MEE UCC 9 Flashcards
What is a security interest?
A creditor’s interest in collateral used to secure repayment of funds.
Who are the parties involved in a secured transaction?
- Debtor
- Secured Party
What happens if the debtor defaults on repayment?
The creditor may take possession of the collateral.
What does UCC Article 9 apply to?
Any transaction that creates a security interest in personal property or fixtures by contract.
True or False: The label given to a transaction by the parties controls its substance.
False
What are the elements to determine if a lease is treated as a secured transaction?
- The lease term is not subject to early termination
- The lease term is for the economic life of the goods or has a purchase option
What are the broad types of collateral recognized by the UCC?
- Goods
- Tangible intangibles
- Intangible intangibles
- Investment property
What are consumer goods?
Goods used or bought primarily for personal, family, or household purposes.
Define inventory in the context of UCC Article 9.
Goods held for sale or lease or to be furnished under a contract of service.
What qualifies as equipment under UCC Article 9?
Goods other than inventory, farm products, or consumer goods, primarily used in a business.
What is a purchase-money security interest (PMSI)?
A security interest in goods that secures an obligation incurred to purchase those goods.
What must happen for a security interest to attach?
- The secured party gives value
- The debtor has rights in the collateral
- The debtor authenticates a security agreement
What is required for a security agreement to be valid?
- It must be in writing
- It must contain a granting clause
- It must describe the collateral
What is ‘after-acquired collateral’?
Property obtained after the security agreement is created, which can be included if specified.
What is the significance of a financing statement?
It is filed to perfect an interest in collateral.
Where should a financing statement be filed for consumer goods?
In the filing office of the state where the debtor is located.
What occurs if a debtor defaults?
Creditors may repossess collateral and there are priority rules for claims.
What does ‘value’ mean in the context of creating a security interest?
Consideration given by the secured party in exchange for the security interest.
What are the two types of proceeds from collateral?
- Cash proceeds
- Noncash proceeds
Fill in the blank: A security agreement must contain a _______ clause.
granting
What is a valid description of collateral in a security agreement?
It must reasonably identify what is described.
True or False: A supergeneric description is sufficient in a security agreement.
False
What is chattel paper?
A record evidencing both a monetary obligation and a security interest in specific goods.
What constitutes a valid financing statement?
- It must include debtor’s name
- It must include secured party’s name
- It must describe the collateral
What is required to create a PMSI?
The obligation must be incurred for the purchase of the goods being secured.
What is the definition of ‘accounts’ under UCC Article 9?
Rights to payment for property sold or for services rendered.
What must be true for a security interest to attach to after-acquired consumer goods?
The debtor must acquire rights in the consumer goods within 10 days of value being given.
What are general intangibles?
Intangible collateral that does not fit into other categories, including choses in action and payment intangibles.
What does ‘after-acquired property clause’ refer to?
A clause that allows a secured party’s security interest to cover equipment acquired after the security agreement is signed.
True or False: A security agreement can cover after-acquired consumer goods.
False
A security agreement cannot cover after-acquired consumer goods unless the debtor acquires rights in them within 10 days of the secured party giving value.
What is the effect of a security interest in collateral regarding its proceeds?
A security interest automatically extends to identifiable proceeds of the collateral.
Fill in the blank: A security agreement may secure ______ advances.
[future]
What is the definition of ‘perfection’ in the context of secured transactions?
Perfection establishes a secured party’s rights in the collateral against third parties.
What is the most common way to perfect a security interest?
Filing a financing statement in a public office.
What must a financing statement include?
- The name of the debtor
- The name of the secured party
- A description of the collateral covered
What happens if a financing statement is filed in the wrong place?
It is ineffective and does not perfect a security interest.
What is the maximum duration of a filed financing statement?
Five years.
What is required for a ‘fixture filing’?
- Indicate it covers fixtures
- File in real property records
- Describe the related real property
- Provide real property owner’s name, if different
What happens to a financing statement if the debtor changes its name?
It may become ineffective unless an amendment correcting it is filed within four months.
What is automatic perfection?
The process by which a security interest is perfected automatically without filing under certain conditions.
True or False: A secured party can perfect a security interest by taking possession of the collateral.
True.
What types of collateral can be perfected by possession?
- Tangible negotiable documents
- Goods
- Instruments
- Money
- Tangible chattel paper
What is required for a secured party to have control over a deposit account?
- The secured party is the bank with which the deposit account is maintained
- An agreement exists between the parties for the bank to follow the secured party’s instructions
What is the general rule regarding priority under Article 9?
First-in-Time, First-in-Right.
What is the effect of a secured party’s security interest if the collateral is sold without consent?
The security interest continues through the sale.
What is needed for a financing statement to be effective despite minor errors?
It must not be seriously misleading.
What is a PMSI?
Purchase Money Security Interest.
Fill in the blank: A secured party must use ______ care in the custody and preservation of collateral.
[reasonable]
What is the consequence of a financing statement lapsing?
It becomes ineffective, and any security interest perfected by it becomes unperfected.
What is the rule regarding the effectiveness of a financing statement if the debtor moves to another state?
A new financing statement must be filed in the new state within four months.
What is the consequence of failing to file a continuation statement?
The financing statement will lapse after five years.
What is the importance of the Code’s provision for grace periods?
They provide temporary automatic perfection under certain conditions.
What prevails among unperfected security interests?
The first security interest to attach.
Between a perfected security interest and an unperfected security interest, which prevails?
The perfected security interest.
How is priority determined between two perfected security interests?
The security interest with the earliest time of filing or perfection.
What special rule applies when the collateral is an instrument or chattel paper?
The secured party who perfects by taking possession has priority over the secured party who perfects by filing.
In the hypothetical involving Maxed-Out Corp., which bank’s interest in the accounts receivable takes priority?
First Rate Bank.
What is the priority rule for a perfected PMSI?
It will prevail over a conflicting security interest if perfected when the debtor receives possession or within 20 days thereafter.
What additional steps must a purchase-money secured party take to acquire priority over the first-in-time secured party when the collateral is inventory?
- Notify the first secured party in an authenticated record
- Perfect the PMSI at the time the debtor receives possession.
In the hypothetical involving Widget Warehouse, who has priority in the widget maker?
The Widget Supply Co.
What is a lien creditor?
A creditor that has acquired an interest in property by attachment, levy, or similar judicial collection procedures.
When does a secured party have priority over a lien creditor?
- Perfects before the lien creditor’s interest arises
- Files a financing statement before the lien creditor’s interest arises.
In the hypothetical involving DotCom Co., who has priority in the computers?
Credulous Bank.
What special rule applies if a PMSI is perfected within 20 days after the debtor receives the collateral?
The PMSI will take priority over an intervening lien creditor.
What is an ‘accession’?
Goods that are physically united with other goods in a manner that the identity of the original goods is not lost.
How is priority determined for a security interest in an accession?
It is subordinate to a security interest in the whole which is perfected by compliance with a certificate of title statute.
What are ‘commingled goods’?
Goods that are physically united with other goods in such a manner that their identity is lost.
How does a security interest attach to commingled goods?
It attaches to the product that results when goods become commingled goods.
What happens to multiple security interests in commingled goods?
They will rank equally in proportion to the value of the collateral at the time it became commingled.
What happens to a security interest upon the sale of the collateral?
It survives the sale, except under certain exceptions.
What defines a buyer in the ordinary course of business (BIOCOB)?
- Buys goods in good faith
- Without knowledge that the sale violates rights of another
- In the ordinary course of business
- From a person in the business of selling goods of that kind.
What is required for a buyer to take free of a security interest in a consumer-to-consumer sale?
- Buys for value
- Without knowledge of the security interest
- Before a financing statement is filed.
What is required for a creditor with a security interest in a fixture to obtain priority over a mortgagee?
File a fixture filing.
What is the general priority rule for fixtures?
First-in-time, first-in-right.
In the hypothetical involving Judy B. Rich, does Luminosity Lighting have the right to remove the chandelier?
Yes, they have the right to remove the chandelier.
What constitutes a default?
Whenever the debtor fails to tender an obligation when due.
What rights does a secured party have upon default?
- Reduce a claim to judgment
- Foreclose
- Repossess tangible collateral.
What is a breach of the peace in the context of repossession?
An act likely to lead to violence during repossession.
What can a secured party do if they cannot obtain collateral without breaching the peace?
Bring an action for replevin.
What must a notification to the account debtor include?
- Be authenticated by the secured party or debtor
- Reasonably identify the rights assigned.
What is the debtor’s right to redeem?
The right to redeem collateral by tendering the amount of the obligation, including interest and expenses.
What right does a debtor have regarding collateral redemption?
The right to redeem the collateral by tendering the amount of the obligation, including interest, reasonable expenses, and attorneys’ fees caused by the default
This is unless the debtor has agreed otherwise in writing after default [§ 9-623(a), (b)]
When must redemption be effected?
Before any of the following:
* The collateral has been collected
* The secured party has disposed of the collateral or entered into a contract for its disposition
* The secured party has accepted the collateral in full or partial satisfaction of the obligation
Is a waiver of the debtor’s redemption rights under the UCC allowed?
No, unless all parties to the security agreement agree to the waiver in writing immediately after the default.
What can a secured party do after default and repossession?
Sell, license, or otherwise dispose of any or all of the collateral in its present condition or following commercially reasonable preparation or processing.
What constitutes a commercially reasonable sale?
A sale is commercially reasonable if it is made:
* In the usual manner on any recognized market
* At the price current in any recognized market at the time of the sale
* In conformity with reasonable commercial practices among dealers in the type of property sold
What must a secured party do before disposing of collateral?
Send a reasonable authenticated notice of disposition to the debtor, filed secured parties, and any other interested persons.
Which types of collateral do not require notification before disposal?
Collateral that is:
* Perishable
* May decline quickly in value
* Of a type customarily sold on a recognized market
What elements must be included in a non-consumer transaction notification?
The notification must include:
* A description of the debtor and secured party
* A description of the collateral
* The method of intended disposition
* A statement that the debtor is entitled to an accounting of all unpaid indebtedness
* The time and place of public disposition or time after which the collateral will be sold in private disposition
What additional information is required in a consumer-goods transaction notification?
The notification must include:
* A description of any liability for a deficiency
* A telephone number the debtor can call to obtain the amount required to redeem the collateral
* A telephone number or mailing address for additional information
What is the order of distribution of cash proceeds from collection, enforcement, or disposition?
The cash proceeds shall be applied as follows:
* Reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing of the collateral
* Satisfaction of obligations secured by the security interest under which the disposition is made
* Satisfaction of obligations secured by any subordinate security interest or other subordinate lien on the collateral, if the secured party has received an authenticated demand before disposal
What happens if the collateral does not bring enough at sale to pay all outstanding obligations?
The secured party is entitled to a judgment for the deficiency, which is the difference between the amount of the debt owed and the amount of the foreclosure sale proceeds received.
What is the rebuttable presumption rule in a non-consumer transaction?
If the debtor proves that the sale was commercially unreasonable, the deficiency will be reduced to the difference between the outstanding loan amount and the amount the collateral would have sold for in a commercially reasonable sale.
What would happen if a secured party fails to give notice of the sale?
The sale would be considered commercially unreasonable, potentially reducing the deficiency judgment to $0 unless the secured party can prove the collateral is worth less than the outstanding amount of the debt.
What rights does a debtor have if they signed a security agreement waiving their right of redemption?
The waiver is unenforceable as against public policy, and the debtor gets a rebuttable presumption that, had the bank acted properly, the foreclosure would have covered the debt.
