Drills 31-59

Question 1

As between a perfected secured creditor and a statutory lien claimant, who has priority in a dispute over the same collateral?

Answer 1

A statutory lien claimant has priority over a perfected secured creditor provided:

(1) The lienholder has possession the goods; and
(2) The lien secures payment or performance of an obligation for services or materials furnished in the ordinary course of the person’s business (e.g., a mechanic’s lien).

Question 2

Typically, a secured party must give authenticated notice of disposition to a variety of parties. When is notice not required?

Answer 2

A secured party is not required to send a notice of disposition when:

(1) The collateral is perishable or threatens to decline speedily in value;
(2) The collateral is customarily sold on a recognized market; or
(3) Notice is waived by an authenticated agreement after default.

Question 3

Where must a financing statement be filed?

Answer 3

Generally, the financing statement must be filed with the Secretary of State (“central filing”) of the state of the debtor’s location.

Question 4

A security interest in a ________ can be perfected only by control.

Answer 4

deposit account

Question 5

Under what circumstances does the same office rule extend temporary perfection?

Answer 5

Under the same office rule, temporary perfection in proceeds may continue indefinitely if:

(1) A filed financing statement covers the original collateral;
(2) The proceeds are collateral in which a security interest may be perfected by filing in the same office as the original financing statement; and
(3) The proceeds are not acquired with cash proceeds.

(E.g., Lender filed a financing statement covering candle inventory. The candles are sold on credit to Boutique generating an account (which is the proceeds of the inventory). Those proceeds and the original inventory would be perfected by filing in the same office, and the account was not acquired with cash proceeds. Lender is perfected in the account without having to file a new financing statement.)

Question 6

When can perfection occur as it relates to attachment?

Answer 6

Perfection can happen after attachment or at the same time - but not before.

Question 7

Who has priority in a car radio that had been installed in a vehicle that was perfected under a certificate-of-title statute?

Answer 7

A security interest in an accession is usually subject to general priority rules. However, a security interest in an accession is subordinate to a security interest in the whole collateral if that collateral was perfected under a certificate-of-title statute. Here, the radio was installed in a vehicle that was perfected under a certificate-of-title statute. Therefore, the security interest in the car radio is subordinate to the holder of the lien noted on the title certificate of the vehicle.

Question 8

As between a secured party and a judicial lien creditor, who has priority?

Answer 8

A judicial lien creditor takes the collateral subject to an existing perfected security interest but generally has priority over an unperfected security interest.

Question 9

A PMSI in what type of goods automatically perfects upon attachment?

Answer 9

A PMSI in consumer goods automatically perfects upon attachment. (A PMSI in other types of goods (e.g., inventory, equipment) or automobiles does not automatically perfect.)

Question 10

Does a perfected security interest have priority over an earlier created but unperfected security interest in the same collateral?

Answer 10

Yes, the perfected security interest has priority of over an earlier created but unperfected security interest in the same collateral.

Question 11

A PMSI in fixtures has priority over a prior interest in the real property with which they are associated when what two things occur?

Answer 11

(1) The debtor has an interest in the real property (owner) or is in possession (lessee); and
(2) The security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter.

Question 12

Explain the “garage sale” exception to the general rule that unless the secured party authorizes the sale free and clear of its security interest, a buyer takes subject to a perfected security interest.
Is there an exception to this exception?

Answer 12

A buyer of consumer goods will take free of a security interest even if it is perfected, if the buyer buys consumer goods for value, from a consumer seller, it’s for his own personal, family, or household use, and it’s without knowledge of the security interest.

However, if the party holding a PMSI in consumer goods filed a financing statement covering those goods before the consumer to consumer purchase occurred, then the secured party’s security interest will be good against the consumer buyer. (Recall that a PMSI in consumer goods is automatically perfected and filing is not required. By filing regardless of automatic perfection, the secured party protects his priority in the event of a consumer to consumer purchase of the covered goods.)

Question 13

The general rule for a perfected security interest versus another perfected security interest in the same collateral is that the first to file or perfect has priority. In essence, this rule rewards the earlier _________.

Answer 13

Filer.

In essence, this rule rewards the first to file - even if the other party was first to attach or first to perfect. In other words, if both parties perfected by filing, the first party to file wins whether or not perfection was actually complete when the filing took place. Furthermore, if two parties perfected at the same time, but one party perfected by filing and the other party perfected using another means (control or possession), the party that perfected by filing wins.

Question 14

Once there has been a default, the secured party can repossess the collateral in what two ways?

Answer 14

(1) By use of judicial process (e.g., replevin action); or
(2) Self-help repossession

Question 15

What is the general rule for a security interest in fixtures versus a real property interest to which it is associated?

Answer 15

The general rule is that a security interest in fixtures is subordinate to a conflicting interest of an owner of the related real property (other than the debtor).

Question 16

In order for a security interest in a fixture to have priority over an interest in the real property, what must happen?

Answer 16

For a security interest in fixtures to have priority over an interest in real property, the secured party must file a fixture filing before the real property interest is recorded. (A fixture filing is a financing statement covering goods that are or are to become fixtures.) It must be filed in the office designated for the recording of a mortgage on the related real property (i.e., local real property records)

Question 17

If a secured party holding a subordinate security interest in a piece of collateral reposseses and sells that collateral, what happens to the senior, or superior, security interests in that collateral?

Answer 17

Senior, or superior, security interests survive the sale. In other words, the superior security interest continues in the collateral in the hands of whoever bought, leased, or licensed it in the foreclosure sale (buyer or transferee takes it subject to the senior security interest).

Question 18

How do you determine priority when there is an unperfected security interest versus another unperfected security interest in the same collateral?

Answer 18

The first to attach takes priority.

Question 19

Self-help repossession cannot “breach the peace,” which is not defined by Article 9 and is left up to the courts. What self-help measures are typically deemed acceptable by courts?

Answer 19

A trespass with respect to the collateral itself (e.g., entering a car or other vehicle), or the debtor’s land (e.g., seizing a car from the debtor’s driveway [but not the garage or residence]) are generally deemed acceptable means of self-help repossession that do not breach the peace.

Question 20

What is the priority rule for a PMSI in goods (other than inventory or livestock)?

Answer 20

This PMSI will prevail over all other security interests in the same collateral, even if those other security interests were previously perfected (e.g., an existing after-acquired equipment clause by a lender), so long as the security interest is perfects before or within 20 days after the debtor receives possession of the collateral.

Question 21

What is the priority rule for a lender with a PMSI versus a seller with a PMSI?

Answer 21

The seller PMSI beats the lender PMSI. (In other words, the seller of collateral has priority over the lender whose loan enabled the purchase of the collateral.)

Question 22

What is the rule regarding construction mortgages and subsequent security interests in fixtures?

Answer 22

A construction mortgage has priority over any subsequent security interest in fixtures, including PMSIs in fixtures, if it is recorded before the goods become fixtures, and it covers only those goods that become fixtures before completion of the construction.

Question 23

“Default” is not defined by Article 9. Typically, parties to a security agreement agree to what circumstances give rise to a default. In the absence of such an agreement, what event gives rise to a default?

Answer 23

In the absence of an agreement between the parties, the only event of default will be the failure of the obligor to make timely payments to the secured party.

Question 24

Upon default, what happens when a secured party has priority in an accession?

Answer 24

The secured party with priority in the accession is allowed to remove the accession from the other goods (i.e., if the security interest in the accession has priority over the claims of every person having an interest in the whole). A secured party that removes an accession from other goods must reimburse the holder of a security interest or the owner of the whole for physical injury to the whole or other goods.

Note: A security interest in a car radio is subordinate to a security interest in the car perfected by notation of the security interest on the title to the car.

Question 25

What remedy is available to a secured party of large equipment that makes repossession difficult?

Answer 25

Equipment that is hard to repossess can be rendered unusable in lieu of repossession. This is usually followed by disposal (e.g., sale) on the debtor’s premises.

Question 26

What is the consumer buyer exception and who qualifies as a consumer buyer?

Answer 26

A consumer buyer of consumer goods takes free of a security interest, even if perfected, unless prior to the purchase, the secured party filed a financing statement covering the goods.

A consumer buyer is a person who:
i) Buys consumer goods for value;
ii) For his own personal, family, or household use;
iii) From a consumer seller; and
iv) Without knowledge of the security interest.

This is often referred to as the “garage sale” rule, because that type of sale would qualify.

Question 27

What is the priority rule for a PMSI in inventory or livestock?

Answer 27

This PMSI will have priority over all other security interest in the same inventory or livestock if the secured party:

(1) Perfects before the inventory or livestock is delivered to the debtor; and
(2) Sends an authenticated notification of the PMSI to other secured parties.

Question 28

Once a default has occurred, what are the secured party’s options?

Answer 28

The secured party may:
(1) Seek possession of tangible collateral (repossess) and either sell or retain it in satisfaction of the obligation owed;
(2) Initiate a judicial action to obtain a judgment against the debtor or obligor; or
(3) Pursue other courses of action to which the debtor and secured party have agreed.

Question 29

All aspects of the disposition of collateral must be conducted in a commercially reasonable manner. When is a disposition considered commercially reasonable?

Answer 29

A disposition is commercially reasonable when the collateral is:

(1) Sold in the usual manner in a recognized market that has standardized prices for fungible goods;
(2) Sold at the price current in a recognized market; or
(3) Disposed of in conformity with reasonable commercial practices among dealers in that type of collateral.

Question 30

If a secured party sells collateral, cash proceeds of a disposition are distributed in what order?

Answer 30

Cash proceeds of a disposition are distributed in the following order:

(1) Pay reasonable expenses for collection and enforcement (e.g., reasonable attorney’s fees); then
(2) Pay off the debt to the foreclosing secured party; then
(3) Pay subordinate security interests, provided the subordinated party makes a formal demand prior to distribution of the proceeds; then
(4) Any surplus or remainder will be returned to the debtor.