Secured Transactions

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Secured Transactions
2011-07-23 21:18:25
Secured Transactions

Secured Transactions
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  1. Collateral
    Tangible movable things; not real estate-related rights
  2. Inventory
    A type of collateral; goods held by a business for sale/lease and any raw or consumable materials (e.g. flour, sugar, chemicals, cleaning supplies)
  3. Equipment
    catch-all category of collateral; any tangible thing owned by a business not within another category. Essentially, for the purpose of the MBE, equipment is anything that is tangible, for value, but not for sale.
  4. Farm Products
    A type of collateral that includes livestock and unmanufactured farm goods (e.g. eggs, grain, apples, wool, honey, etc.). This is seldom tested

    Remember that farmers have inventory too (processed farm products, e.g. cheese) and equipment
  5. Consumer Goods
    Tangible things (1) used for or (2) or bought for use primarily for personal, family or household use.

    The primary focus is on the intended use either at present or at purchase.

    Posting of consumer goods as collateral triggers special rules.
  6. Fixtures
    A source of collateral including any movable thing that is so incorporated into (affixed to) an immovable object (e.g. house) that it becomes part of the realty under property law; e.g. lights, heaters, etc.

    These are covered by Art. 9
  7. As-extracted Collateral
    A type of collateral providing for rights in oil and gas and other minerals that have been reserved before extraction, so that the SI will attach to the oil as soon as it is extracted.

    Art. 9 applies.
  8. Accounts as Collateral
    Account: right co collect on a promse to pay the D later on a monetary obligation after a sale or lease of non-land related thing (among other items).

    Account = Account Receivable

    Remember - Anytime something is sold or leased in exchange for a promise to pay in the future, an account is created
  9. Deposit Account as Collateral
    Deposit Account is a bank account. Only commercial deposit accounts are governed by Art. 9; not consumer accounts.
  10. Instrument as Collateral
    Instrument (as in a negotiable instrument) is a promise to pay memorialized in a note or certificate of deposit.

    Art. 9 applies.
  11. Chattel Paper as collateral
    paper(s) representing both a promise to pay AND a property right.

    • Two most common examples:
    • 1) any lease of a thing (right to collect future rent + reversionary right)
    • 2) retail installment sale agreement, RISA (promissory note + security agreement)
  12. Inventment property as collateral
    stocks, bonds, certificated/uncertificated, securities accounts, entitlements
  13. General Intangibles as collateral
    other tangible rights not otherwise categorized, including rights in intellectual property and business goodwill.
  14. Attachment
    Creates a valid security interest against the debtor

    • Attachment occurs when the last of 3 requirements has occurred:
    • 1) value must be given (usually past or present loan or a binding promise of a future loan);
    • 2) D must have rights in the collateral to convey; and
    • 3) D must have "authenticated" a written security agreement that provides an adequate dsecription of the collateral."

    Note - authenticated meanse signed or otherwise assented in some perceivable form, e.g., sending an e-mail or voicemail

    Note - oral agreements are acceptable if D agreed to put the collateral in C's possession or control.

    Note - description of the collateral in the SA must "reasonably identify," generally by categories discussed earlier, not just the phrase, "all assets." There is nothing wrong with attaching to all of someone's assets, however they need to be properly described.

    In consumer transactions, the description must be more specific and after-aquired-collateral clauses only apply to consumer goods if the consumer acquires the property w/in 10 days of the secured value has been given.
  15. Attachment to proceeds
    whether or not the SA indicates as much, a SI automatically attaches to whatever the D receives for or on account of the collateral as long as the proceeds are somehow identifiable as linked to the original collateral.

    This is an expansive right. It applies to proceeds of proceeds of proceeds, etc.
  16. Subsequent Transfer of Collateral
    SI follows the property into the hands of other people who acquire the collateral from the D unless the C consents to a relase of the SI.

    When D sells the collateral, C's collateral often doubles b/c he has collateral in the proceeds and the original collateral.
  17. 2 Deals Treated as SI Despite Parties' Desire
    1) Lease Disguised as a Sale: lease of a movable thing, structured so the lessor has no expectation of reversion value will be treated as an installment sale with SI (rather than rental payment w/ right of reversion). Commonly this is a long-term lease over the entire useful life of the subject or an option to buy the leased subject at the end for a 'nominal' value.

    2) Consignment: when delivering non-consumer goods worth more than $1000 to a merchant for sale, law treats the 'consignor' not as owner with a right of return, but a C with a SI in goods IF the merchant (1) acts under its own separate name, (2) is not an auctioneer, and (3) is not generally known to sell other people's goods.
  18. Perfection
    Makes rights of the SI enforceable against third parties.

    • Only after attachment has occurred and one of the various steps for perfection is properly taken:
    • 1) File a UCC-1 Financing Statement
    • 2) Certificate of Title
    • 3) Possession by the C
    • 4) Automatic Perfection Upon Attachment
    • 5) Control of the Collateral by C
    • Perfection as a matter of law
  19. UCC-1 Financing Statement
    Simple one page form filed with the Secretary of State.

    Only records notice to third parties; it does not create rights.
  20. Debtor's Name on Financing Statements
    Name provided must be full, accurage legal name of the D to enable other C's to find the statement. Trade names, nicknames, etc. are insufficient

    If the misspelled/wrong name isn't found by searching on the correct full legal name, the financing statement is "seriuosly misleading," and thus ineffective. The SI is therefore unperfected.
  21. D's Name Change
    If the name change makes the financing statment 'seriuosly misleading, there is no effect on the existing collateral

    But the financing statement will be ineffective to perfect a SI in any new collateral acquired after 4 months after the name change.
  22. Description of Collateral on UCC-1 Financing Statement
    Super-generic descriptions are fine. But to be effective, the filing must have been "authorized" in an authenticated record by the D covering that same collateral.

    If the financings statement describes the collateral more broadly than or before execution of the SA, the filing is unauthorized unless D has signed the financing statement or a separate document authorizing the filing.
  23. Perfection for fixtures and as-extracted collateral
    If the collateral is related to fixtures or as-extracted minerals, etc., the financing statement should be done as a "fixture filing."

    1) it shouldn't be filed with the Secretary of State; it should be filed with the mortgage recrods of the county where the land is.

    2) It should describe the real property with sufficient detail to support a mortgage (more detailed); state that it covers fitures; and identify the owner of the realty if other than the owner of the fixture
  24. Lapse Issues
    The effect of perfection by filing lasts for 5 years after filing. Unless the statement is 'continued' it lapses and is treated in most cases as if the statement had never been filed.

    To extend the effectiveness beyond five years, C must file a form continuation statement in the same office the original UCC-1 was filed during the 6-month period before expiration - no earlier!
  25. Interstate transactions and filing location
    For non-land-related collateral, the financing statement should be filed in the office of the Secretary of State of the state in which the D is located. This state's law governs perfection.

    For Fixture filing/land-related collateral, the financing statement should be filed in the mortgage office where the land is.

    Individuals are located in the state of their principal place of residence.

    "Registered Organizations" are located in their state of registry (state must maintain a record to qualify). E.g., DE corp is located in DE, even if operations are in IL.

    Unregistered organizations are located where their office is, or, if in more than one state, at their chief executive office.
  26. Perfection by Certificate of Title
    for vehicles covered by a certificate of title (e.g. boats and cars), perfection can only be achieved by applying to the governing state agency to have the lien noted on the certificate of title.

    New or used cars in a dealer's inventory, however, are treated as inventory, and perfection in that inventory may be accomplished by filing UCC-1.
  27. Perfection by Possession
    Remember that C's possession of the collateral by agreement satisfies both the writing requirement for attachment and the perfection step.

    Possession is superior perfection to filing for instruments or chattel paper

    Possession through agents requires authenticated acnkowledgment by the agent
  28. Purchase-Money Security Interest & Automatic Perfection
    PMSI is a SI that secures repayment of whatever portion of a loan that is actually used to purchase the collateral

    Perfection is automatic upon attachment only for PMSI in consumer goods
  29. Perfection by Control
    Perfection by control is the exclusive method of perfecting an interest in commercial deposit accounts.

    It is also an alternative methdo for perfecting an interest in investment property, though perfection by control in investment property beats perfection in another way.
  30. Perfection: Control of Commercial Deposit Accounts
    • One of 3 ways:
    • 1) If the secured C is the bank where the deposit account is held, it has control.
    • 2) Control agreement, in which the bank agrees to follow the secured C's instrucitons re: the money in the account; or
    • 3) C can become the bank's customer by adding the C's name to the account.
  31. Perfection: Control of Investment Property
    • Depends on which of three specific forms of holding the investment represents:
    • Certificated Securities: If the stock or bond is represented by a paper certificate, transfer of possession of the certificate to C and proper indorsement or re-registration in C's name on the company's books.

    Uncertificated Securities: rare - delivery means official transfer on the issuer's books into the C's name

    • Indirect Holdings--Securities Accounts and Entitlements
    • Held throough a broker in a securities account. Control is just like control over the deposit account
    • 1) broker holding the account automatically has control
    • 2) control agreement
    • 3) C listed as the account holder on the books of the broker.
  32. Perfection as a Matter of Law in Proceeds
    If the interest in the original collateral is perfected --> Automatic attachment to proceeds over the course of a 20-day grace period.

    • After the 20-day grace period, the perfection continues in 3 ways w/o further action by C:
    • 1) orginal financing statement might describe the proceeds (i.e. by category rather than the word 'proceeds')
    • 2) if the proceeds are identifiable cash proceeds --> continuous automatic perfection in cash and its equivalents, e.g. checks, deposit accounts, etc.
    • 3) Perfection as a matter of law per a 3-part test:
    • (i) the original security interest was perfected by filing;
    • (ii) the proceeds are collateral in which a SI can be perfected by filing in the same office as the original filing; and
    • (iii) the proceeds were not acquired w/ cash proceeds.
  33. Priority Rules
    Secured C's - first to file a UCC-1 or perfect otherwise wins.

    Secured C's v. Lien C's - (Lien C's obtain interest via the judicial process). If the SI is perfected before the lien arises (sheriff seizes or the bankr. pet. is filed), then C wins.

    Fixtures & Lien C's - even if a fixture filing was not made, perfection by any method is effective against Lien Cs

    Buyers in Ordinary Course - a perfected SI follows collateral into the hands of a buyer. BUT, inventory sold in the ordinary course of D's business is generally not subject to the D's lender's SI.
  34. PMSI Exceptions to Priority Rules
    Non-Inventory Collateral: PMSI perfected w/in 20 days of D's receiving delivery of collateral beats all other secured and lien C's (both in the PMSI collateral and in proceeds). If not, then the ordinary 'first-to-file' rule applies.

    • Inventory Collateral: super-priority if C does two things before the collateral is delivered to D:
    • 1) perfect the PMSI; and
    • 2) notify any secured C with a filed-perfected competing interest in after-acquired inventory in writing that the PMSI creditor has PMSI priority in the described inventory

    Proceeds of Inventory: PMSI super-priority only for instruments, chattel paper, and identifiable cash proceeds received on or before delivery to the buyers of the inventory. BUT, when inventory is sold on credit, an account is created. PMSI super-priority in the account and its proceeds is cut off.
  35. Repossession
    After default, secured C's can repossess without notice, and by any means, so long as the C avoids breaching the peace.

    Collecting Accounts: repossess by telling account Ds (D's Ds) to pay C. Payment to the D is no longer effective to discharge the account D's debt. Account debtor can assert any defenses to payment and demand proof.

    D can redeem the collateral by paying off the debt plus C's expenses and fees.
  36. Redemption
    • D can redeem the collateral by paying off the debt plus C's expenses and fees.
    • D has to exercise the right to redeem before that right is formally foreclosed or D waives, only after default
  37. Foreclosure by Sale or Other Disposition (After Default)
    • Court sale is possible. More realistically, C simply sells the collateral without recourse to the courts.
    • Commercially Reasonable: Sale can be public or private, but must be "commercially reasonable. Note that just b/c a better price could have been achieved by another method doesn't make the method chosen commercially unreasonable.

    C Bidding at a Private Sale: C can only bid if collateral is of a kind customerily sold on a recognized market or the subject of widely distributed standard price quotations. So C can't sell most things to himself, but he can sell stocks, commodities, etc. to himself.

    Notice: C must send notice to D, any guarantors, and if the collateral isn't consumer goods, other parties who C knows have interests in the collateral. D can waive notice only by authenticated record after default.

    Note that notice isn't required if the collateral is perishable, will depreciate quickly, or is of a tyupce customarily sold on a recognized market.

    Notice must be sent 'reasonably' timely. In non-consumer cases, 10 days before disposition is sufficient. No specific rule for consumer cases.
  38. Disposition of Sale Proceeds (after default)
    • 1) creditor's cost of sale;
    • 2) secured debt to disposing C;
    • 3) debt to subordinate secured Cs
    • 4) any excess returns to the debtor, though more commonly the D remains laible for any deficiency

    In consumer cases, if deficiency is demanded, a written explanation of how the deficiency was calculated must be provided as well.
  39. Strict Foreclosures
    C negotiates to buy collateral from the D

    Proposal: C sends the D a 'proposal' for forgiveness of some or all of the debt in exchange for the sale.

    Notice: C must notify other Cs who C actually or constructively (via UCC-1) knows have an interest in the collateral

    Assent: proposal accepted if, w/in 20 days of sending, D assents by failure to make a written objection, and no other notice party objects. If the proposal is only for partial satisfaction, D must send a record of assent

    • Consumer Exceptions:
    • 1) only full satisfaction of the debt
    • 2) collateral can't be in D's possession at the time of the proposal
    • 3) no strict foreclosures for consumer goods if D has paid 60% of the principal amount of the loan (D can waive this restriction after default).
  40. Remedies for C's Failure to Comply
    Actual damages for anyone actually injured

    • Loss of Deficiency
    • C must prove it complied with rules and a deficiency nonetheless remains. In a non-consumer case, it is presumed that a commercially reasonable sale would have left no deficincy.

    • Statutory Damages in Consumer Cases
    • Damage awarded in every violation in consumer cases of at least 10% of the original principal of the secured loan plus all interest paid over the life of the loan.