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96 Cards in this Set

  • Front
  • Back
THROUGHOUT THIS CARD SET, 'C' REFERS TO A SECURED CREDITOR.
C = SECURED CREDITOR
What does UCC Art. 9 apply to?
Consensual security interest in personality and fixtures.
When the collateral is real property, what law to apply?
Apply law of mtgs.
What types of liens are not subject to Art. 9?
Statutory and mechanics liens, because these interests are not consensual.
Can collateral be both tangible and intangible?
Yes.
Identify different forms of tangible collateral.
Consumer goods; Equipment; Inventory; Farm products; Fixtures
Identify different forms of intangible collateral.
Patents; TM's; Copyrights; Stocks; Bonds; Mutual Funds; Proceeds from collateral accounts; Promissory notes; Drafts
How is an enforceable security interest created?
Through the process of ATTACHMENT.
How does attachment work?
Attachement requires VCR.

1. Value - Creditor must give debtor something of value;

2. Contract - If the creditor is not in possession of the collateral, there must be a record of the agreement, authenticated (signed) by the debtor, which reasonably id's the collateral;
No contract needed if creditor already has the collateral.

3. Right - Debtor must have a right in the collateral.
After Acquired Collateral Clause:
What is it?
Is it enforceable?
K provision that creditor will have a security interest in collateral whether owned now or later acquired.

C is called the After Acquired Collateral Financier (AACF)

ENFORCEABLE
Once C has an attached security interest, how does C put the world on notice of its interest in the collateral?
Through PERFECTION
How does C perfect its security interest?
3 Ways

1. C takes actual possession of the collateral;

2. Automatic perfection when C is a purchase money security interest holder (PMSI);

3. File notice (may be in the form of UCC-1 Financing Statement) of the security interest in the public records.
If C perfects its interest by filing notice (financing statement) in the public records, what must the notice contain?
ONLY:

1. D's name & address

2. C's name & address

3. Description of the collateral - Generic descrpt. ok ('all D's assets')
Where to file the financing statement?
With the Secretary of State (State Corp. Comm. in VA) where D is located.
Where is D 'located' for purposes of filing the financing statement?
D is Indiv - State of principal residence;

D is Registered Org. - State of organization
One exception to where C files the financing statement.
Where the collateral is timber, minerals or fixtures, file in the county where Blackacre is located.
How do debts get paid with respect to their priority?
Each debt must be fully satisfied before a subordinate debt can get paid.
PRIORITY FIGHT

ATTACHED UNPERFECTED CREDITOR (AUC)
vs.
THE WORLD
1. AUC's interest enforceable against D;

2. Earlier AUC defeats later AUC;

3. AUC defeats any General Unsecured Creditor (GUC);

4. AUC loses to Perfected Attached Creditor (PAC);

5. AUC loses to any buyer (in ordinary course or not).
PRIORITY FIGHT

PAC
vs.
THE WORLD
PAC defeats all, except:

1. Earlier PAC;

2. Certain PMSI's;

3. Buyer in ordinary Course (BIOC)
PRIORITY FIGHT

PAC
vs.
PAC
First PAC to perfect wins!
PRIORITY FIGHT

PMSI
vs.
AACF who has perfected & attached the collateral

(The collateral is equipment)
WHEN THE COLLATERAL IS EQUIPMENT:

For a PMSI to defeat the AACF who has perfected & attached the collateral>>>PMSI must file properly w/in 20 days after D takes possession of the items that were purchased
PRIORITY FIGHT

PMSI
vs.
AAFC who has perfected & attached the collateral

(The collateral is inventory)
WHEN THE COLLATERAL IS INVENTORY:

For a PMSI to defeat the AACF who has perfected & attached the collateral>>>PMSI must notify the AACF and file properly BEFORE D takes possession of the items purchased.
PRIORITY FIGHT

BIOC
vs.
THE WORLD
BIOC defeats EVERYONE!
GENERAL RANKING OF PRIORITY FIGHT WINNERS!!!

THE RESULTS ARE IN!!!
Buyer in the Ordinary Course

BEATS

Perfected Attached Creditor

BEATS

Lien Creditor

BEATS

Non-Ordinary Course Buyer

BEATS

Attached Unperfected Creditor

BEATS

General Unsecured Creditor
What rights does C have when D defaults?
1. Self-Help Reposession

2. Repossession by Judicial Action (Distress Warrant)

3. Strict Foreclosure

4. Sale

5. Deficiency Judgment
Self-Help Repossession
(on D's default)
1. OK so long as c d/n breach the peace (take actions likely to cause violence);

2. Repossession made over any protest by D, however mild, is also a breach of the peace;

3. C cannot impersonate the law - it's constructive force;

4. Civil & criminal penalities for C's misconduct;

5. If collateral in D's home, C c/n go in & take w/o D's voluntary & contemporaneous consent;

6. S can take collateral that it not in D's home, so long as D d/n object.
Repossession by Judicial Action
(on D's default)
1. This is the action for a distress warrant that can be brought to the GDC with no monetary cap;

2. C gets a writ from judge ordering sheriff to seize the collateral & deliver it to C.
Strict Foreclosure
(on D's default)
1. Happens when C retains the collateral in full satisfaction of the debt;

2. S must send written notice proposing strict foreclosure to:
>>>Collateral is consumer goods? Then notice to D & secondary obligors;
>>>Collateral not consumer goods? Then notice to D & other C's who have told the foreclosing C of their interest, perfected creditors & secondary obligors. (They have 20 days to object)

3. Strict foreclosure not available to C if D has already paid 60% of the loan (non-PMSI) or 60% of the cash price (PMSI). C repos the collateral and then has 90 days to sell it. If C d/n sell w/in 90 days of repo, D sues C for conversion.
Sale
(on D's default)
C sells the collateral and applies proceeds to the balance of the debt.

C chooses to have a public or private sale.
Requirements for Both Public & Private Sales
(on D's default)
1. Every aspect of the sale must be commercially reasonable.

2. 10 days advanced notice is reasonable in a non-consumer transaction. Consumer transactions just need a commercially reasonable time frame.

3. Reasonable notice sent prior to sale:

Collateral is Consumer Goods:
*Send notice to D & secondary obligors
*notice must contain how deficiency is calculated & how D can redeem.

Collateral is not Consumer Goods:
*Notice sent to D, perfected creditors, secondary obligors, and all secured parties who have told C of their security interest.
Can C buy at both the private and public sale?
No. C can only buy at the public sale. In the private sale, too much opportunity for self-dealing.
Deficiency Judgment
(on D's default)
If the sale falls short, and C d/n get all its money, C can go after D for the deficiency.

If insider buys at sale at a crazy low price, that crazy low sale price is not used to calculate the deficiency - the price an independent 3rd party would have paid is used.
D's Right to Redemption
(after default)
Agreement With Acceleration Clause:
D redeems by paying off the entire debt + interest + expenses

Agreement With No Acceleration Clause:
D redeems by paying the missed payments + interest + C's reasonable expenses

NO RIGHT TO REDEEM AFTER:
1. C has sold the collateral or
2. C has completed a strict foreclosure
What are the 2 types of negotiable instruments?
Notes and drafts (usually a check)
Who are the players with a note?
Maker -makes the promise - the promisor

Payee - is the promisee
Who are the players with a draft?
Drawer - gives the order to pay (the account holder)
Drawee - the one ordered to do the paying (the bank)
Payee - the beneficiary of the order (the person you make the check payable to)
What do we call the person who signs on the back of the promissory note or the draft?
Indorser
How to tell whether the writing is a negotiable instrument. Elements?
1. Writing
2. Signed by the maker (note) or drawer (draft)
3. For a sum certain
4. Payable in US currency
5. Payable on demand or on a date certain
6. payable to order or bearer
7. contains a promise or an order
Acronym for negotiable instrument requirements:

WOSSUPP
*Writing
*payable to Order or bearer
*Signed by maker (note) or drawer (draft)
*for a Sum certain
*Unconditional promise or order
*Payable on demand or on a date certain
*Payable in us currency
May the note contain a conditional promise, or may the draft contain a conditional order?
No. The promise or the order must be unconditional. If there are words of condition, then it is a contract, not a negotiable instrument.
To be negotiable, can the instrument be governed by or subject to the terms of some other agreement?
No. If it does, then it is non-negotiable.
Is the promise or order non-negotiable simply because it happens to refer to an outside writing?
No. The instrument may refer to an outside agreement with respect to rights to collateral, prepayment or acceleration.
Will the instrument be non-negotiable becuase it limits payment to a particular source of funds?
No. 'I promise to pay from the funds I realize from my next week crops' is negotiable.
What does 'sum certain' mean?
You must be able to calculate how much is to be paid either from what the instrument says or by reference to an outside source.
Sum Certain & Interest Rates
Interest rates are perfectly fine and do not make an instrument non-negotiable b/c you can still calculate the amount payable from the face of the note.

Where no specific interest rate is stated, just the words, 'plus interest,' then simply calculate interest by using the judgment rate.
Payable in currency - Is foreign currency ok?
Yes. Negotiable.
Payable in currency - Is payment in goods or services ok?
No. Non-negotiable.
What if the instrument recites payment in both currency AND goods? (Eg. $5000 + my new Rolex watch)
Currency Only. No Goods at all. This would be non-negotiable.
What words let us know the instrument is payable on demand?
On Demand
At Sight
On Presentation
When is a note payable if it states no date at all? Is the instrument still negotiable?
The instrument is still negotiable and it will be payable on demand.
To be negotiable, the writing must be payable to order or bearer. Which of the following is ok in a note or draft?:
Pay to the order of John Doe.
Pay to the assigns of John Doe.
Pay to John Doe or his order.
Pay to the order of John Doe.
Pay to the assigns of John Doe.

The words 'order' OR 'assigns' must be used.
If the instrument is not payable to order, then who must it payable to in order to be negotiable?
Bearer
What words indicate that the instrument is payable to bearer?
Pay to bearer.
Pay to the order of bearer.
Pay to John Doe or bearer.
Pay to cash.
Pay to the order of cash.
What happens if the instrument simply states: 'Pay to John Doe.' What then?
Non-negotiable unless it's a check.

Otherwise, it's just a contract.
Under what theory is the maker of a note liable?
Signature Liability:

Liability simply because the maker signed his name on the note, thus agreeing to pay the instrument.
Under what theory is the indorser of a note or a draft liable?
Signature Liability:

Indorser signs his name on the back of the instrument, indorsing the instrument to another person.

Indorser, by signing the back, promises to pay if he is notified that the check was not paid or that it bounced.
Under what theory of liability is the drawer (the person who signs the check) liable?
Signature Liability:

By signing the back of the check, drawer promises to pay it if he is notified that it was not paid or that it bounced.
Is the drawee (the bank) liable under signature liability if the check bounces or if it is not paid?
No. Remember signature liability means that you have signed the instruments and liability is attached to you.

The bank does not sign the check.
What is the liability of a maker (note) or drawer (draft) who signs 'without recourse'?
The term is a disclaimer of liability. By signing, the maker or the drawer passes title but assumes no signature liability.
Signature vs Contract Liability
If, for some reason, a party is not liable under signature liability, that party may still be liable under tradition theories of contract liability.
Warranty vs Transfer Liability

The issue is WHO CAN BE SUED for breach of warranty in the context of negotiable instruments?
Any transferor who sells a defective instrument.

Therefore, one who GRATUITOUSLY transfers the defective instrument retains no liability under the instrument. We are looking for one who has SOLD the defective instrument.
WHO CAN SUE for breach of warranty when a defective instrument has been sold?
If the defendant has indorsed the back of the instrument, then any plaintiff in possession of the instrument may sue.
Why is it that when the defendant has indorsed the back of the instrument, any plaintiff in possession may sue?
Because, when the transferror has indorsed the back of the instrument, then warranties run with the instrument.
Explain warranties when the defendant has not indorsed the back of the instrument.
If the defendant has not indorsed the back of the instrument, then only the defendant's immidiate transferee may sue.

The warranties will not run with the instrument.
Example of warranties not running with the instrument because the defendant has not indorsed the back of the instrument.
Will, who never indorses his paycheck from NBC, gives the check to his agent for services rendered. His agent, in turn, gives the check to agent's stylist. The check bounces. can stylist sue Will?

No. Will did not indorse the check.
What are the 'warranties' we keep talking about with respect to negotiable instruments?
5 Warranties - Defendant promises:

1. That all signatures are genuine and authorized;

2. That plaintiff has good title to the instrument. (Forgery will be a breach of warranty.);

3. That the instrument has not been materially altered. (Has it been tampered with?);

4. There there is no good defense or claim against the defendant. (The instrument is enforceable.);

5. That defendant has no knowledge of any bankruptcy or insolvency action against the maker or drawer.
What does it mean - what are the ramifications - that a negotiable instrument has been 'duly negotiated'?
It means that the instrument has been properly transferred.

When the instrument has been properly transferred then the transferee is a holder and may be eligible to be a holder in due course.

If not properly transferred, the transferee is not a holder and c/n qualify to be a holder in due course.
How is a PAYABLE TO ORDER OF instrument properly transferred?
Simply deliver it to the specific person it is made payable to.
How is a PAYABLE TO THE ORDER OF instrument further negotiated beyond the person it is specifically made payable to?
Simply indorse the instrument and deliver it to the transferee.
When it is a PAYABLE TO THE ODER OF instrument, is it ok that the check was lost, someone else found it and transferred it?
No. Never.

The indorsement must be authorized and valid.

Paula loses her payckeck, made payable to her. Simon finds it, indorses it, and cashes it at Randy's music shop. Randy IS NOT a holder and CANNOT be a holder in due course.
How is a PAYABLE TO BEARER instrument properly transferred?
Indorsement is not necessary.

Doesn't matter that the check was lost, and then found and transferred by one who the instrument was not intended for.

Paula loses her payckeck, made payable to bearer. Simon finds it and cashes it at Randy's music shop. Randy IS a holder and CAN qualify to be a holder in due course.
Identify the different types of indorsements?
1. Special indorsement

2. Blank indorsement

3. Restrictive indorsement
Special Indorsement
Special indorsement names a specific person as an indorsee. That specific indorsee MUST SIGN in order for the instrument to be further negotiated.

Bobby indorses his paycheck, 'Pay to Elinor, /s/ Bobby.' Elinor is the indorsee. Elinor loses the check. John finds it, signs Elinor's name on the back of the check, and cashes it at Grocery. Grocery is NOT a holder and CANNOT qualify as a holder in due course.
Blank Indorsement
The blank indorsement does not name a specific indorsee. It can be negotiated by delivery alone.

Bobby indorses his paycheck by signing his name on the back and delivers it to Elinor, who loses it. John finds it and cashes it at Grocery. Grocery IS a holder and CAN qualify as a holder in due course.
Restrictive Indorsement
The restrictive indorsement contains a restriction.

Bobby indorses his check 'For deposit only.' Elinor steals the check from Bobby and cashes it at Grocery. Grocery IS NOT a holder, and CANNOT qualify as a holder in due course. Bobby can recover from Grocery in conversion.
Identify the elements necessary for a transferee to be a HOLDER IN DUE COURSE
HOLDER IN DUE COURSE ELEMENTS:

A holder in due course takes the instrument:

1. For value; and

2. In good faith; and

3. Without notice that it is overdue or has been dishonored or is subject to any defense or claim.
To be holder in due course, the holder must have given VALUE for the instrument.
NOT CONSIDERATION (consideration is a contracts principal)

Mere promises are not enough to be VALUE

Past or old VALUE is GOOD VALUE. (Not like in contracts where past consideration is no consideration.)
To be a holder in due course, the holder must have taken the instrument in GOOD FAITH.
This is an OBJECTIVE STANDARD, sometimes referred to as the 'pure heart and empty head' rule.
To be holder in due course, the holder must have taken the insturment WITHOUT NOTICE.
This element asks whether the holder knew or should have known that the instrument was overdue or dishonored or subject to a claim or defense.
Examples of the instrument being overdue:
1. Instrument was payable on a certain date, and that date passed by the time the holder bought it.

2. Principal payment (not interest payments) are in arrears.
Examples of notice of any defense or claim against the instrument:
1. Instrument is already stamped PAID or VOID.

2. The instrument was lost or stolen and the transferee did not know or have reason to know of the loss or theft.

3. A fiduciary of the instrument (eg. holding it for someone else and responsible for its safekeeping) transfers it, and transferee does not have ACTUAL KNOWLEDGE of the fiduciary breach.
Holder in Due Course and The Shelter Rule
A transferee will take shelter in the status of her transferee.

If the transferee is not a wrongdoer, then transferee, even though she otherwise fails to be a holder in due course, will be protected by her transferors status.
Why is it so important to not just be a holder, but to be a holder in due course?

What are the beenfits of holder in due course status?
Holder in due course takes free of any claims or personal defenses, and takes subject only to real defenses.
What does it mean to say that a holder in due course takes free from any claims?
The holder in due course will DEFEAT someone with SUPERIOR OWNERSHIP of the instrument!!!
What does it mean that a holder in due course takes free from PERSONAL DEFENSES?
The holder in due course will not be subject to the following defenses:

1. Lack of consideration;

2. Unconscionability;

3. Waiver;

4. Estoppel;

5. Fraud in the inducement; and

6. Other ordinary contract defenses.
What does it mean to say that a holder in dues course takes subject only to REAL DEFENSES?
The real defenses are:

1. Material Alteration;

2. Duress;

3. Fraud in the Factum;

4. Insolvency;

5. Infancy;

6. Illegality; and

7. Incapacity.
Real Defenses Acronym
MAD FIFIIII
What is a MATERIAL ALTERATION?
The terms of the instrument are fruadulently altered. Eg. the amount of the check is changed from $20 to $200.
What is FRAUD IN THE FACTUM?
It is when there has been a lie about the instrument.

Eg. Attny tells a non-English speaking client that the document he is signing is a credit application when it is actually a promissory note.
LIKELY TO BE TESTED:

CHECKS WRITTEN W/O AUTH.
STUDY IT!!!!!
CHECKS WRITTEN W/O AUTH.

Properly Payable Rule
The bank that honors a forged check must recredit that customer's account, so long as the customer was not negligent.
CHECKS WRITTEN W/O AUTH.

The Bank's Remedies
1. The thief is ALWAYS liable to the bank;

2. The bank's customer is liable if she was negligent; and

3. Other negligent acts and actors.
CHECKS WRITTEN W/O AUTHORIZATION

The Bank's Remedies - We Know
1. The thief is ALWAYS liable to the bank; and that
2. The bank's customer is liable if she was negligent.

What about;
3. Other negligent acts and actors?
EMPLOYEE ENDORSEMENT RULE - Employer is liable for forgeries by an employees entrusted with handling checks.

BANK STATEMENT RULE:
A customer must check his bank statement and must report wrongdoing within 30 days of receiving a statment showing the problem.

IMPOSTER RULE:
If an imposter induces the bank customer to write a check, the bank customer is negligent.

LEAVING BLANKS OR SPACES:
...on the instrument & failing to follow internal procedures designed to avoid forgeries is negligence.
LIKELY TO BE TESTED:

PRIORITY AND EARLY FILING
For purposes of determining priority, UCC Art. 9 allows for filing early, even at the start of negotiations. If C later attaches, the early filing IS GOOD, and PRIORITY WILL RELATE BACK TO THE EARLY FILING DATE!!!
LIKELY TO BE TESTED:

CONSUMER GOODS & THE 60% RULE
Where the collateral is CONSUMER GOODS, and the debtor has already paid back 60% of the loan (non-PMSI situation) or 60% of the cash price of the goods (PMSI situation), C CANNOT resort to a STRICT FORECLOSURE in the event of D's default.

C must repo the collateral, and sell it w/in 90 days of the repo. If C fails to sell the collateral w/in 90 days of repo, C will be liable to D for conversion.
LIKELY TO BE TESTED:

C's SALE OF COLLATERAL UPON D's DEFAULT - C BUYER AT SALE?
C CANNOT be the buyer at its own PRIVATE SALE. (Too much chance for self-dealing!)

C CAN be the buyer at a PUBLIC SALE.