New York Bar Exam: Secured Transactions And Commercial Paper

Front 1

What is a security interest?

Back 1

The right that C has in D's personalty/fixtures.

Front 2

What is collateral?

Back 2

The personalty/fixture that C can look to for satisfaction

Front 3

What forms does collateral take?

Back 3

It could be:

1. Tangible collateral or goods, meaning:

a. consumer goods, furniture, fridge, car

b. equipment: business items, cash registers, ovens, dental chair

c. inventory: goods held for sale or lease, Circuit City's TVs,

d. farm products: crops, livestock and supplies

e. fixtures: items annexed to realty, lighting fixtures, furnaces.

[Key for purposes of classifying tangible property: primary use in the hands of D, golf clubs for me vs. golf clubs for Tiger]

OR

2. Intangible or semi-intangibles, such as stocks, bonds, mutual funds, patents, trademarks, copyrights, accounts (right to payment for goods/services), promissory notes, drafts.

Front 4

How is an enforceable security interest created?

Back 4

By attachment.

Front 5

What does attachment mean?

Back 5

Means that the security interest is enforceable

Front 6

What are the 3 requirements for attachment?

Back 6

VCR:

1. VALUE must be given by C.

2. a CONTRACT, called the security agreement or record, must evidence the secured X-action unless the secured party has taken possession of the collateral, and

3. RIGHTS in the collateral.

Hint 6

VCR

Front 7

Is there a need for a record if the secured party is in possession of the collateral?

Back 7

No. But in contrast, if D is in possession of the collateral, we need a security agreement.

Front 8

What does a record require?

Back 8

The record must:

1. Be authenticated by D (can be signed or electronically marked) and

2. Reasonably ID the collateral

Front 9

What is an after-acquired collateral clause?

Back 9

Secured party takes a security interest in all present and subsequent collateral that D acquires, like inventory. It is akin to a floating lien.

Hint 9

boats...

Front 10

What is perfection?

Back 10

SP puts the world on record notice of the SP's existence.

Protects the SP from competing creditors.

Front 11

How is perfection attained?

Back 11

1. SP taking possession of the collateral

2. Automatic perfection for purchase money security interests (PMSIs) in consumer goods.

Front 12

What is a PMSI

Back 12

Purchase Money Security Interest

A security interest that enables D to purchase the goods. The stuff D buys is what secures the loan.

Front 13

What's the most common route to perfection?

Back 13

SP files notice of the SI in the public records.

Proper filing puts the world of potentially competing Cs on record or constructive notice of the filer's claim.

Front 14

What is filed to put the world on notice?

Back 14

Security agreement could be filed but rarely is.

File a financing statement (UCC I)

Front 15

What must a financing statement contain? (3)

Back 15

"Simple and Sparse"

1. D name and address

2. C name and address and

3. A description of the collateral. Generic descriptions ("all of D's assets") OK.

Hint 15

"SaS"

Front 16

***Where is the financing statement filed?***

What is the exception?

Back 16

***Centrally with the state's Sec'y of State in the state where D is located.

If D is an individual, he is located in the state of his principal residence.

If D registered org (corp, LLC, LTD P-Ship), located in the state under whose law it is organized.

Exception to central filing: If collateral is timber, minerals or fixtures, file locally where realty is located.

Front 17

What is the purpose of collateralization?

Back 17

Priority. The secured party seeks to subordinate, not to share. Each claimant entitled to satisfaction in full b/f a subordinated claimant is entitled to take.

Front 18

Who are the different types of Cs? (6)

Back 18

1. BIOC (Buyer In Ordinary Course): Someone who purchases the collateral from a merchant's inventory, buy guitar from sam ash.

2. PAC (Perfected Attached Creditor): The A9 C who perfects.

3. LC (Lien Creditor): GUC who goes to court to get a judicial lien on the collateral

4. NOCie (Non-Ordinary Course Buyer): purchases the collateral from somewhere else, buys guitar from mechanic

5. AUPie (Attached Unperfected Creditor): The A9 creditor who creates an ESI, but doesn't perfect/botches it

6. GUC (General Unsecured Creditor): never bothered to take collateral to back up loan.

Hint 18

AUPie, LC, PAC, NOCie, BIOC, GUC

Front 19

***What's general order of priorities for the 6 Cs?

Back 19

****Must Memorize***

1. BIOC

2. PAC

3. LC

4. NOCie

5. AUPie

6. GUC

Front 20

AUPie vs. the world?

Back 20

Good: AUPie's interest enforceable against D. AUPie will defeat subsequent AUPies as well as any GUC.

Bad: AUPie loses to PAC, LC, and to any B w/o knowledge of the security interest.

Front 21

PAC vs World?

Back 21

PAC defeats all, except:

1. PAC who filed first

2. certain PMSI holders

3. the BIOC

Front 22

PAC vs PAC?

Back 22

1st in time, 1st in right.

NOTE: For purposes of determining priority, A9 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 23

What is an AACF?

Back 23

After Acquired Collateral Financier (AACF) is a secured C who takes as collateral a security interest "in all of D's [inventory, business eqpt, etc.], whether now held or hereafter acquired." If AAC Clause (floating lien), it's an AACF.

Front 24

PMSI in the context of PAC vs PMSI

What is a PMSI

Back 24

PMSI is UCC favorite.

PMSI = the security interest that allows D to purchase the goods, the extension of value by L who takes as collateral security interest in the stuff that L's loan enables D to acquire.

Front 25

AACF vs PMSI-holder when collateral is EQUIPMENT?

Back 25

For the PMSI-holder to achieve 1st priority over AACF, it must file properly w/in 20 days after D takes possession of the purchased property that is acting as the collateral SI

Front 26

AACF vs PMSI-holder when collateral is inventory?

Back 26

For the PMSI-holder to achieve 1st priority over AACF (here, a bank), it now must satisfy 2 requirements:

1. file properly b/f D takes possession of the purchased property that is acting as the collateral SI

AND

2. notify AACF b/f debtor takes possession.

Front 27

PAC vs BIOC?

Back 27

PAC loses to BIOC. BIOC takes free of a perfected security interest in S's inventory.

promote commerce and honor B's reasonable expectation.

Front 28

How is default defined?

Back 28

Not defined in A9. Defined in security agreement.

Hint 28

Head fake

Front 29

Once D defaults, what may A9 S C do?

Back 29

1. Self-repo: OK, so long as C doesn't breach the peace. A b of p occurs when the secured party's actions are likely to cause violence.

Home enjoys a zone of privacy, SP may not enter D's home w/o voluntary and contemporaneous consent.

When collateral outside home, SP may take the collateral so long as there is no objection.

2. Repo by judicial action: If SP chooses not to resort to self-help, can get a judicial writ ordering sheriff to obtain possession of the collateral and deliver it to the SP. NY: called a writ of replevin.

Front 30

What is strict foreclosure?

Back 30

When SP retains the collateral in full satisfaction of the debt. C lawfully retains the collateral and the debt is cancelled.

Front 31

How does SP strict foreclose?

Back 31

1. SP must send a written proposal to retain the collateral in satisfaction of the debt.

a. When collateral = consumer goods, notice sent to D and secondary obligor (SO is the guarantor of the debt).

b. When collateral not = consumer goods, notice is sent to D and other SPs who have told the foreclosing C of their security interest in the collateral, as well as perfected Cs and secondary obligors

2. ***If any notified parties objects w/in 20 days after the notice is sent, SF will not be allowed. Instead, collateral must be disposed of by sale.***

Hint 31

1, a, b, 2

Front 32

***What is the 60% rule?

Back 32

***If collateral is consumer goods and D has paid 60% of the loan in the event of a non-PMSI or 60% of the cash price in the event of a PMSI, strict foreclosure is not allowed. SP must sell the collateral w/in 90 days or be liable for conversion (avoids awarding Cs windfall)***

Front 33

How does SP sell the collateral.

What are the 2 requirements

Back 33

If SP decides or is forced to sell the collateral and apply the sale proceeds to the debt, SP may choose whether the sale will be public (auction) or private.

2 requirements:

1. Every aspect of sale must be commercially reasonable.

2. Prior to sale, reasonable notice must be sent. A9 provides standard notice forms, which, if used, are presumptively commercially reasonable.

Front 34

Where to send the notice of sale? (5)

Back 34

1. If collateral = consumer goods, notice must be sent to D and 2dary obligors.

2. w/ all other types of collateral, notice must be sent to perfected Cs and any SPs who have advised the foreclosing C of their SI, as well as 2dary obligors.

3. Content of notice depends on type of sale. If disposition is by public sale, notice must state time and place of sale. If dispo by private sale, notice must state time after which the sale will be made.

4. For consumer goods, additional consumer-protective provisions are mandatory, including how to calculate a deficiency and how D can redeem.

5. How much advance notice required: No bright line. Standard is one of commercial reasonableness.

But if a nonconsumer X-action, notice is deemed sent w/in a reasonable time if sent 10 days + b/f time of sale.

Front 35

May SP buy at sale?

Back 35

At a public sale, Yes.

At a private sale, No. (Too much opp for self dealing)

Front 36

What if after the sale of the collateral there is still outstanding debt owed to SP?

Back 36

SP can proceed against D for a deficiency judgment.

Note: If SP sells collateral at a low price to inside buyer, the price that an independent 3P would have paid, rather than the actual amt paid, is the price that will be used in calculating the deficiency.

Front 37

What are D's rights of redemption?

Back 37

D's right to redeem the collateral is cut off once SP has resold or completed a strict foreclosure.

Front 38

What must D do to redeem?

Back 38

D must pay the amount owed (missed payments) + any interest and C's reasonable expenses, including atty fees.

Front 39

What if the security agreement contains an acceleration clause (if default, full balance due)?

Back 39

D must pay off entire debt + interest and expenses.

Front 40

***What is the bright line rule?***

Back 40

***When a NI is duly negotiated to a holder in due course (HDC), the HDC takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.***

Front 41

Commercial Paper: A3 of UCC: What will be the main issues?

Back 41

1. When is the given writing a negotiable instrument as opposed to a mere K?

2. If a commercial paper hypo, on what theories might D get sued? [A. K or signature liability. B. Warranty or X-fer liability]

3. How is a negotiable instrument duly negotiated, meaning, what makes the X-fer proper?

4. How does a X-feree qualify as an HDC?

5. What are the claims and personal defenses (which HDC takes free of) and what are the real defenses (which HDC is subject to)?

Front 42

Commercial Paper: A3 of UCC/Types of Negotiable Instruments: What's a promissory note?

Back 42

1. It contains an affirmative promise to pay.

2. Two parties: Promisor is the maker. Promisee is the payee.

Front 43

Commercial Paper: A3 of UCC/Types of Negotiable Instruments: What's a draft?

Back 43

1. It contains an order or command to pay. A check is a draft b/c it contains an order to draw on this account for payment.

2. 3 parties:

Drawer gives the order.

Drawee is ordered to do the paying.

Payee is the beneficiary of the order.

Front 44

Commercial Paper: A3 of UCC/Types of Negotiable Instruments: Who is the indorser?

Back 44

Appears in the context of promissory notes and checks. The indorser signs on the back.

Front 45

***How to tell whether the writing is a negotiable instrument (a promissory note or draft) or just a K?

Back 45

WOSSUPP!!!

***To qualify as a negotiable instrument, we need:

1. A WRITING

2. Payable to ORDER or to bearer

3. SIGNED by the maker or drawer

4. Reciting a SUM certain

5. Containing an UNCONDITIONAL promise or order, and no additional promises or orders

6. PAYABLE on demand or at a definite time

7. PAYABLE in currency.

In other words: WOSSUPP!!!

Hint 45

WOSSUPP!!!

Front 46

Commercial Paper: A3 of UCC/Types of Negotiable Instruments: Things to keep in mind w/ respect to WOSSUPP requirements?

Back 46

To be negotiable, the instrument:

1. Must be signed by maker if it is a note or by drawer if it is a draft. Any authentication, found anywhere on the instrument, qualifies.

2. Must contain an unconditional promise to qualify as a note or unconditional order to qualify as a draft.

[By contrast, conditional language will make it a K, "governed by, subject to" the terms of some other agreement. Will also be deemed conditional if payment is limited to a particular source or fund. But a promise or order is not conditional simply b/c it refers to another writing for a statement of rights w/ respect to collateral, prepayment, or negotiation]

3. Must state a sum certain or fixed amt, meaning a specifically ascertained sum. Must be able to calculate how much is to be paid, either from what writing says or reference to an accepted outside source.

4. Sum certain must be payable in cold hard currency, not goods.

5. Writing must not contain any additional promises or orders.

6. Must be payable on demand or at a definite time. (acceleration clauses OK)

7. Must be payable to order or to bearer. [Trick Q: "Pay to Andy Garcia" is not negotiable, making it a K, b/c it doesn't contain the magic words "order, assigns, or bearer."

Front 47

How does Def get sued? Two theories?

Back 47

1. K or signature liability

2. Warranty or X-fer liability

Front 48

Who is liable for K/signature liability?

Who is not liable?

Back 48

The person who signed the negotiable instrument is the D. A signature is a promise to pay; failure to pay makes signer liable.

LIABLE (anyone who signs):

1. The promissory note maker,

2. The indorser,

3. The drawer, The party who signs the check.

NOT LIABLE:

The drawee: Pays the draft, usually bank. Doesn't sign, so no signature liability.

NOTE: If the words "Without Recourse" accompany the drawer's or indorser's signature, it means that the person passes title, but assumes no signature liability.

Hint 48

PID, not Dee

Front 49

Who is a potential Warranty or X-fer liability D?

Back 49

Any transferor who sells the negotiable instrument.

If transferor is not a donor, he can be sued.

Front 50

Who is entitled to sue the Def for breach of warranty?

Back 50

1. If D indorsed instrument (signed on the back), any P in possession of the instrument may sue. ***When D indorses, warranties run w/ the instrument.***

2. If D did not indorse the instrument, then only the D's immediate transferee may sue. The warranties will not run w/ the instrument.

Front 51

5 warranties made by D?

Back 51

D promises:

1. P has good title to instrument,

2. No forged signatures + signatures authorized,

3. Instrument has not been materially altered,

4. Instrument is enforceable (there is no defense or claim good against the defendant,

5. has no knowledge of any bankruptcy/insolvency action against the maker/drawer.

Front 52

What does due negotiation mean?

Back 52

Due negotiation =

that there has been a proper X-fer of the instrument,

>>

If instrument been properly transferred, transferee is = holder and may be eligible to be HDC.

BUT: if no proper X-fer, X-feree not holder>>>can never be HDC.

Front 53

How to properly X-fer PTO instrument? (2)

Back 53

1. When instrument is PTO of a specific payee, negotiate by delivering instrument to that payee.

2. For any further negotiation, payee must indorse the instrument and deliver it to transferee.

Indorsement must be authorized and valid.

Front 54

How is an instrument that is payable to bearer properly X-ferred?

Back 54

If the instrument = PTB, indorsement is not required.

Front 55

What are 3 types of indorsements?

Back 55

1. Special indorsement: SI is one that names a particular person as "indorsee." Indorsee must sign in order for instrument to be further negotiated.

2. Blank indorsement: BI doesn't name a specific indorsee. It may be negotiated by delivery alone.

3. Restrictive indorsement: RI contains a condition. "For dep only, /s/ Restrictive indorsee" If bank pays this out to someone else who finds it, bk liable.

Hint 55

SI BI RI

Front 56

Who is an HDC?

Back 56

An HDC is a holder who takes the instrument:

1. For value, and

2. in good faith, and

3. w/o notice that it is void, has been dishonored, or subject to any claim or real defense

Front 57

What does "for value" mean?

Back 57

that H must give value for instrument, giving value not = consideration, (K principle)

Front 58

How does consideration differ from value?

Back 58

1. A mere promise is not value, a promise isn't enough.

2. Old value is good value. C indorses and delivers her paycheck to A, to pay him for the furniture that he made last year. A has given value.

Front 59

What does "good faith" mean?

Back 59

honesty in fact (this is a subjective test)

Front 60

What does "w/o notice" mean?

Back 60

The notice requirement = objective test: Did the holder know or have reason to know of a problem w/ the instrument?

Front 61

What are the different types of notice? (4)

Back 61

(i) Actual Notice: instrument gives notice, "PAID" or "VOID" stamped on it,

Notice:

(ii) that obligation of any party is voidable

(iii) of a competing claim to the negotiable instrument

(iv) that fidu has negotiated the instrument in breach of his her fidu duty.

Front 62

What's the shelter rule for an HDC?

Back 62

X-feree acquires whatever rights her X-feror had, even if x-feree couldn't be HDC otherwise, or is a donee

Front 63

What are the benefits of HDC status?

Back 63

HDC (and subsequent X-ferees who take "shelter" in that status) takes instrument free from claims and free from personal defenses and subject only to real defenses.

Front 64

What does "claims" mean?

Back 64

A right to a negotiable instrument b/c of superior ownership.

If negotiable instrument duly negotiated to an HDC, HDC defeats the superior owner.

Front 65

What are the personal defenses that HDC takes free from? (5)

Back 65

personal defenses (ord K defs):

Waiver,

Estoppel,

Fraud in the inducement,

Lack of consideration,

Unconcscionability.

Hint 65

W.Est.FI.L.U

Front 66

HDC takes subject to what real defenses? (7)

Back 66

MA-D FIF-I(4):

1. MATERIAL ALTERATION

2. DURESS

3. FRAUD IN FACTUM

4. INCAPACITY

5. ILLEGALITY

6. INFANCY

7. INSOLVENCY

Front 67

What does material alteration mean?

Back 67

A change in the terms of the instrument.

But, if payee adds 2 to $100 check b/c maker left space, maker estopped from raising material alteration as D due to own neg

Front 68

What is the difference b/t "real" fraud and personal fraud?

Back 68

Real fraud, FIF, means that there has been a lie about the instrument.

Assertable against HDC b/c real defense

Personal fraud is fraud in the inducement. It's ineffective against an HDC. Not a lie about the instrument, but lie to induce holder to X-fer instrument.