Secured Credit

Question 1

What does article 9 apply to?

Answer 1

Article 9 applies to all security interests in personal property or fixtures by contract.

Question 2

Does something need to specifically state that it is a security agreement to be one?

Answer 2

The words “security agreement” do not have to be specifically stated for one to exist.

Question 3

What is the lease disguise?

Answer 3

Article 9 also applies to lease agreements that are not true leases (but instead, security interests).

Question 4

What are the four classifications of goods?

Answer 4

1. consumer goods
2. inventory
3. equipment
4. farm products

Question 5

What are consumer goods?

Answer 5

goods that are bought for use primarily for personal, family, or household purposes (e.g., a computer in the hands of a consumer).

Question 6

What is inventory?

Answer 6

goods, other than farm products, that are held by a person for sale or lease to be furnished under a contract of service; or raw materials, work in process, or materials used or consumed in a business (e.g., computers sold by a computer store).

Question 7

What is equipment?

Answer 7

goods, other than inventory, farm products, or consumer goods (e.g., a computer used in a business).

Question 8

What are farm products?

Answer 8

crops, livestock, supplies produced in a farming operation or products of crops or livestock in their unmanufactured state in possession of debtor who is engaged in a farming operation.

Question 9

What are the requirements of attachment?

Answer 9

(1) value must be given by the secured party to the debtor (e.g., a loan);

(2) the debtor must have rights in the collateral; AND

(3) there must be a binding security agreement which requires (mnemonic=AID): authentication, intent to create a security agreement, and a description of the collateral.

Question 10

What is after-acquired property rule?

Answer 10

The general rule is that a security agreement can cover after-acquired property and does not need to specifically reference it to be effective.

Question 11

What are the methods of perfection

Answer 11

1. Perfection can occur by filing a financing statement.
2. It can be automatic in some cases (e.g., a PMSI in consumer goods).
3. interest can be perfected by possession
4. or control.

Question 12

When two secured parties have a security interest in the same collateral, who has priority?

Answer 12

The first to file or perfect has priority.

If no party perfects, then the first to attach has priority.

Know that a perfected security interest beats an unperfected one—even if one has an unperfected PMSI.

Question 13

What does the buyer in the ordinary course of business take?

Answer 13

A buyer in the ordinary course of business generally takes free of any security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Question 14

What if a buyer knows a sale is in violation of a term in the security agreement?

Answer 14

a buyer is not in the ordinary course of business

Question 15

What does a buyer NOT in the ordinary course of business take?

Answer 15

A buyer not in the ordinary course of business takes collateral subject to a perfected interest.

Generally, he does not take subject to an unperfected interest if he gives value and does not know about the interest

Question 16

What is the consumer to consumer goods (garage sale) exception?

Answer 16

A buyer ** not** in the ordinary course of business takes free of a security interest even though perfected, if:
1. he buys without knowledge of the security interest;
2. for value; and
3. for his own personal, family, or household purposes UNLESS

• prior to the purchase, the secured party has filed a financing statement covering the goods.

The goods must be consumer goods both when the seller has them and when the buyer buys them for this to apply.

Question 17

As between a secured party and a lien creditor, who takes priority?

Answer 17

Priority belongs to the secured party, provided it perfects before the lien arises.

If the interest was unsecured or only perfected after the lien creditor served the writ, then the lien creditor has priority.

Question 18

If a default occurs, what steps does a secured creditor takes to foreclose on its collateral?

Answer 18

If a default occurs, the lender can demand payment or use self-help to reclaim the goods
so long as it does not breach the peace

Question 19

What is breach of peace?

Answer 19

There are several factors to examine to determine if the lender has breached the peace, including whether the repossession took place at the debtor’s premises and whether the debtor objected.

Some courts also look at whether trickery was used.

Some courts say that any
objection (even if slight and even if only verbal) amounts to a breach of the peace.

Question 20

What is resale?

Answer 20

The secured party may sell or dispose of the collateral in a commercially reasonable way.

The security interest is discharged when this occurs, but the debtor is liable for any deficiency.

The obligation owed to the disposing secured party and any junior liens are paid off. (Senior liens remain on the collateral.)

Question 21

The debtor’s two means of protecting itself if the secured party fails to comply?

Answer 21

1. the sale must be commercially reasonable
2. The debtor must receive written notification of the sale.

Question 22

What constitutes written notification of the sale?

Answer 22

The debtor and perfected secured parties (or secured parties who have notified the secured party of their interest) must know when the chance to redeem the collateral is going to pass. (This is not necessary if the collateral threatens to decline rapidly.)

Question 23

What is the timing for written notification of a sale?

Answer 23

Timeliness: this is generally a question of fact, but in a nonconsumer transaction, a notification sent 10 days or more before the disposition (sale) is considered reasonable.

Question 24

What is the content of the notifcation of sale in nonconsumer transactions?

Answer 24

In nonconsumer transactions: the notification of disposition should describe the debtor and the secured party and the collateral, state the method of disposition, and state that the debtor is liable for unpaid indebtedness as well as a charge for accounting.

Question 25

What is the content of the notifcation of sale in consumer transactions?

Answer 25

In consumer transactions, the notification must additionally contain a description of any liability for a deficiency, a telephone number that the consumer can call to discover the amount owed, and a telephone number or mailing address from which the consumer can get additional information about the disposition and the obligation.

Question 26

What are the remedies if the secured party fails to comply?

Answer 26

Damages (including consequential damages, but the debtor has a duty to
mitigate).

If the collateral constitutes consumer goods, statutory damages are awarded.

Sale (A court may order a sale)

Rebuttable Presumption*:
Nonconsumer transaction: if there is a failure to comply with these requirements and the secured party fails to show that the sale was commercially reasonable, then there is a rebuttable presumption that the collateral is worth the amount of the debt and the debtor’s deficiency is nothing. (J2005)

• Consumer transaction: There are two approaches that courts follow: the absolute bar rule (the creditor’s noncompliance bars any recovery of deficiency) or the rebuttable presumption rule (same as previous bullet point).

Question 27

What is the debtor’s right to redeem?

Answer 27

the debtor can redeem prior to the disposition of the collateral by paying everything due and owing to the creditor