Secured Transactions - Texas Bar 2009

Front 1

What are the options available to a potential creditor?

Back 1

1) Outright refusal
2) Obtain a promise to repay
3)Obtain a surety
4) Obtain collateral

Front 2

What is the basic approach to addresses a secured transaction question?

Back 2

1) Is the transaction within the scope of Article 9?
2) Classify the collateral.
3) Determine if a security interest has been created - attachment

Front 3

What is the basic approach to addresses a secured transaction question?

(cont.)

Back 3

4) Determine if the security interest has been properly perfected.
5)Determine the claimants to the collateral.
6) Apply proper priority rules and rules regarding repossession.

Front 4

What transactions are within the scope of Article 9?

Back 4

1)Collateralized transactions; 2) Sales of Recievables; 3) Consignments; 4) Agricultural Liens created by statute; 5) Lease-Purchase Agreements

Front 5

What is excluded from Article 9?

Back 5

1) Rights governed by federal law (ships, airplanes, IP, etc.); 2) Real property (except fixtures); 3) Tort claims (except business torts); 4) Deposit accounts in a consumer transaction; 5) Statutory liens; 6) Wage Assignments

Front 6

What is a collateralized transaction?

Back 6

Any transaction which is intended to create a security interest in personal property or fixtures.

Front 7

The property used as collateral may be the following:

Back 7

1) Already owned by the debtor
2) To be acquired with loan, that is, a purchase money security interest
3) After-acquired

Front 8

What is a Sale of Receivables?

Back 8

The outright sale of accounts, chattel paper, payment intangibles, and promissory notes.

Front 9

What is a consignment?

Back 9

A consignment is a bailment by the owner/bailor/consignor under which the bailee/consignee has authority to sell.

Front 10

Which consignments must comply with article 9?

Back 10

1) Consigned goods worth a total of $1,000 or more
2) The consignor did not use the goods for personal, family , or household purposes
3) Potentially Deceptive Consignee

Front 11

When is a consigneee a potentially deceptive consignee?

Back 11

When the consignee is in a position to deceive potential creditors with consigned goods and:
1) deals with goods of that kind under a name other than consignor's name, 2) is not an auctioneer, and 3) is not generally known by consignee's creditors to be substantially engaged in selling consigned goods.

Front 12

With is an Agricultural Lien Created by Statute?

Back 12

A nonpossesory lien on farm products such as crops and livestock created by state law in favor of a person who provides goods or services to a farmer.

Front 13

What are evidence that a lease is actually an installment sale and thus subject to Article 9 as a Lease-Purchase agreement?

Back 13

Lessee cannot terminate the lease and: lease term is equal to or greater than remaining economic life of goods, or property is owned by lessee at the end of term, or option to buy for nominal consideration at end of term.

Front 14

Why is it important to classify collateral correctly?

Back 14

Because many rules regarding perfection, priority, repossession, resale, etc. depend on the type of collateral involved.

Front 15

What are the five types of goods classifications?

Back 15

Consumer goods
Equipment (business purposes)
Inventory
Farm Products
Multiple Use goods

Front 16

What are some items that surprisingly are classified as goods?

Back 16

Trees, Growing crops, unborn young animals

Front 17

What are some items that are not classified as goods?

Back 17

Money, Minerals before extraction, collateral that fits other categories

Front 18

What are consumer goods?

Back 18

Goods used for personal, family, or household purposes (clothes, car, couches, bed, phones, etc.)

Front 19

What is Equipment?

Back 19

Goods used or bought for use primarily in business (including farming or a profession). Includes goods bought by a non-profit organization or a governmental subdivision or agency. Default category.

Front 20

What is Inventory?

Back 20

1) Goods held for sale or lease in the ordinary course of business, 2) raw material & work in progress, 3) Consumed materials

Front 21

What are farm products?

Back 21

Crops, livestock, etc. To be a farm product, two requirements: 1) in possession of the farmer engaged in farming operations, and, 2) In an unmanufactured condition

Front 22

Since any item can only be classified as one type of collateral, what are multiple use goods classified as?

Back 22

They are classified according to their principle use.

Front 23

What are the 8 types of semi-tangible and intangible collateral?

Back 23

1) Instruments, 2) documents, 3) chattel paper, 4) account, 5) deposit accounts, 6) investment property, 7) commercial tort claims, 8) general intangiables

Front 24

Documents used as collateral are...

Back 24

written or electronic representations of goods, that is, documents of title under Article 7. Ex. Warehouse receipt - goods in storage; Bill of lading - goods in transit

Front 25

What is chattel paper?

Back 25

A single writing or group of writings evidencing two things: 1) monetary obligation to pay (promissory note), and 2) security interest in or lease of goods. (Ex. Car purchase or lease)

Front 26

What is an Account?

Back 26

Any right to the payment for goods soled or leased or for services rendered not evidenced by an instrument or chattel paper. Ex. A/R

Front 27

What are deposit accounts?

Back 27

Accounts with a financial institution. (Checking and savings, but not C.D.s)

Front 28

What are some examples of investment property?

Back 28

Stocks, bonds, mutual funds, brokerage accounts, etc.

Front 29

What are some general intangibles used as collateral.

Back 29

I.P., liquor license, goodwill, etc.

Front 30

What are proceeds?

Back 30

Whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. Proceeds may include collateral a creditor could not have a security interest in if originally used as collateral.

Front 31

Describe attachment.

Back 31

Attachment is the process by which a security interest is created and becomes enforceable against the debtor so the creditor can repossess the collateral if the debtor does not pay. 3 elements (VCR): 1) Creditor gave value, 2) Contract - the security agreement, 3)Debtor has rights in collateral

Front 32

What are some methods of proving a security agreement?

Back 32

1) Oral - but only if the collateral is in the creditor's possession. This is referred to as a pledge. Creditor has a duty to take reasonable care of collateral in his possession. 2) Authentication Record - must include evidence of record and a description of collateral, 3) Control - creditor has right to sell or cash in the collateral without further action from the debtor (but only for nonconsumer deposit accounts, electronic chattel paper, or investment property)

Front 33

Describe the effect of an after-acquired property clause in a security agreement.

Back 33

Debtor agrees that new acquistions of property will serve as additional collateral for old loan. Situation is referred to as a floating loan and is very common with inventory. Note: clause is not necessary if inventory is used as collateral. Also, will not work with commercial tort claims.

Front 34

What is the consumer good exception to the after-acquired property clause.

Back 34

An after-acquired property clause will work only for consumer goods acquired within 10-days of the creditor giving value.

Front 35

What is perfection?

Back 35

Perfection is the process by which the creditor protects the security interest from most other claimants to the same collateral. Elements: 1) Attachement, 2) Act of Perfection

Front 36

Appropriate act of perfection depends on type of collateral. May be just one method of the following:

Back 36

1) Possession of collateral by Creditor, 2) Filing of Financial Statement by Creditor, 3) Automatic Permanent - attachment alone is sufficient, 4) Automatic Temporary - attachment alone sufficient for short period of time, 5) Control, 6) Notation of Security Interest on Certificate of Title.

Front 37

Almost all collateral may be perfected by possession. What types of collateral may not be perfected this way?

Back 37

Accounts, deposit accounts, nonnegotiable documents, electronic documents, electronic chattel paper, general intangibles.

NOTE: If the creditor no longer has possession of the collateral, perfection is lost. Also, 20 Day exception for instruments, negotiable documents, and certificated securities.

Front 38

What are the requirements of a financing statement?

Back 38

1) Names of debtor and creditor, 2) Addresses of both (but not needed is FS is accepted by filing office, 3) Debtor's authorization in an authenticated records (cannot be oral, but authorization of the FS is automatic if the debtor authenticated the underlying security agreement; and, debtor may authorize FS after filing), 4) description of collateral (after-acquired property covered by the security agreement that fits within the description is automatically covered , 5) description of the land if the collateral is timber, minerals, fixtures, or crops

Front 39

What are the guidelines for the designation of a debtor on a financing statement?

Back 39

Individual = Individual's name
Registered organization = name under which it is organized
Trade name = not sufficient, unless extremely similar to the debtor's name

Front 40

What are the implications on a financing statement if a debtor changes his/her name?

Back 40

1) Collateral debtor has at the time of the name change = perfection continues
2) Collateral debtor obtains within 4 months of name change = perfection continues
3) Collateral debtor obtains after 4 months of name change = perfection ends unless refiled under new name within the 4 month period.

Front 41

Where must a financing statement be filed?

Back 41

The general rule is that they must be filed in the Secretary of State's Office in Austin; however, filings for fixtures, minerals, and timber to be cut should be filed in the county where the mortgage on the real estate would be filed.

Front 42

How long is a financing statement effective?

Back 42

5 years from the date of filing

**A recorded real property mortgage covering fixtures continues until the mortgage is released or satisfied.

Front 43

How may a creditor extend the effectiveness of a filing?

Back 43

The creditor should file a continuation statement withing 6 months prior to the expiration date and before the 5 years expires.

Front 44

What are the rules regarding the filing of a termination statement with regard to consumer goods?

Back 44

The creditor must file a termination in a timely matter, the earlier of: 1) within 20 days after the debtor's written demand; or 2) within one month after there is no outstanding secured obligation or commitment to make advances, even without a demand from the debtor.

Front 45

What are the rules regarding the filing of a termination statement with regard to non-consumer goods?

Back 45

Creditor must provide the debtor with a termination statement within 20 days of written demand. The debtor has the responsibility of filing the termination statement and must incur the cost.

Front 46

What is the minimum fine for filing a fraudulent financing statement?

Back 46

$5000 plus court costs and reasonable attorney's fees.

Front 47

What security interests are receive automatic permanent perfection?

Back 47

Purchase money security interests in consumer goods that are not either certificate of title items or fixtures; assignments of insignificant amount of debtor's accounts; sales of promissory notes.

Front 48

What security interests receive automatic temporary perfection?

Back 48

Proceeds (for 20 days from the debtor's receipt of the proceeds); New value for instruments, negotiable documents, and certified securities (20 days from time of attachment if the creditor gave new value); Delivery of Instruments, negotiable documents, or certified security to debtor for 20 days for certain purposes (sale, exchange, presentation of collateral)

Front 49

Define control.

Back 49

Control means the creditor has the right to sell or cash in the collateral without further action from the debtor (Ex. delivered in bearer form, or delivered with proper endorsements). If a deposit account, secured party has control if the secured party is the bank in which the deposit account is maintained.

Front 50

What items may be perfected by means of a notation on the certificate of title?

Back 50

Motor vehicles, boats, manufactured housing.

Front 51

What State's version of the U.C.C. is used to determine whether a creditor is perfected?

Back 51

The general rule is that the law of the state where the debtor is located. For an individual = permanent residence. For a registered organization = law of sate where organized. For an unregistered organization = place of business, but if more than one place of business, chief executive office.

Front 52

In what cases must a creditor follow the law of the collateral's location?

Back 52

1) Security interests perfected by possession; 2) Fixtures; 3) timber; 4) Agricultural liens (law of the state where the farm product covered by the lien is located;

Other exceptions: 5) Certificate of title items (law of state which issued most recent certificate of title); 6) Deposit accounts ( law of state in which bank has its chief executive office)

Front 53

What are the implications on perfection if the debtor or collateral changes states?

Back 53

General rule: If debtor moves, perfection continues 4 months; If perfection is by possession = continues as long as perfected under new state's law; If perfection is by a notation on certificate of title = perfection for as long as it would have under the original certificate of title.

Front 54

What is the order of priority where two secured parties are fighting for the same collateral?

Back 54

If both creditors are unperfected, the first to attache prevails. If one of them is perfected, then he wins. If both are perfected, then generally the first creditor who either filed a financing statement or perfected will prevail.

Front 55

Describe the priority exceptions with regard to purchase money security interests.

Back 55

1) PMSI in goods: the PMSI creditor prevails if perfected (even if second) at the time debtor receives possession of the collateral, or within 20 days of when the debtor received possession of the collateral; 2) PMSI in Inventory or Livestock: prevails if perfected at time debtor receives possession of the Inventory and proper notice to holders of conflicting security interests

Front 56

Describe two more priority exceptions other than those regarding PMSIs.

Back 56

1) Deposit accounts: secured party with control prevails; 2) Exceptions for investment property: secured party who has control over investment property has priority over a secured party who does not have control.

Front 57

Who wins: Secured party v. Donee?

Back 57

If the debtor makes a gift of the collateral to a donee, the collateral remains subject to the security interest in the donee's hands.

Front 58

Who wins: Secured party v. Purchaser?

Back 58

General rule = secured party prevails.
But, if the debtor has permission to sell = purchaser prevails; or if the secured party is unperfected at time of purhcase = purchaser wins if the buyer gave value, received delivery of the item, and has no knowledge of security interest at time of delivery.

Front 59

Who wins: Buyer in the ordinary course of business v. Secured party?

Back 59

A buyer in the ordinary course of business can prevail even over a perfected creditor if the following are met: 1) Good faith - honesty in fact and observance of reasonable commercial standards; 2) Without knowledge of a security interest violation; 3) purchase of goods that are not farm products; 4) ordinary purchase (must be from a person in the business of selling goods of the kind; 5) Security interest created by the seller; 6) Creditor not perfected by possession.

Front 60

Who wins: Secured party v. consumer purchasers of consumer goods?

Back 60

Purchaser prevails if: 1) consumer goods in seller's hands; 2) consumer goods in buyer's hands; 3) buyer has no knowledge of security interest; 4) buyer pays value; 5) creditor not perfected by possession; 6) creditor's interest is unfiled prior to purchase

Front 61

Who wins: Buyers not in the ordinary course of business vis-a-vis future advances v. Secured Party?

Back 61

The buyer can prevail over a secured creditor for future advance amounts (not the prior advances) made after the first of the events occurs: 1) secured creditor obtains knowledge of the purchase, or 2)45 days have elapsed from the date of the purchase.

Front 62

Who wins: Holder in due course of negotiable instrument v. Secured party?

Back 62

A holder in due course will prevail over earlier perfected interests in the negotiable instrument.

Front 63

Who wins: Secured Creditor vs. Lien Creditor?

Back 63

If SC unperfected at time lien attached = LC prevails; If SC perfected at time lien attached = SC prevails

Front 64

Who wins: Secured Creditor vs. Statutory Mechanics Lien?

Back 64

Statutory lien prevails if following conditions satisfied: 1) Person furnished services or materials with respect to the goods covered by the security interest; 2) Furnishing was in ordinary course of business; and Collateral is in the possession of the statutory lien holder.

Front 65

With regard to fixtures, who wins: Secured party vs. holder of real property mortgage?

Back 65

General rule: Secured party may win if: 1) perfected before real estate interest recorded, AND 2) perfected with a fixture filing.

Front 66

What is a fixture filing?

Back 66

A fixture filing is a financing statement which meets the following additional requirements: 1) describes the real property; 2) filed in office where mortgage on the real property would be recorded.

Front 67

What is the PMSI exception with regard to priority to a fixture?

Back 67

A PMSI creditor, even though perfected after real property interest is of record, can prevail if: a) PMSI Creditor perfected by fixture filing; b) perfected within 20 days of good becoming a fixture; and, c) competing real estate interest is not a construction mortgage.

Front 68

What remedies are available to a secured party upon debtor's default?

Back 68

Repossession; Sale of Collateral by Creditor; Strict Foreclosure

Front 69

Describe the essential components of Repossession.

Back 69

Upon default, creditor may repossess. No judicial process needed - this is a self-help remedy. Creditor need not give debtor notice. Limitation on repossession is no breach of the peace. Creditor cannot delegate duty not to breach peace. Creditor no has choice after a proper repossession to either resell the collateral or do a strict foreclosure.

Front 70

What are the major components of a sale of collateral by creditor?

Back 70

1) Notice of sale; 2) Debtor's right to redeem; 3) Standard of care; 4) Ability of Creditor to repurchase at Resale; 5) Title of purchaser at resale; 6) Application of resale proceeds; 7) Deficiency; 8) Penalty for not complying with resale requirements; 9) Collateral Accounts or Instruments.

Front 71

Describe how Notice works when there is a sale of collateral by creditor.

Back 71

General rule - Notice Required.
Exceptions: 1) Perishable collateral ; 2) collateral threatening to decline speedily in value; 3) collateral is customarily sold on a recognized market.
Contents of Notice: 1) Description of debtor and secured party; 2) Description of collateral; 3) Method of sale; 4) statement that debtor is entitled to an accounting and the charge, if any; 5) Time and pace of public sale; time after which a private sale will be made (earliest date of sale); If the collateral is consumer goods, the notice must also explain the debtor liable for deficiency, telephone number of person from whom debtor can obtain amount needed to redeem collateral, and telephone number or address from which debtor can get additional information about the sale.
Notice must be sent a reasonable amount of time before sale. It is a fact question as to what is a reasonable time but in a nonconsumer transaction, 10 days or more before the sale is considered reasonable.
Debtor, unless he has waived notice in an authenticated agreement made after default, sureties, and if the collateral not consumer goods, creditors who have perfected by filing, notation on certificate of title, or who have given notice to reselling creditor, must all receive notice.

Front 72

Describe the debtor's right to redeem in a sale of collateral by creditor.

Back 72

Debtor has the ability to cure the default and regain the collateral if certain requirements are satisfied: 1) creditor has not yet sold or entered into a contract to sell collateral; 2) strict foreclosure has not yet occurred; 3) debtor has not waived the right to redeem after default; 4) debtor must tender fulfillment of all obligations secured by the collateral; 5) debtor must tender creditor's reasonable expenses.

Front 73

What is the standard of care in a sale of collateral by creditor?

Back 73

All aspects of the sale - method, manner, time, place, and terms - must be commercially reasonable. This is a fact question. Merely because a better price could have been obtained does not make sale unreasonable but if the difference in price is substantial, the sale will be closely analyzed. Burden of proof is on the creditor to show commercial reasonableness of the sale in a deficiency suit.

Front 74

Describe the ability of a creditor to purchase at resale.

Back 74

If it is a public sale then yes, a creditor may purchase. If it is a private sale, and creditor may purchase the collateral only if 1) collateral is customarily sold in a recognized market, or 2) is subject to widely distributed standard price quotations.

Front 75

What is the state of title of collateral sold by creditor.

Back 75

The reselling creditor warrants title, possession, and quiet enjoyment of the collateral by the purchase unless the creditor takes steps to disclaim the warranties.

Front 76

Describe the application of resale proceeds in a sale of collateral by a creditor.

Back 76

1) Reasonable expenses of reselling creditor; 2) Satisfaction of debt; 3) Satisfaction of subordinate creditors; 4) Surplus, if any, to debtor.

REMEMBER, the creditor is unsecured for the deficiency amount if any.

Front 77

What penalties does a creditor face for not complying with resale requirements?

Back 77

1) Creditor liable for actual damages to debtor or to another creditor; 2) The creditor is automatically liable for amount equal to finance charge plus 10% of principal if consumer goods are involved; 3) Effect on Creditor's ability to recover deficiency: (a) Consumer transactions = absolute bar to recover of deficiency; (b) Non-consumer transactions = rebuttable presumption that value of collateral was equal to amount of debt.

Front 78

How does strict foreclosure work?

Back 78

The creditor may retain the collateral in total satisfaction of the debt. In non-consumer transactions, the creditor may retain the collateral in total or partial satisfaction of the debt.
To use strict foreclosure, the following requirements must be met: 1) Debtor consents; expressly or implicitly. If the debtor agrees in an authenticated record made after default, this is express; if the debtor fails to object to the creditor's proposal to strictly foreclose within 20 days of when the creditor sent notice; this is implied; 2) Creditor sends authenticated notice to retain collateral to the debtor (unless notice appropriately waived); if collateral non-consumer goods, notice to creditors who have perfected by filing, notation on certificate of title, or who have given notice to creditor; 3) No timely objection (within 20 days) by debtor or another creditor.

REMEMBER, there is an exception for High equity (debtor has paid 60% of price) Consumer goods. Resale of these is necessary within 90 days of repo.