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144 Cards in this Set
- Front
- Back
Collateral Types
Goods 1 |
1. Inventory
2. Consumer Goods 3. Farm Products (have to be unmanufactured, once goods are manufactured, they become inventory; also includes supplies used/produced in farming operations) 4. Equipment (catchall category; ex - painting on office wall, machine used in factory) |
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Collateral Types
Paper Rights 2 |
Also called "quasi-tangible" collateral & is basically legal rights represented by pieces paper
1. Documents of title (bills of lading, warehouse receipts) 2. Instruments (negotiable & nonnegotiable instruments, checks, promissory notes, drafts & cert of deposit; if the instrument is COMBINED w/SI it becomes chattel paper) 3. chattel paper (record that evidences both a monetary obligation and an SI in or a lease of a specified goods) 4. General Intangibles (blueprints, bid packages, research reports, money) |
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Collateral Types
Control Properties 3 |
1. Investment Property (stocks and bonds
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Collateral Types
Pure Intangibles 4 |
1. Accounts (receivable - a right of payment for goods or services sold or leased that is NOT evidenced by an instrument or chattel paper; use f credit card or lottery)
2. Commercial Tort Claims (Tort Claims filed by organizations, filed by individuals that arose out of business and not PI; claims can be used as collateral) 3. Letter of Credit Rights - Seller is beneficiary of the letter of credit) 4. Deposit Account (accts maintained w/bank, savings/ passbook acct, nonnegotiable cert of deposit) 5. General Intangibles (good will, literary rights, rights of performace) |
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Collateral Types
Mutually Exclusive Rule 5 |
Goods cannot be more than one collateral type at a time. The dominant use controls.
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Exclusions from Collateral Types
Real Estate 6 |
Real property transactions are excluded from A9.
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Exclusions from Collateral Types
Banks 7 |
If two persons owe one another money, the law sometimes allows them to set off their mutual debts against each other. For example, a bank that lent money to the debtor might be able to set off that debt against the debtor’s checking account.
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Exclusions from Collateral Types
Insurance Companies 8 |
Sometimes insurance policies are put up as collateral, but they are not part of normal commercial financing so they are excluded from governance by A9. This is because: insurance companies are regulated as it is, so they don’t want to deal with article 9 and have to file etc.
Exception: Health Care Insurance |
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Exclusions from Collateral Types
Trial Lawyers 9 |
Judgments, setoff rights, and tort claims generally do not serve as collateral in commercial transactions so they are excluded from the Code.
Exception: Commercial Tort Claims |
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Exclusions from Collateral Types
Landlord 10 |
A9 only applies to personal property landlord liens and other all other interests in real property are excluded from the article.
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Exclusions from Collateral Types
Laborers 11 |
Assignment of current or future wages represents a question of social importance rather than a purely commercial problem, so it is left to local law (3)
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Exclusions from Collateral Types
Federally Created Liens 12 |
Security interests governed by any US statute are exempt from the Code to the extend that the statutes control the rights of the parties to the security agreement or the rights of 3rd parties
Usually provide only for filing Have no priority rules so Article 9 still must be checked regarding priority, validity of title docs, GFP, etc. when statute is silent. |
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Transactional Exclusions
Reason for Distinction 13 |
Ostensible ownership problem: looks like the person in possession own the goods when he/she really does not
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Transactional Exclusions
Bailments 14 |
Bailments are not mentioned in A9, so you have to look at acts to see if SI was intended, ie – did the transaction intend to secure payment or performance of an obligation?
If its only a bailment, another SP cannot seize the goods, since under deriviation principle he could only be granted an interest in something the debtor owned, not just ENTRUSTED. |
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Transactional Exclusions
Bailments - Front End 15 |
Exists when the bailee holds the goods for the full benefit of the bailor. The bailor provides the bailee with the goods to manufacture and ship to to bailor's buyers. The bailee retains no separate interest in the goods.
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Transactional Exclusions
Bailments - Back End 16 |
Exists when the bailor gives the stuff back to the bailee.
Bailor might want to force Bailee to purchase goods by proving the deal was really a secured transaction (hidden ST was when the purchase price was fixed only after the goods were manufactured). Bailee might want to insist that the deal was a true bailment to avoid getting stuck with goods that have depreciated. |
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Transactional Exclusions
Leases 17 |
Whether the lease is in effect a conditional sale in which “lessor” retains an interest in the “leased” goods as security for the purchase price.
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Transactional Exclusions
Leases - Types 18 |
1. Security Lease
2. True Lease Other Options Outside of Lease: 1. Transactional Sale 2. Conditional Sale |
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Transactional Exclusions
Leases - Basic Factors to Determining Lease 19 |
1. The Lessee has no right to terminate the lease AND
2. Either the goods have no economic value at the end of the lease OR 3. The lessee can purchase the goods from the lessor for little or nothing |
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Transactional Exclusions
Leases - Additional Factors to Determining Lease 20 |
1. Org term of lease is > than or lease than the remaining economic life of goods (makes it a sale b/c in true lease there is something of value returned to the lessor)
2. Lessee either bound to renew for remaining economic life of goods or to become owner of goods (essentially a sale) 3. Lessee has option to renew for remaining economic life of goods for no additional or nominal consideration 4. Lessee shall become or have the option to become the owner of property for no additional consideration or nominal consideration. 5. If lessee has a right to terminate the transaction before the right to purchase ever arises, the option to become owner for nominal consideration does not make it a security interest. 6. Total amount of rent paid (full payout lease not per se a security interest). 7. Whether lessee acquires equity in the leased property (is there a right to purchase at any time during the lease and apply part of payments already made? 8. Lessee assumes risk of loss or payment of taxes, insurance, filing (not automatically a security interest, but a factor) |
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Transactional Inclusions
Consignments 21 |
In a typical consignment, the consignor turns goods over to a retailer, who acts as the selling agent of the goods.
Consignee retains title to the goods. If the goods are not sold at retail the consignor expects to get the goods back free from any claims of consignee’s creditors. However, if the consignee cannot give back the goods, it is not a true consignment |
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Transactional Inclusions
Consignments - UCC Reqs 22 |
UCC 9-102(a)(20)(A)-(D)
1. The goods (not consumer goods in the hands of the consignor) have a value of at least $1,000 at the time of delivery to consignee 2. Consignee is a merchant not generally known by its creditors to be substantially engaged in the selling of goods of others (because this creates an ostensible ownership problem); AND 3. The consignee’s professional name is different than the consignor |
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Transactional Inclusions
Consignments - Exception for Small Trx 23 |
You don’t have to file if the consignment doesn’t meet the requirements in UCC 9-102(a)(20(A)-(D)
1. Consumer good at delivery 2. Value less than $1,000 at time of delivery 3. Merchant is type that normally sells the goods of others and it’s that type of good (art dealer) Consignee sells under a the same name as consignor |
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Transactional Inclusions
Why Include Accounts 24 |
It avoids difficult problems of distinguishing between transactions in which a receivable secures an obligation and those in which the receivable has been sold outright. In many commercial financing transactions the distinction is blurred.
So it clears things up and protects the parties interests when things would otherwise be unclear and this have to be litigated. |
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Transactional Inclusions
Accounts - UCC 25 |
UCC 9-109(a)(3) - Article 9 applies to a sale of accounts
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Transactional Inclusions
Accounts - Exceptions 26 |
1. A sale of accounts as part of a sale of the business out of which they arose
2. An assignment of accounts for the purpose of collection only 3. Assignment of a contractual payment right to a person already obligated to perform under that contract 4. Assignment of a single account to pay for another indebtedness |
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Transactional Inclusions
Accounts - Texas Method 27 |
The parties' characterization of a trx as a sale of such assets shall be conclusive that the trx is a sale and is not a secured trx and that title has passed to the party characterized as the purchaser of those assets regardless of whether the secured party has any recourse against the debtor, whether the debtor is entitled to any surplus, or any other term of the parties' agreement.
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What is attachment?
28 |
Describes the process by which the security interest is created in the property of the debtor in favor the creditor.
Process by which the debtor and creditor create a security interest in the debtor's collateral effective between the two parties. UCC 9-203 |
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What is perfection?
29 |
Process by which the security interest is then made good against most of the rest of the world.
Perfection may be taken before or after the security interest attaches to the collateral, but the SI is not perfected until it has attached. |
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Attachment Requirements
30 |
UCC 9-203
1. The parties must have an agreement that the security interest attach; 2. Value must be given by the secured party; and 3. The debtor must have rights in the collateral. |
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Attachment Requirement #1
31 |
1. The parties must have an agreement that the security interest attach.
This requires authentication - The debtor has to sign a written security agreement (or electronically sign) for attachment to occur. "AUTHENTICATE THE RECORD" In some situations and oral understanding is enough and no authenticated record is required for attachment: 1. Possession/Pledge (secured party has possession of the collateral) 2. Control (Certain kinds of property (investment property, letter of credit rights, deposit accounts, electronic chattel paper) the secured party need only obtain control over the property to prevail against other parties.) |
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Attachment Requirement #1
Written Requirement 31 |
SOF requirement. A nonpossessory/ noncontrol security interest without authentication is not enforceable against the debtor.
1. Looseness of the writing - The code drafters wrote the language regarding authentication broadly to encompass all possible forms of authentication. 2. Looseness of the signature - So long as it gives adequate notice. 3. Looseness of the collateral description - Test is whether based on the description is can be determined what collateral the parties intended the security interest to cover. (Any method of identification is allowed as long as it’s not confusing). SUPERGENERIC DESCRIPTIONS not allowed. |
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Attachment Requirement #1
Written Requirement - Errors & After Acquired Property 32 |
Errors in Description - Not fatal as long as there is some other proof that the parties intended the collateral in question to be covered by the security agrmt.
After Acquired Property - the agreement itself must expressly use that term or otherwise clearly refer to the collateral to be acquired in the future (except inventory and accounts receivable - acknowledged that these will always change). Debtor becomes the owner of new property in the future the creditor’s security interest will automatically attach to that property without the need to do anything further. EXCEPTIONS: (1) consumer goods - consumer MUST receive goods w/in 10 days of the secured party giving value (2) commercial tort claims |
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Attachment Requirement #2
33 |
2. Value must be given by the secured party;
UCC 1-204 - A person gives value for rights if he gets them: 1. In return for a commitment to extend/increase credit 2. As security/satisfaction for a preexisting claim 3. By accepting delivery under a preexisting k for purchase 4. In return for any consideration given that is sufficient to support a simple contract |
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Attachment Requirement #3
34 |
3. The debtor must have rights in the collateral.
The debtor can not grant a security interest in property he has no interest in!! Rights in the collateral is not defined by the Code but it means that debtor must have some ownership interest or right to obtain possession. |
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Four Main Ways to Perfect
35 |
1. Filing a financing statement
2. Possession of the collateral 3. Control over the collateral 4. Automatic perfection |
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Filing a Financing Statement - Requirements
36 |
9-502: Sufficiency of Financing Statement
(1) provides the name of the debtor (2) provides the name of the secured party or a rep of the secured party (3) indicates the collateral covered by the financing |
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Filing a Financing Statement - Errors in Financing Statement
37 |
The Financing Statement will still be effective even though it contains minor errors that are not seriously misleading. The courts are supposed to avoid the supertechnical reading of statutory requirements.
We have loose reqs so after acquired property clauses remain valid and so not to conflict with the proceeds rule (collateral that we have a SI in can be sold and turn into new collateral). |
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Filing a Financing Statement - Requirement #2
38 |
The financing statement is indexed by debtor’s name so later creditors can search the records to see what property of debtor’s is already encumbered in favor of other creditors. All subsequent documents related to the filing will be kept there too.
Therefore, it is important that the name meet the reqs. The test is whether the incorrect is seriously misleading (and whether a reasonable person could have found it) |
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Filing a Financing Statement - Requirement #2 - Name Change
39 |
If the debtor changes her name (or corporation changes its identity or structure by merger) to the extent that the filing statement becomes seriously misleading, the filing ceases to be effective as to any new collateral acquired by the debtor after four months unless a new statement or amendment is filed before then.
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Filing a Financing Statement - Requirement #2 - Transfer of Collateral to Another Person
39 |
Change in debtor & governing law - When a new debtor arises the original perfection against the old debtor continues only for one year if the new debtor is located in a different state than the original debtor.
Continuation Rule - The security interest transfers to the proceeds of the collateral. Disposition of collateral: continuation of security interest or agricultural lien; proceed. o Buyer in the ordinary course of business takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence. Buyer of consumer goods from someone who themselves used the good for consumer purposes: takes free of a security interest, even if perfected, if the buyer buys: (1) without knowledge of the security interest; (2) for value; (3) primarily for the buyer's personal, family, or household purposes; and (4) before the filing of a financing statement covering the goods. |
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Filing a Financing Statement - Requirement #3
40 |
The financing statement must contain a description of the collateral that is sufficient to allow a party to identify it by reasonable further inquiry.
It can be less specific than in the security agreement b/c to provide mere notice to others to check further (the security agreement is the specific contractual understanding of the two parties). Type of collateral is enough. |
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Duration of Financing Statement
41 |
Financing statement is effective for 5 years from the date of filing.
ii. A continuation statement must be filed in the 6 months before the expiration of the 5 years and if it’s not filed then it is ineffective. If you filed it late, you lose whatever priority position you were in. |
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Financing Statement - Consequences of Not Filing Continuance Statement or Late Filing
42 |
Continuation statement must be filed in the 6 months before the expiration of the 5 year period. If it’s not filed the interest becomes unperfected. The effect is that purchasers, jr security interest holders, and lien creditors whose interests have attached after the lapse gain priority – not before –the retroactive application does not include lien creditors.
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Termination of Financing Statement
43 |
UCC 9-513(c) - When there is no further obligation on the part of the debtor, the debtor can demand that creditor send them a termination statement within 20 days indicating that secured party no longer claims a security interest under the financing statement.
The debtor then files this termination statement. (If they don’t receive the statement within 20 days, they can sue for damages and a statutory penalty of $500) UCC (9-625(b), (e)(4) |
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Bogus Filing of Financing Statement
43 |
Occurs when a financing statement is filed by someone who has no right to file and it is ineffective. The debtor must get the financing statement removed from his record.
To do this the debtor can either file a termination statement or a correction statement explaining the facts - UCC 9-518 or sue for conversion. statutory remedy of $500 + actual damages |
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Overbroad Filing of Financing Statement
44 |
Creditors typically want broad financing statement (to ensure their security) and debtors CANNOT force creditors to narrow statements.
ALSO - only secured parties can authorize the amendment to a filing statement (a debtor cannot unilaterally amend financing statement UCC 9-509(d)) |
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Reviving a Terminated Financing Statement
45 |
Once a financing statement has been terminated it is no longer effective against debtor and cannot be revived. UCC 9-513(d)
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Filing Location of Financing Statement
46 |
UCC 9-301 (1) Filing based on the location of the debtor
4 Types of Debtors for Location: 1. Corporations/Registered organizations - Located in state of incorporation. UCC 9-307(e) 2. Individual debtor’s place of residence - UCC 9-307(b)(1) 3. Organization other than corporations and only has one place of business - At that place of business - UCC 9-307(b)(2) 4. Organization with more than one place of business at the chief executive office – UCC 9-307(b)(3) Place of business means where debtor conducts its affairs - UCC 9-307(a) Federal Government - In DC. UCC 9-307(h) Foreign Debtors - If the country has laws similar to A9 then you abide by them, if not the debtor is located in DC. UCC 9-307(c). |
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Filing Location of Financing Statement - Alternative Locations based on Collateral Type
47 |
Seven exceptions for special types of collateral
(1) UCC 9-301(3) Where negotiable documents, goods, instruments, money or tangible chattel paper is located in a jurisdiction, the local law of that jurisdiction governs. (A) Fixtures, use the law where the fixture is located (2) UCC 9-301(4) Extracted minerals – location where mine well is located. (3) UCC 9-302 Agricultural liens – where farm products located (4) 9-303(c) Certificates of title (automobiles) -use where the title is registered (5) 9-304(a) Deposit accounts – use the local law of the bank’s jurisdiction 9-304(b) – Determines Banks Jurisdiction -Bank’s jurisdiction can be determined through the bank’s agreement with the customer (6) 9-305 Investment property (a)(1)Certificates – use the law where the certificate is located (a)(2)Uncertificated – (on the issuer’s computer) where the issuer is incorporated (a)(3) Brokerage account – also in the agreement like in bank accounts (7) 9-306 - Letters of credit – use the law of the issuer’s jd – created by agreement, if it’s not then use where the issuer is located |
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Filing Location of Financing Statement - Change of Debtor's Location
48 |
If the perfection of a security interest is governed by the law of the state in which the debtor is located and the debtor changes its location a re-perfection is required in the new location within four months after the change.
EVEN WHEN SECURED PARTY DOESN’T KNOW OF THE CHANGE. UCC 9-316(a)(2) New perfection is good for the date of the original filing. UCC 9-316(f) If the secured party re-perfects late he won’t have priority over people who perfected in between the time the interest became unperfected and when he reperfected. UCC 9-316(b). |
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Filing Location of Financing Statement - Change of Collateral's Location
49 |
No rule most of the exceptions do not involve moveable collateral except for when we take a pledge → this can be done without filing so we don’t have to worry about filing.
The debtor is what matters because the filing is in the debtor’s name. |
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Filing Location of Financing Statement - Filing Place
49 |
UCC 9-501 provides that local law governs the filing of the financing statement and that filing is usually w/the secretary of state, but that the state could require local filing (aka – county office) or both.
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Perfection by Pledge
50 |
Occurs when the creditor takes physical possession of the collateral and holds onto it during the term of the loan.
The Code says that the creditor’s possession of the collateral results in perfection as soon as all the requirements for attachment have been met. UCC 9-313(a) |
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Perfection by Pledge - Items Covered and Not Covered
50 |
Types of property covered: Goods, money, negotiable documents, certificated securities, instruments, tangible chattel paper. UCC 9-313(a)-(b)
Perfection by possession is mandatory for money. UCC 9-312(b)(3) Types of property not covered: Property that doesn’t fall within the above categories is not pledgeable : general intangibles (licenses, club memberships, seat on stock exchange, debt). |
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Perfection by Pledge - Goods in Possession of Bailee
51 |
A secured party can’t directly take possession of them. The secured party can perfect by filing or could work with the bailee to indirectly perfect a security interest by possession through the bailee by: Taking possession of the negotiable document of title- the warehouse receipt for example- means that the creditor has a perfected security interest in the document and the goods covered in the document UCC 9-312(c)(field warehousing, almost)
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Perfection by Pledge - Goods in Possession of Bailee by Notification
52 |
A nonnegotiable document of title is a contract by the bailee to deliver the goods to whomever the bailor later directs. So possession of a nonnegotiable DOCUMENT wouldn’t result in perfection b/c it does not denote who the secured party is. BUT the secured party can perfect an interest in the GOODS by having the doc issued directly to the secured party or by sending notice of the secured party’s interest in the goods. UCC 9-312(d)
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Perfection by Pledge - Goods in Possession of Third Party by Acknowledgment
53 |
If the goods are in the hands of a bailee who hasn’t issued a document of title the secured party can perfect by getting the bailee to authenticate a record that says bailee holds the goods for the benefit of the secured party. UCC 9-313(c)
However, the bailee is not required to do this and if all else fails the secured party can perfect by filing. |
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Perfection by Pledge - Debtor as Temporary Agent
54 |
For certificated securities, debtor has 20 days to deliver them to a secured party, during the 20 days the secured party is still secured even though the properly is still in the possession of the debtor.
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Security Party's Duties while Holding Pledge
55 |
1. The Secured party must use reasonable care in storing and preserving the collateral.
2. Regarding chattel paper, the secured party has to take all steps necessary to preserve the rights of the debtor in the paper - UCC 9-207(a) 3. Right to reimburse for expenses 4. Accounting for rents, issues, and profits - SP can keep any increase in profits on the collateral as additional security but any money received has to be returned to debtor or applied against the security obligation. 9-207(c) 5. Right to repledge - SP can repledge the collateral to a 3rd party if this action does not impair the ability of the debtor to redeem. UCC 9-207(c)(3) 6. Right to use collateral- SP can use the collateral only: a. To preserve the collateral or its value b. Pursuant to a court order c. As agreed by debtor (never in the case of consumer goods) UCC 9-207(b)(4) |
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Perfection by Attachment via PMSI in Consumer Goods
56 |
A security interest in consumer goods that arises in connection with the purchase of the goods is perfected automatically upon attachment.
REASON: retail installment contracts, financial burden of all those filings would outweigh protecting the interest by filing. Also, consumer goods are rarely used twice as collateral so usually, there are no later creditors that would benefit from a filing. |
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Perfection by Attachment via Payment Rights
57 |
Assignment of accounts/pmt intangibles that doesn’t transfer a significant part of the assignor’s outstanding accounts/pmt intangibles
The significant portion includes earlier assignments. So an assignor cannot avoid the Code perfection requirements by serial assignment. Basically, if you assign an account, that, when compared to other assignment, is "causal or isolated" perfection is automatic. This is b/c an assignee who doesn't regularly assign may not know he has to file and it may be hard to find out the total amount of the assignor's accounts. (REMEMBER, the assignees assignments are compared to the assignor's accounts). |
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Perfection by Attachment via Other Means
58 |
1. Assignment of health care insurance receivable by the patient
2. Securities borrowing through psuedo-pledges 3. Assignments of the benefits of creditors 4. Assignments of interests in decedent estates |
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Perfection by Attachment - Texas Rule for Oil & Gas Interests
59 |
The security interest provided by this section is perfected automatically without the filing of a financing statement.
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Perfection by Control
60 |
1. Investment Propert
2. Deposit Accounts 3. Letter of Credit Rights 4. Electronic Paper If one creditor perfects by control and another by filing, the creditor with control will prevail. UCC 9-328(1) If two creditors have control, the 1st to gain control wins. UCC 9-328. |
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Control of Investment Property
61 |
Investment Property are stocks, bonds, commodity contracts, and rights in securities held with a broker.
They can also be perfected via filing of financing statement. Once a secured party has control, its security interest remains perfected by control, its security interest remains perfected by control UNTIL the secured party ceases to have control AND the debtor receives (1) possession of collateral that is a certificated security, (2) becomes the registered owner of collateral that is an uncertificated security, or (3) becomes the entitlement holder of collateral that is a security entitlement. |
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Control of Deposit Accounts
62 |
Filing IS NOT an available method to perfect a SI in a bank account – so control is the only way to perfect
UCC 9-104 – A Secured Party has control of the deposit account if: (1) the secured party is the bank w/which the deposit account is maintained; (2) the debtor, secured party and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account w/out further consent of the debtor; OR (3) the secured party becomes the bank’s customer w/respect to the deposit account. |
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Control of Letter of Credit Rights
63 |
Filing is not an available method, getting control is only way to perfect.
Gain control by having the issuer (BANK) of the letter of credit consent to an assignment to the creditor of the proceeds of the letter of credit. UCC 9-107 The issuer is not obligated to consent – if issuer refuses creditor is unperfected, BUT creditor can still perfect by perfecting the deposit account the buyer owes to the creditor. This automatically perfects a security interest in the letter of credit supporting this account. |
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Control of Electronic Chattel Paper
64 |
Can be perfected by filing or control
Obtain control by figuring out a way to have a single authoritative copy of the electronic chattel paper marked so creditor is assignee of record, and the copy is maintained by the creditor so it can only be changed with the agreement of the creditor. Whether technology exists to do this is debatable. |
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Perfection by Title Certificates (Motor Vehicles)
65 |
Title certificate statute replaces perfection by filing UCC 9-311(a)
In all states, certificates of title are issued evidencing the ownership of cars. Security interests in cars must be perfected by notation of the interest on the face of the certificate. |
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Perfection by Title Certificates (Motor Vehicles) - Obtaining Perfection & Change of Governing Law
66 |
Per UCC 9-303(b), after the submission of a valid application and payment of the fee to the right office makes the cert of title effective and would date the secured party's perfection from then.
The certificate is no longer valid if the governing law is changed. If a certificate is not perfected by the earliest of: (1) the time the perfection would have ceased under the law of that jurisdiction; (2) the expiration of 4 mos after a change of the debtor's location to another jurisdiction; or (3) the expiration of one year after a transfer of collateral to a person that becomes a debtor & is located in another jurisdiction. |
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Proceeds
67 |
They are whatever is received on the sale, lease, exchange or other disposition of collateral or of proceeds.
Second generation proceeds are proceeds from proceeds. |
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How Security Interest Attaches Proceeds
67 |
A secured party automatically obtains a security interest in identifiable proceeds. (UCC § 9-315(a)(2)).
The security interest in the proceeds is perfected automatically for 20 days. (UCC 9-315(c) and (d)). If the proceeds are cash proceeds, the perfection continues AUTOMATICALLY after the 20 days. UCC 9-315(d)(2). Perfection in the security interest in proceeds also continues if the secured party perfects by taking possession or by filing within the 20 day period. (UCC 9-315(d)(3)). |
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Same Filing Office Exception for Proceeds
68 |
If (1) the security interest on the original collateral was perfected by filing, (2) the collateral that constitutes the proceeds could also be perfected by filing in the same office, AND (3) the proceeds were not acquired with cash proceeds, then the perfection continues. (UCC 9-315(d)(1)).
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Identifiable Proceeds
69 |
Perfection continues so long as the proceeds are identifiable.
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Lowest Intermediate Balance Rule
70 |
Traces money into bank accounts by presuming that withdrawals from that are of money in which no one claims an interest.
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Priority of the Unperfected Interest vs. Unperfected Interest
71 |
When there are two conflicting attached, unperfected security interests in the same collateral the order of attachment determines priority in the collateral. UCC 9-322(a)(2)
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Priority of the Unperfected Interest vs. Perfected Interest
72 |
Unperfected creditor is subordinate to perfected creditor UCC 9-322(a)(2)
Knowledge of the prior unperfected interest is irrelevant. |
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Priority of the Unperfected Interest vs. Judicial Lien Creditor
73 |
Unperfected creditor is subject to judicial lien creditor 9-317(a)(2)
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Priority of the Unperfected Interest vs. Statutory Lien Creditor
74 |
Unperfected creditor is subject to Statutory Lien Holder 9-333
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Priority of the Unperfected Interest vs. Buyer
75 |
Purchasers who pay value and receive delivery, takes free of unperfected security interests in the collateral as long as they have no knowledge of the unperfected interest. UCC 9-317(b)
EXCEPTION: Inventory purchased in the ordinary course of business is purchased free of all security interest in the inventory, even if buyer knows of the security interest. |
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Priority of the Repossessor vs. Judgment Lienholder
76 |
Repossessor has priority b/c the judgment lien doesn't attach until the time of the levy.
For a trustee, it's when the bankruptcy is filed. |
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Priority of between Secured Parties
77 |
Priority goes to whichever secured party is either the first to file or perfect the security interest.
The time the SI attaches is irrelevant. You can file before attaching. |
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Priority of between Secured Parties - Proceeds & the Exception
78 |
Proceeds follow the usual first to file/perfect priority rules.
Exception: Whenever an SI exists in inventory and another, different SI exists in debtor’s accounts receivable there will be a conflict whenever debtor sells inventory on credit. This is because the proceeds of the inventory will be an accounts receivable (both would have a security interest in the account (1st SI as proceeds, 2nd SI as accounts receivable). The sale creates an account receivable and a proceed from the inventory, which is also part of that creditor’s interest In this case the priority rule is as follows: If neither is a PMSI, then the first to file or perfect has priority. |
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Priority of between Secured Parties - Future Advances
79 |
The filed financing statement will then perfect the security interest both as originally made and as expanded by later advances to the debtor, thereby continuing the original priority. 9-323(a)
As long as a secured party had priority over later creditors by filing or possession, that party will also prevail as to advances pursuant to a later security agreement. This is true even where other A9 creditors perfected their SI’s in the same collateral between the advances. UCC 9-324 Cmt. 3 |
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Priority of between Secured Parties - Future Advances - Exception
80 |
if the original security agreement does not provide for future advances and the secured party does provide a future advances, any creditors that have perfected during the intermittent have a priority over the subsequent advance. The priority dates to the second advance. Had there been a future advance clause in the security agreement, the priority date would have backtracked to the original perfection date. UCC 9-323(a)
How can 2nd creditor perfect? 1. Demand a termination statement on the previous filing statement 2. Ask for a subordination agreement from the first creditor |
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Priority of between Secured Parties - Future Advances - Dragnet Clause
81 |
A security agreement that provides that the collateral will be security for the specific loan and also any other debts owed by the debtor to the creditor now or in the future.
Authorized by UCC 9-204 & Cmt. 5, No longer does it matter if the future advances relates to the collateral (as previous cases have ruled). This is meant to protect banks now. |
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Priority between Secured Parties - Judicial Exception for Wrong Filings
81 |
Not in the Code. If you know of an improper filing you do not have to have notice. So you cannot come in front of the improperly filed FS if you know about it.
Case of filing in the wrong state. You have to knowledge when you LEND. |
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Priority between Secured Parties - Judicial Exception for Collaboration between Creditors
82 |
Secured Party cannot elevate the general creditors to the position of 1st SP by buying up the debt of general creditors.
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Priority between Secured Parties - Exception for the PMSI
83 |
PMSI's have super-priority UCC 9-324
Two situations for PMSI (1) All or part of the price of the collateral (Seller Financing); (2) Bank Loan (but have to prove that money loaned went to purchase the property). Comment 3: PMSI covers obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage, admin charges, expenses of collection and enforcement, attys fees and other similar obligations. (Basically everything traces back to PMSI) |
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Priority between Secured Parties - Exception for the PMSI - Bankruptcy Problem
84 |
Basically if there is a PMSI in household goods, the creditor is out of luck b/c it fits w/in an exemption in the Bankruptcy Code.
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Priority between Secured Parties - Exception for the PMSI - Super Priority Rules for Inventory
85 |
A lender who advances money to a retailer and takes an SI in the retailer’s inventory expects top priority over debtor’s after-acquired inventory in addition to existing inventory.
Requirements for priority - Super-priority available only in these circumstances: (1) PMSI already perfected at the time the debtor receives possession of the collateral. (no 20 day grace period) UCC 9-324(b)(1); AND (2) The pmsi gives notice to any other SI holder who has a previously filed financing statement covering inventory of the same type of goods as those that will be covered in the PMSI. Notice must be given prior to the date on which the debtor takes possession of the collateral. UCC 9-324(b)(2) Once notice given, it’s good for 5 years. New notice must be filed to continue the interest. 9-324(b)(3) |
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Priority between Secured Parties - Exception for the PMSI - Super Priority Rules for NonInventory
86 |
A PMSI in collateral other than inventory or livestock takes priority over conflicting security interests in the same collateral and its identifiable proceeds if the interest is perfected when the debtor takes possession of the collateral or within 20 days thereafter. (20 day grace period)
Where one creditor lends to debtor in a pmsi and takes an SI in the collateral and another creditor lends based on the same collateral and files first, the pmsi still has priority because of the super-priority thing. UCC 9-324(a) Knowledge of prior interest immaterial. |
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Priority of between 2 PMSIs
87 |
The seller of the item has priority over the lender because the seller’s interest secures the price of collateral over purchase money security interests that secure enabling loans. UCC 9-324(g)
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Priority of between 2 PMSIs
Priority of between Secured Parties - Exception for the Seller Surrogate Argument 88 |
If you are Bank and are going to buy out an interest then you better make sure the person who’s shoes you are going to step into is Perfected!!! (SUBROGATION)
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Priority of between Secured Parties - Exception for Consignments
89 |
When goods end up in inventory on consignment from a supplier and at the same time a prior inventory financer claims an interest in the consignee’s debtor’s inventory under an after acquired property clause
If the Consignment is covered by A9 it is treated as a pmsi in inventory If the consignor takes the steps required to gain super-priority in inventory, it will have priority in the consigned goods over all other inventory financiers. 9-103(d), 9-324, Cmt 7 |
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Priority of between Secured Parties - Exception for Commingled Goods - Interests Extends to Ultimate Product
90 |
A perfected SI extends to the product or mass if the goods have become commingled so they are no longer identifiable. UCC 9-336(b)-(d)
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Priority of between Secured Parties - Exception for Commingled Goods - Competing Interests in Ultimate Product
91 |
When more than one perfected secured party may have an interest in a mass of commingled goods. The interests are ranked equally – so each has an interest in the mass or total product in proportion to the value of the collateral at the time of commingling. UCC 9-336(f)(2)
The time of attachment and perfection are irrelevant and unperfected interests are still junior to perfected interests. |
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Priority of between Secured Parties - Exception for Paperized Collateral
92 |
The good faith purchase of a paperized interest wins over a prior perfected security interest SO LONG AS the chattel paper is not marked in the interest of the secured party (because if it was there would be notice)
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Priority of between Secured Parties - Exception for Chattel Collateral
93 |
If the purchaser of chattel paper gives new value for it and takes possession in the ordinary course of business, the purchaser has priority over another security interest in the chattel paper that is claimed merely as [proceeds of inventory subject to a security interest.]
It doesn’t matter if the purchaser of the chattel paper knows that the paper being bought is subject to the SI UCC 9-330(a) |
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Priority of between Secured Parties - Exception for Chattel Collateral - Inventory Financier v. Account Financier
94 |
A dealer has financing with two separate parties: (1) Secured party financing inventory & (2) a purchaser of the chattel paper created by sale of the inventory
Both claim SI in the returned goods; IF – since goods go back into the inventory and Chattel Paper purchaser claiming returned goods as proceeds of the CP WINNER: Chattel Paper purchaser if the purchaser of the chattel paper gave value for the paper and took it in the ordinary course of business. UCC 9-330(c) |
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Priority of between Secured Parties - Exception for Chattel Collateral Subject to SI Other Than as Inventory Proceeds
95 |
If the chattel paper is subject to an SI perfected other than as the proceeds of inventory, a stricter rule applies:
To take priority the purchaser of chattel paper must 1) give value 2) take possession in the ordinary course of business 3)take without knowledge that the purchase violated the rights of the secured party UCC 9-330(b) To avoid this problem: chattel paper should be stamped with notice of the assignment, which puts prospective buyers on notice of the interest. UCC 9-330(f) |
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Priority of between Secured Parties - Exception for Chattel Mortgage Subject to Lease
96 |
If chattel paper is in lease and we are filed and perfected on chattel paper only, it will come back a proceeds and we are not perfected on the lease revenues.
So we have to make sure we are filing both on chattel paper and the good, otherwise we are not perfected. FINANCING STATEMENT NEEDS TO STATE FOR CHATTEL PAPER AND GOODS |
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Priority of between Secured Parties - Exception for Control Property - Deposit Accounts
97 |
Control is the only method to perfect a deposit account.
EXCEPTION: depository bank has a superior right of setoff for debtors owed to it by the depositor and prevails over the SP having control over the account [unless SP obtained control by having the account put in their name] UCC 9-327(3)-(4) |
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Priority of between Secured Parties - Exception for Control Property - Investment Property
98 |
Investment Property can be perfected either by filing or control
However, if one creditor perfects by gaining control and the other by filing, the party who perfected by control wins UCC 9-328(1) If two have control, then whoever gained control first has priority UCC 9-328 |
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Priority of between Secured Parties - Exception for Control Property - Letter of Credit
99 |
Two ways to perfect –
control, perfecting an SI in the act the letter of credit backs up – which gives creditor auto perfection in the letter of credit right The creditor having control has priority UCC 9-329 If multiple parties have control→ 1st to gain control has priority 9-329(2) |
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Procedural Steps of Bankruptcy
100 |
1. Debtor files for bankruptcy
2. Creditors are notified and should file a proof of claim. 3. The timing is critical because many key bankruptcy issues focus on the status of the parties as of the moment the BK is filed. 4. Control of the bankrupt’s estate passes to the bankruptcy court/trustee at the moment the petition is filed. BC 541 5. Collateral subject to a lien/SI, the trustee must determines whether it was valid at the moment of the filing of the bankruptcy petition. 6. Remaining non-exempt property is sold and proceeds are distributed. 7. 1st $ goes to priority creditors, if anything is left over once these creditors have been paid in full, the remainder goes pro rata to the general creditors. 8. Discharge – forgiveness of rest of debts |
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Automatic Stay b/c of Bankruptcy
101 |
The filing of the bankruptcy petition creates an automatic stay against any creditor collection activity. The secured creditor must seek permission of the court or the trustee to enforce any rights.
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Trustee's Powers
102 |
The trustee "steps into the shoes" of the debtor and has all rights of action that the debtor had, including the benefit of all available defenses.
Through "strong arm clause" trustee also has whatever powers that could have been exercised by a creditor w/writ of execution returned unsatisfied or a creditor w/a lien on all property of the debtor at the moment the petition was filed. (creditor's levy will cut off unperfected security interests per UCC 9-317) |
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Bankruptcy Preferences
103 |
A security interest that is neither fraudulent nor attackable by the trustee asserting the power of real or hypothetical creditors may still be vulnerable if the perfection of the security interest contains a preference.
A preference is: 1. A transfer of any property of the debtor (including the perfection of an unperfected security interest), 2. Made to or for the benefit of a creditor, 3. On account of an antecedent debt, 4. Made by the debtor while insolvent and within 90 days before the filing of the bankruptcy petition, 5. The effect of which transfer is to allow the creditor to obtain a greater percentage of the debt than the creditor could otherwise have received in the bankruptcy proceeding, 6. AND, in a consumer case only, the aggregate value of all affected property is greater than 600. |
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Bankruptcy Preferences - Grace Periods
104 |
PMSI's - when a PMSI perfects w/in 30 day sof the debtor receiving possession, no preference occurs.
30 day grace period for all creditors who perfect the loan w/in 30 days and the debtor gets the collateral. If collateral was transferred later than the financing statement, the date is when teh collateral was trnasferred. If the financing statement is filed past 30 days, then the date filed is considered the date the financing statement had been file.d |
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Bankruptcy Preferences - Normal Bill Paying
105 |
Trustee cannot avoid payments made in ordinary course of business or financial affairs. Includes pmts made to secured/unsecured creditors.
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Bankruptcy Preferences - Contemporaneous Exchange
106 |
No preference if the parties intended a contemporaneous exchange or the transfer was in fact substantially contemporaneous.
EX: Bank loans debtor money and two hours later debtor signs SI agreement giving interest in debtor’s interest. (the reason for this exception is because the because wants to encourage people to loan insolvent people money in attempts to avoid bankruptcy). BC 547(c)(1) |
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Bankruptcy Preferences - Unsecured Subsequent Advances
107 |
Trustee can't avoid the lien when it is for the benefit of the the creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor
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Bankruptcy Preferences - Floating Lien; After Acquired Property
108 |
When the Security Interest involves after-acquired property, the advance is not preferential if made w/in the 90 day period.
Exception - build up prohibited. If in the 90 day period, the secured party has the debtor more inventory or accounts receivable than were present at the start of the period. |
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Fixtures
109 |
"Fixtures" means goods that have become so related to particular real property that an interest in them arises under real property law. Sometimes it is difficult to tell whether something is so associated w/real property that it is a fixture.
To achieve priority under certain provisions of this section, a security interest must be perfected by making a "fixture filing" (defined in Section 9-102) in the real-property records. Because the question whether goods have become fixtures often is a difficult one under applicable real-property law, a secured party may make a fixture filing as a precaution. Courts should not infer from a fixture filing that the secured party concedes that the goods are or will become fixtures. |
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Where to File "Fixture Filing"
110 |
The office designated for the filing or recording of a record of a mortgage on the related real property, if: (B) the financing statement is filed as a fixture filing and the collateral is goods that are or are to become fixtures.
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Priority over Fixtures - General Rule
111 |
UCC 9-334(c) A security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor.
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Priority over Fixtures - Fixture Filing Before the Real Estate Mortgage
112 |
The perfected security interest in the fixture filing takes priority over the encumbrancer of the real property if it perfects before the encumbrancer.
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Priority over Fixtures - Fixture Filing by PMSI
113 |
A perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property and:
(1) the security interest is a PMSI (2) the interest of the encumbrancer or owner arises before the goods become fixtures; and (3) the security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter. |
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Priority over Fixtures - Fixture Filing for Readily Removable Goods
114 |
A perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if:
(2) before the goods become fixtures, the security interest is perfected by any method permitted by this article and the fixtures are readily removable: (A) factory or office machines; (B) equipment that is not primarily used or leased for use in the operation of the real property; or (C) replacements of domestic appliances that are consumer goods |
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Priority over Fixtures - Perfection Before Judgment Lien
115 |
A perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if: (3) the conflicting interest is a lien on the real property obtained by legal or equitable proceedings after the security interest was perfected by any method permitted by this article
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Priority over Fixtures - Perfection for Manufactured Homes
116 |
A perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if: (4) the security interest is:
(A) created in a manufactured home in a manufactured-home transaction; and |
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Priority over Fixtures - Super-priority for Construction Mortgages
117 |
A lender who finances the construction of a building takes top priority as to ALL ITEMS that become part of the building during construction. Thus, when a construction mortgage has been RECORDED against the property, even a perfected PMSI in goods becoming fixtures during the construction will be JUNIOR to the construction mortgage.
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Accessions
118 |
Accessions are goods attached to other goods that have no special methods to perfect. If the security interest in the accession is perfected when the accession is installed in other goods, its perfection continues in teh accession.
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Accessions - Motor Vehicles
119 |
If a vehicle is covered by a certificate of title on which the security interest must be noted in order to achieve perfection (which is true in all states for automobiles) the secured party who is listed on the certificate of title has priority in all accessions added to the vehicle, no matter whether the accessions are prior or subsequent to the certificate of title perfection.
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State Liens
120 |
Basically, state liens are exempt from A9 and do not have to follow the same procedure to become perfected and obtain automatic priority in collateralized goods.
UCC 9-109(d)(2) |
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State Liens - Possessory Materialman's Lien
121 |
In this section, "possessory lien" means an interest, other than a security interest or an agricultural lien: (1) which secures payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the person's business; (2) which is created by statute or rule of law in favor of the person; and (3) whose effectiveness depends on the person's possession of the goods.
Why? We give super-priority b/c it allows people to buy what they otherwise could not buy w/out credit. |
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State Liens - Nonpossessory Materialman's Lien
122 |
3 Approaches:
(1) look back to security agreement (2)UCC 9-317 - become lien creditor before perfection (3) Policy grounds - everyone knows about a LL's lien |
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Set Off Rights
123 |
Not covered by A9. A bank with which a deposit account is maintained may exercise any right of recoupment or set-off against a secured party that holds a security interest in the deposit account.
Exception: Ineffective against a secured party that holds a security interest in the deposit account if the set-off is based on a claim against the debtor. |
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Where to File a Federal Tax Lien
124 |
When some state has not designated some office to file in (or where there is more than one place to file), it should be filed with the clerk of the US district Court in whatever jurisdiction the property is located in businesses at principle office
TX – TX Prop Code § 14.001 – the one place is w/the Secretary of State for corporation or w/the county clerk where the human resides |
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Tax Lien Not Valid Agst Secured Parties
125 |
IRC §6323(a) sets forth the general rule that the holder of a security interest is protected against an IRS lien as long as the security interest is properly perfected prior to the filing of the notice of federal tax lien
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Tax Lien Not Valid Agst Secured Parties - Future Advances
126 |
Where the security agreement covers future advances as well as the original loan, a perfected security interest takes priority over the FTL to the extent enlarged by a future advance ONLY IF the advance was made WITHOUT knowledge of the FTL during the 45 days after the FTL filing.
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Tax Lien Not Valid Agst Secured Parties - After Acquired Property
127 |
After-acquired security interests in inventory, chattel paper, instruments, and accounts that come into existence within 45 days after the FTL is filed are Sr. to the FTL those arising 45 day limit – only good for property acquired w/45 days after the gov’ts lien
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Sales of Collateral - Void and Voidable Title
128 |
Full title transfers to a GFP when a good has been sold in a fraudulent manner (bd check)
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Sales of Collateral - Taking Free of Security Interest - Buyer in the Normal Course of Business
129 |
Takes free of all security interests. Must meet the BIOC standards.
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Sales of Collateral - Taking Free of Security Interest - Buyer NOT in the Normal Course of Business
130 |
Takes free of security interest only AFTER the earlier of (1) the secured party gains knowledge or (2) 45 days has passed.
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Sales of Collateral - Taking Free of Security Interest - Proceeds
131 |
The secured party still has a secured interest in the Proceeds in the sale of the collateral.
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Rights Against Debtor W/out Going Through Collection Process - Event of Default
132 |
(1) SP has right to F/C, or otherwise enforce the claim by any available judicial procedure; and (2) if collateral is DOCUMENTS, take the documents or the goods they cover. (UNLESS such rights are waived or subject to some other law.)
Two Limitations: 1) If you forget to add something – Courts will only recognize one = Nonpayment 2) Even if you spell out what constitutes default courts will narrow it, by way of some form of ESTOPPEL. |
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Rights Against Debtor W/out Going Through Collection Process - Acceleration
133 |
A party can accelerate “only if he in good faith believes that the prospect of payment or performance is impaired.” Burden of establishing “lack of good faith” is on the party against whom the acceleration has been exercised.
9-623(b)(1) – Provides for automatic redemption after acceleration. (See Comment 2.) |
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Rights Against Debtor W/out Going Through Collection Process - Good Faith
134 |
Secured party terminates without notice, but the secured party had already instituted the habit of providing notice (and per case). Thus, the secured party has a good faith obligation to provide notice to borrower.
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Rights Against Debtor W/out Going Through Collection Process - Any Available Judicial Procedure
135 |
1. Lien of levy after judgment. Lien goes as far back as:
(1) the date of perfection of the security interest or agricultural lien in the collateral; (2) the date of filing a financing statement covering the collateral; or (3) any date specified in a statute under which the agricultural lien was created. 2. Execution Sale. Secured Party can buy the collateral here from of any interests. |
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Debtors Right of Redemption
136 |
Debtor can redeem himself up until the A9 process is up.
This right is terminated by one of the three things: ii. Terminated by one of 3 Events: 1. Signed waiver after default by the debtor, 2. SP disposition of the collateral (SALE) & 3. SP’s retention of the stuff. |
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Accounting
137 |
• Even after foreclosure, if secured party does not obtain enough to cover debts, debtor still owes money. BUT if there is a surplus, you owe that to the debtor. This right to accounting may not be waived (see below).
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