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72 Cards in this Set
- Front
- Back
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Security Interest
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Arises when a party (Debtor) uses property as collateral to secure repayment of funds to another party (Secured Party). If Debtor defaults on repayment, the Secured Party/Creditor can take possession of the collateral and apply the collateral to the balance owed.
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What does Article 9 cover?
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(1) Any transaction regardless of form that creates a security interest in personal property or fixtures of contract
(2) Agricultural liens (3) Sales of: (a) accounts receivable (b) chattel paper (c) negotiable interests (d) promissory notes (e) payment intangibles (4) Consignments (5) Certain lease-purchase agreements |
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What does Article 9 NOT cover?
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(1) Landlord's liens
(2) Liens granted by statutes for services or materials (3) Assignment of claims for wages, salary, or other compensation (4) Assignment of contract rights (5) Lien/Interest in REAL PROPERTY (6) Tort claims etc. |
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Types of Collateral
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(1) Goods
(2) Tangible Intangibles (3) Intangible Intangibles (4) Investment properties |
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Types of Collateral: Goods
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Includes all things that are movable at the time the security interest attaches.
Categories: (1) Consumer goods (2) Inventory (3) Farm products (4) Equipment (5) Fixtures (6) Accessions (7) Commingled goods |
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Goods - Consumer Goods
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Goods used or bought for use primarily for personal, family, or household purposes
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Goods - Inventory
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Goods, OTHER THAN farm products, that:
(1) are leased by a person as a lessor (2) are held for sale or lease or to be furnished under a K of service (3) are furnished under a K of service (4) consist of raw materials, work in process, or materials used or consumed in business |
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Goods - Farm Products
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Goods, OTHER THAN STANDING TIMBER, with respoect to which the debtor is engaged in a farming operation, including crops, livestock, products of crops or livestock in their unmanufactured state, aquatic goods produced in aquatic operations, and supplies used or purchased in a farming operation.
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Goods - Equipment
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A catch-all category, defined merely as goods other than inventory, farm products, or consumer goods.
USUALLY refers to goods used or bough for use primarily in business (e.g., machinery used in farming or manufacturing, tools of a mechanic or repairman, delivery trucks) The mere fact that the debtor PERIODICALLY sells and replaces his equipment does NOT convert it to inventory A debtor may also use his goods in more than one capacity, but the PRIMARY USE determines the characterization |
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Goods - Fixtures
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Fixtures are goods that become SO RELATED to particular REAL ESTATE that an interest in those goods arises under real property law
Ordinary building materials when incorporated into an improvement on the land are regarded as inseparable from the structure itself, and so Article 9 does NOT apply A security interest in fixtures is generally SUBORDINATE to a conflicting interest in the related real estate by someone other than debtor |
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Goods - Accessions
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Accessions are goods that are PHYSICALLY UNITED with other goods in such a manner that the identity of the original goods is not lost
A security interest may be created in an accession and continues in collateral that BECOMES an accession; if a security interest is perfected when the collateral becomes an accession, it remains perfected |
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Good - Commingled Goods
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Goods that are PHYSICALLY UNITED with other goods in such a way that their IDENTITY is LOST in a product or mass (e.g., flour in cakes). The term includes goods whose identity is lost through manufacturing or production AND through mere mixing with other goods from which they cannot be distinguished (e.g. ball bearings)
A security interest does NOT exist in SPECIFIC goods that have become commingled. But a security interest MAY attach to a product or mass that results when the goods become commingled. If the security interest is perfected BEFORE the goods become commingled, the security interest REMAINS perfected. |
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Types of Collateral: Tangible Intangibles
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Certain intangibles, such as contractual obligations to hold or deliver goods or pay money, and ownership in goods or business entities, are commonly reduced to TANGIBLE or written form, and by transferring the writing, the intangibles themselves are transferred.
3 Types: (1) Instruments (2) Documents (3) Chattel Paper |
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Tangible Intangibles - Instruments
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Negotiable Instruments (drafts and notes as defined in Art. 3), or ANY WRITING that evidences a right to the payment of a monetary obligation but is NOT ITSELF a SECURITY INTEREST or lease.
Writing must be of a type that in the ordinary course of business is transferred by delivery with any necessary indorsement or assignment. |
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Tangible Intangibles - Documents
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Documents are documents of TITLE, which include:
(1) bills of lading (2) dock warrants and receipts (3) warehouse receipts or orders for the delivery of goods AND (4) any other document that in the regular course of business or financing is treated as adequately evidencing that the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers To be a document of title, a document must purport to be issued by or addressed to a bailee and purport to cover goods in the bailee's possession that are either identified or are fungible portions of an identified mass UNLIKE instruments, documents of title represent ownership in TANGIBLE GOODS. It is those goods, or the property interests in them, in which the secured party is really interested; thus, the interests may be created with reference to the documents, the goods, or both. |
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Tangible Intangibles - Chattel Paper
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Chattel paper is a record that evidences both a monetary obligation and a security interest in, or a lease of, specific goods.
If the transaction is evidenced by records that include an instrument or series of instruments, the GROUP of records taken together constitutes chattel paper. Security agreements, such as conditional sales contracts or chattel mortgages, are chattel paper. Chattel paper can be either written (tangible chattel paper) or electronic (electronic chattel paper). |
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Types of Collateral: Intangible Intangibles
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Many intangibles, such as monetary obligations and literary rights, while possibly EVIDENCED in writings, are treated as intangibles. In other words, the WRITINGS take on NO COMMERCIAL SIGNIFICANCE OF THEIR OWN.
3 Types of Intangible Intangibles (1) Accounts (2) Commercial tort claims (3) General Intangibles |
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Intangible Intangibles - Accounts
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Accounts are rights to payment of a monetary obligation, whether or not earned by performance, generally for property that has been transferred or otherwise disposed of, for services, or arising out of the use of credit or charge card.
Accounts INCLUDE health-care insurance receivables, but does NOT include: (1) rights to payment evidenced by instrument or chattel paper (2) commercial tort claims (3) deposit accounts (4) investment property (5) letter of credit rights or letters of credit (6) rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card |
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Intangible Intangibles - Commercial Tort Claims
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A claim arising in tort where the plaintiff is an organization, or where the plaintiff is an individual but the claim arose in the course of the plaintiff's business or profession and it does not include damages arising from personal injury or death.
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General Intangibles
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General intangible is the name given to intangible collateral that fails to fit into any other category. It includes things (choses) in action, payment intangibles, and software
Payment intangible is a type of general intangible under which the account debtor's principal obligation is a monetary obligation |
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Types of Collateral: Investment Properties
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Investment property includes certificated and uncertificated securities, securities accounts, and security entitlements, as defined in UCC Art. 8. It also includes commodity contracts and commodity accounts.
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Proceeds
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Collateral subject to a security interest may also be in the form of PROCEEDS of the disposition of other collateral.
Proceeds means (a) whatever is acquired on the sale, lease, license, exchange, or other disposition of collateral, (b) whatever is collected on, or distributed on account of, collateral, OR (c) rights/claims arising out of the collateral (includes insurance) Either (1) Cash proceeds (money, checks, deposit accounts, etc.); OR (2) Non-cash proceeds (everything else) |
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Security Interest
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A security interest is created by a WRITTEN security agreement OR by the secured party's taking POSSESSION, delivery, or control of the collateral with the INTENT to secure a debt, plus ATTACHMENT of the security interest to the collateral.
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Security Agreement
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An agreement that creates or provides for a security interest in certain collateral.
In order to create a security interest enforceable against the debtor and third parties with respect to the collateral, the agreement MUST contain the following: (1) AUTHENTICATION (can be either SIGNING a WRITTEN document or executing or otherwise adopting a symbol, or encrypting or similarly processing a record with the present intent of the authenticating person to identify the person and adopt or accept the record) AND (2) DESCRIPTION of the collateral (sufficient if it reasonably identifies what is described; if for uncut timber, must also describe the land) A financing statement is the document that is filed to give notice of the security interest in order to PERFECT that interest, and is ONLY sufficient as a security agreement "where there are other facts and circumstances which reflect the parties intent to create a secured relationship". So there must be something else OTHER THAN the financing agreement to indicate a security interest is intended. |
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Possession/Pledge
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There must be a WRITTEN security agreement to create a valid security interest UNLESS the secured party has POSSESSION OF THE COLLATERAL (or in some cases, control, see next card)
Where the secured party has possession of the collateral, all that is needed is an agreement by the debtor, which MAY BE ORAL (but need not be express, and can be shown by "implication from other circumstances"), that the secured party is to have a security interest. Such a security interest is referred to as a PLEDGE The secured party MUST exercise REASONABLE CARE in the custody and preservation of the collateral in the secured party's possession or control. |
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Control
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With respect to certain types of collateral, such as investment property, the concept of CONTROL takes the place of possession
A security agreement may be evidenced by control IF the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, AND the secured party has CONTROL of the collateral. Control may ALSO give rise to PERFECTION of a security interest (discussed in later cards) Secured party MUST exercise REASONABLE CARE in the custody and preservation of collateral in the secured party's possession or control. |
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Validity/Effect of a Security Agreement
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A security agreement is generally effective between the parties, against purchasers of the collateral, and against creditors.
Title to the collateral may be held by the secured party or the debtor without affecting the rights or duties of either party, EXCEPT when the collateral is: (1) a consignment or sale of accounts (2) chattel paper (3) a payment intangible OR (4) a promissory note |
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Attachment
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Attachment is the PROCESS by which the security interest is created. A security interest is created by CONTRACT between the debtor and the secured party. Once the interest has attached, the secured party has all the enforcement rights provided by Art. 9, including the right to repossess the collateral upon default.
A security interest ATTACHES when the following elements exist SIMULTANEOUSLY: (1) Secured party gives VALUE (2) Debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party AND (3) Debtor must have AUTHENTICATED a security agreement that sufficiently describes the collateral (MUST be sufficiently specific) A collateral description is sufficiently specific if it reasonably identifies what is described (it is automatically sufficient if it describes the collateral by UCC type, unless it is a commercial tort claim or consumer goods in a consumer transaction, in which case more specificity is required) |
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After Acquired Collateral
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A security agreement MAY create an interest in AFTER-ACQUIRED collateral, EXCEPT for after-acquired commercial tort claims, and after-acquired consumer goods, unless the goods are acquired within 10 days of the secured party's giving value
Inventory and Accounts Receivable will ALWAYS be counted, even if no SPECIFIC provision naming them "after-acquired" |
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Future Advances
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A security agreement MAY provide that collateral secures future advances, e.g. may secure ALL advances under a revolving credit agreement, such that no additional security agreement is needed to secure the future advances.
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Identifiable Proceeds
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A security interest in collateral AUTOMATICALLY extends to identifiable proceeds of the collateral
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Effect of Sale/Lease/Other Disposition of Collateral
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A secured party's security interest in collateral WILL CONTINUE in such property unless the secured party authorized disposition of the property free of the interest or another Art. 9 exception applies
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Purchase Money Security Interest (PMSI)
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A security interest in GOODS is a PMSI if it pertains to goods that are purchase-money collateral or in inventory that is or was incurred as a result of a purchase money obligation.
A debtor incurs a purchase money obligation IF the obligation is incurred: (1) as all or party of the price of the collateral OR (2) for value given to enable the debtor to acquire rights in or use of the collateral, if the value is in fact so used (i.e., when a bank finances the purchase of goods) PMSI status is important to the perfection and priority of security interests |
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Purchase Money Collateral
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Purchase money collateral means goods or software securing a purchase-money obligation that a debtor incurs in order to purchase the goods
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PMSI In Goods
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A security interest in goods is a PMSI:
(1) to the extent that the goods are given as collateral for an obligation the debtor incurred FOR THE PURCHASE OF THE GOODS, and ACTUALLY USED to purchase the goods (2) if the security interest is in inventory that is or was purchase-money collateral; also to the extent that the security interest secures a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a PMSI (3) also to the extent that the security interest secures a purchase-money obligation incurred with respect to software in which the secured party holds or held a PMSI |
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PMSI in Software
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A security interest in software is a PMSI to the extent that the security interest ALSO secures a purchase-money obligation incurred with respect to GOODS (e.g. a computer) in which the secured party holds or held a PMSI IF:
(1) the debtor acquired its interest in the software as an INTEGRATED TRANSACTION in which it acquired interest in the goods, and (2) the debtor acquired its interest in the software for the principal purpose of using the software in the goods |
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PMSI in Inventory - Consignor's Interest
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A consignor's security interest in goods that are the subject of a consignment is a PMSI in INVENTORY
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Dual Status Rule
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A PMSI does NOT lose its status as such, EVEN IF:
(1) the purchase-money collateral ALSO secures an obligation that is NOT a purchase-money obligation (2) collateral that is not purchase-money collateral also secures the purchase-money obligation, OR (3) the purchase-money obligation has been renewed, refinanced, consolidated, or restructured |
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Perfection Generally
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A security interest is perfected IF:
(1) it has ATTACHED AND (2) all the requirements for perfection are met If the requirements are met BEFORE attachment, then the interest is perfected on attachment. Perfection is the process by which the secured party gives the world NOTICE of its security interest. Perfection is necessary to establish PRIORITY. |
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Law Governing Perfection
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Generally, the governing law will be the law of the jurisdiction where the DEBTOR is LOCATED.
Location is determined by: (1) Principal residence for an INDIVIDUAL debtor (2) Place of business (if only 1) OR chief executive office (if more than 1 place of business) for a registered ORGANIZATION (3) For organizations organized under state law, the location is the state of the organization (4) for organizations organized under FEDERAL law, the location is in the state designated by law, the state the organization designates if so authorized, or in D.C. if neither apply |
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Methods of Perfection
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(1) Filing
(2) Possession (3) Control (4) Automatic Perfection |
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Perfection by Filing
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Filing a FINANCING STATEMENT in a PUBLIC OFFICE is the most common way to perfect a security interest.
Filing can be done: (1) in most cases, in the office of the SECRETARY OF STATE OR (2) in the office designated for filing or recording a MORTGAGE on the RELATED REAL PROPERTY if the collateral is minerals or timber to be cut, or the financing statement is filed as a fixture filing and the collateral constitutes goods that will become fixtures Filing is NOT EFFECTIVE for the following types of collateral: (1) a deposit account (may be perfected ONLY by CONTROL) (2) a letter-of-credit right (may be perfected ONLY by CONTROL) (3) money (may be perfected ONLY by POSSESSION) |
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Perfection by Possession
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A secured party may also perfect a security interest by taking possession of the collateral, but ONLY where the collateral is TANGIBLE.
Perfection by possession ONLY applies to the following types of collateral: (1) negotiable instruments (2) goods (3) instruments (4) money (this is the ONLY way to perfect an interest in money) (5) tangible chattel paper Perfection by possession is NOT PERMITTED for the following types of collateral: (1) accounts (2) commercial tort claims (3) deposit accounts (4) investment property (5) letter-of-credit rights (6) letters of credit or (7) oil, gas, or other minerals BEFORE extraction A secured party who has taken possession of collateral MUST exercise REASONABLE CARE in its custody and preservation. Reasonable expenses incurred may be charged to the debtor; the risk of accidental loss is in the debtor; the secured party must keep the collateral identifiable unless it is fungible; the secured party may use the collateral to preserve its value, as permitted by court order, or as agreed by debtor except in the case of consumer goods; the secured party may hold as additional security any proceeds (other than money) received from the collateral, but must apply any money received from the collateral to reduce the obligation or remit those funds to the debtor and may create a security interest in the collateral |
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Perfection by Control
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A security interest may also be perfected by taking control of the collateral.
Perfection by CONTROL applies ONLY to: (1) investment property, (2) letter-of-credit rights, (3) deposit accounts, and (4) electronic chattel paper Investment property - secured party has control of a certificated security in bearer form if the security is delivered to the party; for a security in registered form the certificate must be indorsed or registered in the name of the secured party; for an uncertificated security must be delivered to the secured party or the issuer agrees that it will comply with the instructions of the secured party Letter-of-credit rights - secured party has control of letter-of-credit rights to the extent of any right to payment or performance by the issuer if the issuer has consented to an assignment of proceeds of the letter of credit Deposit accounts - secured party has control if (a) the secured is the bank with which the deposit amount is maintained (this is a form of automatic perfection, and is sufficient even if debtor retains the right to direct disposition of funds from the account), (b) the debtor, secured party, and bank have agreed in an authenticated record that the bank will follow the secured party's instructions directing the disposition of funds in the account without further consent of the debtor; (c) the secured party becomes the bank's customer w.r.t. the deposit account Electronic chattel paper - secured party has control if the records comprising the chattel paper are created, stored, and assigned such that (a) a single authoritative copy that is unique, identifiable, and unalterable exists, (b) the authoritative copy identifies the secured party as the assignee of the records, (c) the authoritative copy is communicated to and maintained by the secured party, (d) copies that add or change an identified assignee of the authoratative copy may be made only with the participation of the secured party, (e) copies are readily identifiable as copies, and (f) any revision of the authoritative copy is readily identifiable as an authorized or unauthorized revision Perfection by control occurs from the time control is obtained, and remains perfected until control is LOST, or until (1) for certified security, debtor acquires possession of the certificate, (2) for uncertified security, the issuer registers the debtor as the registered owner, or (3) for a security entitlement, the debtor becomes the entitlement holder If there is NO OUTSTANDING SECURED OBLIGATION, the secured party in control of the collateral MUST, within 10 days of demand by debtor, do one of a bunch of very specific things that basically amount to returning control to the debtor |
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Perfection by Automatic Perfection
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Perfection may be AUTOMATIC in limited circumstances
The most common type of PERMANENT AUTOMATIC perfection is: (1) PMSI in CONSUMER GOODS - perfection is automatic, and remains effective PERMANENTLY (no need to file or take possession); automatic perfection will NOT apply, however, if the property is subject to a certificate of title statute (2) all other types of automatic permanent perfection Automatic TEMPORARY Perfection occurs for: (1) Proceeds For ANY OTHER PMSI, there is a 20-day GRACE PERIOD - if the filing of a financing statement occurs within 20 days after the DEBTOR receives DELIVERY of the collateral, the PERFECTION will RELATE BACK to the date the security interest ATTACHED upon debtor's receipt of collateral; the relation back is effective only against intervening buyers, lessees, and lien creditors |
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Financing Statement
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Generally, the code adopts a system of NOTICE FILING, which essentially requires a filing that provides notice that a person may have a security interest in the collateral indicated. The SECURITY AGREEMENT itself need NOT be filed, only a financing statement need be filed.
Financing statement MUST include: (1) the NAME of the DEBTOR (2) the NAME of the SECURED PARTY or its representative (3) a DESCRIPTION of the collateral covered by the financing statement (sufficient if reasonably identifies what is described or if it indicates that the statement covers all assets or all personal property, which differs from security agreements); it will perfect interests in after-acquired property so long as the description of the collateral is sufficiently broad to cover the after-acquired property and/or future advances or they are mentioned specifically (4) MUST be AUTHORIZED by the debtor |
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Authorization of Financing Statement
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A financing statement MUST be AUTHORIZED by the debtor. A security agreement IS authorization for the financing statement, whether it says so explicitly or not.
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Special Financing Statement Rules for Fixtures
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Fixtures are goods that are so related to real property that an interest in them passes under real property law.
To be a fixture, goods must be: (1) attached to land or building (2) appropriated to the use or purpose of that part of the realty it has been connected to, AND (3) regarded as an irremovable part of the real property A FIXTURE filing MUST contain ALL the information required in a financing statement, AND (1) indicate that it covers fixtures (2) indicate that it is to be recorded in the real property records (3) provide a description of the real property to which the fixture is related, AND (4) if the debtor does not have an interest of record in the real property, provide the name of the record owner |
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Rejection/Effectiveness of Financing Statement
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An INEFFECTIVE financing statement does NOT perfect a security interest
RIGHTFUL rejection - a filing office MUST refuse to accept a financing statement (and thus filing will not occur) IF: (1) the record is not communicated by an authorized method (2) the filing fee is not paid (3) for an initial statement, the debtor's name is not provided (4) for an amendment, the statement does not identify the initial filing or identifies an initial filing whose effectiveness has lapsed (5) for real property, the statement does not provide a sufficient description (6) there is a secured party of record and the secured party's name or address is omitted (7) the debtor's address and status as an individual or organization is not provided, OR (8) the financing statement indicates the debtor is an organization and the statement does not provide the type or jurisdiction of the organization or an organizational identification number The above are the ONLY valid reasons to refuse to accept a filing statement WRONGFUL rejection - occurs if the statement is filed properly and rejected for any reason not enumerated above. If that occurs, then the financing statement IS EFFECTIVE as a filing EXCEPT against a purchaser of the collateral that gives value in reasonable reliance upon the absence of the record from the files |
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Effectiveness DESPITE Correct Rejection
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A filed financing statement that provides the names of the debtor and the secured party and sufficiently describes the collateral IS EFFECTIVE, even if the filing office was required to reject it because of one of the circumstances enumerated above.
BUT if the statement provides INCORRECT address for the debtor or incorrect information about the debtor's organizational status, then (1) a CONFLICTING perfected security interest in the collateral will have a priority to the extent that the holder of the conflicting interest gives value in reasonable reliance upon the incorrect information, AND (2) a purchaser (other than a secured party) will take free of the security interest to the extent that the purchaser reasonably relies upon the incorrect information in giving value and for tangible chattel paper, tangible documents, goods, instruments, or a security certificate, receives delivery of the collateral |
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Requirement of Authorization
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If a financing statement is NOT authorized by the debtor, then it is NOT EFFECTIVE.
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Errors or Omissions in Financing Statement
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A financing statement containing MINOR errors will STILL be effective IF it SUBSTANTIALLY SATISFIES the requirements, UNLESS the errors make the statement seriously misleading.
Failure to provide the NAME of the DEBTOR is SERIOUSLY MISLEADING, UNLESS a search of the records of the filing office under the debtor's correct name, using the office's standard search logic, would disclose the financing statement |
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Time of Filing
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A financing statement MAY be filed BEFORE a security agreement is made or a security interest otherwise attaches.
The date of filing will be the date on which the secured party has complied with the filing requirements by presenting the statement for filing and tendering the filing fee, or the date on which the filing office accepts the statement. Failure of the filing office to index a record correctly does NOT affect the effectiveness of the filed record. |
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Changes that can Affect the Effectiveness of a Financing Statement
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Sale, exchange, lease, license, or disposal of collateral does NOT impact effectiveness.
Information in the statement that BECOMES seriously misleading does NOT impact effectiveness, UNLESS the debtor changes its/his name such that the statement becomes seriously misleading Debtor's change of ADDRESS CAN render a financing statement INEFFECTIVE |
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Debtor's Change of Address
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If perfection governed by law of debtor's location. the security interest will remain perfected until the EARLIEST of: (a) time when perfection would have ceased under the laws of the jx under which it perfected, (b) the expiration of 4 months after debtor moves to another jx, or (c) the expiration of 1 year after the collateral is transferred to a new debtor in another jx
If then perfected according to the laws of the new jx, the perfection will RELATE BACK to the date of the original perfection If the security interest is POSSESSORY, the interest will remain perfected IF (a) the collateral is located in one jx and subject to a security interest perfected by another jx's law, (b) the collateral is later brought into another jx, AND (c) upon entry into another jx, the security interest is then perfected under the laws of that jx For MOTOR VEHICLES, if covered by a certificate of title, if already perfected under the law of another state at the time the goods became covered by a certificate of title from Ohio, will REMAIN perfected until the original security interest would have become unperfected under the law of the other state |
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Period of Effectiveness of a Filed Financing Statement
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A financing statement is effective for 5 YEARS after the date of filing (30 years for public financing and manufactured homes, for utilities effective until set termination date, and for record of mortgage effective as a filing for a fixtures, until mortgage is satisfied or discharged)
If no CONTINUATION STATEMENT is filed, then the financing statement lapses and is no longer effective |
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Continuation Statement
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To ensure continued effectiveness, a CONTINUATION STATEMENT must be filed WITHIN 6 MONTHS before the expiration of the 5 year period.
A continuation statement extends the effectiveness of the original filing for another 5 year term from the date the financing statement WOULD HAVE become ineffective absent the filing of a continuation statement |
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Termination Statement
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Required in 2 situations:
Consumer goods - secured party must file a termination statement if the financing statement covers consumer goods AND (1) there is no outstanding obligation and no commitment to make an advance, incur an obligation, or otherwise give value, OR (2) the debtor did not authorize the filing of the initial financing statement The termination statement must be filed: (1) within 1 month after there is no outstanding obligation, etc., OR (2) if earlier, within 20 days after the secured party receives an authenticated demand from the debtor Non-consumer goods - if the debtor makes an AUTHENTICATED DEMAND, the secured party must send the debtor a termination statement or file it in the filing office within 20 days IF: (1) there is no outstanding obligation, etc. (2) the financing statement covers accounts or chattel paper that has been sold but as to which the account debtor or other person obligated has discharged its obligation (3) the financing statement covers goods that were the subject of a consignment to the debtor but are not in debtor's possession OR (4) the debtor did not authorize the original filing of the financing statement |
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Assignment of Power to Amend
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A secured party may designate in a financing statement an assignment of the power to amend the statement to a third party, or may themselves amend the statement to reflect such an assignment
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Priority of Security Interests
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General Hierarchy (from worst to best)
(1) Unperfected Security Interest (prevails ONLY over subsequently attached unperfected security interests) (2)(tie) Perfected Security Interests (prevails over ANY unperfected security interest, and subsequently filed/perfected security interests or subsequently perfected lien creditor claims) (2)(tie) Lien Creditor Claims (prevail over ALL unperfected security interests, subsequently perfected/filed security interests, and subsequently perfected lien creditor claims) (4) Perfected PMSI (prevails over ALL unperfected security interests, ALL perfected security interests, ALL lien creditors, and subsequently perfected/filed perfected PMSI) |
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Priority: PMSI
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PMSI in GOODS will prevail over a conflicting interest IF the PMSI is perfected when the debtor receives possession of the collateral OR within 20 days
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Priority: PMSI in Inventory
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Requires ADDITIONAL steps to acquire priority over first-in-time secured parties:
(1) the PMSI must be perfected when the debtor receives possession of the inventory (2) the purchase-money secured party must send an authenticated notification to the holder of the conflicting security interest, stateing that it has or expects to obtain a PMSI in the inventory and describing the inventory AND (3) the holder of the conflicting interest receives the notification WITHIN 5 YEARS before the debtor takes possession of the property |
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Priority: PMSI in Software
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PMSI in software will prevail IF the PMSI in the GOODS in which the software was acquired for use has priority in the goods and their proceeds
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Priority: PMSI in Consignments
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Must satisfy rules for INVENTORY (above)
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Conflicting PMSIs
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Price prevails over a PMSI created to secure a loan
Otherwise, first in time applies |
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Priority: Lien Creditors
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First in time rule applies to contests between lien creditors and secured parties
Thus, a secured party will prevail IF he: (1) perfects before the lien creditor's interest arises OR (2) files a financing statement before the interest arises |
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Priority: Possessory Lien
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Possessory lien on goods has a priority over a security interest in goods (unless otherwise provided by statute)
Possessory lien: (1) secures payment/performance of an obligation for services or materials, (2) is created by statute in favor of one person, and (3) depends on the person's possession of goods for effectiveness |
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Special Rule for PMSIs (Relation back)
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If a PMSI is perfected WITHIN 20 DAYS after a debtor receives delivery of the collateral, the PMSI will take priority over a lien creditor whose rights arise
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Accessions
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An accession refers to goods that are PHYSICALLY UNITED with other goods in such a way that the identity of the original goods is NOT LOST
Security interest created in collateral that becomes an accession will continue, and if perfected prior to becoming an accession, it remains perfected Same priority rules apply, EXCEPT where there is a security interest in the WHOLE that is perfected by compliance with requirements of a certificate of title statute After default, a secured party may remove an accession from the other goods if the security interest in the accession has priority over the claims of every person having an interest in the whole, BUT must reimburse other security holders in the whole for damage done as a result of removal |
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Commingled Goods
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Commingled goods are goods that are physically united with other goods such that their IDENTITY IS LOST
A security interest does NOT exist per se in commingled goods, but attaches to the PRODUCT that results If the security interest is perfected before the goods become commingled, it remains perfected. A security interest in collateral perfected before the collateral becomes commingled has a priority over a security interest that is UNperfected at the time the collateral becomes commingled. Multiple perfected security interests in commingled goods will rank EQUALLY in proportion to the value of the collateral at the time it became commingled. |
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Buyers vs. Secured Parties
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Generally, a security interest survives the sale of the collateral
EXCEPTION: (1) Consent - when the secured party authorizes the disposition free of the security interest (2) Buyer in the ordinary course of business (i.e., a buyer who buys (1) in good faith, (2) without knowledge that the sale violates the rights of another person in the goods, and (3) buys in the ordinary course from a person in the business of selling goods of that kind (3) licensee in ordinary course (4) lessee in ordinary course |
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Buyers of Consumer Goods
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A buyer of CONSUMER GOODS, where the sale qualifies as CONSUMER-to-CONSUMER (or GARAGE SALE exception) takes free of a security interest (even if PERFECTED), IF:
(1) person buys goods from a person who used or bought the goods primarily for personal, family, or household use, (2) bought without value of the security interest (3) for value (4) primarily for the buyer's personal, family, or household purposes, AND (5) BEFORE the filing of a FINANCING STATEMENT covering the goods (recall that a PMSI in consumer goods can be perfected without filing a financing statement) |
