Secured Transactions

Question 1

When does Article 9 apply?

Answer 1

Article 9 applies to all security interests in personal property or fixtures by contract. The words “security agreement” do not have to be specifically stated for one to exist. Article 9 also applies to lease agreements that are not true leases (but instead, security interests).

Question 2

Four Classifications of Goods (FICE)

Answer 2

1. Consumer Goods 2. Inventory 3. Equipment 4. Farm Products

Question 3

Goods Classification: Inventory

Answer 3

Goods, other than farm products, that are held by a person for sale or lease to be furnished under a K of service; or raw materials, work in process, or materials used or consumed in a business.

Question 4

Goods Classification: Consumer Goods

Answer 4

Goods that are bought for use primarily for personal, family, or household purposes (e.g., a computer in the hands of a consumer)

Question 5

Goods Classification: Equipment

Answer 5

Everything else that is not inventory, consumer or farm products

Question 6

How to gain full protection of secured transactions law?

Answer 6

Under Article 9, a creditor must take 2 steps to gain full protection of secured transactions law: 1. Attach a security interest to the collateral, and 2. Perfect the security interest

Question 7

Requirements of attachment

Answer 7

1. Value must be given by the secured party to the debtor (e.g. a loan)
2. the debtor must have rights in the collateral; and
3. there must be a binding security agreement which requires (AID):
4. authentication (signature),
5. intent to create a security agreement, and a
6. description of the collateral.

Question 8

Scope of Attachment

After-Acquired Property

Answer 8

The general rule is that a security agreement can cover after-acquired property and does not need to specifically reference it to be effective.

Question 9

Methods of Perfection

Answer 9

Perfection can occurs by one of the following:

1. Filing a financing statement
   
   • public doc w/ debtors name (based on art. of incorp), secured p’s name, generic desc.
2. Automatically upon attachment: PMSI in consumer goods
3. Possession of collateral by secured party from the moment of possession until not possessed any longer (thus, must be tangible thing/good / pledge) - usually ends up being ‘automatic’
4. Control - ex. non consumer deposit account
5. Notation on lien of certificate of title (cars/trucks)
   
   • govt authority must note lien on title
   • applies even if pmsi in consumer goods
   • exception: car dealer who holds cars/trucks as inventory as notation for so many of them is impossible

Note: Fixtures are so attached to the real estate w/in that it become a perm part of the building that we treat fixtures as real estate and therefore must be filed with real property records.

Question 10

Priority when 2 secured parties have a security interest in the same collateral

Answer 10

The first to file or perfect (automatic PMSI, possession or control) has priority.

• If no party perfects, then the first to attach has priority.
• A perfected interest beats an unperfected one - even if one has an unperfected PMSI.*

Question 11

Buyer in Ordinary Course

Answer 11

A buyer in the ordinary course of business generally takes free of any security interest created by the buyer’s seller

Buyer in Ordinary Course = someone who buys goods with:

1. Good faith
2. Without knowledge that the sale is in violation of a term of the security agreement, and
3. Buyers from a person who is in the business of selling goods of that kind

Note: Does not matter that security interest is perfected and buyer knows of the security interest.

Question 12

Buyer Not in Ordinary Course

Answer 12

A buyer not in the ordinary course of business takes collateral subject to a perfected security interest.

Generally, he does not take subject to an unperfected interest if he gives value and does not know about the interest.

Note: buyer not in the ordinary course of business = someone who

1. buys from someone not in the business of selling goods, OR
2. knows that sale violates security agreement)

Question 13

Garage Sale Exception

Answer 13

A buyer will take free of a security interest, even if perfected if:

1. He buys without knowledge of security interest,
2. For value; and
3. For personal or household purposes (i.e. consumer goods)

Unless: Prior to the purchase, the secured party has filed a financing statement covering the goods.

The goods must be consumer goods both when the seller has them and when the buyer buys them for this to apply.

Question 14

Secured Party v. Lien Creditor Priority

Answer 14

Priority belongs to the secured party only if he perfects before the lien arises.

If the interest was unsecured or only perfected after the lien creditor served the writ (time of levy), the the lien creditor has priority.

• First to perfect or arise/levy wins.*
• Exception: Statutory Lien will always prevail even over a perfected security interest.*

Question 15

Default

Answer 15

1. Repossession
   
   1. Self-Help (reclaim goods themselves) as long as creditor does not Breach the Peace
      
      • Breach of Peace = any conduct by secured party (or agent) that has the potential for violence; physical presence of both parties is enough for there to be a B of P; fact specific (consider residential v. commercial, time of day, etc.)
   2. Replevin action: court order that tells sheriff to go out and repossess (not as common)
2. Once repossessed, creditor can:
   
   1. Resell: foreclosure sale discharges security interest & subordinate interests(senior liens remain)
      
      1. Hold Sale in a “Commercially Reasonable” way - i.e. give notice to all parties w/in reasonable time (10 days for non-consumer goods)
      2. Debtor still liable for any deficiency

Question 16

Debtors Means of Protection

Answer 16

• The sale must be commercially reasonable
  
  • Public Sale - must have date/time and place
  • Private - time/date
  • Look to commercial factors
• Written notification of the sale.
  
  • To whom: debtor, perfected secured parties (or secured parties who have notified the secured party of their interest)
    
    • To show when change to redeem the collateral is going to pass. (not necessary if the collateral threatens to decline rapidly).
  • Timeliness of notification: whatever “reasonable”, but for a nonconsumer transaction, need at least 10 days .
  • Content of notification:
    
    • Nonconsumer - describe the debtor, secured party, collateral, state method of disposition and that debtor is liable for unpaid indebtedness as well as charge for accounting
    • Consumer - all of the above plus description of liability for a deficiency, a telephone number that consumer can call to discover amount owed and telephone number or mailing address from which the consumer can get additional info about disposition and obligation.

Question 17

Liability when Secured Party Violates Article 9

Answer 17

1. Actual Damages: debtor can recover damages reasonbly calculated to put her in the position she would be in had no violation occured (expectation)
2. Damages for Consumer Goods: debtor is entitled to at least 10% of the cash price of the goods plus interest to be paid over the life of the loan
3. Loss of deficiency judgment
   
   • Non-Consumer: rebuttable presumption rule that value of collateral seized is presumed equal to debt owed unless secured party proves otherwise
   • Consumer trasnaction: courts will do any one of the following:
     
     • Rebuttable presumption rule, or
     • Secured party is complete denied deficieny judgement
     • Secured party may recover dificency minus actual damags debtor can prove

Question 18

Debtor’s Right to Redeem

Answer 18

The debtor can redeem prior to the disposition of the collateral by paying everything due and owing to the creditor.

This right can only be waived AFTER there has been a default (i.e. not via a security agreeement)

- Note that there may be an acceleration clause that may require the debtor to owe not just past debt due but the entire amount of the loan.

Question 19

PMSI

Answer 19

A PMSI (purchase money security interest) is created when a creditor advances credit or provides the funds needed to make a purchase possible and takes a security interest in the goods purchased.

Question 20

Means of Gaining Control (Method of Perfection)

Answer 20

Example: Non Consumer Bank Account

1. The bank in which there is non consumer deposit account is maintained automatically has control over a deposit account.
2. Putting the deposit account in the secured party’s name, or
3. Agreeing in an authenticated records with the debtor, bank, and secured party in which the debtor agrees to let the secured party control.

Question 21

Financing Statement Requirements

Answer 21

The financing statement must contain:

1. The name and mailing address of the debtor & secured party; and
   
   • If the debtor is a registered organization, the debtor’s name must match the name on the debtor’s public records (certificate of incorporation).
   • Minor errors in the debtor’s name will not render the financing statement ineffective, unless those errors make the financing statement “seriously misleading”.
2. An indication of the collateral (generic description)

Question 22

When is a Lease a Security Interest?

Answer 22

lease is a security interest if rental obligation is not terminable by the lessee and at the end of the lease the lessee has an option to purchase the goods for no or nominal consideration.