amarkeson's version from 2017-05-06 00:05

Scope of Security Interest

Question Answer
Secured Transactions gatekeeperArticle 9 of the Uniform Commercial Code ("U.C.C."), as adopted by North Carolina, applies to a transaction that creates a security interest in personal property by contract.
What is a security interest?SI created when a creditor gives the debtor "SOMETHING OF VALUE" in exchange for the debtor providing the creditor with "AN INTEREST" in the debtor's personal property, known as the COLLATERAL.
What are Article 9 (3) requirements for attachment?(1) a signed (or authenticated) written SECURITY AGREEMENT that SUFFICIENTLY DESCRIBES the collateral; (2) the creditor gives VALUE to the debtor (value=consideration); and (3) the debtor HAS PROPERTY RIGHTS to the collateral.
What is "after-acquired" clause?A valid security agreement (with this clause included) will create a security interest in property to be acquired in the future and will attach to the property as soon as the debtor acquires an interest in the property.
What collateral doesn't an "after-acquired" clause attach?(1) commercial tort claims and (2) consumer goods, unless the debtor acquired the goods WITHIN 10 DAYS of the creditor giving value.
When will the court imply an "after-acquired" clause?When collateral is of the type that is RAPIDLY DEPLETED AND REPLENISHED (e.g., accounts and inventory).
Will a security interest automatically attach to proceeds?YES. A proceed is anything debtor receives for the sale, exchange, or disposition of the collateral. SI automatically attaches to "IDENTIFIABLE PROCEEDS" of collateral, whether or not the security agreement reserves a security interest in proceeds.
What is the effect of attachment?Makes the security agreement enforceable as against the debtor, and the debtor alone.
When does a PMSI arise?A Purchase Money Security Interest "PMSI" arises when a creditor (A) advances funds that are used by the debtor to purchase goods or (B) sells the goods to the debtor on credit, AND retains a security interest in the goods as security for the debt created.
What is the rule of priority for a PMSI in equipment?PMSI in equipment has priority over ALL OTHER SI in the same goods al lonh as it is perfected BEFORE OR WITHIN 20 DAYS after debtor obtains possession of the goods.

Classification of Collateral


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Why is classifying collateral important?Because the RULES OF PERFECTION and PRIORITY depend on the type of collateral involved.
What is the test for classifying collateral?How the debtor is "primarily USING THE GOODS at the time the security interest attaches.
What are the three broad classifications of collateral?(1) Goods; (2) Intangible and Semi-Intangibles; and (3) Proceeds.
What is a "GOOD"?All things holdable/movable at the time of attachment
What are the four types of GOODS?CEFI - (1) Consumer goods - "personal, household, family purposes": (2) Equipment - "used in business" - long term); (3) Farming products - "produced in farming operation"; and (4) Inventory - "held for sale or lease" - short term.
What are the types of Intangibles and Semi-Intangibles(1) INSTRUMENTS (writing that evidences a right to payment); (2) DOCUMENTS (writing to evidences right to receive goods); (3) CHATTEL PAPER (record evidences BOTH monetary obligation and security interest)< (4) INVESTMENT PAPER (stocks and bonds); (5) ACCOUNTS (right to payment NOT evidenced by a writing); (6) DEPOSIT ACCOUNTS (nonconsumer account maintained at a bank); (7) COMMERCIAL TORT CLAIMS (filed by organization or individual that arose out of business and NOT personal injury); and (8) GENERAL INTANGIBLES (catch-all, goodwill and payment intangibles)
What is a "DEPOSIT ACCOUNTS"?Intangible/Semi-Intangible Category... NONCONSUMER account maintained at a bank...must be a "business bank account" and NOT a personal account.

PERFECTION - Automatic


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What is the effect of perfecting a security interest?To acquire MAXIMUM priority in the collateral over third parties.
Automatic PerfectionPMSI in consumer goods is automatically perfected upon attachment (EXCEPT with motor vehicles which must be perfected by notion on Certificate of Title. NOTE: Should file a FS to project against BFP.
Should a creditor still file a financing statement for a security interest that automatically perfected?YES! To protect against GARAGE SALE RULE, whuch allows a BFP to take free of a SI in "consumer to consumer" sales, even though it is perfected.
What is a BFP?(1) buys WITHOUT knowledge of SI: (2) for VALUE; and (3) for his own personal, family, or household purpose. Garage Sale Rule only applies when sale is between TWO CONSUMERS.
How long are PMSI in consumer goods and equipment automatically perfected for?For 20 DAYS, automatic for fixtures for 20 DAYS upon attachment, then BECOMES UNPERFECTED on the 21st DAY unless perfected by another method.

PERFECTION - Possession


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What is perfection by possession?Creditor possesses the collateral. Will apply to most types of collateral except to items you cannot PHYSICALLY POSSESS (accounts, general intangibles).
When does perfection by possession occur?Perfection occurs at the MOMENT OF POSSESSION (no relation back to date of attachment) and continues so long as possession is RETAINED. Money can ONLY be perfected by possession.



Question Answer
What collateral may be perfected by control?SI in INVESTMENT PAPER (stocks, bonds) and ELECTRONIC CHATTEL PAPER may be perfected by control.
What is the ONLY way to perfect (nonconsumer) DEPOSIT ACCOUNTS?By CONTROL
What are the 3 ways to exercise control over (nonconsumer) Deposit Account?(1) Bank where deposit account is MAINTAINED automatically has control over the account; (2) if the creditor is not a bank, it may obtain control by either (a) putting deposit account in creditor's name as CO-OWNER or (b) by executing a CONTROL AGREEMENT.

PERFECTION - Notation on Certificate of Title


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How does creditor perfect by notation on certificate of title?Creditor makes a notation of lien on the certificate of title (must do it officially)
What is the ONLY method to perfect SI for motor vehicles?Notation of Certificate of Title and any other item with certificate of title (this trumps rule for automatic perfection of PMSI in consumer goods)
Who is excluded from certificate of title perfection ruleCar dealers and rental car companies...since they are holding the car as INVENTORY, the creditor must perfect by filing a FINANCING STATEMENT against the inventory, need not notate certification of title.

PERFECTION - Of Proceeds


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What are proceeds?Proceeds = ANYTHING that is "acquired" upon the SALE, EXCHANGE, or other DISPOSITION of collateral.
How long does the rule of perfection of proceeds last?20 DAYS, UOA, a security interest automatically gives a secured party right to "IDENTIFIABLE PROCEEDS", IF collateral is exchanged for proceeds for 20 days after debtor receives interest in proceeds.
How may a creditor maintain a SI after 20 days?File a financing statement in the jurisdiction in which the debtor is located.
What is the Proceeds 20 DAY Rule?If collateral is exchanged for proceeds there is an automatic perfection in the security interest in the proceeds the debtor receives for 20 DAYS so long as the proceeds are (1) IDENTIFIABLE and (2) TRACEABLE directly to the original collateral.
What are the exceptions to beyond 20 days(1) proceeds are identifiable cash proceeds: (2) same office rule - the SI in the original collateral was perfected by filing a FS, a FS for SI in the type of collateral constituting the proceeds would be filed in teh same place as FS was filed for original collaterl, or (iii) SI in proceeds is perfected within 20 day period.



Question Answer
How to perfect with FS?Creditor may perfect a SI by filing a financing statement with the Secretary of State in the DEBTOR'S JURISDICTION.
What should be included in Financial Statement?(1) Name and address of the debtor; (2) Name and address of secured party and (3) description of the collateral. (reasonably identifiable)
What must be included in the FS?(1) Debtor's name; (2) description of collateral; and (3) authorization by debtor
How are financial statements indexed?FS are indexed UNDER THE DEBTOR'S NAME. For a registered organization, it is the name on the most recently filed public organic record.
What happens when a financial statement fails to sufficiently name the debtor?It is considered "SERIOUSLY MISLEADING unless a search of the records under the debtor's correct name, using the filing office's standard logic, would reveal it.
What happens when a debtor changes his name?It may make the FS seriously misleading. In such case, the FS will perfect a security interest in collateral obtained BEFORE OR WITHIN FOUR MONTHS after the name change, and no farther, unless an amendment to the FS, which renders the FS not seriously misleading, is filed within FOUR MONTHS after the change.
Is misspelling of the debtor's name ok?Yes, and other errors are ok, so long as the error is NOT SERIOUSLY MISLEADING. Further, creditor is not responsible for filing office errors.
How should the collateral be discribed?Must be sufficient enough to "reasonably identify" the collateral. Super generic descriptions ARE OK!! (e.g., all assets)
Must the debtor sign?No signature required however, the debtor must authorize the filing in an authenticated record.
What is IPSO FACTO authorization?Debtor automatically authorizes FS if he authenticates (signs) a security agreement covering the same collateral.
Where must FS be filed?With Secretary of State WHERE THE DEBTOR IS LOCATED. "Real estate" must be filed with (local register of deeds office in county) where property is located.
What collateral must be filed in Country Register of Deeds Office?(1) Mortgages; (2) fixtures; (3) timber to be cut; (4) minerals and gas.
For how long is a FS effective?5 YEARS from the date of filing.
Can a FS be continued?YES. By filing a "Continuation Statement" Must be filed in the LAST 6 MONTHS of the 5 year life of the FS.



Question Answer
When do priority problems arise?When more than one creditor seeks to enforce interest in the same collateral.
What is the general rule to priority?The FIRST IN TIME TO PERFECT has priority over later perfected security interests. And subsequent judgment liens in that same collateral. Also, a perfected security interest has priority over an unperfected security interest.
What is BOIC?Buyer in Ordinary Course of Business - buyer who purchases goods from MERCHANT in good faith, without knowledge that sale VIOLATES RIGHTS TO ANOTHER PARTY in goods, and in the ordinary course from person in the business of selling such goods. The merchant (seller) must be in the business of selling goods just like the collateral.
What is the Hierarchy of Priority?(1) Buyer in Ordinary Court of Business (BIOC); (2) Perfected Attached Creditor; (3) Lien Creditor; (4) Non-Ordinary Course Buyer (NOCB); Attached Unperfected Creditor; and General Unsecured Creditor



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What is a fixture?Personal property ATTACHED/AFFIXED to the real estate with the intent that it becomes a PERMANENT part of the real estate.
Where do you file a "FIXTURE FILING"?In the county Register of Deeds Office in county where property is located.
What must be in fixture filing?Must "reasonably identify" the real estate in addition to the usual requirements.
What does fixture filing have priority over?Any REAL ESTATE INTEREST that arises subsequent, but NOT prior to the perfection of the SI by fixture filing. However, a PMSI in a fixture TAKES PRIORITY over a prior realty interesr if perfects by a fixture filing BEFORE the goods become fixtures or within 20 DAYS thereafter.
What is the exception to fixture filings with regard to construction liens/mortgages?EXCEPTION: Construction lien/mortgage (properly recorded) takes priority over subsequent PMSI in a fixture if (a) mortgage/lien recorded (attached) to property prior to installation of fixtures and (b) fixture becomes attached to the property PRIOR to the COMPLETION of construction.



Question Answer
Where do rights on default arise from?The Security Agreement. Article 9 does NOT define the events that trigger default, rather the security agreement usually provides that upon certain events, the secured party may exercise default remedies.
What is self-help?Secured party is entitled to take possession of the collateral WITHOUT JUDICIAL PROCESS.
What is the limitation to self-help?Must be done WITHOUT a "BREACH OF THE PEACE"
What constitutes breach of the peace?"Potential to lead to violence" = physical objection of debtor = physical presence
What is a consequence of breaching the peace?He loses his authorization and may be SUED for CONVERSION and ACTUAL DAMAGES.
What must a party do to RETAIN collateral in full or partial satisfaction?Secured party must get (1) the debtor's consent in an authenticated record or fails to object in 20 DAYS; (2) secured party must send PROPOSAL to all other secured parties who have provided notice or an interest or filed a financing statement and (3) none of the notified parties objects with 20 DAYS after sending notice.
What is the general rule of sale of collateral?Must be COMMERCIALLY REASONABLE. If commercially reasonable, a secured party may dispose of collateral by public of private proceedings.
What must a secured party do before a sale?(1) Send reasonable notice to ALL secured parties who have provided notice and ALL parties who have filed a financing statement AND (2) the debtor.
What if the proceeds are insufficient to satisfy the debt?The secured party is entitled to a deficiency.
For the sale of nonconsumer goods, what must be included in the debtor's notice of sale?(1) description of the debtor and secured party; (2) method of sale (i.e., private or public); (3) description of collateral; (4) statement that debtor is entitled to accounting; (5) time and place of public sale or time after which private sell will be held; (6) authentication of notice; and (7) sent 10 DAYS or more before sale.
What is the rebuttable presumption of an COMMERCIALLY UNREASONABLE SALE?Rebuttable presumption that the value received by the sale EQUALS the balance due on the debt.
What must a secured party who disposes of collateral send the debtor?A REASONABLE, AUTHENTICATED, NOTIFICATION of disposition.
Will "oral" notice of sale do?NO! Notification must be authenticated. Thus, it may be signed, but cannot be oral.