Essay rule statements

Question 1

What does Article 9 apply to?

Answer 1

Article 9 of the Uniform Commercial Code (UCC) applies to security interests in personal property.

A lease is subject to UCC Article 9 only when the transaction, although in the form of a lease, is in reality a secured transaction.

This is generally determined on a case-by-case basis not by the parties’ characterization of the transaction, but by the economic reality of the transaction.

A transaction in the form of a lease is treated as a security interest if (a) the lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease, (b) the payment obligation cannot be terminated by the lessee, and (c) upon completion of the lease agreement, the lessee has an option to become the owner of the goods for no (or nominal) additional consideration.

Question 2

Attachment

Answer 2

Under Article 9, attachment of a security interest must occur for the security interest to be valid as between the debtor and creditor.

For the security interest to attach, three conditions must coexist: (i) value has been given by the secured party; (ii) the debtor has rights in the collateral; and (iii) the debtor has an authenticated written security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement.

A certificated security (stocks) may be perfected by the secured party taking delivery of the security.

Question 3

Perfection

Answer 3

A security interest is perfected upon attachment of that interest and compliance with one of the methods of perfection.

There are three methods of perfection—filing a financing statement with the Secretary of State for the state where the debtor is located, possession by the secured party, or automatic perfection.

Although the security interest typically attaches and is then perfected, if the necessary steps for perfection are taken before attachment, then the secured interest is perfected upon attachment.

Question 4

PMSI in consumer goods

Answer 4

Goods acquired by the debtor for a personal, family, or household purpose are is classified as consumer goods.

A purchase money security interest (PMSI) in consumer goods is automatically perfected.

Question 5

Perfection of a vehicle

Answer 5

In order to perfect a security interest in a vehicle, the security interest must be noted on the certificate of title; filing a financing statement is not sufficient to perfect a security interest in a vehicle.

Question 6

Accessions

Answer 6

Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost.

A security interest that is created in collateral that becomes an accession is not lost due to the collateral becoming an accession.

Instead, a security interest in an accession is usually subject to the general priority rules of Article 9.

A security interest in an accession is subordinate to a security interest in the whole collateral that is perfected under a certificate-of-title statute.

Question 7

Priority rules

Answer 7

As between an unperfected security interest and a perfected security interest, the perfected security interest has priority.

When there are two or more perfected security interests in the same collateral, the general rule is that the first security interest to be filed or perfected has priority.

However, preference is generally given to a purchase-money security interest (PMSI) over a non-PMSI security interest.

A PMSI in goods prevails over all other security interests in the collateral, even if they were previously perfected, if the PMSI is perfected before or within 20 days after the debtor receives possession of the collateral.

A PMSI in livestock has priority over all other security interests in the same collateral, even if they were previously perfected, if (1) the PMSI is perfected by the time the debtor receives possession of the collateral, and (2) the purchase-money secured party sends an authenticated notification of the PMSI to the holder of any conflicting security interests that has previously been perfected by filing.

Question 8

Identifiable proceeds

Answer 8

A security interest in collateral automatically attaches to identifiable proceeds.

Question 9

Description of collateral

Answer 9

The security agreement must describe the collateral. A description of the UCC Article 9 type of collateral is usually sufficient, unless the collateral is consumer goods or a commercial tort claim, but a super-generic description of collateral, such as “all the debtor’s assets” or “all the debtor’s personal property,” is not sufficient.

Question 10

After acquired property clause

Answer 10

An after-acquired property clause is sufficient to give the secured party rights in adequately described collateral that subsequently is acquired by the debtor

Question 11

Equipment

Answer 11

Under UCC Article 9, goods that are used or bought primarily for use in the debtor’s business and that are not consumer goods, farm products, or inventory are classified as equipment.

Question 12

Notice of sale

Answer 12

A secured party is generally required to send an authenticated notification of disposition. The notification is required to be reasonable as to its content, the manner in which it is sent, and its timeliness.

Notification of disposition is required to be sent to (i) the debtor, (ii) any secondary obligor, and, in the case of non-consumer goods, (iii) any other secured party or lien holder who held a security interest that was perfected by filing or pursuant to a statute, and (iv) any other party from whom the secured party has received authenticated notice of a claim or interest in the collateral.

The notification is required to be reasonable as to its content, the manner in which it is sent, and its timeliness. The notification should be sent sufficiently far in advance of the disposition to allow the notified party to act on the notification.

A secured party is not required to send a notice of disposition when (i) the collateral is perishable or threatens to decline speedily in value, (ii) the collateral is of a type customarily sold on a recognized market, or (iii) the persons entitled to notification waive the right to notification.

Question 13

Failure to comply with Article 9

Answer 13

If a secured party fails to comply with Article 9, the debtor or other secured party may seek injunctive relief from a court to compel or restrain collection, enforcement, or disposition of collateral. In addition, the debtor or other secured party may seek damages for any loss caused by the secured party’s failure.

If the secured party’s collection, enforcement, disposition, or acceptance of the collateral is not in accordance with Article 9 and the transaction is a commercial transaction, there is a rebuttable presumption that the secured party is not entitled to collect a deficiency.

The secured party can rebut this presumption in whole or in part by showing that the deficiency would have existed even had the secured party complied with Article 9.

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 (i) in the usual manner on a recognized market, (ii) at the price current in any recognized market at the time of disposition, or (iii) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

Article 9 of the UCC does not mandate that the secured party obtain a specific price in disposing of the collateral. The mere fact that a higher price could have been obtained by disposing of the collateral in a different manner or at a different time does not establish that the disposition was not commercially reasonable. A low price may, however, trigger careful scrutiny by the court of the disposition and its reasonableness.

Question 14

Buyer rights when collateral is sold

Answer 14

A sale of the collateral gives the buyer all of the debtor’s rights in the collateral. If the buyer acts in good faith, then the disposition discharges the security interest being foreclosed upon as well as any subordinate security interests and liens, even when the secured party fails to comply with Article 9.

However, the buyer takes the collateral subject to any security interests that were senior to the security interest foreclosed upon.

Question 15

Fixture filing

Answer 15

A fixture filing, which is the filing of a financing statement covering goods that are or are to become fixtures, must be done in the office designated for the filing or recording of a mortgage on the related real property,

Question 16

Default

Answer 16

Article 9 does not define “default,” but rather leaves it up to the parties to determine the circumstances that give rise to a default, such as the debtor’s transfer of the collateral without approval.

In the absence of agreement, default generally occurs when the obligor fails to make a timely payment.

Question 17

Creditor rights after default

Answer 17

Once a default occurs, a secured party is free to (i) seek possession of the collateral and either sell the collateral or retain it in full or partial satisfaction of the obligation, (ii) initiate a judicial action to obtain a judgment, or (iii) pursue any course of action to which the debtor and obligor have agreed.

Once a default occurs, unless the security agreement provides otherwise, a secured party is not required to give notice of the default, nor is the secured party required to give notice of its intent to repossess the collateral.

However, a secured party is required to use judicial process to obtain possession of the collateral, unless possession can be obtained without breach of the peace.

Breach of the peace is left up to court interpretation. Generally, anything that would lead to the commission of a crime is a breach of the peace. However, an exception exists for trespass with respect to the collateral itself or to the debtor’s land. Additionally, if a debtor physically objects to the removal of collateral, that seizure can amount to a breach of the peace.

Question 18

Financing statement

Answer 18

The debtor’s signature is not required on the financing statement. However, the debtor must authorize the filing of a financing statement for the statement to be effective.

A person may amend a financing statement, such as by adding or deleting collateral covered by the statement. When the debtor is a registered organization, the debtor’s name for purposes of the financing statement must be the name shown on public records, including the formation records filed to create a business entity.

Because financing statements are indexed under the name of the debtor, a financing statement that fails to accurately contain the debtor’s name is seriously misleading and therefore not effective to perfect the security interest. If the debtor changes its name and the filed financing statement consequently becomes seriously misleading, then the secured party has four months in which to file an amendment to the financing statement reflecting the new name.

A financing statement need not make specific reference to proceeds for a security interest in proceeds to be perfected.

Question 19

Order of payment after sale

Answer 19

(i) reasonable expenses for collection and enforcement, (ii) satisfaction of obligations secured by the security interest, (iii) satisfaction of any subordinate security interests, and (iv) remit the remainder of the proceeds to the debtor.

Question 20

Creating a PMSI

Answer 20

A PMSI in goods is created in one of two ways: (1) a secured party gives value (e.g., makes a loan) to the debtor and the debtor incurs an obligation to enable the debtor to acquire rights in or use of the goods, and the value given was so used;

or (2) a secured party sells goods to the debtor and the debtor incurs an obligation to pay the secured party all or part of the purchase price (i.e., a sale of goods on credit).

Question 21

Judgment on the pleadings

Answer 21

A motion for judgment on the pleadings can be made when there are no facts contested by the parties, such as when a defendant’s answer admits all the facts in the plaintiff’s complaint.