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Secured Transactions > Bar Exam > Flashcards

Bar Exam Flashcards

1
Q

Opening sentence for an ST essay

A

Article 9 of the UCC governs any transaction regardless of its form that creates a security interest.

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2
Q

What is a security interest (in general)?

A

A security interest is generally an interest in personal property or fixtures that secures payment or performance of an obligation.

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3
Q

What are the four classes of tangible goods?

A
  1. Consumer goods - acquires primarily for personal, family, or household purposes
  2. Farm products - crops grown, growing, or to be grown, livestock, supplies used in farming; for goods to be farm products, debtor must be engaged in a farming operation
  3. Inventory - goods, other than farm products, held for sale or lease; furnished under a service K; or consist of raw materials, works in process, or materials used or consumed in a business
  4. Equipment - catchall; goods that are not consumer goods, farm products, or inventory
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4
Q

What is chattel paper?

A

-Consists of one or more records that evidence both (i) a monetary obligation; and (ii) a security interest in specific goods or a lease of specific goods
-Can be either electronic or tangible

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5
Q

What is an instrument?

A

Encompass negotiable instruments, such as promissory notes and checks, and nonnegotiable instruments that evidence right to payment of a monetary obligation

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6
Q

What is investment property?

A

Stocks and bonds

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7
Q

What is “accounts?”

A

-Includes the right to payment for property sold, leased, licensed, etc.

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8
Q

What is a “deposit account?”

A

Includes savings and checking accounts

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9
Q

What are “general intangibles?”

A

-the residual category of personal property that is not included in other types of collateral

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10
Q

Leases

A

-A true lease of goods is governed by Article 2A
-Leases fall under Article 9 when the transaction, although in the form of a lease, is in economic reality a secured transaction
-A lease is treated as an SI if the lessee must pay consideration to lesor for the right to possess & use the goods for the lease term, the payment obligation cannot be terminated by the lessee, & 1 of 4 conditions is met:
1. original term of lease is equal to or greater than the remaining economic life of the goods;
2. The lessee is bound to renew the lease for the remaining economic life of the goods or bound to become owner of the goods;
3. Lessee has option to renew lease for no additional consideration or nominal additional consideration;
4. lessee has an option to become owner of the goods, for no additional consideration or nominal additional consideration

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11
Q

What can a lessor do if he is worried that his “lease” might end up being characterized as an Art 9 security interest?

A

-Can make a protective filing so that he will be accorded perfected status in the event the court later determines that the lease is a secured transaction

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12
Q

When will a consignment fall within Article 9’s scope?

A

If consignment is found to fall w/in Art 9’s scope, will be treated as a purchase-money security interest (PMSI) in inventory
1. A person (the consignor) must deliver goods to a merchant for the merchant to sell;
2. The merchant (consignee) must: (a) deal in goods of that kind, (b) not operate under consignor’s name, (c) not be generally known by its creditors to be substantially engaged in selling goods of others; and (d) not be an auctioneer
3. With respect to each delivery, the value of the goods delivered must be at least $1,000; and
4. The goods must not be consumer goods immediately before delivery

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13
Q

Is an agricultural lien subject to Article 9?

A

Yes and it must comply with the rules regarding perfection of the lien to enjoy priority status

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14
Q

What are the three conditions for attachment?

A
  1. The secured party has given value;
  2. The debtor has rights in the collateral;
  3. The debtor has authenticated a security agreement that describes the collateral or the secured party has possession or control of the collateral pursuant to an SA
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15
Q

When does a security interest become enforceable against the debtor?

A

When the security interest is properly “attached” to the collateral it becomes enforceable

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16
Q

Security agreement via authenticated record

A

most common way to evidence debtor’s assent to the SA is by an authenticated record. To satisfy this, the SA must:
1. Be in a record;
2. Contain a description of the collateral; and
3. Be authenticated by the debtor
-The description need only reasonably identify the collateral - may list the collateral or use an Art 9 description (“all debtor’s equipment”)

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17
Q

2 exceptions to requirement of an authenticated security agreement

A

The secured party has either (1) taken possession of tangible goods or (2) has control of the collateral (deposit accounts, etc.)

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18
Q

When will a security interest apply to after-acquired collateral?

A

-Original security agreement can provide that it applies to after-acquired collateral (“all inventory now owned and hereafter acquired.”); if so, the creditor’s SI automatically attaches when the debtor acquires rights in future collateral

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19
Q

When is an after-acquired clause not effective?

A

Not effective if the collateral is consumer goods, unless debtor acquires them within 10 days after the secured party gives value, or a commercial tort claim

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20
Q

How are proceeds handled?

A

A security interest in collateral automatically attaches to identifiable proceeds

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21
Q

What two categories of collateral can a PMSI exist in?

A

A purchase-money security interest (PMSI) may only exist in two types of collateral (1) goods - including fixtures; and (2) software

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22
Q

When does a PMSI in goods arise?

A

A PMSI in goods exists when: (1) a secured party gave value to the debtor and the debtor incurred an obligation to enable the debtor to acquire rights in or use of the goods, and the value given was so used; or (2) the secured party sold goods to the debtor, and debtor incurs an obligation to pay the secured party all or part of the purchase price (sale of goods on credit)

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23
Q

When does a PMSI in software arise?

A

A PMSI in software exists only when the debtor acquired his interest in software in an integrated transaction in which the debtor also acquired an interest in the goods

24
Q

What are accessions?

A

-Goods that are physically united with other goods in such a way that the identity of the original goods is not lost, such as tires on a car
-An SI that is created in collateral that becomes an accession is not lost

25
Q

What are commingled goods?

A

-Goods that are physically united with other goods in such a way that their identity is lost in a product or mass
-No SI in specific goods once commingled; may attach to the product/mass that results when the goods are comingled

26
Q

What is perfection of a security interest?

A

-Perfection is necessary for the secured party to have rights in the collateral that are superior to rights held by others
-Perfection has no relevance to the secured party’s rights against the debtor
-An SI is perfected upon attachment of that interest and compliance with one of the Art 9 methods of perfection

27
Q

What are the four methods of perfection?

A
  1. Filing of a financing statement
  2. Possession of the collateral
  3. Control over the collateral; and
  4. Automatic perfection (either temporary or permanent)
28
Q

Perfection by filing; what must a financing statement contain?

A

-An SI in any collateral - except a deposit account, money, or letter of credit rights - may be perfected by filing a financing statement
-Filing is mot common method of perfection
-Primary objective of filing is to give interested parties notice of the existence of the SI
-FS filed with the secretary of state (“central filing”) office of the state of debtor’s location

An FS must contain the following:
1. The debtor’s name; (majority rule is to use name on debtor’s current, unexpired driver’s license); solely using debtor’s trade name is insufficient; if debtor is a registered organization - debtor’s name is name on public organic records
2. The name of the secured party or a rep of the secured party; and
3. The collateral covered by the FS (description must sufficiently indicate the collateral - super-generic, broad descriptions are allowed)

29
Q

What is the only way to perfect an SI in moneY?

A

Possession

30
Q

What is the only way to perfect a deposit account or letter of credit rights that are not a supporting obligation?

A

by control

31
Q

What SI may only be perfected by filing?

A

An SI in accounts

32
Q

What must the secured party do if the debtor changes its named after an FS has been filed?

A

Secured party has four months to file an amendment to the FS reflecting the new name; if the SP fails to do so, collateral acquired by the debtor after the 4 month period isn’t covered by the FS

33
Q

When will an error in the debtor’s name render the FS ineffective?

A

-B/c the FS is indexed under the debtor’s name, an FS that fails to accurately contain the debtor’s name is seriously misleading and not effective to perfect an SI
-However, when a standard search of the filing office records under the debtor’s correct name would disclose such FS, the erroneous name doesn’t make the FS seriously misleading

34
Q

How is a financing statement authorized?

A

-debtor’s signature not required on the FS BUT debtor must authorize the filing of an FS for it to be effective
-If the debtor has authenticated the SA, this constitutes an authorization to file the FS w/ respect to collateral covered by the SA

35
Q

What is the length of perfection given by a financing statement? How may this period be extended

A

-Five years
-May be extended by filing a continuation statement - which extends the effect of the FS for another five-year period; must be filed w/in six months prior to the FS expiration date

36
Q

Perfection by possession; what types of collateral can be perfected this way?

A

-The SI remains perfected only while the secured party retains possession
-Goods, instruments, negotiable documents, money, and tangible chattel paper are the only types of collateral that may be perfected by possession

37
Q

Perfection by control; what types of collateral can be perfected this way?

A

-SP may perfect an SI in collateral by taking control of it
-SI remains perfected only while SP retains control
-Investment property, deposit accounts, letter of credit rights, electronic chattel paper, or electronic documents

38
Q

Perfection of a PMSI in consumer goods

A

-A PMSI in consumer goods is automatically perfected upon attachment
-SP does not need to file an FS or have possession to have a perfected PMSI in consumer goods

39
Q

Perfection of a PMSi in other types of goods - inventory, equipment, automobiles

A

-NOT automatically perfected!

40
Q

Perfection of an SI in proceeds

A

-SI in proceeds enjoys temporary perfection and may be entitled to indefinite automatic perfection - this occurs even though the FS doesn’t specifically mention proceeds
-If the Si in the original collateral is perfected, then an SI in proceeds is temporarily perfected for 20 days from the time it attaches
-Indefinite automatic perfection: if the original FS is broad enough to encompass the proceeds or SP takes steps to amend the FS to cover the proceeds w/in the 20-day period, the SI in the proceeds continues to be perfected; if the proceeds are identifiable cash proceeds & SI in original collateral is perfected, the perfected SI in the proceeds continues indefinitely

41
Q

Notation for Vehicle (Non-Article 9 Rules)

A

-An SI in a motor vehicle is subject to state certificate-of-title statutes and thus the SI must be noted on the certificate of title or a registry maintained by a state agency (DMV) in order to perfect the SI
-Neither the filing of an FS nor possession of the vehicle is sufficient to perfect
-Limited exception for dealers under which the Article 9 rules for perfection do apply - when motor vehicles are held as inventory for sale or lease by a person and that person is in the business of selling goods of that kind (car dealership), perfection can be done by filing under typical Article 9 rules

42
Q

What are the general steps for tackling a priority dispute?

A
  1. Identify the status of each claimant; and
  2. Apply the appropriate priority rule
43
Q

Buyer in the Ordinary Course of Business (BIOCB) - Priority Rule

A

-A BIOCB takes free of an SI created by buyer’s seller, even if the SI is perfected and buyer knows of its existence. BIOCB is a person who:
1. Buys goods (other than farm products);
2. In the ordinary course;
3. From a seller who is in the business of selling goods of that kind;
4. In good faith; and
5. Without knowledge that the sale violates the rights of another in the same goods

-If the BIOCB transfers the goods to another buyer, that buyer will also become a BIOCB and gain equal protection under the “Shelter principle”

44
Q

Consumer buyer - priority rule

A

A consumer buyer of consumer goods takes free of an SI, even if perfected, unless prior to the purchase, the SP filed an FS covering the goods
-A consumer buyer is a person who:
1. Buys consumer goods for value;
2. For his own personal, family, or household use;
3. From a consumer seller; and
4. Without knowledge of the SI

-referred to as the “garage sale” rule

45
Q

Priority rule - perfected SI vs. perfected SI

A

-“First to file or perfect” - the first party to file the FS and put the world on notice wins

46
Q

Priority rule - unperfected SI vs. perfected SI

A

-Perfection gives SP priority over unperfected SP

47
Q

Priority rule - unperfected SI vs. unperfected SI

A

-First to attach has priority

48
Q

Priority rule - perfected SI vs. general unsecured creditor

A

-A general creditor is one who has a claim, including a judgment, but who has no lien or SI w/ respect to the property; a GC has no interest to assert under Article 9
-An SP will always prevail over a GC w/ respect to debtor’s collateral

49
Q

Priority rule - Judicial lien creditors (perf and unperf SIs)

A

-A JLC is a creditor who acquires a lien on the collateral by a judicial process
-A JLC takes the collateral subject to an existing perfected SI, but has priority over unperfected SI’s
-Even if he Si is unperfected at the time the judicial lien comes into existence, the SP will have priority if the debtor has authenticated an SA listing the collaeral and an FS has been filed

50
Q

PMSI vs. lien creditors

A

-If the SP has a PMSI that is perfected before or within 20 days after debtor receives possession of the collateral, then the SI takes priority over the rights of a creditor that arose between the time the SI attached and time of filing
-An SP with a PMSi will prevail over any creditor that obtains a lien within that 20-day period

51
Q

Priority rule - PMSI vs. PMSI

A

The “first to file or perfect” rule governs priority

52
Q

Once a default has occurred, what can the secured party do?

A
  1. Seek possession of the collateral and, in order to satisfy the obligor’s outstanding obligation, either: (a) sell the collateral; or (b) retain it in full or partial satisfaction of the obligation
  2. Initiate a judicial action to obtain a judgment based on that obligation; or
  3. Subject to statutory limitations, pursue any course of action to which the debtor and obligor have agreed
53
Q

Secured party’s means of acquiring possession

A

-an SP is required to use the judicial process (replevin action) to obtain possession of colalteral unless possession can be obtained without breach of the peace
-“breach of the peace” is characterized by likelihood to result in violence and includes any disturbance, threat of disturbance, constructive force, breaking/entering

54
Q

Disposition of collateral by secured party

A

All aspects of the disposition of collateral (method, manner, time, and place) must be conducted in a commercially reasonable manner. A disposition is commercially reasonable when conducted:
1. In the usual manner on a recognized market, such as a stock exchange, that has standardized price quotations for fungible goods;
2. At the price current in any recognized market at the time of disposition; or
3. Otherwise in conformity with reasonable commercial practices among dealers in the type of property

55
Q

Does the secured party need to give notice before conducting a disposition?

A

-Yes - SP generally required to send an reasonable authenticated notification of disposition to (i) the debtor; (ii) any secondary obligor; and in the case of non-consumer goods, (iii) any SP or lien holder; and (iv) any other party from whom the SP has received authenticated notice of a claim/interest in the collateral

56
Q

How are proceeds from collateral disposition applied?

A

An SP must apply cash proceeds from disposition in the following order:
1. Reasonable expenses for collection & enforcement, including reasonable attorney’s fees and other legal expenses; then
2. Satisfaction of obligations secured by the SI or agricultural lien; then
3. Satisfaction of any subordinate SI’s, provided that the junior SP made an authenticated demand for proceeds before distribution of the proceeds is complete; then
4. The remainder goes to the debtor

57
Q

Remedies for a secured party’s failure to comply

A
  1. Injunctive Relief - when SP hasn’t conducted disposition in accordance w/ Article 9, debtor or other SP may seek injunctive relief from court to compel or restrain. collection, enforcement, or disposition of collateral
  2. Actual damages - debtor or other SP may seek damages for any loss caused by SP’s failure

Secured Transactions (1 decks)

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