SECURED TRANSACTION

Question 1

LEASE OR TRANSACTION?

Answer 1

If a transaction is characterized as a lease but it is intended to give effect as a security interest, Article 9 governs.

Transaction is a security interest and not a lease if (1) rental obligation is not terminable by lessee and (2) there is an option to purchase at no or nominal value at the end of the lease.

Like the installment sales contracts.

Question 2

DEFAULT OF DEBT

Answer 2

Upon default by the debtor, secured party may repossess and sell the collateral which has attached security interest.

Security interest is unenforceable unless it attaches.

Question 3

ATTACHMENT

Answer 3

Security interest attaches when creditor and debtor have agreement that security interest will attach, creditor gives value and debtor has rights in the collateral

Question 4

FORECLOSURE / SALE OF COLLATERAL

Answer 4

At sale, sales proceeds first covers the expenses to repossess and sell, then pays the debt foreclosed. The remaining surplus goes to the junior creditors.

If secured party sells the collateral after default of the debtor, security interest and all junior security interest in collateral are discharged absent bad faith of the purchaser.