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Secured Transactions

Terms in this set (73)

A security interest arises when
a party (the debtor) uses certain property as collateral to secure repayment of funds to another party (the creditor).
UCC Article 9 applies to
1. any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract.
2. leases, if the lease if for the entire economic life of the item
3 sales of accounts receivable, chattel paper, negotiable instruments, and payment intangibles.
UCC Article 9 does not apply to
Landlord's liens; Any interest in or lien on real property, including a lease or rents thereunder
Four broad categories of good under Art. 9
Goods, Tangible Intangibles, Intangible intangibles, and Investment Property
Goods
anything that is moveable at time SI attaches
Four sub categories of goods
(1) consumer goods, (2) inventory, (3) farm products, (4) equipment
Consumer Goods
Goods used or brought primarily for personal, family, or household use
Inventory
Goods (except farm products) held for sale or lease, or furnished under
a contract for service (e.g., raw materials, work in progress, or business materials)
Farm Products
Goods, other than standing timber, used in a farming operation
Equipment
Goods other than consumer goods, inventory, or farm products (catchall
category)
Tangible Intangibles
certain intangibles reduced to writing that can be transferred by writing (e.g., contractual obligations)
Instruments
Negotiable instruments (e.g., drafts or notes) that evidence a right to
payment of money [writing must be of the types used in the ordinary course of business with the necessary endorsement or assignment]
Documents of Title
Any document used in the regular course of business or
financing that evidences the person in possession is entitled to the goods covered
by the document (e.g., delivery orders)
Chattel Paper
A record evidencing both a monetary obligation and an SI in, or a
lease of, specific goods
Intangible intangibles include
General Intangibles [intangible collateral that doesn't fit in any other category] and Accounts [right of payment]
Investment Property
Certificated and uncertificated securities, securities accounts,
and entitlements, as defined in UCC Art. 8
Proceeds
Collateral in the form of proceeds obtained from the disposition of other collateral [two kinds: cash or non-cash]
Security Interest is created by
A written security agreement or possession of collateral by secured party AND attachment of security interest to collateral
A Security Agreement is
an agreement that creates or provides for a security interest in collateral
Security Agreement must:
(1) be in writing, (2) be authenticated (i.e., signed by Debtor), (3) contain a granting clause, and (4) contain a [sufficient] description of the collateral
Possession [as exception to writing requirement]
Secured party must possess the collateral with the intent to secure the debt [if have possession, security agreement can be oral]
A Secured party has a purchase money security interest (PMSI) if the obligation is incurred
(1) as all or part of the price of the collateral; or (2) for value given to enable the debtor to acquire or use the collateral, if the value is in fact so used
Security Interest attaches when:
(1) SP gives value, (2) Debtor has rights in the collateral, and (3) Debtor has authenticated a security agreement that sufficiently describes the collateral
Once a SI has attached, a secured party
has enforcement rights under Article 9
After-Acquired Collateral Rule
A security interest attaches to after-acquired collateral if the agreement contain an express after-acquired-collateral clause
After-Acquired Collateral Rule - Two Exceptions
(1) An interest in inventory or accounts receivable automatically creates SI in
after-acquired collateral; (2) A security agreement can't cover after-acquired consumer goods unless Debtor
acquires rights in the good within 10 days of the SP giving value
After-Acquired Collateral - Future Advances
The security agreement can provide that the collateral secured future advances (e..g, revolving-credit agreement)
After-Acquired Collateral - Proceeds
SI automatically extends to identifiable proceeds of the collateral
Perfection
An SI is perfected upon: Attachment + Perfection [if perfected first, then perfection occurs upon attachment]
Where to file financing statement if collateral is fixture
County's clerks office where land to which fixture is attached is located
Where to file financing statement for all other collateral
SOS's office in jurisdiction where debtor located
Financing Statement must include
(1) Names of the Debtor and SP (or their representative); and
(2) A sufficient description of the collateral covered by the FS
Special Rules for Financing Statement for Fixtures
In addition to the general requirements, a fixture filing must also:
(a) Indicate that it covers fixtures;
(b) Indicate that it will be filled in the real property records;
(c) Describe the real property to which the fixture is related; and
(d) Provide the real property owner's name, if different than Debtor
A financing statement is ineffective (i.e., doesn't perfect SI) if it
(a) Is filed in the wrong place,
(b) Doesn't include the required information, or
(c) is not authorized by the debtor
Financing statement with minor errors is effective unless
The error makes it seriously misleading
A filed financing statement is effective for
Five years form the date of filing (continuation must be filed within 6 months before 5 year period expires)
Perfection by Possession
SI is perfected if the SP, or a third-party authorized by SP, takes possession of the collateral.
Applies only if the collateral is: (1) tangible negotiable documents, (2) goods, (3) instruments, (4) money, or (5) tangible chattel paper
Perfection by Control
SI is perfected if the SP takes control of the collateral
i) Applies only if the collateral is: (1) an investment security, (2) rights to a letter of credit, (3) a deposit account, or (4) an electronic chattel paper
Automatic Perfection
A PMSI in consumer goods perfects upon attachment and remains effective permanently [Exception: motor vehicles and fixtures (must file to perfect)]
Priorities: General Rule
First-in-Time, First-in-Right
Priority: Unperfected SI v. Unperfected SI
First SI to attach
Priority: Perfected SI v. Unperfected SI
Perfected SI
Priority: Perfected SI v. Perfected SI
First to file or perfect
Priority: When collateral is an instrument or chattel paper
SP that perfects by taking possession has priority over SP that perfects by filing
Priorities - Special PMSI Rules
A PMSI prevails over an earlier perfected SI (i.e., "second in time, first in right") if the PMSI is perfected:
(i) when Debtor gets possession of the collateral; or
(ii) within 20 days of Debtor receiving possession
Priorities - Special PMSI Rules - Exception
When the collateral is inventory, the party with the PMSI must also:
(i) notify the SP, in an authenticated record, that it is obtaining a PMSI in Debtor's collateral; and
(ii) be perfected when Debtor receives possession of the inventory (no grace period)
Priorities - Lien Creditor v. SP
SP has priority over a LC if SP:
(1) perfects before the LC's interest arises; or
(2) files a financing statement and evidences a security agreement (by authentication, possession, or control) before the LC's interest arises
Lien Creditor acquires interest in the property by
attachment, levy, or similar judicial collection procedures, or is a bankruptcy trustee
Priorities - Lien Creditor - Special Rules for PMSI
(1) PMSI takes priority over an intervening LC if the PMSI is perfected within 20 days of when Debtor receives the collateral
Accessions
Goods physically united with other goods but the identity of the original goods is not lost
Priorities - Accessions
Ordinary rules of priority apply except for multiple SIs in comingled goods
(i) Each SI ranks equally in proportion to the value of the collateral at the time it became commingled goods
Priorities - Buyer of Collateral v. Secured Parties
SI survives a sale of the collateral, except where:
(i) SP authorized the sale free of the SI;
(ii) buyer in the ordinary course of business (BIOCOB); or
(iii) Consumer-to-consumer transaction
Buyer in the Ordinary Course of Business (BIOCOB) is a person who:
(a) buys in good faith;
(b) without knowledge that the sale violates SP's rights in the goods;
(c) in the ordinary course of business; and
(d) from a person in the business of selling those goods
Consumer-to-consumer transaction
Applies to goods bought for personal, family, or household use by someone who uses the goods for that purpose
Consumer-to-consumer transaction - Rule
A buyer takes free of an SI created by the seller if:
(a) buys for value;
(b) without knowledge of the SI; and
(c) before a financing statement is filed
Priorities - Buyer of Chattel Paper
Buyer of chattel paper has priority over an SI in proceeds of inventory if:
(1) bought in good faith and in ordinary course of business;
(2) gave value and took possession or control of the chattel paper; and
(3) the chattel paper does not indicate that it's been assigned to another party
Priorities - Special Rule for Fixtures
First in time, first in right" applies if the SP with an SI in the fixture files a fixture filing à mortgage has priority if recorded before the SP files a fixture filing
Priorities - Special Rule for Fixtures - Exception
A PMSI in the fixture has super-priority ("second in time, first in right") if the SI is perfected by a fixture filing:
(a) before becoming fixtures, or
(b) within 20 days of the goods becoming fixtures
A default occurs
Whenever the Debtor fails to tender an obligation when due
Upon default, a SP may
repossess tangible collateral if it can do so without breach of peace (i.e., likely to cause violence). If not, the SP must file an action for replevin
Debtor has the right to redeem the collateral by:
paying the amount of the obligation, interest, and reasonable expenses and attorneys' fees caused by the default
Debtor can waive the right to redemption
in writing after default only
All aspects of disposition of the collateral must be
Commercially reasonable
Notice before disposition SP must send notice to
Debtor, any filed SPs, and any other person for whom the SP has received notification of an interest in the collateral
Notice must be sent within
A reasonable time before the sale [10 days is always sufficient in commercial transactions]
Contents of Notice - Non-consumer transaction
(a) description of Debtor and SP;
(b) description of the collateral;
(c) method of intended disposition;
(d) a statement that Debtor is entitled to an accounting of all unpaid indebtedness; and
(e) the time and place of a public sale, or when the collateral will be sold in a private sale
Contents of Notice - consumer transaction - must additionally include:
(a) description of any liability for a deficiency;
(b) phone number to call to obtain the amount required to redeem the collateral; and
(c) phone number or mailing address to find out additional information that is available
Order of Distributing Proceeds
First: all reasonable expenses, including attorneys' fees, incurred by the SP in the process of disposing of the collateral
Second: pay outstanding amount due to the SP that foreclosed on and sold the collateral
Third: pay subordinate SIs or liens on the collateral if they sent an authenticated demand before disposal
Finally: any surplus goes to Debtor; if all debts are not covered by the sales, the SPs can obtain a deficiency judgment
Deficiency
Difference between the foreclosure price and the amount due on the SI
If the sale is commercially unreasonable
the deficiency cane be reduced
In the sale in commercially unreasonable, in non-consumer transactions
we reduce the deficiency by the amount between the outstanding amount of the loan and the amount the collateral would have sold for in a commercial reasonable sale
In the sale in commercially unreasonable, in non-consumer transactions - Rebuttable Presumptions
presume the difference equals $0, so Debtor does not owe a deficiency
In the sale in commercially unreasonable, in non-consumer transactions - Rebutting the Presumption
SP can rebut the presumption by showing the collateral is worth less than the outstanding amount of the debt
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