Term
| Contractual Security Interest |
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Definition
| Contractual: interests in personal property derived from a contract that secures payment or performance of an obligation |
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Term
| Purchase Money Security Interest |
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Definition
| PMSI (Purchase Money Security Interest): special type of SI in goods. A person who holds a PMSI has priority over other security interests in the same goods if certain requirements are met. A PMSI can arise in two ways: a. the creditor sells the goods (collateral) to the debtor on credit, retaining a SI in the goods (collateral) for the purchase price (e.g. debtor buys car from car lot on credit, and car lot retains SI in the car); or b. the creditor advances the debtor funds used to buy specific goods, and the creditor takes a SI in the goods (e.g. debtor borrows money from the bank to buy car from car lot, and bank retains SI in the car for the purchase price) |
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Term
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Definition
Collateral: Article 9 rules vary depending on the type of collateral. To perfect, the collateral must be described in the security agreement, so the following distinctions are made between various types of collateral: 1. Tangible Collateral or Goods 2. Intangible or semitangible Collateral |
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Term
| Tangible Collateral or Goods |
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Definition
Tangible collateral or goods: this distinction depends on the primary use to which the debtor puts the property
a. consumer goods: personal, family, or household goods (e.g., refrigerator, couch, car, hairdryer)
b. farm products: goods used or produced in farming that are in the possession of or used by the farmer (e.g. pigs, corn)
c. inventory: goods held for sale or lease and goods consumed in a business (e.g. fridge at Sears, bacon at WinCo)
d. equipment: goods that are not consumer goods, inventory, or farm products (e.g. tractors, fridge at McDonalds)
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Term
| Intangible or Semi-Tangible Collateral |
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Definition
Intangible or Semi-intangible: this distinction depends on the nature of the collateral (rather than its use) a. instruments: notes, drafts, certificates of deposit b. documents: shows person is entitled to property (e.g., bills of lading and warehouse receipts) c. accounts: rights to payment for goods, services, etc., (such as accounts receivable) d. deposit accounts: savings accounts, passbook accounts, etc. e. chattel paper: records (can be written or electronic) evidencing both a monetary obligation and a security interest in or lease of goods, (such as a promissory note and written security agreement) f. investment property: stocks, bonds, mutual funds, brokerage accounts, etc. g. commercial tort claims: claims filed by organizations or individuals that arose out of the individuals’ business and do not involve personal injury h. general intangibles: those not fitting the definitions of other types of intangibles (e.g., copyrights and goodwill) |
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Term
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Definition
Attachment and Creation of an Art. 9 Security Interest (requires three things; can occur in any order)
1. A security agreement: a written (or electronically stored) security agreement is required unless the collateral is in the possession or control of the secured party pursuant to an agreement (e.g., pledge).
a. SA requirements – (a) record showing intent to create a security interest; (b) authentication by debtor; (c) a description of the collateral.
2. Value given by secured party: this may include any consideration, present or past.
3. Debtor must have rights in the collateral: can only grant a contingent property interest in property it owns.
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Term
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Definition
1. Future advances: a security agreement may provide that the collateral will serve as a security not only for the present obligation, but also for advances the creditor makes to the debtor in the future.
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Term
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Definition
| After acquired property: Without an explicit after-acquired property clause in the SA, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement. (exception: if no explicit after-acquired property clause, the courts will often imply one when the collateral is of a type that is rapidly depleted and replenished. e.g., inventory and accounts) (note: an after-acquired property clause does not apply to consumer goods unless the debtor acquires the rights in the goods within 10 days after the creditor gives full value. Additionally, an after-acquired property clause does not apply to any commercial tort claims.) |
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Term
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Definition
| Proceeds: SI generally continues in proceeds. Proceeds include whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is a proceed. Claims arising out of the loss of, defects in, or damage to collateral also are proceeds. Must be identifiable! If comingled, use the lowest intermediate balance test – lowest balance during time period in commingled bank account. |
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Term
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Definition
| Perfection: deals with rights between secured and third parties. To acquire maximum priority in the collateral over third parties, the secured party must “perfect.” A SI is not enforceable against anyone until it has attached to the collateral. If all of the steps of perfection are taken before the SI has attached, perfection will occur upon attachment. |
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Term
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Definition
1. Automatic Perfection 2. Possession 3. Control 4. Filing 5. Notation of Lien 6. 20-day period for Proceeds |
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Term
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Definition
| Automatic Perfection: a PMSI in consumer goods is perfected as soon as it attaches. (This is only for PMSI in consumer goods—a PMSI for inventory or equipment must be filed to be valid.) |
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Term
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Definition
| Possession: where the secured party takes actual possession of the collateral, the SI is perfected from the moment of possession and continues as long as possession is retained. General intangibles, nonnegotiable documents, electronic chattel paper, certificate of title of goods, and accounts cannot be perfected by possession. |
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Term
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Definition
| Control: SI in investment property and nonconsumer deposit accounts can perfect by control. Bank has automatic control over deposit account. Other parties gain control by putting account in secured parties name or a control agreement. |
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Term
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Definition
d. Filing: a secured party may perfect by filing a financing statement (FS). The FS must contain:
i. the debtor’s name and mailing address (effective unless names are seriously misleading)
ii. the secured party’s name and mailing address (if name change, amended FS must be filed in 4 months)
iii. an indication of the collateral covered by the financing statement; and
iv. if the financing statement covers real property-related collateral, a description of the real property to which the collateral is related [secured party is not responsible for filing office errors]
1. If real estate, file in the county. Everything else goes to the Secretary of State’s office.
2. If debtor is person, file in the state where debtor is located or her principal residence.
3. If debtor is registered organization, file in state where registered organization is organized.
4. If debtor is unregistered organization (general partnership), file at place of business.
5. If debtor moves across state lines you have 4 months to file FS in new state.
6. If collateral moves, creditor has one year to file FS in state of new collateral.
7. FS is effective for 5 years from date of filing. Can be extended by filing a continuation statement within 6 months of expiration.
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Term
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Definition
| Notation of lien: Only way to perfect a security interest in an automobile is for the secured party to note its lien on the certificate of title. (exception: if automobiles are inventory, i.e., dealer, secured party may perfect by filing a financing statement against inventory. |
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Term
| 20-Day Period for Proceeds |
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Definition
| 20 day period for proceeds—a SI in proceeds from original collateral is continuously perfected for 20 days from the debtor’s receipt of the proceeds. This SI becomes unperfected on the 21st day after the debtor’s receipt of the proceeds unless the statutory requirements are complied with. There is a 4 month grace period when a debtor moves to a new state or the organization changes its name. |
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Term
| Secured Party v. Secured Party |
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Definition
| Secured Party v. Secured Party: The first to file or perfect, whichever occurs first, has priority. (special rule: A PMSI in goods other than inventory or livestock has priority for 20 days over a conflicting security interest in the same goods) |
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Term
| Secured Party v. Buyer of Collateral |
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Definition
B. Secured Party v. buyer of the collateral:
a. Authorized sales – If the sale is authorized by the secured party, the buyer takes free of the security interest. This authorization may be express, or it may be implied from the type of sale or from the seller’s conduct.
b. Unauthorized sales – A buyer in the ordinary course of business (other than a person buying farm products from a person engaged in farming operations) takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence. (note: buyer in the ordinary course means a person who buys goods in good faith, without knowledge that the sale violates the right of a secured party in the goods or buys in the ordinary course from a person in the business of selling goods of that kind)
i. Special rule: in consumer to consumer sales (garage sell exception) buyers take free of a SI even though it is perfected if he buys without knowledge of SI, for value, and for his own personal, family, or household purposes. This is true unless the secured party had filed a FS covering such goods.
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Term
| Secured Party V. Judgment Lien Holders |
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Definition
C. Secured Party v. judgment lien holders: An unperfected SI is subordinate to the rights of a person who becomes a lien creditor before the SI is perfected. If SI is perfected before the person becomes a lien creditor, the SI has priority. (note: a “lien creditor” is an unsecured creditor who has obtained a judgment and has levied on that judgment)
a. Special rule: If the secured party files with respect to a PMSI within 20 days after the debtor receives possession of the collateral, he takes priority over the rights of a lien creditor which arises between the time the SI attaches and the time of filing.
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Term
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Definition
| Self-help repossession: After default the secured party is entitled to take possession of the collateral without judicial process if this can be done without “breach of the peace.” When a secured party breaches the peace, he loses the authorization to repossess and may be sued for conversion, trespass, etc. He may also be required to actual and punitive damages. 1. Breach of the peace – any conduct by the secured party that has the potential to lead to violence is a breach of the peace. Generally, physical presence by the debtor plus verbal objection is enough to create a breach of the peace. |
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Term
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Definition
| Retention of collateral: After default and repo, the secured party may propose retaining the collateral in full or partial satisfaction of the debt. Must obtain consent by other secured parties and debtor. If not, must sell collateral. |
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Term
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Definition
| Resale of collateral: After default, the secured party may sell, lease, license, or otherwise dispose of the collateral. 1. Creditor may sell it by public or private sale, and then sue to collect for any deficiency. All aspects of the sale (including the method, manner, time, place and terms) must be commercially reasonable, and the debtor, any sureties on the debt, and, in nonconsumer goods cases, other secured parties generally are entitled to notice. The notice must be sent within a reasonable time before the sale (usually 10 days for nonconsumer transactions) and it must contain details about the parties, the collateral, and time and method of sale (can waive notice after default). For a public sale, notice of the time and place of sale is required. For a private sale, notice of the time after which the sale will occur must be given. |
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Term
| Debtor's Right of Redemption |
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Definition
| Debtor’s right of redemption: Any time before the secured party has sold the collateral or has discharged the debt by retention of the collateral, the debtor, surety, or any other secured party or lienholder may redeem the collateral by paying all obligations secured by the collateral plus additional reasonable expenses. |
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