount of the obligation, including interest, plus reasonable interest and fees.
Can a debtor waive her right to redemption?
Yes, but only if she waives AFTER a default. She can't sign an initial contract with the lender waiving her right to redeem.
After repossession, lender may sell, license, or otherwise dispose the collateral so long as:
(1) it is done so in a commercially reasonably way
(2) the debtor is given reasonable notices
**no notice or insufficient notice is commercially unreasonable.
Case proceeds are disbursed as follows:
(1) the reasonable expenses of retaking incurred by the secured party
(2) satisfaction of obligations of security interest
(3) satisfaction of obligations of subordinate security interest or other subordinate lien on the collateral, if the secured party has received an authenticated demand before disposal
(4) any surplus to debtor.
If the collateral does not bring enough at sale or collection:
the secured party is entitled to a judgment for the deficiency. If the sale was conducted in a commercially unreasonable manner, the deficiency can be reduced.