Bare Bones Secured Transactions - Texas Bar Exam 2014

Front 1

Purchase Money Security Interest (PMSI)

Back 1

PMSI arises if:
1. Creditor sells the collateral to debtor on credit and retains a security interest in the collateral, or
2. Creditor advances funds which are used by debtor to purchase the collateral

Front 2

Attachment (definition; elements)

Back 2

3 elements (VCR):
1. creditor gave value (ex. lend you money or good/services on credit)
2. contract - the security agreement
3. debtor has rights in collateral

Elements of attachment may occur in any order; no attachment until all elements satisfied

Front 3

Perfection versus Attachment

Back 3

Serves as constructive notice and gives creditor rights in the collateral as against third parties who might also have an interest in the same collateral

Security interest cannot be perfected in collateral unless it has attached to the collateral

Front 4

Elements of Perfection

Back 4

FCPA:
a. Filing of financing statement by creditor
b. Control
c. Possession of collateral by creditor
d. Automatic temporary attachment - sufficient for short period of time

Front 5

Perfection by Possession

Back 5

1. Almost all collateral may be perfected by possession
2. Exceptions: accounts; deposit accounts; nonnegotiable documents; electronic documents; electronic chattel paper; general intangibles
3. Loss of possession - if creditor no longer has possession of the collateral, perfection is lost; 20 day exception for instruments, negotiable documents, and certificated securities

Front 6

Automatic Permanent Perfection

Back 6

1. Purchase Money Security Interest (PMSI) in consumer goods (only for consumer goods that are NOT either certificate or title items or fixtures)

Example = Wells Fargo loans Jim money which which he buys a refrigerator; if he signs a security agreement giving Wells Fargo a security interest in the refrigerator, Wells Fargo is perfected without having to file a financing statement assuming the money is actually used to buy the collateral
2. Assignment of insignificant amount of debtor's accounts
3. Sale of promissory notes

Front 7

Automatic Temporary Perfection

Back 7

1.Proceeds - automatically perfected for 20 days from debtor's receipt of the proceeds
2. New value for instruments, negotiable documents, and certified securities - creditor automatically perfected for 20 days (grace period to perfect using normal methods) from time of attachment if creditor gives new value (ex. On May 1, Jim grants Bank a security interest in a promissory note he owns and Bank lends him $100; Bank is automatically perfected for 20 days, but Bank must file or take possession within 20 days or its security interest will become unperfected)
3. Delivery of instrument, negotiable document, or certified security to debtor for 20 days for certain purposes (examples of these purposes include for sale, exchange, or presentation of the collateral)

Front 8

Control

Back 8

1. Investment property, nonconsumer deposit accounts, electronic documents, and electronic chattel paper
2. Defined - Creditor right ot sell or cash in collateral without further action from debtor (ex. delivering bearer form); if a deposit account, secured party has control if security party is the bank in which the deposit account is maintained

Front 9

Special Rules for Proceeds

Back 9

1. General rule = perfection continues for 20 days
2. When perfection continues beyond 20 days:
a. Same office - original security interest perfected by filing and a financing statement covering the proceeds would be filed in the same place as the original collateral (ex. both inventory and equipment are perfected by filing in the Secretary of State's Office)
b. Identifiable cash proceeds
c. Proceeds perfected within the 20 days

Front 10

Priorities - Approach
(The crux of secured transactions)

Back 10

1. Classify persons claiming the collateral
2. Determine who prevails
By contract, the competing parties may agree to a priority order different from the normal rules - called subordination.

Front 11

Secured Party versus Secured Party

Back 11

1. Both creditors unperfected = first to attach prevails
2. One creditor perfected = perfected creditor prevails
3. Both creditors perfected - general rule = first creditor to either (1) file or (2) perfect; does not matter which creditor first had security agreement with debtor, which creditor attached first, or which creditor perfected first if one creditor filed before that perfection
4. Exception: PMSI creditor in goods (other than inventory and livestock) prevails (even though second) if it is perfected (1) at the time debtor receives possession of the collateral, or (2) within 20 days of when debtor received possession of collateral
c. PMSI creditor in inventory or livestock prevails if (1) PMSI creditor perfected at time debtor receives possession of inventory/livestock, and (2) proper notice to holders of conflicting security interest
d. Exception for deposit accounts - secured party with control prevails
e. Exception for investment property - secured party who has control over investment property has priority over a secured party who does not have control (ex. secured party who perfected by filing)

Front 12

Secured Party versus Donee

Back 12

If debtor makes a gift of the collateral to a donee, collateral remains subject to the security interest in the donee's hands

Front 13

Secured Party versus Purchaser

Back 13

1. General rule = secured party prevails
2. Debtor has permission to sell = purchaser prevails
3. Secured party unperfected at time of purchase - purchaser wins if (1) buyer gives value, (2) receives delivery of item, and (3) has no knowledge of security interest at time of delivery; but if PMSI creditor perfects within 20 days after debtor receives collateral but after debtor sells collateral to purchaser, creditor will prevail over the "gap" purchaser
4. Buyers in the ordinary course of business can prevail even over a perfected creditor if (a) good faith, (b) without knowledge of security interest violation, (c) purchase of goods that are not farm goods, (d) ordinary purchase from person in the business of selling goods of the kind, (e) security interest created by seller, and (f) creditor not perfected by possession
5. Garage sale/Ebay rule: consumer purchaser of consumer goods prevails if (a) consumer goods in seller's hands, (b) consumer goods in buyer's hands, (c) buyer has no knowledge of security interest, (d) buyer pays value, (e) creditor not perfected by possession, (f) creditor's interest is unfiled prior to purchase
6. Non-buyer in the ordinary course of business can prevail over secured creditor for future advance amounts (not prior advances) made after the first of these events occurs: (a) secured creditor obtains knowledge of purchase, or (b) 45 days have elapsed from date of purchase
7. Holder in due course will prevail over earlier perfected interests in the negotiable instrument

Front 14

Secured Creditor versus Lien Creditor

Back 14

1. Lien creditor = acquired a judicial lien by levy on the debtor's property (includes bankruptcy trustee)
2. If secured creditor unperfected at time lien attached, then lien creditor prevails
3. If secured creditor perfected at time lien attached, then secured creditor prevails
4. If PMSI creditor perfects by filing within 20 days after debtor receives possession, creditor will defeat lien creditors who obtained liens in the gap period
5. Secured creditor will lose priority to a lien creditor for future advances after both of the following 2 things occur: 1) secured creditor obtains knowledge of lien, and 2) 45 days elapse from date of lien

Front 15

Secured Creditor versus Statutory Mechanics Lien

Back 15

Statutory lien prevails if following conditions satisfied:
1. Person furnished services or materials with respect to the goods covered by the security interest,
2. Furnishing was in ordinary course of business, and
3. Collateral is in the possession of the statutory lien holder

Front 16

Fixtures - Secured Party versus Holder of Real Property Mortgage

Back 16

1. General rule - secured party wins if:
a. perfected before real estate interest recorded, and
b. perfected with a fixture filing (financing statement which (1) describes the real property and (2) filed in office where mortgage on real property would be recorded)
2. PMSI creditor, even though perfected after real property interest is of record, can prevail if:
a. PMSI perfected by fixture filing,
b. perfected within 20 days of good becoming a fixture, and
c. competing real estate interest is not a construction mortgage (loan which enabled whole building process to begin and thus not defeated by later PMSI)
3. If good is readily removable, it will be treated as a regular good, rather than as a fixture, and thus may be perfected without a fixture filing
4. Security interest in fixtures that is perfected in any manner prevails over a later-acquired judicial lien, even if the perfection was not done via a fixture filing

Front 17

Crops

Back 17

perfected security interest in crops has priority over a conflicting interest in the land on which crops are growing; it does not matter who filed or perfected first

Front 18

Repossession

Back 18

1. Upon default, creditor may repossess
2. No judicial action needed: self-help remedy
3. Creditor need not give debtor notice
4. Limitation on repossession: no breach of peace

Front 19

Sale of Collateral by Creditor - Application of Resale Proceeds

Back 19

1. reasonable expenses of reselling creditor
2. satisfaction of secured debt
3. satisfaction of subordinate creditors
4. surplus to debtor/deficiency due from Debtor

Front 20

Sale of Collateral by Creditor - Penalty for Not Complying with Resale Requirements

Back 20

1. Creditor liable for actual damages - liability could be to debtor or to other creditors
2. Consumer goods - creditor is automatically liable for amount equal to finance charge plus 10% of the principal
3. Effect on creditor's ability to recover deficiency:
a. consumer transactions = absolute bar to recovery of deficiency
b. nonconsumer transactions = rebuttable presumption that value of collateral was equal to amount of debt; secured creditor may prove otherwise and still recover a deficiency

Front 21

Texas special rule

Back 21

In Tx, if transaction is a consumer transaction and a secured party's collection, enforcement, disposition or acceptance does not accord with Article 9, courts apply an ABSOLUTE BAR RULE, under which a non-complying party cannot recover any deficiency.