Secured Transactions Flashcards

Flashcards on Secured Transactions

Article 9 of the UCC

• Any transaction,

• regardless of its form,

• that creates a security interest.

Substance over form controls (how the parties classify the transaction is immaterial).

When a Transaction is a Lease Deemed a Security Interest

• 1) If a commitment to make payments cannot be withdrawn; AND

• 2) Either:

  • a. The lease lasts as long as or longer than how much life the goods have left in them.;

  • b. The lessee renews the lease for the remaining life of the goods; OR

  • c. The lessee has an option to renew or become the owner for no additional consideration.

Account

A right to payment arising from:

• a) Property that has been sold, leased, or disposed of;

• b) Services rendered;

• c) A policy of insurance issued;

• d) A secondary obligation incurred;

• e) Energy provided;

• f) The use/hire of a vessel under charter/contract;

• g) A debt from a credit card; OR

• h) Winnings in a lottery.

Deposit Account

• A demand, time, savings, or similar account maintained with a bank.

• Does NOT include investment property or accounts evidenced by an instrument.

Inventory

Goods which are:

• a) Leased by a person as lessor;

• b) Held by a person for sale/lease;

• c) Given by a person under contract of service; OR

• d) Consist of raw materials, work in process, or materials used/consumed in a business.

Does NOT include: Farm products or Goods being held for repair.

Equipment

Goods other than inventory, farm products, or consumer goods.

Goods = all things that are movable when a security interest attaches.

Certificate-of-Title Statute

It requires the security interest to be noted on the title of the vehicle for it to be perfected.

Consumer Goods

Goods purchased primarily for personal, family, or household purposes.

Proceeds

The following property:

• a) Anything acquired upon the sale, lease, or disposition of collateral;

• b) Anything distributed/collected on account of collateral;

• c) Rights arising out of collateral;

• d) Claims arising out of the loss, nonconformity, defect, or interference with the use of collateral; OR

• e) Insurance payable by the result of the above.

Chattel Paper

A record that evidences both:

• 1) A monetary obligation; AND

• 2) Either:

  • a. Security interest in specific goods (with or without a software license used in the goods); OR

  • b. A lease of specific goods.

    *Monetary obligation = obligation to pay money that is secured by the goods or owed under a lease of goods.

Enforcing and Priority of a Security Interest Depends On…

• 1) Attachment (secures the creditors rights to the collateral); AND

• 2) Perfection (gives notice of rights to other parties).

*Perfection is obtained by the creditor filing a financing statement with the Secretary of State.

Attachment Requires…

• 1) Creditor extends value to the debtor;

• 2) Debtor has rights in the collateral; AND

• 3) Interest must be authenticated by one of the following:

  • a. an authenticated record/security agreement – it must (i) be authenticated by the debtor and (ii) reasonably identify the collateral;

  • b. collateral is in the secured party’s possession;

  • c. collateral is a certificated security in registered form and the security certificate has been delivered to the secured party; OR

  • d. the secured party has control of certain types of collateral (deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights).

What a Financing Statement Must Contain

• To be effective, is must:

  • 1) State the name of the debtor and secured party;

  • 2) Reasonably identify the collateral covered by the statement; AND

  • 3) Be filed by a person authorized by the debtor in an authenticated record, security agreement, or upon acquisition of the collateral.

    *Unless seriously misleading, minor errors DO NOT render the statement ineffective.

Purchase Money Security Interest (PMSI)

When a creditor extends value to the debtor for the purpose of enabling them to acquire rights in the collateral.

A PMSI in consumer goods enjoy AUTOMATIC perfection (there is no need to file a financing statement to perfect).

Interests in Proceeds (From the Disposition of Collateral) Will Become Unperfected on the 21st Day After Attachment, Unless…

• a) The proceeds are identifiable cash proceeds;

• b) The security interest in the proceeds is perfected when the interest attaches to the proceeds or within 20 days; OR

• c) If all of the following conditions are satisfied:

  • i. Original collateral was perfected under the general filing rule;

  • ii. The proceeds are collateral that may be perfected;

  • iii. The proceeds are not acquired with cash proceeds.

Consignment

A transaction in which:

• 1) A person delivers goods to a merchant for the purpose of sale;

• 2) The merchant deals in goods of that kind;

• 3) The aggregate value is $1,000 or more;

• 4) The goods are NOT consumer goods (before delivery); AND

• 5) The transaction does not create a security interest.

When a Secured Party Has 'Control' of a Deposit Account

If:

• a) The secured party is the bank where the account is maintained;

• b) The debtor, secured party, and bank all have agreed (in an authenticated record) that the bank WILL comply with the secured party’s instructions for deposit without further consent needed; OR

• c) The secured party becomes the bank’s customer with respect to the deposit account.

Shelter Principle

If a buyer acquires property free of a security interest, then any subsequent transfer is also free of the security interest.

Buyer in the Ordinary Course of Business

A person that:

• 1) Buys goods in good faith,

• 2) Without knowledge that the sale violates the rights of another person in the goods,

• 3) In the ordinary course from a merchant.

*They take free of any security interest.

Consumer-to-Consumer Rule?

When the goods are bought:

• 1) Without knowledge of the security interest;

• 2) For value;

• 3) From a consumer who purchased them for personal, family, or household purposes; AND

• 4) Before the filing of a financing statement covering the goods.

Perfected Interest vs. Unperfected Interest

A perfected security interest has PRIORITY over a conflicting unperfected security interest in the same collateral.

Unperfected Interest vs. Unperfected interest

When there are two competing unperfected security interests, the first to attach will prevail.

Perfected Interest vs. Perfected Interest

'First in time, first in right' controls – the first creditor to prefect by filing has priority.

Possessory Lien

An interest (other than security) that:

• 1) Secures payment/performance of an obligation for services/materials furnished by another in the ordinary course of their business;

• 2) Is created by statute or rule of law in favor of the person; AND

• 3) Whose effectiveness depends on the person’s possession of the goods.

Example = mechanic’s lien

When a Possessory Lien Has Priority

It has priority over another security interest UNLESS the lien is created by a statute that expressly states otherwise.

When do Judgment Lien Creditors Have Priority Over Conflicting Security Interests?

If they became a lien creditor BEFORE the conflicting security interest was perfected.

An Ownership Interest in Real Property Has Priority Over Conflicting Interests in Fixtures Exception

• 1) A perfected PMSI in the fixture.

• 2) A fixture filing.

Perfected PMSI in Fixtures Have Priority Over a Conflicting Ownership Interest in Real Property?

• 1) The debtor has recorded interest or is in possession of the real property;

• 2) The ownership interest arose before the goods became fixtures; AND

• 3) The PMSI was perfected before the goods became fixtures or within 20 days thereafter.

Fixture Filing

A financing statement that:

• 1) Covers goods that are/will become fixtures;

• 2) Satisfies all general rules for financing statements; AND

• 3) States that it covers a fixture, is filed in the real property records, gives a description of the property, and provides the name of the record owner.

What a Secured Party May Do After Default

• 1) Take possession of the collateral; AND

• 2) Without removal, render equipment unusable and dispose of collateral on a debtor’s premises.

*They may proceed with or without judicial process.

What a Secured Party Must Do If They Want to Dispose of Collateral

They MUST send an authenticated notice of the disposition to the debtor (and any secondary obligors), or else they are liable for damages.

Exception – If the collateral: a) is perishable; b) threatens to decline speedily in value; OR c) is customarily sold on a recognized market.

What Does Disposition of Collateral at a Foreclosure Sale Do?

• 1) Transfers all of the debtor’s rights to the transferee for value;

• 2) Discharges the security interest; AND

• 3) Discharges any subordinate security interests.

Damages Available to the Debtor If a Secured Party Fails to Comply With The Applicable Rules

Actual damage for the amount of any loss caused by their failure to comply. The damages for loss are generally equal to expectation damages, and may include losses resulting from the debtor’s inability to obtain alternative financing.

Debtor's Right of Redemption

A debtor has the right to repay/reclaim property held by a secured party. To redeem collateral, a debtor must:

• 1) Fulfill ALL obligations secured by the collateral; AND

• 2) Pay reasonable expenses and attorney’s fees.

Absolute Bar Rule

Secured party is barred from collecting any remaining deficiency after the disposition of collateral when they fail to comply with disposition provisions.

Rebuttable Presumption Rule

If the secured party fails to comply, it is presumed that the proceeds from the disposition are equal to the debt owed. Can be rebutted if the secured party shows the debt owed is greater than the fair market value of the collateral.

If a Debtor Places a Secured Party’s Compliance in Issue and the Secured Party Fails to Prove That the Disposition Was Proper, Then What Is The Amount Recoverable in Deficiency?

It is limited to an amount by which the total debt exceeds the greater of:

• a) The proceeds of the disposition; OR

• b) The amount that would have been realized had the secured party complied with the applicable provisions.