Biz Law - Secured Transactions

Question 1

Secure transaction

Answer 1

Transaction in which debtor gives to the creditor an interest in specific personal property to secure the payment of the debt.
UCC Article 9 applies.

Question 2

Secured party

Answer 2

The lender, seller or other party in whose favor the security interest arises i.e. the creditor

Question 3

Fixture

Answer 3

Personal property which has become so attached to real property as to be considered part of the real property itself

Question 4

Security interest

Answer 4

An interest in personal property or fixtures that secure payment or performance of an obligation

Question 5

Security agreement

Answer 5

An agreement between the debtor and secured party that creates security interest.
May be oral or written. Must be written to enforce against debtor (unless secured party has possession of property)
Must be authenticated by debtor (signed).
Must reasonably identify the collateral.

Question 6

Attachment of the security interest

Answer 6

Creation of a security interest. For security interest to be legally enforceable, must attach to particular collateral.

Before attachment, following must occur:
– Must be security agreement (oral or written)
– Secured party must give value
– Debtor must have rights in the collateral

Question 7

Financing statement

Answer 7

File to give public notice of security interest: provide constructive notice.

Must contain following:
– Names and addresses of secured party and debtor
– Description of collateral

Question 8

Perfection of a security interest

Answer 8

Security agreement binds parties but does not protect secured party against rights of third parties until perfected.
Both attachment and perfection of security interest must occur before interest is good against other creditors.

Question 9

Perfection: accounts, contract rights, and general intangibles

Answer 9

Perfection by filing only

Question 10

Perfection: goods

Answer 10

Perfection by taking possession or filing a financial statement. No filing needed if secured party has possession.

Question 11

Perfection: consumer goods

PMSI

Answer 11

Automatically perfected upon attachment if purchaser buys on credit or secured party lends to debtor the funds used to make purchase. The security interest is called Purchase Money Security Interest.

However, not good against buyer who:
– Purchases without knowledge of security interest
– Gives value for goods
– Purchases for own personal family or household use
– Purchases before financing statement is filed

Question 12

Perfection: instruments, documents and chattel paper

Answer 12

Perfection by possession or filing

Question 13

Perfection: fixtures

Answer 13

Perfection only by filing financing statement with office work mortgages on real estate are recorded

Question 14

Perfection: instruments and negotiable documents

Answer 14

Perfected by attachment alone for 21 days without filing or possession

Question 15

Rights and duties of the secured party

Answer 15

If have possession of collateral, must exercise reasonable care in preserving. Legally, secured party is bailee in a mutual benefit bailment.

Question 16

Rights and duties of the debtor

Answer 16

Expenses incurred in custody, preservation and operating of collateral are paid by debtor.
Risk of loss is with debtor

Question 17

Conflicting security interest in the same collateral

Answer 17

Security interests rank in priority according to time of filing financing statements or perfection, whichever earlier. If no security interests perfected, priority based upon order they attached to collateral.

Holder of PMSI in inventory of debtor generally has priority over another secured party if perfected w/in 10 days of sale)

Buyer in ordinary course of business from merchant seller takes free of any security interest in the property purchased even if it is perfected and buyer is aware. Purpose is to allow to consumer to buy merchants inventory without fear it could be repossessed by secured party.

Question 18

Preference payment

Answer 18

Preference is transfers of assets/payments made by debtor within 90 days prior to filing bankruptcy to a preferred creditor; one year if to insider: relative or business partner.
This defrauds all other creditors.

Preference can be avoided, set aside or overruled by the trustee.

Question 19

Default

Answer 19

Not defined in UCC. So debtor and secured party can define what default is.
Generally, secured party can retain collateral to satisfy debt. Written notice of intention must be sent to debtor and any other secured party. If no objection received within 21 days, collateral may be retained. If objection is made, secured party must sell collateral.
If collateral is sold, proceeds go to pay expenses of sale, then to satisfy unpaid debt, then to any other debts owed by debtor to creditor. Remainder returns to debtor. If there is deficiency, debtor can be liable.

Question 20

Common Law Lien

Answer 20

Given to artisans, innkeepers, and common carriers to secure payment for services rendered.

Question 21

Artisan’s liens

Answer 21

Statutory lien arising from work done on personal property.
Has priority over any perfected security interest in the collateral.
Must give notice of legal action before selling debtors property to satisfy debt.

Question 22

Mechanic’s lien

Answer 22

Contractors who provide labor or materials that improve real property can establish statutory lien on improved property for unpaid balance.
Must give notice of legal action before selling debtors property to satisfy debt.

Question 23

Mortgage

Answer 23

Nonpossessory lien on real property to secure payment of debt.
Executed with same formality as deed. Statute of frauds requires that it must be in writing, oral mortgages are not enforceable. An unrecorded mortgage is only effective between the mortgagor and the mortgagee.
Person cannot issue mortgage unless person owns the property.
Priorities: tax and mechanics liens, first recorded mortgage, later recorded mortgages.
Recorded in the county where property is located.