Article 9 - Secured Transactions

Question 1

Scope of Article 9 - Generally

Answer 1

I. Scope of Article 9

A. applies to any transaction regardless of form that creates a SI in personal property by K

1. security interest: an interest in personal property that secures the payment of an obligation
   a) personal property subject to the SI is the collateral
2. security agreement: SA: K that creates SI
3. a creditor has a SI in collateral to the extent the SI is attached

B. applies to agricultural liens: statutory lien on farm products to secure payment of obligation for providing goods or services or leasing real property to a debtor engaged in farming operations

C. Sale of Monetary Accounts

D. Certain Consignments

E. Leases

Question 2

Accounts, Chattel Paper and Payment Intangibles

Answer 2

C. Sale of Monetary Accounts:

1. accounts: right to payment of a monetary obligation for property sold or leased or services rendered
2. chattel paper: a writing that evidences both a monetary obligation and a SI in specific goods (ex: conditional sales K)
3. payment intangibles: catchall: right of creditor to receive repayment of a loan

Question 3

Is the Transaction an Assignment

Answer 3

D. Consignment: transaction in which a person delivers goods to a merchant for the purpose of sale and the merchant deals in goods of that kind under a name other than that of the person making delivery

1. consumer goods exception: when consumer goods immediately before the delivery, not a consignment subject to Art. 9
2. not a consignment if consignee an auctioneer, generally known by its creditors to be subst. engaged in selling the goods of others, the value of the goods is less than $1,000, or the tx was a security consignment that created a SI in the goods to secure an
   obligation to pay the purchase price

Question 4

Certain Leases of Personal Property

Answer 4

E. Lease: whether a tx is a true lease or creates an Art. 9 SI→ test: if lessee can’t terminate its obligation to pay for use and possession of the goods AND 1 of the following 4 attributes

1. original term of lease is equal to or greater than remaining useful life of the goods
2. lessee bound to renew the lease or purchase goods for the remaining useful life of goods
3. lessee has option to renew the lease for nominal or no additional consideration
4. option to purchase for nominal or no additional consideration (ok if option to purchase for FMV of goods at time, or for a reas. projection of value of goods at the time)

Question 5

Attachment

Answer 5

II. Attachment: a creditor will have a SI in collateral to the extent the SI is attached

A. A SI attaches when it becomes enforceable against the debtor with respect to the collateral

1. SA that satisfies Art. 9’s SoF (filing, possession/control, automatic)
2. debtor has rights in the collateral or power to transfer rights in the collateral to a SP
3. SP has given value

Question 6

Article 9 Statute of Frauds

Answer 6

B. SoF:

1. oral SA okay if SP in possession of or has control over the collateral (such as deposit accts)
2. otherwise, need authenticated SA w description of collateral
   a) sufficient SA: written or in electronic form, create or provide for a SI, can be by composite documents, but not FS standing alone

b) sufficient authentication: signed by debtor, or anything w/ present intent to adopt SA in electronic format (so like a tape of phone convo)
c) sufficient description of collateral:
(1) can be generic, by type of collateral like equipment, inventory
(2) can’t be super-generic “al personal property” (this is sufficient for FS)

Question 7

Rights in Collateral or Power to Transfer Rights in the Collateral to a SP

Answer 7

C. Rights in the Collateral or Power to Transfer Rights in the Collateral to a SP

1. normally because debtor owns, possesses the collateral
   a) mere bailee doesn’t have rights in collateral unless they got goods under an Art. 9 assignment
2. power to transfer rights in collateral: dealer w/ SP having interest in aap, dealer has voidable title and can transfer good title to a GF purchaser for value; Art. 9 SP’s considered GF purchaser for value

Question 8

Giving Value

Answer 8

D. SP gives value if it obtains the SI in exchange for a binding commitment to extend credit, the extension of credit, or any consideration sufficient to support a K

Question 9

Scope of Security Interest

Answer 9

E. Scope of SI

1. floating lien: gives interest in AAP, which can also secure additional advances by the SP
2. Proceeds: whatever is acquired upon the sale, exchange, or other disposition of the collateral
   a) SI attaches to proceeds as a matter of law, & the proceeds become collateral → automatic attachment
   b) best idea is to get proceeds in segregated account & get control over that account, but can identify commingled cash proceeds using “lowest intermediate balance” of tracing: withdraw non-proceeds first, deposits don’t replenish proceeds unless made w/ intent to replenish
3. After Acquired Property: only if SA so provides: that collateral, whenever acquired, can secure all obligations covered by the agreement
   a) if collateral is inventory or accounts (cyclical) presumption is that parties were intending for there to be a SI in AAP → rebuttable presumption
4. Future Advances: only if the SA so provides

Question 10

Ways a SI Can Be Perfected

Answer 10

Automatic Perfection: perfects upon attachment w/o filing FS or taking possession/control of collateral

Perfection by Possession: for goods, instruments, negotiable documents, chattel paper & money

Perfection by Control: deposit account, investment property, letter-of-credit rights, or electronic chattel paper

Perfection by Filing

Perfection by Control

Perfection in Certain Documents of Title

Question 11

Types of Automatic Perfection

Answer 11

1. PMSI in Consumer Goods
2. Certain Asssignments of Accounts
3. Sales of Payment Intangibles
4. Temporary Automatic Perfection of SI in Proceeds

Question 12

Automatic Perfection - PMSI in Consumer Goods

Answer 12

1. PMSI in Consumer Goods (other that goods subject to certificate of title statute)
   a) consumer goods: used or bought primarily for personal, family, or household purposes
   b) when SI is to (1) secure buyer’s obligation to pay the purchase price or (2) to secure an enabling loan made so debtor could acquire the collateral and the funds were in fact so used
   c) transformation rule: cross-collateralization and refinancing of PMSI in consumer goods transforms the SI’s into non-PMSI’s (courts are to determine effect of cross collateralization and refinancing→ unexercised cross collateral clause did not transform PMSI in consumer goods into non-PMSI)
   d) a buyer of goods from someone who used them as consumer goods takes free of perfected SI if the buyer buys without knowledge of the SI, for value, primarily for consumer purposes, and before a FS is filed covering the goods

Question 13

Automatic Perfection - Certain Assignments of Accounts

Answer 13

2. Certain Assignments of Accounts: normally have to be perfected by filing FS, 2 args. if you fail to file FS:
   a) an assignment of a single account in full or partial satisfaction of a preexisting debt is excluded from Art. 9→ resolved under CL and first assignee wins
   b) an assigment of accounts which does not transfer a significant part of assignor’s outstanding accounts is automatically perfected when assignee does not regularly take assignment of accounts

Question 14

Automatic Perfection - Sales of Payment Intangibles and Promissory Notes

Answer 14

3. Sales of Payment Intangibles and Promissory Notes: automatically perfected for 20 days in negotiable instruments, but a HDC of a negotiable instrument has priority over a prior perfected SI in the note

Question 15

Temporary Automatic Perfection of SIs in Proceeds

Answer 15

4. Temporary Automatic Perfection of SI’s in Proceeds: automatically perfected for 20 days remains perfected if:
   a) could’ve perfected in the proceeds by filing in the same office that you filed for the orig. collateral
   b) if the proceeds are identifiable cash proceeds, or
   c) SP perfects by filing on possession before expiration of 20 day period

Question 16

Perfection by Control

Answer 16

1. can gain control of a deposit account (checking & savings account) by:
   a) if the SP is the bank at which the account is maintained
   b) the SP, debtor, & bank have a control agreement
   c) the SP becomes a customer of the bank with respect to the deposit account

Question 17

Perfection by Filing - Contents of FS

Answer 17

1. generally, FS must be filed to perfect a SI;
   a) name of debtor
   (1) FS not seriously misleading if search under debtor’s correct name would disclose the FS
   b) name of SP
   c) indication of collateral covered
   (1) same rules as those for SA, except a super-generic description of collateral such as “all assets” is sufficient, and you don’t need reference to after acquired property in FS
   d) mailing address for SP
   e) mailing address for debtor
   f) indication of whether debtor is an individual (need last name) or an organization (need type)

Question 18

Effect of Incomplete and Erroneous FS

Answer 18

2. if required info. is omitted, filing office must refuse to accept it (required info. is a-c above)
   a) if the office accepts FS omitting required info, FS won’t perfect the SI (a-c)
   b) if office accepts FS only omitting additional info. (d-f above), FS is effect to perfect SI
3. minor errors or omissions don’t render FS ineffective, unless errors/omissions make FS seriously misleading
   a) other SP’s that give value in reasonable reliance on the incorrect info. have priority
4. Indexing Errors: FS effective against 3rd parties even though FS couldn’t be found

Question 19

Authorization to File FS

Answer 19

5. Authorization to File: debtor doesn’t have to sign FS
   a) FS effective only to the extent it is authorized by the debtor in a signed writing → sufficient if debtor authenticates a SA
   b) if unauthorized, debtor’s remedies: termination statements, UCC Lien Satisfaction Affidavit & damages

Question 20

FS - Where to File

Answer 20

6. Where to File: office of the Secretary of State in the jx where debtor is located
   a) individual: principal residence; registered organization: state in which they’re organized/inc.
   b) except as-extracted collateral, timber to be cut, fixture filings→ filed in real property records

Question 21

Lapse and Refiling of FS

Answer 21

7. FS is effective for five years
   a) lapses after that five year period of effectiveness & the SI becomes unperfected
   b) can extend effectiveness of FS by filing continuation statement w/I last 6 mos. of FS effectiveness
8. Refiling:
   a) transfer collateral to transferee in another state (transfer & change in governing law): unauthorized transfer and buyer not a buyer in ordinary course, buyer takes subject to SI
   (1) SI remains perfected for 1 year

(2) must perfect/refile in new jx within 1 year period or SI becomes unperfected
b) debtor moves to another jx (change in governing law)

(1) SI remains in collateral before move and w/I 4 months of move
(2) must refile in new jx w/I 4 month period get earlier date of filing in original jx) or SI becomes unperfected
c) name change:
(1) remain perfected if name change doesn’t render FS seriously misleading
(2) if FS now seriously misleading, have SI in collateral owned before an w/I 4 months of name change; to get SI after that must file an amendment
d) new debtor: incorporation or merger
(1) FS against original debtor is effective unless name change makes FS seriously misleading
(2) if FS now seriously misleading, have SI in collateral owned before and w/I 4 months of becoming new debtor; must refile within 4 month period
(3) SP who filed against original debtor may be subordinated to a SP who files against new debtor

Question 22

Perfection in Goods Subject to Certificate of Title Statutes

Answer 22

E. Perfection in Goods Subject to Certificate of Title Statutes: motor vehicles and water craft

1. can’t file to perfect must comply w/ certificate of title statute
2. EXCEPT: SI in goods covered by COT statute that are held as inventory for sale or lease by a person in business of selling goods of that kind→ must file to perfect that SI (i.e. in car dealer’s inventory)
3. 4 month rule when goods covered by COT enter jx subject to SI perfected under law of another jx- have 4 months to reperfect in new jx; doesn’t work against consumer buyers and SP who rely on COT- take free of SI

Question 23

Priority of Unperfected SI

Answer 23

A. Unperfected SI: subordinate to perfected SI, rights of a lien creditor (bank. trustee); first unperfected SI to attach has authoirty

Question 24

Priority - First to File or Perfect Rule

Answer 24

B. First to File or Perfect Rule

1. first SP to file a FS or perfect its SI has priority
2. a SP that perfected by filing can use the earlier date of filing or perfection for priority purposes
3. Proceeds: use date of filing or perfection w/ respect to the collateral
4. Future Advances: SP’s priority in future advances is fixed by its date of filing or perfection by possession (for both later advances pursuant to a future advance clause in the SA, and later advances secured by the same collateral)

Question 25

Purchase Money Priorities

Answer 25

C. Purchase Money Priorities: exception to first to file or perfect rule; allows subsequent PM financer of new collateral to establish priority over an earlier filed SP who claims a SI in the new collateral as AAP

1. SI is a PMSI to the extent it secures a PM obligation with respect to the collateral.
   a) obligation to pay the purchase price of the collateral or
   b) obligation to repay enabling loan if funds were in fact used to purchase the collateral
2. cross-collateralization or refinancing may transform PMSI into non-PMSI
   a) consumer goods: issue for court
   b) equipment: no transformation, but party claiming PMSI has burden to prove extent to which its SI is PMSI
   c) inventory: special definition intended to fully protect PM inventory financers from transformation into non-PMSI; interest of owner in goods consigned is a PMSI in inventory

Question 26

PMSI Priority in Equipment and Inventory

Answer 26

3. PM priority in equipment: if perfects SI before or within 20 days of debtor receiving collateral
   a) sale on approval: receive the collateral when they decide to buy/buy it
   b) initial blanket FS can perfect PMSI’s in a series of subsequent tx’s and preserve the PM financer’s priority
   c) PM priority in equity extends to priority in proceeds of the collateral
4. PM priority in inventory:
   a) requirements:
   (1) financer holds PMSI
   (2) PMSI was perfected when the debtor received possession of the new inventory
   (3) the financer sent an authenticated notification to the holders of conflicting SI’s who perfected by filing before the PM financer filed or perfected
   (4) the holder of conflicting SI received the notification within 5 years before the debtor received possession of the collateral and
   (5) the notification stated that the PM financer has or expects to acquire a PMSI in inventory and describes the inventory
   b) PM priority in inventory extends to proceeds only if they are identifiable cash proceeds received by the debtor before the delivery of the inventory, or if the proceeds are chattel paper the PM financer has priority in by possession; no priority in proceeds that are accounts
   c) Conflicting PMSI’s: PMSI securing purchase price wins over PMSI securing enabling loan

Question 27

SP v. Buyer in Goods

Answer 27

1. SI continues in collateral unless SP authorized the sale of collateral free of the SI
2. Unperfected SI: buyer who gives value and receives delivery of the goods without knowledge of the SI and before it is perfected takes free of the SI
   a) UNLESS: SP holds a PMSI & files a FS w/I 20 days of debtor receiving delivery of the collateral
3. Perfected SI: a buyer in the ordinary course of business takes free of a SI created by the buyer’s seller, even if the SI is perfected and the buyer knows of its existence;
   a) buyer in the ordinary course:
   (1) buys goods
   (2) in good faith
   (3) without knowledge that the sale violates the rights of another person
   (4) in the ordinary course and
   (5) from a person in the business of selling goods of that kind
   (6) & takes possession or has the right to possession
   b) take free only of SI’s created by the buyer’s seller, unless SP acquiesces amounting to an entrustment of their interest & buyer will get a claim for breach of implied warranty of good title
   c) shelter principle: if a buyer of collateral takes free of a SI, subsequent transferee also takes free of the SI even if transferee is not a buyer in the ordinary course

Question 28

Double Debtor Issue - Buyer of Goods

Answer 28

d) double debtor: inventory financer, then an unauthorized sale of inventory & SP of the buyer takes a PMSI in the inventory: SI claimed by the SP of the buyer w/ the PMSI is subordinated to the SP of the seller/inventory financer if 4 requirements are met:
(1) buyer acquired the collateral subject to the SI created by the seller
(2) the SI created by the seller was perfected when the buyer acquired the collateral
(3) at no period thereafter was the SI of the seller’s SP unperfected &
(4) SI created by the buyer would otherwise have priority

Question 29

Priority - Purchasers of Chattel Paper

Answer 29

E. Purchasers of Chattel Paper

1. chattel paper: a record that evidences both a monetary obligation & either a SI or lease of goods
   a) typically a conditional sales K
2. Art. 9 applies to SI’s in chattel paper AND to sales of chattel paper
3. perfected by filing or taking possession (or control for electronic chattel paper)- perfection by possession or control is preferable to filing
4. inventory financer vs. chattel paper purchaser: CP purchaser who gives new value and takes possession/control has priority over a SI in the CP which is claimed merely as proceeds of inventory
5. Galaxy Boats Problem: inventory financer vs. CP purchaser interest in returned goods: returned goods are proceeds of the chattel paper
   a) if CP purchaser had priority in the CP then has priority in the proceeds of the CP that are the specific goods covered by the CP, even if CP purchaser’s SI in proceeds is unperfected
6. CP as proceeds:
   a) PM priority in inventory doesn’t extend to proceeds, but may extend to proceeds consisting of chattel paper

Question 30

Priority of Claims to Deposit Accounts

Answer 30

F. Priority of Claims to Deposit Accounts

1. can take SI in deposit account as original collateral (but not in consumer tx’s)- can ONLY perfect by control to have deposit acct as original collateral- will get priority over SI’s perfected any other way
   a) if SP is the bank
   b) control agreement
   c) SP becoming customer of bank w/ respect to deposit account (only way to get priority over bank’s right to set-off and bank’s SI perfected by control
2. may have SI in deposit account that contains identifiable cash proceeds of the collateral→ proceeds that are identifiable cash proceeds remain perfected
3. priority: bank’s right to set off wins over SI in cash proceeds perfected by filing

Question 31

Priority - Fixtures - Fixture Filing

Answer 31

G. Fixtures: goods that have become so related to real property that an interest in them arises under real property law: can be subject to both a real property encumbrance and an Art. 9 SI → file in both Art. 9 records w/ Sec. of State & real property records

1. Fixture filing:
   a) FS w/ additional information
   (1) covers fixtures
   (2) to be filed for record in real property records
   (3) description of real property
   (4) if debtor not record owner, name of the record owner
   b) filed in real property records- register of deed’s office in county where property is located
2. Summary: For Fixture Financer to get priority over
   a) real property mortgagor: make a fixture filing w/I 20 days after equipment becomes a fixture
   b) Art. 9 party: perfect by filing FS w/ Sec. of State w/I 20 days of debtor receiving possession- PMSI

Question 32

Priority of Fixture Filers

Answer 32

2. Priority: Art. 9 subordinate to real property encumbrancer unless:
   a) fixture filing before real property encumbrancer records its interest
   b) Art. 9 fixture financer has PMSI in the fixture if:
   (1) debtor has an interest of record in or possession of the real property
   (2) the finxture financer has a PMSI
   (3) the interest of the real property encumbrancer arose before the goods became fixtures and
   (4) the fixture financer’s SI was perfected by a fixture filing before or w/I 20 days after the goods became fixtures
   c) PM priority in fixture can’t be asserted against construction mortgage
   d) SI in fixture priority over judicial lien creditors
   e) fixture financer has priority over real property encumbrancer if perfected under Art. 9 before goods became fixtures if the collateral is a fixture and is
   (1) a readily removable factory or office machine
   (2) readily removable equipment that is not primarily used in the operation of the real prop
   (3) or a readily removable replacement domestic appliance that qualifies as consumer goods

Question 33

Default Rules

Answer 33

V. Default

A. not defined by Art. 9, non-consumer tx’s: it is defined in SA

B. SP can take possession of collateral immediately, w/ judicial process or w/o it if they don’t breach the peace

C. SP has right to dispose of the collateral: must give notice & disposition must be commercially reasonable