Secured Transactions

Question 1

Article 9

Answer 1

Article 9 applies to all security interests in personal property or fixtures by contract. The words “security agreement” do not have to be specifically stated for one to exist. Article 9 also applies to lease agreements that are not true leases (but instead, security interests).

Question 2

Consumer goods:

Answer 2

goods that are bought for use primarily for personal, family, or household
purposes (e.g., a computer in the hands of a consumer).

Question 3

Inventory:

Answer 3

goods held for sale or lease, goods that are to be furnished under service contracts, and materials used or consumed in a business in a short period of time )

Question 4

Equipment:

Answer 4

goods that are used or bought for use in a business.
Note: This is also the default category for goods.

Question 5

Farm products:

Answer 5

crops, livestock, supplies produced in a farming operation or products of crops or livestock in their unmanufactured state in possession of debtor who is engaged in a farming operation.

Question 6

Attachment Purpose

Answer 6

creates security interest

Question 7

Attachment Requirements:

Answer 7

1. Security Agreement by possession, control, or authentication
2. Value ( any consideration including past by Debtor and Creditor)
3. Debtor has rights in collateral

Question 8

Security Agreement Requires:

Answer 8

1. Record showing intent to create security interests
2. Authenticated (Signed by Debtor)
3. Describes Collateral - Reasonably Identifiable

Question 9

After-acquired property:

Answer 9

the general rule is that a security agreement can cover after-acquired property and does not need to specifically reference it to be effective.

Question 10

Perfection requires:

Answer 10

1. attachment and
2. one of the following
   - Possession ( most common = goods and only way to perfect $)
   - Control ( only way to perfect deposit account)
   - Filing of finance agreement
   - Automatic ( PMSI in consumer goods)
   - Temporary

Question 11

Perfection - Choice of Law

Answer 11

state of law where debtor is located governs

Question 12

An individual Debtor’s location:

Answer 12

principal residence

Question 13

A Registered Business Debtor’s location:

Answer 13

state of incorporation

Question 14

An Unregistered Business Debtor’s location:

Answer 14

Principal place of business

Question 15

Priority between perfected and unperfected secured party.

Answer 15

Know that a perfected security interest beats an unperfected one—even if one has an unperfected PMSI.

Question 16

Priority between Two Unperfected parties

Answer 16

then the first to attach has priority.

Question 17

Priority between two Perfected Secured Parties

Answer 17

the first to file or perfect has priority.

Question 18

A buyer in the ordinary course of business:

Answer 18

buyer in the ordinary course of business generally takes free of any security interest created by the buyer’s seller, even if the security interest is
perfected and the buyer knows of its existence.

Note: that the buyer is not in the ordinary course of business if he knows that the sale is in violation of a term in the security agreement.

Question 19

A buyer not in the ordinary course of business:

Answer 19

A buyer not in the ordinary course of business takes collateral subject to a perfected interest.

Generally, he does not take subject to an unperfected interest if he gives value and does not know about the interest.

Question 20

Consumer to consumer goods (garage sale) exception to the buyer not in the ordinary course of business rule:

Answer 20

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.

Question 21

Secured Party vs a lien creditor

Answer 21

• 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 priority.

Question 22

The steps that a secured creditor takes to foreclose on its collateral:

Answer 22

If a default occurs the lender can demand payment or self help to reclaim the goods as long as it does not breach the peace.

Question 23

Default

Answer 23

if a default occurs, the lender can demand payment or use self-help to reclaim the goods so long as it does not breach the peace.

Question 24

Breach of Peace

Answer 24

Any conduct that has the potential to lead to violence.

There are several factors to examine to determine if the lender has breached the peace, including:

1. whether the repossession took place at the debtor’s premises and
2. 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 25

Resale after Default

Answer 25

The secured party may sell or dispose of the collateral in a commercially reasonable way.

• The security interest is discharged when this occurs, but the debtor is liable for any deficiency.
• The obligation owed to the disposing secured party and any junior liens are paid off. (Senior liens remain on the collateral.)

Question 26

Debtor’s means of protection #1 and #2 under a Resale

Answer 26

1. the sale must be commercially reasonable.
2. The debtor must receive written notification of the sale.

The debtor and perfected secured parties (or secured parties who have notified the secured party of their interest) must know when the chance to redeem the collateral is going to pass. (This is not necessary if the collateral threatens to decline rapidly.)

Question 27

Timeliness of notification in Debtor Protection

Answer 27

this is generally a question of fact, but in a nonconsumer transaction, a notification sent 10 days or more before the disposition (sale) is considered reasonable.

Question 28

Debtors Means of Protection - Content of notification:

Answer 28

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.

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 29

Remedies if secured party fails to comply with above requirements

Answer 29

• 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

Question 30

Rebuttable Presumption Remedy

Answer 30

• 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. (July 2005)
• 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 31

Debtor’s right to redeem:

Answer 31

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