R7.2 – Secured Transactions (UCC Article 9)

Question 0

Purchase Money Security Interests (PMSI)

Answer 0

PMSI = Special type of security interest

Properly Perfected PMSI has priority over all other types of security interest in the collateral

PMSI arises when
– creditor sells collateral to debtor on credit, retaining a security interest for purchase price, or
– Creditor advances funds used by debtor to purchase collateral

PMSI Often tested
– simply ask if debtor received collateral with creditor’s money or credit, if yes = PMSI

Question 1

UCC Article 9 (Secured Transactions)

Answer 1

Secured transaction governed by Article 9 of the UCC

Secured transaction = debt secured by collateral

Security interest = right of creditor to repossess collateral upon default by debtor

Security interest becomes effective as soon as parties take steps to attach the interest

Attachment does not provide creditor with rights against 3rd parties with interest in collateral

Perfection of the security interest gives the creditor rights over 3rd parties

Article 9 applies to most contractual security interest in personal property or fixtures and outfights sales of Accounts Receivable

Article 9 does not apply to:
– Security interest in land (mortgages)
– Wage claims
– Statutory liens e.g. mechanic’s lien

Question 2

Types of Collateral

Answer 2

Goods
– Consumer goods = goods used for personal, family of household purposes
– Inventory = held for sale or lease, or goods used up quickly in business
– Equipment = goods that don’t fit other two categories, including durable goods use or bought for use primarily in a business

Intangible and semi-intangible collateral accounts
– Account = any right to payment for goods, services, real property, or use of a credit card, not evidenced by an instrument or chattel paper

Investment property = tocks, bonds, mutual funds, and brokerage accounts containing such items

Proceeds from the sale, exchange, collection or other disposition of collateral

Question 3

Duties of Secured Party

Answer 3

File or send debtor a termination statement when the debt is paid

Confirm for the debtor the unpaid amount left on the secured debt

Use reasonable care to preserve any collateral in the secured party’s possession

Question 4

Attachment of Security Interest

Answer 4

Article 9 concerns secured party’s right vs. both debtor and 3rd parties
Debtor = via attachment
3rd parties = via perfection

A security interest is not enforceable unless it has attached to the collateral

Question 5

Attachment of Security Interests – Requirements

Answer 5

1. Agreement creating security interest evidenced by:
   i. Authenticated record of security agreement, or
   ii. Creditor taking possession or control of the collateral (pledge)
2. Value given by secured party in exchange for the security interest
3. Debtor must have rights in the collateral; doesn’t have to own it

Question 6

Attachment of Security Interests – Requirements: Authenticated Record

Answer 6

Authenticated by debtor not creditor

Authentication = written signature, or electronic mark made with intent to identify the authenticating person and adopt the agreement

Record = written security agreements and intangible records such as computer files

Question 7

Attachment of Security Interests – Requirements: Control

Answer 7

Control = power to make or prevent dispositions of the collateral

Question 8

Perfection

Answer 8

Perfection establishes the secured party’s rights vs a 3rd party who may also have an interest in the same collateral

Perfection cannot be completed until these is attachment, but attachment and perfection may be simultaneous

Question 9

Methods of Perfection

Answer 9

1. Filing a financing statement
2. Taking possession of collateral (not accounts or intangibles)
3. Control (investment property)
4. Automatic perfection
5. Temporary perfection

Question 10

Methods of Perfection – Filing a financing statement

Answer 10

Financial statements must contain the following elements:

1. Name and address of debtor and secured party
2. Indicate collateral covered by financial statement
3. If collateral relates to real property, describe real property

Debtor must authorize filing of financial statements in an authentic record
– Cannot be oral
– Debtor deemed to have authorized the filing if the debtor authenticates a security agreement covering the collateral that is covered by the financial statement

Financial statements filed with Secretary of state

Financial statements effective for 5 years
– can renew for 5 more years by filing continuation statement

Question 11

Methods of Perfection – Taking possession of collateral (not accounts of intangibles)

Answer 11

Can’t take perfect the following by possession
– accounts
– deposit accounts
– nonnegotiable documents
– Intangibles

Secured party must use reasonable care in storing and preserving the collateral
– Can charge debtor for storage, insurance etc. expenses

Question 12

Methods of Perfection – Control (investment property)

Answer 12

For security interest in investment property

Control = secured party has taken steps to be able to have investment property sold without further action from owner.

Taking control
– take possession of stock or bond certificates
– have non-bearer securities endorsed to him
– Uncertified securities = get owner to notify issuer to reregister securities in name of secured party or have issuer agree to follow secured party’s instructions regarding the security.
– Securities Accounts = Get owner to contact broker or mutual fund company and instruct broker that secured party has right in the account that owner has or that broker is to comply with secured party’s instructions

Question 13

Methods of Perfection – Automatic perfection

Answer 13

Small scale assignment of accounts (e.g. assignment of a few A/R) automatically perfects

PMSI in CONSUMER GOODS automatically perfects

Note: PMSI in INVENTORY or EQUIPMENT does not automatically perfect – perfect by filing

Question 14

Methods of Perfection – Temporary perfection

Answer 14

Proceeds from original collateral
– Security interest continuously perfected for 20 days from debtor’s receipt of proceeds

Interstate shipments = Collateral taken from one state to another
– Perfection in first state valid for 4 months after collateral enters second state
– To maintain priority, perfect in new state within 4 month period.

Question 15

Priority Rankings – Highest Priority

Answer 15

Buyer in ordinary course of business of inventory that serves as collateral for a security agreement created by seller
– Exception: buyer knows sale is in violation of prior security agreement

Holders in due course of negotiable instruments

Holders of possessory liens

Question 16

Priority Rankings – 2nd Highest Priority

Answer 16

Properly perfect PMSI
– PMSI in consumer goods perfects upon attachment
– PMSI in inventory of equipment perfected by filing

Question 17

Priority Rankings – 3rd highest Priority

Answer 17

Perfected security interest is and judicial liens that has attached to the collateral

If there is a conflict between perfected security interests - the first to file or perfect wins.

If there is a conflict between a perfected security interest and a judicial lien that has attached, the first to perfect (if security interest) or attach (if judicial lien) has priority.

Question 18

Priority Rankings – 4th Highest Priority

Answer 18

Unperfected Security Interest

If two unperfected security interests conflict, then the first to attach has priority.

Question 19

Priority Rankings – Lowest Priority

Answer 19

Lowest priority = debtor

Question 20

Creditor’s Rights on Default

Answer 20

1. The creditor may take possession of collateral and keep it or sell it
2. Retention of collateral in satisfaction of the debt
3. Judicial action against debtor:

Question 21

Creditor’s Rights on Default – Taking Possession of Collateral

Answer 21

No judicial action required – Creditor can take possession by himself as long as can do so without a breach of the peace

For collateral such as accounts and instruments – upon default, secured party notifies account debtor to make payments to secured party

Secured party can take possession of collateral by replevin
– Replevin = a judicial action seeking the transfer of personal property

Question 22

Creditor’s Rights on Default – Sale of Collateral

Answer 22

Sale must be commercially reasonable

Must give notice of sale to debtor

Sale wipes out all subordinate interests; superior interest still valid

Sale terminates debtor’s right to redeem by paying off indebtedness

Process for sale distributed in following order

1. Expenses of repossession and sale
2. Pay creditors with security interests in order of priority
3. Any surplus goes to debtor

If sale proceeds don’t cover expenses of sale and debt, secured party can bring court action to recover delinquency

Question 23

Creditor’s Rights on Default – Retention of collateral in satisfaction of the debt

Answer 23

If debtor is a consumer it will be considered full satisfaction

If debtor is nonconsumer, the secured party can still collect any deficiency

Secured party cannot retain the collateral if the debtor has paid at least 60 percent – Must sell collateral within 90 days after repossession

Question 24

Creditor’s Rights on Default – Judicial action against debtor

Answer 24

Secured party can bring judicial action for amounts due and levy on collateral after judgement

Secured party can have collateral seized at same time that he begins judicial action

Question 25

Debtor’s Right of Redemption

Answer 25

Up until sale or discharge of debt through retention of collateral, debtor can redeem collated by paying all of the obligations secured by the collateral plus all reasonable expenses incurred related to the repossession