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SECURED TRANSACTIONS

(Generally)

What is a secured transaction?
A secured transaction under UCC Article 9 involves a debor-creditor relationship between the debtor and the secured party (creditor) where the debtor has given to the secured party a security interest in certain personal property (collateral) for the purpose of securing the debt.
What is the purpose of a security interest?
The purpose of a security interest is to make the debt more easily collectible if the debtor does not pay when it is due, and to give the secured party (creditor) a position superior to other creditors of the debtor who might attempt to reach the collateral to satisfy their debts, and to retain the secured party's rights to reach the collateral if it is sold to a third party by the debtor.
What types of security interests are governed under Article 9
Personal property, fixtures, accounts and chattel paper.
What types of transactions are excluded from Article 9?
-Transfers of claims of an employee for wages or salary;
-Transfers of claims arising out of tort;
-Interests in or claims in or under insurance policies;
-deposit or savings accounts in a banking institution;
-creations or transfers of liens on or interests in real estate;
-landlord's liens;
-statutory or common-law liens for services or materials;
-transfers by a government or governmental subdivision or agency.
(Creating a Security Interest)

How can a security interest be created?
A security interest can be created by:
-a security agreement; or
-by the secured party taking possession of the debtor's property with the intent that the possession is to secure a debt.
What is a security agreement?
A security agreement is an agreement where the debtor gives to the secured party a security interest in certain collateral. It must be in WRITING and:
-contain a "granting" clause, (state that it is creating a security interest);
-contain a description of collateral; and
-be signed by the debtor.
When is a description sufficient?
A description is sufficient if it reasonably identifies what is described.
What is a financing statement?
A financing statement is the document that is filed to give notice of the security interest--to "perfect" the security interest. A financing statement is not sufficient as a security agreement unless the financing statement itself, or some other writing, contains a "granting clause".
What is the exception when a party already has possession of the collateral?
Where the secured party has possession of the collateral, all that is needed is an agreement, which can be oral, that the secured party is to have a security interest. Such security interests are frequently referred to as "pledges".
(Attachment)

What is the key issue regarding attachment?
A secured party has no security interest in any specific property UNTIL it "attaches" to the collateral.
What three events must occur before the security interest to "attach"?
1)A secuirty agreement or possession of the collateral by the secured party;
2)Value must be given by the secured party; and
3)The debtor must have rights in the collateral.
What constitutes value?
An executory or conditional promise constitutes "value" under Article 9.
(Types of Collateral)

What three broad types of collateral with subcategories exist under Article 9?
1) Goods
-Consumer goods
-Inventory
-Farm Products
-Equipment
2)Tangible Intangibles
-Instruments
-Documents
-Chattel paper
3)Intangible Intangibles
-Accounts
-General Intangibles
What is the MAJOR rule regarding the types of collateral under UCC Artcle 9?
The collateral of any given secured transaction must fit into one and only of these categories at any one given time.
What are goods?
"Goods" includes all things which are movable at the time the security interest attaches or which are fixtures and standing timber which is to be cut and removed under a conveyance or contract for sale, the unborn young of animals and growing crops.
What is excluded under "Goods"?
Excluded are money and other categories of collateral.
What is the test for determining the characterization of a good?
The test is the owners actual use of the goods.

-A debtor may usethe same goods in more than one category, but it is the primary use which determines the characterization.
What are "consumer goods"?
"Consumer Goods" are those used or bought for use primarily for personal, family or household purposes.
What is "inventory"?
"Inventory" is:
-Goods sold, leased, or furnished with services, which include merchandise held by a merchant or wholesaler for resale.
-Raw materials to be processed or those being processed;
-Materials used or consumed in a business, including timber to be cut.
What are "farm products"?
"Farm Products" are crops, livestock, or SUPPLIES USED AND PRODUCED IN FARMING OPERATIONS, and products of crops or livestock in their unmanufactured states if in possession of a debtor engaged in raising, fattening, grazing or other farming operations.
What is "equipment"?
"Equipment" is goods that are used or bought for use primarily in a business (including farming or a profession) or by a debtor which is a non-profit organization or a governmental subdivision or agency, or goods that are not inventory, farm products, or consumer goods.
(Fixtures vs Goods)

What are "fixtures"?
"Fixtures" includes goods which become so related to particular real estate that an interst in those goods arises under real estate law.
How does one assert priority over one claiming rights in real estate?
A secured party must effect a "fixture filing" (in addition to any required filing for perfection) to give notice to persons having an encumberance or interest in real estate.
What does a fixture filing require?
A fixture filing requires that a financing statement covering goods that are )or are to become) fixtures be filed in the office where a mortgage would be recorded.
Is a recorded mortgage effective as a fixture filing for goods?
A recorded mortgage is effective as a fixture filing for goods described that are to become fixtures if the mortgage fulfills the financing statement required.
Does a perfected interest in fixtures have priority over conflicting real estate intersts that arose before the goods became fixtures?
Yes, provided that:
-the security interest is a purchase money security interest;
-the security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter; and
-the debtor has either an interest of record in the real estate or is in possession.
3 PART RULE
Does a perfected interest in fixtures have priority over subsequent real estate interests (including liens)?
Yes, if there has been a fixture filing before the real estate interest is recorded.
What is the MAJOR EXCEPTION to the priority rules mentioned above?
These priority rules do not apply when a CONSTRUCTION MORTGAGE has been filed before the goods actually become fixtures so long as the goods become fixtures before the completion of construction. In such cases, the construction mortgage interest prevails.
Can a secured party who has established his priority sever and remove his collateral?
Yes, subject to a duty to reimburse any real estate claimant (other than the detor himself)for physical injury by removal.
(Tangible Intangibles)

What are tangible intangibles?
Tangible Intangibles include contractual obligations commonly reduced to tangible or written form. By transferring the writing, the intangibles are transferred.
What are "instruments"?
Instruments, as used in Art 9, includes negotiable instruments, i.e., drafts and notes as defined in Art 3; investment securities, such as stocks and bonds, as defined in Art 8, and "any other writing which evidences a right to the payment of money.
What are "Documents of Title"?
"Documents of Title" are negotiable or nonnegotiable bills of lading, warehouse receipts, delivery orders, and documents, etc. which purport to be issued by or addressed to a bailee and purport to cover identified or fungible goods. The person in possession of the documents is entitled to receive, hold, dispose of the document and the goods it covers. Interests may be created and protected with reference to the documents, the goods or both.
What is "chattel paper"?
"Chattel Paper" means a writing or writings evidencing both a monetary obligation and a security interest in or a lease of specific goods, including any instruments which also evidence the transaction.
What types of agreements fall under chattel paper?
Security agreements, such as conditional sales of contract or chattel mortgages, are chattel paper.
(Intangible Intangibles)

What falls under the category?
Intangible Intangibles include:
-Accounts, which are rights to payment for goods sold or leased or for services rendered not evidenced by an instrument or chattel paper. This definition includes what are commonly understood to be receivables from open accounts; and
-general intangibles, the name given to intangible collateral which fails to fit into any other category, such as goodwill, literary rights, copyrights, trademarks and patents to the extent that federal statutes do not govern.
(Proceeds)

What falls under the category?
Proceeds include whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.
How many types of proceeds are there?
There are two types of proceeds:
-cash, such as money and checks. Money collected from the account debtor would be cash proceeds.
-noncash, which includes other proceeds. An account which results when payment is earned under a contract is noncash proceeds.
What does the UCC provide with respect to proceeds?
A security interest in proceeds is automatically provided by the UCC automatically, unless the security agreement specifically provides otherwise.
How long does automatic perfection last?
This automatic perfection for proceeds continues for only 20 days after receipt of the proceeds by the debtor unless:
-the originally filed financing statement indicates that proceeds are covered; or
-a separate security interest in the proceeds is perfected before the expiration of the 20-day period; or
-the proceeds are cash.
REMEDIES OF THE SECURED PARTY UPON DEBTOR'S DEFAULT

(Generally)
Generally, upon the debtor's defaults the secured party may obtain possession of the collateral, sell it, and use the proceeds of the sale to satisfy the obligation.
When does a default occur?
Generally, a default occurs whenever the debtor fails to tender an obligation due.
How are rights and remedies decided upon when a secured party has defaulted?
Generally, the parties are free to specify in the security agreement the rights and remedies of the secured party upon default, except the parties cannot alter the following obligations:
-The secured party MUST ACCOUNT FOR ANY SURPLUS OBTAINED FROM A SALE of the collateral over and above the amount necessary to pay off the obligation, interest and allowable expenses such as the cost of the sale;
-Where the collateral is sold, the SALE MUST BE IN A COMMERICIALLY REASONABLE MANNER; with NOTICE where possible;
-Where the collateral is CONSUMER GOODS, the collateral MUST BE SOLD UNLESS THE DEBTOR AGREES, after default, that the secured party may keep it in satisfaction;
-Where the secured party ELECTS TO KEEP THE COLLATERAL to satisfy the obligation, the debtor is entitled to NOTICE and may require a sale. This right to force a sale cannot be waived;
-The debtor's right to redeem the collateral may not be contracted away;
-A seller cannot disclaim warranties in a security ageement.
(Means of Obtaining Possession)

How does the secured party obtain possession?
Upon default, the secured party has an immediate right to possession of the collateral, and he may obtain possession by self-help if this can be done without a breach of the peace

-If he cannot obtain the collateral himself, he has a right to bring an action to obtain possession.
(Debtor's Right to Redeem)

When does a debtor have a right to redeem?
A debtor always has a right to redeem the collateral by tendering to the secured party the amount of the obligation, including interest, together with any costs caused by the default.
When must redemption be effected?
Redemption must be effected before:
1)The collateral has been sold;
2)a contract for its sale has been made;
3)the secured party has accepted the collateral in satisfaction of the obligation.
(Secured Party's Right to Keep Collateral In Satisfaction Of Obligation)

What can the secured party do after obtaining possession of the collateral?
After the secured party obtains possession of the collateral, he may sell the collateral and use the proceeds to satisfy the obligation, or he may keep the collateral in satisfaction of the obligation.
What must the secured party do if he elects to keep the collateral?
If he elects to keep the collateral, then he must give NOTICE of his intention to the debtor, unless the debtor has after default waived notice.
What must the secured party do if the collateral is non-consumer goods and he wants to maintain possession?
If the collateral is non-consumer goods, the creditor must also send notice to other secured parties who have notified the secured party of their interest in the collateral. If any of the parties entitled to notice objects to the secured party's retention in satisfaction, then the secured party must sell the collateral.
What must the secured party do if the goods are consumer goods and the security interest is a purchase money security interest and the debtor has paid 60 percent of the cash price?
The secured party has no right to keep the goods to satisfy the obligation of the debtor: they must be sold
(Sale of The Collateral By The Secured Party)

What can the secured party do after default and repossession?
The secured party has the right to sell the property and to use so much of the proceeds as are necessary to satisfy the obligation of the debtor.
What is the key rule regarding the sale?
The sale must be commercially reasonable.
What types of sales under commerically reasonable are allowed?
The sale may be public sale (auction) or private sale; sale in one unit or in parcels; for cash or credit; at any time and place
Does the fact that a better price could have been obtained in itself mean that the sale is not commercially reasonable?
No
Does notice have to given when the sale is established?
Yes, unless the collateral is perishable, if the sale is:
1) Public, notice of the time and place of the sale must be given a reasonable time before the sale is to be made.

2) Private, notice must be given within a reasonable time of the time after which teh secured party will make the sale or contract to sell.

*Notice must be given to the debtor
May the secured party purchase the collateral at any public sale?
Yes
May the secured party purchase the collateral at a private sale?
Yes, if the collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed price quotations."
How must the proceeds be distributed?
The proceeds of the sale are to be distributed as follows:
-Expenses of the retaking, sale, etc.
-Satisfaction of the indebtedness
-Satisfaction of subordinate security interests if demanded in writing by the junior secured party
-The remainder to the debtor.
What happens to the secured party if a proper sale is not made?
Failure to hold a proper sale makes the secured party liable for any damages resulting to the debtor.
What rights does the purchaser gain at the sale?
A sale of the collateral gives the purchaser at the sale all of the debtor's rights in the collateral, discharges the security interest of the party selling and all subordinate security interests. If there are superior security interests, the property is sold subject to them.
What happens if the sale does not produce sufficient revenue?
If the sale does not produce sufficient revenue to satisfy the obligation, the creditor may bring an action on the debt against the debtor or sureties for a deficiency judgment.
PURCHASE MONEY SECURITY INTERESTS

(Generally)

What is a PMSI?
A security interest is a PMSI to the extent it is:
-taken or retained by the seller of the collateral to secure all or part of its price; or
-taken by a person, who, by making advances or incurring an obligation, gives value to enable the debtor to acquire rights in the use of collateral if such value is in fact so used.
What does the UCC give with respec to PMSI?
The UCC gives special priority to PMSI and provides automatic perfection in some instances.
What if the advance is made or obligation incurred to allow the debtor to buy the collateral, but he does not so use it (acquring the collateral in a different manner)?
The security interest is not a purhase money security interest.
PERFECTION

(Generally and Methods of Perfection)

What is perfection?
Perfection is the primary method by which the secured party protects his interest against third parties. It has the general purpose of giving notice to the world of the secured party's interest.
What are the two basic methods by which the secured party may perfect?
1)By taking possession of the collateral
2)By filing
What must happen before perfection can occur?
Perfection cannot occur unless and until the security interest has attached.
If the security party is in possession, is there still a need for filing?
No. perfection exists from the time that possession is taken and lasting as long as possession is retained by the secured party.
Can there be perfection by possession where the collateral is accounts, general intangibles, or nonnegotiable documents of title?
No. To perfect a security interest in accounts or general intangibles, the secured party must file.
What is the seond method of perfecting?
The second method of perfection is by filing in the proper way and in the proper place. This constitutes perfection as of the time of filing.
What is the MAJOR EXCEPTION with respect to perfection by filing?
There can be no perfection by filing where the collateral is instruments of money.
(Automatic Permanent Perfection for Consumer Goods PMSI's)

When is permanent perfection automatic?
Permanent perfection is automatic as soon as the security interest attaches if the security interest is a PMSI in consumer goods (excluding motor vehicles and fixtures). In this case, the secured party need neither file nor have possession to have perfected security interest.
(Automatic Temporary Perfection)

When does Art 9 provide for temporary automatic perfection?
-in negotiable documents of title and in instruments for 21 days after attachment of the security interest when new value is given under a written security agreement.
-In any instruments or documents for 21 days after the secured party delivers them to the debtor
-In proceeds of collateral for 20 days after debtor receives the proceeds.
(Grace Period for PMSIs)
The Code provides for a limited 20 day grace period where the security interest is a PMSI. HOWEVER, this reversion is only good against bulk transferees and lien creditors.
FILING

(What to File)
UCC 9 uses the concept of "notice filing", which means that the primary object of the filing is to give those interested notice that the security interest exists, but not notice of its terms.
What must the scured party file?
The secured party may file either the security agreement itself or a financing statement. To be valid, the document must contain:
-names and addresses of both debtor and secured party
-description of the collateral by items or types
-signature of the debtor
Will minor errors effect the validity of the filing and amendments?
No, minor errors will not effect the validity of the filing and amendments are permitted.
What must the financing statement show if the collateral is fixtures, timber to cut, crops, minerals or like?
The financing statement must show that it covers collateral of this type and must contain a description of the real estate.
(Where to File)

Where to file if the collateral is consumer goods, farm equipment, or farm products?
Filing is in the office of the clerk of the primary court in the county of the debtor's residence if the debtor is a resident of this state, but in the court of the county where the goods are kept if the debtor is not a resident.
Where to file if the collateral is timber to be cut, minerals or goods which are to become fixtures?
Filing is in the office of the Land Records in the county where the land is located.
Where to file in all other instances?
Filing is usually with a statewide repository for filing Article 9 statements.
What is the result if a financing statement if filed in the wrong place?
It is nevertheless good as to those who have knowledge of the contents of the statement.
STATUS OF CONTESTING THIRD PARTIES

(General and Lien Creditors)

What is a general creditor?
A general creditor is one who has a claim (including a judgment) but who has no lien on the property in question.
Secured Party vs. General Creditor?
Secured party ALWAYS prevails over a general creditor.
What is a judicial lien creditor?
A judicial lien creditor is one who acquires a lien on the collateral by attachment, levy, or the like, either before or after the security interest attaches. If it is acquired AFTER attachment, the creditor must be without knowledge of the security interest at the time his lien attaches (i.e., when there has been a levy on the property).
What happens if a person becomes a lien creditor after a seurity interest is perfected?
The lien creditor takes subject to the security interest as to advances made either:
-before he became a lien creditor, or
-within 45 days of acquiring the lien; or
-without knowledge of the lien
(Transferees)

What are transferees?
Transferees of the collateral are those who ostensibly acquire full title to the goods as a result of purchasing the collateral from the debtor.
What rights does a person have who in good faith and without knowledge that the sale to him violates the ownership rights of a security interest?
A person who in good faith and wihtout knowledge that the sale to him is in violation of the ownership rights of a security interest of a third party in the goods buys in the ordinary course from a person in the business of selling goods of that kind will take free and clear of the security interest.
Does a buyer of consumer goods take free of a security interest even though perfected?
Yes, provided he buys without knowledge of the security interest, for value, and for his own personal, family or household purposes, unless prior to the purchase, the secured party has filed a financing statement covering such goods.
A buyer other than a buyer in the ordinary course takes free of a security interest (whether perfected or not) to the extent that it secures future advancements made either:
-after the secured party acqires knowledge of the purchase, or
-more than 45 days after purchase (whichever occurs first), unless the advance was made pursuant to a committment entered into without knowledge of the purchase and before expiration of the 45 days period.
What is a "holder in due course"?
A holder in due course of a negotiable instrument is one who takes the instrument for value, in good faith and without notice that it is overdue or has been dishonored or of any defense against or claims to it on the part of any person.
(Trustee in Bankurptcy)

What is a trustee in bankruptcy?
Under the Bankruptcy Code, the trustee in Bankruptcy takes as if he had no notice or without knowledge of security interests or other dispositions of the property made by the debtor prior to the time the debtor filed a petition of bankruptcy.
PRIORITY RULES

(Generally)

How do you determine priority?
To determine priority, you must
-determine the status of the parties, which includes determining the existence and validity of any security agreement;
-classify the collateral
-determine whether the security interests atached;
-determine whether an dhow the security interest(s) were perfected;
-determine whether the security interest was a purchase money security interest;
-determine the status of the other parties who claim an interest in the property;
-then, apply the priority rules.
What is the basic priority rule?
The basic rule, subjec to many exceptions, is first in time, first in right. The party whose rights were perfected first prevails.
(Secured Parties vs. Other Creditors Without A Security)
The priority rule here is first in time, first in right. The time for the vesting of the rights of the secured party is the time that his security interst is perfected, while the critical time for the creditor is the time that his lien has attached.
What happens if the secured party perfects first?
Then he prevails.
What happens if the lien attached first?
Then the creditor prevails
What is the MAJOR EXCEPTION?
If the security interest is a PMSI, and if the secured party perfects wihthin 20 days after the debtor receives possession of the collateral, the perfetion reverts back to thte date tha the debtor received possession, and the secured party will prevail over creditors who obtained liens during the intervening twenty days.
What happens if the creditor has not obtained a lien and the secured party has not perfected?
The Code provides that the secured party prevails.
(Securd Party vs. Other Secured Parties)
Generally, when there are two or more secured parties contesting rights in the same collateral, the basic rule is again first in time, first in right.
Who prevails when both parties perfected?
Priority dates from the time a filing is first made covering the collateral, or the time the security interest is first perfected, whichever is earlier.
Who prevails when one security interest is perfected, and the other is not?
The perfected takes over unperfected.
Who prevails where neither is perfected?
First in time, first in right, with the critical time being the time of attachment.
Who prevals where the collateral is not inventory?
A PMSI prevails over all ohter security interests in the collateral (even though they are previously perfected) if he perfects within twenty days after the debtor's receiving possession.
Who prevails where the collateral is inventory?
PMSI prevails over all other security interests in the same collateral, even if the others were perfected first, provided that the party claiming under the PMSI perfects before the debtor receives possession, and gives notice in writing to all other secured parties of record and of whom he knows.
(Secured Parties vs. Transferees Of the Collateral)

Generally...
First in time, first in right; if one purchases (gives value and takes deliver) without knowledge of the security interest, he prevails over the secured party if he purchases before the secured party has perfected.
Who prevails if the secured party gives the debtor permission to sell the collateral?
The security interest of the third party is extinguished upon its sale, and the buyer and all subsequent pruchasers take free and clear of it.
Who is a "buyer in the ordinary course of business"?
A buyer in the ordinary course of business is one who buys, in good faith and w/o knowledge that the sale to him is in violation of the interests of others, in the ordinary course of business from a person in the business of selling goods of that kind.
Does a buyer in the ordinary course of business take free of all security interests created by his seller?
Yes, even though the security interests are filed or otherwise perfected, and even though the buyer in ordinary course knew of the security interest.
Do consumer buyers take free and clear of all unfiled security interests?
Yes.
Is a PMSI in consumer goods perfected automatically?
Yes. However, if the debtor sells the goods to another "consumer buyer" who takes without knowledge of the security interest, the security interest is not good against him.