Article IX Introduction: Scope and Definitions

Question 1

What is a secured transaction?

Answer 1

A transaction intended to create a security interest in personal property or fixtures. Often involves a sale on credit in which either the seller or the lender obtains a lien on the debtor’s property as security for payment.

Question 2

What is necessary for a creditor to secure its interest against the debtor?

Answer 2

Attachment

Question 3

What is necessary for a creditor to maximize its interests against other parties in interest?

Answer 3

Perfection

Question 4

To what transactions does Article 9 apply?

Answer 4

(1) Contractual security interests in personal property or fixtures (regardless of form)
(2) Sales of accounts, chattel paper, payment intangibles, and promissory notes.
(3) Certain commercial consignments of goods.
(4) Agricultural liens
(5) Leases intended to serve as security arrangements
(6) A seller’s retention of title to delivered goods

Question 5

When are commercial consignments of goods governed by Article 9?

Answer 5

When the consignment is of goods worth a total of $1000 or more to persons who (1) deal in goods of that kind under a name other the consignor’s, (2) are not auctioneer’s, and (3) are not generally known by their creditors to be substantially engaged in selling the goods of others.

Question 6

What is an agricultural lien?

Answer 6

A nonpossessory lien on farm products created by state statute in favor of persons providing farmers with goods, services, or rental land

Question 7

What aspects of agricultural liens are governed by Article 9?

Answer 7

Perfection and priority. Their creation and enforcement are governed by other state statutes.

Question 8

Who is the debtor?

Answer 8

The person who owes payment or performance of the obligation secured.

Question 9

Who is the secured party?

Answer 9

A/K/A the secured creditor. The lender, seller or other person in whose favor there is a security interest.

Question 10

What is the security agreement?

Answer 10

The agreement between debtor and creditor creating the security interest.

Question 11

What is the security interest?

Answer 11

The interest in personal property or fixtures securing payment or performance. The interest is a contingent property interest in the debtor’s collateral which springs to life upon default.

Question 12

What is collateral?

Answer 12

The property subject to the security interest which the secured party may repossess on default.

Question 13

What is a purchase money security interest?

Answer 13

There are two forms:

(1) Seller-financed PMSIs, in which the secured party sells the debtor the collateral on credit and retains a security interest in the item sold, and
(2) Financer-financed PMSIs, which are enabling loans in which a lender advances the debtor money for the purpose of purchasing specific collateral in which the creditor then takes a security interest (the debtor must use the money for the collateral).

Question 14

What is the dual status rule?

Answer 14

A PMSI in nonconsumer goods will remain a PMSI even if (1) the security interest is also secured by other property not purchased with the loan money or credit, (2) the debtor also receives advances made to purchase the collateral, or (3) it is refinanced, consolidated, etc. It is for courts to determine what rules apply to PMSIs for consumer goods in these circumstances.

Question 15

What is an after-acquired property clause?

Answer 15

A secured party may include a clause in the security agreement allowing it to obtain a security interest not only in the debtor’s present property, but in the property they acquire in the future.

Question 16

What is a future advance clause?

Answer 16

A secured part can secure future loans to the debtor in the present agreement, meaning that new security agreement is not needed upon a future advance.

Question 17

What are the broad types of collateral covered under Article 9 rules?

Answer 17

(1) Goods
(2) Intangible and semi-intangible collateral
(3) Proceeds

Question 18

What are goods?

Answer 18

All tangible, movable, personal property. They include fixtures.

Question 19

What are the subclassifications of goods?

Answer 19

(1) Consumer goods
(2) Equipment
(3) Farm products
(4) Inventory

Question 20

What is the test for classifying types of goods?

Answer 20

From the debtor’s perspective: what is the collateral in the hands of the debtor?

Question 21

What are consumer goods?

Answer 21

Goods bought or used primarily for personal, family, or household purposes.

Question 22

What is inventory?

Answer 22

Goods held for sale or lease or materials used or consumed by a business in a short period of time.

Question 23

What are farm products?

Answer 23

Goods used or produced in farming which are in the possession of or used by the farmer. This includes crops, livestock, supplies used or produced in farming operations, and products of crops or livestock in their unmanufactured state.

Question 24

What is equipment?

Answer 24

Goods that are not consumer goods, inventory, or farm products, like those bought for use in a business. This is the default, catch-all category.

Question 25

What are the eight types of intangible or semi-intangible collateral?

Answer 25

(1) Instruments
(2) Documents
(3) Chattel paper
(4) Investment property
(5) Accounts
(6) Deposit accounts
(7) Commercial tort claims
(8) General intangibles

Question 26

What is the test for determining what type of intangible or semi-intangible collateral the collateral in question is?

Answer 26

The nature of the collateral (rather than its use)

Question 27

What are instruments?

Answer 27

Negotiable instruments or writings evidencing a right to payment of a monetary obligation and which are in the ordinary course of business transferred by delivery with any necessary endorsement or assignment. These are checks, promissory notes, and certificates of deposit.

Question 28

What are documents?

Answer 28

A document which, in the regular course of business, is treated as evidencing that the person in possession of the document is entitled to possess goods. These are bills of lading and warehouse receipts.

Question 29

What is chattel paper?

Answer 29

A record which evidences (1) a monetary obligation and (2) a security interest or lease of specific goods. May be written or electronically stored. Examples are promissory notes and written security agreements.

Question 30

What are accounts?

Answer 30

Rights to payment for property sold or services rendered. Examples include accounts receivable. This includes a right to payment based on an insurance policy (including health insurance receivables), secondary obligations, energy provided, use or hire of a vessel, use of a credit card, or lottery winnings.

Question 31

What are deposit accounts?

Answer 31

An account maintained with a bank.

Question 32

To which kind of deposit accounts does Article 9 apply?

Answer 32

Only to nonconsumer deposit accounts and consumer deposit accounts claimed as proceeds of other collateral.

Question 33

What is investment property?

Answer 33

Stocks, bonds, mutual funds, brokerage accounts, etc..

Question 34

What are commercial tort claims?

Answer 34

Tort claims filed by organizations and by individuals arising out of their business and non involving personal injury. Article 9 only applies to noncommercial tort claims where they are claimed as proceeds of other collateral.

Question 35

What are general intangibles?

Answer 35

Intangibles not fitting any of the other definitions (e.g., copyrights and goodwill

Question 36

What are payment intangibles?

Answer 36

A subtype of general intangible in which the principal obligation of one of the parties is the payment of money.

Question 37

What category of intangible is a contractual obligation arising from a loan of money?

Answer 37

A general intangible

Question 38

What are proceeds?

Answer 38

Whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds (proceeds of proceeds, or second generation proceeds, are proceeds).

Question 39

Is insurance payable by reason of loss or damage to the collateral proceeds?

Answer 39

Yes, if payable to the debtor or to the secured party.

Question 40

Is a claim arising out of the loss of, defects in, or damage to collateral proceeds?

Answer 40

Yes

Question 41

How do the courts distinguish a true lease from a disguised sale with security interest?

Answer 41

The relevant question is whether, at the time the parties entered into the transaction, it was reasonably likely that the lessor would get the item back while it still had meaningful economic value. If yes, it is a true lease; if no it is a sale with a security interest.