Secured Transactions

Front 1

Definition of a Secured Transaction

Back 1

Transaction intended to create a security interest in personal property or fixtures.

Elements to look for:
1) Credit transaction -- sale on credit or a loan
2) Agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt

Front 2

Definition of Security Interest

Back 2

Dormant or contingent Interest in debtor’s personal property or fixtures that secures payment or performance

When DEFAULT occurs, the interest springs to life and creditor has rights to collateral

Front 3

Two kinds of Purchase Money Security Interest

Back 3

1) Seller-Financed -- Secured party sells debtor collateral on credit and retains security interest in sold items

2) Financer Financed -- enabling loan allows debtor to buy specific collateral – Creditor takes security interest in the collateral

Front 4

After-acquired property clause

Back 4

Creditor takes interest in property debtor has now AND property debtor has in the future

Front 5

Future Advance Clause

Back 5

Agreement to make future loans to debtor securing them in the present security agreement

Front 6

Definition of Attachment

Back 6

Step at which creditor becomes secured – provision in the contract giving dormant interest

Effective as against the debtor

Front 7

Definition of Perfection

Back 7

Steps required to give the secured party an interest in the collateral that is effective as against the world

Process of giving public notice of the lien

Front 8

Financing Statement

Back 8

Document giving public notice of security interest

Used to perfect an interest

Front 9

Two major types of Collateral

Back 9

1) Goods

2) Semi-tangible and Tangible property

Front 10

Collateral -- 4 categories of goods

Back 10

1) Consumer Goods -- used or bought for personal, family or household use

2) Equipment -- used in business

3) Farm Products -- Crops, livestock, supplies

4) Inventory -- held by owner for sale or lease

Front 11

Collateral -- Categories of Intangible and semi-intangible property

Back 11

Learn these, dammit! There's 8 of them

Front 12

Tips for classifying goods as collateral

Back 12

Look at how the item is being used by the debtor

Creditor’s actions are irrelevant

Front 13

Scope of Article 9

Back 13

Applies to:
Any transaction creating a security interest in fixtures or personal property by contract
Applies regardless of the wording of the parties as long as it creates a contingent interest in the property of another – Art. 9 applies

Front 14

Leases under Article 9

Back 14

Leases are NOT covered by Art. 9
“Leases” that are actually sales w/ security interests ARE covered by Art. 9

Relevant question:
At the time the parties entered into the transaction, was it reasonably likely that the “lessor” would get the item back when it still had meaningful economic value?

Front 15

Three Elements required for attachment

Back 15

1)Security Agreement
2) Value given by Secured Party
3) Debtor has rights in the collateral

Front 16

Possession of collateral under a security agreement

Back 16

1) If secured party in possession of collateral: no need for a writing.

2) If debtor in possession of collateral: Need written security agreement, contract or record
Written security agreement must: A) Show intent to create a security interest; B) Be authenticated by the debtor; C) Description of the collateral

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Three factors defining the scope of security interests

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1) Debt Secured May include future advances (agreement that collateral covers present and/or future loans)

2) Property may include property acquired by debtor in the future (eg. inventory)

3) Property Secured generally includes proceeds (whatever is received from sale, exchange or other disposition of collateral) Must be identifiable

Front 18

Identifying cash proceeds from specific collateral (security of proceeds)

Back 18

Lowest intermediate balance test:
1) Look to the bank account starting at the time the proceeds are deposited and ending at the time the test is applied
2) The lowest balance during that time is the secured party’s identifiable proceeds

Front 19

Methods of Perfection

Back 19

1) Automatic Perfection
2) Possession
3) Control
4) Notation of lien on certificate of title
5) Filing of notice (most common)

Front 20

Automatic Possession

Back 20

PMSI in CONSUMER GOODS -- Perfection is instantaneous with attachment

Front 21

Perfection by POSSESSION

Back 21

Secured party’s taking possession of collateral puts world on notice

Generally only applies to tangible goods

Front 22

Perfection by CONTROL

Back 22

Security interest in investment property and electronic chattel paper may be perfected by control

Front 23

Perfection by Notation of Lien on certificate of title

Back 23

The ONLY way to perfect a SI in automobile if for lien to be noted on the certificate of title

Front 24

Perfection by FILING NOTICE

Back 24

Secured party files notice of security interest in public records.
Proper filing puts potential competing creditors on record notice of interest.

What is filed:
1) Security Agreement
2) Financing Statement

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Required contents of a Financing Statement

Back 25

1) Debtors Name and Address
2) Creditor's name and address
3) Description of Collateral

Front 26

Consequences of errors in financing statement

Back 26

Errors that are seriously misleading make filing ineffective

Secured creditors not responsible for errors made by filing office

Front 27

Perfected interest in proceeds

Back 27

If perfected interest in collateral – you have a perfected interest in proceeds for 20 days after the exchange.

To remain perfected beyond those 20 days, secured party must take new action UNLESS:
1) Proceeds are identifiable cash
2) Security in original collateral perfected by financing statement and financing statement for proceeds would be filed in the same place

Front 28

Perfection -- Debtor's change in the use of collateral

Back 28

If debtor changes use of collateral (eg. from equipment to inventory) the filed financing statement remains effective to perfect

Front 29

Definition of Priority

Back 29

Priority determines who gets paid first out of proceeds of Collateral sale if and when debtor defaults.

Front 30

Rules of Priority -- Perfected Secured Party vs. Perfected secured party

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First to file OR perfect has priority, which ever of those is first

Knowledge of other interests is irrelevant

Only applies when both are perfected

Front 31

Rules of Priority -- Unperfected Creditor v. Unperfected Creditor

Back 31

First to attach wins

Front 32

Rules of Priority -- Perfected Creditor vs. Unperfected Creditor

Back 32

Perfected creditor always wins

Front 33

Special Rules of Priority -- PMSI in goods other than inventory or livestock

Back 33

Has priority over conflicting interest in same goods if interest is perfected at the time debtor received possession of collateral or within 20 days

If requirements are not met – back to general rule

Front 34

Special Rules of Priority -- PMSI Seller Financed vs. PMSI Financer Financed

Back 34

Seller PMSI wins.

Front 35

Special Rules of Priority -- Investment Property

Back 35

Interest perfected by control has priority over interest perfected by any other method

Front 36

Special Rules of Priority -- Deposit Accounts

Back 36

Control is the only method of perfection

Security interest over bank account has priority over interest in proceeds deposited into the account

Front 37

Priority -- Secured Creditor v. Buyer of Collateral

Back 37

• If sale is authorized (express or implied) by secured party (free of the SI) -- Buyer takes with no SI attached

Unauthorized Sale -- Good Faith Buyer in the ordinary course of business takes free of SI created by its seller

Front 38

Consumer to Consumer sales

Back 38

Buyer takes free of SI if:
1) Buys without knowledge of SI
2) Pays value
3) And if purchased for personal, family or household purposes

UNLESS:
Secured party files financing statement covering the goods PRIOR to the purchase

Front 39

Priority -- Secured Party v. judgment lien holder

Back 39

If SP perfects before the lien took effect, SP wins

Front 40

Priority -- Ultimate Rankings

Back 40

Higher ranking = Higher priority
Same Ranking = First in time has priority

1) Buyer in ordinary course of business
2) Perfected Secured Creditor
3) Lien creditor
4) Non-ordinary course buyer
5) Unperfected secured party
6) General Unsecured Creditor

Front 41

Definition of Default

Back 41

Breach by debtor. Defined by Security Agreement

Triggers rights of Secured Party to proceed against collateral

Front 42

Default -- Creditor's Options

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1) Self Help Repossession (can't be made over debtor's protest)
2) Possession by Judicial Action
3) Strict Forclosure
4) Sale
5) Action For Deficiency Judgment

Front 43

Default -- Possession by Judicial Action

Back 43

Secured party may also go to court for judicial writ ordering sheriff to obtain possession of collateral and deliver it to secured party.

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Default -- Strict Foreclosure

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Occurs when secured party lawfully retains collateral in full satisfaction of debt (and debt, in turn, is canceled).

Process:
1) Written notice to debtor
2) Consumer Goods -- notice to 2nd obligors
3) Non-Consumer goods -- Notice to other secured parties

Any objection prevents foreclosure

Front 45

Default -- Sale

Back 45

Secured party may sell collateral and apply sale proceeds to debt.

Can choose whether sale will be public (i.e., public auction) or private.

Requirements:
1) Must be commericially reasonable
2) Notice must be sent

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Default -- Action for Delinquency Judgment

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If sale of collateral not enough to satisfy outstanding collateral secured party can proceed against debtor for deficiency judgment.

Front 47

Default -- Debtor's limited right of redemtpion

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To redeem, debtor must pay amount owed on missed payments PLUS interest and reasonable expenses (attorney’s fees).

Front 48

Definition of Fixtures

Back 48

Goods so related to particular real property than interest in them arises under real property law

Front 49

Perfection of Fixtures

Back 49

Must make a “fixture filing” -- Identifies real estate -- Name of the owner

Front 50

Fixtures -- Creditor's rights on default

Back 50

Right to take collateral, regardless of impact on property

Front 51

Fixtures -- Priority

Back 51

Perfected Secured Parties prevail over subsequent purchasers of real estate.

Prior real estate interests prevail over Perfected secured interests IF they are properly recorded.

Exception:
PMSI prevails if perfected by fixture filing before goods become fixtures or within 20 days thereafter