Md - Secured Transactions

Front 1

Three questions of secured transactions?

Back 1

1. Is there a security interest?
2. Has the creditor successfully attached?
3. Has the creditor perfected?

Front 2

What is the SCOPE of Article 9 of the UCC

Back 2

Article 9 applies to consentual securities interests in personalty and fixtures. (called an Article 9 Security Interest)

 

--- Only applies to vountary or consensual collateralizations - thus it is does NOT apply to statutory or mechanics leins. 

 

--- When collateral is real estate apply law of mortgages. 

Front 3

Debtor

Back 3

Entity who owes the money

Front 4

Secured party or secured creditor

Back 4

Entity who LENDS the money.

Front 5

Security agreement 

Back 5

Contract or record. 

Front 6

Security Interest 

Back 6

The right creditor has in debtor's personalty or fixtures.  

Front 7

Collateral 

Back 7

The personalty or fixtures that creditor can look to for satisfaction. 

Front 8

Collateral can be: Tangible Collateral (goods) 

Back 8

1. Consumer goods: items used for personal or familial purposes, such as a home dining room set, blender, ovan, refrigerator, car, etc. 

 

2. Equiptment: Items used in business (i.e. Mrs. Fields cooking items) 

 

3. Inventory: Goods held for sale or lease (i.e. Nordstrom's spring clothing line). 

 

4. Farm Products: Crops, livestock, and supplies used in farming operations. 

 

5. Fixutres: Items annexed to realty, such as lighting fixtures, sprinkler systems, furnances. 

 

 

Front 9

Collateral can be: Intangible or Semi-Intangible

Back 9

1. IP: Patents, trademarks, copyrights.

 

2. Stocks, bonds, mutual funds, proceeds from sale or collateral.  

Front 10

What is Attachment?

 

Back 10

When a creditor acquires a security interest and becomes a secured party. Once attachment occurs, the secured party (creditor) will have rights against debtor under Art. 9

Front 11

How to Attach? 

Back 11

1. Value: Secured party has to give VALUE for the security interest. 

2. Contract: A contract (called the security agreement), must evidence the secured transaction UNLESS the secured party has taken possession of the collateral. [Note if the secured party is in possession of the colllateral there is NO need for a record.]

2. Rights: Debtor must have rights in the collateral. 

Front 12

How to establish a record in a security agreement 

Back 12

Record Must: 

1. Be authenticated by debtor (signed or electronically marked). 

 

2. It must reasonably identify the collateral. 

Front 13

Security Agreement, After-Acquired Collateral

Back 13

After-acquired collateral clause is enforceable. 

 

 

Example: All inventory, whetehr now held, or hereafter acquired.  

Front 14

What is perfection of security Interest? 

Back 14

Perfection is best understood as a publicity device. It is something that the secured party does to put the world on constructive or record notice of the secured party's existence.  

 

-- Proper perfection helps to protect the secured party from competing creditors. 

 

-- The creditor who perfects first is Supreme.

Front 15

What is a purchase money security interest (PMSI)?

Back 15

It is a security interest that enables the debtor to purchase goods.

---  [i.e. Store extends $6,000 in value to enable Debtor to acquire a new bedroom set.  Store takes as colalteral a security interest in bedroom set. It has PMSi in a consumer good.  Upon attachment, perfection is automatic.]

 

Front 16

How to Attain Perfection

Back 16

1. By the secured party's taking possession of the collateral. 

 

2. Automatic perfect for purchase moeny security intersts (PMSIs) in consumer goods. 

 

3. The secured party files notice of the security interest in the public records.  Proper filing puts the world of potentially competing creditors on record/constructive notice of the filer's claim. 

Front 17

When obtaining perfection: what is filed to put the worlds on notice?

Back 17

1. Rare - The security agreement could be filed.

2. Common - Financing Statement UCC-1 - a simple document whose only purpose is to provide interested parties with sufficient information to make follow-up inquiries.

--- Article 9 aims to encourage electronic filing, and is "media-neutral"  (no one method preferred). 

Front 18

What are the requisite contents of a financing statement? 

Back 18

1. Debtor's name & address

2. Creditor's name and address; and 

3. Description of collateral [super-generic descriptions of the colateral - ie. all of Debtor's assets - are ok]

Front 19

Where is a financing statement filed? 

Back 19

1. Central Filing: State Department of Assessments and Taxation where debtor is located. 

--- Individual debtor: state of principal residence.

--- Organization: in the state under whose laws it is organized. 

 

2. Exception to Central Filing: If the collateral is timber, mineral or fixtures, file locally, in thecountry where timber, mineral or fixtures is located. 

 

Front 20

Priority 

Back 20

The basic context: More than one party stakes a claim to the same collateral. Who gets to take first, second, third, etc? 

 

The basic concept: Priority is the purpose of collateralization, and the secured party seeks to subordinate, NOT to share. 

 

--- Each claimant is entitled to satisfaction in full before a subordinated claimant is entitled to take. 

Front 21

Attached Unperfected Creditor

Back 21

Attached Unperfected Creditor: This is the Article 9 creditor who creates an enforceable security interest, i.e., it attaches, but either never bothers to perfect or tries to perfect buy botches the effort, perhaps by filing in the wrong place. 

Front 22

Lein Creditor

Back 22

General unsecured creditor who goes to court to get a judicial lien on the collateral. 

Front 23

Perfected Attached Creditor 

Back 23

This is the Article 9 creditor who succeeds in attaining perfection. 

Front 24

Non-Ordinary Course Buyer

Back 24

This is someone who purchases the collateral outside the ordinary stream of commerce.  [ie. Steven Tyler buys a guitar from his auto mechanic]

Front 25

Buyer in Ordinary Course

Back 25

This is someone who purchases the collateral from a merchant's inventory.  [i.e. Steven Tyler buys a guitar from Guitar Store]

Front 26

General Unsecured Creditor

Back 26

This is the lender who never bothered to take collateral. [i.e. Jared lends Subway Sandwich Co. $50,000, and believing  it to be a good credit risk, takes no collateral to back up his extension of value]  

 

-- GUC is the ultimate loser! 

Front 27

Priority of Creditors

Back 27

Buyer in Ordinary Course [BIOC] - Perfected Attached Creditor [PAC]  - Lien Creditor [LC] - Non-Ordinary Course Buyer [NOCie] - Attached Unperfected Creditor [AUPie] - General Unsecured Creditor [GUC]

Front 28

Attached Unperfected Creditor AUPie vs. The World 

Back 28

AUPie's interest is enforceable against debtor, and AUPie will defeat any subsequent AUPie, as well as any GUC.  But AUPie will lose to PAC to LC and to buyer without knowledge of security interst. 

Front 29

Perfected Attached Creditor [PAC] vs. The World 

Back 29

Perfected Attached Creditor defeats all, except: 

 

i. the PAC who filed first

ii. certain PMSI-holders

iii. the Buyer in ORdinary Course 

Front 30

What is the effect of filing? 

Back 30

For purposes of determining priority, Article 9 gives special effect to filing.  It allows for early filing, even at the onset of loan negotiations.  IF an early filer subsequently attaches, she is allowed the benefit of her early filing.  Priority will relate back to the early filing date. 

Front 31

Floating Lein Holder

Back 31

An After-Acquired Collateral Financier: A secured creditor who takes as collateral security interest "in all of Debtor's [i.e. business equiptment, or inventory]" whetehr now held or hereafter quire. 

Front 32

AACF v. PMSI when collateral is equiptment 

Back 32

To achieve first priority  -  A PMSI holder must file properly in 20 days after debtor takes possession of the goods that security interest allowed debtor to buy. 

 

[i.e. On MArch 1, Macy's borrows $2 million from Bank, granting Bank a security interest "in all of Macy's business equiptment, whether now held, or hereafter acquired.  Bank perfects it is an AACF PAC.  Later Macy;s busy 10 new cash registers on credit from Office Depot, granting Office Depot a security interest in the new cash registers.  Office depot is PMSI - collateral is equiptment. Office Depot must file properly within 20 days after Macy's take possession]

Front 33

AACF v. PMSI when collateral is inventory. 

Back 33

To achieve first priority:

1. PMSI must file properly before debtor takes possession;

 

2. AND PMSI must notify AACF before debtor takes possession. 

 

The reason for these aditional safeguards when collateral is inventory: to prevent debtor fraud (insofar debtor might otherwise entice the AAFC into extending additional value to it on the basis of new qcquisition of inventory, failing to mention that the new inventory is already encumbered on behlaf of the PMSI leader)

Front 34

PAC vs. BIOC

Back 34

General Rule: PAC loses to BIOC.  A buyer in the ordinary course of business takes free of a perfected security interest in seller's inventory.  

 

[i.e. Bank has a pefected interest in Nordstrom's inventor. When Mrs. Jones buys a suit or handback from Norstroms, she need not worried that she has good title]

 

Reason: to promote commerce & honor buyer's reasonable expectations. 

Front 35

Default Defined

Back 35

1. Debtor has breached the K. 

 

Front 36

Default: Self-Help Repossession Gernally

Back 36

Self-help repossession is permissible, so long as creditor does NOT breach the peace. 

 

A breach of peace:  occurs when the secured party's actions are likely to cause violance.  [ask: did secured party do something to provocate, or likely to cause violence?]

--- i.e. A repossession made over ANY protest by debtor, however mild, constitutes a breach of the peace.  

--- i.e. Repossessor misues the color of law, i.e. impersonating law enforcement, he or she has used constructive force, and has breached the peace. 

 

Civil and criminal penalties attach to creditor's misconduct. 

Front 37

Default: Self-Help Repossession When Collateral is In Debtor's Home

Back 37

Home enjoys a zone of privacy.  Secured Party may not enter debtor's home without voluntary & contemporaneous consent. 

 

 

Front 38

Default: Self-Help Repossession When Collateral is In Debtor's Home

Back 38

More latitude for creditor.  Secured Party may take the collateral so long as ther is no debtor action. 

Front 39

Default: Repossession by Judicial Action

Back 39

If the secured party chooses NOT to resort to self-help repossession, he or she may get a judicial writ, ordering the sheriff to obtain possession of the collateral and deliver it to the secured party. 

Front 40

Default: Strict Foreclosure

Back 40

Strict foreclosure occurs when the secured party retains the collateral in full satisfaction of the debt still owed.  The creditor lawfully retains the collateral and the debt in turn is cancelled. 

Front 41

Default: Strict Foreclosure: How to strictly foreclose on consumer goods. 

Back 41

Notice is sent to:

1. debtor; and

2. a secondary obligor (guarantor of the debt/co-signor/surety)

 

If any of the notified parties objects within 20 days after the notice is sent, strict foreclsoure will NOT be allowed .  Instead, the collateral must be disposed of by sale. 

Front 42

Default: Strict Foreclosure: How to strictly foreclose on non-consumer goods. 

Back 42

Notice is sent to:

1. debtor;

2.  other secured parties who have told the forclsoing creditor of their security interst in the collatral; 

3.Perfected creditors; 

4. Secondary obligor (guarantor of the debt/co-signor/surety)

 

If any of the notified parties objects within 20 days after the notice is sent, strict foreclsoure will NOT be allowed .  Instead, the collateral must be disposed of by sale. 

Front 43

Default: Strict Foreclosure: Consumer Goods and the 60% Rule

Back 43

Special Protection for Consumer Debtors: 

If the collateral is consumer goods and the debtor has paid 60% of the loan in the event of a non-PSMI, or 60% of the cash price in teh event of a PMSI, strict foreclosure is NOT allowed.  Instead theecured party must sell the collateral within 90 days, or be liable for conversion.

 

[Reason: Avoid giving creditors a windfall at consumer debtor's expense]. 

Front 44

Default: Sale

Back 44

1.The secured party may sell the collateral and apply the sale proceeds to the debt.  

2. The secured party chooses whether the sale will be public 

3. Every aspect of the sale MUST be commercially reasonable. 

4. Prior to the sale, reasonable notice MUST be sent.  

Front 45

Default: Sale - Notice - To Whom

Back 45

Article 9 provides standard notice forms, which if used, are presumptively commercially reasonable. 

 

1. CONSUMER GOODS: Notice must be sent to debtor & secondary obligors. 

2. NON-CONSUMER GOODS: Notice must be sent to i. debtor; ii. secured parties who have advised the foreclosing creditor of their security interest, iii. perfected creditors & iv. secondary obligor. 

 

 

 

 

 

Front 46

Default: Sale - Notice - Content

Back 46

Content of notice of sale demends on sale. 

 

1. Public sale: Notice must state time & place of sale. 

2. Private sale: Notice must state the time after which sale will be made. (i.e. please be advised that after Feb. 1, 2011, Secured party will sell the following collateral. 

3. Consumer Goods: additional consumer-protective provisions are mandatory, inlucing how to caluculate any deficiency and how debtor can redeemn. 

Front 47

Default: Sale - Notice - Timing

Back 47

There  is no bright line of how much advance notice is required.   Standard: Commercial resonable.  

 

Nonconsumer transaction: notice is deemed sent within a reasonable time if it is sent 10 days or more before the time of the sale. 

Front 48

Default: Sale - Buying by Secured Party

Back 48

Public Sale: Yes, the secured party can buy. 

Private Sale: No, absent external market checks. [too much change for self-dealing]

Front 49

Action for Deficiency Judgment 

Back 49

If the sale of collateral nets less than the secured party is ddue the secured party can proceed against debtor for a deficiency judgment.  

 

Note: If a secured party sells collateral at a low price to an insider buyer, the price that an independent & 3rd party would have paid, rather than the actual amount paid, is the price that will be used in calculating the deficiency. 

Front 50

Debtors Limited Right of Redemption 

Back 50

The debtor's right to redeem the collatral is cut off once the secured party has: 

1. Resold; or 

2. Completed a strict foreclosure. 

 

 

Front 51

How a debtor can redeem collateral 

Back 51

Debtor must pay the missed payment(s) plus: any interest & creditor's reaonable expenses (including attorney's fees) 

Front 52

Acceleration clause in event of acceleration

Back 52

What: permits the creditor to declare the full balance due in the event.  To redeem the debtor must pay off the full debt plus interest, plus expenses.