Secured Transactions

Question 1

Consumer Goods

Answer 1

Consumer goods: “Consumer goods” are those goods acquired primarily for personal, family, or household purposes.

Question 2

Farm products

Answer 2

Farm products: “Farm products” are goods that are crops or livestock and include supplies that are used or produced in farming. For goods to be considered farm products, the obligor must be engaged in a farming operation.

Question 3

Inventory Goods

Answer 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. This term usually refers to goods that are consumed in a business

Question 4

Equipment Goods

Answer 4

“Equipment,” a catchall class, consists of goods that are not consumer goods, farm products, or inventory. It usually refers to goods that are used or bought for use primarily in a business, such as employees’ desks or machinery used in
manufacturing.

Question 5

If a good fits into multiple categories for secured transaction, how do we determine which category applies?

Answer 5

When the obligor uses the property for multiple purposes, the principal use to which the obligor puts the property determines the class of the goods

Question 6

Intangible collateral

Answer 6

—Intangible collateral includes nine classes of personal property. The more frequently tested types of intangible collateral are:

1) Accounts: “Accounts” include the right to payment for goods sold, property licensed, or services rendered. Also included is a right to payment for the issuance of an insurance policy, the use of a credit or charge card, or winning a lottery.

2) Deposit account: A “deposit account” includes a savings, passbook, time, or demand
account maintained with a bank

Question 7

Can leases be secured transactions?

Answer 7

Leases are covered under Article 9 when the transaction, although in the form of a lease, is in economic reality or substance a secured transaction. It is generally determined on a case‐by‐case basis.

o There are several rules for when a lease can create a security interest.

The most frequently tested rule is: “A transaction in the form of a lease creates a security interest if 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 (a small amount of money) consideration at the conclusion of the lease agreement.”

Although the agreement is called a “lease” and L retained title of the
printing press, the actual terms of the agreement created a sale of the printing
press to P with a security interest retained by L. Watch out for “leases” and
sellers that “retain title” of the goods!

Question 8

What is attachment and when does it attach?

Answer 8

Generally, a security interest that is enforceable against the debtor with respect to the collateral is said
to have “attached” to the collateral. For the security interest to be enforceable against the debtor,
three conditions must coexist:

 Value has been given by the secured party;
 The debtor has rights in the collateral; and
 The debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement

Question 9

When is value given for a secured transaction

Answer 9

Value Given—The secured party must give value for the security interest. Value may be given:

o By providing consideration sufficient to support a simple contract;
o By extending credit, either immediately or under a binding commitment to do so;
o By, as a buyer, accepting delivery under a preexisting contract, thereby converting a contingent obligation into a fixed obligation; or
o In satisfaction of, or as security for, part or all of a preexisting claim

Question 10

When does a debtor have right in the collateral

Answer 10

For the security interest to attach to the collateral, the debtor generally must have rights in the collateral.

The basic rule is that a security interest attaches
only to the rights that the debtor has. A debtor’s limited rights in collateral are sufficient for a security interest to attach.

Question 11

Exception to after-acquired Collateral

Answer 11

Exception: An after‐acquired clause is not effective if the collateral is consumer goods, unless the debtor acquires them within 10 days after the secured party gives value.

Question 12

Are there debtor rights in proceeds from collateral?

Answer 12

A security interest in collateral automatically attaches to

identifiable proceeds from the sale, exchange, or other disposition of the collateral.

Question 13

What are Accessions and how do they affect interests in collateral

Answer 13

Accessions: Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost, such as memory installed in a computer, or tires installed on a car. A security interest that is created in collateral that becomes an accession is not lost due to the collateral becoming an accession.

Question 14

What are the elements of a binding security agreement

Answer 14

o The debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement.

o The security agreement must meet the following requirements:

 It must be in a record, such as a written or typed document,

 Contain a description of the collateral (such as “all of debtor’s equipment”; and

 Be authenticated (typically signed) by the debtor

(mnemonic=AID): authentication, intent to create a security agreement, and a description of the collateral

Question 15

Purchase Money Security Interest what is it

Answer 15

—A PMSI gives lenders a security interest in goods that have been purchased with funds borrowed from them or purchased on credit from them. A PMSI is subject to special rules with respect to perfection and priority (discussed later). A PMSI may exist only with respect to two types of collateral— goods (including fixtures) and software.

Question 16

When does a PMSI exist?

Answer 16

A PMSI in goods exists when:

A secured party gave value (e.g., made a loan) to the debtor and the debtor uses the loan to acquire rights in or use of the collateral; OR

A secured party sells the collateral to the debtor, and the debtor enters an agreement requiring it to pay the secured party all or part of the purchase price (i.e., a sale of goods
on credit).

Question 17

What is perfection and what are the elements of a “perfected” good

Answer 17

Perfection” of a security interest is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties.

A security interest is “perfected” upon attachment of that interest and compliance with one of the methods of perfection.

Question 18

What are the methods of perfection (LIST only no explanation)

Answer 18

1. Methods of Perfection—Under Article 9, a secured party can perfect a security interest in the following ways:

o Filing of a financing statement

o Possession of the collateral

o Control over the collateral

o Automatic perfection (either temporary or permanent)

o Statute: If there is another statute that governs perfection of a security interest, that statute may provide another method of perfection

Question 19

What goods are perfected on filing a Financing Statement

Answer 19

A security interest in any collateral, except

a deposit account,
money, or
letter‐of‐credit rights that are not a supporting obligation,

may be perfected by filing a financing
statement.

The primary objective of filing is to give interested parties notice of the existence of the security interest

Question 20

What must a financing Statement have

Answer 20

A financing statement must contain the following information:
 The debtor’s name;
 The name of the secured party or a representative of the secured party; and
 The collateral covered by the financing statement.

Question 21

When is a filing statement effective, and for how long

Answer 21

The financing statement will be effective on the date of filing. A financing statement is generally effective for five years and may be continued for another five years by filing a continuation statement within six months prior to the expiration of the statement

Question 22

What happens if there is an error in the debtor’s name on a financing statement?

Answer 22

Error in the debtor’s name (recently tested)
 A financing statement that fails to accurately contain the debtor’s name may be “seriously misleading” and therefore not effective to perfect the security interest.

 Exception: When a standard search of the filing office records under the debtor’s correct name would disclose the financing statement, the erroneous name does not make the financing statement seriously misleading and it will be valid.

Question 23

What properties can be perfected by control over the good?

Answer 23

A secured party may perfect a security interest in in
investment property,
deposit accounts,
letter‐of‐credit rights,
electronic chattel paper, or
electronic documents by taking control of the collateral.

The security interest remains perfected only while the secured party retains control.

1) Deposit Account (recently tested)—A security interest in a deposit account can be perfected only by control. A secured party has control of a deposit account if:

 The secured party is the bank with which the deposit account is maintained;

 The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party; or

 The secured party becomes the bank’s customer with respect to the deposit account.

Question 24

What security interests automatically perfect?

Answer 24

 PMSI (Purchase Money Security Interest) in consumer goods

 Remember, a PMSI gives lenders a special security interest in goods that have been purchased with funds borrowed from them or purchased on credit from them.

 A PMSI in consumer goods is automatically perfected upon attachment. A secured party does not need to file a financing statement or have possession to have a perfected PMSI in consumer goods. A PMSI in other types of goods (e.g., inventory, equipment) or in automobiles is not automatically perfected.

Exam Tip 5: Read the facts carefully to determine if the PMSI is in consumer goods, or other goods. If the PMSI is not in consumer goods, the secured party still must take steps to perfect the interest (filing a financial statement)

Question 25

Proceeds of Sale of Collateral

Answer 25

If a security interest in collateral is perfected, and then the collateral is sold for cash proceeds (or checks or deposit account), the secured party will have a perfected security interest in the proceeds.

Question 26

Priority of Unsecured general creditor

Answer 26

General Creditor (Unsecured)—A general creditor is one who has a claim, including a judgment,
but who has no lien or security interest with respect to the property in question (i.e., the
collateral). This type of creditor does not have a claim to particular property owned by the
debtor. A secured party will always prevail over a general creditor with respect to the debtor’s
collateral

Question 27

Judicial Lien Creditor Priority

Answer 27

Judicial Lien Creditor—A judicial lien creditor is a creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law.

A perfected security interest has priority over a judicial lien creditor, but the judicial lien creditor had priority over an unperfected security interest.

Note 6: Even if the security interest is unperfected at the time the judicial lien comes into existence, the secured party will have priority if the only reason why it was unperfected was that the secured party had not yet given value.

Question 28

Transferee versus secured party with a security interest

Answer 28

Transferee versus secured party with a security interest

If the collateral is transferred from the debtor to the transferee and the transferee is not a buyer, the security interest continues in the collateral unless the secured party authorized the transfer free of the security interest.

In other words, the secured party still has a security interest in the collateral

Question 29

Buyer versus secured party with an unperfected security interest

Answer 29

buyer, other than a secured party, of collateral that is goods, tangible chattel paper, tangible documents or a security certificate takes free of an unperfected security interest in collateral if the buyer:

o Gives value; and

o Receives delivery of the collateral;

o Without knowledge of the existing security interest.

Question 30

Buyer versus secured party with a perfected security interest

Answer 30

A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that interest, unless the secured party has authorized its sale free of the security interest.

Question 31

Buyers in the Ordinary Course of Business (BOCB)

Answer 31

A buyer in the ordinary course of business (BOCB) takes the goods free of a security interest that the seller gave to the
creditor in the goods, even if the security interest is perfected and the buyer knows of its existence. A BOCB is a person who:

o Buys goods (not including farm products);
o In the ordinary course of business;
o From a merchant who is in the business of selling goods of that kind;
o In good faith; and
o Without knowledge that the sale violates the rights of another in the same goods.

Note 7: The requirement that a BOCB take without knowledge means actual knowledge that the sale is in violation of another party’s rights. Mere notice or
reason to know is insufficient.

Exam Tip 7: Remember that a person may have knowledge that there is a perfected security interest in goods when he purchases them and still qualify as
a BOCB, as long as the elements of BOCB are met.

Question 32

Consumer Buyer Elements

Answer 32

A 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.

A consumer buyer is a person who:
 Buys consumer goods for value;
 For his own personal, family, or household use;
 From a consumer seller; and
 Without knowledge of the security interest

Question 33

PMSI and consumer buyer interaction

Answer 33

If a financing statement for a PMSI in consumer goods is not filed, and the consumer buyer does not know of the PMSI, then he will take free of the security interest.

If the party holding the PMSI in consumer goods does in fact file, then his security interest will be good even against a consumer buyer

Question 34

Priority: Perfected security interest versus perfected security interest

Answer 34

When there are two or more perfected secured parties with rights in the same collateral, the first to party to either file a
financial statement or perfect has priority

Question 35

Priority: Perfected security interest versus unperfected security interest

Answer 35

—If only one security interest is perfected and the other is not, then the perfected interest takes over the unperfected one

Question 36

Unperfected security interest versus unperfected security interest

Answer 36

If neither interest is perfected, then the first party to have attached their interest has priority.

Question 37

Priority: PMSI (Purchase Money Security Interest) Rules

Answer 37

Preference is generally given to a PMSI over a non‐PMSI security interest.

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

Question 38

Priority: A PMSI in inventory or livestock

Answer 38

—prevails over all other security interests in the same
collateral, even if they were previously perfected, if

(i) the PMSI is perfected by the time the debtor receives possession of the collateral, and
(ii) the purchase‐money secured party sends an authenticated notification of the PMSI to the holder of any conflicting security interest before the debtor receives possession of the collateral.

 The notification must state that the purchase‐money secured party has or expects tohave a PMSI in the debtor’s inventory or livestock and it must include a description

Question 39

PMSI versus PMSI

Answer 39

If there are two or more competing PMSIs, the first to party to either
file a financial statement or perfect has priority.

Question 40

priority Proceeds from a PMSI in goods

Answer 40

the priority of a PMSI in goods generally extends to the
identifiable proceeds of the original collateral, but only as to proceeds in which the security
interest is perfected when the debtor receives possession of the collateral or within 20 days
thereafter

Question 41

Construction Mortgage priority

Answer 41

A construction mortgage (i.e., a mortgage that
secures an obligation incurred for the construction of an improvement on land, including the
cost of acquiring the land, and that indicates it is a construction mortgage in the real property
records) has priority over a subsequent security interest in a fixture, including a PMSI in a fixture. The construction mortgage must be recorded before the goods become fixtures, and it covers only goods that become fixtures before completion of the construction. UCC § 9‐334(h).

Question 42

Proceeds priority

Answer 42

Generally, the basic rules (e.g., first‐to‐file‐or‐perfect) govern priority if there are
conflicting security interests and at least one of those interests is claimed as proceeds. The filing
or perfection date for the original collateral is treated as the filing or perfection date for the
proceeds.

Question 43

DEFAULT, what it is, what the secured party may do

Answer 43

Generally, default will be the failure of the obligor to make timely payments to the secured party.

 Once a default has occurred, the secured party may:
o Seek possession of the collateral and, in order to satisfy the obligor’s outstanding obligation, either:

 Sell the collateral; or

 Retain it in full or partial satisfaction of the obligation;

o Initiate a judicial action to obtain a judgment based on that obligation; or

o Subject to statutory limitations, pursue any course of action to which the debtor and obligor
have agreed

Question 44

Security Agreement Covering Fixtures

Answer 44

 When a security agreement covers fixtures, a secured party may proceed as to the fixtures in accord with the rights and remedies with respect to the real property.

 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.

Question 45

Possession of Collateral after default

Answer 45

After default, a secured party is entitled to take possession of the collateral.

Unless the security agreement provides otherwise, a secured party is not required to give notice of default, nor is he required to give notice of his intent to take possession of the collateral.

Question 46

Disposition of Collateral—what is it generally

Answer 46

After default, a secured party may sell, lease, license, or otherwise dispose of all or any of the collateral. Within limits, the secured party may keep the collateral (strict
foreclosure) in full or partial satisfaction of the obligation

Question 47

Commercially Reasonable Standard for Disposition, elements

Answer 47

—All aspects of the disposition of collateral (method, manner, time, and place) must be conducted in a commercially reasonable manner.

A disposition is commercially reasonable when conducted:

o In the usual manner on a recognized market, such as a stock exchange, that has standardized price quotations for fungible goods;

o At the price current in any recognized market at the time of the disposition; or

o Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

Question 48

Disposition of Collateral—Price

Answer 48

There is not a specific price that must be obtained by the secured party in disposing of the collateral.

The mere fact that a higher price could have been obtained by disposing of the collateral in a different manner or at a different time does not establish that the disposition was not commercially reasonable.

A low price may trigger scrutiny by the court of the disposition and its reasonableness.

Question 49

Disposition of Collateral -Time of Disposition

Answer 49

There is not a specific time in which a disposition must occu

Question 50

Disposition of Collateral—Type of Disposition

Answer 50

o A secured party may dispose of the collateral publicly or privately.

o A secured party may purchase the collateral at a public sale, but she cannot do so at a private sale unless the collateral is of a kind that is customarily sold on a recognized market (e.g., the New York Stock Exchange) or the subject of widely distributed standard price quotations.

A secured party cannot purchase the collateral at a private sale when the prices are individually negotiated or when items are not fungible in a recognized market

Question 51

Disposition of Collateral- Notice of Disposition General

Answer 51

—A secured party is generally required to send an authenticated notification of disposition. The notification is required to be reasonable as to its content, the
manner in which it is sent, and its timeliness

Question 52

Disposition of Collateral- Notice of Disposition - Who must it be sent to

Answer 52

Notification of disposition is required to be sent to

(i) the debtor,
(ii) any secondary obligor, and, in the case of non‐consumer goods,
(iii) any other secured party or lien holder who held a security interest that was perfected by filing or pursuant to a statute, and
(iv) any other party from whom the secured party has received authenticated notice of a claim or interest in the collateral.

Question 53

Disposition of Collateral- Notice of Disposition Timeliness of notice

Answer 53

In general, the test for the timeliness of a notification of a disposition is reasonableness.

The notification should be sent sufficiently far in advance of the disposition to allow the notified party to act on the notification.

In a transaction other than a consumer transaction, when a secured party sends a notification of disposition after default and at least 10 days before the earliest time for disposition set forth in the notification, the timeliness of the notice is reasonable, provided that the notice is sent in a commercially reasonable manner.

Question 54

Secured transactions Content of Notification of Disposition

Answer 54

In nonconsumer transactions, the notification of disposition should : describe the debtor
and the secured party and
the collateral,
state the method of
disposition, and
state that the debtor is liable for unpaid indebtedness as well as a charge for accounting.

In consumer transactions, the notification must additionally contain:
a description of any liability for a deficiency,
a telephone number that the consumer can call to discover the amount owed, and
a telephone number or mailing address from which the consumer can get additional information about the disposition and the obligation.

Question 55

Application of the Proceeds From a Disposition-Cash proceeds priority order/application order

Answer 55

A secured party must apply, or pay over for application, cash proceeds of a disposition in the following order:

o Reasonable expenses for collection and enforcement, including reasonable attorney’s fees and other legal expenses; then

o Satisfaction of obligations secured by the security interest; then

o Satisfaction of any subordinate security interests, provided that the junior secured party made an authenticated demand for proceeds before distribution of the proceeds is complete; then

o The remainder of the proceeds to the debtor

Question 56

What if there is a deficiency after a disposition of property?

Answer 56

Deficiency: If, after the required payments and applications of proceeds have been made, there is a deficiency, then the obligor generally is liable for the deficiency.

Question 57

Debtor’s right to redeem

Answer 57

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

Question 58

Transferee’s Rights

Answer 58

—A sale of the collateral gives the buyer at the sale all of the debtor’s rights
in the collateral. If the transferee/buyer acts in good faith (i.e., honesty in fact and the
observance of reasonable commercial standards of fair dealing), then the disposition discharges
the security interest being foreclosed and any subordinate security interests and liens.
However, the transferee takes the collateral subject to any security interests that were senior to
the security interest foreclosed

Question 59

Remedies if secured party fails to comply with a sale being commercially reasonable or lack of written notification of sale

Answer 59

Remedies if secured party fails to comply with above requirements

Remedy #1: Damages (including consequential damages, but the debtor has a duty to mitigate). If the collateral constitutes consumer goods, statutory damages are awarded.

§ Remedy #2: Sale. A court may order a sale.

§ Remedy #3: Rebuttable presumption:

• Nonconsumer transaction: if there is a failure to comply with these requirements and the secured party fails to show that the sale was commercially reasonable, then there is a rebuttable presumption that the collateral is worth the amount of the debt and the debtor’s deficiency is nothing.
• Consumer transaction: There are two approaches that courts follow: the absolute bar rule (the creditor’s noncompliance bars any recovery of deficiency) or the rebuttable presumption rule (same as previous bullet point).

Question 60

Secured transactions Breach of peace

Answer 60

Breach of peace: There are several factors to examine to determine if the lender has breached the
peace, including whether the repossession took place at the debtor’s premises and whether the
debtor objected. Some courts also look at whether trickery was used. Some courts say that any
objection (even if slight and even if only verbal) amounts to a breach of the peace.

Question 61

Priority when lien creditor involved

Answer 61

When a lien creditor is involved: The general rule is that, as between a secured party and a lien
creditor, priority belongs to the secured party, provided it perfects before the lien arises. If the
interest was unsecured or only perfected after the lien creditor served the writ, then the lien
creditor has prior

Question 62

Consumer to consumer goods (garage sale) exception

Answer 62

A buyer not in the ordinary course of business takes free of a security interest even though perfected, if he buys without knowledge of the security interest; for value; and for his own personal, family, or household purposes 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.