Secured Transactions

Question 1

Perfecting a Security Interest in a Deposit Account

Answer 1

a security interest in a deposit account may be per-fected only by control.” Under UCC § 9-104, a creditor only has control of a deposit account if: (1) “the secured party is the bank with which the deposit account is maintained” (the bank account is at State Bank, not First Bank), (2) the bank where the account is held has agreed in writing to follow the instructions of the secured party (no such agreement exists), or (3) the secured party becomes the bank’s customer with respect to the account (which was not done).

Question 2

Elements of an Effective Financing Statement

Answer 2

For a financing statement to be effective under UCC § 9-502, it must contain three pieces of information: (1) the name of the debtor, (2) the name of the secured party, and (3) an indication of the collateral.

Question 3

Errors in a Financing Statement

Answer 3

Under UCC § 9-506(a), minor errors do not render a financing statement ineffective, unless those errors make the financing statement “seriously misleading.”

If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a statement that [otherwise] fails . . . to provide the name of the debtor . . . the name provided does not make the financing statement seriously misleading.”

The safe harbor applies only to searches using the filing office’s “standard search logic.” Some states permit informal searches, not utilizing standard search logic. Some examinees may note that the fact pattern does not indicate whether the standard search logic was used. Examinees who note and discuss this problem could receive extra credit.

Question 4

Perfected Secured Creditor vs. Judgement Lien Creditor

Answer 4

a judgment lien creditor takes priority over a security interest only if the creditor becomes a “lien creditor” before the conflicting security interest is perfected.

i.e. they are treated as equal so whoever is first wins

Question 5

What is a Security Interest

Answer 5

A security interest arises when one party uses certain collateral in order to secure repayment of an obligation from another party

Question 6

Attachment

Answer 6

Attachment is the process by which a
security agreement is created. Attachment occurs when the secured party gives value, the debtor has rights in the collateral, and a valid security agreement exists. A valid security agreement is (1) in writing, (2) authenticated by the debtor, (3) contains a granting clause indicating that a security agreement exists, and (4) contains a description of the collateral. A description of collateral in a security agreement is sufficient if it reasonably identifies what is being described.

Question 7

Inventory

Answer 7

Inventory includes all goods that a company holds for sale to customers in its business.

Question 8

Buyer in the Ordinary Course of Business (BIOC)

Answer 8

A buyer in the ordinary course of business is one that purchases consumer goods in good faith, without notice of any prior interest in the goods, and in the ordinary course of business from a seller that normally sells those types of goods.

Question 9

PMSI

Answer 9

created when an interest in
goods is incurred by the debtor in order to purchase the goods. In order to qualify as a
PMSI the debtor must actually use the funds to purchase the goods

Question 10

Garage Sale Rule

Answer 10

The “garage sale” exception applies when a person buys a consumer good face to-face from another individual (such as when one buys from another person at a garage sale). Similarly to the buyer in the course of ordinary business, a “garage sale” buyer purchases free and clear from any previous interests in the item, so long as they buy in good-faith and without knowledge of the interest

Question 11

Secured Party’s Right to Proceeds from the Sale of Collateral

Answer 11

A secured party’s interest extends also to any proceeds from sale of the collateral. Proceeds include any payment or any goods the collateral might be exchanged or traded for.

Question 12

Remedies for a Secured Creditor in Case of Default

Answer 12

When a debtor defaults on a security agreement, a secured creditor may pursue a variety of remedies. The creditor may initiate a replevin action to acquire the property, or it may use self-help to repossess the property provided that this does not lead to a breach
of the peace. In many jurisdictions, the debtor’s mere presence and objection to a self help repossession is enough to compel the creditor to use legal process. In line with the general disfavoring of self-help methods, a creditor may not extra-legally destroy or
deactivate its collateral, particularly when such actions are likely to lead to large consequential damages for the debtor, and may forfeit important rights in any subsequent sale of the property.

Question 13

Equipment

Answer 13

Tangible property in machinery or other products used

for the ordinary functioning of a business is called “equipment”

Question 14

PMSI in Equipment Priority

Answer 14

PMSIs in equipment will take priority over all other security interests if a financing statement is filed within 20 days of the debtor taking possession of the property.

Question 15

Priority when Property becomes a Fixture

Answer 15

After property becomes a fixture, an interest in the property exists in favor of anyone with an interest in the real property. A holder of a PMSI in the fixture may retain priority over a mortgage holder by a filing a fixture financing statement in the proper real
estate records office within 20 days of the property being incorporated as a fixture. If it fails to do so, it retains its security interest, but it is subordinated to the interest of the property’s mortgage holder.

Question 16

Same Office Rule

Answer 16

While an interest in cash proceeds also perfects automatically, perfection can be maintained in non-cash proceeds via the “same office rule” - if a financing statement for the proceeds can be filed in the same office where the financing statement for the
initial collateral was filed, then perfection is maintained throughout. Proceeds can be the product of a sale or a lease of the collateral, and can be either tangible or intangible, the latter including accounts and rights to payment.

Question 17

How to start out a Secured Transaction Question

Answer 17

Article 9 of the UCC governs the law of secured transactions. A security interest is an
interest that one party–the secured party–has in the non-real property, known as collateral, of another–the debtor. The security interest is created to provide collateral, similar to a down-payment or insurance–of a loan or other item of value provided by the
secured party to the debtor. A security interest is created under Article 9 when a proper security agreement is executed and when attachment occurs.

Question 18

Getting After Acquired Property to Attach

Answer 18

Must be express in the security agreement

Question 19

Elements of a Properly Executed Security Agreement

Answer 19

A security agreement is properly executed when there is a contract that (1) identifies the debtor and secured party, (2) identifies the collateral with a description sufficient to reasonably identify the collateral property, (3) grants the secured party an interest in that collateral in exchange for something of value, and (4) is signed by the parties.

Question 20

Rights of a Secured Creditor in case of Default and has right to account collateral

Answer 20

In the case of accounts receivable, the secured party has the right to make a demand on the parties
owing the debtor and whom the secured party has a collateral interest in the accounts receivable of. Once such a demand has been reasonably made (with proper notice) to the debted parties owing the debtor under an accounts receivable that has been sold to the secured party, they must comply with the lawful demand.

Question 21

Notice prior to sale of collateral

Answer 21

Upon default, a secured party may repossess collateral without notice to the debtor, so long as it does not breach the peace. Once the property is repossessed, however, the secured party must send proper notice to the debtor, any secondary obligor, other secured parties, and creditors prior to distribution (selling the collateral). Notice must be provided within a reasonable time prior to the sale of collateral; generally, 10 days or more prior to sale has been found reasonable. Failure to properly notify may result in adverse consequences for the secured party: they may be estopped from seeking a deficiency against the debtor, the
deficiency may be reduced, or they may be liable to suit on behalf of the debtor or other
creditors with interest in the collateral for damages or even to enjoin the sale if it has not
already occurred. In all other respects, the sale of collateral after default must be commercially
reasonable.

Question 22

3 Ways an Interest can be Perfected

Answer 22

A secured party perfects its interest when, after the interest attaches), the secured party files a financing statement, obtains control or possession over the collateral, or through automatic perfection by operation of law.

Question 23

How to authenticate a Security agreement

Answer 23

1. Typical Security Agreement document

2. Possession or control