Secured Trans

Question 1

Eligible transactions under Art. 9 of UCC

Answer 1

(1) Transactions that create by agreement a security interest in personal property or a fixture;
(2) Leases/consignments that are in economic reality or substance a secured transaction.

Question 2

A security interest

Answer 2

is an interest in personal property or fixtures that secures payment or performance of an obligation.

Question 3

A lease is a secured transaction if

Answer 3

A transaction in the form of a lease is treated as a security interest if:

In a true lease, the item still has meaningful economic value when the lessor gets it back at the end of the lease term

Question 4

Bright-line rule for lease as a secured transaction

Answer 4

Bright-line rule
A transaction in the form of a lease is treated as a security interest if:

(A) “Lessee” is obligated to pay the full obligation under the lease (contract may not be terminated early); and

(B) (1) Original terms of the lease is equal or greater than the goods’ economic value; or

(2) Nothing of value is going back to the lessor; or
(3) Lessee has an option to become the owner for free at the end of the lease.

Question 5

Tangible collateral: goods

Answer 5

A good is anything movable at the time a security interest attaches:

(1) Consumer goods are those acquired primarily for personal, family, or household purposes;
(2) Farm products include crops, livestock, and supplies used or produced in farming;

(3) Inventory includes:
- Goods other than farm products, that are held for sale;
- Goods consisting of raw materials, works in progress, or materials used or consumed in a business;

(4) Equipment is a catchall for goods that are not consumer goods, farm products, or inventory.

Question 6

Intangible collateral

Answer 6

There are nine classes of intangible collateral, of which the most tested are:

(1) Accounts—e.g., rights to payment for:
(a) Goods sold, property licensed, or services rendered;
(b) The issuance of an insurance policy, the use of a credit or charge card, or winning the lottery.
(2) Deposit accounts—e.g., savings, passbook, time, or demand accounts maintained with a bank.

Question 7

Intangible collateral: accounts

Answer 7

rights to payment for:

(a) Goods sold, property licensed, or services rendered;
(b) The issuance of an insurance policy, the use of a credit or charge card, or winning the lottery.

Question 8

How to extend security interest to after-acquired collateral

Answer 8

A security interest can extend to collateral that the debtor acquires in the future, e.g., “all inventory now owned or hereafter acquired.”

Question 9

After-acquired collateral clause for consumer goods

Answer 9

Not effective unless the debtor acquires the goods within 10 days after the secured party gives value.

Question 10

Attachment

Answer 10

A security interest is enforceable with respect to the collateralif it attached to the collateral.

Question 11

Requirements for attachment

Answer 11

There is attachment if:

(1) The secured party gives value;
(2) The debtor has rights in the collateral, and;
(3) Either:
(a) The debtor authenticates an agreement describing the collateral; or
(b) The secured party has possession or control of the collateral pursuant to a security agreement.

Question 12

Requirements for attachment: value given

Answer 12

Giving value includes:

(1) Providing consideration sufficient to support a simple contract;
(2) Extending credit, either immediately or under a binding obligation to do so;
(3) No new value needs to be given

Question 13

Requirements for attachment: security agreement

Answer 13

A security agreement must:

(a) Be in a record—e.g., a signed or written document;
(b) Contain a description of the collateral—e.g., “all of debtor’s equipment”; and
(c) Be authenticated by the debtor—e.g., by signature.

Question 14

Requirements for attachment: debtor’s rights in the collateral

Answer 14

A debtor’s limited rights in collateral—e.g., in property acquired on credit as in a PMSI—suffice for a security interest to attach.

The secured party’s rights in the collateral are no greater than the debtor’s rights.

Question 15

Proceeds from collateral

Answer 15

arise when collateral is sold, leased, license, or otherwise disposed of

Question 16

Attachment: Proceeds:

Answer 16

A security interest in collateral automatically attaches to identifiable proceeds from the sale, exchange, or other disposition of the collateral.

Question 17

Attachment: after-acquired property:

Answer 17

The security interest for after-acquired property attaches as soon as the debtor obtains an interest in the property.

Question 18

Attachment: purchase money security interest

Answer 18

A PMSI attaches if the seller sells property to the buyer on credit and retains a security interest in the property.

Question 19

Purchase‐money security interest (PMSI)

Answer 19

a special type of security interest that exists when a secured party sold goods to the debtor, and the debtor incurs an obligation to pay the secured party all or part of the purchase price (a sale on credit).

Question 20

Perfection

Answer 20

A security interest is perfected upon attachment and compliance with one of the methods ofperfection.

(1) Attachment, AND

(2) (a) Filing of a financing statement; or
(b) Possession of the collateral, or
(c) Control of the collateral.

Question 21

Statutory perfection:

Answer 21

E.g., a state statute requiring security interests in a motor vehicle to be noted on its certificate of title.

Question 22

Perfection: financing statement

Content requirement

Answer 22

The financing statement, effective on the date of filing, must contain the following information:

(a) The debtor’s name, or an incorrect name that is not “seriously misleading”;
(b) The name of the secured party or a representative of the secured party, AND;
(c) The collateral covered by the financing statement.

Question 23

Financing statement is effective when

Answer 23

effective on the date of filing,

Question 24

Financing statement is an ineffective method of perfection for

Answer 24

filing cannot be used to perfect a security interest in any collateral in:

• A deposit account;
• Money, or;
• Letter-of-credit rights that are not a supporting obligation.

Question 25

Perfection: control of the collateral can be used to perfect for

Answer 25

Control of the collateral can be used to perfect a security interest in:

• Investment property;
• Deposit accounts;
• Letter-of-credit rights;
• Electronic chattel paper, or;
• Electronic documents.

Question 26

Perfection: control of the collateral - limitation

Answer 26

The security interest remains perfected only while the secured party retains control.

Question 27

Perfection: control of a deposit account

Answer 27

A secured party has control of a deposit account if:

1. [SP isBank] The secured party is the bank with which the deposit account is maintained;
2. [Agreement]The bank, secured party, and debtor agree in writing to follow the instructions of the secured party, OR;
3. [SP becomes Customer]The secured party becomes the bank’s customer with respect to the deposit account.

Question 28

Perfection: proceeds of sale of collateral

Answer 28

A security interest in proceeds is initially perfected for 20 days after collateral is sold.

Perfection lapses after 20 days unless:

1. Amend financing statement
2. Cash proceeds: perfection continues indefinitely.
3. Same office rule: perfection continues in proceeds indefinitely if(a) the financing statement covers the original collateral;(b) the proceeds are collateral in which a security interest may be perfected by filing in the same office as the financing statement; and(c) the proceeds are not acquired with cash proceeds

Question 29

Perfection: proceeds of sale of collateral–same office rule

Answer 29

A perfected security interest in proceeds may continue indefinitely when:

(a) the financing statement covers the original collateral;
(b) the proceeds are collateral in which a security interest may be perfected by filing in the same office as the financing statement; and
(c) the proceeds are not acquired with cash proceeds.
* typically applies when inventory is sold for accounts

Question 30

Perfection: purchase money security interest

Answer 30

Only a PMSI in consumer goods is automatically perfected upon attachment.

A PMSI in other types of goods (e.g., inventory or equipment) or in cars is not—i.e., the seller must file a financing statement to perfect.

Question 31

Priority rule:

Secured party vs. general creditor

Answer 31

A secured party will always prevail over a general creditor.

A general creditor is one who has a claim, including a judgment, but who has no lien or security interest with respect to the property in question (i.e., the collateral).

Question 32

Priority rule:

Judicial lien creditor vs. secured party

If interest is perfected:

Answer 32

A perfected security interest has priority over a judicial lien creditor.

Question 33

Priority rule:

Judicial lien creditor vs. secured party

If interest is unperfected:

Answer 33

A judicial lien creditor has priority over an unperfected security interest—unless the only reason the interest was not perfected was because the secured party had not yet given value.

Question 34

Priority rule:

Transferee vs. secured party

Answer 34

If the collateral is transferred, the security interest continues in the collateral unless the secured party has authorized the transfer free of the security interest.

Question 35

Priority rule:

Buyer vs. secured party

If the security interest is perfected:

Answer 35

The buyer takes subject to the security interest unless the secured party has authorized sale of the collateral free of the security interest

*applies to applies to goods, tangible chattel paper, tangible documents, or a security certificate.

Question 36

Priority rule:

Buyer vs. secured party

If the security interest is unperfected:

Answer 36

The buyer takes FREE of the security interest if she:

(a) gives value and
(b) receives delivery of the collateral
(c) without knowledge of the existing security interest.

*applies to applies to goods, tangible chattel paper, tangible documents, or a security certificate.

Question 37

Priority rule:

Buyer vs. secured party

Exception: Buyer in the ordinary course of business

(1) Rule
(2) Definition of BOCB

Answer 37

Rule: A buyer in the ordinary course of business takes FREE of a security interest that the seller gave in the goods, even if the security interest is perfected; and/or the buyer knows of its existence.

Definition: A buyer in the ordinary course of business is someone who ∑

(a) Buys goods that are NOT FARM products;
(b) In the ordinary course of business;
(c) From a merchant who is in the business of selling goods of that kind;
(d) In good faith and without knowledge that the sale violates the rights of another in the same goods—i.e., more than mere notice or reason to know.

Question 38

Priority rule:

Buyer vs. secured party

Exception: Consumer buyer

(1) Rule
(2) Definition of a consumer buyer

Answer 38

A consumer buyer of consumer goods takes FREE of a security interest, even if perfected, UNLESS the secured party filed a financing statement covering the goods.

A consumer buyer is someone ∑:

(a) buys consumer goods for value
(b) for his own personal, family, or household use
(c) from a consumer seller
(d) without knowledge of the security interest.

*Because of the consumer buyer rule, holders of PMSIs in consumer goods may file a financing statement even though they do not need to do so to perfect.

Question 39

Priority rule:

perfected security interest vs. perfected security interest

Answer 39

The first either to file a financial statement or perfect has priority

(e.g. if a secured party files first without attaching but subsequently perfects by attaching, it defeats a secured party who perfected first but filed second.)

Question 40

Priority rule:

perfected security interest vs. unperfected security interest

Answer 40

A perfected interest takes priority over an unperfected one.

Question 41

Priority rule:

unperfected security interest vs. unperfected security interest

Answer 41

The first party to attach has priority.

Question 42

Priority rule:

PMSI (consumer goods or equipment) vs. non-PMSI

Answer 42

PMSI for consumer goods/equipment prevails over all other security interests ifthe interest is perfected before/within 20 days after the debtor receives possession of the collateral.

Question 43

Priority rule:

PMSI (inventory or livestock) vs. non-PMSI

Answer 43

A PMSI in inventory or livestock prevails over all other security interests if ∑

(a) the interest is perfected before debtor receives possession of the collateral; and
(b) SP sentan authenticated notification of PMSI to other secured parties before the debtor receives possession of the collateral.

Note: contrast to priority requirements forPMSI for consumer goods/equipment (PMSI isperfected before/within 20 daysafter the debtor receivespossession of the collateral)

Question 44

Priority rule:

PMSI vs. PMSI

Answer 44

First party to either file a financial statement or perfect has priority.

© Seller PMSI beats lender PMSI

Question 45

Priority rule:

Priority of a PMSI in good for proceeds

Answer 45

The priority generally extends to identifiable proceeds of the original collateral—but only as to proceeds in which the security interest is perfected before/within 20 days after the debtor receives possession of the collateral

Question 46

Priority rule:

Non-PMSI Fixtures vs. interest in real property

Rule
Exception

Answer 46

A security interest in fixtures is subordinate to an interest in real property

EXCEPT
A security interest in fixture takes priority over an interest in real property if perfected by a fixture filing before the real property is recorded.

Question 47

Priority rule:

PMSI in fixtures vs. interest in real property

Answer 47

PMSI in the fixture takes priority over the interest in real property if

(a) it is perfected by fixture filing before/within 20 days after goods become fixtures and
(b) debtor has an interest/possession of the real property

Question 48

Priority rule:

Fixtures vs. Construction mortgage

Answer 48

A construction mortgage has priority over a subsequent security interest in a fixture (incl. PMSI fixtures) if:

(a) it is recorded before the goods become fixtures
(b) goods become fixtures before completion of the construction.

Question 49

Construction mortgage definition

Answer 49

A construction mortgage is a mortgage:

(1) that secures an obligation:
- incurred for the construction of an improvement on land,
- including the cost of acquiring the land, and
(2) that indicates that it is a construction mortgage in the real property records.

Question 50

Secured parties’ rights upon default

Answer 50

Upon default the secured party may:

(1) Seek possession of the collateral and, in order to satisfy the obligor’s outstanding obligation, either:
(a) Sell the collateral; or
(b) Retain it in full or partial satisfaction of the obligation;

(2) Initiate a judicial action to obtain a judgment based on that obligation; or
(3) Subject to any statutory limitations, pursue any course of action to which the debtor and obligor have agreed.

Question 51

Secured party right to fixtures: remedy upon default

Answer 51

Against owner & individual who encumber real property: SP may remove fixture from real property if SP’s interesthas priority over owners and individuals who encumber real property.

If the owner or encumbrancer is not the debtor, the secured party is liable for:
• the cost of repairing any physical object damaged by the removal
• but not for any reduction in the value of the real property due to the removal.

Question 52

Transferee’s rights to collateral after foreclosure

Answer 52

If the transferee/buyer at a foreclosure sale acts in good faith, she takes the collateral:
• free of the foreclosed security interest and any subordinate interests
• but subject to any security interests senior to that foreclosed.

Question 53

Repossession of collateral: Notice requirement

Answer 53

Not required to give notice of default (nor its intent to take possession of the collateral),unless the security agreement provides otherwise.

Question 54

Repossession of collateral: self help

Answer 54

When using self-help repossession, the secured party cannot breach the peace.

The repossession agent is allowed to:
• Trespass on land; and
• Repossess if there is no confrontation.

Question 55

Repossession of collateral: breach of the peace occurs when

Answer 55

A secured party breaches the peace if:

• unauthorized repo officer:She brings an officer to the repossession, and the officer is not there pursuant to judicial authorization;
• crime by repo officer:The repossession agent breaks into the debtor’s home or garage, or commits some other criminal act;
• physical confrontations:Self help involves certain physical confrontations; or
• deception: Self help involves certain deception or trickery.

Question 56

Repossession of collateral: large equipment

Answer 56

For equipment that is hard to repossess, it is acceptable to render it unusable in lieu of repossession—if done so without disruption or violence.

Question 57

Disposition of collateral: Notice requirement

Answer 57

A secured party generally must send an authenticated notification of disposition to:

(1) The debtor;
(2) Any secondary obligor; and
(3) With respect to non-consumer goods:
(a) Any other secured party or lien holder who held a security interest that was perfected by filing or statute; and
(b) Any other party from whom the secured party has received authenticated notice of a claim or interest in the collateral.

Question 58

Secured party’s right to purchase collateral at foreclosure upon default

Answer 58

The secured party can purchase the collateral:

(a) In a public sale; or
(b) In a private sale if the collateral:
(i) Is of the kind customarily sold on a recognized market—e.g., the NYSE; or
(ii) Is the subject of widely distributed standard price quotations.

Question 59

Disposition of collateral: order of distribution of cash proceeds

Answer 59

A secured party must apply, or pay over for application, cash proceeds of a disposition in the following order:
1. Administrative expense:Reasonable expenses for collection and enforcement, including attorneys’ and legal fees;
2. Security interest: Satisfaction of obligations secured by the security interest;
3. Junior interest demanded: Satisfaction of any subordinate security interests, provided that:
• the juniormade an authenticated demand for proceeds
• before distribution of the proceeds is complete;
4. Surplus:The remainder of the proceeds to the debtor (“surplus”).

Question 60

Disposition of collateral: deficiencies

Answer 60

If there is a deficiency after the requirements and application of proceeds are made, the obligor generally is liable for the deficiency.

Question 61

Remedies for breach by secured party’s failure to comply with disposition requirements

Answer 61

If a secured party fails to comply with the disposition requirements, then the debtor or other secured party may seek damages for any loss caused by the secured party’s failure to notify.

Question 62

When a SP violates its obligations under Article 9, can SPclaim a deficiency?

presumption
rebuttal

Answer 62

Presumption: There is a rebuttable presumption that the secured party did not sell the goods in a commercially reasonable manner, so not entitled to collect a deficiency.

Rebut: The secured party can rebut this presumption in whole or in part by showing that the deficiency would have existed even had the secured party complied with Article 9.