Secured Transaction

Question 1

General rule for Attachment

Answer 1

Attachment is essentially how a security interest is created in the collateral.

Once a security interest attaches, it becomes enforceable.

A valid attachment requires that there is:

 1. A valid security agreement,
 2. The debtor has rights in the collateral, and
 3. The secured party gives value to the debtor.

Question 2

A valid security agreement requires:

Answer 2

A valid security agreement requires:

1. Authentication,
2. Intent to create the security agreement, and
3. Description of the collateral.

Mnemonic: AID

Question 3

Rule for attachment of After-Acquired property

Answer 3

Generally, a security agreement can cover after-acquired property and does not need to specifically reference it to be effective. After-acquired property clauses are typically enforceable.

Question 4

After-acquired property in consumer goods

Answer 4

After-acquired property does not apply to consumer goods, unless the debtor acquired them within 10 days after the secured party gives value.

Question 5

What are Goods?

Answer 5

Goods are movable personal property.

There are 4 types of goods:

1. Consumer goods,
2. Inventory,
3. Farm products, and
4. Equipment

Mnemonic: F. ICE

Question 6

Define Consumer Goods

Answer 6

Consumer goods are those goods bought and used primarily for personal, family or household use.

Question 7

Define Inventory

Answer 7

Inventory are goods that are held for sale or lease, including raw materials and work in progress.

Question 8

Define Farm Products

Answer 8

Farm products are crops, livestock, or supplies produced in a farming operation and remain in their unmanufactured state.

Question 9

Define Equipment

Answer 9

Equipment are goods that are not consumer goods, inventory, or farm products.

Question 10

General rule for Secured Transactions?

Answer 10

Article 9 of the UCC governs any transaction, regardless of form, creating a security interest in personal property or fixtures.

Question 11

Rule for if Secured Party (the lender) retains title to property

Answer 11

Regardless of whether title remains in the name of the secured party (the lender), once the collateral is shipped/delivered, the seller is limited to a security interest.

Question 12

Rule for if a “Lease” is involved

Answer 12

A transaction labeled as a “lease” may be deemed a security interest. Courts look to the economic realities of in making that determination.

A “lease” will be deemed a security interest if there is a commitment to make payments for a term and either the original term is for equal or greater value than the remaining economic life of the goods or lessee must renew the lease for the remaining economic life of the goods. (there are others)

Question 13

General rule for Perfection

Answer 13

Under Article 9, once the security interest attaches, it is enforceable. Perfection of the interest only enhances the secured party’s rights in the collateral.

Perfection can occur by filing a financing statement, can be automatic, or by obtaining possession or control.

Question 14

Rule for when a Financing Statement is used to perfect

Answer 14

The filing of a financing statement is the primary method of perfection.

The filing must contain the:

1. Debtor’s name,
2. Secured party’s name,
3. An adequate description of the collateral, and
4. The filing fee.

The filing must be filed by an authorized party.

Authorization is presumed by the debtor’s signing a security agreement.

Question 15

Rule for errors in the names or description on financing statement

Answer 15

Minor errors will not invalidate the financing statement, unless the error makes it seriously misleading.

A failure to sufficiently provide the name of the debtor is deemed seriously misleading, unless the statement would be discoverable in a search of the records under the debtor’s correct name.

Question 16

Rule for perfection of PMSI

Answer 16

When a creditor extends value to a debtor for the purpose of enabling the debtor to acquire rights in the collateral, a purchase money security interest (PMSI) arises.

PMSI’s in consumer goods automatically perfect.

Question 17

What types of security interest automatically perfect?

Answer 17

1. PMSI and
2. Assignment of accounts and consumer goods

automatically perfect.

Question 18

Rule for automatic perfection in Assignment of Accounts

Answer 18

Under Article 9, a security agreement for an assignment of accounts automatically perfects.

Question 19

Rule for security interest in the sale of collateral

Answer 19

A security is effective against purchasers of the collateral, unless the secured party authorizes the disposition free of the security interest.

Question 20

Rule for security interest in the proceeds of collateral

Answer 20

A perfected security interest will attach to any identifiable proceeds from the disposition of collateral, but will become unperfected on the 21st day unless certain conditions are met.

Question 21

What is the Shelter Rule?

Answer 21

Under the Shelter Rule, if a buyer acquires property free of a security interest, then any subsequent purchaser by the buyer is also free of the security interest.

Question 22

Rule for Buyer in the Ordinary Course of Business

Answer 22

Buyers in the ordinary course of business take free of a security interest created by the seller. A BIOCB is a person that buys goods in good faith without knowledge that the sale violates another’s rights and from a person in the business of selling goods of that kind.

Question 23

Rule for Consumer-To-Consumer

Answer 23

Under the consumer to consumer rule, buyers of consumer goods from another consumer take free of a security interest if value is given for consumer goods before the filing of a security statement and without knowledge of the of the security interest.

Question 24

Rule for Perfected vs. Unperfected Interests

Answer 24

A perfected security interest has priority over an unperfected security interests, even if the unperfected security interest is a PMSI for nonconsumer goods.

Question 25

Rule for priority

Answer 25

Under Article 9 of the UCC, a creditor achieves priority by perfecting his security interest before another creditor. Perfection involves giving value and putting others on notice of the security interest by filing (recording).

Question 26

Rule for Perfected v. Perfected

Answer 26

When there are competing perfected security interests, the first to perfect by filing has priority.

Question 27

Rule for Unperfected v. Unperfected

Answer 27

When there are competing unperfected security interests, the first to attach will prevail.

Question 28

Rule for Possessory Lien

Answer 28

A possessory lien is created by a statute or rule of law. A possessory lien is an interest (other than a security interest) that secures payment or performance of an obligation for services or materials furnished by a person in the ordinary course of the person’s business and is only effective upon the person’s possession. (a mechanic’s lien)

A possessory lien on goods has priority over a security interest unless the statute expressly provides otherwise.

Question 29

Rule on Judgment Lien Creditors

Answer 29

Judgment lien creditors have priority over conflicting security interests if the person became a lien creditor BEFORE the conflicting security interest was perfected. Priority extends to future advances secured more than 45 days after the person became a judgment lien creditor.

Question 30

Define and Rule for Accessions

Answer 30

Accessions are goods that are physically united with other goods, but continue to retain their separate identity.

Generally, the security interest in the separate goods continues in the accession collateral.

Question 31

Rule for Secured Party’s Right to Take Possession of Collateral

Answer 31

Upon default, the secured party may attempt to take possession of the collateral without judicial process, so long as they do not commit a breach of the peace. The secured party may sell, lease or otherwise dispose of the collateral in its present condition or in any commercially reasonable manner.

Question 32

Rule for Breach of the Peace

Answer 32

Although not defined under Article 9, some jurisdictions suggest ANY opposition to the seizure, however slight, normally results in a breach of the peace.

Question 33

Rule for reasonable notification of sale of collateral by secured party

Answer 33

Article 9 requires the secured party to send reasonable notification of the time and place of the public sale to the debtor and any secondary creditor in a fashion to provide sufficient time to take appropriate steps to protect their interest.

Question 34

Rule for default, if collateral is an Account

Answer 34

Upon default, a secured party has the right to collect directly from the account holder, after sending an authenticated notification to the account debtor notifying them of the assignment and that payment is to be made directly to the assignee. Upon receipt of proper notification, the account debtor may discharge its payment obligation only by payment to the assignee.

Question 35

Rule for disposition at foreclosure sale

Answer 35

At foreclosure sale, all the debtor’s rights in the collateral are transferred to the transferee for value and subordinate security interests are discharged.

A transferee acting in good faith takes free of the rights of the debtor, even if the secured party fails to comply with the rules governing disposition.

Question 36

Rule for priority involving fixtures

Answer 36

An ownership interest in real property has priority over conflicting security interest in fixtures.

However, a perfected PMSI in a fixture has priority over a conflicting ownership interest if the debtor has an interest of record or is in possession of the real property, the ownership interest arose BEFORE the goods became fixtures, and the PMSI was perfected before or within 20 days of the goods becoming fixtures.

Question 37

Rule for default if collateral is equipment

Answer 37

Following a debtor’s default, if the collateral is equipment, a secured party may leave the equipment in place and render it unusable.

Question 38

Rule for secured party’s failure to comply with applicable rules concerning secured transactions

Answer 38

A secured party is liable for the debtor’s actual damages for any loss caused by their failure to comply with applicable rules. These damages are generally equal to expectation damages. In addition, a debtor may recover $500 in statutory damages for a secured party’s failure to comply with Article 9 of the UCC.

Question 39

Rule for secured party’s failure to comply with Article 9 in consumer goods

Answer 39

A civil penalty is applied if the collateral is consumer goods. The debtor may recover damages for loss plus 10% of the principal amount of the obligation.