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(2) But if it’s for entire life of car – that is a security interest, not a lease = UCC applies!
o Or, if you have the ability to buy carfor one dollar at the end of a long time, then that’s really a security interest.
o (1) landlord’s liens.
o (2) interests in real property (mortgage)
o (3) assignments of claims of wages orsalary
o (4) assignment of right to payment undercontract
o (5) fixtures: once something has beenincorporated into real property, Art 9 doesn’t apply; have to deal with real property statutes/laws.
*Note1: Raw materials/work in process
*Note2: materials used or consumed in a business (office supplies at an accountingbusiness)
(a) Fixtures: once something has beenincorporated into real property, Art 9 doesn’t apply
(b) Accession: instead of a good, it’sjust goods attached to another good (Expensive bicycle seat for a bycicle).
(c) Co-mingled goods: (eggs into a cake) --> End up with a security interst in the final product.
GIST: Paper which represents something ofvalue.
- Draft or a note that evidences a right to payment.
- Documentsof title: some goods stored somewhere and you have a warehouse receipt givingyou title.
(3) Chattel Paper:
- Record that evidences two things:
(a) a monetary obligation (a loan), and (b) a security interest, or lease, of some goods
Anything else of value that isn't tangible:
--> Monetary obligations, Literary rights, IP rights, Rights to a website, commercial tort claim,
o General Intangibles: any kind of personal property subject to ownership that doesn’t fit into theabove categories.
o Account Receivable: outstanding obligation to pay for sale; please pay me 30 days from now.
Can be goods, or services.
§ Once you’ve done something, until you’ve been paid, there’s an account receivable.
§ Or if you’ve agreed in advance to do something, you can have an account receivable even before you do the service/sell the good.
§ *Exam Tip*: if you see a fact pattern where someone owes money, but there’s no instrument or written obligation, likely an account receivable.
Certificated securities: has been issued in a stock certificate form. Can grant security interest in this.
Uncertificated securities: Securities entitlement (no certificate, but proof that you own.) Can also grant security interest in this.
- Rule of Proceeds: All else equal, after collateral is sold, the security interest holder will then have a security interest in the proceeds from the sale.
*Thisincludes if the widgets are destroyed; any insurance money you collect willthen have a security interest on it.
General rule: normally, a writing is required for a security interest UNLESS secured party has possession of the collateral.
If secured party has collateral, then you only need an *oral agreement* assuring the secured party that the collateral entails a security interest. (A "Pledge.")
- Exam Note 1: This happens at pawn shops
- Exam Note 2: For some collateral, “control” is possession
Sufficient if it describes it by “UCCtype:” according to definitions above (including chattel, tangible intangibles,etc.)
*Exception 1: can’t grant a securityinterest in all of your consumergoods. (Must denominate specific goods.)
*Exception 2: Cannot have a super generic description. Cannotsay, “all assets” or “all property.” Must be more specific than this.
- Governedby K interpretation: “Debtor grants to secured party interest in allequipment now owned, and all after here acquired.”
*Note: Ifit doesn’t say “after acquired” then court will likely interpret K *against* someone claiming that they had security interest in future collateral.
§ Exception 1: Inventory and accounts receivable: constantly churning, so you don’t have to say “after acquired” as well – it’s deemed implicit.
§ Exception 2: Cannot have endless right in after acquired consumer goods – only those bought 10 days after exchange of value. (Protects consumers.)
§ Exception 3: No right to an after acquired commercial tort claim.
Can add a clause which pertains to "future advances" --> Contract says: this collateral also applies to any future advances (loans)that I make to you.
Often:this and after acquired collateral both happen. (Again, except for consumergoods limitations.)
Default rule is that secure party has interest in:
(1) any proceeds from the sale of the collateral
(2) AND a security interest in the original collateral
o Bank has choice: can go after thecollateral when it gets to new buyer, or can go after proceeds from sale ofcollateral.
§ *ExamNote 1: Look for money that it loaned (even from parents) contingent upon himbuying a specific thing; or for seller financing in the store.
§ *ExamNote 2: If you don’t use the loan directly for the purchase, then no PMSI. Evenif the person then goes out to buy the item anyway. (Parents issue check forpurpose of buying stove; but buys video games instead, and uses credit card tobuy stove. Not a PMSI.)
§ (B)Taking possession
§ (C)Control of collateral
§ (D)Automatic perfection
Basics: File financing statement.
(1) Location:secretary of state’s office
(2) Unless, fixture: then file at county records w/ deeds and mortgages (real estatestuff)
(1) Fixtures: filed with real estate items at county records (deeds/mortgages, etc.)
(2) Cars: Cars are a big exception! (Governed by a different set of laws; not Article 9).
General: not required to do financing statement if the goods are subject to some other titles laws.
(3) Normally, location of the DEBTOR state:
o (1) if corporation, located where registered
o (2) non registered corp (partnership), then place of biz. (if more than one, pick the primary place of biz.)
o (3) principal residence if debtor is individual
(1) Only works with tangible goods (consumer goods, instruments, tangible/intangibles).
(2) NOT with intangible intangibles
Note: what if the good is too big to possess?
- Canget a third party to hold on your behalf.
- Ifyou do it: third party who holds it must acknowledge in signed writingthat they are holding this on your behalf.
Secured party who has taken possession of collateral must use reasonable care.
- Must keep items identifiable, unless fungible, then *okay* to comingle.
- Can keep proceeds generated by collateral, *unless* money. BUT:
(1) reasonable expenses charged to the debtor.
(2) risk of accidental loss is still on debtor
(3) money received from collateral must be given to debtor
Preferredway of perfecting is not filing;it’s control
· (A) “Certificated to bearer”= whoever holds is entitled to it. (If you hold it, you control it.)
· (B) “Certificate to individual --- Wayne Barnes,” = hasto be indorsed over by Wayne. (So need indorsement and control.)
· (C) “Uncertificated securities” = need toenter into three way contract. (“Company says to bank, we acknowledge that youare getting control over Wayne’s shares.” If Wayne defaults, you get.
· Gist: Three way agreement where buyerwants to buy from seller and seller doesn’t want to extend credit.
· Need to get the letter of credit bankissue to consent to the fact that there’s a security interest – this iscontrol.
**Your own bank**: (A) If you borrow from bank where youraccount is, then they already have control over the deposit account. (“HomeBank Rule.”)
** Different bank**:
o (B) Option 1: enter three way agreement, making sure that the other bank will agree with what you say after the default.
o (C) Option 2: get them to sign the account over to the second bank.
(1) If paper form, perfected = when you have possession
(2) If electronic form, must be able to verifythat you have "access to the single authoritative copy."
Once attached as secured party, it’s indefinite.
(1) PMSI in security goods
(2) Small assignment of accounts or payment intangibles that does not transfer significant part of assignor’s outstanding accounts.
-- Exam Note: Look for something that’s really small (1out of 500 accounts receivables) = small enough to be automatically perfected.
(3) Security interest in investment property created by a broker or securities intermediary
Gist: Grace period before you file/perfect.
THREE cases: (All 20 day window).
(1) Proceeds from sale of original collateral:
(2) New loan which has been taken out and secured by securities/negotiable instruments
*Remember relate back doctrine
(1) Proceeds: automatically perfected for20 days and cuts off after that UNLESS:
Example 1: Filed financing statement and no cash. Requires: (A)A filed financing statement covered the original collateral; (B)Proceeds are collateral in that security interest may be filed in office inwhich financing statement was filed. (Always SoS unless fixtures or cars). AND; (C)Not cash proceeds. If all three = perfected indefinitely.
Example 2: Proceeds for cash = indefinitely protected
PMSI's also have a 20 day grace period:
Important: hypo: you’ll beat the lien creditorthat comes after the PMSI, as long as you get there before the 20 day graceperiod.
Also prevails over all other securedcreditors.
As long as you file, it will relate back to time of PMSI.
o (1) Name of debtor
o (2) Name of secured party
o (3) Description of collateral (can be quite generic: "all assets" or "all property"
Note: *Debtormust authorize filing of financing statement, but deemed automatically to do soonce they enter into a security agreement.
§ Becomespart of real estate
(1) all stuff above forfinancing statement
(2) statement that it covers fixtures
(3) statement that it will be filed inreal property records
(4) provide description of real property
(5) if debtor doesn’t have interest ofrecord in real property, provide name of record owner
Notauthorized if: (1) filed in wrong place, (2) not authorized by debtor (again, presumed that it is), or (3) “seriouslymisleading information”
* Okayif small mistakes – not “seriously misleading”
Exam **NOTE ** Debtor’s name must be PERFECT:
· If not, considered seriously misleading.
· Exception:if standard search logic would bring up the wrongly misspelled person anyway,then no harm no foul. Rule = “Search logic exception.”
Proceeds: If collateral is sold, then have 20 days to update financing statement to perfect new collateral.
Name Change: FOUR month grace period before secured party must update. (Otherwise, not secured).
State Change: Four month grace period
Generally: "First in time, first in right." (Unless PMSI)
(1) If two unperfected security interests: first to *attach* takes priority.
(2) Perfected secured party trumps un perfected secured party
(3) Two perfected secured parties: first timely filed or fully perfected has priority.
(4) *Note: Lien creditors has same logic. If lien takes place before security interest, they trump.
(1) Has to be continued w/o interruption. If there’s a lapse, can’t relate back. (Lookfor gaps!)
(2) You can file a financing statement even before a security agreement has been made; can file in anticipation!
(3) If chattel or instrument, perfection by possession trumps perfection by filing.
"Secondin time, but first in right status"
As long as PMSI perfects w/in 20 days, they get super priority, even oversomeone who had a prior perfected security interest in a property!
If PMSI in inventory – 20 days after possession is not going to do it.
In order to have super priority for inventory, PMSI party must: (1) notify prior security interest holder in authenticated record (writing) that it expects to obtain a PMSI in the collateral; (2) perfected by the time debtor gets possession of the PMSI inventory (no 20 day grace period).
Accessions: (Seat on bicycle)
Securityinterest in accession is subordinate to an interest in the whole.
· If you get security interest in tires,will go down to someone who has security interest in the whole.
Same for commingled goods:
§ Ifthere are two interests in parts of the goods (one person has interest in eggs;one in flour) = TIE
(1) buys in good faith
(2) without knowledge that it violatesrights of someone else in the goods
(3) buys in ordinary course fromperson/company in biz of selling those goods (i.e. best buy/merchant)
Exam note: Look for big retail stores, etc.
Hypo: Even if chase bank has a securityinterest in all of Best Buy’s inventory, that security interest won’t allowchase to come and confiscate it from your house after you’ve purchased it.
Buyer takes free of anysecurity interest if:
o (1) buys for value
o (2) without knowledge of securityinterest
o (3) before financing statement is filed
**Trumps PMSI stuff bc/ will be nofinancing statement! Eg. Best Buy sells to Marco with PMSI. Nofinancing statement bc it’s a PMSI. Marco then sells to Susie. Susie takes freeand clear provided she met three requirements above.
Buyer of chattel paper has priority if:
o (1) buy in good faith in ordinary courseof biz
o (2) buyer gives value and takespossession or control
o (3) chattel paper does not indicate thatit has been assigned to someone else
Example: Article 9 lender vs. mortgage lender –both claiming security interest
--> General rule: mortgage lender wins
§ (1)first in time (rare)
§ (2)fixture acquired in PMSI, but must: file in 20 days, and must file a fixture filing. If you do, you have super priority over even prior mortgage holder.
(1) Sue to get judgment on debt.
(2) Proceed on collateral (selfhelp okay, so long as it does not breach the peace).
(3) For Accounts receivable, instruments orchattel paper youcan go straight to the holder of the account and tell them to bay you. (Mustprovided proof that you are entitled to the account.)
Mustpay (1) what’s owed, (2) interest, and (3) atty’s fees.
BUT, onceit has been sold or collected on, that’s too late!
Note:Cannot waive right of redemption, except when: after the default and inwriting.
(1) Commercially reasonable
(2) Provide advanced notice to debtor (usually 20 days, but doesn't count for collateral like stock that can depreciate quickly)
(3) Reasonable content of notification ofsale
§ (1)must be made in usual manner on recognized market
§ (2)at the price that’s current in that market
§ (3)otherwise in keeping with reasonable commercial practices
· Description of debtor and secured party
· Description of collateral
· Method of intended disposition
· Statement that debtor is entitled toaccounting
· Time and place of public disposition
*Most important: state that if we don’t get enoughfrom this, you will owe the balance.
· Description of any liability for adeficiency
· Telephone number the debtor can call
· Telephone number or mailing address fromwhich additional info is available.
§ If you don't follow the requirements, it creates a rebuttablepresumption: if commercially unreasonable aspects, debtor can say: “if you hadfollowed the rules, you would have gotten the full amount of the debt.”
§ Basically:creates presumption that the creditor can’t get the deficiency. But creditorcan of course rebut.
How do proceeds from a default sale get divided?
§ (1)Costs and expenses of sale
§ (2)Pay off secured party’s debt
§ (3)Then junior secured party
§ (4)Whatever’s left = debtor gets it.
· *But, debtor is also reasonable fordeficiency!
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