Secured Transactions

Question 1

What law governs secured transactions?

Answer 1

UCC Article 9

Question 2

What should you look for in a secured transaction question?

Answer 2

1) a credit sale or a loan AND

2) an agreement that creates a lien on debtor’s collateral to secure the debt

Question 3

Definition of debtor?

Answer 3

The person who owes payment or performance of the obligation secured. Don’t have to worry about the debtor/obligor distinction for the bar exam

Question 4

Definition of the secured party?

Answer 4

The lender, seller, or person who has the security interest in their favor

Question 5

Definition of security agreement?

Answer 5

Security agreement is the agreement between the debtor and the secured party that creates the security interest. Just a special kind of contract.

Question 6

Definition of security interest?

Answer 6

An interest in personal property or fixtures that secures payment or performance of an obligation. It’s a contingent property interest in the collateral that springs to life when the default occurs

Question 7

Definition of collateral?

Answer 7

The property subject to the security interest

Question 8

What is a purchase money security interest?

Answer 8

PMSI is a security interest that is created either:
1) by a seller of goods on credit in the goods sold
OR
2) created by a lender of $ to a debtor who uses the $ to buy specific property with that specific $ which property the collateral for the loan

Question 9

What is an after acquired property clause?

Answer 9

A secured party can take an interest in the property the debtor has not and also property that they acquire in the future (typical arrangement)

Question 10

What is a future advance clause?

Answer 10

A future advance clause allows future loans to be made under the present security agreement. No need for future security agreements once one with a future advance clause is signed

Question 11

What is attachment?

Answer 11

Attachment refers to the legal steps needed to give a secured party a security interest in the collateral that is effective AGAINST THE DEBTOR

Question 12

What makes a creditor a secured creditor?

Answer 12

Attachment of a security interest

Question 13

What is perfection?

Answer 13

Perfection refers to the legal steps required to make a security interest effective AGAINST THIRD PARTIES (gives public notice)

Question 14

What is a financing statement?

Answer 14

A document used to provide public notice of the security interest/perfect the security interest

Question 15

*HIGHLY TESTED
What are goods under Article 9?
What are the 4 subtypes of goods?
What is the classification based on?

Answer 15

All tangible, movable, personal property PLUS fixtures, unborn animals, and growing crops

4 Types:

1) Consumer goods (goods used/bought for personal/family/household purposes)
2) Equipment (goods used/bought for use in a business or any good that doesn’t fit one of the other 3 types - it’s the default)
3) Farm Products (crops/livestock products thereof if in possession of the farmer debtor)
4) Inventory (goods used/bought for sale or lease OR used/consumed in a business in a short period of time including raw materials)

The classification is based on how the DEBTOR USES the collateral (not the nature of the collateral)

Question 16

If you think a piece of collateral falls into more than one UCC category on the bar exam what should you do?

Answer 16

You should state the couple of things you think it might be, give the definitions and say why.

Question 17

*HIGHLY TESTED

What are the 8 types of intangible or semi-intangible collateral? What is the classification based on?

Answer 17

The classification is based on the NATURE of the collateral (not how the debtor uses it)

1) Instruments (paper representing the right to be paid $ - promissory notes, CDs)
2) Documents (right to receive goods - bill of lading/warehouse receipt)
3) Chattel Paper (record which evidences a monetary obligation AND a security interest/lease in specific goods. Record is a permanent storage)
4) Investment Property (stocks, bonds, etc.)
5) Accounts (right to payment for property sold/services rendered, but debtor’s owing for a loan is a payment intangible which is a general intangible)
6) Deposit Accounts
7) Commercial tort claims (tort claims by orgs - or - by individuals related to their business and not for personal injury/death)
8) General Intangibles (default category - personal property not within the scope of other definitions - patents, trademarks, copyrights, goodwill, payment intangibles= debtor’s owing of $ on a loan or a contract where $ is owed)

Question 18

Does Art 9 apply to noncommercial tort claims?

Answer 18

Only as proceeds of other collateral

Question 19

What is the difference in an instrument, an account, a payment intangible, and a general intangible?

Answer 19

An account is a receivable from goods sold or services rendered.
An instrument is a right to be paid $ like a promissory note or a check
A payment intangible is the debt of an account debtor that is principally monetary like a loan of $. Type of General Intangible

Question 20

Not highly tested*

To what does Art 9 apply?

Answer 20

~ To a transaction that creates a security interest in personal property or fixtures by contract (regardless of phrasing/form

• Seller’s retention of title in a sale of goods
• Nonpossessory agricultural liens (perfection and priority only)
• Sales of accounts, chattel paper, payment intangibles, promissory notes
• Commercial consignment (consignment where the consignee’s creditors might think the consigned property is owned by the debtor and not the consignor)
• Secured sale disguised as a lease (if at time of least, not reasonably likely that lease will end and lessor will get goods back with meaningful economic value left, then disguised sale)

Question 21

Do you have to use the terms article 9 or security interest to create a security interest?

Answer 21

No, and conversely, not using them does not allow you to dodge the formalities of Art 9 (saying “contractual lien” allowing sale of your stuff on default doesn’t work)

Question 22

HIGHLY TESTED
What are the 3 requirements for attachment?

When does attachment occur?

Answer 22

These 3 must COEXIST:

1) Agreement to create a security interest by either a) taking possession b) authenticating a security agreement or c) taking control
2) Value given by secured party (and value given by debtor to creditor but this is rarely a problem)
3) Debtor must have rights in the collateral

Attachment occurs when the last of the 3 elements - even if there is a lag in time

Question 23

HIGHLY TESTED

What is required of an authenticated security agreement?

Answer 23

Need all of

1) a record evidencing an intent to create a security interest (no magic words needed)
2) agreement authenticated by the debtor (signed or marked with intent to authenticate)
3) description that “REASONABLY IDENTIFIES” the collateral - by UCC category or type ok (but consumer goods, consumer securities accounts, and commercial tort claims cannot be listed by type)

Question 24

Does “all of the debtor’s assets” or “all of the debtor’s personal property” work for purposes of a security agreement description of the collateral?

Answer 24

No, that’s a “supergeneric description”

Question 25

Does past consideration work for purposes of giving value for attachment?

Answer 25

Yes, any consideration for a contract works or past consideration if it is clear that the security interest is given as security for the past consideration

Question 26

What rights does the debtor have to have in the collateral to grant a security interest in it?

Answer 26

Debtor only has to have some kind of rights - doesn’t have to have title

Question 27

What responsibility does a creditor with possession or control have to exercise with regard to the collateral? What happens to profits/proceeds from the collateral?

Who bears the risk of loss?

Answer 27

Secured party in possession must use reasonable care to store/preserve the collateral but can get these expenses reimbursed by the debtor. Secured party can also hold profits/proceeds as additional security except cash which must be given to the debtor or applied toward the secured obligation

Risk of loss is on the debtor to the extent of any deficiency in the creditor’s insurance

Question 28

Can you have an oral security agreement?

Answer 28

Yes, it’s called a “pledge” and the oral agreement must convey intent to create a security interest if the creditor also has possession or control of the collateral. Only need one of 1) record security agreement 2) possession 3) control in addition to the value and rights in the collateral requirements

Question 29

Without an after acquired property clause, what is the secured party’s collateral limited to?

Answer 29

Property that the debtor had rights in at the time the debtor signed the security agreement (and proceeds of that property)

Question 30

Will a court ever imply an after acquired property clause?

Answer 30

Yes, a court will often imply an after acquired property clause if the collateral is of a type that is rapidly depleted or replenished (e.g. inventory, accounts) such that the parties must have intended it.

Question 31

Is an after acquired property clause required to obtain a security interest in property that the debtor acquires later?

Answer 31

Generally yes, but the security interest automatically continues into proceeds of the original collateral even without an after acquired property clause

Question 32

If a security agreement has an after acquired property clause, what categories of future collateral will NOT be subject to the security interest?

Answer 32

After acquired property clauses don’t apply to consumer goods for longer than 10 days after the creditor gives value and don’t apply to commercial tort claims at all

Question 33

What are proceeds?

Answer 33

Proceeds are IDENTIFIABLE proceeds received upon the sale, exchange, collection, or other disposition of collateral OR other proceeds.
E.g. insurance $ payable by reason of loss of collateral is proceeds if payable to the debtor or secured party

Question 34

What is meant by “identifiable” proceeds?

Answer 34

It means that the SECURED CREDITOR can prove that the proceeds are TRACEABLE back to the original collateral.

Question 35

What is the rule for determining how much of cash in a commingled bank account is cash proceeds?

Answer 35

The Lowest Intermediate Balance Rule applies to determine what portion of the account is identifiable proceeds. From the time the proceeds are deposited to the time you are applying the rule, find the lowest balance and that’s the cap on cash proceeds. In other words, assume personal funds are spent first

Question 36

What is a “supporting obligation” to some piece of collateral? Does the secured party have a security interest in that supporting obligation?

Answer 36

A supporting obligation is like a guarantee/surety for the collateral.

Security interests in a piece of collateral automatically extend to include supporting interests of the collateral.

Question 37

HIGHLY TESTED

What are the 5 methods of perfection?

Answer 37

1) Filing
2) taking possession of the collateral
3) control
4) automatic perfection
5) temporary perfection

Question 38

If all of the steps for perfection are satisfied before the attachment of a security interest, when is the security interest perfected?

Answer 38

The security interest is perfected upon attachment

Question 39

Unperfected DOES NOT MEAN UNSECURED

Answer 39

Perfection and secured status against the debtor are totally different

Question 40

What is required for perfection?

Answer 40

Attachment and following the proper steps for perfection

Question 41

What is the only type of security interest that automatically perfects? (and what is the key limitation)

Answer 41

A PMSI in CONSUMER GOODS perfects upon attachment (but security interests in motor vehicles can be perfected only by notation on the certificate of title)

Question 42

When is a security interest perfected as of if the perfection is by possession?

Answer 42

The security interest is perfected as of the secured party’s taking of possession as long as possession is retained

Question 43

How does a secured party perfect by possession if the goods are in the hands of a bailee?

Answer 43

the bailee must authenticate a record acknowledging that it is holding the collateral for the secured party’s benefit

Question 44

When does possession NOT perfect a security interest?

When can you perfect by possession?

Answer 44

Cannot perfect by possession in general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, goods with certificates of title, and accounts

Can perfect by possession in any kind of goods, instruments, certificated securities, negotiable documents.

Question 45

How do you perfect a security interest in money?

Answer 45

ONLY by possession

Question 46

In what kind of collateral can you perfect your security interest by control?

In what kind of collateral can you ONLY perfect by control?

Answer 46

Investment property, nonconsumer deposit accounts, and electronic chattel paper.

Can only perfect by control in nonconsumer deposit accounts (unless the account is proceeds)

Question 47

What is the only way to perfect a security interest in a deposit account?

Answer 47

Control

Question 48

What are the three methods of taking control of a deposit account?

Answer 48

Do one of the following:

1) Be the bank (then control automatic)
2) Put the account in the secured party’s name
3) Agree in an authenticated record with the debtor and the bank that the bank will comply with the secured party’s orders regarding the account without the debtor’s consent (“control agreement”)

Question 49

How does a secured party take control of a piece of investment property?

Answer 49

Secured party must take what ever steps are necessary to have the investment property sold without further action by the owner/debtor

Question 50

How does a secured party take control of a piece of electronic chattel paper?

Answer 50

Secured party must put a system in place to show the transfer of interests in the chattel paper that “reliably establishes” the secured party as the assignee.

Question 51

How do you perfect a security interest in property that has a certificate of title?

Answer 51

ONLY by notation on the certificate of title via the appropriate govt agency UNLESS the debtor holds the vehicle in inventory, then can ONLY perfect by filing a financing statement

*PMSIs in titled consumer goods do not perfect automatically - have to get govt to note on certificate of title

Question 52

What details must be included on a financing statement?

Answer 52

1) Debtor’s name and address
2) Secured party’s name and address
3) Description of the collateral

Question 53

What kinds of security interests can be perfected by filing a financing statement?

Answer 53

All kinds of collateral except for titled items, deposit accounts, and money

Question 54

What is the purpose of notice filing?

Answer 54

The purpose of notice filing is to put the world on notice that a person may have a security interest in the debtor’s property

Question 55

What is the rule for what name must be put on the financing statement for a debtor that is an individual? For a debtor that is a registered organization?

Is a trade name good enough?

Answer 55

Must use the name on their unexpired drivers license issued by the state where the financing statement is to be filed. Or if not, then the name by which you’re known in the community

Must use the name listed on the public organic record available for that organization

Use of a trade name is not good enough for a person or a business

Question 56

Will an error in the debtor’s name invalidate a financing statement?

Answer 56

Only if the error is “seriously misleading” which means someone searching under the debtor’s correct name under the standard search logic would not find the financing statement

Question 57

Secured creditor files a financing statement and the filing office botches the filing such that it could not be found in a search?

Answer 57

The financing statement is still effective - error by the filing office does not impact its effectiveness

Question 58

What is the effectiveness of a financing statement filed against a debtor who changes their name after the financing statement is filed?

Answer 58

If the name change is such that the FS becomes seriously misleading, then the FS is effective only against the property that the debtor had at the time of the name change AND property acquired within 4 months after the name change.

If a person changes their name but not on their DL, not seriously misleading because the DL name is still the name for UCC purposes.

Question 59

What is required of the description of the collateral in a financing statement?

Answer 59

Must REASONABLY IDENTIFY the collateral. Can be by normal language, type, or a supergeneric description like “all assets”

Question 60

Does a financing statement have to reference after acquired property?

Answer 60

No as long as the description is broad enough to cover the after acquired property

Question 61

Will an error in the secured party’s name make a financing statement seriously misleading?

Answer 61

No because searches are conducted under the debtor’s name, the financing statement will not be seriously misleading and will remain effective

Question 62

What should you remember when you see a financing statement on collateral that is related to real property? What is collateral related to real property?

Answer 62

When you see fixtures, timber to be cut, minerals, you should remember that the financing statement must contain all of the usual requirements PLUS

1) a description of the related real property
2) name of the record owner (if property owned by someone that is not the debtor)
3) indication that it is to be filed in the real property records

Question 63

Is a signature required on the financing statement?

Answer 63

No, but the debtor must authorize the filing

Question 64

When must the debtor authorize a financing statement filed against him?

Answer 64

Either before or after the filing of the financing statement

Question 65

How does the debtor authorize a financing statement to be filed against them?

Answer 65

Can be authorized in any signed writing either before or after the FS is filed.

FS is automatically authorized if the debtor authenticates the FS or a security agreement covering the same collateral as the FS (“ipso facto authorization”)

Question 66

Can a secured party file the security agreement itself as a financing statement?

Answer 66

Yes, if it contains the same information as the financing statement form requires

Question 67

What is the effect of a missing address for the debtor? For the secured party?

Answer 67

If it is accepted by the filing office, it is effective despite the omission

Question 68

What is the general rule for where a financing statement should be filed? What is the exception?

Answer 68

General rule: file with the secretary of state
Exception: File on timber to be cut, minerals and fixtures (“fixture filings”) in the county real property records.

But for fixtures, smart creditors will file in the UCC system and real property system in case it’s not actually a fixture

Question 69

Which state’s law governs perfection? What is the key implication of this?

Answer 69

The state where the debtor is located governs perfection, so you should generally file the FS in the state where the debtor is located

But if fixture/mineral/timber to be cut, then must file in the real property records where the property is located

Question 70

Where is the debtor located for purposes of determining which state’s law applies (and generally where should you file the FS)?

Answer 70

If individual -> debtor located in the state of their principal residence
If registered organization -> debtor located in the state under whose laws it is organized
If Unregistered organization-> location at place of business (or if more than one, the chief executive office)

Question 71

In what state should you perfect if the property has a certificate of title?

Answer 71

In the state where the most recent certificate of title is issued

Question 72

If the collateral is a deposit account which state’s law applies to govern perfection?

Answer 72

The state where the bank has its chief executive office

Question 73

Where should you perfect if the collateral is…
- a certificated security
- an uncertificated security
- a securities account
- farm products?
————-
If a bank, issuer of securities, or securities intermediary moves to a new state, how long is perfection in the deposit account, uncertificated security or securities account good for?

Answer 73

Certificated security -> The state where the certificated security is located
Uncertificated security -> state where the issuer is organized
Securities account -> state where the securities intermediary’s chief executive office is located
Farm products -> State where the farm products are located
———————–
Good until the earlier of 4 months and when the interest would have lapsed anyway

Question 74

What is the effect on perfection if the debtor moves states if the collateral is such that the location of the debtor determines what law applies?

Answer 74

The security interest becomes unperfected 4 months after the debtor’s move unless the secured party files a financing statement in the new state within the 4 months

Question 75

What is the effect on perfection if collateral is transferred to a new owner in a different state and the collateral is of the type where the debtor’s location determines perfection?

Answer 75

The security interest remains perfected for one year unless the secured party files a new financing statement in the collateral against the new owner

Question 76

Time periods rapid fire…

• How long is a FS good for if debtor name change?
• How long is an FS good for if debtor transfers collateral to out of state owner?
• How long is an FS good for if debtor moves out of state?
• How long is a creditor automatically perfected in proceeds of collateral in which they have a perfected security interest?
• How long does a PMSI in non-inventory have to perfect to retain superpriority status?

Answer 76

Name Change -> 4 mo.

Debtor Move -> 4 mo.

Collateral Move -> 1 year

20 days

20 days

Question 77

If a security interest is perfected by possession of the collateral, which state’s law governs?

What happens of the collateral is moved to a different state but is still in possession of the secured party?

Answer 77

The state where the collateral is located’s law governs

The security interest remains perfected as long as the security interest in the collateral can be perfected by possession in the new state

Question 78

If a security interest is perfected in a piece of titled property and the property is titled in a new state, how long is the perfection in collateral good for in the new state (assuming the notation IS transferred to the new title)?

Answer 78

The security interest remains perfected for as long as it would have been perfected in the original state if there was no move,
BUT is only perfected against a BFP until the earlier of when perfection would have lapsed in the original state and 4 months after the vehicle is covered by the new car certificate of title

Question 79

If a security interest is perfected in a piece of titled property and the property is titled in a new state, how long is the perfection in collateral good for in the new state (assuming the notation IS NOT transferred to the new title)?

Answer 79

Perfection not good at all against:

• BFP who takes delivery and is not a car dealer
• a secured party without knowledge who perfects after the clean title is issued in the new state

Question 80

How long is a financing statement good for?

Answer 80

5 years

Question 81

When can a continuation statement be filed?

How long is a continuation statement good for?

Answer 81

Within 6 months of the lapse of the financing statement

Continuation statement is good for 5 years from when it is filed

Question 82

Does a debtor have to authorize the filing of a continuation statement?

Answer 82

No

Question 83

Can a financing statement be extended beyond 5 years by fling another financing statement?

Answer 83

No

Question 84

When does a secured party have to terminate their financing statement?

Answer 84

On demand if there is no obligation from the debtor and no commitment to make future advances OR if the debtor didn’t authorize the financing statement in the first place.

Unless demand is made, there is no obligation to terminate the financing statement unless the FS is on consumer goods. If on consumer goods, then secured party must file within 1 month of there being no outstanding obligation

Question 85

How long does perfection in collateral automatically extend to perfection in proceeds of that collateral?

When does perfection continue beyond that time period?

Answer 85

20 days automatically

Continues beyond 20 days IF:

• proceeds are identifiable cash proceeds or
• all of (a) security interest in original collateral was perfected by filing an FS (b) the perfection in the proceeds would be by filing an FS in the same office AND (c) WAS NOT PURCHASED USING THE CASH PROCEEDS OF THE COLLATERAL (d) if FS does not already cover the proceeds, would need to amend it (“same office rule” - usually comes up in barter transactions) or
• Security interest in the proceeds is perfected within the 20 day period

Question 86

What is the most famous example of the same office rule?

How does this example meet the same office rule?

Answer 86

Famous example is when inventory (collateral) is sold on credit and seller receives an “account” as proceeds

Same office rule is met because (a) security interest in inventory is perfected by filing, (b) perfecting against accounts would be accomplished by filing a financing statement in the same office as inventory AND (c) the account was not purchased using cash

Question 87

How long is a security interest automatically perfected in instruments, negotiable documents, or certificated securities?

Answer 87

Automatic perfection for 20 days if the secured creditor gave new value under a security agreement. (This is because you can perfect by possession in these and the 20 days gives time for transport to the secured party)

Question 88

What is the effect on perfection if a debtor changes their usage of collateral such that the description in the financing statement becomes seriously misleading?

Answer 88

No effect - secured creditor has no obligation to monitor the collateral or amend the financing statement even If the description becomes seriously misleading.

Question 89

Who wins in a perfected secured party vs perfected security party priority contest?

Answer 89

The first to file or perfect

*remember you can file before you perfect

Question 90

Who are the potential competitors for priority?

Answer 90

another secured party, PMSI, purchaser, lien/judgment creditor

Question 91

For every priority contest what are the two steps you should do?

Answer 91

0) Confirm attachment and priority date
1) Identify the competitors (are they secured/judgment/buyer/PMSI)
2) Apply the priority rule

Question 92

Who wins in a unperfected secured party vs unperfected secured party priority contest?

Answer 92

The first to attach has priority

Question 93

Who wins in a perfected secured party vs unperfected secured party priority contest?

Answer 93

The perfected party has priority

Question 94

Highly Tested

Who wins in a PMSI vs prior perfected secured creditor?

Answer 94

PMSI in inventory/livestock has priority over a conflicting security interest in the same inventory (or proceeds that are chattel paper, instruments, cash) IF
- PMSI perfected at the time debtor gets possession AND
- any secured creditor who has filed their security interest in the same inventory receives an authenticated notification of the PMSI before the debtor receives possession. notice good for 5 years

Question 95

What kind of security interest does a consignor have in inventory?

Answer 95

Consignor has a PMSI (and so can take super priority if complies with the requirements)

Question 96

Who wins in a seller financed PMSI and a financer financed PMSI?

Answer 96

The seller financed PMSI wins

Question 97

Highly Tested
What is necessary for perfection in a PMSI in…
- consumer goods?
- equipment?
- inventory?

Answer 97

Consumer goods - nothing, automatically perfected

Equipment - can be perfected any time within 20 days of debtor receiving the collateral to get superpriority

Inventory - perfected by the time debtor gets possession and notice given to any prior perfected creditors with floating inventory liens

Question 98

Who wins in a priority contest between a security interest perfected by control vs security interest perfected by any other method?

Answer 98

Security interest perfected by control wins

Question 99

Who wins in a contest between two or more security interests perfected by control in a deposit account?

Answer 99

Best: Secured party’s name is listed on the account
2nd Best: Be the Bank
3rd Best: Authenticated agreement with debtor/bank/creditor giving control

Question 100

Does a transferee of funds out of a deposit account that is subject to a security interest take those funds subject to the security interest?

Answer 100

No, unless the transferee is colluding with the debtor to undermine the security interest

Question 101

For purposes of analyzing priority in proceeds of collateral, who wins?

Answer 101

Generally, a security interest in proceeds will have the same date of priority as the security interest in the collateral
BUT a secured party has priority in non-filing collateral (collateral which is not perfected in using a filing) IF:
- the secured party has priority in the original collateral
- security interest in proceeds is perfected AND
- proceeds are cash/accounts or of the same type as the original collateral

Question 102

What is the general rule for purchasing something with a security interest on it?

Answer 102

The security interest generally stays on the item, but some exceptions exist

Question 103

When does a purchaser of an item of collateral take free of that security interest?

Answer 103

1) if the secured party authorized the sale (Express or implied)
2) Buyer in ordinary COB in good faith and without knowledge of violation of secured party’s rights takes free of security interest created by buyer’s seller
3) Buyers not in the ordinary COB where security interest is not perfected
4) Garage Sale Exception

^ you should consider each of these in sequence when answering a question involving a sale of collateral

Question 104

What are the ways that a secured party can authorize sale of collateral free from a security interest?

Answer 104

Can be express in the security agreement or other communication or implied from conduct/acquiescence/type of sale (e.g. there is implied auth of sale of inventory in ordinary COB to a consumer unless expressly prohibited)

Question 105

If a sale in ordinary COB is not authorized by the secured party, when does a buyer take free of the security interest?

Answer 105

Buyer takes free of a security interest CREATED BY THE BUYER’S SELLER if buyer:

1) is in good faith
2) without knowledge that the sale violates the rights of another person in the goods (i.e. knows it violates the security agreement - but buyer can know of the security interest)
3) buys in ordinary COB from a seller who’s in the business of selling goods of the kind (seller must be in ordinary COB, buyer can be buying under any kind of circumstance)

Question 106

Does a buyer NOT in the ordinary course of business take free of a lien?

Answer 106

If the lien is perfected, no (takes subject to the lien)

If the lien unperfected, yes (take free of lien UNLESS…
THEY KNOW OF the security interest when they give value or take delivery OR
the 20 day PMSI grace period applies and secured creditor perfects)

Question 107

HIGHLY TESTED

Does a buyer in the ordinary course of business take free of a PMSI?

Answer 107

If a secured party attaches a PMSI in the debtor’s collateral before a buyer/lessee without knowledge pays value and takes delivery, the secured party has priority over the buyer if secured party files within 20 days after debtor receives collateral

Question 108

What is the garage sale exception for consumer to consumer sales?

Does the garage sale exception allow a buyer to take free of a PMSI? [Highly Tested]

Answer 108

A buyer takes free of a PERFECTED OR UNPERFECTED security interest if a buyer buys:
1) CONSUMER GOODS (in the hands of the buyer and the seller)
2) without knowledge of the security interest
3) for value
4) before a financing statement covering the goods has been filed
————
A buyer under the garage sale exception can take free of a PMSI (even though a PMSI in consumer goods automatically perfects) unless the secured party files a FS

Question 109

If you’re selling consumer goods on credit and taking a security interest, is there any benefit to filing a financing statement?

Answer 109

For purposes of perfection no, BUT filing a financing statement does allow the seller to beat the garage sale exception and enforce the security interest against a buyer that would otherwise take free

Question 110

Who is a lien creditor?

Answer 110

A judgment lien creditor is a person who has acquired a lien on the collateral through judicial attachment, levy or bankruptcy trustee

Question 111

When does the holder of a judgment become a lien creditor?

Answer 111

At the time the sheriff levies on the property.

Question 112

Who wins in a contest between a lien creditor and an art 9 secured creditor who is unperfected?

Who wins in a contest between a lien creditor and an art 9 secured creditor who is perfected?

Answer 112

A lien creditor prevails against any art 9 interest that is unperfected at the time of levy.

A lien creditor is subordinate to any art 9 interest that is perfected at the time of the levy

Question 113

Is there ever a circumstance when a lien creditor loses to a secured creditor who had not perfected at the time of levy?

Answer 113

Yes, a lien creditor loses to an art 9 secured creditor who has filed and obtained a security agreement at the time of the levy as long as the security interest eventually attaches or perfects

Question 114

Who wins in a contest between a judicial lien creditor who levied during the 20 day grace period for a PMSI secured creditor to file?

Answer 114

The PMSI secured creditor wins if they file within that 20 day grace period

Question 115

Who wins in a priority contest between a judicial lien creditor who levied before a future advance was made and a creditor who has a prior perfected financing statement?

Answer 115

The future advance creditor wins if made 1) without knowledge of the lien 2) within 45 days of the lien OR 3) under a commitment that was entered into without knowledge of the lien

Question 116

In a priority contest between a secured party and a statutory lien creditor who wins?

What is a statutory lien creditor?

Answer 116

A statutory lien creditor has priority over an art 9 interest EVEN IF PERFECTED as long as the goods/services were provided in the ordinary COB and collateral remains in the lienholder’s possession

A statutory lien creditor is a possessory lien created by state law that is not art 9 in favor of those who supply goods or services (e.g. artisan’s lien or materialman’s lien or mechanic’s lien)

Question 117

What document defines default? What is the significance of default?

Answer 117

Art 9 doesn’t define default, but usually the security agreement defines default. If it doesn’t, default is usually late or missed payments

Default triggers the secured creditor’s right to proceed against the collateral (unless default has been waived)

Question 118

When can a secured creditor take the collateral without judicial process?

Answer 118

If the secured creditor can take the property without a breach of the peace

Question 119

What is the effect if a secured creditor takes the collateral without judicial process despite breaching the peace?

Answer 119

Secured party can be sued for conversion, assault, battery, trespass, etc. for actual and often punitive damages

Question 120

What is a breach of the peace for purposes of self-help repossession?

Does entry onto the premises have to be authorized? Can the debtor give permission for entry in the security agreement?

Answer 120

Any conduct by the secured party that has the potential to lead to violence (physical presence by the debtor plus verbal objection is enough to create breach of the peace)

Simple trespass is not a breach of the peace. Unauthorized entry of a residence (or closed garage) is probably a breach of the peace. Breaking and entering a commercial property is less likely to be a breach of the peace.

Debtor cannot give permission to enter the premises to repossess in the security agreement

Question 121

If the creditor can’t do a self-help repossession, what can they do?

Answer 121

They can file an action for replevin, get an order for the sheriff to repossess the property for them.

Question 122

What is an alternate way to perform a self help repossession of equipment?

Answer 122

Can make it unusable and dispose of it on the debtor’s property (unless doing so would breach the peace)

Question 123

What is an alternate way to perform a self help repossession of an account?

Answer 123

The secured creditor can direct the party that owes the account (“account debtor”) to pay them directly instead of the debtor. Then the account debtor must pay the secured party and payment to the debtor will not discharge the account

Question 124

What is a strict foreclosure? What is a full vs partial strict foreclosure?

Answer 124

A strict foreclosure is when the creditor keeps the collateral for itself rather than sell it to satisfy the debt.

Strict foreclosure can be full or partial. Full strict foreclosure is secured creditor keeping the collateral in satisfaction of all of the debt. Partial strict foreclosure is keeping the collateral and seeking a deficiency judgment

Question 125

What is procedurally required for a strict foreclosure?

Answer 125

1) secured party must send its proposal to retain the collateral to any other secured party. If another secured creditor objections within 20 days, collateral must be disposed of by sale
2) secured party must also obtain the debtor’s consent either through their authentication of a record agreeing to it after default or (if full strict foreclosure) failing to make an authenticated record objection within 20 days

Question 126

When is strict foreclosure not available?

Answer 126

~ Strict foreclosure is not available in consumer transactions if the creditor wants to seek a deficiency judgment. Creditor can only do a strict foreclosure if it’s in full satisfaction of the debt

~ Consumer Goods 60% Rule (if the debtor paid 60% of the cash price/loan on a PMSI, the secured creditor must dispose of the property within 90 days after repo)

Question 127

If a sale of collateral is conducted, which security interests are discharged?

Answer 127

The security interest under which the sale is being held and all subordinate security interests are discharged, but any senior security interests remain on the collateral

Question 128

Who must be notified before collateral is sold? How must they be notified?
When is notice not required?
What amount of time for notice before the sale is required?

Answer 128

~ Must be notified in writing by the secured creditor conducting the sale
Must notify:
- the debtor and any sureties on the debt unless the collateral is consumer goods
- any other secured parties who have notified the secured party of their interest
- any secured parties who have filed a financing statement or made notation on the certificate of title

Notice is not required if the collateral is perishable or threatens to decline rapidly in value or is readily sold in an organized market (e.g. stock). Debtor and surety can waive notice in writing after the default

Notice must be given in a reasonable time (10 days deemed reasonable for nonconsumer collateral)

Question 129

What are the two methods of selling collateral? What is required in the notice given for each?

Answer 129

Private Sale - notice must state a time after which the property will be sold

Public sale - notice of time and place of sale is required

Question 130

What is required of a private sale of collateral by a secured creditor?

Answer 130

EVERY ASPECT OF THE SALE MUST BE COMMERCIALLY REASONABLE

- method, manner, time, place, terms

Question 131

Under what circumstances can the secured party buy the collateral when it is sold?

Answer 131

A) in a public sale OR

B) in a private sale where there is a generally recognized market or widely distributed price quotations

Question 132

What is the flow of money from a foreclosure sale?

Answer 132

Money must flow first to repay the costs of the repossession and sale and then to pay off the debt of the foreclosing creditor and then to pay off lower priority secured debts and then to the debtor

Creditors with higher priority debts get nothing because their lien survives

Question 133

After a sale of collateral, what must the secured creditor send the debtor IF THE DEBTOR IS A CONSUMER?

Answer 133

Must send the debtor a calculation of deficiency or a calculation of the surplus (the $ debtor will receive)

Question 134

What is the penalty for a secured creditor conducting a sale in a manner that is not commercially reasonable (or otherwise violates the UCC’s rules)?

Answer 134

Secured creditor is liable for actual damages.

If the collateral is consumer goods, the debtor is entitled to a min of 10% of the cash price of the goods plus an amt of all the interest charges paid over the life of the loan

There is also a rebuttable presumption that the secured creditor loses any deficiency judgment (i.e. sale price presumed to be sufficient to pay off the debt)

Question 135

When can the debtor/surety/other secured party exercise their right to redeem?

What does a party have to do to redeem the collateral?

Answer 135

Any time before the foreclosure sale or debt has been discharged by strict foreclosure

A party can redeem the collateral if they fulfill ALL obligations secured by the collateral to the creditor (this is usually the full balance because most security agreements have acceleration clauses)

Question 136

Who has the right to redeem?

Answer 136

The debtor, any surety, any other secured creditor

Question 137

What is a fixture?

Answer 137

A fixture is goods (personal property) that has become so attached to the real estate that it has become a permanent part of the real estate

Question 138

Can a security interest be taken in the building materials that have been incorporated into an improvement on the land?

Answer 138

No

Question 139

Where do you perfect a security interest in fixtures? What do you have to file?

Answer 139

In the office where a mortgage on the real estate would be filed. You have to file a “fixture filing” which is like a regular FS but also requires details about the real estate and the owner of the real estate (if the debtor does not own an interest in the real estate)

Question 140

What are a secured creditor’s rights when their collateral is a fixture (and the creditor secured by the fixture has priority)?

Answer 140

Can repossess the fixture, and if the debtor does not own the real estate, must reimburse the owner for damage caused by removal but not for diminution in value. No need to reimburse the debtor for damage caused by removal if debtor owns the real estate

Question 141

Who has priority: a prior perfected security interest in fixtures or a later perfected security interest in real estate?

Answer 141

A security interest in fixtures prevails over any later perfected security interest in real estate

Question 142

Who has priority: a prior perfected security interest in real estate or a later perfected security interest in fixtures? What if the fixture security interest is a PMSI?

Answer 142

The prior perfected security interest in real estate prevails UNLESS the fixture security interest is a PMSI perfected within 20 days

Question 143

What is special about a construction mortgage?

Answer 143

Construction mortgage ALWAYS WINS

A construction mortgage takes priority over a subsequent PMSI in fixtures even if the PMSI is perfected within the 20 days of affixation

Question 144

When is a fixture filing not necessary?

Answer 144

Any regular kind of perfection works (even though the collateral is fixtures) if the collateral is READILY REMOVABLE:

• office/factory machines,
• equipment not used/lease for use in operation of the real estate or
• replacements of domestic appliances that are consumer goods

A secured creditor does not need to perfect at all to have priority if the owner of the real estate has consented to the security interest or disclaimed any interest in the property as fixtures in an authenticated record OR debtor has the right to remove the fixtures as against the owner of the real estate

Question 145

What is an accession?

Answer 145

Goods that are physically united with other goods such that the identity of the original goods is NOT lost (e.g. tires on a car)

Question 146

How is a security interest perfected in collateral that becomes an accession?

Answer 146

If the security interest is perfected before the collateral becomes an accession, it remains perfected in the collateral (but only the collateral, not the big thing it is attached to)

Question 147

What priority rules apply to competitions between a creditor secured by the accession and the creditor secured by the larger property? What if the security interest in the accession is a PMSI?

Answer 147

Same rule on first to file or perfect applies. A PMSI still has a 20 day grace period for filing BUT

A security interest in an accession (including a PMSI) is subordinate to a security interest in a whole WHICH IS PERFECTED BY NOTATION ON THE TITLE. (if not perfected by notation on title, PMSI wins)

Question 148

When can a creditor with a security interest in an accession remove its collateral from the whole?

What liability does this secured creditor face for damage to the whole that they cause in removal? How can the parties potentially entitled to payment enforce this right?

Answer 148

It must have priority over every creditor with a security interest in the whole.

The secured creditor is liable for any damage caused by removing the accession to the owner of the larger thing. To enforce this right the owners of the larger thing can refuse the accession secured creditor permission to remove until they provide adequate assurances that they will perform on their obligation to reimburse if needed.