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93 Cards in this Set

  • Front
  • Back
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What are the six steps of analyzing a secured tranaction?
1. Does the transaction fall under UCC Article 9?
2. Is there attachment?
3. Is there perfection?
4. If there is a dispute, who prevails (has superior claim)?
5. What happens in the event of bankruptcy?
6. What rights and duties do the parties have in the event of default?
FAP - DBD
What types of transactions does Article 9 cover?
1. Any transaction intended to create a security interest in personal property or fixtures.
2. Sale of accounts, chattel paper, payment intangibles, promissory notes
3. Consignments
4. Agricultural liens
5. Security Interests created under other articles of the UCC
What types of collateral does Article 9 cover?
Tangible collateral (things that are moveable when the Security Interest attaches. Includes consumer goods, inventory, farm products, and equipment)
Quasi-tangible collateral (legal rights represented by pieces of paper)
Intangible collateral (accounts, letters of credit, deposit accounts, etc.)
When does Article 9 apply?
When
* the parties INTEND to create a security interest,
* the collateral is covered by Article 9, and
* The transaction is a type covered by Article 9.
When is a lease actually a disguised secure transaction?
When:
* the lessee does not have the right to terminate the lease and return the goods at any time

AND

* lessee has an option to purchase for no or nominal consideration, or
* at end of the lease the goods will have economic value
When is a consignment subject to compliance with Article 9?
* Goods are not consumer goods
* Goods have a value in excess of $1000
* Consignee is a merchant not generally known by creditors to be substantially engaged in the sale of goods of others
* Consignee's professional name is different than that of consignor.
NC - 1000 - M - D
What is needed for a security interest to attach?
* Security agreement is complete (accompanied by possession, control, or an authenticated record)
* Secured Party gives value to the debtor (through consideration, preexisting claim, buyer's acceptance of delivery, or creditor commitment to give further value)
* Debtor has existing rights in the collateral (current ownership or collateral identified by the seller as intended for the buyer)
A-V-R
What does attachment establish?
SP's rights in the collateral as against the debtor
What does perfection establish?
SP's rights in the collateral as against third parties.
What is meant by an authenticated record?
A record that is signed intent to IDENTIFY the authenticating party and ADOPT the record.
To what extent must the collateral be identified in the security agreement?
The collateral must be reasonably identified so that the collateral meant to be covered can be determined. Super-generic descriptions are not allowed.
What are the rules regarding after acquired property being covered as collateral under a security agreement?
After-acquired consumer goods are not covered under a security agreement unless the goods are purchased within 10 days of the secured party giving value.
However, if "inventory," "accounts receivable," or "farm equipment" are covered in the security agreement, those may include after-acquired properties of such types b/c each by their nature changes from day to day.
When does a debtor acquire rights in collateral?
When the buyer owns the collateral or as soon as goods are identified as being intended for the buyer.
In what ways may a security interest be perfected?
1. Filing a financing statement
2. Taking possession of collateral
3. Taking control of collateral
4. Automatic perfection
F-CAP
When is perfection automatic upon attachment?
Purchase money security interests, assignment of beneficial interest in decedent's estate, assignment of accounts and payment intangibles, sale of promissory notes.
Also, the code provides for 20 days of temporary perfection when the SP gives new value and the collateral is a negotiable document of some kind.
For what types of collateral may perfection be achieved by filing?
All types except deposit accounts and letter of credit rights
For what types of collateral may perfection be achieved by possession?
Goods, money, documents, certificated securities, instruments, tangible chattel paper
For what types of collateral may perfection be achieved by control?
Investment property, deposit accounts, letter of credit rights, electronic chattel paper
How might a secured party gain possession of a nonnegotiable document of title?
Have the document issued directly to the secured party or send the bailee notice of the secured party's interest in the goods.
How might a secured party gain possession of goods held by a bailee when there is no document of title?
Have the bailee authenticate a record stating that the bailee holds the goods for the benefit of the secured party.
What rights and duties does a secured party in possession of the collateral have?
* Duty to reasonably care for and maintain the collateral & preserve the debtor's rights. This includes notifying the debtor of any actions that must be taken and allow the debtor to perform the act.
* Right to reimbursement of expenses incurred in maintaining the collateral
* Duty to account for rents, issues and profits.
* Right to repledge so long as it doesn't impair the debtor's ability to redeem
* Right to use the collateral to preserve it, pursuant to a court order, or as agreed by the debtor.
What is a purchase money security interest?
A security interest in consumer goods that rises in connection with the purchase of goods. PMSI are automatically perfected.
It arises when the secured party advances money to enable the debtor to purchase the collateral.
What is the test for what constitutes a consumer good?
The primary use test - if the primary use is for personal, family, or household purposes, it is a consumer good.
How might one perfect a security interest in investment property through control?
Delivery of stock certificates in the case of certificated securities.

In the case of uncertificated securities, SP may become the registered owner or by having the issuer agree to comply with the SP's instructions.

In the case of brokered accounts, it is the same as uncertificated accounts, but the SP must change the name on the account with the brokerage firm's or obtain an agreement that the brokerage firm will act in accord with the SP's instructions. If at any point the brokerage firm becomes the creditor, the brokerage firm gets super priority over other secured creditors.
Security interests in what types of collateral may only be perfected by control?
Deposit accounts and letters of credit. In those cases, control occurs by having the name on the account changed to that of the secured party or by having the bank/issuer sign an authenticated record stating they will follow the instructions of the secured party.
Generally, what law governs the perfection of a security interest?
Generally, the law of the jurisdiction in which the debtor is located prevails. Location of the debtor follows the rules of domicile.
When might other laws govern the perfection of a security interest?
When the SP perfects by possession, or if the collateral is a fixture or an agricultural lien, the location of the collateral governs issues relating to perfection.

If the collateral is a certificated security, the location of the certificated security governs.

If the collateral is an uncertificated security or a letter of credit, the jurisdiction of the issuer governs.

If the collateral is a deposit account the jurisdiction of the bank governs.
What law governs the effect of perfection?
The jurisdiction where the collateral is located.
What happens to perfection if it is governed by the law of the debtor's location and the debtor moves?
The security interest must be reperfected in the new jurisidiction within four months to continue the perfection. If such reperfection is accomplished, the perfection relates back to the original date of perfection. Otherwise, the security interest becomes unperfected.
What if a judicial lien arises during the grace period that is afforded when a debtor moves?
If the lien arises in the four month grace period, the lien is junior to the Security Interest even if the interest is not reperfected. If the lien arises after the four month grace period has expired, the judicial lien will have priority.
What must be included in a filing statement?
Name and address of the debtor, name and address of the secured party, description of the collateral.
Who may file a financing statement?
The secured party may file a financing statement once authorized to do so by the debtor through an authenticated record. The debtor's authentication of the original security agreement is automatically authorization for the SP to file a financing statement.
What errors may exist in a financing statement without rendering it ineffective?
A financing statement that is substantially compliant but containing minor errors that do not seriously mislead may be deemed sufficient and effective.
What is the test for determining whether errors in a filing statement are seriously misleading?
With regard to errors in the debtor's name, if the filing office's standard search logic would still be able to locate the document based on the debtor's name then there is no seriously misleading error. Also, debtor's name must be the debtor's actual name - not a trade name or a dba. If, after a filing statement is properly filed, a debtor changes his/her name so as to make hte filing statement seriously misleading, the filing ceases to be effective as to new collateral after four months unless a new FS or an amendment is filed.

With regard to errors in the name and address of the SP, the code merely requires that they be "reasonable under the circumstances" - a case-by-case determination, really.
How specific must a description of collateral in a filing statement be?
Must be sufficient to allow a party to identify it by reasonable further inquiry - the description of the collateral serves merely as notice to others to check further. The FS doesn't need the specificity that the SA needs.
How long is a filing statement effective?
Five years
How long is a continuation statement effective and when must it be filed?
An additional five years. It may be filed within six months of the expiration of the filing statement.
When MUST a SP issue a termination statement?
2 circumstances:
* When there is no longer any outstanding secured obligation and no commitment to make future advances or otherwise give value, the SP must, on authenticated demand from the debtor send the debtor a termination statement within 20 days, which the debtor can then file.
* when the collateral is consumer goods, the SP is under a duty to file a termination statement within one month following full payment regardless of whether the debtor sends an authenticated demand.
Who has priority in a dispute between conflicting attached (but neither perfected) security interests?
Order of attachment determines order of superior claim
Who has priority in a dispute between an unperfected creditor and perfected creditor?
The perfected creditor wins regardless of the order of attachment or whether the perfected creditor had knowledge of the unperfected creditor's interest.
Who wins in a dispute between an unperfected creditor and a judicial lien creditor?
The judicial lien creditor wins
Who wins in a dispute between a statutory lien holder and an unperfected creditor?
The statutory lien holder wins
Who wins in a dispute between an unperfected creditor and a buyer?
The buyer takes free of the unperfected creditor's interest so long as the buyer gives value for the collateral and takes delivery and the buyer has no knowledge of the unperfected creditor's interest.
Who wins in a dispute involving a buyer of inventory?
Where the collateral is inventory, a buyer in the ordinary course of business takes free of all security interests, perfected or unperfected even if the buyer knows of the security interests.
Who wins in a dispute involving perfected creditors?
The first party to file or perfect (which ever is earlier) wins. Therefore, a creditor who files first will have top priority even if another creditor perfects by another means first.
When a PMSI is involved, who gets priority?
The PMSI gets super priority regardless of the first to file or perfect rule.
What if a PMSI is not in consumer goods, but rather in collateral other than inventory or livestock (i.e. equipment or farm products)? What are the priority implications therein?
The PMSI gets super-priority over other interests in the same collateral so long as the interest is perfected upon the debtor receiving the collateral or within 20 days thereafter.

A PSMI super-priority also extends to all identifiable proceeds.
What is the PMSI is in inventory or live stock? What are the priority implications therein?
PSMI in inventory gets super priority so long as:
* PSMI is perfected when the debtor takes possession
* SP gives notice to other creditors who've previously filed financing statements in similar collateral prior to debtor taking possession. Such notice must describe the inventory or livestock covered and lasts for five years.

A PSMI super-priority also extends to the proceeds of inventory collateral and to the identifiable proceeds and unmanufactured products of livestock collateral
What if a seller of the collateral and the lender of a PSMI have a dispute regarding the same collateral? Who prevails?
The seller prevails as having the superior interest regardless of the order of perfection.
Who prevails in a contest between a secured creditor who has made a fixture filing and a party with an interest in the real estate to which it is attached?
First to file wins, however if the fixture filing is a PMSI filed within 20 days after the goods are affixed to the real estate, the PSMI has priority unless the real estate interest is a construction mortgage.
What interest does a secured creditor have in proceeds received on the sale of collateral?
The SP has the same interest in the proceeds as s/he did in the collateral.
What rules exists regarding proceeds from the sale of collateral?
The Same Office Rule - where a hypothetical financing statement regarding the proceeds would be filed in the same office as the original filing statement, creditor need do nothing to continue perfection even if the financing statement on file is now misleading as applied to the proceeds

Cash Proceeds Rule - Perfection of a security interest in cash proceeds of the collateral continues so long as the cash is identifiable. CL favors the lowest intermediate balance rule which traces money within bank accounts by assuming that funds in the account prior to the deposit of proceeds are money in which no one claims an interest.
What rules apply when one creditor has a security interest in inventory and another has a security interest in accounts receiveable if the proceeds of an inventory sale becomes an AR?
First to file rule applies.
What happens regarding interest in proceeds when the underlying security interest is a PMSI?
Proceeds retain the super-priority of the PMSI.
What happens when there is a dispute over returned goods between a chattel paper purchaser who gives value for the chattel paper and an inventory financer?
Chattel paper buyer wins, as he gave new value.
What priority does a creditor in control of a deposit account, investment property, or letter of credit have against other creditors?
The controller of the deposit account has priority over those creditors with interest in the deposit account who lack control (even the proceeds creditors). If more than one creditor has control of such collateral, priority is ranked according to time of obtaining control.
How are advances under later securitiy agreements treated with respect to priority?
So long as a perfected creditor has a financing statement on file, that creditor retains his/her priority over other creditors who first perfected later.
What is a dragnet clause and how is it treated in most courts?
A dragnet clause in a security agreement provides that the collateral will not only stand to secure repayment of the instant loan but also for repayment of all other debts owed by the debtor to the creditor. Most courts refuse to enforce such clauses if the other debt is completely unrelated to the original transaction.
What happens if the secured party allows the debtor to breach the security agreement?
Failure to enforce the security agreement may be seen as a waiver of the security interest.
What result when a buyer in the ordinary course of business buys collateral covered by a perfected security interest?
Such a buyer takes free of all claims, even if the buyer knows of the security interest so long as the buyer isn't aware the sale is in violation of the security interest.
What constitutes a buyer in the ordinary course of business?
4 requirements:
* Must be a run of the mill purchase of the type that the debtor engages in on a REGULAR basis
* Buyer must give new VALUE for the collateral
* The buyer must buy in GOOD FAITH and not know that the sale is in violation of the security agreement.
* The security interest in the item sold must have been CREATED by the buyer's seller.
RVGC
What result between a secured party in possession of the collateral and a buyer in the ordinary course of business?
The possessory secured party wins.
What is the result if collateral other than inventory is sold to a good faith buyer for value?
The security interest continues in the collateral, even in the buyer's hands.
What is the result between a statutory lien holder in possession of the collateral and a perfected secured creditor?
The statutory lien holder wins.
What is the result between a judicial lien holder and a perfected secured creditor? What if the perfected secured creditor makes subsequent advances after the judicial lien?
Generally the secured creditor wins. Future advances retain priority if made within 45 days of the judicial lien (regardless of knowledge of lien) or after 45 days if the creditor has no knowledge of the lien or the advance is made subject to a prior commitment.
Ideally, how is a perfected security interest treated when the debtor declares bankruptcy?
If the SP has done everything right, the collateral can be retained and used in satisfaction of the debt. If, however, something has gone wrong, the interest will become unsecured as part of the bankruptcy and be relegated to the general pool of creditors
How might an otherwise valid and perfected security interest be vulnerable in bankruptcy proceedings?
It could be deemed a fraudulent conveyance or a preference.
What is the immediate effect of a filing of a bankruptcy petition upon a secured party's interests?
The filing creates an automatic stay against any creditor collection activity
When is a transfer of debtor's property considered a preference?
* Where a transfer including PERFECTION of an unperfected security interest is made to the benefit of a creditor
* Where the transfer is made on account of an ANTECEDENT debt
* Where the transfer was made while the debtor was INSOLVENT and within 90 days of the filing of bankruptcy
* Where the transfer allows the secured creditor to get MORE of the debt than he would otherwise
* Where the transfer is NOT made CONEMPORANEOUS with the giving of value or in the ordinary course of business.
PAIM-NC
What happens if a security interest is deemed a prefrence?
The preference becomes voidable and the SP must give back $ or if perfected, the security interest is invalid and becomes an unsecured interest.
What is insolvency?
When the debtor has more debts than assets. The debtor is presumed insolvent within 90 days of filing bankruptcy.
Who is considered an insider in a bankruptcy?
Someone having a close connection with the debtor - a spouse, relative, partner, corporate director, or anyone in control of the debtor.
What special rules exist for a preferred creditor who is also an insider in bankruptcy?
If the insider receives a preference between 90d - 1y of the bankruptcy proceeding it is voidable if the insider had knowledge of the insolvency at the time of transfer. If this is the case, the trustee may recover the property transferred.
What special rules exist for a PMSI when a bankruptcy has been filed?
So long as the PMSI perfects within 30 days of the debtor receiving possession of the collateral, it is not considered a preference.
What rules apply for accounts receivable and inventory acquired under a floating lien when bankruptcy is filed?
AR & inventory under a floating lien are not preferences even if acquired within 90 days of the bankruptcy filing.
What remedies does a secured creditor have if the debtor defaults?
1. He may sell the collateral (discuss notice requirements, right of SP to bid, debtor's right to accounting and to proceeds after disbursement, whether debtor liable for deficiency)
2. He may retain the collateral in full or partial satisfaction of the debt (strict foreclosure) (discuss notice requirement and limitations re: consumer goods)
3. He may ignore the collateral and sue on the debt.
Keep, sell, or sue
What constitutes a breach of the peace when a secured party seeks to repossess collateral?
A breach of the peace occurs when any protest to the repossession occurs. The presence of a weapon per se constitutes a breach of the peace. Also breaking and entering constitutes a breach of the peace. Simple trespass doesn't constitute a breach of the peace, trickery is permitted, and subsequent attempts to repossess after repossession is halted for one reason or another is also permitted.
What is the effect of an acceleration clause?
An acceleration clause in a security agreement allows the secured party to opt to declare the entire outstanding balance immediately due upon the occurrence of some default.
What is the notice requirement regarding repossession?
The code doesn't require that the SP give the debtor notice of repossession, however after the repossession, the creditor must give the debtor notice of the time and place of the resale.
What is strict foreclosure?
When the creditor who repossesses elects to keep the good and forget the remainder of the debt.
When is strict foreclosure not permitted?
When the collateral repossessed is consumer goods and the debtor has already repaid at least 60% of the debt, the creditor MUST resell the collateral within 90 days of the repossession and give over any excess to the debtor. This right to sale may be waived by the debtor after default, however (not before).
What other requirements exist for the strict foreclosure of non-consumer goods or consumer goods < 60% paid for?
Repossessing secured party must send notice that the collateral is being kept to the debtor, other creditors who have expressed an interest in the collateral.
What if the debtor objects to the strict foreclosure?
If the debtor objects to the strict foreclosure within 20 days following notice, the repossessing party must have a sale to dispose of the collateral.
Is strict foreclosure only permitted to fully satisfy a debt?
No - it may serve as partial satisfaction as well, where the collateral satisfies part of the debt with the remainder still owing. Such partial satisfaction is permitted if the secured party gives the authenticated notice as required for full strict foreclosure, the debtor consents to the partial satisfaction, and no other secured parties object w/i 20 days of authenticated notice.
What are the requirements governing the sale of collateral to satisfy a debt that has been defaulted upon?
All aspects of the sale must be commericially reasonable. This includes the time and date of the sale, the advertising for the sale, etc. The secured party has the burden of proving commercial reasonability.
What must be contained in the notice antecedent to the sale following repossession?
Description of debtor and secured party.
Description of collateral.
Method of sale.
Time and place (public sale) or
Time after which a private sale will be made.
Statement that debtor entitled to accounting and the charge for performing such accounting.
Who must be notified of a sale after repossession?
The debtor (who may waive the notice requirement after default)
Cosigners, sureties, guarantors, etc.
Other creditors of record (who have filed FS) if the collateral is non-consumer goods.

No such notice is needed if goods are sold on a recognized market.
When should notice be sent?
The code simply states that notice be given a reasonable time before the sale. There is a 10-day safe harbor that is presumptively reasonable for sale of non-consumer goods. There is no such safe-harbor rule for sale of consumer goods - reasonability determined case-by-case.
In what order are proceeds from a repo sale applied?
First : in satisfaction of defaulted expenses
Second : in satisfaction of other outstanding debt to the secured party
Third : to pay junior creditors with an interest in collateral.
What result if the buyer at the repo sale is the secured party or someone under the control of the secured party, resulting in a sale significantly below the range of proceeds to an independent person would have gleaned.
In that case, the code presumes the surplus or deficiency would have been realized had there been a proper disposition and so there is no deficiency.
What happens if the SP fails to follow the rules on default?
A rebuttable presumption arises that a foreclosure sale would have brought the amount still due, so there is no deficiency.

The purchaser, however, so long as the purchase was made in good faith, is protected.
What punitive damages may be levied upon a failure by the SP to follow default rules?
The amount of the finance charges + 10% of the principal
What rights does the purchaser at a foreclosure sale have in the collateral?
The purchaser takes free of secured interests by creditors lower in priority than the seller; re: creditors superior in priority, the purchaser takes subject to those security interests.