Definitions

Question 1

Secured Party

Answer 1

the entity loaning money to the debtor in exchange for a security interest in the debtor’s collateral

Question 2

Debtor

Answer 2

the entity borrowing money from the secured party in exchange for a security interest in the debtor’s collateral

Question 3

Collateral

Answer 3

a piece of property that the debtor offers to the secured party to create a security interest

Question 4

Application of Article 9

Answer 4

Article 9 applies to the following transactions (even if the parties do not realize that
they are entering into a secured transaction!):
(1) all security interests in personal property or fixtures by contract; (2) lease agreements that are not true leases (ex. the equipment belongs to the lessee after all payments are made); (3) consignments; (4) sales of payment intangibles, promissory notes, accounts receivables, chattel paper, instruments; (5) health insurance receivables; and (6) commercial tort claims

Question 5

Security Interest

Answer 5

An interest in personal property or fixtures that secures payment or performance of an obligation. It’s essentially a contingent property interest in the debtor’s collateral that the debtor grants to to the creditor.

Question 6

Attachment

Answer 6

Attachment requires three things: (1) value must be given by the secured party, (2) the debtor must have rights in the collateral, and (3) there must be a binding security agreement between the parties.

Additionally, a binding security agreement has three requirements: (1) authentication by the debtor, (2) and intent to create a security agreement, and (3) a description of the collateral

Question 7

Binding Security Agreement

Answer 7

a binding security agreement has three requirements: (1) authentication by the debtor, (2) and intent to create a security agreement, and (3) a description of the collateral

Question 8

After-Acquired Property Clause

Answer 8

Provision in the security agreement that provides that the secured party’s security interest will attach to after-acquired property as soon as the debtor acquires an interest in the property.

Even without such a clause, a security interest will attach automatically to collateral of a type that’s rapidly depleted and replenished, such as accounts and inventory.

Question 9

Future Advance Clause

Answer 9

Provision in the security agreement providing that the collateral will serve as security not only for the present obligation, but also for future advances the creditor may make to the debtor in the future.

Question 10

Attachment vs. Perfection

Answer 10

For the secured party to have a security interest in the collateral, there must be attachment of the security agreement to the collateral.

Question 11

Default

Answer 11

Default occurs when the debtor does not make the required payments to the secured party (or lender). The lender has a statutory right to repossess the collateral pursuant to the judicial process or via self-help so long as the lender does not breach the peace.

Question 12

4 categories of goods

Answer 12

consumer goods, inventory, equipment, and farm products

Question 13

consumer goods

Answer 13

goods bought primarily for personal, family, or household purposes

Question 14

equipment

Answer 14

goods other than consumer goods, inventory, or farm products

Question 15

inventory

Answer 15

Goods other than farm products that are for sale or lease or to be furnished under a contract. Examples include inventory at a store, raw materials, work in process, or materials used or consumed in a business

Question 16

farm products

Answer 16

goods such as crops, livestock, and supplies used or produced in a farming operation

Question 17

Eight types of Intangible or Semi-intangible Collateral

Answer 17

Instruments, Documents, Chattel paper, Investment property, Accounts, Deposit accounts (art. 9 only applies to nonconsumer deposit account), commercial tort claims, and general intangibles

Question 18

Fixture

Answer 18

A fixture is a good that has become so related to a particular real property that an interest in the good arises under real property law. Perfection in a fixture requires a fixture filing.

Question 19

Perfection

Answer 19

In order to perfect a security interest (maximize priority over third parties), there must be attachment and one of the following methods of perfection:
(1) Filing of a financing statement describing the collateral;
(2) Taking Possession of the collateral;
(3) Taking Control over the collateral;
(4) Automatic perfection; and
(5) temporary perfection.

Question 20

Financing Statement

Answer 20

A financing statement is the document used to provide public notice of the security interest. Filing a financing statement is one of the four methods of perfection.

Question 21

Filing

Answer 21

Perfection by filing takes place when the secured party files a financing statement with the secretary of state where the debtor is located. The financing statement should include:
(1) debtor’s name and mailing address;
(2) the secured party’s name and mailing address; and
(3) a description of the collateral covering by the filing statement.

All types of collateral except for deposit accounts and money can be perfected by filing.

Question 22

Fixture Filing Requirements

Answer 22

(1) Names of debtor and secured party; (2) an indication that the filing covers fixtures; (3) description of the real property; (4) name of the real property’s record owner if the debtor has no interest in the property; and (5) filed in the state where the real property sits in the office’s real property records.

Question 23

Automatic Perfection

Answer 23

A PMSI in consumer goods perfects as soon as it attaches, no further action needed unless a state statute says otherwise (motor vehicles)

Question 24

PMSI

Answer 24

A purchase-money security interest (PMSI) arises when the goods for which the loan is extended to the debtor is the collateral for the security interest. The general rule is that a PMSI takes priority over a conflicting, perfected security interest in the same goods.

A consignor’s interest in the consigned goods is considered to be a PMSI in inventory.

Question 25

Two types of PMSI

Answer 25

A seller-financed PMSI arises when the debtor buys collateral from a seller who retains a security interest in the goods. A financier-financed PMSI arises when the debtor borrows money from a lender who advances funds for the buyer to purchase the collateral. A seller-financed PMSI takes priority over a financier-financed PMSI.

Question 26

Perfection by Taking Possession

Answer 26

When the secured party takes actual possession of the collateral, the security interest is perfected from the moment of possession and continues as long as possession is retained.

Certain collateral cannot be perfected by Possession: general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, certificate of title goods, and accounts.

Question 27

Perfection by Control

Answer 27

Security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by control.

Nonconsumer deposit accounts can ONLY be perfected by control.

Method of of obtaining control varies based on type of collateral, but for nonconsumer deposit accounts, they obtain control by:
(1) being the bank in which a nonconsumer deposit account is maintained;
(2) putting the deposit account in the secured party’s name; or
(3) agreeing in an authenticated record with the debtor and the maintaining bank that the bank will comply with the secured party’s orders regarding the deposit account without requiring the debtor’s consent.

Question 28

Perfection for Motor Vehicles

Answer 28

Under state certificate of title statute, security interests in motor vehicles required to be titled can ONLY be perfected by notation on the certificate of title issued by the state.

Exception-car dealers’ inventory.

Question 29

Proceeds

Answer 29

Whatever is received upon the sale, lease, license, exchange, or other disposition of collateral.

Question 30

Perfection of Proceeds

Answer 30

In general, a security interest in proceeds remains automatically perfected for 20 days.

An automatically perfected security interest in proceeds must be perfected after 20 days unless:
(1) The proceeds are identifiable cash proceeds;
(2) The proceeds are of the same type as the original collateral; OR
(3) A financing statement covers the original collateral, a financing statement for the proceeds would be perfected by filing in the same office, and the proceeds are not acquired with case proceeds (i.e. not second generation proceeds).

Question 31

General rule for priority

Answer 31

When two secured parties have a security interest in the same collateral, the first to file
or perfect has priority.

If no party perfects, then the first to attach has priority.

Know that a perfected security interest beats an unperfected one—even if one has an unperfected PMSI.

Question 32

Perfection by Control and Priority

Answer 32

Security interest perfected by control has priority over security interests perfected by other methods.

For conflicting security interests perfected by control, the first to obtain control has priority, but, for nonconsumer deposit accounts, a secured party who obtained control by putting the account in their name has priority

Question 33

PMSI and Priority

Answer 33

PMSIs enjoy superpriority. They are superior to prior perfected security interests in the same collateral if certain conditions are met (based on type of collateral).

Question 34

Priority for PMSIs in Goods other than inventory and livestock (so consumer goods and equipment)

Answer 34

A PMSI in goods other than inventory and livestock has priority over conflicting security interests in the same goods or their proceeds if the interest is perfected before or within 20 days after the debtor receives possession of the goods.

Question 35

Priority for PMSIs in Inventory and Livestock

Answer 35

A PMSI in inventory or livestock collateral has priority over a conflicting security interest in the same inventory or proceeds of the inventory that are chattel paper, instruments, or cash if:
(1) It is perfected at the time the debtor gets possession of the inventory (i.e. filing must take place before the inventory is delivered to the debtor); AND
(2) Any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory.

The notice must state that the purchase money party has or expects to take PMSI in inventory of the debtor described by kind or type. Notification is effective for 5 years.

Question 36

Priority among conflicting PMSIs

Answer 36

Seller-financed beats finacier-financed.

Otherwise, the first secured party to file or perfect prevails.

Question 37

Priority for Proceeds

Answer 37

Generally, a perfected security interest in proceeds will have the same date of priority as the perfected security interest in the original collateral, as long as the perfection of the security interest in the proceeds extends beyond the 20-day temporary filing window.

A secured party has priority in the proceeds of non-filing collateral if:
(1) the secured party has priority in the original collateral;
(2) their security interests in the proceeds is perfected; and
(3) the proceeds are cash proceeds or proceeds of the same type as the original collateral.

Question 38

Filing versus Non-Filing Collateral (for the purposes of determining priority for proceeds)

Answer 38

Filing collateral is collateral in which a secured party would normally achieve priority by filing (goods, accounts, commercial tort claims, general intangibles, and nonnegotiable documents).

Non-filing collateral is collateral in which a secured party would normally achieve priority by possession or control instead of filing (cash, chattel paper, nonconsumer deposit accounts, negotiable documents, instruments, and investment property).

Question 39

Effect of debtor selling collateral to a third party (and the names of the exceptions)

Answer 39

When a buyer buys or leases something with a security interest on it, the security interest generally stays on the item.

Exceptions for authorized sales, buyers in the ordinary course of business, consumer-to-consumer sales

Question 40

Authorized Sale of Collateral

Answer 40

If the sale or lease of the collateral is authorized by the secured party free of the security interest, the transferee takes free.

Authorization can be express or implied from the type of sale or the seller’s conduct.

Question 41

Sale to a Buyer in the Ordinary Course of Business

Answer 41

A BIOC takes free of a nonpossessory security interest in the goods created by the buyer’s seller, even if the security interest is perfected and the buyer knows of the security interest.

Question 42

BIOC defined

Answer 42

A buyer in the ordinary course is one who buys goods:
(1) in good faith; (2) without knowledge that the sale violates the rights of another person in the goods; and (3) in the ordinary course of business from a seller in the business of selling goods of the kind purchased.

Question 43

Sale to a Buyer not in the ordinary course of business

Answer 43

A buyer not in the ordinary course of business takes collateral subject to a perfected interest. Generally, he does not take subject to an unperfected interest if he gives value and does not know about the interest.

Subject to the consumer-to-consumer sales exception

Question 44

Consumer to Consumer exception (AKA garage sale)

Answer 44

In the case of consumer goods, a buyer takes free of a security interest, even though it’s perfected, if the buyer buys:
(1) without knowledge of the security interest; (2) for value; (3) for the buyer’s own personal, family, or household purposes; and (4) before a financing statement covering the goods has been filed.

Question 45

Priority against a lien creditor

Answer 45

The general rule is that, as between a secured party and a lien creditor, priority belongs to the secured party, provided it perfects before the lien arises. If the interest was unsecured or only perfected after the lien creditor served the writ, then the lien creditor has priority.

A judicial lien arises at the time of levy–seizure of the collateral by the sheriff.

Question 46

General Hierarchy of Interests in Collateral (Chart)

Answer 46

Question 47

Self-help

Answer 47

if a default occurs, the lender can demand payment or use self-help to reclaim the goods so long as it does not breach the peace

Question 48

Breach of the Peace

Answer 48

There are several factors to examine to determine if the lender has breached the
peace, including whether the repossession took place at the debtor’s premises and whether the debtor objected. Some courts also look at whether trickery was used. Some courts say that any
objection (even if slight and even if only verbal) amounts to a breach of the peace.

Hard rule: breaking and entering of a residence is breach. Less clear if commercial.

If breached, secured party loses the authority to repossess and may be sued for conversion and liable for damages.

Question 49

Resale

Answer 49

The secured party may sell or dispose of the collateral in a commercially reasonable way.
The security interest is discharged when this occurs, but the debtor is liable for any deficiency. The
obligation owed to the disposing secured party and any junior liens are paid off. (Senior liens remain on the collateral.)

Question 50

Secured Party’s Requirements in Resale

Answer 50

All parts of the sale must be commercially reasonable, and the debtor must receive written notice of the sale. Perfected secured parties should also receive notice.

Question 51

Commercial Reasonableness

Answer 51

Courts consider the sufficiency of advertising for the sale, whether collateral should’ve been cleaned or repaired before sale, the convenience of the time and place of the sale if it was a public auction, and whether relevant people were contacted if there was a limited market for the collateral.

Question 52

Notification of Resale

Answer 52

In nonconsumer transactions, the notification of disposition should
describe the debtor and the secured party and the collateral, state the method of disposition, and state that the debtor is liable for unpaid indebtedness as well as a charge for accounting.

In consumer transactions, the notification must additionally contain a description of any liability for a deficiency, a telephone number that the consumer can call to discover the amount owed, and a telephone number or mailing address from which the consumer can get additional information about the disposition and the obligation.

Further the notification must be timely. This is generally a question of fact, but in a nonconsumer transaction, a notification sent 10 days or more before the disposition is considered reasonable.

Question 53

Debtor’s Remedies if Secured Party Fails to Comply with Resale Requirements

Answer 53

If the secured party fails to comply with ANY requirement, the Court may order a sale and/or award damages (consumer goods trigger statutory damages).

Noncompliance also raised a rebuttable presumption: if there is a failure to comply with these
requirements and the secured party fails to show that the sale was commercially reasonable, then there is a rebuttable presumption that the collateral is worth the amount of the debt and the debtor’s deficiency is nothing.

Some courts follow the absolute bar rule for consumer transaction, where the above presumption is irrebuttable.

Question 54

Debtor’s Right to Redeem

Answer 54

The debtor can redeem prior to the disposition of the collateral by paying everything due and owing to the creditor.