Introduction

Question 1

DEFINITION OF SECURED
TRANSACTION

Answer 1

• Secured transaction: transaction intended to create a security interest in personal property/fixtures.
• It generally involves a sale on credit/a loan in which seller/lender obtains a lien on some or all of the debtor’s property as security for payment.
• To spot a secured transaction, look for (1) a credit transaction (a sale on credit/loan) & (2) an agreement that creates a lien in favor of creditor in debtor’s personal property to secure the debt

Question 2

TERMINOLOGY

Answer 2

Consider the following hypothetical: Hilda borrows $20,000 from First Bank to buy some additional inventory for her retail hat shop. First Bank and Hilda execute a document that grants to First Bank a lien on the hats being purchased, and, in addition, on all other inventory now owned or hereafter acquired by Hilda to secure this loan and any future indebtedness of Hilda to First Bank. First Bank also files a form in the public records that indicates that First Bank has a lien on Hilda’s inventory. Who is the debtor here? The secured party? What is the security interest? See below for more.

Question 3

Debtor
.

Answer 3

Debtor: person who owes payment/performance of the obligation secured (here, Hilda)

Question 4

Secured Party

Answer 4

Secured party (also called the “creditor”): lender, seller, or other person in whose favor there is a security interest (here, First Bank).

Question 5

Security Agreement

Answer 5

Security agreement: agreement between debtor (Hilda) & secured party (First Bank) that creates the security interest.

Question 6

Security Interest

Answer 6

• Security interest: interest in personal property/ fixtures that secures payment/performance of an obligation.
• It’s a contingent property interest in debtor’s collateral that debtor grants to creditor.
• When that contingency (which is default) occurs, the property interest springs to life & creditor has rights in debtor’s collateral.

Question 7

Collateral

Answer 7

• Collateral: property subject to a security interest (here, inventory).
• It is property that the secured party can repossess upon default to ensure that the debt is paid.

Question 8

Purchase Money Security Interest

Answer 8

• A purchase money security interest (“PMSI”) is a special type of security interest in goods.
• A PMSI can arise in 2 ways:
  (1) Secured party sells the goods to the debtor on credit & retains a security interest in the goods sold, or
  (2) Creditor loans the funds to the debtor to enable debtor to buy specific collateral, those funds are used by debtor to acquire the specific collateral, & creditor takes a security interest in that collateral.
• The PMSI secures whatever portion of the purchase price still has to be paid.

Question 9

After-Acquired Property Clause

Answer 9

• A secured party often will want to obtain a security interest not only in debtor’s present property, but also in property that debtor will obtain in the future.
• This is permissible.
• Security agreements typically contain an after-acquired property clause (as in the hypo above

Question 10

Future Advance Clause

Answer 10

• A secured party often contemplates making future loans to debtor & wants to secure these future advances in the present security agreement. This is permissible.
• Security agreements typically contain a future advance clause (as in the hypo above), in which case a new security agreement is not needed when a future advance is made.

Question 11

Attachment

Answer 11

• Attachment deals w/ steps legally required to give secured party a security interest in the collateral that is effective against debtor.
• Once a security interest attaches, it is effective against debtor & creditor has all of rights of a secured creditor under Article 9.
• A creditor is not a secured creditor until attachment.

Question 12

Perfection

Answer 12

• Perfection deals w/ steps legally required to give secured party an interest in the collateral that is effective against the world.
• In general, perfection is the process of giving public notice of security interest to the world.

Question 13

Financing Statement

Answer 13

• Financing statement: document generally used to
  provide public notice of security interest, & so to perfect the security interest

Question 14

TYPES OF COLLATERAL

Answer 14

• Classification of collateral is important b/c many
  provisions of Article 9 (particularly those dealing w/ perfection & priorities) make legal distinctions based on the type of collateral.

Question 15

Goods (Tangible Collateral)

Answer 15

• “Goods”: all things that are movable at time security interest attaches (including unborn animals & growing crops). Goods also include fixtures.
• 4 types of goods. The category where good is placed depends on how debtor is using the collateral.
  (1) Consumer good: goods used/bought primarily for
  personal, family, or household purposes
  (2) Equipment: goods that are used/bought for use in
  a business. Note: This is also the default category for
  goods. In other words, if the collateral is a good, and it doesn’t fit the definition of consumer goods, inventory, or farm products, it gets classified as equipment.
  (3) Farm products: crops/livestock/supplies used/ produced in farming operations/products of crops/ livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk, & eggs) if they are in the possession of a debtor engaged in farming operations
  (4) Inventory: goods held for sale/lease, goods that are to be furnished under service Ks, materials used
  /consumed in a business in a short period of time

Question 16

Tip

Answer 16

Secured transactions questions often involve perfection issues that hinge on the type of tangible collateral involved. Thus, it’s very important for you to understand the difference between the above categories.

Question 17

Intangible or Semi-Intangible Collateral

Answer 17

• 8 types of intangible/semi-intangible collateral.
• The category into which intangible or semi-intangible collateral is placed depends on the nature of the collateral (rather than its use):
  (1) Instruments: Pieces of paper representing right to be paid money, like promissory notes, drafts (ex. checks), & certificates of deposit
  (2) Documents: document that represents right to receive goods (ex. bill of lading, a warehouse receipt)
  (3) Chattel paper: record/s which evidence both
  (a) a monetary obligation, & (b) a security interest in/ lease of specific goods.
• A “record” is info that is stored in either a tangible medium (ex. written on paper), or an intangible medium (ex. electronically stored).
• Chattel paper that is stored in an electronic medium is also called “electronic chattel paper.”
  (4) Investment property: Includes items such as stocks, bonds, mutual funds, & brokerage accounts containing such items
  (5) Accounts: Includes a right to payment (that is not evidenced by an instrument/chattel paper) for property sold/services rendered.
• Note: A contractual obligation arising from a loan of money is not an account—it is a general intangible (see below).
  (6) Deposit accounts: An account maintained w/ bank.
• Note: In general, Article 9 only applies to security interests in nonconsumer deposit accounts & account monies that are claimed as proceeds of other collateral.
  (7) Commercial tort claims: A tort claim where (a) claimant is an org (ex. partnership/ corp), or (2) claimant is an individual, claim arose out of claimant’s business/profession, & claim does not include damages for personal injury/death of individual (note: Article 9 also applies to noncommercial tort claims that are claimed as proceeds of other collateral)
  (8) General intangibles: Any personal property not coming within scope of the other definitions, such as patent & trademark rights, copyrights, & goodwill.
• A general intangible under which the account debtor’s principal obligation is a monetary obligation is a payment intangible

Question 18

Scope of Article 9

Answer 18

• Article 9 applies to the following transactions:
  (1) A transaction, regardless of its form, that creates a security interest in personal property/fixtures by K
  (2) A seller’s retention of title: if a seller & buyer of goods agree that seller will retain title to the goods after they are delivered until buyer has paid for them, the agreement will be treated as seller’s retention of a security interest
  (3) Agricultural liens: nonpossessory liens on farm products that are created by state statute in favor of persons providing goods, services, or rental land to farmers (only the perfection & priority of agricultural liens are governed by Article 9; creation & enforcement of liens are governed by state statutes)
  (4) Sales of accounts, chattel paper, payment intangibles, & promissory notes
  (5) Commercial consignments of goods (where consignor did not use the goods for personal, family, or household purposes) worth a total of $1,000/more to persons who (1) deal in goods of that kind under a name other than the consignor’s, (2) are not auctioneers, and (3) are not generally known by their creditors to be substantially engaged in selling the goods of others
  (6) A secured sale disguised as a lease: leases that are intended to serve as security arrangements (but not
  true leases); & a lease where the rental obligation is not terminable by the lessee & either: (1) the lease term is equal to/greater than the remaining economic life of the goods, (2) the lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life of the goods, or (3) at the end of the lease, the lessee has an option to purchase the goods/renew the lease for the remaining economic life of the goods for no/nominal consideration

Question 19

Examples

Answer 19

(1) D rents a stall at Ark Self Storage and stores their goods there. The rental agreement provides that Ark has “a contractual lien” on the contents of the stall, & that if D defaults on rental payments, Ark has the right to enter the stall, seize the contents, & sell them to satisfy the rental obligation. No mention is made of the creation of any security interest. Nevertheless, a security interest has been created that is governed by Article 9.
(2) A state has enacted a statute giving unpaid farmers who have delivered their crops to a middleman a lien on the inventory of the middleman. Article 9 would govern the perfection & priority for this lien.
(3) To raise money, Acme Manufacturing sold all of its accounts to Friendly Finance, which notified customers that payments should be made directly to Friendly. This sale is governed by Article 9, & buyer must comply w/ Article 9 to protect its interest against competing 3rd parties.
(4) Elvis, a music promoter, delivers compact discs worth $1,500 by the band No Tolerance to CD Barn to be sold on consignment. If the compact discs are not sold, CD Barn (consignee) may return them to Elvis (consignor). Unless CD Barn is generally known by its creditors to be substantially engaged in selling the goods of others, Elvis must comply w/ provisions
of Article 9 to protect his interest in the compact discs against creditors of CD Barn.
(5) Machines, Inc. leases a duplicating machine to Print Shop. The parties execute a 5-year lease (which is non-terminable by Print Shop, the lessee). Article 9 will apply if: (1) at the end of the lease period, Print Shop becomes the owner of the machine for little/no consideration (ex. an option to purchase for $1 when machine is worth $1,000), (2) the lessee is bound to purchase machine at end of the lease/to renew lease for remaining economic life of machine, or (3) lease is for the entire economic life of machine, with/without
renewal.