Secured Transactions

Question 1

Applicable law; put this in every essay

Answer 1

Article 9 of the UCC governs any transaction (regardless of its form) that creates a security interest.
− Includes → security interests in personal property, consignments, sale of accounts, chattel paper, & promissory notes.

Question 2

Scope of UCC Art. 9 + lease vs security interest

Answer 2

Substance over form controls, as to whether a security interest is created.
− How the parties classify the transaction is immaterial.

Title to Collateral is Immaterial – UCC Art. 9 applies to a security interest regardless of whether title to the collateral is in the name of secured party.
− Seller CANNOT retain or reserve title to goods that have been delivered or shipped. Any attempt to retain/reserve title is limited to a reservation of a security interest.

Lease vs. Security Interest – Courts look at the economic reality to determine if a lease is actually a security interest.

A “lease” will be deemed a security interest if:

1) A commitment to make payments for a term exists; AND
2) Either: a) The original term is equal to (or greater) than the remaining economic life of the goods; b) Lessee must renew the lease for the remaining economic life of the goods (or is forced to take ownership); c) Lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration; OR d) Lessee has the option to become the owner of the goods for no additional consideration

Question 3

type of collateral; accounts

Answer 3

Account = A right to payment of a monetary obligation (whether or not earned by performance). − Includes → (1) property that has been (or is to be) sold, leased, or disposed of; (2) services rendered; (3) policy of insurance; (4) secondary obligation incurred; (5) energy provided; (6) use or hire of a vessel under a charter/contract; (7) credit card debt; and (8) lottery winnings.

Question 4

type of collateral; deposit account

Answer 4

Deposit Account = An demand, time, savings, or similar account maintained with a bank (can only be perfected by control).
− DOES NOT include investment property or accounts evidenced by an instrument.

Question 5

Type of collateral; inventory

Answer 5

inventory = Goods that are:

a) Leased;
b) Held for sale/lease or to be given under a contract of service;
c) Given under a contract of service; OR
d) Consisting of raw materials, work in process, or materials used/consumed in a business.

*Inventory DOES NOT include farm products or goods held only for repair.

Question 6

Equipment; type of collateral

Answer 6

Equipment = Goods other than inventory, farm products, or consumer goods.
− Goods = all things movable when the security interest attaches (including fixtures, timber, unborn young of animals, crops, and manufactured homes)

“Certificate of Title” Statute – Some States require that a security interest on a motor vehicle be noted on the title inorder to be perfected.

Question 7

Consumer goods

Answer 7

Consumer Goods = Goods purchased primarily for personal, family, or household purposes.

Question 8

Proceeds

Answer 8

= The following types of property:

a) Acquired upon the sale, lease, or other disposition of collateral;
b) Collected/distributed on account of collateral;
c) Rights arising out of collateral;
d) Claims arising out of the loss, nonconformity, defect, or interreference with the use of collateral; OR
e) Insurance payable by loss of collateral.
* A check given in exchange for collateral is “cash proceeds”.

Question 9

Chattel Paper

Answer 9

A record that evidences:

1) a monetary obligation; AND
2) either (a) a security interest in specific goods, (b) a lease of specific goods, or (c) a security interest in specific goods with software (or a software license used in the goods).

Monetary Obligation = An obligation to pay money that is: a) secured by the goods; OR b) owed under a lease of the goods

Question 10

Attachment and Perfection

Answer 10

Attachment & Perfection – Enforcing a security interest depends on two factors: (1) Attachment; AND (2) Perfection.

− Attachment → secures the creditor’s rights in the collateral, making it enforceable.
− Perfection → gives notice of the creditor’s rights in the collateral (determines priority of interests).
*A security interest CANNOT be perfected, unless it’s first attached.

Attachment requires:

1) That creditor extends value to the debtor;
2) Debtor must have rights in the collateral; AND
3) One of the following:
a. An authenticated record or security agreement (authenticated by debtor + reasonably identify the collateral);
b. Secured party has possession of the collateral;
c. Certificated security in registered form + security certificate delivered to the secured party; OR
d. Control for deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights.

Perfection is obtained by:

a) Filing a financing statement with the Secretary of State (must identify the collateral and security
interest) ; OR b) Taking possession or control of the collateral

Question 11

Financing Statement

Answer 11

– An effective financing statement MUST:

1) Provide the name of the debtor and secured party (if debtor is an organization, must provide official registered name);
2) Reasonably identify the collateral; AND
3) Be filed by a person authorized by the debtor.

Substantial compliance with the above is required.
− Minor errors/omissions are ok UNLESS it makes the statement seriously misleading.
− Insufficient name of debtor → is seriously misleading UNLESS the statement is discoverable in a search of the records of the filling office under debtor’s correct name

Question 12

Purchased Money Security Interest (PMSI)

Answer 12

a PMSI is created when a creditor extends value to the debtor for the purpose of enabling the debtor to acquire rights in the collateral.
− PMSI for Consumer Goods → automatic perfection.
− PMSI for Non-Consumer Goods → takes priority if the creditor files a financing statement before/within 20 days after debtor receives delivery of the collateral

Question 13

Payment Right Sold & Rights/Title of Creditors &Purchasers

Answer 13

Payment Right Sold & Rights/Title of Creditors & Purchasers – A debtor that has sold an account, chattel
paper, payment intangible, or promissory note DOES NOT retain an interest in the collateral sold.

− BUT, when determining the rights of creditors/purchasers of an account or chattel paper sold by a debtor, the debtor is deemed to have rights in such collateral while the buyer’s security interest is unperfected.

Question 14

Automatic Perfection for Certain Assignment of Accounts

Answer 14

Automatic Perfection for Certain Assignment of
Accounts – A security interest is automatically perfected upon attachment of an assignment of accounts IF IT DOES NOT transfer a significant part of the outstanding accounts of the assignor.

Question 15

Security Interest in the Sale of Collateral & Identifiable Proceeds

Answer 15

A security interest will continue despite any sale, lease, or other disposition of the collateral.
− UNLESS the secured party authorizes a transfer free of the security interest.

A perfected security interest will attach to any identifiable proceeds from the disposition of collateral.
− HOWEVER, that interest will become unperfected on the 21st day after attachment UNLESS:
a) Proceeds are identifiable cash proceeds;
b) a Security interest is perfected when it attaches to the proceeds or within 20 days; OR
c) If ALL of the following are satisfied: (I) original collateral was perfected under the general filing rule; (ii) proceeds are collateral that may be perfected by filing; and (iii) proceeds are not acquired with cash proceeds

Question 16

Consignment

Answer 16

Treated like a PMSI in inventory.
A consignment is a transaction in which:
1) A person delivers goods to a merchant for the purpose of sale;
2) Merchant deals in goods of the kind, is not an auctioneer, and is generally not known by his creditors to be substantially engaged in selling goods of others;
3) Value of goods is $1,000 or more at the time of delivery;
4) Goods are not consumer goods immediately before delivery; AND
5) Transaction does not create a security interest.

Question 17

Control of a Deposit Account

Answer 17

Control of a Deposit Account – a deposit account can only be perfected by control.
A secured party has “control” if:
a) The secured party is the bank where the account is maintained;
b) The debtor, secured party, and bank have agreed as such in an authenticated record; OR
c) The secured party becomes the bank’s customer with respect to the deposit account.

Question 18

Future Advances and After Acquired Property

Answer 18

Future Advances – A security agreement may provide that the collateral secures future advances (whether or not the advances are mandatory).

After-Acquired Property – A security agreement may create (or provide for) a security interest in after-acquired collateral.
− Exceptions → (a) commercial tort claim; OR (b) consumer goods (other than accessions given as additional security) unless the debtor acquires rights within 10 days

Question 19

Protection of a Buyer of Goods; Transfers of Collateral - Shelter, BIOC, C2C

Answer 19

A buyer receives ALL of the rights the seller had upon the transfer of goods. Thus, a seller who did not have title to goods CANNOT transfer title to a buyer (unless an exception applies).
− Exceptions → (1) Shelter Principle, (2) Buyer in the Ordinary Course of Business, (3) Consumer to-Consumer Rule.

The Shelter Principle → If a buyer acquires property free of a security interest, then any subsequent transfer is also free of the security interest

Buyer in the Ordinary Course of Business – takes free of a security interest.
Buyer in the Ordinary Course of Business = a person:
1) that buys goods in good faith,
2) without knowledge that the sale violates the rights of another person, AND
3) is in the ordinary course from a merchant (a person in the business of selling goods of that kind).
Example → If a person entrusts goods to a merchant who deals in goods of that kind, then that merchant has the power to transfer title to a buyer in the ordinary course of business (even though the merchant seller did not have title to the goods).

Consumer-to-Consumer Rule – Buyers of consumer goods take free of a security interest if the goods are bought:

1) without knowledge of the security interest;
2) for value;
3) from a consumer who primarily bought the goods for personal/family/household purposes; AND
4) before the filing of a financing statement covering the goods

Question 20

Priority of Perfected & Unperfected Interests

Answer 20

Perfected Interest vs. Unperfected Interest → Perfected interest has priority over a conflicting unperfected interest.
Unperfected Interest vs. Unperfected Interest → The first creditor to attach will prevail.
Perfected Interest vs. Perfected Interest → Rule of “first in time, first in right” controls – first creditor to perfect has priority.

PMSI vs. Perfected/Unperfected Interest → A PMSI in consumer goods enjoys automatic perfection, so it has priority.
− PMSI’s in non-consumer goods require filing a financing statement to be perfected → so apply the appropriate priority rule above (depending if the interest was perfected or unperfected

Question 21

Priority of Liens Arising by Law

Answer 21

A possessory lien on goods has priority over a security interest in goods.
− UNLESS the lien is created by a statute that states otherwise

A Possessory Lien is an interest that:
1) Secures payment/performance of an obligation for services or materials furnished by a person in the ordinary course of business;
2) Is created by statute or rule of law in favor of the person; AND
3) Whose effectiveness depends on the person’s possession of the goods.
Example → mechanic’s lien.

Question 22

Judgment Liens

Answer 22

Judgment lien creditors have priority over conflicting security interests ONLY IF the person became a judgment lien creditor before the security was perfected.
− Priority also extends to future advances secured more than 45 days after the person became a lien creditor UNLESS the advance is made without knowledge of the lien.
▪ BUT, this rule DOES NOT apply to a buyer of accounts or a consignor

Question 23

Fixtures

Answer 23

An ownership interest in real property has priority over conflicting security interests in fixtures. − BUT, see exceptions below.

Exception #1 → Perfected PMSI in a Fixture has priority if:

1) Debtor has an interest of record or is in possession of the real property;
2) Ownership interest arose before the goods became fixtures; AND
3) PMSI was perfected before the goods became fixtures (or within 20 days thereafter).

Exception #2 → Fixture Filing – requires:

1) Filing a financing statement that covers goods that are or will become fixtures;
2) Satisfy the general rules for financing statements (names of debtor, name of secured party/representative, and indicate collateral); AND
3) Satisfy real property filing rules: (i) state that it covers a fixture; (ii) filed in real property records; (iii) sufficient description of the real property; and (iv) provide the name of a record owner (if the debtor does not have an interest of record in the real property).

Question 24

Accessions & Commingling

Answer 24

Accessions → Goods that are physically united with other goods, but still retain their separate identity.
− Security interest in the separate goods continues in the accession collateral.
− If perfected when the collateral became an accession, the interest remains perfected.

Commingling → An accession (combining) of two goods that are each subject to a different security interest.
− General priority rules govern EXCEPT when an interest is perfected by compliance with a Certificate-of-Title Statute (that takes priority over all other interests).

Question 25

Right to take Possession of Collateral –

Answer 25

After default, a secured party MAY:

1) take possession of the collateral; AND/OR
2) without removal, render equipment unusable and dispose of collateral on a debtor’s premises.

The secured party may proceed pursuant to:

a) judicial process; OR
b) without judicial process (if it’s without a breach of the peace).

Question 26

Right to Dispose of Collateral

Answer 26

After default, a secured party MAY sell, lease, or otherwise dispose of the collateral in any reasonably commercial manner.
Notice – Secured party MUST send an authenticated notification of the disposition to the debtor and any secondary obligor. Notice requirement DOES NOT apply → if the collateral: (a) is perishable; (b) threatens to decline speedily in value; or (c) is customarily sold on a recognized market. Secured party will be liable for damages for failing to provide notice even if the debtor had actual knowledge of the disposition.

Disposition at Foreclosure Sale – The sale:

1) Transfers all of the debtor’s rights in the collateral to a transferee for value;
2) Discharges the security interest; AND
3) Discharges any subordinate security interests (senior interests are not discharged).
* A transferee that acts in good faith takes free of the rights of the debtor, even if the secured party failed to comply with the rules governing dispositions.

Commercially Reasonable Sale – A sale is deemed commercially reasonable by law if made: STRICT

a) in the usual manner on any recognized market;
b) at the current price in any recognized market at the time of disposition; OR
c) in conformity with reasonable commercial practices among dealers in similar property.

Secured Party’s Purchase of Collateral – Unless otherwise agreed, the secured party MAY purchase the collateral at a:
a) Public sale; OR b) Private sale, BUT ONLY IF the collateral is (I) customarily sold on a recognized market, or (ii) the subject of widely distributed standard price quotations.

Question 27

Right to Collect Directly from an Account Debtor

Answer 27

A secured party has the right to collect a debt directly from account debtor (the person obligated on an account, chattel paper, or general intangible).
− If so agreed or after default.

Once the account debtor receives proper notification of an assignment, it can no longer discharge the debt by payments to the original creditor (the assignor).
− It can only discharge its obligation by payments to the secured party (the assignee)

Question 28

Damages for a Secured Party’s Failure to Comply with Applicable Rules

Answer 28

A secured party is liable to the debtor for:
− Actual Damages caused by a failure to comply with applicable rules. Includes expectation damages, and may include losses from an inability to obtain (or the increased cost of) alternative financing.
− $500 in Statutory Damages.
− Civil Penalty – Applies to consumer goods, and debtor may recover: (1) damages for loss; and (2) either the amount not less than (a) the credit service charge, plus 10% of the principal obligation, or (b) the time-price differential, plus 10% of the cash price.
− Restrain Collection – A court may order or restrain collection, enforcement, or a proper sale of the collateral if a secured party is NOT proceeding in accordance with the law

Question 29

Right of Redemption

Answer 29

A debtor has the right to repay and reclaim property held by the secured party (known as redemption).
To redeem collateral, the debtor MUST:
1) fulfill all obligations; AND 2) pay reasonable expenses and attorney’s fees.

Redemption may occur at any time before a secured party has:

a) Collected the collateral;
b) Disposed of the collateral (or entered into a contract to dispose of it); OR
c) Accepted the collateral in full/partial satisfaction of the debt.

Question 30

Deficiency Judgments

Answer 30

A deficiency judgment may be limited when a secured party fails to comply with UCC Art. 9.

For Consumer Goods Transactions:
− Left for the court to determine.
− Some States → Absolute Bar Rule – bars collecting any deficiency.
− Other States → Rebuttable Presumption Rule; presumed that the proceeds equal the total debt owed (unless the secured party proves otherwise).

For Non-Consumer Transactions → If (1) a debtor places a secured party’s compliance at issue AND (2) the secured party fails to prove disposition was proper, THEN the deficiency amount recoverable is limited to an amount by which the total debt exceeds the greater of the:

a) Proceeds of the disposition; OR
b) Amount that would have been realized had the secured party complied with UCC Art. 9

*The amount of proceeds = the total debt unless it’s proven that compliance would have yielded a smaller amouNT