North Carolina

Question 1

How do you approach a secured transaction question?

Answer 1

1. Read the call of the question 2. Identify and classify the property at issue 3. Determine which parties have or claim an interest in the collateral 4. For each security interest, access a. Attachement b. Perfection 5. Use this information to find the appropriate priority rule 6. Apply the priority rule to the facts and resolve the dispute

Question 2

Who are the parties to a secured transaction?

Answer 2

1. Secured party; 2. Obligor; and 3. Debtor

Question 3

What is the scope of Article 9?

Answer 3

Article 9 governs transactions that create a security interest in personal property or fixtures by contract. It also governs agricultural liens and rights to payment.

Question 4

Article 9 and Rights to Payment

Answer 4

Sales of the following are treated like secured transactions (treat the buyer as the secured party): 1. Chattel paper 2. Promissory notes 3. Accounts 4. Payment intangibles Mnemonic: Chicago Police Patrol Noteworthy Alleys; Prevent Incidents

Question 5

How do you properly classify collateral?

Answer 5

Look to the debtor’s principal use at the time the security interest is created. Collateral can be reclassified as the principal use changes.

Question 6

What are goods in relation to secured transactions?

Answer 6

Goods are anything movable at the time a security interest attaches (it includes some that are not technically movable). Goods are: 1. Fixtures 2. Standing timber 3. Unborn animals 4. Growing or unharvested crops 5. Manufactured homes

Question 7

What are the four mutually exclusive sub categories of goods?

Answer 7

1. Consumer goods; 2. Farm products; 3. Inventory ; and 4. Equipment Mnemonic: Cats Get Furry Paws Into Everything

Question 8

What are the four types of rights to payment?

Answer 8

Debtor’s may use their right to be paid money as collateral. 1. Instruments; 2. Chattel paper; 3. Accounts; and 4. Payment intangibles

Question 9

How do you spot rights to payment?

Answer 9

1. Look for a transaction in which a third party (account debtor); 2. Owes money to your debtor; and 3. That right to receive the money is used as collateral for a loan

Question 10

What are documents in relation to other types of collateral?

Answer 10

Documents of title that generally give the holder ownership rights in goods held by a bailee.

Question 11

What are investment properties?

Answer 11

Investment property are certified and uncertified securities such as stocks and bonds.

Question 12

What are deposit accounts?

Answer 12

Savings accounts, checking accounts, passbook, time, and demand accounts.

Question 13

What are commercial tort claims?

Answer 13

Claims possessed by an organization or an individual that arose in the course of the organization or individual’s business. (Do not include claims for personal injury or death)

Question 14

What are letters of credit rights?

Answer 14

A right to payment or performance under a letter of credit.

Question 15

What are general intangibles?

Answer 15

This is a residual category that catches anything that doesn’t fit into the other categories. These can be things like blueprints, copyrights, trademarks, and software.

Question 16

What are consumer goods?

Answer 16

Goods acquired primarily for personal, family, or household purposes.

Question 17

What are farm products?

Answer 17

Crops, livestock, and supplies used or produced in farming operations. Note: This does not include farming equipment or machinery.

Question 18

What is inventory?

Answer 18

1. Goods that are not farm products held for sale or lease; or 2. Goods that are furnished under a service contract, raw materials, works in progress, and materials used or consumed in business

Question 19

What is equipment?

Answer 19

Equipment is defined as goods that do not fit into any other category such as machinery, office equipment, and delivery vans.

Question 20

What are instruments?

Answer 20

Things such as promissory notes, checks, and drafts.

Question 21

What is chattel paper?

Answer 21

An electronic or paper record that is a: 1. Monetary obligation; and 2. A security interest or a lease

Question 22

What is an account?

Answer 22

A right to payment of a monetary obligation for goods that are sold, leased, or licensed, or services rendered. This includes accounts receivable, the right to be paid under insurance policies, and amounts owing on credit cards.

Question 23

What is a payment intangible?

Answer 23

This a a “catch-all” of rights of payment.

Question 24

What are the other types of collateral?

Answer 24

1. Documents; 2. Investment property; 3. Deposit accounts; 4. Commercial tort claims; 5. Letter of credit rights; and 6. General intangibles

Question 25

What is a secured party?

Answer 25

A creditor who obtains a security interest in the debtor’s property.

Question 26

What is an obligor?

Answer 26

A party that must pay or perform the obligation that the collateral secures.

Question 27

What is a debtor?

Answer 27

A party that has an interest, other than a security interest, in the collateral. (Usually the debtor is the owner of the collateral and usually this is the same person as the obligor)

Question 28

What is attachment?

Answer 28

Attachment is an agreement linking a debt to a particular piece of personal collateral and is the point when a security interest becomes enforceable.

Question 29

What are the three requirements for attachment?

Answer 29

1. Value given by the secured party; 2. The debtor has rights in the collateral; and 3. There is a security agreement consisting of either an authenticated record describing the collateral or the secured party has possession or control of the collateral pursuant to an unauthenticated agreement.

Question 30

What are the properties of value?

Answer 30

Value can be given by providing the same consideration needed for a contract. no new value needs to be given. A binding commitment to extend credit is value. A security agreement may provide that the collateral secures future advances.

Question 31

What are the rights in the collateral?

Answer 31

Security interest can only attach to the rights the debtor has in the collateral. Note: If the debtor has voidable title but could transfer full title to a good faith purchaser, the the debtor can create an enforceable security interest.

Question 32

What is an authenticated record?

Answer 32

1. A record stored in a tangible medium so it can be viewed by others; 2. Authenticated by the debtor with either a signature or symbol showing their intent; and 3. Reasonably identifying the collateral Exception: For consumer goods and commercial tort claims, the collateral must be identified with particularity Mnemonic: Security agreements are RAD

Question 33

What is possession of collateral?

Answer 33

When there is physical possession of the object. This applies to consumer goods, equipment, farm products, chattel paper, tangible documents, certified securities, instruments, and money. Must be pursuant to an oral or unauthenticated security agreement.

Question 34

What is control of collateral?

Answer 34

When the secured party is in control or has the ability to control the collateral. This applies to electronic chattel paper, investment property, letters of credit rights, and deposit accounts. Note: This is the exclusive method for perfecting security in deposit accounts and letter of credit rights. Must be pursuant to an oral or unauthenticated security agreement.

Question 35

What rights and duties are required of the secured party in possession?

Answer 35

1. The secured party must act with reasonable care; 2. They must keep the collateral identifiable; 3. The must relinquish the collateral once the obligation has been satisfied; and 4. They may charge the debtor for reasonable expenses for storing and maintaining the collateral.

Question 36

What is after acquired property?

Answer 36

Property acquired by the debtor after the security interest attaches. If there is no reference to after-acquired property, collateral is limited to what was present at the time the contract was executed.

Question 37

What is an accession?

Answer 37

Goods that have been physically united with other goods so that that identity of the original goods is not lost. Look to the agreement to determine if other parties gain interest when accession occurs.

Question 38

What are commingled goods?

Answer 38

Goods that are physically united with other goods to the point that their identity is lost in a product or mass. Interest is not lost, but transferred to the larger product or mass that results.

Question 39

What are proceeds?

Answer 39

Proceeds are whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of. Interest attaches to proceeds automatically.

Question 40

What is a purchase money security interest (PMSI)?

Answer 40

A security interest qualifies as a PMSI only if the collateral is goods or software and: 1. The value given allows the debtor to acquire the goods or software; and 2. The goods or software acquired secure the loan.

Question 41

What is lender PMSI?

Answer 41

The lender loans money to the debtor so that the debtor can acquire the goods and; 1. The value is actually used to purchase the goods; and 2. The lender takes interest in those same goods to secure the loan.

Question 42

What is seller PMSI?

Answer 42

When the goods are bought on credit.

Question 43

What is perfection?

Answer 43

The process that stakes the secured party’s claim so that the secured party might have priority over a later party. Note: In order for the security interest to be perfected, it must first attach to the collateral.

Question 44

What are the methods of perfection?

Answer 44

1. Filing; 2. Possession; 3. Control; 4. Alternative perfection; and 5. Automatic perfection Mnemonic: Famous People Can’t Avoid Attention

Question 45

What is perfection by filing?

Answer 45

When the secured party files a financing statement in the central filing office of the appropriate state. Note: Not available for deposit accounts, money, letters of credit, and collateral subject to other perfection methods.

Question 46

What is a financing statement?

Answer 46

A statement that puts others on notice that there may be a security interest on specific collateral.

Question 47

Where should a financing notice be filed?

Answer 47

In the central filing office, often the secretary of state’s office where the debtor is located which is their principal residence. Note: For corporations it should be in the state where the corporation is incorporated and if it is an unregistered business, it should be where the business operates.

Question 48

What information is required on a financing statement?

Answer 48

1. Name of the debtor; 2. Name of the secured party; and 3. Description of the collateral Note: If any of this information is missing, the secured party is not perfected.

Question 49

What requirements are there for the debtor’s name on the financing statement?

Answer 49

It must be the correct legal name of the debtor and the name on the articles of incorporation for companies.

Question 50

How must the collateral be described on the financing statement?

Answer 50

The parties can either: 1. Use the same description on the security agreement; or 2. Use a super generic description

Question 51

What is the duration of a financing statement?

Answer 51

Finance statements lapse after 5 years and the secured party must file a continuation 6 months before the lapse. If the statement lapses, a secured party may refile but may lose its spot in priority.

Question 52

In what ways may control be obtained over a deposit account?

Answer 52

1. The secured party is the bank that has the deposit account; 2. The secured party, the bank, and the debtor agree in an authenticated record that the lender has control of the account; or 3. The secured party can become the bank’s customer with respect to the account.

Question 53

What are alternate perfection systems?

Answer 53

When another statute governs how a security interest is perfected such as a certificate of title. Note: Certificate of title is applicable to cars, motorcycles, or other vehicles and is most likely to be tested on the bar.

Question 54

What is automatic perfection?

Answer 54

This is when collateral is perfected automatically after the security interest attaches. This is most often the case in PMSIs in consumer goods.

Question 55

When are post filing changes required?

Answer 55

1. When the debtor changes their legal name and to leave the filing would be seriously misleading; or 2. When the debtor moves out of state.

Question 56

How long does the secured party have to file required changes?

Answer 56

The secured party has 4 months to learn of a name or location change of the debtor to file an amended financial statement. If it was collateral that has been transferred out of state to a new debtor, the secured party has 1 year to file. Note: Collateral obtained within the 4 months remains perfected, but any collateral obtained after that time is not perfected.

Question 57

What happens if a secured party fails to file a required financial statement?

Answer 57

The security interest ceases to be perfected until the secured party refiles. Essentially they lose their spot in line.

Question 58

How long does the automatic perfection for proceeds last?

Answer 58

20 days unless the secured party: 1. Takes steps necessary to amend the financing statement (or the statement is broad enough to cover the proceeds); or 2. The proceeds are in the form of cash, in which the perfection continues indefinitely as long as the cash is identifiable.

Question 59

What is the same office rule?

Answer 59

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

Question 60

Who has priority in a perfected security interest vs a perfected security interest?

Answer 60

The first in time to file or perfect takes priority.

Question 61

Who has priority in a unperfected security interest vs an unperfected security interest?

Answer 61

The first security to attach or become effective takes priority.

Question 62

Who takes priority in a perfected security interest vs a lien creditor?

Answer 62

A perfected security interest takes priority over a lien creditor.

Question 63

Who takes priority in an unperfected security interest vs a lien creditor?

Answer 63

The lien creditor will take priority over an unperfected security interest. Exception: If the debtor has authenticated a security agreement listing the collateral and a financing statement is on file but the secured party has not given value, the secured party will take priority.

Question 64

Who takes priority in a security interest vs a statutory lien?

Answer 64

A statutory lien takes priority over a security interest (even if it is perfected) unless: 1. The effectiveness of the lien depends on the lienholder’s possession of 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.

Question 65

Who takes priority in a secured party vs secured party over future advances?

Answer 65

The first to file or perfect with respect to future advances, even if that secured party has knowledge of the competing security interest when the future advance is made.

Question 66

Who takes priority in a secured party vs lien creditor over future advances?

Answer 66

If the secured party’s advance is made within 45 days of the lien creditor’s lien, then the secured party takes priority. Advances made 45 days or more after the person becomes a lien creditor are subordinate to the lien creditor unless: 1. The advance is made without knowledge of the lien; or 2. The advance is made pursuant to a commitment entered into without knowledge of the lien.

Question 67

Who takes priority in a buyer vs perfected security interest?

Answer 67

Unless the secured party authorizes the sale free and clear, the buyer takes subject to a perfected security interest. Exception: BIOCB and the garage sale rule

Question 68

What is the BIOCB rule?

Answer 68

The buyer in the ordinary course of business is an exception whereby a buyer takes priority over a secured party interest when: 1. The buyer buys goods from a merchant; 2. In the ordinary course of the merchant’s business; and 3. The buyer acts in good faith and without actual notice that the sale violates the rights of others in the same goods. Note: This merchant cannot be a pawnbroker.

Question 69

What is the garage sale exception a/k/a the consumer to consumer buyer rule?

Answer 69

A buyer of consumer goods will take free of a security interest, even if it is perfected if: 1. The buyer buys consumer goods for value; 2. For their own personal, family, or household use; 3. From a consumer seller; and 4. Without knowledge of the security interest. Exception: This rule does not apply if the secured party has filed a financing statement covering the goods. In most cases they won’t as these goods are typically automatically perfected as PMSIs.

Question 70

Who takes priority in a buyer vs unperfected security interest?

Answer 70

Unless a secured party authorizes the sale free and clear, the buyer takes subject to a security interest.

Question 71

When are PMSIs for consumer goods perfected?

Answer 71

Automatically unless the collateral is subject to a certificate of title. For all other PMSIs, the secured party must either exercise possession or file a financing statement.

Question 72

Who takes priority in a PMSI vs lien creditor?

Answer 72

Follow the general rule for lien creditors vs security interest except: 1. PMSIs have a 20 day grace period starting when the debtor receives possession of the collateral.

Question 73

What is the PMSI super priority for goods rule?

Answer 73

PMSI in goods other than inventory or livestock takes priority over all other security interests, no matter when they are perfected, if the secured party perfects within 20 days of the debtor receiving the goods.

Question 74

What is the PMSI priority for inventory?

Answer 74

A PMSI in inventory or livestock will have priority over all other security interests in that same inventory if a secured party: 1. Perfects before the inventory is delivered to the debtor; and 2. Sends an authenticated notification of the PMSI to other secured parties. Note: For other PMSIs that are perfected but do not satisfy the two priority rules, apply the SP vs SP rule.

Question 75

When does article 9 govern a lease?

Answer 75

When the secured transaction is disguised as a lease but it is not economically different than a secured transaction.

Question 76

What is the bright line test?

Answer 76

These are per se secured transactions when the following two elements are met: 1. The “lessee” is obligated to pay for the full obligation under the lease, whether or not they terminate the lease early; and 2. One of the following outcomes is met; a. The original term of the lease is equal to or greater than the remaining economic life of the goods; b. The lessee is bound to renew the lease for the remaining economic life of the goods; c. The lessee has the option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration; or d. The lessee has the option to become the owner of the goods for no or nominal additional consideration. Note: In these cases, the secured party will need to file to perfect his interest in the goods.

Question 77

What is a consignment?

Answer 77

A party (the consigner) has ownership of goods but gives possession to another party (the consignee) for the purpose of allowing the consignee to sell the goods.

Question 78

When does Article 9 govern consignment?

Answer 78

When: 1. The consignor delivers the goods to a merchant, who deals in goods of that kind, for the merchant to sell; 2. The merchant is not generally known by its creditors to be substantially engaged in the business of selling goods of others; 3. The value of the goods is $1,000 or greater in each delivery; and 4. The goods are not consumer goods immediately before the delivery.

Question 79

How does Article 9 define default?

Answer 79

It doesn’t define it. Refer to the security agreement and applicable contract law to determine what constitutes default.

Question 80

What may a secured party do upon default?

Answer 80

1. Seek possession of the collateral and either sell it or retain it;
2. Abandon Article 9 rights and obtain a judgment against the debtor; or
3. Pursue other courses of action as agreed to under the terms.

Note: These rights are cumulative and may be exercised simultaneously

Question 81

What are the two ways a secured party may repossess collateral?

Answer 81

1. Pursuant to a judicial process such as replevin; or
2. Self help repossession

Note: When using self-help, the secured party cannot breach the peace. This includes breaking into the debtor’s home or garage, committing a criminal act, physical altercations, or some form of trickery.

Question 82

How may the secured party dispose of collateral?

Answer 82

Once the secured party takes possession of the collateral after default, they may sell, lease, license, or otherwise dispose of the collateral as long as they do so in a commercially reasonable way which is:

1. Sold in the usual manner in a recognized market;
2. Sold at the price current in that markey; or
3. Otherwise in confomity with the reasonable commercial practices among dealers in that type of collateral

Note: The sale price alone is not determinative of reasonableness, but a very low price will trigger increased scrutiny by the court.

Question 83

Who must be provided with notice?

Answer 83

1. The debtor;
2. Secondary obligor;
3. Other secured parties; and
4. Anyone else who the secured party has received a notice of a claim or interest in the collateral

Note__: All parts, including time, must be commercially reasonable for the notice. For non-consumer transactions there must be at least 10 days for the notice.

Question 84

What must the notice include?

Answer 84

1. Secured party’s name;
2. Debtor’s name;
3. Description of the property;
4. How, when, and where the property will be sold;
5. A statement that the debtor is entitled to an accounting for the unpaid balance;
6. Describe any liability for the deficiency; and
7. Telephone number that the debtor can call to obtain more information

Question 85

How are proceeds distributed?

Answer 85

Cash proceeds are distributed in the following order:

1. Reasonable expenses for the collection and enforcement;
2. Paying off the debt to the foreclosing secured party;
3. Pay subordinate security interests (so long as that party has made a formal demand before the distribution of the proceeds);
4. Any surplus will be returned to the debtor

Note: If there is not enough money to satisfy the debt, the secured party can seek a deficiency judgment

Question 86

When may a secured party accept collateral in full satisfaction of the debt?

Answer 86

1. The debtor must consent after the default to the acceptance; or
2. Acceptance by silence is permitted if the debtor does not object to the secured party’s proposal within 20 days after the proposal is sent

Note: When the satisfaction is for consumer goods:

The secured party can only accept the collateral in full satisfaction of the obligation.

60% Rule - If the debtor has paid 60% or more of the debt, the goods must be sold. Acceptance is not permitted unless the debtor waives this rule in an authenticated record.

Question 87

When may a secured party accept collateral in partial satisfaction of a debt?

Answer 87

1. The debtor must consent after default to the acceptance in an authenticated record;
2. Consent by silence is not permitted and partial satisfaction is not permitted for consumer goods