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97 Cards in this Set

  • Front
  • Back
What is the scope of Article 9?
Article 9 applies to consensual security interests in personalty and fixtures.
How does a creditor create an enforceable security interest in debtor's collateral, meaning, how does the creditor ATTACH?
VCR -
1) V - Value;
2) C - Contract;
3) R - Rights in the collateral
Once attached, how does the creditor attain PERFECTION?
By placing the world on record notice of that creditor's existence.
When more than one creditor has a stake in the same collateral, what are the rules of priority?
Generally, the first to perfect takes first; second to perfect takes second, etc.
What if the debtor defaults on the debt or obligation?
The article 9 creditor has statutory and judicial remedies.
What law applies where the collateral is real estate?
Law of mortgages
What law applies when the collateral is personalty or fixtures?
Article 9
What is personalty?
In general, personalty equals goods.
What type of collateralizations does Article 9 apply to?
Only to voluntary or consensual collateralizations. Thus, does not apply to statutory or mechanics liens.
What is the entity who owes the money called?
The debtor.
What is the entity who lends the money called?
The secured party or secured creditor.
What is the contract or record called?
The security agreement.
What is the right that the creditor has in debtor's personalty or fixtures called?
The security interest.
What are the personalty or fixtures that creditors can look to for satisfaction on the debt called?
Collateral.
What can the collateral be?
1) Tangible goods;
2) Intangible or semi-intangibles
What does tangible collateral or goods mean?
1) Consumer goods;
2) Equipment;
3) Inventory;
4) Farm products;
5) Fixtures
What are consumer goods?
Those items used for personal, familial, or household purposes, such as a home dining room set, blender, oven, refrigerator, or car.
What is equipment?
Items used in business, such as Macy's cash registers, Mrs. Field's cookie ovens, Le Cirque restaurant's china, Dr. Dentist's dental chair, and Armani's sewing machines.
What is inventory?
Goods held for sale or lease, such as Circuit City's stock of stereos, Nordstrom's spring clothing line, or Ethan Allen's furniture line.
What are farm products?
Crops, livestock, and supplies used in farming operations, such as eggs, corn and cows in possession of a farmer.

What are fixtures?

Items annexed to realty, such as lighting fixtures, sprinkler systems, furnaces.
What is the key for classifying types of tangible collateral?
Primary use in the hands of the debtor, meaning this is a subjective standard - no absolutes (e.g, golf clubs in your hands are consumer goods; in Tiger Woods' hands, equipment; in the hands of sports store, inventory).
What are intangibles or semi-intangibles?
For example, patent, copyright, and trademark rights (intellectual property); stocks, bonds, and mutual funds; proceeds received upon the sale of collateral; accounts (meaning any right to payment for goods or services); promissory notes and drafts (pieces of commercial paper - right to payment).
What does attachment mean?
That the security interest is enforceable.

In other words, to ask, "Is the security interest enforceable" is to ask "Has it attached?"
What are the three requirements for attachment?
VCR -
Value
Contract
Rights in the collateral.
What is the value requirement?
Value must be given by the creditor.
What is the contract requirement?
1) A contract, called the security agreement or record, must evidence the secured transaction UNLESS the secured party has taken possession of the collateral.
2) If the secured party is in possession of the collateral, there is no need for record. By contrast, if the debtor is in possession of the collateral, we need a record.
What are the requirements of the record?
The record must:
1) Be authenticated by the debtor (means signed or electronically marked);
and
2) Reasonably identify the collateral.
What is the rights requirement?
Debtor must have rights in the collateral.
What are "after-acquired collateral clauses"?
Taking a security interest "in all of X's inventory, whether now or hereafter acquired."
Are after-acquired collateral clauses enforceable?
Yes, this is the floating lien.
What is perfection?
A publicity device.
It is something that the secured party does to put the world on record/constructive notice of the secured party's existence.

Proper perfection helps to protect the secured party from competing creditors.
How can you attain perfection?
1) By the secured party's taking possession of the collateral;
2) Automatic perfection for purchase money security interests (PMSIs) in consumer goods;
3) (Most common way): The secured party FILES NOTICE of the security interest in the public records.
What is a purchase money security interest (PMSI)?
It is a security interest that enables the debtor to purchase the goods.
What is the rule of perfection for PMSIs?
Upon attachment, perfection is automatic.
What does proper filing do?
Puts the world of potentially competing creditors on record or constructive notice of the filer's claim.
What is filed to put the world on notice?
1) The security agreement could be filed, but rarely is.
2) Instead, the document typically filed is called a financing statement (UCC-1).
What is a financing statement?
A very simple document whose only purpose is to provide interested parties with sufficient information to make follow-up inquiries.
How does Article 9 encourage filing?
Article 9 aims to encourage electronic filing, but is "media-neutral."
What are the requisite contents of a financing statement?
Buzzwords: Simple and sparse.
The financing statement need only contain:
1) Debtor's name and address;
2) Secured creditor's name and address; and
3) A description of the collateral.
What type of description of the collateral is required?
In the financing statement, super-generic descriptions of the collateral (such as "all of debtor's assets") are permissible.
**Where is the financing statement filed?
Filing is done centrally, with the state Secretary of State, in the state where the DEBTOR is located.

UNLESS, the collateral is timber, minerals, or fixtures, in which case, you file locally, in the county where the underlying realty is located.
Where is the debtor located?
1) If the debtor is an individual, he or she is located in the state of her principal residence;
2) If the debtor is a registered organization (i.e., a corporation, a limited liability company, or a limited partnership), it is located in the state under whose laws it is organized.
What is the exception to central filing?
If the collateral is timber, minerals, or fixtures, file locally, in the county where the UNDERLYING REALTY is located.

What is the purpose of collateralization?

Priority is the purpose of collateralization, and the secured party seeks to subordinate, not to share.
What is the rule with respect to priority?
Each claimant is entitled to satisfaction IN FULL before a subordinated claimant is entitled to take.
What types of creditors are there?
1) Attached Unperfected Creditor (AUPie)
2) Lien Creditor (LC)
3) Perfected Attached Creditor (PAC);
4) Non-Ordinary Course Buyer (NOCue)
5) Buyer in Ordinary Course (BIOC)
6) General Unsecured Creditor (GUC)
What are Attached Unperfected Creditors (AUPies)?
These are Article 9 creditors who create an enforceable security interest, i.e., it attaches, but either never bothers to perfect or tries to perfect but botches the effort, perhaps by filing in the wrong place.
What are Lien Creditors (LC's)
These are general unsecured creditors who go to court to get a judicial lien on the collateral.
What are Perfected Attached Creditors (PACs)?
These are the Article 9 creditors who succeed in attaining perfection.
What are the Non-Ordinary Course Buyers

(NOCies)?
These are people who purchase the collateral outside the ordinary stream of commerce (e.g., Steven Tyler buys a guitar from his auto mechanic).
Who are Buyers in Ordinary Course (BIOCs)?
These are people who purchsae the collateral from a merchant's inventory. For example, Steven Tyler buys a guitar from Sam Ash Guitar Store.

Supreme WINNERS
What are General Unsecured Creditors (GUCs)
These are lenders who never bothered to take collateral.

Supreme LOSERS
What are the rankings for types of creditors?
Typically:
1) BIOC;
2) PAC;
3) LC;
4) NOCie;
5) AUPie;
6) GUC
What are an AUPies rights vs. The World?
1) AUPie's interest is enforceable against the debtor and will defeat any subsequent AUPie as well as any GUC.
2) BUT, AUPie will lose to: PAC, LC, and ANY BUYER without knowledge of the security interest.
What are the rights of a PAC vs. The World?
1) The basic rule is that PAC defeats all, EXCEPT:
a) The PAC who filed first;
b) Certain PMSI-holders;
c) the BIOC.
What is the rule where there is more than one PAC?
First in time, first in right.
When does Article 9 allow for filing?
For purposes of determining priority, Article 9 gives special effect to filing and allows for early filing, even at the onset of loan negotitations. If an early filer subsequently attaches, she is allowed the benefit of her early filing. Priority will RELATE BACK to the early filing date.
What priority contests occur with PMSIs?
Between the after-acquired collateral financier (AACF) and the holder of a purchase money security interest (PMSI).
Who is an AACF?
A secured creditor who takes as collateral a security interest "in all of Debtor's [business equipment, or inventory, etc.] whether now held of hereafter acquired."

When you have an after-acquired collateral clause, you have an after acquired collateral financier (AACF)
What is a PMSI?
A security interest that enables the debtor to purchase the goods. In other workds, an extension of value by a lender who takes as collateral a security interest in the very item that its loan enables the debtor to acquire.

PMSIs are UCC favorites.
How does the (earlier in time) AACF collide with the (later in time) PMSI-holder?
One of two ways:
1) The AACF v. the PMSI-holder when the collateral is equipment;
2) The AACF v. the PMSI-holder when the collateral is inventory.
Where you have an AACF PAC and a PMSI holder and the collateral is equipment, how can the PMSI holder achieve first priority in the newly acquired equipment?
All the PMSI holder must do is FILE PROPERLY within 20 days after the debtor takes possession of the new equipment.
Where you have an AACF PAC and a PMSI holder and the collateral is inventory, how can the PMSI holder achieve first priority in teh newly acquired equipment?
The PMSI holder must:
1) FILE PROPERLY BEFORE debtor takes possession; AND
2) NOTIFY the AACF PAC BEFORE debtor takes possession.
What is the reason for the additional safeguards when the collateral is inventory?
To prevent debtor from committing fraud (insofar as debtor might otherwise entice the AACF into extending additional value to it on the basis of the new acquisition of inventory, failing to mention that the new inventory is already encumbered on behalf of the PMSI lender).
What is the rule where PAC v. BIOC?
General rule is that PAC loses to BIOC. A buyer in the ordinary course of business takes free of a perfected security interest in seller's inventory.
What are the reasons for this rule?
To promote commerce and consumerism and to honor buyers' reasonable expectations.
What is default?
Where debtor is in breach, typically for failure to pay.

Default is not defined in Article 9.


Typically, it is defined in the security agreement/contract/record.
Once the debtor has defaulted, what can an Article 9 secured creditor do?
1) Self-help repossession;
2) Repossession by judicial action;
3) Strict foreclosure;
4) Sale;
5) The action for a deficiency judgment.
What is the rule with respect to self-help repossession?
Self-help repossession is permissible, so long as creditor does not breach the peace.
When does a breeach of the peace occur?
A breach of the peace occurs when the secured party's actions are LIKELY to cause violence.
What is the relevant question in evaluating self-help repossession?
Not whether or not an actual fight broke out, but whether the secured party did something provocative or likely to cause violence.
What always constitutes a breach of the peace?
1) A repossession made over ANY PROTEST by the debtor, however mild the protest, constitutes a breach of the peace.
2) If the repossessor misuses the color of law, by, e.g., impersonating a law enforcement officer, he or she has used constructive force and therefore has breached the peace.
What is the consequence of breaching the peace?
Civil and criminal penalties attach to creditor's misconduct, i.e., will attached if the creditor betrays the breach of the peace standard.
What is the rule where repossession is of collateral in the debtor's home?
The home enjoys a zone of privacy. May not enter debtor's home without VOLUNTARY AND CONTEMPORANEOUS CONSENT.
What is the rule where repossession is of collateral outside the home?
May take the collateral so long as there is no debtor objection.
What is repossession by judicial action?
If the secured party chooses not to resort to self-help repossession, he or she may go to court to obtain a judicial writ, ordering the sheriff to obtain possession of the collateral and deliver it to the secured party.

Writ of Replevin
What is strict foreclosure?
Strict foreclosure occurs when the secured party retains the collateral in full satisfaction of the outstanding debt. In other words, the creditor lawfully retains the collateral and the debt in turn is cancelled.
When does strict foreclosure work best?
When the value of the collateral approximates the value of the outstanding debt.
How can you strictly foreclose?
To accomplish strict foreclosure, the secured party must send a written proposal to retain the collateral in satisfaction of the debt.
To whom is this proposal sent?
1) When the collateral is consumer goods, the notice is sent to the debtor and any secondary obligors;
2) When the collateral is not consumer goods, the notice is sent to debtor and other secured parties who have told the foreclosing creditor of their security interest in the collateral, as well as perfected secured parties and secondary obligors.
What is a secondary obligor?
A secondary obligor is a guarantor of the underlyling debt.
*What is the result if the parties object?
If any of the notified parties objects within 20 days after the notice is sent, strict foreclosure will NOT be allowed. Instead, the collateral must be disposed of by sale.
For what reasons may a party object?
Any party can object for any reason or no reason whatsoever.
What is the rule with respect to consumer goods?
The 60% Rule: If the collateral is consumer goods and the debtor 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. Instead, the secured party must sell the collateral within 90 days or be liable in conversion.

What is the reason for the 60% rule?

To avoid giving creditors a windfall at the expense of consumer-debtors.
What is the rule with respect to sale of the collateral?
The secured party may sell the collateral and apply the sale proceeds to the debt. The secured party chooses whether the sale will be public (i.e. a public auction) or private.
What are the governing guideposts for sale?
1) Every aspect of the sale must be commercially reasonable;
2) Prior to the sale, reasonable notice must be sent.
What always constitutes reasonable notice?
Article 9 provides standard notice forms which, if used, are prsumptively commercially reasoanble.
To whom must the notice be sent?
1) If the collateral is consumer goods, notice must be sent to the debtor and any secondary obligors;
2) With all other types of collateral, notice must be sent to the debtor and those secured parties who have advised the foreclosing creditor of their security interest, as well as the perfected secured creditors and secondary obligors.
What is the content of the notice?
Depends on the type of sale:
1) If dispostion is by PUBLIC sale, the notice must state the time and place of sale;
2) If disposition is by PRIVATE sale, the notice must state the time AFTER WHICH the sale will be made.
3) For consumer goods, additional consumer-protective provisions are mandatory, including how any deficiency will be calculated and how debtor can redeem the collateral.
How much advance notice is required?
No bright line right. The standard is one of commercial reasonableness. But, in a nonconsumer transaction, notice is deemed sent within a reasonable time if it is sent 10 days or more before the time of sale.
May the secured party buy at the sale?
1) At a public sale, yes.
2) At a private sale, absent external market checks, no. (B/c too much potential for unregulated self-dealing)
What can the secured creditor do if the sale of the collateral nets less than the outstanding debt?
Proceed against the debtor for a deficiency judgment.
How is the deficiency calculated?
If a secured party sells collateral at a low price to an inside buyer, the price that an independent third party would have paid, rather than the actual amount paid, is the price that will be used in calculating the deficiency.
What are the debtor's rights of redemption?
1) The debtor's right to redeem the collateral is cut off once the secured party has resold the collateral or completed a strict foreclosure.
2) To redeem, the debtor must pay the amount owed (meaning the missed payment or payments) PLUS: accrued interest and secured party's reasonable expenses, including attorneys' fees.
3) If the security agreement contains an acceleration clause, to redeem the debtor must pay off the entire unpaid balance plus accrued interest plus secured party's reasonable expenses, including attorney's fees.
What is an acceleration clause?
Clause which permits the creditor to declare the full balance due in the event of default.