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51 Cards in this Set
- Front
- Back
Definition of a Secured Transaction
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Transaction intended to create a security interest in personal property or fixtures.
Elements to look for: 1) Credit transaction -- sale on credit or a loan 2) Agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt |
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Definition of Security Interest
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Dormant or contingent Interest in debtor’s personal property or fixtures that secures payment or performance
When DEFAULT occurs, the interest springs to life and creditor has rights to collateral |
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Two kinds of Purchase Money Security Interest
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1) Seller-Financed -- Secured party sells debtor collateral on credit and retains security interest in sold items
2) Financer Financed -- enabling loan allows debtor to buy specific collateral – Creditor takes security interest in the collateral |
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After-acquired property clause
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Creditor takes interest in property debtor has now AND property debtor has in the future
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Future Advance Clause
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Agreement to make future loans to debtor securing them in the present security agreement
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Definition of Attachment
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Step at which creditor becomes secured – provision in the contract giving dormant interest
Effective as against the debtor |
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Definition of Perfection
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Steps required to give the secured party an interest in the collateral that is effective as against the world
Process of giving public notice of the lien |
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Financing Statement
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Document giving public notice of security interest
Used to perfect an interest |
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Two major types of Collateral
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1) Goods
2) Semi-tangible and Tangible property |
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Collateral -- 4 categories of goods
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1) Consumer Goods -- used or bought for personal, family or household use
2) Equipment -- used in business 3) Farm Products -- Crops, livestock, supplies 4) Inventory -- held by owner for sale or lease |
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Collateral -- Categories of Intangible and semi-intangible property
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Learn these, dammit! There's 8 of them
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Tips for classifying goods as collateral
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Look at how the item is being used by the debtor
Creditor’s actions are irrelevant |
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Scope of Article 9
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Applies to:
Any transaction creating a security interest in fixtures or personal property by contract Applies regardless of the wording of the parties as long as it creates a contingent interest in the property of another – Art. 9 applies |
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Leases under Article 9
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Leases are NOT covered by Art. 9
“Leases” that are actually sales w/ security interests ARE covered by Art. 9 Relevant question: At the time the parties entered into the transaction, was it reasonably likely that the “lessor” would get the item back when it still had meaningful economic value? |
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Three Elements required for attachment
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1)Security Agreement
2) Value given by Secured Party 3) Debtor has rights in the collateral |
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Possession of collateral under a security agreement
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1) If secured party in possession of collateral: no need for a writing.
2) If debtor in possession of collateral: Need written security agreement, contract or record Written security agreement must: A) Show intent to create a security interest; B) Be authenticated by the debtor; C) Description of the collateral |
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Three factors defining the scope of security interests
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1) Debt Secured May include future advances (agreement that collateral covers present and/or future loans)
2) Property may include property acquired by debtor in the future (eg. inventory) 3) Property Secured generally includes proceeds (whatever is received from sale, exchange or other disposition of collateral) Must be identifiable |
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Identifying cash proceeds from specific collateral (security of proceeds)
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Lowest intermediate balance test:
1) Look to the bank account starting at the time the proceeds are deposited and ending at the time the test is applied 2) The lowest balance during that time is the secured party’s identifiable proceeds |
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Methods of Perfection
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1) Automatic Perfection
2) Possession 3) Control 4) Notation of lien on certificate of title 5) Filing of notice (most common) |
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Automatic Possession
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PMSI in CONSUMER GOODS -- Perfection is instantaneous with attachment
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Perfection by POSSESSION
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Secured party’s taking possession of collateral puts world on notice
Generally only applies to tangible goods |
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Perfection by CONTROL
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Security interest in investment property and electronic chattel paper may be perfected by control
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Perfection by Notation of Lien on certificate of title
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The ONLY way to perfect a SI in automobile if for lien to be noted on the certificate of title
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Perfection by FILING NOTICE
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Secured party files notice of security interest in public records.
Proper filing puts potential competing creditors on record notice of interest. What is filed: 1) Security Agreement 2) Financing Statement |
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Required contents of a Financing Statement
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1) Debtors Name and Address
2) Creditor's name and address 3) Description of Collateral |
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Consequences of errors in financing statement
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Errors that are seriously misleading make filing ineffective
Secured creditors not responsible for errors made by filing office |
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Perfected interest in proceeds
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If perfected interest in collateral – you have a perfected interest in proceeds for 20 days after the exchange.
To remain perfected beyond those 20 days, secured party must take new action UNLESS: 1) Proceeds are identifiable cash 2) Security in original collateral perfected by financing statement and financing statement for proceeds would be filed in the same place |
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Perfection -- Debtor's change in the use of collateral
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If debtor changes use of collateral (eg. from equipment to inventory) the filed financing statement remains effective to perfect
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Definition of Priority
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Priority determines who gets paid first out of proceeds of Collateral sale if and when debtor defaults.
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Rules of Priority -- Perfected Secured Party vs. Perfected secured party
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First to file OR perfect has priority, which ever of those is first
Knowledge of other interests is irrelevant Only applies when both are perfected |
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Rules of Priority -- Unperfected Creditor v. Unperfected Creditor
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First to attach wins
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Rules of Priority -- Perfected Creditor vs. Unperfected Creditor
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Perfected creditor always wins
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Special Rules of Priority -- PMSI in goods other than inventory or livestock
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Has priority over conflicting interest in same goods if interest is perfected at the time debtor received possession of collateral or within 20 days
If requirements are not met – back to general rule |
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Special Rules of Priority -- PMSI Seller Financed vs. PMSI Financer Financed
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Seller PMSI wins.
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Special Rules of Priority -- Investment Property
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Interest perfected by control has priority over interest perfected by any other method
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Special Rules of Priority -- Deposit Accounts
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Control is the only method of perfection
Security interest over bank account has priority over interest in proceeds deposited into the account |
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Priority -- Secured Creditor v. Buyer of Collateral
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• If sale is authorized (express or implied) by secured party (free of the SI) -- Buyer takes with no SI attached
Unauthorized Sale -- Good Faith Buyer in the ordinary course of business takes free of SI created by its seller |
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Consumer to Consumer sales
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Buyer takes free of SI if:
1) Buys without knowledge of SI 2) Pays value 3) And if purchased for personal, family or household purposes UNLESS: Secured party files financing statement covering the goods PRIOR to the purchase |
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Priority -- Secured Party v. judgment lien holder
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If SP perfects before the lien took effect, SP wins
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Priority -- Ultimate Rankings
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Higher ranking = Higher priority
Same Ranking = First in time has priority 1) Buyer in ordinary course of business 2) Perfected Secured Creditor 3) Lien creditor 4) Non-ordinary course buyer 5) Unperfected secured party 6) General Unsecured Creditor |
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Definition of Default
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Breach by debtor. Defined by Security Agreement
Triggers rights of Secured Party to proceed against collateral |
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Default -- Creditor's Options
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1) Self Help Repossession (can't be made over debtor's protest)
2) Possession by Judicial Action 3) Strict Forclosure 4) Sale 5) Action For Deficiency Judgment |
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Default -- Possession by Judicial Action
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Secured party may also go to court for judicial writ ordering sheriff to obtain possession of collateral and deliver it to secured party.
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Default -- Strict Foreclosure
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Occurs when secured party lawfully retains collateral in full satisfaction of debt (and debt, in turn, is canceled).
Process: 1) Written notice to debtor 2) Consumer Goods -- notice to 2nd obligors 3) Non-Consumer goods -- Notice to other secured parties Any objection prevents foreclosure |
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Default -- Sale
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Secured party may sell collateral and apply sale proceeds to debt.
Can choose whether sale will be public (i.e., public auction) or private. Requirements: 1) Must be commericially reasonable 2) Notice must be sent |
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Default -- Action for Delinquency Judgment
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If sale of collateral not enough to satisfy outstanding collateral secured party can proceed against debtor for deficiency judgment.
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Default -- Debtor's limited right of redemtpion
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To redeem, debtor must pay amount owed on missed payments PLUS interest and reasonable expenses (attorney’s fees).
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Definition of Fixtures
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Goods so related to particular real property than interest in them arises under real property law
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Perfection of Fixtures
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Must make a “fixture filing” -- Identifies real estate -- Name of the owner
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Fixtures -- Creditor's rights on default
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Right to take collateral, regardless of impact on property
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Fixtures -- Priority
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Perfected Secured Parties prevail over subsequent purchasers of real estate.
Prior real estate interests prevail over Perfected secured interests IF they are properly recorded. Exception: PMSI prevails if perfected by fixture filing before goods become fixtures or within 20 days thereafter |