Secured Transactions

Question 1

What are the 4 classes of tangible collateral (goods)?

Answer 1

(1) Consumer goods
(2) Farm products
(3) Inventory
(4) Equipment

Question 2

The characterization of collateral can affect the validity of a security interest, the way in which a security interest can be perfected, and the rights of a 3P in the collateral. Please classify the following collateral:

(1) A check or promissory note
(2) A check along with a security agreement
(3) The right to be paid for a service rendered
(4) A saving account at a bank

Answer 2

(1) Instrument
(2) Chattel paper
(3) Accounts
(4) Deposit account

Question 3

When distinguishing b/w types of collateral, what’s the difference b/w “accounts” and “deposit accounts”?

Answer 3

Accounts include the right to payment for property sold, leased, licensed, or for services rendered. Also included are rights to payment under insurance policies, amounts owing on credit cards, as well as a company’s accounts receivable.

Deposit accounts include savings, passbook, time, or demand accounts maintained w/a bank.

Question 4

What happens when parties leave out after-acquired language in situations that suggest they intended to include it (e.g., when the collateral is inventory or accounts)?

Answer 4

General rule: if there’s no reference to after-acquired party, the security interest attaches only to the collateral that exists at the time that the security agreement is executed.

Exception: in most states, if the security agreement describes inventory or accounts, there’s a rebuttable presumption that the description includes after-acquired inventory and accounts.

Question 5

Which of the following descriptions of collateral in a security agreement are inadequate for purposes of attachment? Why?

(1) “All of debtor’s equipment”
(2) “All of debtor’s inventory”
(3) “All of debtor’s assets”
(4) “All of debtor’s personal property”

Answer 5

(3) and (4): super-generic and don’t reasonably identify the collateral

Note: super-generic descriptions in a financing statement are adequate for perfecting a security interest. The security agreement for attachment purposes must be more specific.

Question 6

Consignments may fall w/in Article 9 in order to facilitate public notice. These consignments carry the risk that a consignee’s lenders may be misled into thinking that consigned inventory is actually owned by the consignee rather than the consignor. If a consignment is subject to Article 9, how are the consignor and the security interest in the consigned goods treated?

Answer 6

Consignor is treated as the secured party and must perfect its security interest in the consigned inventory, and the security interest in the consigned goods is treated as a PMSI in inventory.

AKA: consignor perfects by filing before consignee receives possession of the items, and the consignor properly notifies any secured parties w/conflicting security interests in consignee’s inventory

Question 7

In order for a consignment to be subject to Article 9, what 4 requirements must be met?

Answer 7

(1) Consigned must deliver goods to a merchant (consignee) to sell
(2) Merchant (consignee) must deal in goods of that kind, not operate under name of consignor, not be generally known by its creditors to be substantially engaged in the business of selling goods of others, and not be auctioneer
(3) Value of the goods must be at least $1,000 in each delivery
(4) Goods must not be consumer goods immediately before delivery

Question 8

A PMSI may exist only w/respect to 2 types of collateral. What are they?

Answer 8

(1) Goods (including fixtures)

(2) Software

Question 9

A new security agreement is not necessary when a debtor buys additional collateral if the original security agreement includes what?

Answer 9

B/c a security interest only attaches to collateral described in the security agreement, an after-acquired property clause should be included in the original security agreement if a creditor wants to have a security interest in property acquired by the debtor after the agreement is authenticated. Typical language includes, “all of the debtor’s existing and after-acquired [collateral]” or “all of the [collateral] now owner or hereafter acquired.”

Question 10

Under what circumstances does a buyer of goods take free of an unperfected security interest?

Answer 10

A buyer, other than a secured party, of collateral that is goods, takes free of an unperfected security interest in the same collateral if the buyer:

(1) Gives value
(2) Receives delivery of the collateral
(3) Without knowledge of the existing security interest

Question 11

What’s the most common method of perfection, and what’s this method’s objective?

Answer 11

Filing: gives notice that secured party has interest in debtor’s personal property

Actual security agreement b/w parties does not have to be filed. Perfection by filing assumes that a 3P will investigate any details of a security agreement.

Question 12

An after-acquired clause is not effective if the collateral is consumer goods, unless…?

Answer 12

Debtor acquires them w/in 10 days after the secured party gives value

Question 13

Even if parties label their transaction as a lease in the hopes of avoiding Article 9 rules, their transaction will be governed by Article 9 if one of the following 4 conditions is present:

Answer 13

(1) Original lease term is = or > good’s remaining economic life
(2) Lessee is bound to renew the lease for the good’s remaining economic life (or is bound to become owner of goods)
(3) Lessee has option to renew lease for the good’s remaining economic life for nominal or no additional consideration
(4) Lessee has option to become owner of the goods upon completion of lease for nominal or no additional consideration

Essentially: economic reality in all of these situations is that there’s a sale to lessee w/security interest retained by lessor. Lessor is secured party and can’t avoid filing by labeling transaction as lease. Lessor would need to file or otherwise perfect their interest in the goods.

Question 14

What happens to perfection when (1) debtor moves to another state, or (2) collateral is transferred to person in another state who takes collateral subject to security interest?

Answer 14

(1) Perfected security interest will remain perfected for 4 months after the move (unless financing statement lapses earlier). Grace period also covers collateral the debtor acquires post-move. To remain continuously perfected, secured party must re-fil in new state w/in 4-month window.
(2) Secured party has 1 year to file new financing statement listing the new debtor.

Question 15

How and when does tangible collateral (goods) get classified, and does this method apply to other types of collateral?

Answer 15

Look to debtor’s principal use when security interest attaches.

Unlike tangible goods, classification of other types of collateral does not turn on the manner in which the debtor uses the property.

Question 16

Proceeds are whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of. If a security interest was attached to collateral, how does the security interest then attach to the proceeds of that original collateral upon its sale or disposition?

Answer 16

Attaches automatically to identifiable proceeds

Question 17

“Goods” encompass anything that’s moveable at the time that a security interest attaches. Also included in “goods” that are technically not moveable. Give 5 examples of these non-moveable goods.

Answer 17

(1) Fixtures
(2) Standing timber
(3) Unborn animals
(4) Growing or unharvested crops (including crops grown on tress, vines, or bushes)
(5) Manufactured homes

Question 18

When can a PMSI exist in goods?

Answer 18

(1) Value given (e.g., a loan) allows debtor to acquire the goods or software; or
(2) Goods or software acquired is the collateral that secures the loan (e.g., goods bought on credit)

Question 19

Upon default, what happens when a secured party has priority in a fixture?

Answer 19

Secured party may remove fixture from real estate but will be liable for cost of repairing any physical damage to real estate. But not liable for any reduction in value of real property due to removal.

Question 20

How must the collateral be described in a financing statement?

Answer 20

Must sufficiently indicate the collateral (like one that meets the requirements for creation of an enforceable security agreement).

When the security interest covers all of the debtor’s assets or personal property, the description can contain a broad statement to that effect.

Question 21

Chattel paper is a record (paper or electronic) w/what 2 components?

Answer 21

(1) Monetary obligation

(2) Security interest in specific goods (security agreement) or a lease of specific goods

Question 22

For a security interest to be enforceable against a debtor, (i.e., attachment), what 3 conditions must be met?

Answer 22

(1) Value given by secured party
(2) Debtor has rights in the collateral
(3) Debtor has authenticated a security agreement describing collateral, or secured party has possession or control of collateral

Question 23

General rule: unless the secured party authorizes the sale free and clear of its security interest, a buyer takes subject to a perfected security interest. This is not the case for a buyer in the ordinary course of business who can take free of the security interest, even if the buyer knows of its existence. Explain what it means to be a buyer in the ordinary course of business.

Answer 23

(1) Buys goods (not farm products) in ordinary course of business
(2) From merchant who is in the business of selling goods of that kind
(3) In good faith
(4) Without actual notice that the sale violates the rights of another in the same goods
(5) Merchant is not a pawnbroker

Question 24

What’s the difference b/w accessions and commingled goods? What happens to security interests that are attached to those types of goods?

Answer 24

Accessions are goods that are physically untied w/other goods so that the identity of the original goods is not lost (e.g., a framed piece of art). The security interest in the accession continues the accession.

Commingled goods are goods that’re physically united w/other goods to the point that their identity is lost (e.g., eggs being used to make a cake). The security interest in the good does not continue, but it will attach to the large product.

Question 25

At a minimum, what information must a financing statement contain?

Answer 25

(1) Debtor’s name
(2) Name of secured party or representative of secured party
(3) Collateral covered by financing statement

Question 26

A security interest in _______ can be perfected only by possession

Answer 26

Money

Question 27

Does the buyer of collateral subject to a perfected security interest take the collateral free and clear, or subject to the security interest?

Answer 27

Subject to that interest.

Exception: secured party has authorized its sale free of the security interest

Question 28

A security interest in proceeds enjoys temporary perfection (20 days) and may continue to be perfected indefinitely under what 3 circumstances?

Answer 28

(1) Original financing statement is broad enough to encompass the proceeds or the secured party amends the financing statement w/in 20 days
(2) Proceeds are identifiable case proceeds and the security interest in the original collateral was perfected (note: cash proceeds include checks and deposit accounts)
(3) Same office rule applies

Question 29

What’s the buyer in ordinary course of business (BIOCB) exception, and who qualifies as a BIOCB?

Answer 29

BIOCB takes free of a security interest created by buyer’s seller, even if security interest is perfected and buyer knows of its existence.

(1) Buys goods (other than farm products)
(2) In the ordinary course
(3) From a seller who is in the business of selling goods of that kind
(4) In good faith
(5) Without knowledge that the sale violates the rights of another in the same goods

Question 30

If attachment is the process by which a security interest in a piece of collateral becomes enforceable against a debtor, then why is it important to perfect?

Answer 30

Generally necessary for secured party to have rights in collateral that’re superior to any rights claimed by 3Ps. Focus is to protect secured party from subsequent buyers of collateral, lien creditors, etc. who may claim interest in same collateral. While perfection has no relevance to secured party’s rights against debtor, it stakes secured party’s claim so that secured party might have priority over a later party.

Question 31

As b/w a perfected secured creditor and a statutory lien claimant, who has priority in a dispute over the same collateral?

Answer 31

Statutory lien creditor has priority if:

(1) Lienholder has possession of the goods
(2) Lien secures payment or performance of obligation for services or materials furnished in ordinary course of person’s business (e.g., mechanic’s lien)

Question 32

Typically, a secured party must give authenticated notice of disposition to a variety of parties. When is notice not required?

Answer 32

(1) Collateral is perishable or threatens to decline speedily in value
(2) Collateral is customarily sold on recognized market; or
(3) Notice is waived by authenticated agreement after default

Question 33

Where must a financing statement be filed?

Answer 33

Generally, the financing statement must be filed w/the Secretary of State (“central filing”) of the state of the debtor’s location

Question 34

A security interest in a _______ can be perfected only by control

Answer 34

Deposit account

Question 35

Under what circumstances does the same office rule extend temporary perfection?

Answer 35

(1) Filed financing statement covers original collateral
(2) Proceeds are collateral in which a security interest may be perfected by filing in the same office as the original financing statement
(3) Proceeds are not acquired with cash proceeds

Example:
Lender filed financing statement covering candle inventory. Candles are sold on credit to Boutique generating an account (which is proceeds of inventory). Proceeds and original inventory would be perfected by filling in same office, and account was not acquired w/cash proceeds. Lender is perfected in account w/o having to file new financing statement.

Question 36

When can perfection occur as it relates to attachment?

Answer 36

Perfection can happen after attachment or at the same time - but not before

Question 37

Who has priority in a car radio that had been installed in a vehicle that was perfected under a certificate-of-title statute?

Answer 37

Security interest in an accession is usually subject to general priority rules. However, security interest in an accession is subordinate to security interest in the whole collateral if that collateral was perfected under a certificate-of-title statute. Here, the radio was installed in a vehicle that was perfected under a certificate-of-title statute. Therefore, the security interest in the car radio is subordinate to the holder of the lien noted on the title certificate of the vehicle.

Question 38

As b/w a secured party and a judicial lien creditor, who has priority?

Answer 38

Judicial lien creditor takes collateral subject to existing perfected security interest but generally has priority over an unperfected security interest

Question 39

A PMSI in what type of goods automatically perfects upon attachment?

Answer 39

Consumer goods

Question 40

Does a perfected security interest have priority over an earlier created but unperfected security interest in the same collateral?

Answer 40

Yes

Question 41

PMSI in fixtures has priority over a prior interest in the real property w/which they are associated when what 2 things occur?

Answer 41

(1) Debtor has interest in real property (owner) or is in possession (lessee)
(2) Security interest is perfected by fixture filing before the goods become fixtures or w/in 20 days thereafter

Question 42

Explain the “garage sale” exception to the general rule that unless the secured party authorizes the sale free and clear of its security interest, a buyer takes subject to a perfected security interest. Is there an exception to this exception?

Answer 42

Buyer of consumer goods will take free of a security interest even if it’s perfected if the buyer:

(1) Buys consumer goods for value
(2) From a consumer seller
(3) For personal, family, or household use
(4) Without knowledge of the security interest

Exception: party holding PMSI in consumer goods filed financing statement covering those goods before consumer-to-consumer purchase occurred. Secured party’s security interest will be good against consumer buyer. PMSI in consumer goods is automatically perfected, but filling anyways protects priority in case of consumer-to-consumer purchase of the covered goods.

Question 43

The general rule for a perfected security interest vs. perfected security interest = first to file or perfect. In essence, this rule rewards the earlier _______.

Answer 43

Filer

Question 44

Once there’s been a default, the secured party can repossess the collateral in what 2 ways?

Answer 44

(1) Use of judicial process (e.g., replevin action)

(2) Self-help repossession

Question 45

(1) What’s the general rule for a security interest in futures vs. a real property interest to which it is associated?
(2) In order for a security interest in a fixture to have priority over an interest in the real property, what must happen?

Answer 45

(1) Security interest in fixtures is subordinate to a conflicting interest of an owner of the related real property (other than the debtor).
(2) Secured party must file a fixture filing before the real property interest is recorded. A fixture filing is a financing statement covering goods that are or are to become fixtures. It must be filed in the office designated for the recording of a mortgage on the related real property (i.e., local real property records).

Question 46

If a secured party holding a subordinate security interest in a piece of collateral repossesses and sells that collateral, what happens to the senior, or superior, security interests in that collateral?

Answer 46

Senior, or superior, security interest survive the sale. In other words, the superior security interest continues in the collateral in the hands of whoever bought, leased, or licensed it in the foreclosure sale (buyer or transferee takes it subject to the senior security interest).

Question 47

How do you determine priority when there’s an unperfected security interest vs. another unperfected security interest in the same collateral?

Answer 47

First to attach takes priority

Question 48

Self-help repossession cannot “breach the peace,” which is not defined by Article 9 and is left up to the courts. What self-help measures are typically deemed acceptable by courts?

Answer 48

A trespass w/respect to the collateral itself, or the debtor’s land, are generally deemed acceptable means of self-repossession that do not breach the peace.

Question 49

What’s the priority rule for a PMSI in goods (other than inventory or livestock)?

Answer 49

PMSI will prevail over all other security interests in the same collateral, even if those other security interests were previously perfected (e.g., an existing after-acquired equipment clause by a lender), so long as the security interest is perfected before or w/in 20 days after the debtor receives possession of the collateral.

Question 50

What’s the priority rule for a lender w/a PMSI vs. a seller w/PMSI?

Answer 50

Seller PMSI beats the lender PMSI.

Question 51

What’s the rule regarding construction mortgages and subsequent security interests in fixtures?

Answer 51

Construction mortgage has priority over any subsequent security interest in fixtures, including PMSIs in fixtures, if it is recorded before the goods become fixtures, and it covers only those goods that become fixtures before completion of the construction.

Question 52

“Default” is not defined by Article 9. Typically, parties to a security agreement agree to what circumstances give rise to a default. In the absence of such an agreement, what event gives rise to a default?

Answer 52

Failure of obligor to make timely payments to secured party

Question 53

Upon default, what happens when a secured party has priority in an accession?

Answer 53

Secured party is allowed to remove the accession from the other goods (i.e., if the security interest in the accession has priority over the claim of every person having an interest in the whole). Secured party that removes an accession from other goods must reimburse the holder of a security interest or the owner of the whole for physical injury to the whole or other goods.

Note: security interest in a car radio is subordinate to security interest in the car perfected by notation of the security interest on the title to the car.

Question 54

What remedy is available to a secured party of large equipment that makes repossession difficult?

Answer 54

Equipment that is hard to repossess can be rendered unusable in lieu of repossession. This is usually followed by disposal (e.g., sale) on the debtor’s premises.

Question 55

What is the consumer buyer exception and who qualifies as a consumer buyer?

Answer 55

Consumer buyer of consumer goods takes free of a security interest, even if perfected, unless prior to the purchase, the secured party filed a financing statement covering the goods.

Consumer buyer:

(1) Buys consumer goods for value
(2) For personal, family, or household use
(3) From a consumer seller; and
(4) Without knowledge of the security interest

This is often referred to as the “garage sale” rule b/c that type of sale would qualify.

Question 56

What’s the priority rule for a PMSI in inventory or livestock?

Answer 56

(1) Secured party perfects before inventory or livestock is delivered to debtor
(2) Secured party sends authenticated notification of the PMSI to other secured parties

Question 57

Once a default has occurred, what are the secured party’s options?

Answer 57

(1) Seek possession of tangible collateral (repossess) and either sell or retain it in satisfaction of the obligation owed
(2) Initiate a judicial action to obtain a judgment against the debtor or obligor
(3) Pursue other courses of action to which the debtor and secured party have agreed

Question 58

All aspects of the disposition of collateral must be conducted in a commercially reasonable manner. When is a disposition considered commercially reasonable?

Answer 58

When the collateral is:

(1) Sold in the usual manner in a recognized market that has standardized prices for fungible goods
(2) Sold at the price current in a recognized market; or
(4) Disposed of in conformity with reasonable commercial practices among dealers in that type of collateral

Question 59

If a secured party sells collateral, cash proceeds of a disposition are distributed in what order?

Answer 59

(1) Pay reasonable expenses for collection and enforcement (e.g., reasonable attorney’s fees)
(2) Pay off the debt to the foreclosing secured party
(3) Pay subordinate security interests, provided the subordinated party makes a formal demand prior to distribution of the proceeds
(4) Any surplus or remainder will be returned to the debtor