Secured Transactions

Question 1

Seller Financed PMSI

Answer 1

• secured party sells collateral on credit; and

- retains security interest in collateral

Question 2

Financed-Financed PMSI

Answer 2

• loan to purchase collateral;
• loan used to acquire that collateral; and
• creditor takes SI in that collateral

Question 3

Attachment requirements (req’s for creating a SI/becoming secured party)

Answer 3

• security agreement (can be evidenced by creditor taking possession/control of collateral or by authenticated SA);
• value given by both parties (any consideration sufficient under K law or even past consideration; every debtor gives value by promising to repay loan); and
• debtor has rights in the collateral (e.g. ownership).

When the last req attaches (in any order), the SI attaches.

Question 4

Requirements of Written Security Agreement

Answer 4

• record showing intent to create security interest (no magic language req’d);
• authenticated (e.g. signed) by debtor (can be any symbol incl :) ); and
• must describe (“reasonably ID”) collateral.

[But a supergeneric description of collateral such as “all of the debtor’s assets” or “all of the debtor’s personal property” is not a sufficient description.]

Question 5

after acquired property clause

Answer 5

Generally, SI only reaches collateral debtor had rights in at the time of signing SA unless there is an explicit AAPC.

Exception: SI attaches to AAP even w/out an AAPC if the collateral is of a type rapidly depleted and replenished (inventory or accounts).

A SI will also automatically attach to identifiable proceeds of collateral, even without an AAPC.

Question 6

Proceeds

Answer 6

Proceeds include whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.

A SI in collateral automatically attaches to identifiable proceeds of the collateral.

SP can trace commingled cash proceeds using the lowest intermediate balance rule. Look at the bank account starting at the time the proceeds are deposited and ending at the time you are applying the rule. The lowest balance during that time period
is the SP’s identifiable proceeds, not to exceed cash value of proceeds originally deposited.

Question 7

PMSI in consumer goods

Answer 7

automatically perfected upon attachment (if not otherwise covered by a certificate of title statute like for motorized vehicles, which can only be perfected by notation on the certificate of title)

Question 8

SIs in non consumer (e.g. business) deposit accounts (including demand accounts)

Answer 8

can only be perfected by control (unless perfected as proceeds of collateral).

NDAs are for a business’s use and not for personal use.

Question 9

Control of Non-Consumer (e.g. Business) Deposit Accounts (including demand accounts)

Answer 9

• putting the deposit account in the SP’s name;
• automatic control by bank maintaining the deposit account; or
• control agreement (k bw debtor, creditor, and bank where deposit account is located)

Question 10

Deposit account priority control

Answer 10

Best: co-owner (deposit account in the SP’s name)
Next best: maintain account (bank maintaining the deposit account)
Worst: control agreement (k bw debtor, creditor, and bank where deposit account is located)

Question 11

Methods of Perfection

Answer 11

• automatic (PMSI in consumer goods)
• possession
• control
• notation on certificate of title (incl motor vehicles not held as inventory)
• filing a financing statement

Question 12

Perfection for Motor Vehicles

Answer 12

Under the state’s certificate of title law, security interests in
motor vehicles required to be titled can only be perfected
by notation on the certificate of title issued by the state.

But SIs created by dealers in vehicles held in inventory for sale or lease are perfected by filing a financing statement under the ordinary Code rules, even if a certificate of title covering the vehicle is outstanding.

Question 13

Perfected SP v. Perfected SP

Answer 13

First to file or perfect (whichever is earlier) wins (assuming no lapse)

Question 14

Unperfected SP v. Unperfected SP

Answer 14

First to attach wins

Question 15

Perfected SP v. Unperfected SP

Answer 15

Perfected SP wins

Question 16

PMSIs in goods other than livestock or inventory (so that means PMSIs in *equipment, consumer goods, and farm products other than livestock)

Answer 16

Get superpriority over conflicting SIs in the same goods or their proceeds (the PMSI jumps to the front of the priority line) if perfected immediately or within 20 days after debtor receives possession of the goods.

Question 17

PMSIs in livestock or inventory

Answer 17

Get superpriority over conflicting SIs in the same collateral or their proceeds (the PMSI jumps to the front of the priority line) if, before debtor receives possession (before delivery):

• SP perfects;
• SP sends authenticated notice to other holders; and
• the notice is received within 5 yrs of debtor getting possession

[consignors have PMSIs in inventory]

Question 18

SP v. Buyer (or other transferee)

Answer 18

SP wins unless:

• SP expressly or impliedly (incl acquiescence) authorized sale/lease free of SI (implied authorization for inventory sold to ordinary consumer when sale is not expressly prohibited); or
• buyer is a BIOCOB and the SI was created by his/her seller.

[The implied exception only applies when the collateral is inventory in the original debtor’s hands.]

Question 19

BIOCOB rule

Answer 19

A buyer in the ordinary course of business (BIOCOB) takes free of a SI created by his/her seller (not created by others), even if SI is perfected and even if BIOCOB knew of the SI. Debtors create SIs.

A BIOCOB is a person who buys goods:

• in good faith;
• without knowledge that the sale violates the rights of another person/creditor (e.g. w/out knowledge that the sale violates the SA);
• in the ordinary course of business; and
• from seller of goods of the kind purchased

Question 20

Buyers NOT in the ordinary course of business (NON-BIOCOBS)

Answer 20

take subject to perfected SIs;

but take free of unperfected SIs unless they know of the SI when they give value or take delivery

Question 21

consumer to consumer sales of consumer goods

Answer 21

Buyer takes free of SI (even if perfected) if:

• buyer has no knowledge of the SI;
• buyer gives value;
• bought for buyer’s personal/family/household use; and
• bought before financing statement has been filed.

Must be consumer goods in the hands of both buyer and seller.

Question 22

Judgment lienholder v. SP

Answer 22

Judgment lienholder wins if lien arose (arises at time of levy by sheriff) before SI was perfected (or before SP obtains SA and files a FS).***

If SI was perfected when lien arose, then SP wins. However, the SP will also have priority/win if the SP obtained a security agreement and filed a financing statement (but did not attach & perfect) before the judicial lien arose, as long as the SP eventually attaches and perfects.***

***subject to special PMSI rule and special Future Advances rule

Question 23

Special PMSI rule for SP v. Judgment Lienholder (Grace Period Exception)

Answer 23

If SP files a financing statement for a PMSI within 20 days after the debtor receives the collateral, the SP will have priority over a judicial lien arising between the time the SI attaches and the time of filing.

Question 24

Special Future Advances rule for SP v. Judgment Lienholder

Answer 24

For a perfected future advance to gain priority over a subsequent judicial lien, the future advance must be made:

• without knowledge of the lien,
• within 45 days of the lien arising, OR
• pursuant to a commitment entered into without knowledge of the lien.

Question 25

Secured Party vs. Possessory (Statutory) Lien Holder

Answer 25

A possessory lien imposed by other (non-Code) state law in favor of those who supply goods or services (e.g. an artisan’s lien, auto mechanic’s, materialman’s lien) has priority over a SI (even if perfected) as long as the goods or services were provided in the ordinary course of business and the collateral remains in the lien holder’s possession.

Question 26

Self-Help Repossession

Answer 26

After default, the SP is entitled to take possession of the collateral without judicial process (by “self-help”) if this can be done without a breach of the peace. [If SP breaches the peace, SP may be sued for conversion (or assault, battery, trespass, etc.), and is liable for actual or punitive damages.]

Breach of the peace is any conduct by SP that has the potential to lead to violence. Physical presence + verbal objection = BOP.

Question 27

Self Help for Accounts or Equipment

Answer 27

If collateral is an account, SP can notify the person owing money to the
debtor (the account debtor) to make payment to the SP, rather than to the debtor. Upon notification, the account debtor must pay the SP. Payment to the debtor will not discharge the obligation.

If collateral is equipment (e.g. heavy/bulky), SP can render it unusable without removing it if SP can do so without bop.

Question 28

strict foreclosure

Answer 28

Creditor keeps collateral itself to satisfy debt (instead of selling it). SP can do this if it gets debtor’s consent and SP sends notice to any other known creditors with a lien in that collateral (known if they filed a FS). If that other creditor or the debtor objects, collateral must be sold.

No partial strict foreclosures (must be full).

Question 29

Foreclosure sale

Answer 29

Requires:

• reasonably, timely notice; and
• every aspect of the sale must be commercially reasonable (price alone is not dispositive).

SP may buy the collateral.

Question 30

Proceeds of Foreclosure Sale

Answer 30

$ goes first to repay the costs of the repossession and sale, then to pay off the debt of the foreclosing creditor, and then to pay off the debt of creditors with lower priority than the foreclosing creditor. If any $ is left over, the debtor gets this surplus.

If the collateral when sold doesn’t bring in enough $ to pay the expenses of the sale and the SP’s debt, the SP may recover any deficiency from the debtor (deficiency judgement).

Creditors with higher priority than the foreclosing creditor receive no $ from the sale bc they don’t lose their liens as a result of the foreclosure sale.

Question 31

Failure to Comply with Code Rules (including commercially unreasonable sale)

Answer 31

SP is liable for actual damages caused by violation of Code rules.

If sale was not commercially reasonable, SP presumptively loses any deficiency judgment. There is a rebuttable presumption that the sale
proceeds equal the amount of the debt.

Statutory penalty imposed on SP if the collateral is consumer goods.

Question 32

Debtor’s Right to Redeem

Answer 32

Debtor’s ability to recover collateral by paying everything owed to creditor.

Any time before SP has resold the collateral, or has K’ed for its disposition, or discharged the debt by strict foreclosure, the debtor (or any surety or other SP or lienholder) may redeem the collateral.

To do so, the debtor must tender fulfillment of all obligations secured by the collateral, plus additional reasonable expenses.

Question 33

Fixtures (generally and filings)

Answer 33

goods permanently attached to RP

Fixture filings (which are not just a FS) normally needed for fixtures. Requires info from FS + description of RP + name of owner. Filed in the county property records where fixtures located.

Question 34

Priority Rules for Fixtures

Answer 34

A SI in fixtures has priority over any real estate interest that is recorded subsequent to (after) the perfection of the SI by fixture filing.

A prior real estate interest that is properly recorded has priority over a SI that subsequently (later) arises. Exception: A PMSI takes priority over an earlier in time realty interest if it’s perfected by a fixture filing before the goods become fixtures or within 20 days thereafter. BUT a construction mortgage takes priority even over a subsequent PMSI that is fixture filed w/in 20 days.

Question 35

Accessions

Answer 35

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

If a SI is perfected when the collateral becomes an accession, the SI remains perfected in the collateral.

Same priority rules generally apply, except for with vehicles. A SI in an accession is subordinate to a SI in a whole (e.g. a car) which is perfected by compliance with the requirements of a certificate-of-title statute.

Question 36

For a FS to be effective, it must contain:

Answer 36

(i) the name and mailing address of the debtor;
(ii) the name and mailing address of the SP; and
(iii) an indication of the collateral covered by the FS.

Minor errors in the debtor’s name will not render the FS ineffective unless those errors make the FS seriously misleading. However, an incorrect name is not misleading if the FS would be discovered in a filing office search under the debtor’s correct name, using the filing office’s standard search logic.

If debtor is a registered organization, the debtor’s name must match the name on the debtor’s public organic record. Use of debtor’s trade name is insufficient.

Filed with the Secretary of State (unless real property).

Question 37

Security interests in all collateral except for _______ can be perfected by filing a FS.

Answer 37

deposit accounts (including NDAs) and money - these must be perfected via control

Question 38

account

Answer 38

right to payment for goods and services

Typically perfected via filing a FS. However, perfection may occur automatically, without filing, in the case of a security interest in a small-scale assignment of an account or payment intangible. This rule applies to an assignment of accounts or payment intangibles that does not alone, or in conjunction with other assignments to the same assignee, transfer a significant part of the assignor’s outstanding accounts or payment intangibles to the creditor.