SECURED TRANSACTIONS PROFESSOR COLIN MARKS ST. MARY'S UNIVERSITY SCHOOL OF LAW

Transcription

1 SECURED TRANSACTIONS PROFESSOR COLIN MARKS ST. MARY'S UNIVERSITY SCHOOL OF LAW CHAPTER 1: DEFINITIONS AND CLASSIFIYING COLLATERAL A. Terms What des it mean t be secured? A secured transactin invlves a relatinship between tw parties, typically a debtr and a creditr, where the debtr has given certain assurances in the frm f a security interest in specific prperty t assure that the bligatin will be perfrmed. Security interest: An interest in r that secures payment r perfrmance f an bligatin. Security agreement: that creates a. Debtr: A persn wh has an interest, ther than a, in the cllateral, such as the sle wner f the cllateral. Obligr: A persn wh with respect t the bligatin that is secured by a security interest in the cllateral. Cllateral: may be tangible r intangible. Example 1: Stewie lans Peter $1,000 and takes a security interest in Peter s guitar. In this example, the guitar is the cllateral and Peter is bth the bligr and the debtr. Example 2: Peter subsequently sells his guitar t Brian withut Stewie s authrizatin. Peter is still the bligr but nw Brian is the debtr (nt the bligr). Example 3: If Lis had guaranteed the lan, then she wuld be an, but nt the debtr. B. Classifying Cllateral Generally Classificatin f gds is imprtant because it can affect the validity f a security interest, the way in which a security interest can be perfected, and the rights f a third party in the cllateral, such as a buyer f cllateral.

2 Classificatin is based n the debtr s at the time when the security interest attaches. C. Gds Anything that is mveable at the time that a security interest attaches Includes, standing timber that is t be cut,, grwing r unharvested crps, and manufactured hmes Fur classes f gds (mutually exclusive): Mnemnic - Cats Get Furry Paws Int Everything CG: Cnsumer Gds: Thse acquired primarily fr Example 4: Televisin, clthes, etc. FP: Farm Prducts: Gds that are and include supplies that are used r prduced in farming Example 5: Eggs that chickens lay, hay fr the hrses, etc. I: Inventry: Gds, ther than farm prducts, that are, are furnished under a service cntract, r cnsist f raw materials, wrks in prcess, r materials used r cnsumed in a business Example 6: Furniture at the furniture stre, apples at the grcery stre, etc. E: Equipment: The catch-all class, cnsists f gds that are nt,, r Example 7: Delivery trucks Example 8: Brian is a dairy farmer. He milks his cws and delivers the milk t Family Milk, Inc. which pasteurizes the milk, cartns it and sells it t the lcal grcery stre. Stewie buys a cartn t pur n his cereal. Example 9: The milk that Brian has is a. Example 10: Once the milk is prcessed by Family Milk and is at the grcery stre, it is. Example 11: In Stewie s hands, the milk is a. D. Intangibles Includes nine classes f persnal prperty. Unlike the classificatin f tangible cllateral, classificatin f intangible cllateral des nt turn n the manner in which the debtr uses the prperty Themis Bar Review, LLC TX Secured Transactins

3 Sme gds are tangible enugh t be pssessed even if it des nt cnstitute a gd these are prperty, usually defined by a writing. 1. Quasi-intangible Prperty: Dcuments: A dcument f title, which cnfers n the hlder. Example 12: Warehuse receipt, bill f lading Instruments: Negtiable instruments, such as, and that evidence a right t the payment f a mnetary bligatin and are transferred in the rdinary curse f business by delivery, such as a certificate f depsit frm a bank. Example 13: An IOU Investment prperty: Includes bth and securities, such as stcks and bnds Example 14: Stck certificates Chattel paper: Cnsists f ne r mre recrds that evidences bth A and A security interest in r a lease f specific gds. Example 15: A security agreement that als shws the amunt due 2. True Intangible Prperty Accunts: Includes the right t payment f a mnetary bligatin fr gds r services Example 16: Accunt receivable NOT A CHECKING ACCOUNT Depsit accunt: Includes a, passbk, time, r demand accunt maintained with a bank. Example 17: A checking accunt Cmmercial trt claim: Trt claims pssessed by an rganizatin, r by an individual that arse in the curse f the Example 18: Malpractice suits TX Secured Transactins 2016 Themis Bar Review, LLC 3

4 Persnal trt claims are nt cvered General intangibles: Residual categry f persnal prperty that is nt included in ther types f cllateral Example 19: Cpyrights, trademarks CHAPTER 2: TRANSACTIONS UNDER ARTICLE 9 A. Generally: Article 9 gverns: A transactin that creates,, a security interest in persnal prperty r a fixture. B. Types f Transactins: 1. Leases: True lease Article 2A is given pririty Hwever, there are transactins called leases that are actually a disguised sale with a security interest. Test fr a disguised sale : Lessee must pay cnsideratin t the lessr and this payment bligatin cannt be terminated by the lessee, PLUS ne f the fllwing fur cnditins is als met: The riginal term f the lease is the remaining ecnmic life f the gds; r The lessee is bund t renew the lease fr the f the gds r is bund t becme wner f the gds; r The lessee has an ptin t renew the lease fr the remaining ecnmic life f the gds fr n r nminal additinal cnsideratin upn cmpletin f the lease; r The lessee has an ptin t f the gds fr n additinal cnsideratin r nminal additinal cnsideratin upn cmpletin f the lease. Example 20: Stewie sells used cars n credit. Lis cmes t Stewie t buy a car. Stewie decides, instead f selling a car, t lease a car t Lis fr $ per mnth fr 3 years (the same terms as he wuld nrmally sell the car) with an ptin t buy at end f lease fr anther $10. Lis can exit the lease nly by making all remaining lease payments. Is this transactin a lease r a disguised sale? Themis Bar Review, LLC TX Secured Transactins

5 Example 21: This wuld be a sale. The lease is nt and ging thrugh the 4 ther factrs, is met. 2. Cnsignments: Sme cnsignments may fall within the scpe f Article 9 as a purchase-mney security interest in cnsigned inventry. In rder t be subject t Article 9, the fllwing must be met: A persn (i.e., cnsignr) must deliver gds t a merchant,, fr the merchant t sell (and wh des nt perate under the same name as the cnsignr); The merchant is nt generally knwn by its creditrs t be substantially engaged in selling gds fr thers r is nt an auctineer; The value f the gds delivered in each delivery must be at least ; and The gds must nt be immediately befre the delivery. NOTE: T prtect their interests, cnsignrs must perfect their interests like any ther security interest. Example 22: Lis gives pian lessns fr a living. Recently, she decided t purchase a new pian and went t Stewie s Pian Emprium t sell her ld pian, which she used exclusively at wrk. Stewie ffers Lis $2,000 fr the pian, but Lis refuses as she believes the true value t be clser t $5,000. Unsatisfied with the price Stewie ffers, she instead cnvinces Stewie t sell the pian n cnsignment, a practice Stewie has never befre engaged in. Lis s transactin with Stewie is subject t Article Liens Statutry liens in services and materials (mechanic s liens) are t Article 9. Exceptin: Pririty prvisin in Article. 9 Agricultural liens t Article 9. Includes an interest in farm prducts that secures payment fr either (i) furnished with respect t the debtr s farming peratin (e.g., livestck feed sld t a cattle rancher) r (ii) rent n real prperty leased by a debtr in cnnectin with a farming peratin 4. Sales f Receivables Mnemnic: Charlie Parker s Prlific Ntes Are Played Intensely TX Secured Transactins 2016 Themis Bar Review, LLC 5

6 CP: PN: A: PI: The buyer f these receivables is the secured party; the seller is the debtr. Hwever, Article 9 is inapplicable t sme sales and assignments that by their nature d nt cncern cmmercial financing transactins. Tw ntable examples that ARE NOT gverned by Article 9: Sale f business and assignment f a single receivable in satisfactin f a preexisting debt. 5. Real Prperty Transactins Nt subject t Article 9 Hwever, if an Article 9 receivable is secured by real prperty, then it will still be subject t Article 9 Example 23: Brian lends Peter $300,000 t buy a huse secured by a mrtgage. Brian then gets a lan frm Stewie fr $100,000 and signs a prmissry nte fr that amunt and secures the nte with the mrtgage frm Peter. Example 24: The mrtgage between Brian and Peter is by Article 9. Example 25: Hwever, the transactin between Brian and Stewie is by Article 9 despite the use f the mrtgage as cllateral. 6. Texas Assignment f Rents Act Under Texas law, an assignment f rents arising frm real prperty creates a presently effective security interest in the accrued and unaccrued rents. CHAPTER 3: ATTACHMENT A. Attachment: A security interest that is enfrceable against the debtr with respect t the cllateral is said t have t the cllateral. Three cnditins must exist fr attachment: has been given, Debtr has in the cllateral, AND Debtr has with a descriptin f the cllateral OR the secured party has Themis Bar Review, LLC TX Secured Transactins

7 1. Value: r f the cllateral pursuant t the security agreement. The same cnsideratin needed fr cntract t be valid BUT. Example 26: Stewie lans Brian $1,000. He later realizes he shuld have secured the lan and s has Brian sign a security agreement taking an interest in Brian s cllectin f rare bks. Stewie t have given value. 2. Debtr s Rights in the Cllateral Attaches nly t the rights the debtr has. 3. Security Agreement T be enfrceable, the security agreement must have three things: Mnemnic - Restful Days Ahead R: can be any tangible medium r in electrnic frm; D: must reasnably describe cllateral, such as by class but CANNOT be ; and Example 27: A security agreement describing the cllateral as all Brian s equipment wuld be acceptable but all Brian s assets wuld nt. Nte: Cnsumer gds cannt be described by class s all Brian s cnsumer gds wuld nt be an acceptable descriptin. A: nrmally a signature but can be any symbl adpted by the debtr (such as an mniker). 4. Alternatives t a Written Security Agreement Pssessin (fr tangible cllateral) r Cntrl (fr certain intangible cllateral) but bth must still be pursuant t a. A secured party that pts fr pssessin r cntrl wes a duty f with respect t the cllateral as well as a duty t keep the cllateral identifiable and t relinquish the cllateral nce the underlying bligatin has been satisfied. TX Secured Transactins 2016 Themis Bar Review, LLC 7

8 CHAPTER 4: PURCHASE MONEY SECURED INTERESTS (PMSI), ACCESSIONS AND COMMINGLED GOODS, AFTER-ACQUIRED PROPERTY VERSUS PROCEEDS A. PMSI Only applies t gds and sftware Receives special pririty status Hw des a PMSI arise? Lender s PMSI: Secured party gives value t the debtr in rder t enable the debtr t acquire rights in r use f the gds, and the value given was s used. Example 28: Brian lans Peter $2,000 t buy a new pian (and secured by the pian) and Peter des in fact use mney t purchase the pian. Brian has a in the pian. Example 29: NOTE: If Peter uses the mney fr smething else, Brian. Seller s PMSI: A secured party sld gds t the debtr, and the debtr incurs an bligatin t pay the secured party all r part f the purchase price. Example 30: Stewie sells a pian t Peter fr $2,000 n credit, pursuant t a security agreement under which Stewie retains a security interest in the pian. Stewie has a in the pian. NOTE: In bth f the abve situatins, the security interest must still attach befre a PMSI is created. Cnsignment f gds = PMSI in inventry Example 31: Stewie supplies rugs t Peter with an agreement that Peter nly has t pay fr the rugs he sells and has t return the rest. Under this arrangement, Stewie has a PMSI in the inventry f rugs he supplied t Peter. PMSI in sftware: Exists nly where the debtr acquired its interest in sftware in an in which the debtr als acquired an interest in gds (e.g., cmputer), and the debtr acquired that interest in the sftware fr the principal purpse f using the sftware in the gds. Dual status PMSIs In a nn-cnsumer gds transactin, cllateral des nt lse its PMSI status merely because it: Als secures ; r The underlying bligatin is als secured by ; r The underlying bligatin has been renewed, refinanced r restructured Themis Bar Review, LLC TX Secured Transactins

9 B. Accessins versus Cmmingled Gds Accessins are gds that are physically united with ther gds in such a manner that the identity f the riginal gds is. Cmmingled gds are gds that are physically united with ther gds in such a manner that their identity in a prduct r mass. The fact that cllateral is r becmes des nt destry the security interest in the particular cllateral. Hwever, d lse their identity BUT the security interest will nw attach t the prduct r mass. Example 32: Stewie sells a car stere t Brian n credit and takes a PMSI in the stere. Brian then installs the stere int his car. The car stere is and Stewie s security interest cntinues in the stere. Example 33: Quagmire s Egg Cmpany sells eggs t Cleveland s Ckies, Inc. n credit and retains a PMSI security interest in the eggs. Cleveland s Ckies uses the eggs t make ckies. The eggs are and have lst their identity. Hwever, Quagmire s Egg Cmpany will nw have a security interest in the. C. After-Acquired Prperty versus Prceeds 1. After-Acquired Prperty A security interest attaches nly t the cllateral described in the agreement. Thus, if a creditr wishes t als have an interest attach t cllateral acquired subsequent t attachment, the creditr must include an. Example 34: Stewie wishes t take a security interest in all f Lis business equipment, which at the time f drafting the security agreement cnsists f nly a pian. Stewie thus executes a security agreement describing the cllateral as all f Lis equipment. Tw mnths later, Lis buys a cmputer which she uses exclusively fr wrk. Thugh the cmputer wuld qualify as equipment, Stewie s security agreement wuld nt reach the after-acquired prperty. T extend t this equipment, Stewie shuld have phrased the descriptin as all f Lis currently wned and subsequently acquired equipment. Exceptin: A majrity f curts find that the simple descriptin f inventry implies that it includes after-acquired inventry due t the high turnver inherent in inventry. TX Secured Transactins 2016 Themis Bar Review, LLC 9

10 2. Prceeds N additinal clause in the security agreement is necessary t reach prceeds as attachment f cllateral gives the secured party the rights t prceeds autmatically. Prceeds are defined bradly by the cde as: 1) Whatever is acquired upn the sale, lease, license, exchange, r ther dispsitin f cllateral; 2) Whatever is cllected n, r distributed n accunt f, cllateral; 3) arising ut f cllateral; 4) Legal claims arising ut f the cllateral r 5) Insurance claims arising ut f the cllateral. Example 35: In the abve example, had Lis nt bught the cmputer but instead traded her pian fr the cmputer, Stewie s security interest wuld have in the cmputer despite the lack f an after-acquired prperty clause as the cmputer wuld be a prceed frm the pian. It was acquired upn exchange f the cllateral (the pian) and thus fits the definitin f prceeds. Example 36: Assume in the abve example that the pian was destryed in a fire. Lis had an insurance plicy cvering the pian. Stewie nw has a security interest in the insurance prceeds frm the destryed pian. NOTE: Further actin may still be required t perfect in the prceeds as will be discussed in chapter 6. CHAPTER 5: PERFECTION, PERFECTION BY FILING A. Attachment v. Perfectin Attachment: Describes the prcess by which a security interest becmes enfrceable against the debtr with respect t cllateral. Perfectin: Generally gives the secured party in the cllateral t an unperfected secured party (and pssibly pririty ver ther secured parties). ATTACHMENT DOES NOT ALWAYS EQUAL PERFECTION OR VICE VERSA In rder fr a secured interest t be perfected it must be attached. Ask: 1) Was the interest attached? 2) Was the interest perfected? Themis Bar Review, LLC TX Secured Transactins

11 Perfectin requires ne f the fllwing: a financing statement; f the cllateral; ver the cllateral; r (either temprary r permanent) Mnemnic Fussy Peple Cry Alud B. Filing What is filed is called a financing statement Filing is sufficient fr any cllateral EXCEPT: Depsit accunts Mney Letter-f-credit 1. Financing Statement Basic infrmatin: MUST have the fllwing three pieces f infrmatin:,, AND. The purpse f a financing statement is t put ther ptential creditrs n ntice that there may be a security interest. This is called. Additinal infrmatin is required fr real prperty-related cllateral such as, extracted cllateral such as il, and timber t be cut. Fr such cllateral, the fllwing additinal pieces f infrmatin must be n the financing statement: An indicatin that it cvers this type f cllateral, An indicatin that it is t be filed in the real prperty recrds, t which the cllateral relates, and Name f a f the real prperty if the debtr des nt have an interest f recrd in the real prperty. a. Debtr s name The debtr s name must be its crrect legal name and cannt be. If the debtr s name is nt crrect, it culd vid the financing statement filing. TX Secured Transactins 2016 Themis Bar Review, LLC 11

12 Safe harbr: Hwever, there is a safe harbr rule that makes a financing statement with an incrrect debtr s name nnetheless valid if a search fr the crrect legal name in the filing ffice wuld uncver the misleading financing statement. Example 37: Brian files a financing statement with the debtr listed as Stewie Griffin. Stewie s crrect legal name is Stewart Griffin. Despite this errr, Brian s financing statement will be saved if a search f the Secretary f State s recrds under the name wuld shw the name Stewie Griffin. Texas individual debtrs If the individual has a state-issued driver's license r identificatin card, the financing statement is crrect nly if it prvides the name f the individual n the driver's license r identificatin card (mst recent if multiple have been issued). If there is n such license r identificatin card, the financing statement must cntain the surname and first persnal name f the debtr. Crpratin name: If the debtr is a rganizatin, the debtr s name fr purpses f the financing statement is the name shwn n the public registratin recrds (e.g. the articles f incrpratin). NOTE: Filing nly under the crpratin s is insufficient. Als, a filing will nt be ineffective fr failure t list a trade name. Changed legal name If the debtr changes its name causing the financing statement t becme seriusly misleading, the secured party has in which t file an amendment t the financing statement reflecting the new name. If the secured party des nt amend in this time frame, cllateral acquired by the debtr the fur-mnth perid is nt cvered by the financing statement. Example 38: On March 1, Stewie takes a security interest in all Lis s present and after-acquired equipment and files under the name Lis Pewter, Lis s legal name. At the time f the agreement, Lis s equipment includes a cmputer and a bulldzer. On April 1, Lis marries Peter and changes her legal name t Lis Griffin. On May 1, Lis acquires anther piece f equipment, a backhe. On August 1, Lis acquires a secnd bulldzer which is als equipment. Stewie never amends the financing statement. Example 39: Nevertheless, Stewie will be perfected in the cmputer, the first bulldzer and the as it was acquired. He will nt be perfected in Themis Bar Review, LLC TX Secured Transactins

13 the, hwever, as that was acquired after the 4 mnth windw. b. Secured party s name While the debtr s name cannt be seriusly misleading, an errr in the name f the secured party n a financing statement the perfectin f the security interest, but the secured party wh files a financing statement with such an errr may be subject t estppel in favr f a hlder f a cnflicting claim in the cllateral. c. Cllateral must be indicated The financing statement must cntain a descriptin f the cllateral that sufficiently indicates the cllateral. This requirement can be satisfied by a descriptin that meets the requirements fr the security agreement, OR can be, such as by listing all debtr s assets. NOTE: The financing statement descriptin CAN BE much brader than a security agreement. After-acquired prperty and prceeds: While a financing statement des nt have t mentin that it cvers after-acquired prperty, the descriptin must still be brad enugh t cver such cllateral. The financing statement als need nt make specific reference t prceeds in rder fr a security interest in prceeds t be perfected, hwever, further actin may be required (as described belw). 2. Authrizatin The debtr is nt required t sign the financing statement but they must authrize filing in an authenticated recrd. An authenticated autmatically authrizes a filing with respect t the cllateral cvered in the agreement. 3. Where t File Generally: With the Secretary f State f the state where the debtr is Fr individuals, this is their principal residence. Fr registered rganizatins, such as crpratins, this is the state in which the rganizatin is. Fr unregistered rganizatins, such as partnerships, this is the state in which the rganizatin maintains its place f business. If there is mre than ne place f business, then the rganizatin is lcated where it has its. TX Secured Transactins 2016 Themis Bar Review, LLC 13

14 EXCEPTION: (e.g. fixtures) are filed in the real prperty recrds in the cunty where the prperty is lcated. Additinally, under the Texas Assignments f Rents Act, a security interest in rents arising frm real prperty is perfected when the dcument creating the assignment is recrded in the cunty in which any part f the prperty is lcated. 4. Additinal Infrmatin Required The fllwing pieces f infrmatin are als required, hwever, errrs will nt necessarily destry the effectiveness f the financing statement: f bth the debtr and the secured party; and Identify whether the debtr is an. Thugh required, if the filing ffice accepts a financing statement with ne f the abve left blank, the financing statement is nevertheless fully effective. 5. Effect f Filing Office Errrs If the financing statement is missing any f the required infrmatin, then the filing ffice may the financing statement and it is treated has having nt been filed. Hwever, if the filing ffice s refusal t accept a financing statement fr filing is unjustified, the financing statement is treated has having been filed, except with respect t a purchaser f the cllateral wh gives value in upn the absence f the recrd frm the files. The term purchaser cvers subsequent. The filing ffice s incrrect indexing f a financing statement the effectiveness f the filed financing statement. 6. Duratin f Financing Statement Effective fr: frm date f filing. Cntinued: T cntinue a financing statement beynd 5 years, a statement must be filed within prir t the expiratin f the financing statement. The debtr s authrizatin is nt needed t file a cntinuatin statement. Terminatin: The effectiveness f a financing statement may be terminated prir t the 5 year time-frame by the filing f a statement Themis Bar Review, LLC TX Secured Transactins

15 CHAPTER 6: PERFECTION BY POSSESSION & CONTROL, AUTOMATIC PERFECTION A. Perfectin by Pssessin A secured party may perfect a security interest in mst tangible cllateral by taking pssessin f the cllateral. The fllwing cllateral may be perfected by pssessin: Gds, instruments, negtiable dcuments, and tangible chattel paper Mnemnic: Gd Investrs Never Dare Tip Chatty Peple NOTE: Pssessin is the EXCLUSIVE methd fr perfecting in. B. Perfectin by Cntrl A secured party may perfect a security interest in specific cllateral by taking cntrl f the cllateral. The fllwing cllateral can be perfected by cntrl: Depsit accunts, investment prperty, electrnic dcuments r electrnic chattel paper, and letter-f-credit rights. Mnemnic: DA s In Philadelphia Encunter Danger Establishing Criminal Prcedure, Lts Of Cases NOTE: Fr letter-f-credit rights and depsit accunts (such as checking accunts), cntrl is the exclusive methd f perfectin. A secured party can gain cntrl ver a in ne f three ways: 1) The secured party is the bank maintaining the accunt; 2) The debtr, secured party and bank have authenticated a recrd agreeing that the secured party has cntrl; r 3) The secured party s name is added t the debtr s accunt. C. Autmatic Perfectin Regardless f the abve methds f perfectin, sme types f perfectin can ccur upn attachment. These can be divided int tw types f autmatic perfectin: and perids f perfectin. 1. Indefinite The majr type f indefinite perid f perfectin is a PMSI in. A purchase-mney security interest (PMSI) in cnsumer gds is autmatically perfected. A secured party des nt need t file a statement r have pssessin t have a perfected PMSI in cnsumer gds. TX Secured Transactins 2016 Themis Bar Review, LLC 15

16 A PMSI in ther types f gds (e.g., inventry, equipment) r in autmbiles is. 2. Temprary Three majr ways in which temprary perfectin arise: 1) When the secured party perfects by pssessin and subsequently gives the cllateral ver t the debtr fr resale; 2) When either the debtr r cllateral mves frm ne state t anther; r 3) When the cllateral is exchanged fr r gives rise t prceeds. Delivery f cllateral t debtr When the secured party is perfected, and makes cllateral available t the debtr fr the purpse f selling r exchanging the cllateral, the security interest in the cllateral remains perfected fr 20 days. Example 40: Stewie is perfected via pssessin in Brian s inventry f bicycles but has nt filed a financing statement. Brian requests the bicycles s that he can sell them at his stre. Stewie delivers the bicycles n March 1. Stewie will remain perfected in the bicycles fr. If Stewie wishes t remain perfected beynd this time perid he must r repssess the inventry. Interstate mvement f debtr r cllateral Mvement f debtr When a debtr mves states, a perfected security interest remains perfected fr after the debtr s change in lcatin. Example 41: Stewie perfects a security interest against Lis by filing a financing statement in Texas (Lis s state f residence). Lis subsequently mves t Missuri. Stewie will remain perfected fr. If Stewie wishes t remain perfected beynd this time frame, he must within the 4-mnth windw. NOTE: This als applies t cllateral that that is acquired subject t a security interest, such as by peratin f an after-acquired prperty clause, within the 4- mnth windw. Mvement f cllateral When cllateral is transferred t a persn lcated in anther state wh becmes a debtr, a perfected security interest generally remains perfected fr ne year after the transfer Themis Bar Review, LLC TX Secured Transactins

17 Example 42: Stewie perfects a security interest in Lis s antique sewing machine by filing a financing statement in Texas (Lis s state f residence). Lis subsequently frms Lis, Inc. and incrprates in Missuri and transfers all f her assets, including the sewing machine, t Lis, Inc. in Missuri. Stewie will remain perfected fr after the transfer. If Stewie wishes t remain perfected beynd this time frame, he must. within the 1 year windw. Effect f lapse f perfectin In either f the abve tw situatins, where a security interest is nt perfected in the secnd state befre the expiratin f the applicable temprary perfectin perid, the security interest generally ceases t be perfected and with respect t purchasers fr value, such as a subsequent secured party, such a security interest is deemed never t have been. Example 43: Stewie perfects a security interest in Lis s antique sewing machine by filing a financing statement in Texas (Lis s state f residence). Lis subsequently makes an unauthrized sale f the sewing machine t Brian, wh lives in Missuri. Within a mnth f receiving the sewing machine, Brian enters int a security agreement with Peter wh prperly files against Brian in Missuri. A year passes and Stewie fails t re-file in Missuri. With respect t Peter, it is as if Stewie in the first place (despite the perid f temprary perfectin). 3. Prceeds A security interest in prceeds enjys temprary perfectin and may als be entitled t indefinite autmatic perfectin. Temprary perfectin: When the security interest in the riginal cllateral is perfected, a security interest in prceeds is perfected fr frm the time it attaches. Indefinite autmatic perfectin: Regardless f the abve, a security interest in prceeds may cntinue t be autmatically perfected beynd the 20-day perid in the fllwing tw circumstances: a. Cash prceeds Where the prceeds are cash prceeds and the security interest in the riginal cllateral is perfected, the perfected security interest in the prceeds cntinues indefinitely. TX Secured Transactins 2016 Themis Bar Review, LLC 17

18 Example 44: Stewie takes a security interest in Lis s antique sewing machine and prperly perfects by filing. Lis subsequently sells the sewing machine t Brian fr $500. Assuming he can identify the $500 dllars, Stewie will be in the $500. b. Same ffice A perfected security interest in prceeds may als cntinue indefinitely when: A filed financing statement cvers the ; The prceeds are cllateral in which a security interest may be perfected by filing in which the riginal financing statement has been filed; AND The prceeds are nt acquired with. Example 45: Stewie takes a security interest in Lis s antique sewing machine and prperly perfects by filing a financing statement describing the cllateral as sewing machine. Lis subsequently trades the sewing machine t Brian fr a pian. As bth a sewing machine and pian wuld be filed in the, Stewie will be perfected in the pian withut re-filing r amending. Example 46: BUT what if Lis had sld the sewing machine t Brian fr $500 and then used the cash prceeds t buy the pian? Example 47: In this instance, the same ffice rule wuld nt apply due t the intrductin f cash prceeds. Stewie wuld have t file an amendment. NOTE: If the riginal financing statement describes the cllateral bradly enugh, there is n need t invke the same ffice rule. Example 48: Assume in the abve example that instead f describing the cllateral as a sewing machine, Stewie described the cllateral as all Lis s assets (which is permitted n a financing statement but NOT a security agreement). Stewie s riginal financing statement is brad enugh t cver bth the sewing machine and pian s there is n need t invke the same ffice rule r wrry abut the use f cash prceeds. NOTE: State Certificate f Title: When prperty is subject t a special statute in lieu f Article 9 s rules n perfectin, such as the certificate f title statute fr autmbiles, the statute dictates the manner f perfectin. Example 49: Stewie takes a security interest in Lis s antique sewing machine and prperly perfects by filing a financing statement describing the cllateral as sewing machine. Lis subsequently trades the sewing machine t Brian fr a Themis Bar Review, LLC TX Secured Transactins

19 car. As cars are subject t the certificate f title statute, Stewie must recrd his interest n the certificate f title. Nte the same ffice rule wuld nt apply here as, the cllateral are t be perfected in. CHAPTER 7: PRIORITIES RULES A. Types f creditrs Cnflicts between three majr types f creditrs: General creditrs (Unsecured) A general creditr is ne wh has a claim, including a judgment, but wh has n lien r security interest with respect t the prperty in questin. Judicial lien creditr A judicial lien creditr is a creditr wh acquires a lien n the cllateral by a judicial prcess, rather than by peratin f law. Secured creditr Fr pririty purpses, there are three majr types f secured creditrs: thse that have perfected, thse that have nt (unperfected), and thse that have perfected a PMSI. B. Secured Interest v. Judicial Liens and Unsecured Interest Unperfected secured v. general creditrs A secured party will ver a general creditr with respect t the debtr s cllateral. Unperfected v. judicial lien A judicial lien creditr has pririty ver an unperfected security interest. Hwever, if a judgment lien is acquired after attachment f a security interest, the judicial lien creditr f the security interest at the time the lien attaches. Perfected v. judicial lien A judicial lien creditr t a perfected security interest. PMSI v. judicial lien If the secured party has a PMSI that perfects befre r within after the debtr receives pssessin f the cllateral, the perfectin will revert back t the date the debtr receives pssessin fr pririty purpses. Example 50: On March 1, Stewie sells Lis a pian n credit fr use in her business subject t a security agreement. On March 6, five days after Lis receives the pian, Brian, pursuant t a curt rder, has the sheriff levy n the pian, thus becming a judicial lien creditr. Stewie prperly files a financing TX Secured Transactins 2016 Themis Bar Review, LLC 19

20 Advances: statement n March 16. Despite Brian s intervening interest, Stewie s pririty will t March 1. An amunt f mney lent after the security agreement attaches Advances made f the lien creditr becming such will have pririty. Advances made mre than 45 days after the persn becmes a lien creditr, are t the lien creditr UNLESS: The advance is made withut knwledge f the lien, r Is made pursuant t a cmmitment entered int withut knwledge f the lien. Basically this gives the secured party a 45 day windw t advance mney regardless f knwledge. C. Secured Interest v. Secured Interest The general rule fr all f the belw cnflicts is: The first t OR wins. Perfected v. unperfected The takes ver the unperfected interest regardless f the date the security agreement was signed r the interest attached. Unperfected v. unperfected The first in time, first in right rule applies with the critical time being the time f. Perfected v. perfected The first t file r perfect has pririty. When bth security interests are perfected, pririty dates frm the time f filing r perfectin,. Example 51: Stewie enters int a security agreement n March 1 with Lis, taking an interest in her pian and the interest attaches that same day. On March 5, Brian gets authrizatin frm Lis t file a financing statement listing her pian as cllateral and files that same day. On March 10, Stewie gets arund t filing a financing statement cvering the pian. On March 15, Brian enters int a security agreement with Lis taking an interest in her pian and the interest attaches the same day. Example 52: Wh has pririty in the pian? Themis Bar Review, LLC TX Secured Transactins

21 CHAPTER 8: EXCEPTIONS TO FIRST IN TIME PRINCIPLE A. PMSI Fur kinds f PMSIs: PMSIs in cnsumer gds, PMSIs in equipment, PMSIs in fixtures, and PMSIs in inventry. Cnsumer gds perfectin is. Equipment and fixtures perfectin requires a filing within f either the debtr receiving the gds r the gds becming fixtures. Inventry perfectin requires that a filing must be made prir t the debtr and the secured party must ntify all cnflicting security interest hlders f the PMSI prir t the debtr receiving pssessin. As lng as the PMSI is prperly perfected, it will generally have pririty ver subject t exceptins listed belw. 1. PMSI v. PMSI As t cmpeting PMSIs, the first t file r perfect rule applies EXCEPT: takes pririty ver a Lender s PMSI. Example 53: Brian lans Lis $500 t buy a new pian fr her business pursuant t a security agreement and prperly files the PMSI lan with a financing statement n March 1. On March 5, Lis buys a $1000 pian frm Stewie putting the $500 frm Brian dwn and pting t pay the rest n credit pursuant t a security agreement. Stewie files n March 8. Wh has pririty in the pian? 2. PMSI in fixtures v. ther interests in real prperty A PMSI in fixtures has pririty ver a prir interest in the real prperty with which the fixtures are assciated if: The debtr has an interest f recrd in the real prperty (e.g., wner) r is in pssessin f the real prperty (e.g., Lessee); and The security interest is perfected by a fixture filing befre the gds becme fixtures r within 20 days thereafter. Exceptin: A cnstructin mrtgage (e.g. a mrtgage securing the cnstructin f building, including the cst f the acquiring the land, and that indicates it is a cnstructin mrtgage in the real prperty recrds) has pririty ver a subsequent PMSI in a fixture IF: The cnstructin mrtgage is recrded the gds becme fixtures, and It nly cvers gds that becme fixtures befre the cmpletin f the cnstructin. TX Secured Transactins 2016 Themis Bar Review, LLC 21

22 The belw chart is meant t help yu keep the different PMSI interests straight. It des nt include the rules gverning cmpeting PMSIs listed abve. Type f PMSI Hw perfected Pririty ver In cnsumer gds. Autmatically. Everyne but BIOCB and cnsumer-tcnsumer transactins. In nn-cnsumer; nninventry, nn-fixture gds. In fixtures. Filing w/in 20 days f debtr receiving cllateral. Filing a fixture filing prir t r w/in 20 days f gds becming fixtures. Everyne but BIOCB. Everyne but a cnstructin mrtgage. In inventry. Filing prir t debtr receiving pssessin AND sending prper ntice t cnflicting SI. Everyne but BIOCB. B. Purchasers Certain types f purchasers take cllateral free and clear f a security interest. 1. Buyer v. Unperfected A buyer takes free f any interest prvided: The buyer ; Receives delivery f the f the cllateral; and Buys f the preexisting security interest. 2. Buyer v. Perfected Generally, a buyer f gds takes subject t a perfected security interest unless the security interest hlder authrizes the sale. Hwever, this rule is subject t sme exceptins. A buyer in the rdinary curse f business (BIOCB) takes free f a security interest created by the buyer s seller, even if the security interest is perfected and the buyer knws f its existence if the fllwing cnditins are met: Themis Bar Review, LLC TX Secured Transactins

23 (nt including farm prducts); Frm a wh is in the business f ; and In and withut actual knwledge that the sale vilates the rights f anther in the same gds. NOTE: The buyer des have t buy in the rdinary curse f their wn business. The fcus is n the. Example 54: Stewie sells a pian t Lis n credit pursuant t a security agreement. She uses the pian as a cnsumer gd and the interest perfects autmatically as a PMSI. Six mnths later, Lis sells the pian t Brian, wh wns a used pian stre. He intends t resell the pian as part f his business. Brian has n knwledge f Stewie s security interest. Example 55: Wh has pririty in the pian? because Brian is nt buying frm a merchant wh is in the. 3. Cnsumer Buyer v. Secured Garage sale rule - A buyer f cnsumer gds takes free f a security interest, even if perfected, unless prir t the purchase, the secured party has cvering the gds. T qualify under this rule, hwever, the cnsumer must: Buy cnsumer gds fr value; Fr his wn persnal, family, r husehld use; Frm a ; and f the security interest. NOTE: A PMSI with autmatic prtectin wuld nt be prtected under the garage sale rule. Example 56: Stewie sells a pian t Lis n credit pursuant t a security agreement. Lis intends t use the pian as a cnsumer gd and Stewie des nt file r take any further steps t perfect (he simply relies n his autmatic perfectin). Three mnths later, Lis sells the pian t Brian fr $500. Brian als intends t use the pian as a cnsumer gd and has n actual knwledge f Stewie s security agreement. Example 57: Wh has pririty in the pian? because Stewie failed t. 4. Purchaser v. Future Advances A purchaser wh des nt qualify as a BIOCB may still take free f a security interest t the extent that it secures an advance made after the earlier f: TX Secured Transactins 2016 Themis Bar Review, LLC 23

24 The time the secured party acquires knwledge f the buyer s purchase; r 45 days after purchase. CHAPTER 9: DEFAULT A. Cnsequences f Default Default is nt defined by Article 9. T determine if there is a default, refer t the security agreement and rules f cntract interpretatin. Nn-payment is nt the nly means f defaulting n a security agreement. Once there has been a default, the secured party may chse t seek t pssess the cllateral either thrugh: Judgment secured party ges t curt, prves up default, gets judgment, OR Nn-judicial re-pssessin - after default, a secured party is entitled t take pssessin f the cllateral thrugh self-help repssessin. Self help repssessin is limited in that the repssessin cannt. While the term breach the peace is nt defined, typically any criminal act will cnstitute a breach f peace, such as pulling ut a gun r threatening physical harm. NOTE: If the secured party brings a plice fficer t the repssessin, and the fficer is nt there pursuant t a writ f executin, the fficer s presence is a per se breach f peace. T cnstitute a breach f peace, there typically must be sme ptential fr vilence. Alternative t self-help repssessin: After a default, a secured party may render equipment (e.g., heavy machinery) unusable. By agreement, this may als apply t cnsumer gds. In the case f accunts, the secured party has the ptin t step int the debtr s shes fr 3rd parties that we the debtr; secured party can cllect directly. In the case f fixtures, the secured party is entitled t repssess, i.e., remve, the fixture. Hwever, if the real prperty wner t which the fixture is attached is smene ther than the debtr, the secured party must reimburse the wner fr any damages caused by the remval but nt fr any diminutin in value caused by the absence f the gds. B. Dispsitin f Cllateral A secured party may sell, lease, license, r therwise dispse f all r any cllateral s lng as the dispsitin is in all ways. A secured party may dispse f the cllateral publicly r privately Themis Bar Review, LLC TX Secured Transactins

25 1. Cmmercially Reasnable Standard fr Dispsitin A dispsitin IS cmmercially reasnable if the cllateral: Is sld in the usual manner n a (e.g. stck exchange); At the in any recgnized market at the time f the dispsitin; r Otherwise in cnfrmity with amng dealers in the type f prperty that was the subject f the dispsitin. 2. Cmmercially Reasnable Price Price alne des nt establish that the dispsitin was nt cmmercially reasnable. Hwever, a lw price can trigger carefully scrutiny by the curt f all aspects f the dispsitin and its reasnableness. 3. Cmmercially Reasnable Time Article 9 des nt mandate a specific time in which a dispsitin must ccur. Instead, may dictate what is a cmmercially reasnable time fr dispsitin. 4. Ntice the secured party must give ntice f the dispsitin. a. T: The debtr; Any ther secured party r lienhlder that was perfected by filing r pursuant t a statute; and Any ther party frm whm the secured party has received authenticated ntice f a claim r interest in the cllateral. b. Timely The ntice must be given in a time perid. Article 9 prvides a safe harbr that prir t dispsitin is reasnable. c. Cntent Must cntain: The debtr and the secured party s name; A descriptin f the cllateral; the cllateral will be dispsed; and A statement that the debtr is entitled t an accunting f the unpaid indebtedness and the charge, if any, fr prviding that accunting. TX Secured Transactins 2016 Themis Bar Review, LLC 25

26 In additin t the abve, in the case f cnsumer gds, the ntice must include: A descriptin f any liability fr a deficiency f the persn t whm the ntificatin is sent; The telephne number frm which the redemptin amunt is available; and The telephne number r mailing address frm which additinal infrmatin cncerning the dispsitin and secured bligatin is available. C. Prceeds f Dispsitin A secured party must apply, r pay ver fr applicatin, cash prceeds f a dispsitin in the fllwing rder: Reasnable expenses fr cllectin and enfrcement, including reasnable attrney s fees (if prvided fr in the security agreement); then T satisfy the debt wed t the freclsing secured party; then T satisfy any subrdinate security interests (prvided that the junir secured party makes a demand prir t distributin f prceeds; then The remainder f the prceeds t the debtr. Shrt hand Reasnable expenses, secured party, subrdinate liens, debtr. Mnemnic Rusty Elders Shuldn t Play Sccer Late Dear If the prceeds are insufficient t pay the underlying bligatin, then the secured party can seek a fr the remaining amunt (but may be an unsecured creditr fr that amunt). NOTE: Senir liens d nt get any f the prceeds. Instead, they cntinue t have a security interest in the cllateral. Junir liens are extinguished by the sale. Example 58: Brian, Peter, and Stewie all have a perfected security interest in Lis s pian. Brian has the senir mst lien, fllwed by Peter, and Stewie is last. Lis defaults n her payments t Peter and Stewie (but nt Brian). Peter freclses and sells the pian fr $1000. These cash prceeds wuld g first t pay Peter s, and then wuld g tward satisfying. If there is any mney left ver, it will g t and the remainder will. Brian gets nthing but cntinues t have a security interest in the pian (nw in the hands f a 3rd party). D. Acceptance f Cllateral In lieu f dispsing f the cllateral, a secured party may pt t keep the cllateral in f the debt if certain cnditins are met Themis Bar Review, LLC TX Secured Transactins

27 Full Satisfactin: A secured party may accept cllateral in full satisfactin f an bligatin secured by the cllateral when: The debtr cnsents,, t the acceptance in an authenticated recrd; r The debtr des nt bject t the secured party s prpsal t accept the cllateral within after the prpsal is sent. Partial satisfactin: A secured party may accept cllateral in partial satisfactin f an bligatin secured by the cllateral when the, after default, t the acceptance in an authenticated recrd. NOTE: Fr either f the tw methds abve, the secured party must send ntice t ther secured parties wh have an interest in the same cllateral and cannt accept the cllateral in full r partial satisfactin if it receives bjectin t the prpsed acceptance within 20 days after such ntice was sent. EXCEPTION: Cnsumer debtrs: A secured party can accept the cllateral nly in f the bligatin. EXCEPTION TO THE EXCEPTION: The 60 percent rule: If the gds are cnsumer gds AND the debtr has paid 60 percent f the cash price in the case f a PMSI, r 60 percent f the bligatin secured in a nn-pmsi case, then the gds must be sld UNLESS the debtr waives this right t frce a sale f the cllateral, prvided it is dne in an authenticated agreement. E. Redemptin Up t any pint befre the Secured Party has dispsed f (r entered int a cntract t dispse f) the cllateral, the debtr can fulfill all bligatins and redeem the cllateral. This fulfillment f bligatins includes reasnable expenses fr repssessin. F. Secured Party s Failure t Cmply A secured party s failure t cmply with Article 9, such as by breaching the peace during a repssessin, failing t give prper ntice f dispsitin, failing t dispse in a cmmercially reasnable manner, etc., can lead t injunctive relief, damages and the reductin f any deficiency judgment sught by the secured creditr. Actual Damages The debtr (r ther secured party) may seek damages fr any lss cause by the secured party s failure t cmply. This lss may include lss resulting frm the debtr s inability t btain alternative financing, r the increased cst f btaining such financing. TX Secured Transactins 2016 Themis Bar Review, LLC 27

28 Statutry Minimum fr Cnsumer Gds If the cllateral is cnsumer gds, a debtr may recver an amunt nt less than the credit service charge, plus f the bligatin r the time-price differential, plus 10% f the cash price, even if the actual damages are less. Reductin f deficiency in nn-cnsumer transactin There is a rebuttable presumptin that the secured party is t cllect a deficiency which can be vercme by shwing that the deficiency wuld have existed even had the secured party cmplied with Article 9. Reductin f deficiency in cnsumer transactins In Texas, if the transactin is a cnsumer transactin and a secured party s cllectin, enfrcement, dispsitin, r acceptance is nt in accrd with Article 9, curts apply, under which the nn-cmplying secured party cannt recver a deficiency. NOTE: This is a Texas rule Texas is a minrity jurisdictin in this regard. Cnversin actin fr imprper repssessin - When a secured party imprperly repssesses cllateral, the debtr may be able t pursue a under nn-ucc law. Exam tip: Fcus n elements f attachment, hw t perfect, the difference between attachment & perfectin, and pririty rules. Gd luck! [END OF HANDOUT] Themis Bar Review, LLC TX Secured Transactins