final exam BLAW Large

Collateral types: Goods: Semi-Tangible Property

1. NI (commercial paper), 2. Documents of title (warehouse receipt for a diamond, oil, or grain, OR bill of lading which they use to collect the item), 3. Chattel paper (personal property, represents a right to something, auto financing business/ farm equipment), 4. Investment property (go through broker

To pledge collateral, two key questions

1. does the creditor have an enforceable security interest in the property (collateral) that is pledged? Is the law on our side? 2. If #1 is true, and the debtor defaults, will he creditor be able to take priority over the claims of other creditors?, did we pledge it to other banks? Where do we fall in line? do we share? ANSWERS: to answer the questions we will need to know when the creditor's interest ATTACHED and when the interest was PERFECTED

Elements of an enforceable security interest

1. security agreement, 2. creditor must give something of value to the debtor (loan $ or agree to loan $), 3. Debtor must have rights in the collateral (you must own it)-- you don't have any right at all unless they have attached, need ALL 3, in any order

pledge

A common law security device (retained in Article 9 of the UCC) in which personal property is transferred into the possession of the creditor as security for the payment of a debt and retained by the creditor until the debt is paid.

order for relief

A court's grant of assistance to a complainant. In bankruptcy proceedings, the order relieves the debtor of the immediate obligation to pay the debts listed in the bankruptcy petition.

writ of execution

A court's order, issued after a judgment has been entered against a debtor, directing the sheriff to seize and sell any of the debtor's nonexempt real or personal property.

writ of attachment

A court's order, issued prior to a trial to collect a debt, directing the sheriff or other public officer to seize nonexempt property of the debtor. If the creditor prevails at trial, the seized property can be sold to satisfy the judgment.

financing statement

A document prepared by a secured creditor, and filed with the appropriate state or local official, to give notice to the public that the creditor has a security interest in collateral belonging to the debtor named in the statement. The financing statement must contain the names and addresses of both the debtor and the secured party and must describe the collateral by type or item.

U.S. trustee

A government official who performs certain administrative tasks that a bankruptcy judge would otherwise have to perform.

co-surety

A joint surety; a person who assumes liability jointly with another surety for the payment of an obligation.

deficiency judgment

A judgment against a debtor for the amount of a debt remaining unpaid after the collateral has been repossessed and sold.

homestead exemption

A law permitting a debtor to retain the family home, either in its entirety or up to a specified dollar amount, free from the claims of unsecured creditors or trustees in bankruptcy.

garnishment

A legal process used by a creditor to collect a debt by seizing property of the debtor (such as wages) that is being held by a third party (such as the debtor's employer).

secured party

A lender, seller, or any other person in whose favor there is a security interest, including a person to whom accounts or chattel paper have been sold.

junior lienholder

A party that holds a lien that is subordinate to one or more other liens on the same property.

guarantor

A person who agrees to satisfy the debt of another (the debtor) only after the principal debtor defaults. Thus, a guarantor's liability is secondary.

surety

A person, such as a cosigner on a note, who agrees to be primarily responsible for the debt of another.

artisan's lien

A possessory lien given to a person who has made improvements and added value to another person's personal property as security for payment for services performed.

cram-down provision

A provision of the Bankruptcy Code that allows a court to confirm a debtor's Chapter 11 reorganization plan even though only one class of creditors has accepted it.

floating lien

A security interest in proceeds, after-acquired property, or collateral subject to future advances by the secured party (or all three); a security interest in collateral that is retained even when the collateral changes in character, classification, or location.

purchase-money security interest (PMSI)

A security interest that arises when a seller or lender extends credit for part or all of the purchase price of goods purchased by a buyer.

debtor in possession (DIP)

In Chapter 11 bankruptcy proceedings, a debtor who is allowed to continue in possession of the estate in property (the business) and to continue business operations.

Purchase money security interest (PMSI)

A special security interest that yields greater rights for the SP, special status--treated differently-- MOST COMMON: 1. Go to bank to buy a car, can i have the money?, car will be collateral, we take security interest, you did not own it but you take their money to buy it, 2. seller is extending credit to you to buy something you didn't have before, not a credit card

continuation statement

A statement that, if filed within six months prior to the expiration date of the original financing statement, continues the perfection of the original security interest for another five years. The perfection of a security interest can be continued in the same manner indefinitely.

mechanic's lien

A statutory lien on the real property of another to ensure payment for work performed and materials furnished in the repair or improvement of real property, such as a building.

mortgage

A written instrument giving a creditor an interest in (lien on) the debtor's real property as security for payment of a debt.

execution

An action to carry into effect the directions in a court decree or judgment.

reaffirmation agreement

An agreement between a debtor and a creditor in which the debtor voluntarily agrees to pay, or reaffirm, a debt dischargeable in bankruptcy. To be enforceable, the agreement must be made before the debtor is granted a discharge.

creditors' composition agreement

An agreement formed between a debtor and his or her creditors in which the creditors agree to accept a lesser sum than that owed by the debtor in full satisfaction of the debt.

security agreement

An agreement that creates or provides for a security interest between the debtor and a secured party.

suretyship

An express contract in which a third party to a debtor-creditor relationship (the surety) promises to be primarily responsible for the debtor's obligation.

consumer-debtor

An individual whose debts are primarily consumer debts (debts for purchases made primarily for personal, family, or household use).

workout

An out-of-court agreement between a debtor and creditors in which the parties work out a payment plan or schedule under which the debtor's debts can be discharged.

security interest

Any interest in personal property or fixtures that secures payment or performance of an obligation.

secured transaction

Any transaction in which the payment of a debt is guaranteed, or secured, by personal property owned by the debtor or in which the debtor has a legal interest.

Default

Art. 9 does not define default-- can define it in the security agreement-- BLAW DEFINITION: failure to make payments on time, when you don't do what you are supposed to do-- Death, bankruptcy, fraud on loan application are often included in SA as events of default

Buyer in ordinary course of business

Buyer who, in good faith, without knowledge that the sale might violate the SI of another, buys a good from a person in the business of selling such goods, can't be shady but buyer can take free of any SI, SP can still pursue identifiable proceeds of the sale, EXAMPLE: Ann Taylor Store-- if you purchase a suit, lenders can't recollect it as inventory (collateral)

Retention of collateral by SP

Consumer goods-- you do not have to give debtor notice if you keep it (might be waiving your right to notice) if there is a second claim you must give them notice of what you've done in 21 days, they can object to you keeping it if they think it is worth too much, they deserve some money if there is any left

Fuentes v. Chevin

Court case-- 5th amendment says you can't take property without a due process of law-- a "check" against the government, due process means you have a right to a hearing so in the case of SP they must give the debtor a right to be heard, must give notice and opportunity (only if you plan to use the government's power

Debtor has rights in the collateral

Debtor has an ownership interest in the collateral, can't cheat the bank, the bank must check the facts--smart to verify--Debtor has contract rights in goods not yet olwn, don't possess, being manufactured, make sure they have contractual rights, if something happens they still know its yours, still have ownership interest. EXAMPLE: exotic car that's not on the lot

Perfection by filing

Describe collateral in as much detail as possible so you don't confuse the collateral and so you can resolve issues-- serial #s help-- will help in resolving conflicts with other SPs, financing statement may say "all of debtor's inventory and equipment now owned or hereafter acquired"-- you are allowed to globalized, sometimes items may receive different classifications according to their use, priority is determined by the order of perfection (1st to perfect WINS, you don't have to share), Each lender has a duty to examine the public records to see if this particular piece of collateral has been pledged before

Priorities

Determine when perfection took place or when security interest attached--who had it first?-- execution of judgment, bankruptcy (worst case), neither perfected-- first to attach

default

Failure to observe a promise or discharge an obligation; commonly used to refer to failure to pay a debt when it is due.

Intangible collateral

Generally valuables such as patents, copyrights liquor licenses--Account receivable, high risk, interest rates are high-- rights under contracts, are they worth anything?

You may renew filing as many times as needed, don't need permission to renew (have to wait 4.5 years, you can renew 6 months early), if you allow it to expire, if someone is behind you, they move up

How long is my filing valid?

Care of collateral

If SP has possession, SP must use reasonable care in preserving the collateral (must care for it)-- maintenance care for something goes towards the loan and the debtor must pay, ALSO socks/bonds related to dividends, if it generates money lenders have 2 options1. apply to loan, or 2. remit cash to debtor-- creditor has duty to inform debtor (upon debtor's request) of the amount of the unpaid debt and to list remain collateral

Proceeds

If you debtor sells the collateral, the proceeds from the sale become your collateral, you can restrict them from selling but they may not listen

attachment

In a secured transaction, the process by which a secured creditor's interest "attaches" to the property of another (collateral) and the creditor's security interest becomes enforceable. In the context of judicial liens, a court-ordered seizure and taking into custody of property prior to the securing of a judgment for a past-due debt.

estate in property

In bankruptcy proceedings, all of the debtor's interests in property currently held, wherever located, together with certain jointly owned property, property transferred in transactions voidable by the trustee, proceeds and profits from the property of the estate, and certain property interests to which the debtor becomes entitled within 180 days after filing for bankruptcy.

preference

In bankruptcy proceedings, property transfers or payments made by the debtor that favor (give preference to) one creditor over others. The bankruptcy trustee is allowed to recover payments made both voluntarily and involuntarily to one creditor in preference over another.

automatic stay

In bankruptcy proceedings, the suspension of almost all litigation and other action by creditors against the debtor or the debtor's property. The stay is effective the moment the debtor files a petition in bankruptcy.

preferred creditor

In the context of bankruptcy, a creditor who has received a preferential transfer from a debtor.

Floating Lien (legal claim)

Inventory financing tool which secures a commercial line of credit (from bank)-- after-acquired security clause, future advances clause-- The SPs security interest floats up and down based on the level of debt and inventory, want LOW inventory and debt, EXAMPLE: Toys R US- Christmas = high inventory and high purchases, inventory decreases, they pay off the credit line (decreases)

Perfect proceeds beyond the 20 days

Make sure your UCC-1 lists "proceeds of the collateral"-- can help but not fool proof-- if cash proceeds, get possession or make sure debtor purchases property of the same type described in your UCC-1, otherwise SP must reperfect, if proceeds are non-cash and not in a form listed on UCC-1, SP must reperfect (possession or refile)

Disposal of collateral

Notice of time, place and manner of the sale must be given to other SPs and the debtor (unless debtor has waived the right in writing after default), no notice is required if collateral is perishable or threatens to decline rapidly in vlaue, or if the type of collateral is customarily sold in a recognized market (stock market), you are allowed to sell in a public or private manner, *commercially reasonable manner, need the best rpice, have to be fair to the debtor (and junior lender/holders) so they can watch you

after-acquired property

Property that is acquired by the debtor after the execution of a security agreement

after-acquired property clause

SI can cover-- (I get everything now and hereafter), common in inventory financing, buys new inventory with proceeds, new inventory remains subject to security agreement (and prior perfection), SI can cover FUTURE credit advances by the SP (inventory financing)--"I have inventory and everything now and hereafter is my collateral, if you buy more with the new money the inventory is still mine"-- line of credit from the bank, same idea

Collateral moved to another state

SP has to reperfect in the new state within 4 months from the date collateral is moved or the remaining time left on your perfection (whichever is less), otherwise reperfect so you don't lose your place in line, During the pd the perfection is valid, if expires sooner, you have to move quickly, NOTE: tagged vehicles are treated differently, mobile--lien shows up online (PENNDOT)

Perfection in the proceeds of the sale of collateral

SP is automatically perfected in proceeds of collateral for 20 days after receipt of the proceeds by the debtor, want debtor to repurchase whatever is described, DANGER: perfection in cash collateral will be lost if debtor transfers cash to a 3rd party , such as paying bills in the ordinary course of business-- if they spent it, it is gone-- ADVICE: monitor accounts, freeze if needed

Value given to debtor

SP must give value to the debtor, must get something in return-- pledged because you owe me money, can pledge behind existing debt, if collateral price drops you can pledge more, passes the test to pledge more to the existing loan-- if the bank is legally obligated but hasn't given you the money yet, it still passes because you have have the option to get money

Security agreement

SP must have a written (in most cases, always in writing to solve problems) security agreement unless it has the collateral in its possession, EXCEPTION: if they have possession, it is proof that you agreed, but also reasonably describe the collateral (Ex. Serial #s)

petition in bankruptcy

The document that is filed with a bankruptcy court to initiate bankruptcy proceedings. The official forms required for a petition in bankruptcy must be completed accurately, sworn to under oath, and signed by the debtor.

perfection

The legal process by which secured parties protect themselves against the claims of third parties who may wish to have their debts satisfied out of the same collateral; usually accomplished by filing a financing statement with the appropriate government official.

right of reimbursement

The legal right of a person to be restored, repaid, or indemnified for costs, expenses, or losses incurred or expended on behalf of another.

levy

The obtaining of funds by legal process through the seizure and sale of nonexempt property, usually done after a writ of execution has been issued.

right of contribution

The right of a co-surety who pays more than her or his proportionate share on a debtor's default to recover the excess paid from other co-sureties.

right of subrogation

The right of a person to stand in the place of (be substituted for) another, giving the substituted party the same legal rights that the original party had.

liquidation

The sale of all of the nonexempt assets of a debtor and the distribution of the proceeds to the debtor's creditors. Chapter 7 of the Bankruptcy Code provides for liquidation bankruptcy proceedings.

discharge

The termination of an obligation. In contract law, discharge occurs when the parties have fully performed their contractual obligations or when events, conduct of the parties, or operation of law releases the parties from performance. In bankruptcy proceedings, the extinction of the debtor's dischargeable debts, thereby relieving the debtor of the obligation to pay the debts.

cross-collateralization

The use of an asset that is not the subject of a loan to collateralize that loan.

debtor

Under Article 9 of the UCC, any party who owes payment or performance of a secured obligation, whether or not the party actually owns or has rights in the collateral.

collateral

Under Article 9 of the UCC, the property subject to a security interest, including accounts and chattel paper that have been sold.

mortgagee

Under a mortgage agreement, the creditor who takes a security interest in the debtor's property.

mortgagor

Under a mortgage agreement, the debtor who gives the creditor a security interest in the debtor's property in return for a mortgage loan.

Deficiency

Unless otherwise agreed, SP may sue debtor for any deficiency after the disposal of the collateral

1. SP may choose to ignore the collateral and attempt to obtain a money judgment against the debtor (done when collateral is worthless or someone perfected before you), 2. Take possession of collateral-- want to get it and turn it into cash but it would be a loss if they're not worth the same (if you take the collateral and don't sell it, YOU ARE DONE, if you sell it you can get a judgment for the difference)

What can the secured party do upon default?

SP applies the proceeds in this order: 1. Reasonable expenses of getting possession of collateral, preparing for sale, selling it (hire repo person, clean it up, auctioneers, attorneys), 2. The debt, 3. subordinate SIs, 4. remainder to the debtor (never happens)

What does SP do with the money?

Business collateral- central filing (capital in Hburg), Consumer- local, where the consumer resides, Farm- local, where they live AND where the farm is (if different) might file twice, Fixture- where the fixture is and where the land is

Where do you file UCC-1s?

Scope of security interest

a security interest can over proceeds of collateral, if the collateral is sold, SP is entitled to the same interest in the proceeds of the sale--"I still have priority", cash, a/r, commercial paper +other

secured lending

anytime you loan money and take collateral, for example: "I will get something back if you don't pay"--car loan, the car is the collateral, if you don't pay they can sell the car

Automatic perfection

applies with regard to PMSI in consumer goods, will beat bankruptcy, EXCEPTIONS: cars, fixtures-- still has to be written security agreement, EXAMPLE: Dell extends credit to you to buy a computer to use for school, Dell will win, ALWAYS, New value (loan) given to obtain (buy) a NI, certicated security or negotiable doc of title-- you have 20 days ONLY to get possession, also allows 20 days for debtor to sell or exchange the NI, PMSI must be involved in the transaction (might involve delivery/endorsement)

Collateral types: fixtures

can be moved, bought and sold under Art. 2, attached to real estate but can be removed without significant damage, still under Art. 9

Collateral types: Goods: Tangible Personal Property

consumer goods, business has inventory held for resale, farm products (growing, livestock, unborn young), businesses that use goods to help run the business aka equipment

Attachment

creating an enforceable security interest, if you want any legal claim it must attach, creditor must have a security interest in the collateral to become a secured party

secured party

creditor, lender- owns security interest

Rights and duties of debtors

creditors have the right to know the date and time of all filings in the UCC records with respect to the debtor (public info, the world on notice), A secured creditor may amend its SI, release it, or assign it to another creditor--must record these at the same place as original, loans can be sold and can purchase the same place in line, amended filings must be singed by both the debtor and creditor, releases, assignments and continuation statements need only be signed by the SP, if it hurts the debtor they must sign, if not they don't

UCC-1 (Filing a financing stmt)

file a financing statement with the secretary of state/county--now digital-- tells the party (must get debtors signature, must own the property) and collateral (legal description, even farm activities) filed with the government, it is your responsibility to check-- PUBLIC documents, public notice system (gives notice of who has a claim on your collateral, if you do not perfect, someone can pass you up), idea is to put the world at notice of SPs claim against collateral so you don't lend against this and keeps debtor from going around from lender to lender pledging same property

Consumer goods

if this is a ________________ and subject to PMSI and debtor has paid 60% (or more) of the cash price of the item-- 60% equity-- then SP MUST sell it, dispose of the collateral within 90 days-- most likely there is additional value there-- Failure may subject SP to damages unless the debtor has waived right to demand a sale

Bad filing, failure to file, filing incorrectly

if you file in the wrong county, do not get the debtor's signature, have the wrong description, etc.-- NO notice!, SP will not be perfected and a competing perfected creditor will defeat SP, must protect your interest, if you discover an error you need to refile ASAP

security agreement

in writing (usually)-- debtor and secured party-- if I don't pay you you can have the collateral

Investment property

just have to go through broker (electronic), it is possible for a lease of personal property to serve as a SI if the parties demonstrate such an intent, structured so that when you finish you either own nothing or only a little, you were paying for it the whole time but you leased it for tax reasons

security interest

legal interest/claim that the 3rd party has to put the property that is collateral

Methods of perfecting a security interest

obtaining possession of the collateral or by control (recognize that you are in a good spot to sell it, it is easy to hide collateral), sometimes you HAVE TO have possession (cash/NI) if it can circulate like money, stocks, bonds, CDs-- must get possession to be perfected so that i can be used like cash otherwise it could be sold and you can't do anything), other investments that there is not a piece of paper-- secured part must get control, debtor fills out a form and turns it in, they can't sell it, if they default, I have control, I have perfected

personal property

opposite of real property (not land), includes A/R, equipment, computers, vehicles, bank accts, stocks, bonds, CODs-- Can be tangible or intangible-- anything of value that isn't land

PMSI vs. Non-PMSI

perfect PMSI defeats a prior perfected SI if the PMSI was perfected within 20 days of the debtor getting possession of the collateral (what they bought w/ new money), NOTE: inventory ONLY-- second lender needs advance notice of new inventory, give notice to those in line before them, giving them a chance to do an audit BEFORE new inventory arrives, no notice = second in line, must give a reasonable opportunity. EXAMPLE: A- if you have a lien for all new inventory now and hereafter, you refuse to lend more, you're 1st, EXCEPT they go to another lender B, who will lend and they purchase something with new money, B is now first for that equipment only

debtor

person borrowing the money or the person who pledges collateral for you on the PN--- "wealthy aunt hilda"--she doesn't have to sign the PN, they have special rights so that both debtors are covered

Chattel Paper

personal property, represents a right to something-- often seen in auto financing/ farm equipment, *special: face--PN + Art. 9 pledge of collateral security agreement, collected and sold, EXAMPLE: car dealer sells to a bank

collateral

pledged property

Perfection

the key to obtaining a priority position in the collateral in the event that the debtor defaults, we want to be 1st (priority) so we can keep or sell the collateral-- usually it won't cover but it helps--we've attached the security interest, now we must do this or we might lose the collateral

SPs Right to take possession

unless the security agreement states otherwise, SP has the right to take possession, "self help", you can repo but you can't breach the peace-- can't go into their house-- try once, next time you can take the police and they will have to let you in