Secured Transactions

Question 1

A security interest arises when a party (Debtor) uses certain property as collateral to secure:

Answer 1

Repayment of funds to another party (the secured party)

Question 2

By using the property as collateral, if the debtor defaults on repayment of the funds, the creditor may:

Answer 2

Take possession of the collateral and apply the collateral to the balance owed

Question 3

The creditor’s interest in the collateral is called:

Answer 3

a security interest

EXAMPLE: Alice wants to buy a car, but does not have enough money to do so. She gets a loan from Bank to buy the car and gives Bank an interest in the car as collateral. Bank’s interest in the car is a security interest. This creates a secured transaction. If Alice defaults on her loan from Bank, Bank can take possession of the car and sell it. Alice is the Debtor; Bank is the Secured Party.

Question 4

UCC Article 9 applies to [§ 9-109(a)]:

Answer 4

a. any transaction, regardless of its form, that creates a: security interest in fixtures by contract

EXAMPLE: Ben wants to buy a stove for $500 from Ed’s Appliance Emporium. Ben and Ed’s Appliance Emporium agree that Ben will pay $100 as a down payment and the remaining $400 over six months. Ben will take the stove home, but Ed’s Appliance Emporium intends to retain title to the stove. This transaction creates a security interest.

b. leases, if the lease if for: the entire economic life of an item
c. sales of: accounts receivable, shadow paper, negotiable instruments and payment tangibles.

EXAMPLE: Clothing Manufacturer needs money to manufacture its fall fashion line. To get the money, Clothing Manufacturer sells $1,000,000 worth of payments due from department stores (accounts receivable) to Finance Co. This sale of accounts is governed by Article 9. Finance Co. must comply with Article 9 in order for its rights in the accounts receivable to be recognized by third parties.

Question 5

UCC Article 9 is not applicable to [§ 9-109(d)]:

Answer 5

a. landlord’s liens;

b. an interest in or lien on: real property, including a lease or rents therein

Question 6

Types of Collateral

Answer 6

1. Different rules governing enforcement, perfection of the security interest, and priorities often depend upon which category the collateral falls into.
2. The Code provides for certain broad types of collateral and then breaks each down into more specific categories. The broad types of collateral include:
   a. Goods;
   b. Tangible intangibles;
   c. Intangible intangibles; and
   d. Investment property.

Question 7

Goods

Answer 7

a. “Goods” includes all things that are:
moveable at the time the security interest attaches

(1) This generally includes fixtures and computer programs imbedded in goods in computers.
b. “Goods” are further broken down into several categories depending on in what capacity and how the debtor primarily uses them:
(1) consumer goods;
(a) Consumer goods are those used or bought primarily for: personal, family or household purposes
(2) inventory;
(a) Inventory is goods, other than farm products, that: are held for sale or lease or to be furnished under a contract of service.
(b) Inventory also consists of: raw materials, work and process, or materials used or consumed in course of business.
(3) farm products; and
(a) Farm products generally means “goods, other than standing timber, with respect to which the debtor is engaged in a farming operation,” including crops, livestock, products of crops or livestock in their unmanufactured state, aquatic goods produced in aquacultural operations, and supplies used or produced in a farming operation [§ 9-102(a)(34)].
(4) equipment.
(a) Equipment is a catch-all category, defined merely as: goods other than inventory, farm products, or consumer goods.
(b) This term usually refers to goods that are used or bought for use primarily in a business (e.g., machinery used in farming operations or manufacturing, tools of a mechanic or repairman, delivery trucks).
c. A debtor may use the same goods in more than one capacity, but it is the primary use that determines the characterization.

EXAMPLE: Thus, a washing machine in the debtor’s household is consumer goods, in the debtor’s appliance store for resale is inventory, and in the debtor’s automatic laundry is equipment.

Question 8

Tangible Intangibles

Answer 8

Certain intangibles, such as contractual obligations to hold or deliver goods or to pay money, and ownership in goods or business entities, are commonly reduced to tangible or written form; by transferring the writing, the intangibles are transferred.

b. Tangible intangibles may be categorized as:
(1) instruments;
(a) Instruments, under UCC 9, means: negotiable instruments, that is drafts or notes under article 3. Piece of paper that represents goods.
(b) The writing must be “of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment.”
(2) documents; or
(a) Documents under UCC 9 are documents of title (as provided in Article 7) which include bills of lading, dock receipts, warehouse receipts, delivery orders, and any other document which, in the regular course of business or financing, is treated as adequately evidencing that the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers.
(b) To be a document of title, a document must purport to be issued by, or addressed to, a bailee and purport to cover goods in the bailee’s possession that are either identified or fungible portions of an identified mass [§ 1-201(b)(16)].
(3) chattel paper.
(a) Chattel paper means a record or records evidencing both a monetary obligation and a security interest in or a lease of specific goods.

EXAMPLE: Car Dealer sells a car to Consumer. Consumer signs a promissory note for $20,000 and a security agreement granting Car Dealer a security interest in the car. This package of note and security agreement, when used by Car Dealer as collateral for a loan to Consumer, is chattel paper.

(b) Electronic chattel paper is chattel paper that is stored in an electronic medium instead of in tangible form.

Question 9

Intangible Intangibles

Answer 9

Many intangibles, such as monetary obligations or literary rights, while possibly evidenced by writings, are treated as intangibles. The writings take on no commercial significance of their own (i.e., they are not indispensable).

EXAMPLE: Web site domain names, intellectual property rights, and rights to sue are all intangible intangibles upon which security rights can be granted.

b. Such intangibles include:
(1) general intangibles; and
(a) General intangibles is the name given to intangible collateral that: fails to fit any other category. (websites, IP rights).
(2) accounts.
(a) Accounts are right of payment of a monetary obligation, generally for: property sold or to be sold or services rendered or to be rendered.

Question 10

Investment Property

Answer 10

Investment property includes certificated and uncertificated: securities, accounts, and entitlements as defined in Article 8.

Question 11

Proceeds

Answer 11

1. Collateral subject to a security interest may also be in the form of proceeds obtained from the disposition of other collateral, including whatever is received upon the: sale, lease, license, exchange or disposition of collateral including payment of insurance proceeds.

EXAMPLE: A store asking for a loan puts up a security interest in the entirety of its inventory of widgets. The store then sells its inventory for cash, checks, promissory notes, other goods, etc. All of these things are proceeds; they were derived from the collateral.

2. There are two kinds of proceeds:

a. cash;
b. non-cash.

Question 12

The Security Interest

Answer 12

1. Two steps are required to create a security interest:
   a. a written security agreement or possession of the collateral by the secured party with the intent to secure a debt; and
   b. attachment of the security interest to the collateral.
2. A security agreement is an agreement that creates or provides for a: name for the contract
   a. The security interest must be in writing and:
   (1) be authenticated by the debtor.
   (a) Authentication means either signing a written document or executing or otherwise adopting a symbol, or (to include electronic transmissions) encrypting or similarly processing a record in whole or in part [§ 9-102(a)(7)].
   (2) Contain a granting clause.
   (a) The granting clause need not be formal and can be in a different document. Just needs to say it grants a security interest.
   (3) Contain a description of the collateral.
   (a) A description is sufficient if it reasonably identifies what is described [§ 9-108(a)].

Question 13

Possession

Answer 13

Where the secured party has possession, all that is needed is an agreement, which can be: oral that the secured party is to have a security interest.

Question 14

A security agreement is generally binding and effective between the:

Answer 14

the parties against purchasers of the collateral and against creditors.

Question 15

Purchase-Money Security Interest

Answer 15

A security interest in goods is a purchase-money security interest (PMSI) [§ 9-103] if it pertains to goods that are purchase-money collateral.

a. Goods securing a purchase-money obligation that a debtor incurs to purchase the goods are called purchase-money collateral.
b. A debtor incurs a purchase-money obligation if the obligation is incurred:
(1) as all or part of the: price of the collateral
(2) for value given to enable the debtor to: acquire rights in or the use of the collateral if the value of the collateral is so used.
2. Thus, to qualify as a PMSI, the security interest must be in goods that are given as collateral for an obligation the debtor incurred for the purchase of the goods, and actually used to purchase the goods.

EXAMPLE: John borrows $500 from his parents to buy a new stove, on the condition that the stove will be used as collateral to secure the loan. John uses the money to buy the stove and gives his parents a security interest in the stove. This will be a PMSI.

EXAMPLE: John wants to buy a $500 stove from Ed’s Appliance Emporium, but does not have $500 in cash. John pays $100 in cash and signs a promissory note to Ed’s Appliance Emporium for the remaining $400. John grants Ed’s Appliance Emporium a security interest in the stove to secure the repayment of the $400. This will be a PMSI.

HYPO: John borrows $500 from his parents to buy a new stove, on the condition that the stove will be used as collateral for the loan. John instead spends the $500 on video games, and purchases the stove on his MasterCard. John then grants his parents a security interest in the stove.

Do John’s parents have a PMSI in the stove? No. Because, the value must be directly used to buy the item intended.

Question 16

Attachment

Answer 16

is the process by which the security interest is created. A security interest is created by a contract between the debtor and the secured party.

Question 17

Once the security interest has attached, the secured party has all of the:

Answer 17

Enforcement rights provided by article 9, including the right to reposes the collateral if the debtor defaults

Question 18

The security interest attaches when [§ 9-203]:

Answer 18

(a) The secured party gives value

EXAMPLE: Chris borrows $10,000 from Bank to purchase a snowmobile. Bank hands Chris the $10,000 check. Bank has given value.

b. the debtor has rights in the property.

EXAMPLE: Chris goes to Dan’s Sports and buys a snowmobile. Chris has rights in the collateral.

c. the debtor has authenticated a security agreement that sufficiently describes the collateral.

EXAMPLE: Chris and Bank enter into an agreement under which Chris grants Bank a security interest in his snowmobile as collateral for the $10,000 loan. Chris signs the security agreement. Chris has authenticated a security agreement that sufficiently describes the collateral

(1) A collateral description is sufficient if it reasonably identifies what is described [§ 9-108].
(a) A description of collateral by UCC type is sufficient unless: the collateral is consumer goods and the the transaction is a consumer transaction.
(2) A supergeneric description: not sufficient in a security agreement.

EXAMPLE: “All the debtor’s property” is not a sufficient collateral description.

Question 19

After-Acquired Collateral

Answer 19

After-acquired collateral is property obtained after the security agreement is created.

b. RULE: A security interest will attach to after-acquired collateral If the agreement specifically: says it includes after acquired collateral

EXAMPLE: “Debtor grants to Secured Party a security interest in all of Debtor’s equipment now owned or hereafter acquired.” Equipment that the debtor acquires after the security agreement is signed will be covered by the secured party’s security interest because there is an after-acquired property clause.

Question 20

Exceptions to After-Acquired Collateral

Answer 20

(1) A security agreement specifying an interest in inventory or accounts receivable will create an interest in after-acquired collateral, notwithstanding: the fact that there is no explicit after acquired collateral clause.
(2) A security agreement cannot provide that it covers after-acquired consumer goods, unless: the debtor acquires rights in the consumer goods within 10 days of the the secured party getting value

EXAMPLE: Bank makes a loan to Consumer. Consumer signs a security agreement that covers “all of Consumer’s furniture, now owned or hereafter acquired.” This agreement will be ineffective to cover the after-acquired furniture.

EXAMPLE: The BetterBuy electronics store offers financing through its BetterBuy Charge Card. The Card is a secured card, so BetterBuy retains a security interest in each item bought with the card. BetterBuy’s security interest can reach after-acquired electronics because the debtor/cardholder will acquire the consumer goods at the same time that the secured party gives value.

Question 21

Future Advances

Answer 21

a. A security agreement may also provide that the collateral secures future advances [§ 9-204]. For instance, a security agreement may secure all advances under a revolving credit agreement.

Question 22

Proceeds

Answer 22

a. A security interest in collateral automatically extends to: identifiable proceeds of the collateral.

EXAMPLE: Bank has a security interest in Chris’s snowmobile. Chris trades his snowmobile to Frank. Frank gives Chris his boat in exchange for the snowmobile. Bank has a security interest in the boat.

EXAMPLE: Finance Company has a security interest in BetterBuy’s accounts receivable. BetterBuy’s customers pay their accounts with checks. Finance Company has a security interest in the checks

Question 23

A secured party’s security interest in collateral will continue regardless of a sale, lease, or other disposition of the collateral, unless:

Answer 23

the secured party authorized disposition of the collateral without the security interest.

a. A secured party may end up with both: a security interest in the original collateral and the identifiable proceeds of the collateral.

Fallen Soufflé, a catering company, borrowed $10,000 from Bank, secured by its kitchen equipment. The security agreement states that all of Fallen Soufflé’s equipment will serve as collateral for the loan. It also states that Fallen Soufflé will not sell any equipment without Bank’s consent. Fallen Soufflé sells a stove to Diana’s Delights, another caterer, without Bank’s consent.

If Fallen Soufflé defaults on the loan, is Bank entitled to recover the stove from Diana’s Delights?

ANSWER: Yes. The stove is subject to the security interest.

Question 24

Perfection

Answer 24

establishes a secured party’s rights in the collateral against third parties.

2. A security interest is perfected if: it has attached and all other requirements for perfection have been met.
3. Perfection of a security interest is most commonly done by:
   a. filing;
   b. possession;
   c. control; or
   d. automatic perfection.

Question 25

Filing

Answer 25

1. Filing a financing statement in a public office is the most common way to perfect a security interest.
2. Filing can be done:
   a. usually in the: secretary of states office.
   b. in limited circumstances (when the collateral consists of fixtures), in the: office of the county clerk in the county where the land to which the collateral is attached is located.
3. If the secured party is perfecting by filing a financing statement, the security interest is perfected only if the financing statement is filed in the correct office in the correct state

Question 26

RULE: The law governing perfection of a security interest is:

Answer 26

in the state where the DEBTOR is located

(1) A debtor who is an individual is located at the individual’s principal residence.
(2) A debtor that is a non-registered organization is deemed to be located at its place of business. If the debtor has more than one place of business, it is deemed located at its chief executive office.
(3) A debtor that is a registered organization is deemed to be located in its state of organization.
(a) A registered organization is one as to which a state must maintain a public record showing the organization to have been organized.

EXAMPLE: ABC Partners is a general partnership organized under Missouri law. It has two offices—one in E. St. Louis, Illinois, and one in St. Louis, Missouri. All of the bills are sent to the St. Louis office and the letterhead shows the St. Louis office as the primary office. Bank must perfect its security interest in ABC Partners’ equipment by filing a financing statement in the Missouri Secretary of State’s Office.

Question 27

In certain instances, a mechanism other than a financing statement is required for perfection. The most common instance is notation on a certificate of title to perfect a security interest in motor vehicles.

Answer 27

In certain instances, a mechanism other than a financing statement is required for perfection. The most common instance is notation on a certificate of title to perfect a security interest in motor vehicles.

Question 28

Financing Statement

Answer 28

a. The Code adopts the system of notice filing, which essentially requires a filing that provides notice that a person may have a security interest in the collateral indicated. The security agreement itself need not be filed; instead, the financing statement is filed.
b. A financing statement must include [§ 9-502(a)]:
(1) name of the debtor
(2) name of the secured party
(3) a description of the collateral covered by the collateral statement
(a) A financing statement sufficiently describes the collateral it covers if it provides [§ 9-504]:
1) a description of the collateral that reasonably describes the collateral by UCC type;
2) an indication that the financing statement covers all assets or personal property.
a) Note that this rule differs from that of security agreements. A supergeneric collateral description in a financing statement is sufficient.
c. A financing statement must be authorized by the debtor.
(1) A security agreement is authorization for the financing statement.

Question 29

Special Rules for Fixtures

Answer 29

(1) Fixtures are goods that are so related to real property that an interest in them passes under real estate law [§ 9-102(a)(41)].

EXAMPLE: Kit buys a chandelier from Bowery Lighting. The chandelier is installed in her living room. Removing it would cause some damage to the ceiling. The chandelier is a fixture. If Bowery Lighting wants priority over Kit’s mortgage creditor, Bowery Lighting will have to file a fixture filing.

(2) In addition to the requirements of a financing statement mentioned above, a fixture filing must also [§ 9-502(b)]:
(a) indicate that it: cover fixtures
(b) indicate that it is to be: filed in the real property records
(c) provide a description of the: real property to which the fixture is related
(d) provide the real property owner’s name, if: different than the article 9 debtor

Question 30

Effectiveness of Financing Statement

Answer 30

(1) If a financing statement is filed in the wrong place, does not include the required information, or is not authorized by the debtor, it is ineffective. An ineffective financing statement does not perfect a security interest.
(2) A financing statement containing minor errors will still be effective, unless: the errors make the financing statement seriously misleading
(a) Failure to sufficiently provide the name of the debtor is seriously misleading.
1) Standard search logic exception: If a search of the records of the financing office under the debtor’s correct name, using the office’s standard search logic, would disclose a: financing statement that fails sufficiently to provide the name of the debtor is not seriously misleading.

EXAMPLE: A financing statement for which John Quincy Adams is the debtor is filed, with the debtor’s name listed as “John Q. Adams.” So long as a search for “John Quincy Adams” would disclose a financing statement for “John Q. Adams,” this will not be seriously misleading

Question 31

Changes that can affect the effectiveness of a financing statement

Answer 31

(1) Proceeds: A perfected security interest in proceeds is provided by the Code automatically when the security interest in the original collateral is perfected, unless the security agreement specifically provides that proceeds are not covered [§ 9-315(c)].
(a) This automatic perfection for proceeds continues for only 20 days after attachment (i.e., receipt of the proceeds by the debtor), unless:
1) a filed financing statement covers the original collateral, 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 the proceeds are not acquired with cash proceeds;
2) the proceeds are identifiable cash proceeds; or
3) the security interest in proceeds is otherwise perfected when: the security interest attaches to the proceeds or within 20 days thereafter [§ 9-315(d)].

Question 32

Name Changes: cccccccccccccccccc

Answer 32

If the information in the financing statement becomes seriously misleading only after the financing statement is filed, the financing statement will remain effective unless the debtor changes its name or the original collateral is exchanged for proceeds.

(a) If a debtor changes his name, resulting in a financing statement that is seriously misleading, the financing statement will only be effective to perfect security interests in collateral acquired within four months of the name change, unless an amendment to the financing statement correcting this is filed within four months of the name change [§ 9-507].

EXAMPLE: After a long marketing study, We Stink Corp. decides to change its name to A Bed of Roses Corp. Before the name change, We Stink Corp. had borrowed $1,000,000 from Bank, secured by its inventory. Bank properly perfected its interest by filing a financing statement in the Secretary of State’s Office. The name change became effective on March 1, 2008. Bank will remain perfected in all inventory that A Bed of Roses Corp. receives until June 30, 2008. If Bank files an amendment before June 30, 2008, it will be continuously perfected in all of A Bed of Roses Corp.’s inventory.

Question 33

A financing statement can also become ineffective if the debtor moves [§ 9-316].

Answer 33

If the debtor moves to another state, the secured party must file a new financing statement in the new state within four months of the debtor’s move.

(a) If the secured party does so, it is continuously perfected, and its priority will relate back to the date it filed in the debtor’s original state.
(b) If the secured party does not file in the debtor’s new state within four months of the debtor’s move, the secured party becomes unperfected in all of the collateral covered by the financing statement.

Question 34

A filed financing statement is effective for five years after the date of filing [§ 9-515].

Answer 34

(1) If the financing statement expires without a continuation statement being filed, the financing statement will lapse. Upon lapse, the filing statement becomes ineffective, and any security interest that was perfected by the filing statement becomes unperfected.
(2) A continuation statement must be filed within six months before the expiration of the five-year period.

(a) A continuation statement extends the
effectiveness of the original filing statement for another five-year term from the date the financing statement would have become ineffective absent the filing of the continuation statement.

(b) Continuation statements may be filed repeatedly to extend the effectiveness of the financing statement.

Question 35

Possession

Answer 35

1. A secured party may also perfect a security interest by taking possession of the collateral.
   a. Perfection by possession only applies to the following types of collateral:
   (1) tangible negotiable documents;
   (2) goods;
   (3) instruments;
   (4) money;
   (5) tangible chattel paper.
2. The secured party normally perfects by taking possession of the collateral itself. However, the Code provides for the secured party to have a third-party possess the collateral on its behalf, so long as the third-party authenticates a record acknowledging that it is holding the collateral for the secured party’s benefit.

Question 36

Control

Answer 36

1. A secured party may also perfect a security interest by taking control of the collateral.
2. Taking control of the collateral applies only to:
   a. investment securities;
   (1) A person has control of a certificated security in bearer form if: he has possession of the security.
   (2) A person has control of a certificated security in registered form if he has possession of the security, and: the certificate is endorsed to the purchaser or registered to the name of the purchaser.
   b. letter-of-credit rights;
   (1) A secured party has control of a letter-of-credit right if the issuer has: consented to an assignment of proceeds to a letter of credit.
   c. deposit accounts; and
   (1) A security interest in a deposit account is perfected only by control. Such perfection is effective only when, and for as long as, the secured party has control [§ 9-107].
   (a) A secured party has control of a deposit account if [§ 9-104]:
   1) the secured party is the bank with which: the deposit account is maintained.

EXAMPLE: Wayne borrows money from Bank of America and grants a security interest in the savings account that Wayne has with that bank.

2) the debtor, secured party, and bank have agreed in an authenticated record that the bank will follow the secured party’s instructions directing the: disposition of the funds in the deposit account without further consent of the debtor.

EXAMPLE: Chase Bank and Bank of America agree that Wayne’s loan from Chase will be secured by his funds on account with Bank of America.

3) the secured party becomes: the banks customer of the account.
d. electronic chattel paper. [Consult your outline materials for further reference.]

Question 37

Automatic Perfection

Answer 37

There are limited instances in which perfection is automatic. The most common is when the security interest is a PMSI in CONSUMER GOODS, which perfects upon attachment [§ 9-309].

Hal buys a stereo system for his home from BetterBuy. He pays $500 down, and BetterBuy extends him credit for the remaining $2,000 of the purchase price. Hal signs an agreement in which he grants BetterBuy a security interest in the stereo system.

Does BetterBuy need to file a financing statement to perfect its interest in the stereo system?

ANSWER: No. This is automatically. This PMSI and this is a consumer good. Thus, auto perfection.

Question 38

If the security interest is a PMSI in consumer goods:

Answer 38

perfection is automatic as soon as the security interest attaches, and remains effective permanently, excluding motor vehicles and fixtures.

a. Automatic perfection also sometimes occurs in other situations, including the assignment of accounts or payment intangibles that does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles.

EXAMPLE: A bank takes a security interest in only one out of 500 outstanding accounts. This interest perfects automatically.

Question 39

Multiple Methods of Perfection

Answer 39

1. If a security interest is perfected by one method, and later perfected by another method, without an intermediate period of: the security interest is perfected continuous.

Question 40

General Rule: First-in-Time, First-in-Right

Answer 40

1. The general rule regarding priority under Article 9 is “first in time, first in right.”
2. Among unperfected security interests: the first to attach will prevail.
3. Between a perfected security interest and an unperfected security interest: a perfected security interest will prevail.
4. Between two perfected security interests, the security interest with the earliest time of filing or of perfection, which has continued without interruption, will prevail [§ 9-322(1)].
5. When the collateral is an instrument or chattel paper, the secured party who perfects by taking possession will have priority over the secured party who perfects by filing [§ 9-330].

Question 41

HYPO

Answer 41

Maxed-Out Corp. obtains separate $5,000,000 loans secured by its accounts receivable from First Rate Bank and Second Rate Bank. The timeline for these loans is as follows:

April 1 – First Rate Bank files a financing statement authorized by Maxed-Out Corp.

April 5 – Maxed-Out Corp. signs a security agreement in favor of Second Rate Bank, and Second Rate Bank advances the $5,000,000 and files the financing statement the same day.

April 9 – Maxed-Out Corp. signs a security agreement in favor of First Rate Bank, and First Rate Bank advances the $5,000,000.

Which bank’s interest in the accounts receivable takes priority? First Rate Bank, because they were the first to file or perfect.

Question 42

HYPO

Answer 42

Liz painted and currently owns a famous abstract work called “Pain.” To finance her next masterpiece, “Suffering,” she takes out separate loans from County Bank and River Bank. The timeline for these loans is as follows:

April 1 – Liz grants County Bank a security interest in “Pain” for a $1,000,000 loan. She signs the security agreement in favor of County Bank, and County Bank advances the money the same day.

April 5 – Liz grants River Bank a security interest in “Pain” for a $1,000,000 loan. She signs a security agreement in favor of River Bank, and River Bank advances her the money the same day.

April 6 – County Bank perfects its interest by possession, placing “Pain” in its vault.

April 7 – River Bank perfects its interest by filing a financing statement.

Which bank’s interest in “Pain” takes priority? County Bank. First to either file or perfect!

Question 43

A perfected PMSI will prevail over a conflicting security interest if the PMSI is perfected when the debtor receives:

Answer 43

Possession of the collateral or within 20 days thereafter.

a. However, when the collateral is inventory, the purchase-money secured party has to take additional steps to acquire priority over the first-in-time secured party. The most important extra steps are:
(1) the purchase-money secured party must notify the: first secured party in the an authenticated record that it expects to obtain a PMSI in the debtors collateral; and
(2) the PMSI must be perfected at the time: the debtor receives possession of the inventory.

Question 44

HYPO

Answer 44

Warehouse purchased a new widget maker from The Widget Supply Co. The timeline for these transactions is as follows:

January 1 – Big Bank perfects its security interest by filing a financing statement in the correct Secretary of State’s office.

April 15 – Widget Warehouse buys the $100,000 widget maker from The Widget Supply Co. with a $10,000 down payment and a promissory note for the remaining $90,000. Widget Warehouse signs a security agreement giving The Widget Supply Co. a security interest in the machine to secure repayment of the promissory note.

April 16 – Widget Warehouse receives the widget maker, and The Widget Supply Co. files its financing statement in the correct Secretary of State’s office.
Who has priority in the machine: Big Bank or The Widget Supply Co.?

Widget Supply

Question 45

The first-in-time, first-in-right rule applies to priority contests between lien creditors and secured parties [§ 9-317].

Answer 45

a. A lien creditor is a creditor that has acquired an interest in the property by: attachment, levy, or similar judicial collection procedures and a bankruptcy trustee.
b. Therefore, a secured party will have priority over a lien creditor if the secured party:
(1) perfects before the lien creditor’s interest arises; or
(2) files a financing statement and evidences a security agreement (by authentication, possession, or control) before the lien creditor’s interest arises.

Question 46

HYPO: DotCom Co. has an unsecured loan from Credulous Bank. When DotCom Co. defaults on the loan, Credulous Bank sues and obtains a judgment against DotCom Co., entitling the bank to a writ of execution directing the sheriff to seize DotCom Co.’s property to satisfy the debt. The day after the sheriff seizes DotCom Co.’s computers, Deficit Finance Co. perfects a security interest in DotCom Co.’s computers for a $10,000,000 loan.

Who has priority in the computers, Credulous Bank or Deficit Finance Co.?

Answer 46

Credulous Bank. Got judicial lien first.

Question 47

Special Rule for PMSIs

Answer 47

a. If the PMSI is perfected within 20 days after the debtor: receives the collateral the PMSI will take priority over an intervening lien creditor.

EXAMPLE: On May 1, Green Delivery Service bought five mountain bikes from City Bike. Green Delivery Service paid a $500 down payment and gave City Bike a $2,000 promissory note for the remaining purchase price. Green Delivery Service signed a security agreement giving City Bike a security interest in the bikes to secure repayment of the note and received the bikes on May 3. On May 10, the sheriff seized the bicycles pursuant to a writ from Bank, because Green Delivery Service had defaulted on an unsecured note to Bank. City Bike perfected its security interest in the bikes by filing a financing statement on May 15. Because City Bike has a PMSI and perfected its interest within 20 days after Green Delivery Service took possession of the bikes, City Bike has priority over Bank.

Question 48

Accessions

Answer 48

9. Accessions
   a. “Accession” refers to goods that are physically united with other: goods in such a manner that the identity of the original goods is not lost.

EXAMPLE: An expensive custom bicycle seat would be an accession to the bicycle it is attached to.

(1) The priority of a security interest in an accession is determined in the same manner as with any other collateral, except that a security interest in an accession is subordinate to: a security interest in the whole which is perfected by compliance with the requirements of the certificate of title statute.

Question 49

Commingled Goods

Answer 49

a. “Commingled goods” are goods that are physically united with other: in such a manner that their identity is lost.
(1) A security interest does not exist per se in commingled goods, but attaches to the product that results when goods become commingled goods.

EXAMPLE: A person may have security interest in flour as part of a security interest in the inventory of a bakery. Once the bakery has used the flour to make a cake, the creditor can no longer point to the flour in the cake as a separate good, because it has been commingled.

(2) Multiple security interests in commingled goods will rank equally in proportion to the: value of the collateral at the time it became commingled goods, otherwise ordinary priority applies.

Question 50

Buyers Versus Secured Parties

Answer 50

1. A security interest survives the sale of collateral.
   a. There are several exceptions to this rule:
   (1) The secured party: authorizes the sale free of the security interest.
   (2) The buyer is a: buyer in the ordinary course of business.
   (a) To determine whether a buyer is a BIOCOB, look at the business of the seller/debtor. A BIOCOB is a person who:
   1) buys goods in goodfaith;
   2) without knowledge that the sale: violates of another person in the goods.
   3) in the ordinary course of business; and
   4) from a person in the business of selling goods of that kind.

EXAMPLE: BetterBuy financed its entire inventory of HDTVs with a loan from Bank. Bank properly perfected its security interest in the HDTVs. Marco buys an HDTV from BetterBuy. Marco takes the HDTV free from Bank’s security interest. Therefore, if Better Buy does not pay Bank, Bank cannot recover the HDTV from Marco.

Question 51

(3) The sale qualifies as a consumer-to-consumer or “garage sale” exception.

Answer 51

(a) This exception applies only when a person buys goods for personal, family, or household use from someone who used the goods for that purpose.
(b) Such a buyer takes free of a security interest created by his seller if:
1) buys for value;
2) without knowledge of the security interest;
3) before a financing statement is filed.
(c) Remember that a PMSI in consumer goods can be perfected without filing a financing statement.

EXAMPLE: Marco buys an HDTV from BetterBuy. BetterBuy takes back a note and security agreement for the purchase price. Because this is a PMSI, BetterBuy does not file a financing statement. Marco wants to upgrade to a better TV, so Marco sells the HDTV to Nikki at a garage sale. Nikki takes the HDTV free of BetterBuy’s security interest; therefore, if Marco defaults on his obligation to BetterBuy, BetterBuy cannot recover the HDTV from Nikki.

Question 52

(4) A buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest if:

Answer 52

(a) the buyer buys in good faith and in the ordinary course of business;
(b) the buyer gives value and takes possession or control of the chattel paper; and
(c) the chattel paper does not indicate that it has been assigned to another party.

Question 53

Special Rules for Fixtures

Answer 53

a. When the collateral consists of a fixture, the creditor with a security interest in the fixture will want priority over the creditor who holds the mortgage on the real property to which the fixture is attached. The only way that such a creditor can obtain priority over the mortgagee is by filing a fixture filing [§ 9-334]. A secured party with priority over a mortgagee has the right to remove the fixture from the real property upon the debtor’s default [§ 9-604].
(1) The general priority rule is first-in-time, first-in-right. Therefore, if the mortgage is recorded before the security interest in the fixture is: PERFECT BY A FIXTURE FILING THEN THE MORTGAGE HAS PRIORY.
(a) However, if the security interest in the fixture is a PMSI, then second-in-time, first-in-right priority applies, so long as the security interest is perfected by: a fixture filing before the goods become fixtures or within 20 days thereafter.

Question 54

HYPO

Judy B. Rich bought a $10,000 chandelier from Luminosity Lighting, paying $1,000 down and giving Luminosity Lighting a promissory note for the remaining $9,000. She also signed a security agreement giving Luminosity Lighting a security interest in the chandelier. SubPrime Bank holds the mortgage on Judy’s house, which was duly recorded in the Clerk’s Office on February 15. On April 20 of that year, two days after the chandelier was installed in Judy’s house, Luminosity Lighting filed a financing statement that met the requirements of a fixture filing.
If Judy defaults on her loan from Luminosity Lighting, does Luminosity Lighting have the right to remove the chandelier?

Answer 54

ANSWER: Yes, Luminosity filed the fixture filing within 20 days of it becoming a fixture.

Question 55

Default

Answer 55

In General

1. Generally, a default occurs whenever the debtor fails to tender an obligation when due. Thus, if a debtor fails to meet an installment payment, there is a default.

Question 56

Rights Upon Default

Answer 56

1. Upon default, a secured party may: reduce a claim to judgment, foreclose, other otherwise enforce the claim.
2. Upon default, a secured party has the right to repossess tangible collateral if: it can do so without a breach of the peace.
   a. An act that is likely to lead to violence will be considered to breach the peace. An entry into a home to repossess collateral will always be considered a breach of the peace.

EXAMPLE: Bank hires Repo, Inc. to repossess the inventory of Sam’s Shoes. The Repo, Inc. employee responsible for the repossession takes a gun with him to Sam’s Shoes, and shows the gun when he requests entry to Sam’s Shoes. Bank’s repossession will likely be held to breach the peace.

b. If the secured party cannot obtain the collateral without a breach of the peace, the secured party will be required to bring an action for replevin. A court will issue a writ of replevin, under which the sheriff can seize the property for the secured party.

Question 57

Payment to Secured Party

Answer 57

If the collateral consists of accounts receivable, instruments, or chattel paper, the secured party may, upon the debtor’s default, notify: the person obligated on the collateral to make payment to the secured party.

EXAMPLE: Charlie’s Cuisine, a catering company, borrowed $50,000 from Finance Company, secured by its accounts receivable. State University owes Charlie’s Cuisine $50,000 for catering the inauguration festivities for State University’s new president. If Charlie’s Cuisine defaults on the loan, Finance Company can notify State University to make payment to Finance Company.

Question 58

Debtor’s Right to Redeem

Answer 58

1. The debtor has a right to redeem the collateral by tendering to the secured party the: amount of the obligation including interest together with reasonable attorneys fees incurred because of the default.
2. Waiver: There is no right to waiver of the debtor’s redemption rights under the UCC unless all parties to the security agreement agree to the waiver in: writing and do immediately following the default.
   a. It may not occur in advance of default, or at the inception of the secured transaction.

Question 59

Disposition After Default

Answer 59

1. After default and repossession, a secured party may sell, license, or otherwise dispose of any or all of the collateral in its present condition, or following any commercially reasonable preparation or processing.
   a. All aspects of disposition must be: commercial reasonable and disposal by public or private sale.
2. Before disposing of collateral, the secured party must send to the debtor, to any filed secured parties, and to any other person from whom the secured party has received notification of an interest in the collateral, a: reasonable authenticated notice of disposition. Writing and signed.
   a. Notice is an element of commercial reasonableness. Therefore, if no notice is sent, or if the notice is not sent within a: reasonable time, the sale may be considered commercially unreasonable. 10 days is always enough notice in commercial transactions.
   (1) In a non-consumer transaction, the notification must include [§ 9-613(1)]:
   (a) a description of the debtor and secured party;
   (b) a description of the collateral;
   (c) the method of intended disposition;
   (d) a statement that the debtor is entitled to an accounting of all unpaid indebtedness; and
   (e) the time and place of a public disposition or the time after which the collateral will be sold in a private disposition.
   (2) In a consumer-goods transaction, the notice must additionally include:
   (a) a description of any liability for a deficiency;
   (b) a telephone number the debtor can call to obtain the amount required to redeem the collateral; and
   (c) a telephone number or mailing address from which additional information is available.

Question 60

Order of Distribution

Answer 60

a. The cash proceeds of collection, enforcement [§ 9-608], or disposition [§ 9-615] shall be applied as follows:
(1) the reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing of the: collateral and reasonable legal fees and expenses incurred by the secured party.
(2) the satisfaction of obligations secured by the: security interest under which the disposition is made.
(3) the satisfaction of obligations secured by any subordinate security interest in or other subordinate lien on the collateral, if: the secured party has received an authenticated demand before disposal.
b. The secured party shall pay to the debtor any surplus, or the debtor shall be liable for: any deficiency following the sale

Question 61

Deficiency

Answer 61

a. If the collateral does not bring enough at sale or collection to pay all outstanding obligations, the secured party is entitled to a judgment for the deficiency, which is the difference between: the amount of debt and the foreclosure sale proceeds.

EXAMPLE: Charlie’s Cuisine borrowed $5,000 from Bank, secured by one of its ovens. Charlie’s Cuisine defaulted in payment, owing Bank $4,500. Bank sold the oven in a commercially reasonable sale and recovered $3,500. Bank is entitled to a deficiency judgment for $1,000.

b. If the sale is conducted in a commercially unreasonable manner: however the deficiency can be reduced.
(1) In a non-consumer transaction, the deficiency can be reduced according to the “rebuttable presumption rule.”
(a) If the debtor proves that the sale was commercially unreasonable, then the deficiency will be reduced to the difference between the outstanding amount of the loan and the amount that the collateral would have sold for in a commercially reasonable sale. For the purpose of this calculation, the amount that the collateral would have sold for in a commercially reasonable sale is: presumed to be the outstanding amount of the debt.

EXAMPLE: If Bank in the above example had failed to give notice of the sale, the sale would be considered commercially unreasonable. In the commercially unreasonable sale, Bank recovered $2,500. If Bank cannot prove that the oven is worth less than $4,500, the deficiency judgment will be $0.

Question 62

HYPOTHETICAL

Debtor borrowed funds from Bank to purchase kitchen equipment for his business, and signed a promissory note and security agreement waiving Debtor’s right of redemption and providing that any missed payment would render the entire obligation due and payable. Bank perfected its security interest. Debtor missed four monthly payments, and Bank repossessed the equipment by going to the restaurant after closing time. Then, Bank telephoned Debtor the morning of the scheduled auction sale and told Debtor the sale was occurring that day. Bank is now suing Debtor for the deficiency.

What are Debtor’s rights, remedies, and liabilities under the Uniform Commercial Code?

Answer 62

ANSWER:

• maybe a breach of peace issue here, but maybe not
• Should not waive debtor’s write of redemption. But no harm no foul here, since debtor never tried to redeem.
• Bank never gave proper notice, thus unreasonable sale, bank would have to rebut the presumption.