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111 Cards in this Set
- Front
- Back
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Secured Transactions are covered by
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Article 9 of the UCC
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What are our 5 inquiries into secured transactions?
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1- What is the Scope of Article 9? Consensual security interests on personalty and fixtures
2- How does a creditor create an enforceable security interest indebotor's collateral, meaning how does the creditor attach? Value, Contract. Right in the collateral 3- Once attached, how does the creditor attain perfection? by placing the world on record notice 4- When more than one creditor has a stake in the same collateral, what are the rules of priority? First to perfect takes 5- What if the debtor defaults on the debt or obligation? Article 9 has statutory and judicial remedies |
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Article 9 applies to
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consensual security interests in personalty or fixtures
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When the collateral is real estate apply the law of
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mortgages
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when teh collateral is personalty or fixtures apply
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article 9
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in general, personalty equals
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goods
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Article 9 does not apply to what kinds of personalty?
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statutory or mechanics leins
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Article 9 cast of characters
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debtor: entity who owes the money
secured party or secured creditor: the entity who lends the money security agreement: the contract or record security interest: the right that creditor has in debtor's personalty or fixtures collateral: the personalty or fixtures that creditor can look to for satisfaction |
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Collateral should be in what forms?
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Tangible collateral or goods: consumer goods, equipment, inventory, farm products, fixtures (the key: primary use in the hands of your debtor, subjective test)
or Intangibles or semi-intangibles such as: patents, trademarks copyrights, stocks, bonds, mutual funds, proceeds from the sale of collateral, accounts, right to payment for goods or services, promissory notes and drafts |
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attachment means that the security interest is
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envorceable
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The three requirements for attachment
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Value must be given by creditor
a contract, called the security agreement or record, must evidence the secured transaction unless the secured party has taken possession of the collateral rights in the collateral: debtor must ahve rights in the collateral |
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If the secured party is in possession of the collateral, there is no need for
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a record
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What do we need if the debtor is in possession of the collateral?
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we need a security agreement
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the record must contain
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authenticated by debtor, signed or electronically market
And must reasonably identify the collateral |
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Are after acquired collateral clauses enforceable?
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yes (security interest in inventory, whether now held or hereafter acquired)
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Perfection is best understood as a
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publicity device. It is something that the secured party does to put the world on record or constructive notice of the secured party's existence. Proper perfection helps to protect the secured party from competing creditors
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How to attain perfection
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1-by the secured party's taking possession of the collateral
2- automatic perfection for purchase money security interests (PMSIs) in consumer goods 3- *** most common: the secured party files notice of the security interest in the public records: Proper filing puts the world of potentially competing creditors on record or constructvie notice of the filers claim |
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What is a Purchase Money Security Interest?
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a security interest that enables the debtor to purchase the goods
To encourage lending to consumers, PMSIs in consumer goods are perfected automatically, upon attachment |
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What is filed to put the world on notice?
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The security agreement could be filed, but rarely is. Instead the document typically filed is called a financing statement. It is a very simple document whose only prupose is to provide interested parties with sufficient information to make follow up inquiries. Article 9 aims to encourage electronic filing and is media neutral.
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What are the requisite contents of a financing statement?
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1- Debtor's name and address
2- Creditor's name and address and 3- a description of the collateral in the financing statement, super-generic descriptions of the collateral (such as "all of debtor's assets") are ok |
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Where is the financing statement filed?
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Filing is done centrally, with the secretary of state in the state where debtor is located.
If the debtor is an individual, he or she is located in the state of principal residence If debtor is a registered organization, it is located in the state under whose laws it is organized |
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The exception to central filing
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If the collateral is timber, minerals, or fixtures, file locally, in the county where the realty is located
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Priority: more than one party stakes a claim to the same collateral, who gets to take first, second, third, etc?
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Priority is the purpose of collateralization, and the secured party seeks to subordinate, not to share.
Each claimant is entitled to satisfaction in full before a subordinated claim is entitled to take |
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Attached Unperfected Creditor (AUPie)
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thsi is the Article 9 creditor who creates an enforceable security interest, it attaches, but either never bothers to perfect or tries to perfect but botches teh effort, perhaps by filing in the wrong place
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Lien Creditor (LC)
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This is the general unsecured creditor who goes to court to get a judicial lien on the) collateral
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Perfected Attached Creditor (PAC)
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this is the ARticle 9 Creditor who succeeds in attaining perfection
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Non-Ordinary Course Buyer (NOCie)
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This is someone who purchasesred to take collateral the collateral outside the ordinary stream of commerce
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Buyer in Ordinary Course (BIOC)
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This is someone who purchases the collateral from a merchant's inventory
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General Unsecured Creditor (GUC)
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This is the lender who never bothered to perfect
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Ranking of creditors
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BIOC
PAC LC NOCie AUPie GUC |
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AUPie v. The world
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AUPie's interest is enforceable as against Debtor, and AUPIE will defeat any supsequent AUPie as well as an GUC
AUPie will lose to PAC, to L and to any buyer without knowledge of the security interest |
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PAC v. The world
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PAC defeats all except:
-the PAC who filed first -Certain PMSI-holders -the BIOC |
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PAC v PAC
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First in time, first in right
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First in Time First in Right
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Article 9 gives special effect to filing. It allows for early filing, even at the onset of loan negotiations. If an early filer subsequently attaches, she is allowed the benefit of her early filing. Priority will relate back to the early filing date
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After acquired collateral financier (AACF)
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A secured creditor who takes as collateral a security interest "in all of Debtor's (business equipment, inventory, whatever) whether now held or hereafter acquired. When you've got an after acauired collateral clause you've got an AACF
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PMSI
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a security interest that enables the debtor to purchase goods. It is an extension of value by a lender who takes as collateral a security interest in the very item that the loan enables the debtor to acquire
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How does the AACF collide with the PMSI holder?
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The AACF v. the PMSI-holder when the collateral is equipment: PMSI files properly, they have priority in the equipment
AACF v. PMSI-holder when the collateral is inventory: PMSI holder must file properly before debtor takes possession AND notify AACF before possession |
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PAC v. BIOC
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PAC loses to BIOC. A buyer in the ordinary course of business takes free of a perfected security interest in seller's inventory.
The reason for this rule is to promote commerce and honor buyer's reasonable expectations |
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Default means
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debtor has breached- defined in parties security agreement, NOT Article 9
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Once debtor has defaulted, what can our Article 9 secured creditor do?
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1- Self-Help
2- Repossession by Judicial Action 3- Strict Foreclosure 4- Sale 5- Action for a deficiency Judgment |
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Self-help repossession is permissible so long as
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creditor does not breach the peace. A breach of the peace occurs when the secured party's actions are likely to cause violence
Thus the relevant question is not whether or not an actual fight broke out, but whether the secured party did something provocative or likely to cause violence. A repossession made over any protest by the debtor, however mild the protest,constitutes a breach of the peace. For that matter, if the repossessor misuses the color of law, he has used constructive force and therefore has breached the peace |
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Civil and criminal penalties attach to creditor's misconduct by repossessing how?
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1- Repossession when the collateral is in debtor's home: the home enoys a zone of privacy. SP may not enter debtor's home without voluntary and contemporaneous consent
2- Repossession when the collateral is outside the home: more latitude, SP may take the collateral so long as there is no debtor objection |
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Repossession by judicial action
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If the secured party chooses not to resort to self-help repossession, he or she may get a judicial writ, ordering the sheriff to obtain psosession of the collateral and deliver it to the secured party.
IN NY THE APPROPRIATE WRIT IS CALLED A WRIT OF REPLEVIN |
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Strict foreclosure defined
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Occurs when the secured party retains teh collateral in full satisfaction of the debt. In other words, the creditor lawfully retains the collateral and the debt in turn is canceled
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How to strictly foreclose:
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the secured party must send a written proposal to retain the collateral in satisfaction of the debt.
- when the collateral is consumer goods, the notice is sent to debtor and secondary obligors: a grantor of the debt. - When the collateral is not consumer goods, the notice is sent to debtor and other secured parties who have told the foreclosing creditor of their security interest in the collateral as well as perfected creditors and secondary obligors - if any of the notified parties objects within 20 days after the notice is sent, strict foreclosure will not be allowed. Instead the collateral must be disposed of by sale |
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Consumer goods and the 60% rule (Article 9 consumer protective measures)
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If the collateral is consumer goods and the debtor has paid 60% of the loan in the event of a non-PMSI or 60% of the cash price in the event of a PMSI, strict foreclosure is not allowed. Instead the secured party must sell the collateral within 90 days or be liable in conversion. (to avoid creditor's windfalls)
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Sale defined:
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the secued party may sell the collateral and apply teh sale proceeds to the debt. The secured party chooses whether the sale will be public or private
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Two governing guideposts to sale:
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1- Every aspect of the sale must be commercially reasonable
2- prior to the sale, reasonable notice must be sent |
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Article 9 provides standard notice forms, which if used are presumptively
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commercially reasonable
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If the collateral is consumer goods, notice must be sent to
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debtor and secondary obligors
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With all other types of collateral, other than consumer goods, notice must be sent to
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debtor and those secured parties who have advised teh foreclosing creditor of their security interest, as well as perfected creditors and secondary obligors
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The content of the notice depends on the type of sale
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Public sale: time and place of sale
Private sale: time after which the sale will be made |
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For consumer goods, additional consumer protective provisions are mandatory including
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how to calculate any deficiency and how debtor can redeem
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How much advance notice is required?
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Commercial reasonable standard. In a nonconsumer transaction, notice is deemed sent within a reasonable time if it is sent 10 days or more before the time of sale
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May the secured party buy at a sale
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At a public sale, yes
At a private sale, absent external market checks, no. too much potential for self dealing |
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In the case where sale amounts to less than the outstanding debt
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Secured party may proceed against a debtor for a deficiency judgment.
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If a secured party sells collateral at a low price to an inside buyer, the price that an
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independent third party would have paid, rather than the actual amount paid is the price that will be used in calculating the deficiency.
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The debtor's limited right to redemption is cut off once the secured party has
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resold or completed a strict foreclosure
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To redeem, the debtor must pay
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the amount owed plus, the missed payment or payments plus any interest and creditors' reasonable expenses including attorney fees
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If the security agreement contains an acceleration clause (which permits the creditor to declare the full balance due in the event of default), to redeem the debtor must
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pay off the entire debt plus interest plus expenses
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Commercial Paper: Article 3 of the UCC bright line rule
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When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses
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Types of negotiable instruments
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The promissory note
The draft |
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The promissory note contains
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an affirmative promise to pay, and not just a mere IOU
Two parties: Te promisor is called the maker. The promisee is called the payee |
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The draft contains
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(check)
An order or command Three parties: The drawer: gives the order The drawee is ordered to do the paying The payee is the beneficiary of the order |
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The Indorser
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appears in the context of promissory notes and checks.
Signs on the back |
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How to tell whether the writing is a negotiable instrument or just a contract
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To qualify as a negotiable instrument we need:
1- a writing 2- payable to order or bearer 3- signed by the maker or drawer 4- citing a sum certain 5- containing an unconditional promise or order, and no additional promises or orders 6- payable on demand or at a definite time and 7- payable in currency (WOSSUPP) |
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The instrument must be signed by the maker if it is a
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note
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The instrument must be signed by the drawer if it is a
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draft
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Authentication is
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found anywhere on the instrument, initials, defining mark nickname, in the margins or anywhere else on the paper. Not formal
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To qualify as a note, the instrument must contain an
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unconditional promise
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To qualify as an order, the instrument must contain an
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unconditional order
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Conditional language signals
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a contract, which is not covered under article 3
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The holder of a negotiable instrument should not be required to
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examine another document to determine rights with respect to repayment, however, merely referring to another writing does not of itself make the promise or order conditional. A promise or order is not conditional simply because it refers to another writing for a statement of rights with respect to collateral, prepayment or acceleeration.
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Reference to an outside source regarding tangental matters
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is ok
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If it limits payment to a particular source or fund, the instrument will be deemed
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conditional
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To be negotiable, the instrument must state a sum certain or fixed amount, meaning a specifically ascertainable sum. In other words, you must be able to calculate how much is to be paid either from
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what the writing says or reference to an outside source
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To be negotiable, the sum certain must be payable in
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currency= money, foreign currency
but not goods |
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To be negotiable, the writing must not contain
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any additional promises or orders
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To be negotiable, the instrument must be payable
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on demand- an instrument is apyable on demand when it specifically states that it is payable "on demand"or "on sight" or "on presentation. If the instrument is silent as to the time of payment it is still negotiable and payable on demand
or at a definite time- by its terms, it is payable on or before a stated date or at a fixed period after a stated date |
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Are acceleration clauses permissible? What is their effect?
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permissible and do not destroy negotiability
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payable to order
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to be negotiable, the draft or note must use the word "order" or the word "assigns" in connection with the payee's name
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Payable to bearer
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If the instrument is not payable to order, then to be negotiable, it must be payable to bearer, meaning that it is payable to anyone who has it
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In a commercial paper hypothetical, how does the defendant get sued?
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Contract or signature liability
Warranty or transfer liability |
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Contract or signature liability, who and how?
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When you sign it, you promise to pay it and that's how you get sued.
The maker: promisor in the promissory note. Merely by signing his name to the instrument enters intoa contract, whereby he agrees to pay the instrument if he fails to pay, he gets sued The indorser, signs his name on the back of the instrument . If the check bounces and he is notified, he will pay. If he does not honor this promise, he can be sued The drawer: the party who signs the check. By signing the check you promise that if it bounses and you are notified, you will pay. If you fail to do so, you can be sued the drawee: pays the draft, typically the bank. the drawee does not sign and is therefore not liable |
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"Without recourse" accompanying the signature
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a term of art used by indorsers and drawers. It represents a disclaimer of liability.
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What is Warranty or transfer liabiliy?
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Seller's liability for selling a defective instrument
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Who may be sued for breach of warranty?
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any transferor who sells the negotiable instrument.
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Who is entitled to sue the defendant for breach of warranty
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If the defendant indorsed the instrument (signed on the back) any plaintiff in possession of it may sue. The warranties will not run with the instrument
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The five warranties made by the defendant
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1-P has good title to the instrument
2- all signatures are genuine and authorized. Thus forgery is a breach of warranty 3- the instrument has not been materially altered. When the facts tell you that the instrument has been tampered with, it is defective 4- there is no defense or claim good against the defendant, meaning that the instrument is enforceable 5- she has no knowledge of any bankruptcy or insolvency action against the maker or drawer |
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Due negotiation or "duly negotiated" means that there has been
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a proper transfer of the instrument.
If the instrument has been properly transferred, the transferee is a holder and may be elibigle to be a holder in due course. By contrast, if the instrument has been improperly transferred, the transferee is not a holder and cannot qualify as a holder in due course |
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When the instrument is payable to order of a specific payee, it is negotiated by
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delivery of the instrument to that payee
Any further negotiation requires that the payee endorse the instrument and deliver it to the transferee |
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The indorsement must be
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authorized and valid
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If the instrument is payable to bearer what is not required?
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indorsement
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Every indorsement must be either
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special or blank and restrictive or unrestrictive
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The special indorsement is one that
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names a particular person as indorsee. the indorsee must sign in order for the instrument to be further negotiated
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The blank indorsement is one that
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does not name a specific indorsee. It may be negotiated by delivery alone
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What is unique about The restrictive indorsement?
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contains a condition
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The Holder in due course: How does a transferee Qualify?
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A holder in due course is a holder who 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 |
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For value
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the holder must give value for the instrument. Note that giving value does not mean giving consideration, which is a contract principle
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Consideration and value differ in two important ways:
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1- a mere promise is not value
2- Old value is good value |
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In good faith means
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honesty in fact (subjective test), sometimes referred to as the rule of the pure heart and the empty head
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Without notice:
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the holder must acquire the instrument without notice that it is overdue, has been dishonored or is subject to any defense or claim. The notice requirement imposes an objective test. It asks, did the holder know or have reason to know of the problem
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Notice that the instrument is overdue
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If the holder has notice or reason to know that the instrument should already have been paid, he or she is not a holder in due course
1- payable at a definite time 2- Principal in arrears 3- Interest in arrears |
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How can Notice be given of any defense or claim against the negotiable instrument's enforcement
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1- the appearance of the instrument gives notice
2- notice that obligation of any party is voidable 3- notice of a competing claim to the negotiable instrument: if the instrument is lost by or stolen from the true owner, the transferee could still qualify as a holder in due course if the instrument has been duly negotiated and the transferee did not have notice or reason to know of the theft or loss 4- notice that fiduciary has negotiated the instrument in breach of his or her fiduciary duty |
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Holder in due course and the shelter rule:
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A transferee acquires whatever rights her transferor had. The transferee takes shelter int he status of her transferor
This rule allows the transferee to "step into the shoes" of the HDC, even though she otherwise clearly fails to meet the requirements of due course holding. Thus, transferee has all the rights of the HDC even though transferee is a donee or otherwise fails to qualify |
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The benefits of holder in due course status:
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the HDC takes free from claims and personal defenses but subject to real defenses
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The Holder in Due course takes free from claims:
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A claim of right to a negotiable instrument because of superior ownership
If a negotiable instrument is duly negotiated to a holder in due course, the holder in due course defeats the superior owner |
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The HDC takes free from personal defenses
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inslucing every defense available in ordinary contract actions such as lack of consideration unconscionably, waiver, estoppel, fraud in the inducement
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The Holder in Due Course takes subject to real defenses
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Material Alteration
Duress Fraud in the Factume (instrument) Incapacity Illegality Infancy Insolvency |
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What is material alteration?
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A material alteration is a change in terms of the instrument
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The difference between real fraud and personal fraud
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Real fraud, known as fraud in the factum, is assertable against an HDC. Real fraud means that there has been a lie about the instrument.
Personal fraud, meaning fraud in the inducement, is a personal defense. It is merely a personal defense against an HDC> |
