Business Law 2 Final

Methods for Perfection

(1) perfection by filing a financing statement, (2) perfection by possession of collateral, and (3) perfection by a purchase money security interest in consumer goods

an improperly recorded document is not effective against either

(1) subsequent purchasers of the real property or (2) other mortgagees or lienholders who have no notice of the prior mortgages.

bankruptcy court confirms a plan of reorganization under the acceptance method if

(1) the plan is in the best interests of the creditors because the creditors would receive at least what they would receive in a Chapter 7 liquidation bankruptcy, (2) the plan is feasible (i.e., the new reorganized company is likely to succeed), and (3) each class of creditors accepts the plan (i.e., at least one-half the number of creditors who represent at least two-thirds of the dollar amount of the debt vote to accept the plan).

What a Floating Lien attach to

1. After-Acquired Property 2. Sale Proceeds 3. Future Advances

The security agreement must

1. Clearly describe the collateral so it can be readily defined 2. Contain the debtors promise to prepay the creditor, including the terms of repayment 3. Set forth creditor's rights upon the debtor's default 4. Be signed by the debtor, the debtor must have a current or future legal right to the possession of the collateral

Security Interests are created by

1. Security Agreement and either a. a. There is a record of the security agreement that describes the collateral or tThe secured party is in possession of the collateral 2. The secured party must give value to get the security interest a. Granted the debtor a lien to the property 3. The debtor must have legal rights to the collateral

Three-Party Secured Transaction; seller; Buyer- Debtor; lender-secured creditor.

A business purchases an airplane from an airplane manufacturer. The business obtains a loan to purchase the airplane from a bank, which obtains a security interest in the airplane. The airplane manufacturer is paid for the airplane out of the proceeds of the loan. This is a ____________________. The airplane manufacturer is the ______________, the purchasing business is the ___________________, and the bank is the ________________

construction lien (mechanic's lien)

A contractor's, laborer's, supplier's, or design professional's statutory lien that makes the real property to which services or materials have been provided security for the payment of the services and materials.

Secured versus unsecured claims

A creditor who has the only secured interest in the debtor's collateral has priority over unsecured interests.

Default

A debtor that does not make the required payments on a secured real estate transaction is in

Three Party Instrument

A deed of trust is a __________

financing statement

A document filed by a secured creditor with the appropriate government office that constructively notifies the world of his or her security interest in personal property.

termination statement

A document filed by a secured party that ends a secured interest because the debt has been paid. must be filed within one month after the debt is paid or 20 days after receipt of the debtor's written demand, whichever occurs first

Proof of interest

A document required to be filed by an equity security holder that states the amount of his or her interest against the debtor. An equity security holder (e.g., a shareholder of a corporation) must file this.

two-party secured transaction; buyer-debtor; seller-lender-secured creditor

A farmer purchases equipment on credit from a farm equipment dealer. The dealer retains a security interest in the farm equipment that becomes collateral for the loan. This is a __________________________. The farmer is the buyer-debtor and the farm equipment dealer is the seller-lender-secured creditor. The farmer is the _______________ and the farm equipment dealer is the __________________________.

Secured party.

A person in whose favor a security interest is created or provided under a security agreement

Debtor.

A person who has an ownership or other interest in the collateral and owes payment of a secured obligation

buyer in the ordinary course of business

A person who in good faith and without knowledge of another's ownership or security interest in goods buys the goods in the ordinary course of business from a person in the business of selling goods of that kind.

Power of Sale

A power stated in a mortgage or deed that permits foreclosure without court proceedings and sale of the property through an auction.

Perfection of Security Interest

A process that establishes the right of a secured creditor against other creditors who claim an interest in the collateral.

right of redemption

A right that allows the mortgagor to redeem real property after default and before foreclosure. It requires the mortgagor to pay the full amount of the debt incurred by the mortgagee because of the mortgagor's default.

perfection by possession of the collateral

A rule that says if a secured creditor has physical possession of the collateral, no financing statement has to be filed; the creditor's possession is sufficient to put other potential creditors on notice of the creditor's secured interest in the property.

antideficiency statute

A statute that prohibits deficiency judgments regarding certain types of mortgages, such as those on residential property. Can't come sue the person for the remaining balance if the house does not cover the amount of the loan.

Recording Statutes

A statute that requires a mortgage or deed of trust to be recorded in the county recorder's office of the county in which the real property is located. These filings are public record and alert the world that a mortgage or deed of trust has been recorded against the real property. This record gives potential lenders or purchasers of real property the ability to determine whether there are any existing liens (mortgages) on the property.

artisan's lien

A statutory lien given to workers on personal property to which they furnish services or materials in the ordinary course of business. prevails over all other security interests in the goods unless a statutory lien provides otherwise. Also called a super-priority lien. must be in possession of the property in order to affect this

UCC Financing Statement (Form UCC-1)

A uniform financing statement form that is used in all states.

Lien Release

A written document signed by a contractor, subcontractor, laborer, or material person, waiving his or her statutory lien against real property.

Examples of Tangible Personal Property

Accessions Consumer goods Equipment bought or used primarily for business Farm products, including crops, aquatic goods, livestock, and supplies produced in farming operations Inventory held for sale or lease, including work in progress and materials

Examples of Intangible Property

Accounts that include a right to payment of a monetary obligation for personal or real property sold or leased, services rendered, and policies of insurance Chattel paper Deposit accounts General intangibles Instruments

Tangible Personal Property

All things that are movable when a security interest attaches are called

intangible personal property

All things that are nonphysical personal property when a security interest attaches are called

Security agreement

An agreement that creates or provides for a security interest

Mortgage

An arrangement where an owner of real property borrows money from a lender and pledges the real property as collateral to secure the repayment of the loan. Two-Party instrument

Revised Article 9 (Secured Transactions)

An article of the Uniform Commercial Code that governs secured transactions in personal property.

Note

An instrument that evidences a borrower's debt to the lender.

deed of trust

An instrument that gives a creditor a security interest in the debtor's real property that is pledged as collateral for a loan.

purchase money security interest

An interest a creditor automatically obtains when he or she extends credit to a consumer to purchase consumer goods.

Security interest

An interest in the collateral, such as personal property or fixtures, which secures payment or performance of an obligation

first purchase money mortgages.

Antideficiency statutes usually apply only to _________________. Second mortgages and other subsequent mortgages, even mortgages that refinance the first mortgage, usually are not protected by anti-deficiency statutes.

Unsecured loan

Arnold borrows $15,000 from Mary. Mary lends the money to Arnold without taking an interest in collateral for the loan. This is a(n)__________________

Unsecured Loan

Arnold borrows $15,000 from Mary. Mary lends the money to Arnold without taking an interest in collateral for the loan. This is an

No;Anti-Takeover Statute; Yes

Assume that a house is located in a state that has an antideficiency statute. Qian buys the house for $800,000. She puts $200,000 down and borrows $600,000 of the purchase price from First Bank, which takes a mortgage on the property to secure the loan. This is a first purchase money mortgage. Subsequently, Qian borrows $100,000 from Second Bank and gives a second mortgage to Second Bank to secure the loan. Qian defaults on both loans, and when she defaults, the house is worth only $500,000. Both banks bring foreclosure proceedings to recover the house. First Bank can recover the house worth $500,000 at foreclosure. However, First Bank has a deficiency of $100,000 ($600,000 loan - $500,000 foreclosure sale price). Can First Bank Recover this deficiency? If not, Why? Can Second bank recover their deficiency?

cannot

Central Car Sales, Inc. (Central), a new car dealership, finances all its inventory of new automobiles at First Bank. First Bank takes a security interest in Central's inventory of cars and perfects this security interest. Kim, a buyer in the ordinary course of business, purchases a car from Central for cash. The car ___________be recovered from Kim if Central defaults on its payments to the bank.

Foreclose; 500,000; 75,000

Christine borrows $500,000 from Country Bank to buy a house. Christine (mortgagor) gives a mortgage to Country Bank (mortgagee), making the house collateral to secure the loan. Later, Christine defaults on the loan. Country Bank can ____________. If the house sells for $575,000, the bank keeps _____________ and must remit ______________ to Christine

Unsecured Credit

Credit that does not require any security (collateral) to protect the payment of the debt. This is riskier from the perspective of the creditor. Interest rate will be higher. Credit Cards, Personal Loans, Student Loans.

Secured Credit

Credit that requires security (collateral) that secures payment of the loan.

Advance becase they recorded the mortgage

Eileen purchases a house for $500,000. She borrows $400,000 from Boulevard Bank and gives the bank a mortgage on the house for this amount. Boulevard Bank fails to record the mortgage. Eileen then applies to borrow $400,000 from Advance Bank. Advance Bank reviews the real estate recordings and finds no mortgage recorded against the property, so it lends Eileen $400,000. Advance Bank records its mortgage. Later, Eileen defaults on both loans. Who can foreclose on the house?

Constructive Notice

Financing statements are available for review by the public. They serve as ___________________ to the world that a creditor claims an interest in a property. Financing statements are effective for five years from the date of filing

Trustor

For a deed, the Owner-Debtor is the

Future advances

Funds advanced to a debtor from a line of credit secured by collateral. Future advances are future withdrawals from a line of credit. a. You've protected your #1 spot, allows a debtor to get more credit in the future. A debtor may establish a continuing or revolving line of credit at a bank. Certain personal property of the debtor is designated as collateral for future loans from the line of credit. A maximum limit that the debtor may borrow is set, but the debtor can draw against the line of credit at any time

Land Sales Contract

Here, the owner of real property agrees to sell the property to a purchaser, who agrees to pay the purchase price to the owner-seller over an agreed-upon period of time. Often, making such a loan is referred to as "carrying the paper." These contracts are often used to sell undeveloped property, farms, and the like. If the purchaser defaults, the seller may declare forfeiture and retake possession of the property.

rfected secured claims in fungible, commingled goods

If a security interest in goods is perfected but the goods are later commingled with other goods in which there are also perfected security interests, and the goods become part of a product or mass and lose their identity, the security interests rank equal and according to the ratio that the original cost of goods of each security interest bears to the cost of the total product or mass

Competing unperfected security interests.

If two or more secured parties claim an interest in the same collateral but neither has a perfected claim, the first to attach has priority

Perfected versus unperfected claims

If two or more secured parties claim an interest in the same collateral but only one has perfected his or her security interest, the perfected security interest has priority

Competing perfected security interests

If two or more secured parties have perfected security interests in the same collateral, the first to perfect (e.g., by filing a financing statement, by taking possession of the collateral) has priority

Trustee

In a deed, legal title of the real property is placed with a

cannot; he has possession of the motorcycle

Karen borrows $3,000 from Alan and gives her motorcycle to him as security for the loan. Alan does not file a financing statement. Another creditor obtains a judgment against Karen. This creditor __________ recover the motorcycle from Alan. Even though Alan has not filed a financing statement, his security interest in the motorcycle is perfected because ___________________

File a mechanics lien against the house; pay Roofing Company; Lien Release

Landowner, which owns an undeveloped piece of property, hires General Contractor, a general contractor, to build a house on the property. General Contractor hires Roofing Company, a roofer, as a subcontractor to put the roof on the house. When the house is complete, Landowner pays General Contractor the full contract price for the house but has failed to obtain a lien release from Roofing Company. General Contractor fails to pay Roofing Company for the roofing work. Roofing Company can ________________________. If they do this, the landowner must __________________ for the work, or they could foreclose on their home. Landowner's only recourse is to sue General Contractor to recover its payment. If Landowner had obtained a _______________ from Roofing Company before or at the time they paid the general contractor,

Mortgagee

Lender-Credito

Purchase Money Security

Marcia buys a $3,000 high-definition plasma television for her home on credit extended by the seller, Circuit City. Circuit City requires Marcia to sign a security agreement. Circuit City has a

statutory period of redemption

Most states allow the mortgagor to redeem real property for a specified period (usually six months or one year) after foreclosure

the county clerk

Most states require financing statements covering farm equipment, farm products, accounts, and consumer goods to be filed with

two-party secured transaction

Occurs when a seller sells goods to a buyer on credit and retains a security interest in the goods.

Mortgagor

Owner-Debtor

Deficiency Judgement

Permits a secured lender to recover other property or income from a defaulting debtor if the collateral is insufficient to repay an unpaid loan.

collateral

Personal property that is subject to a security agreement.

borrower-debtor; lender-creditor.

Prima Company goes to Urban Bank and borrows $100,000. In this case, Prima Company is the _________________, and Urban Bank is the ____________.

after-acquired property

Property that a debtor acquires after a security agreement is executed. When you do the original agreement, the car dealer agrees to put any new transactions for cars under the same security

Chapter 11

Reorganization

deed of trust and note

Some states' laws provide for the use of a ____________ in place of a mortgage.

personal property

Tangible property such as equipment, vehicles, furniture, and jewelry, as well as intangible property such as securities, patents, trademarks, and copyrights.

perfection by a purchase money security interest in consumer goods

The agreement automatically perfects the creditor's security interest at the time of the sale. This is called ______________________. The creditor does not have to file a financing statement or take possession of the goods to perfect his or her security interest

Debtor

The borrower in a credit transaction.

creditor

The lender in a credit transaction.

notice of lien

The lienholder must file a(n) ______________ with the county recorder's office in the county in which the real property subject to the lien is located. When a lien is properly filed, the real property to which the improvements have been made becomes security for the payment of these services and materials. In essence, the lienholder has the equivalent of a mortgage on the property. If the owner defaults, the lienholder may foreclose on the lien, sell the property, and satisfy the debt plus interest and costs out of the proceeds of the sale. Any surplus must be paid to the owner-debtor. Mechanic's liens are usually subject to the debtor's right of redemption.

Priority of claims

The order in which conflicting claims of creditors in the same collateral are solved. determined according to (1) whether the claim is unsecured or secured and (2) the time at which secured claims were attached or perfected

Collateral

The property that is subject to a security agreement

Financing statement

The record of an initial financing statement or filed record relating to the initial financing statement [Revised UCC 9-102(a)(39)]. This is Form UCC 1 (UCC Financing Statement). The financing statement is usually filed with the appropriate state office to give public notice of the secured party's security interest in the collateral.

default

The term _________ is not defined. Instead, the parties are free to define it in their security agreement. Events such as failing to make scheduled payments when due, bankruptcy of the debtor, breach of the warranty of ownership as to the collateral, and other such events are commonly defined in security agreements as default.

perfection by a purchase money security interest in consumer goods

This interest is called perfection by a purchase money security interest in consumer goods interest is called perfection by attachment or automatic perfection rule

security interests in real property

This occurs if an owner borrows money from a lender and pledges real estate as security for repayment of the loan.

Foreclosure Sale

Under this method, the debtor's default may trigger a legal court action for foreclosure. Any party having an interest in the property—including owners of the property and other mortgagees or lienholders—must be named as defendants. If the mortgagee's case is successful, the court will issue a judgment that orders the real property to be sold at a judicial sale. The procedures for a foreclosure action and sale are mandated by state statute. Any surplus must be paid to the mortgagor.

Sale proceeds

Unless otherwise stated in a security agreement, if a debtor sells, exchanges, or disposes of collateral subject to such an agreement, the secured party automatically has the right to receive the

Real, Personal, Intangible and other property

Ways a security interest may be taken

Reconveyance

When the loan is repaid, the trustee files a written _______________ with the county recorder's office, which transfers title to the real property to the borrower-debtor.

State law

_______________ specifies where a financing statement must be filed. A state may choose either the secretary of state or the county recorder's office in the county of the debtor's residence or, if the debtor is not a resident of the state, in the county where the goods are kept or in another county office or both.

proof of claim

a document required to be filed by a creditor that states the amount of his or her claim against the debtor. must be timely filed, which generally means within six months of the first meeting of the creditors

Chattel paper

a record that evidences both a monetary obligation and a security interest in specific goods Tangible chattel paper is inscribed on a tangible medium Electronic chattel paper is evidenced by information stored in an electronic medium

Composition

an agreement that provides for the reduction of a debtor's debts. An extension is a provision that allows a debtor a longer period of time to pay his or her debts.

Three-Party Secured Transaction

arises when a seller sells goods to a buyer who has obtained financing from a third-party lender (e.g., bank) and the third-party lender takes a security interest in the goods

Electronic chattel paper

chattel paper evidenced by a record or records consisting of information stored in an electronic medium [Revised UCC 9-102(a)(31)]. This includes records initially created and executed in electronic form and tangible writings that are converted to electronic form (e.g., electronic images created from a signed writing).

Nonrecordation of a mortgage

does not affect either the legality of the instrument between the mortgagor and the mortgagee or the rights and obligations of the parties. In other words, the mortgagor is obligated to pay the amount of the mortgage according to the terms of the mortgage, even if the document is not recorded.

Accessions

goods that are physically united with other goods in such a manner that the identity of the original goods is not lost. Example: GPS system that is installed in an automobile.

Consumer Goods

include furniture, television sets, home appliances, and other goods used primarily for personal, family, or household purposes.

Record

information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form

Continuation Statement

may be filed up to six months prior to the expiration of a financing statement's five-year term. Such statements are effective for a new five-year term. Succeeding continuation statements may be filed

Attachment

means that the creditor has an enforceable security interest against the debtor and can satisfy the debt out of the designated collateral

Credit

occurs when one party makes a loan to another party

Financing Statement must contain

the name of the debtor, the name and address of the secured party or a representative of the secured party, and the collateral covered by the financing statement. A financing statement that provides only the debtor's trade name does not sufficiently provide the name of the debtor