Secured Transaction Essay Rules

Question 1

Secured Transaction and parties

Answer 1

A secured transaction under the Uniform Commercial code Article 9 involves a loan that is secured by collateral. One party, the debtor, gives the creditor a security interest in the debtor’s specific property to assure that the debtor will perform.

The secured party is the one with a security interest under the security agreement. The obligor is who must pay under the obligation of the security agreement. The debtor is the party with an interest, other than the security lien, in the collateral.

Question 2

Security Interest

Answer 2

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

Question 3

Types of tangible collateral

Answer 3

Property subject to the security interest is collateral.

Tangible Collateral: Goods are anything moveable when the security interest attaches. 4 Types

1) Consumer Goods are goods acquired primarily for personal, family, or household purposes.

2) Farm products are goods that are crops or livestock and include supplies that are used or produced in farming. Must involve a farming operation

3) Inventory includes goods, other than farm products, that are held for sale or lease; are furnished under a service contract; or consist of raw materials, works in process, or materials used or consumed in a business. Usually refers to goods consumed in a business.

4) Equipment is a catch all term and consists of goods that aren’t 1-3.

Question 4

Intangible collateral

Answer 4

The main categories tested are:

Accounts: The right to be paid for goods sold, property licensed, or services rendered. Also includes the right to payment for an insurance policy, credit card charges, or winning lottery ticket.

Deposit accounts: Includes savings, passbook, time, or demand account that is maintained within a bank.

Question 5

Leases subject to article 9

Answer 5

A lease can be subject to article 9 when the transaction, although in the form of a lease, is in economic reality a secured transaction.

This occurs when lease payments must be made for the full term of the lease and are not subject to termination and the lessee has an option to become the owner of the goods for nominal consideration at the end of the lease.

Question 6

Attachment

Answer 6

A security interest is in enforceable when it has “attached.” This occurs when

1) Value has been given by the secured party
2) The debtor has rights in the collateral; and
3) The debtor has authenticated a security agreement that describes the collateral, OR the secured party has possession or control of the collateral.

Value given: includes consideration, extending credit (future advances), a buyer accepting delivery under a preexisting contract and converting a contingent obligation into a fixed one

Question 7

After acquired collateral

Answer 7

A security interest may apply to after acquired collateral but not in consumer goods unless the debtor acquires them within 10 days after the SP gives value.

Can’t apply in commercial tort claims

Question 8

Proceeds in collateral

Answer 8

The SI attaches automatically to identifiable proceeds (whatever is acquired upon disposition of the collateral)

Question 9

Accessions/Commingled goods

Answer 9

Accessions are goods that are physically united with other goods in a such a manner that the identify of the original goods is not lost. A SI in a good that becomes an accession is not lost.

Commingled goods are physically united with another good so that their identity is lost.

There is no SI in specific goods once they are commingled but the SI can attach to the product or mass that results from commingling. Ex: An SI in inventory of someone who makes brass by combining copper and zinc.

An existing security interest in collateral that subsequently becomes commingled goods is transferred to the resulting product or mass.

Question 10

Security agreement

Answer 10

A security agreement must be in writing, be authenticated by the debtor (signed), and describe the collateral. OR the secured party must have control or possession of the collateral pursuant to a security agreement (can be oral)

Question 11

Purchase Money Security Agreement

Answer 11

A PMSI gives a lender a SI in goods that have been purchased with funds borrowed from them or purchased on credit from them. May only exist with goods and software sold along with a good.

Question 12

Perfection of a security interest

Answer 12

Perfection is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by 3rd parties.

Perfection occurs upon attachment and compliance with one of the methods of perfection.

Question 13

Methods of perfection

Answer 13

1) Filing a financing statement
2) Automatic perfection
3) Control or possession over the collateral
4) Statute if one provides another method

Question 14

Filing a financing statement

Answer 14

Perfection method.

May be used in any collateral except a deposit account, money, or letter-of-credit rights that are not a supporting obligation.

Financing statement is effective on the date of filing and for 5 years. It may be continued for another 5 years if a continuation statement is filed within six months prior to the expiration of the statement.

Question 15

Error in debtor’s name on financing statement

Answer 15

If the incorrect name is used and it makes a search seriously misleading then the financing statement is not effective to perfect the security interest. If the incorrect name search reveals the security interest then the financing statement is not misleading.

Question 16

Control over collateral to perfect

Answer 16

A SP may perfect a security interest in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents by taking control of the collateral. The SI remains perfected as long as the SP retains control.

A deposit account can only be perfected by control. Control can occur if the SP is the bank where the account is maintained; the SP, debtor, and obligor agree in writing to follow the instructions of the secured party; or the SP becomes the banks customer with respect to the deposit account.

Question 17

Automatic perfection

Answer 17

PMSIs in consumer goods are automatically perfected upon attachment.

If a SP is perfected then it is also perfected in the cash proceeds of the collateral.

3) Same office

A perfected security interest in proceeds may also continue indefinitely when:

i) A filed financing statement covers the original collateral;

ii) The proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and

iii) The proceeds are not acquired with cash proceeds.

Question 18

Priority of general creditor

Answer 18

A general creditor is one who has a claim, including a judgment, but who has no lien or SI. A secured party will always prevail over a general creditor.

Question 19

Perfection timing

Answer 19

Perfection occurs when the security interest attaches and the SP complies with a method of perfection. If they comply with one method and then later perfect by another method without lapse the date of perfection is when they originally became perfected.

Question 20

Priority of judicial lien creditor

Answer 20

A judicial lien creditor is one who has a claim to the property through the judicial process and obtains a lien. A perfected security interest has priority over a judicial lien creditor.

Result: a perfected SI has priority over a judicial lien; a judicial lien has priority over an unperfected SI unless the only reason the SI was unperfected was that the secured
party had not yet given value

PMSI exception: If a PMSI is perfected within 20 days after the debtor receives possession of the collateral, the PMSI has priority of a creditor’s rights that arose between the time of attachment of the SI and filing.

Advances: a SI securing an advance is subordinate to a lien creditor’s rights when the advance is made more than 45 days after a person becomes a lien creditor, unless the advance is made without knowledge of the lien.

Question 21

Statutory Lien

Answer 21

Created by operation of law

Result: a possessory lien has priority over any SI if the lien secures payment for
goods or services furnished in the ordinary course of business (e.g., mechanic’s lien)
unless a statute provides different priority rule

Question 22

Transferees Priority

Answer 22

Transferee v. Secured party with an SI: The SI continues in the collateral unless the secured party authorizes the transfer free of the SI

Buyer vs. Unperfected SI: The buyer takes free of the SI if he gives value; receives delivery; and didn’t have knowledge of the SI.

Buyer vs Perfected SI: The buyer takes the collateral subject to the SI.

Question 23

BICOB Exception

Answer 23

Buyer in the ordinary course of business

A buyer who 1) buys goods (not farm products) for new value (not to satisfy a debt); 2) in the ordinary course; 3) from a seller in the business of selling those types of goods; 4) in good faith and; 5) without knowledge that the sale violates another’s rights in the goods take FREE of the SI given by the buyer’s seller.

Doesn’t apply if buyer buys from a pawn broker.

Question 24

Consumer buyer priority exception

Answer 24

A consumer buyer of consumer goods takes free of a SI if he buys from a consumer seller for his own personal, family, or household use, without knowledge of the security interest.

Doesn’t apply if the SP has filed a financing statement.

Consumer seller
For this exception to apply, not only must the buyer primarily use the purchased goods for personal, family, or household purposes but also the seller must have primarily used the purchased goods for personal, family, or household purposes.

Question 25

Consumer buyer vs PMSI in consumer goods

Answer 25

A PMSI in consumer goods is automatically perfected upon attachment. If the lender fails to file a financing statement a consumer buyer who doesn’t know of the of the SI will take free of it. If a financing statement is filed then the lender has priority.

Question 26

Perfected Security Interest vs. Perfected Security Interest

Perfected vs. Unperfected

Unperfected vs. Unperfected

Answer 26

When there are two or more perfected secured parties the party to perfect or file a financing statement first has priority.

A perfected security interest has priority over an unperfected security interest

Between two unperfected security interests the first to attach has priority.

Question 27

PMSI Priority rules

Answer 27

A PMSI generally has preference over a non-PMSI security interest.

A PMSI in goods (other than inventory or livestock) prevails over all other security interests, even ones perfected earlier, so long as the PMSI is perfected before or within 20 days after the debtor receives perfection of the collateral.

A PMSI in inventory or livestock prevails over other security interests, even if they were perfected first, if 1) the PMSI is perfected by the time the debtor receives possession and 2) the PMSP sends an authenticated notification of the PMSI to the holder of any conflicting SI before the debtor receives possession of the collateral. (Notification is only required when the prior SI was perfected by filing)

Question 28

PMSI vs PMSI

Answer 28

If there are two or more competing PMSIs, then the first-to-file-or-perfect rule generally governs priority.

If there are two competing PMSIs and one PMSI secures the price of the collateral for the seller of the collateral while the other PMSI secures loans enabling the purchase of the collateral, then the PMSI taken by the seller has priority over the PMSI taken by the lender.

Question 29

PMSI in proceeds

Answer 29

priority of a PMSI in goods generally extends to the
proceeds of the original collateral, if the SI is perfected when the debtor receives possession of collateral or within 20 days thereafter

The priority of a PMSI in inventory extends to identifiable cash proceeds received on or before the delivery of the inventory to a buyer if:

i) The PMSI is perfected when the debtor receives possession of the inventory; and

ii) The purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest, revealing the secured party’s intent to acquire a PMSI in the inventory of the debtor and describing the inventory.
*same for livestock

Question 30

Construction Mortgage

Answer 30

A construction mortgage has priority over a subsequent SI in fixtures, including PMSIs. The construction mortgage must be recorded before the goods become fixtures, and it covers only goods that become fixtures before completion of the project.

A construction mortgage is used to acquire/improve land and must indicate it is a constructive mortgage in the real property records.

Question 31

Fixtures

Answer 31

SI in fixtures versus real property interest—an SI in fixtures has priority over an
interest in the real property with which the fixtures are associated if the SI in fixtures is
perfected by a fixture filing before the real property interest is recorded

• Perfected SI in fixtures versus subsequent judicial lien—a perfected SI in
  fixtures has priority
• PMSI in fixtures v. prior real property interest—a PMSI in fixtures has priority if it
  is perfected by a fixture filing before the goods become fixtures or within 20 days
  thereafter
• SI in fixtures v. prior construction mortgage—a prior construction mortgage has priority if recorded before the goods become fixtures

Question 32

Default

Answer 32

Once default has occurred the SP may seek possession of the collateral and, in order to satisfy the outstanding obligation, either:

Sell the collateral or Retain it in full or partial satisfaction of the obligation.

Only full satisfaction is allowed for consumer transactions.

The SP may initiated a judicial action to obtain a judgement based on that obligation; OR pursue any course of action to which the debtor and obligor have agreed.

Question 33

Security Agreement covering fixtures

Answer 33

When a secured party’s security interest has priority over owners and individuals who encumber real property, that secured party may remove the fixture from the real property. With respect to an owner or encumbrancer who 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. UCC § 9-604.

Question 34

Possession of collateral after default

Answer 34

A secured party is entitled to take possession of collateral after default. Doesn’t have to give notice.

Question 35

Disposition of collateral after default

Answer 35

SP can sell, lease, or license the collateral or keep the collateral in full or partial disclosure of the obligation.

Commercially reasonable standard for disposition: all aspects of disposition must be commercially reasonable. Reasonable if done on a recognized market, at a price current in a recognized market, or otherwise in conformity with reasonable commercial practices.

The mere fact that a higher price could have been obtained by disposing of the collateral differently or at a different time does not establish that it was unreasonable.

Question 36

Type of dispositions

Answer 36

Can be public or private. A SP can purchase the collateral in a public sale but only in a private sale if sold on a recognized market (stock exchange)

Question 37

Notice of disposition

Answer 37

The SP is required to send an authenticated notice that is reasonable in its consents/timeliness to the debtor, secondary obligors, in the case of non-consumer goods anyone else with a perfected SI as well as anyone else who the SP has received authenticated notice of a claim or interest in the collateral.

Timeliness is based on reasonableness. At least ten days before disposition is reasonable.

Question 38

Cash proceeds from disposition

Answer 38

First pay for reasonable expenses related to disposition, then SP, then subordinate parties who made an authenticated demand, then to the debtor.

Surplus generally goes to the debtor and a the obligor is liable for any deficiency.