Secured Transaction

Question 1

What transactions are covered?

Answer 1

1. Contractual Security Interests
2. Sales of accounts, chattel paper, payment intangibles and promissory notes
3. Commercial consignments
4. Agricultural liens
5. Leases (for other purposes than true leases)
6. Seller retention of title

Question 2

What transactions are not covered by Article 9?

Answer 2

1. Transactions governed by fed., state, or foreign law
2. Most real property transactions involving interests or liens on land (i.e., does not apply to mortgages on real property)
3. Assignment of tort claims (except with respect to proceeds and priority in proceeds from tort claims)
4. Assignment of claims for wages

Question 3

What are the 4 types of tangible goods

Answer 3

Tangible goods- four types:

1. Farming goods - items used/produced in farming (e.g., crops)
2. Consumer goods- items used for personal, household purposes
3. lnventory- goods kept for sale or lease
4. Equipment- catchall for tangible items that do not fit above (e.g., factory machinery)

Question 4

What are Farming goods?

Answer 4

Tangible goods

items used/produced in farming (e.g., crops)

Question 5

What are Consumer goods?

Answer 5

items used for personal, household purposes

Question 6

What are lnventory?

Answer 6

goods kept for sale or lease

Question 7

What is equipment?

Answer 7

catchall for tangible items that do not fit above (e.g., factory machinery)

Question 8

What are the 5 types of intangible goods?

Answer 8

1. Instruments- writings representing the right to be paid money (e.g., promissory notes, checks, etc.)
2. Documents- writings representing the right to receive goods (e.g., bills of lading, receipts, etc.)
3. Chattel paper- record evidencing an obligation and SI in goods or a lease of goods (e.g., a promissory note and security agreement)
4. Accounts- a right to payment not evidenced by an instrument or chattel (i.e., accounts receivable)
   
   • >>E.g., money owed to a dentist after seeing a patient
   • >> Does not include deposit accounts, investment property, or commercial tort claims
5. General intangibles- e.g., patent rights, software

Question 9

What is an instrument?

Answer 9

Intangible good

Instruments- writings representing the right to be paid money (e.g., promissory notes, checks, etc.)

Question 10

What are documents?

Answer 10

Intangible goods

Documents- writings representing the right to receive goods (e.g., bills of lading, receipts, etc.)

Question 11

What are Chattel Papel?

Answer 11

Intangible Goods

Chattel paper- record evidence both a monetary obligation and a security interest in or a lease of specific goods o (e.g., a promissory note and security agreement)

Chattel paper that is stored in an electronic medium also is called “electronic chattel paper.”

Perfection: by control (if electronic) or by possession (if tangible)

Question 12

What is an account?

Answer 12

a right to payment not evidenced by an instrument or chattel (i.e., accounts receivable)

E.g., money owed to a dentist after seeing a patient

Does not include deposit accounts, investment property, or commercial tort claims

Health care insurance receivables are included.

A contractual obligation arising from a loan of money is not an account—it is a general intangible

Question 13

What are general intangibles?

Answer 13

General intangibles- e.g., patent rights, software

Question 14

What is a deposit account?

Answer 14

An account maintained with a bank. Note: Article 9 only applies to nonconsumer deposit accounts and deposit accounts that are claimed as proceeds of other collateral.

Security perfection: By control (controlling bank, DACA)

Question 15

What is Investment property?

Answer 15

Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items.

Perfection: by control always, if it is in security account, or by taking possession and in the issuer registry

Question 16

What is consignment?

Answer 16

Consignments are transactions where an owner of goods/consignor (e.g., manufacturer or wholesaler) delivers goods to a merchant (consignee) for the purpose of sale

Question 17

What is the problem with consignment?

Answer 17

consignment can be considered a SI if inventory consignee is selling on consignment is difficult to distinguish from inventory consignee actually owns

• I.e., where a consignee/merchant owns inventory that could be mistaken by a creditor of consignee for similar inventory that is on consignment (i.e., owned by consignor), the consignment is considered a SI and consignor must comply with Art. 9 to give notice to consignee’s creditors

Question 18

When consignor should be worried about consignee creditors?

Answer 18

Consignor must comply with Art. 9 to protect her interest in consigned goods against consignee’s creditors if:

1. Consigned goods are worth $1,000 or more;
2. Consignor did not use goods for personal, family, or household purposes (e.g., consigned used clothes not covered by Art. 9); and
3. Consignee/merchant:
4. Deals in goods of that kind under a name other than the name of the person making delivery;
5. Is not an auctioneer; and
6. Is not generally known by creditors to be substantially engaged in selling goods of others

Question 19

If consignor wants to stop consignee creditors from taking his stuff, what should he do?

Answer 19

Use art 9 to protect his security interests on the goods. As any other creditor would have done

Question 20

What are the requirements for a SI to attach?

Answer 20

1. Agreement to the parties to create a valid security interest:
   
   1. ​By creditor taking posession or control of the goods of the goods
   2. By debtor authenticating a security agreement describing the collateral
2. Value - secured party (i.e., creditor) must give value to create a SI
3. Rights in collateral - debtor must have rights in property he offers as collateral

Question 21

What is required in a security agreement?

Answer 21

Must be in writing, reasonably describe collateral (not supergeneric), and signed by the debtor

Question 22

When the secured party gives value to create a SI?

Answer 22

Any consideration is enough

E.g., creditor loans debtor money or delivers equipment in exchange for SI

Question 23

What is an after-acquired property clause in a SA?

Answer 23

Security agreements may include provisions that give the secured party/creditor a SI in property acquired by debtor using funds loaned pursuant to the security agreement

• E.g., L loans $5,000 to D, secured by attachment of D’s gold watch as collateral; security agreement includes an after-acquired property clause; L will have a security interest in the gold watch, as well as property D acquires using the $5,000

Is not required when: proceeds from the disposition of collateral and to accounts and new items of inventory collateral

Question 24

What is a future advance clause in a security agreement?

Answer 24

Security agreements may contemplate future loans/advances from creditor to debtor based on debtor’s present collateral or collateral to be acquired in the future

• In such cases, a new security agreement is not required​
  
  • E.g., L loans $2000 to D secured by inventory in D’s business; security agreement provides for future advances; D may get additional loans in the future from L

Question 25

What is a specification clause in a SA?

Answer 25

Parties may include clauses specifying terms and/or creating provisions for potential events

• E.g., parties may define what constitutes a default, may provide for acceleration of payments upon the happening of a certain event (e.g., one missed payment), etc.

Question 26

What are the methods of perfection?

Answer 26

1. Filing
2. Taking possession
3. Automatic perfection (PMSI and others)

Question 27

How do you perfect with a Financing Statement?

Answer 27

Usually filed with state office

>> Requirements- financing statement must:

1. Identify debtor- name must exactly match (if debtor is business org., name must match Art. of Incorporation)
2. Identify secured party/creditor
3. Contain an adequate description of collateral
   
   • Authorization for filing must be obtained from debtor (usually security agreement itself satisfies this requirement)

Question 28

How do you perfect by taking possession?

Answer 28

Secured party may perfect a SI in many types of collateral simply by taking possession

• E.g., goods (pawnshop), negotiable documents, instruments
  
  • Certain intangible collateral cannot be perfected by possession
• E.g., accounts, certificate of title goods, electronic chattel paper, general intangibles

Question 29

When an account receivable is automatically perfected?

Answer 29

SI perfects automatically when:

1. Accounts or payment intangibles are assigned; and
2. Assignment does not transfer a significant portion of the assignor’s outstanding accounts or Intangibles

Question 30

How do you perfect in Motorvehicles?

Answer 30

Notation on the vehicle’s certificate of title.

This apply even if PMSI

Question 31

How do you perfect a PMSI on consumer goods?

Answer 31

PMSI arises where a creditor sells goods to debtor and/or advances funds to debtor to buy goods, reserving a SI in the goods themselves

• E.g., A sells Ba TV on credit; once the SI is created and attached (i.e., when B receives the goods), A has a PMSI in goods that is automatically perfected
• Consumer goods only - automatic perfection only occurs for PMSls in consumer goods; a PMSI in inventory or equipment must be filed to be perfected
• Limitation- motor vehicles and fixtures:
  
  • Motor vehicles- notation on the vehicle title is required for perfection
  • Fixture filings- consumer goods that are to become fixtures require a fixture filing to obtain priority over an interest in the real property to which fixture is affixed

Question 32

What other things can be perfected automatically (besides PMSI in consumer goods)?

Answer 32

Small assignment of accounts - SI perfects automatically when:

1. Accounts or payment intangibles are assigned; and
2. Assignment does not transfer a significant portion of the assignor’s outstanding accounts or Intangibles

Sale of payment intangibles or promissory notes – automatically perfected

Question 33

What is the 20 days rule (proceeds)?

Answer 33

Quick rule: Is the term that proceeds from the sale of collateral remain perfected. Then it needs to be perfected again (unless filing already included the proceeds, the proceeds are identifiable cash proceeds, or a new filing is made)

Rule: Sis in proceeds from original collateral is perfected automatically for 20 days from the debtor’s receipt of the proceeds but may become unperfected on the 21st day

• Arises where debtor sells property used as collateral; Art. 9 gives creditor an automatic SI in proceeds from the sale of collateral

Identifiable proceeds – SI in proceeds from collateral is automatically perfected for 20 days from debtor’s receipt of goods

• E.g., TV store takes a loan and puts up TV inventory as collateral; store can continue selling TVs but creditor has an automatically perfected SI in store’s TV proceeds for 20 days

Continuing perfection beyond 20 days - after 20 days, SI continues to be perfected if:

1. SI in original collateral was perfected by filing,
2. Proceeds are identifiable cash, or
3. SI in proceeds is perfected by creditor within the 20-day period

Illustration: S loans money to D and takes a security interest in D’s inventory. S perfects its security interest by filing a financing statement with the secretary of state. D trades some of its inventory to X for some equipment. S remains perfected as to the equipment.

Illustration: S loans money to D and takes a security interest in D’s inventory. S perfects its security interest by filing a financing statement with the secretary of state. D sells some inventory for cash, and uses the cash to purchase some equipment. Unless the financing statement’s description was already broad enough to encompass the equipment, S would need to amend its financing statement (by amending the description to cover the equipment) within 20 days to be perfected as to the equipment.

Question 34

What is the Dual status rule?

Answer 34

A PMSI on nonconsumer goods, is still a PMSI when:

1. other collateral: the security interest is also secured by property not purchased with the loan money or credit;
2. other advances: the collateral also secures advances that were not made for the purchase of collateral;
3. Changes: PMSI has been refinanced, consolidated, etc.

Question 35

What does a financing statement require?

Answer 35

1. Debtor name and his mailing address
2. Secured party name and mailing address
3. Indication (not a description) of the collateral covered
   
   • If the collateral is related to land (timber, mineral, and fixtures) it must also include the description of the real property, and name of the landowner (if no the debtor) and an indication of the real property records

Question 36

What happens if there is an error with the debtor’s name?

Answer 36

Only an Issue when seriously misleading (not discoverable by someone searching)

Question 37

What happens when you change name?

Answer 37

Financing statement applies to prior name AND within four months of change

The secured party must refile using the debtor’s correct name

Question 38

After acquired property, do you need to mention it on the financing statement?

Answer 38

No, if the description is broad enough to include it, and if the security agreement includes the after-acquired property clause

Question 39

What law applies to UCC?

Answer 39

law of the state where debtor is located generally governs perfection of a SI

• Individual debtors - location is place of residence
• Registered organizational debtors - location is state under whose laws it is organized (e.g., where Articles of Incorporation filed)
• Unregistered organizational debtors (e.g. partnership) - location is place of business or chief executive office if more than one place

Common exceptions:

• Certificate of title- where goods are covered by a certificate of title (e.g., automobile), the state issuing the most recent certificate of title governs perfection
• Agricultural liens- governed by law of state in which farm product is located

Question 40

To continue the effectiveness of a financing statement, who must authorize a continuation statement?

Answer 40

The secured party only.

Only the secured party must authorize the continuation statement; the debtor need not do so. Continuation statements may be filed during the last six months of the effective period of a prior filing, and will continue the effectiveness of the filing for five more years.

Question 41

How long a UCC filing last?

Answer 41

5 years, extendable for another 5 years (with same authorization)

The refiling must be done 6 months prior to termination of the original term

Question 42

What are the other applications of the 20 days rule?

Answer 42

There is only a 20 days perfection when:

1. New value is given under a SA where collateral is a negotiable document, instrument or certificated security
2. A secured party makes available goods in possession of a bailee to the debtor for disposition

Question 43

Priority: Who wins between unperfected vs unperfected?

Answer 43

The first one to attach

Question 44

Priority: Who wins between unperfected vs perfected?

Answer 44

Perfected always

Question 45

Priority: Who wins between attached vs unattached/unsecured

Answer 45

• Attached SI prevails
  
  • Note- beware of scenarios where someone signed a security agreement but has not given value or obtained proper title

Question 46

Priority: Who wins between perfected vs perfected?

Answer 46

The date of perfection controls. The first one to perfect wins.

Exceptions

1. Control beats other methods like filing or automatic perfection
2. PMSI supermajority wins

Good faith is not important Knowledge of a prior unperfected SI will not prevent a prospective secured party from filing first to obtain priority

Question 47

What are the 3 situations applicable to PMSI?

Answer 47

1. PMSI in Inventory and livestock: Requires a prior filing and notice before the possession of the goods by the debtor Elvis buys CDs to sale
2. PMSI in noninventory: Requires filing within 20 days of possession Elvis buys a new cash register
3. PMSI in consumer goods: Is automatic, therefore is already perfected Elvis got a new guitar for himself

Question 48

What happens when you move the collateral or the debtor from one state to another?

Answer 48

The SI will remain temporarily perfected for four months, then is necessary to refile to stop the SI from extinguishing

Question 49

Who wins between multiples PMSIs?

Answer 49

where there are multiple PMSls in the same collateral, priority goes to:

1. Secured party who has PMSI as the seller of the collateral (as opposed to lender), or
2. Otherwise, first secured party to file or perfect

• E.g., A takes $300 loan from bank to buy $500 TV, giving bank SI in TV, then A signs $200 credit agreement with TV store to complete purchase; store, as seller of collateral, has priority over bank as lender

Question 50

What is the rule of priority regarding the proceeds?

Answer 50

Perfected Sis in proceeds generally have the same date of priority as the SI in the original collateral that generated the proceeds

• E.g., on Day 1, A lends $5,000 to D and A perfects a SI in D’s inventory; on Day 5, Blends D $5,000 and takes a SI in D’s accounts; on Day 10, D sells an item of inventory to a customer on credit (creating an account)
• A has priority in the account as a proceed of inventory b/c A first perfected her SI in the inventory that generated the proceeds

Question 51

What happens if the proceeds come from a multiple pledge collateral? (Equipment with two liens?)

Answer 51

where multiple Sis exist in proceeds, the type of collateral that generated the proceeds can determine priority

• Filing collateral- secured party would normally achieve priority by filing financing statement (e.g., goods, accounts, general intangibles)
• Non-filing collateral- secured party would normally achieve priority by possession or control, not filing (e.g., cash, chattel paper, negotiable documents, instruments)

Question 52

Who wins between a real property mortgagee and a lienholder on a fixture?

Answer 52

• • first to file or record prevails

Where a SI in fixtures competes again an interest in the real property containing the attached fixture, the first party to file a fixture filing or record its real property interest prevails

Fixture filing= filing a financial statement where the mortgage on the real property would be recorded

Question 53

What is a Fixture filing?

Answer 53

A financial statement on a fixture filed where the mortgage on the real property would be recorded

Question 54

Can you do a PMSI in a fixture?

Does it have a priority?

Answer 54

Yes, with filing.

Also when you file within 20 days of affixation, you will have priority

Question 55

What is an accession?

Answer 55

Collateral that does not lose its identity when physically united with other goods

• E.g., a hard drive serving as collateral does not lose its identity when installed in a laptop
• Sis can be created in the collateral and continue when collateral becomes an accession

Question 56

Who wins between a lien on crops and a lien on real estate?

Answer 56

Crops

Perfected SI in crops has priority over an interest in the land on which crops are planted, regardless of time of filing or perfection

Question 57

Who will win between a buyer and an unsecured creditor?

Answer 57

Buyer will prevail if BONA FIDE, before collateral is perfected, he:

1. Gives value and receives delivery; and
2. Has no knowledge of the SI

Question 58

Who will win between buyer vs perfected secured party?

Answer 58

Generally, perfected SI wins

Two Exceptions:

1. BIOC: Buyer is bona fide, and is a buyer in ordinary course of business (he normally buys the goods that seller sales)
2. PMSI: Buyer sales goods subject to PMSI to a second buyer that: 1) bona fide, buys 2) before financing statement is filed

Question 59

Who wins between a secured party and a judicial lien creditor (JLC)?

Answer 59

Almost always secured party wins

JLC prevails only if they become JLCs before a secured party files or perfects

Exception: When the secured party makes advances, he will prevail ONLY if it is made 45 days after lien rose, and he doesn’t know about the judicial lien

Question 60

Upon default: Can the creditor obtain the goods secured by his SI?

Answer 60

Yes, without judicial process, upon a default (defined in SA)

A secured party may take possession of collateral without judicial process or collect on non­-goods via authenticated notification (collection rights)

Question 61

How does a creditor reclaim possession?

Answer 61

Self-help mechanisms are allowed, however, reach of peace is NOT allowed

Question 62

When there is a breach of peace?

Answer 62

Breach of the peace = repossession made over debtor’s protest

>> Violence, threats of violence, breaking and entering, etc. will likely constitute a breach of the peace

>> Simple trespass in order to repossess property is permissible

Question 63

How do you enforce your collection rights?

Answer 63

By notifying the person owing the debtor (account debtor)

• Secured party must send authenticated notification to account debtor stating that amount due has been assigned and payment must be made to secured party
  
  • Upon notification, account debtor can only discharge his obligation by payment to secured party
• E.g., A loans B $10,000, for which A receives a promissory note; A takes out a loan from C for $5,000 using B’s promissory note as collateral; A defaults on C’s loan; C may notify B of A’s default and require that B pay C on the promissory note

Question 64

Once you obtain the goods, what yo do you do?

Answer 64

Upon default, a secured party can dispose of collateral (i.e., sell, lease, etc.) as long as it is done in a commercially reasonable manner

Question 65

What is the requirements of the disposition of the collateral?

Answer 65

1. Must be done in a commercially reasonable manner
2. Notice of sale must be given to debtor in authenticated writing

Question 66

What happens if the sale is too low or too high?

Answer 66

• Surplus - sale generates more than remaining obligation; secured party must pay debtor any surplus
• Deficiency - sale generates less than remaining obligation; debtor is still liable for amount remaining
• Exception - neither party is liable for surplus or deficiency if underlying transaction involves: accounts, chattel paper, payment intangibles, or promissory notes

Question 67

What is the Right of redemption>

Answer 67

Until secured party has sold collateral or discharged debt by retaining collateral , debtor or any other secured party may redeem collateral by paying all remaining obligations plus reasonable expenses incurred for repossession

Question 68

What is strict foreclosure? Requirements?

Answer 68

Is when the creditor keeps the collateral instead of selling it to satisfy the debt

1. Debtor must consent
   
   • (Either by consenting to it in an authenticated record)
   • (or by failing to object)
2. The secured party must send notice of intent to keep collateral
   
   • ​​Send to the debtor and other interested parties (other creditors)
3. No notified party objects within 20 days

Question 69

When there is no strict foreclosure?

Answer 69

• Consumer transactions - secured party may not keep collateral in partial satisfaction of debt, then seek deficiency judgment for remaining unpaid balance
• Consumer goods- where debtor has paid at least 60% of a PMSI or loan, secured party must sell col lateral within 90 days after repossession unless debtor waives rights requiring sale

Question 70

What happens if a creditor violates article 9?

Answer 70

Remedies available:

• Actual damages - debtor can recover damages reasonably calculated to put her in the position she would be in had no violation occurred
• Damages for consumer goods – if collateral involved is consumer goods, debtor is entitled to at least 10%of the cash price of the goods plus interest charges to be paid over the life of the loan
• Loss of deficiency judgment - secured party may lose right to deficiency judgmen
• The value of the collateral is presumed to equal the amount of the debt. (non consumer transactions)

Question 71

What are the differences in the loss of the deficiency judgment depending on the transaction?

Answer 71

• Non-consumer transactions- rebuttable presumption rule:
  
  • Value of collateral seized is presumed equal to debt owed unless the secured party proves otherwise
• Consumer transactions- courts take one of three approaches
  
  1. Follow rebuttable presumption rule,
  2. Deny secured party deficiency judgment, or
  3. Allow secured party to recover deficiency minus actual damages debtor can prove

Question 72

What law do you apply to secured transactions?

Answer 72

Law of the state where debtor is located generally governs perfection of a SI

• Individual debtors - location is place of residence
• Registered organizational debtors - location is state under whose laws it is organized (e.g., where Articles of Incorporation filed)
• Unregistered organizational debtors (e.g. partnership) - location is place of business or chief executive office if more than one place

Question 73

What are the exceptions to art 9 rules?

Answer 73

Common exceptions:

• Certificate of title- where goods are covered by a certificate of title (e.g., automobile), the state issuing the most recent certificate of title governs perfection
• Agricultural liens- governed by law of state in which farm product is located
• Possessory Sis - governed by law of state in which collateral is located

Question 74

More issues with location

Answer 74

Relocation of debtor - SI remains perfected for four months or until perfection in first state lapses, whichever occurs first

Possessory SI – if collateral in one state perfected by a possessory SI in that state is moved to a new state, SI remains perfected as long as it would be perfected by possession under laws of the new state

Cars/vehicles & certificate of title - if moved from one state and the new state issues a title certificate, the original perfected SI lasts as long as it would have if new title had not been issued

New debtor in different state - arises where a new debtor becomes bound by another’s security agreement in a different state

• If collateral is transferred to a new debtor located in a different state, SI remains perfected until one year after sale of collateral or until perfection in original state lapses, whichever occurs first

Question 75

May a security agreement contain a clause giving the secured party rights in property the debtor will acquire in the future?

Answer 75

Yes, for all types of collateral other than commercial tort claims.

A valid security agreement may create a security interest in property to be acquired in the future for all collateral other than commercial tort claims. The security interest attaches to the property as soon as the debtor acquires an interest in it. Note, however, that such after acquired property clauses are effective for consumer goods only if the debtor acquires rights in the goods within 10 days after the creditor gives value.

Question 76

Remember this examples of breach of piece

Answer 76

Creditor enters Debtor’s unlocked garage in the middle of the day, finds Debtor’s keys in her car’s ignition, opens the garage door, and drives the car away.

Creditor finds Debtor’s car parked on the street in front of Debtor’s house. While hooking it up to a tow truck, Creditor hears Debtor yell “Don’t take my car!” from the house. Creditor tows the car away before Debtor is able to run from the house to the street.

Creditor, dressed as a police officer, goes to Debtor’s house and informs her that her car is being repossessed. Debtor hands over the keys.

A repossession made over any protest by the debtor constitutes a breach of the peace, even though no violence or significant disturbance occurs. Thus, taking a car when a debtor yells “don’t take my car” is a breach of the peace. Constructive force or actions that contain implied threats are not peaceful. Carrying a weapon or dressing as a law enforcement officer are implied threats that constitute breaches of the peace. Breaking and entering is also generally a breach of the peace. So, entering an unlocked garage is a breach of the peace, but merely trespassing on a debtor’s driveway is not.

Question 77

What are the remedies to a secured party when a debtor defaults?

Answer 77

1. Selling the collateral to recover the amount owed at a private sale.
2. Retaining the collateral to fully satisfy the debt.
3. Levying on the collateral after bringing a judicial action for the amounts due.

Question 78

What is the garage sale rule?

Answer 78

A purchase money security interest (“PMSI”) in consumer goods is perfected automatically without filing. If the buyer of consumer goods in turn resells them to another consumer (i.e., a buyer who buys for his own personal, household, or family use), the second buyer takes the consumer goods free of the security interest if he buys without knowledge of it, for value, and before a financing statement covering the goods has been filed.