Secured Transactions

Question 1

Security Agreement

Answer 1

The security agreement is the agreement between the debtor and the secured party that creates the security interest.

Question 2

Security Interest

Answer 2

A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. It’s a contingent property interest in the debtor’s collateral that the debtor grants to the creditor.

Question 3

Purchase Money Security Interest (PMSI)

Answer 3

A purchase money security interest (“PMSI”) is a special type of security interest. A PMSI can arise in two ways:

(1) Seller-Financed PMSI: (i) The secured party sells the goods to the debtor on credit, and (ii) retains a security interest in the goods;

OR

(2) Financer-Financed PMSI: (i) The creditor loans the funds to the debtor to enable him to purchase the specific collateral; (ii) those funds are used by the debtor to acquire the specific collateral; and (iii) the creditor takes a security interest in that collateral.

Question 4

After-Acquired Property Clause

Answer 4

Grant of a security interest in debtor’s property obtained in the future. If the security agreement has an explicit after-acquired property clause, the security interest will attach to the property as soon as the debtor acquires an interest in the collateral.

W/o an explicit after-acquired clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement.

–Exception: Even w/o an after-acquired property clause, a security interest will attach automatically to collateral of a type that’s rapidly depleted and replenished, such as accounts and inventory. A security interest will also automatically attach to identifiable proceeds of collateral, even w/o an after-acquired property clause.

-An after-acquired property clause will NOT apply to consumer goods unless the debtor acquires rights in the goods within 10 days after the creditor gives value.

–An after-acquired property clause will NOT apply to any commercial tort claims.

Question 5

Future Advance Clause

Answer 5

Grant of security agreement securing future loans w/ same collateral

–Creditor secures future advances to debtor in the present security agreement

Question 6

Perfection

Answer 6

Maximizes secured party’s rights in the collateral as against third parties.

–It’s the process of giving public notice of the security interest

–The secured party’s rights against third parties are established by perfection

–Perfection does not occur until: (1) you attached; and (2) you did 1 of the 5 methods of perfection

Question 7

Financing Statement

Answer 7

Document used to provide public notice of the security interest

–One of the methods used to perfect the security interest

Question 8

Goods (Tangible Collateral)

Answer 8

Include all things that are tangible, movable personal property at the time the security interest attaches. (This includes unborn animals, growing crops, and fixtures)

There are 4 types of goods. They are classified based on how the collateral is used by the debtor:

(1) Consumer Goods - goods used or bought primarily for personal, family, or household purposes;
(2) Equipment - goods that are used or bought for use in a business (Note: this is also the default category for goods they don’t fit in any other category);
(3) Farm Products - crops or livestock or supplies used or produced in farming ops (these must include a farmer);
(4) Inventory - 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 (e.g., raw materials and consumables).

Question 9

Intangible or Semi-Tangible Collateral

Answer 9

There are 8 types of intangible or semi-intangible collateral. The category into which intangible or semi-intangible collateral is placed depends on the nature of the collateral:

(1) Instruments - pieces of paper representing the right to be paid money (e.g., promissory notes, drafts, checks, certificates of deposit);
(2) Documents - a document that represents the right to receive goods (e.g., a bill of lading [shipping receipt], a warehouse receipt);
(3) Chattel Paper - a record (writing) or records which evidence both (1) a monetary obligation, and (2) a security interest in a lease of specific goods. [“Record” is info stored in either a tangible medium (e.g., on paper) or an intangible medium (e.g., electronically stored = “electronic chattel paper”);
(4) Investment Property - includes items such as stock, bonds, mutual funds, and brokerage accounts containing such items;
(5) Accounts - includes a right to payment for property sold or services rendered (think “accounts receivable”);
(6) Deposit Accounts - an account maintained w/ a bank (nonconsumer + account monies claimed as proceeds of other collateral);
(7) Commercial Tort Claims - claimant must be either an organization or an individual, and the claim must arise out of the claimant’s business or profession, and doesn’t include damages for personal injury or death (can also apply to noncommercial tort claims that are claimed as proceeds of another collateral) (these are lawsuits)
(8) General Intangibles - any personal property not coming within the scope of the other definitions (e.g., patents, trademarks, copyrights, and goodwill)

Note: A general intangible under which the account debtor’s principal obligation is a monetary obligation = a payment intangible (e.g., a claim arising in tort that has been settled and reduced to a contractual obligation to pay)

Question 10

Scope of Article 9

Answer 10

Article 9 applies to the following transactions:

(1) A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
(2) A seller’s retention of title - if the seller and buyer agree that the seller will retain title to the goods after they are delivered until the buyer has paid for them, the agreement will be treated as the seller’s retention of a security interest
(3) Agricultural liens - nonpossessory liens on farm products that are created by state statute in favor of persons providing goods, services, or rental land to farmers (only the perfection and priority of these liens are governed by Art 9) [farmers get a lien on their inventory];
(4) Sales of accounts, chattel paper, payment intangibles, and promissory notes;
(5) Commercial consignment of goods - worth a total of $1000 or more to persons who (i) deal in goods of that kind under a name other than the consignor’s, (ii) are not auctioneers, and (iii) are not generally known by their creditors to be substantially engaged in selling the goods of others.

–In a typical consignment, the consignor (who’s the owner of the goods) retains title to them but delivers them to a consignee (usually a retailer), for sale to the public. If the goods aren’t sold, the consignee may return them to the consignor. In cases where the creditors of the consignee would have difficulty distinguishing inventory that a consignee is selling on consignment vs. inventory that the consignee actually owns, Art 9 considers the consignment to be a security interest and requires consignors to comply w/ it by giving notice to the consignee’s creditors.

(6) A secured sale disguised as a lease - parties may try to disguise what really is a sale w/ a security interest as a lease (either for tax purposes or to avoid the requirements of Art 9, etc). Ask: Is this transaction in substance a lease or a sale? At the time the parties entered into the transaction, was it reasonably likely that the lessor would get the item back when it still had meaningful economic value?
- –If yes, that’s a real lease.
- –If no, it’s a sale w/ a security interest (governed by Art 9)
- –Examples: At end of lease term, lessee becomes owner for little or no consideration; or, the lessee is bound to purchase at the end of the lease or to renew the lease for the remaining economic life of the property; or, the lease is for the entire economic life of the property, w/ or w/o renewal.

Question 11

Attachment

Answer 11

Establishes secured party’s rights in the collateral as against the debtor.

–A security interest is NOT enforceable until it has attached.

Question 12

Requirements for Attachment

Answer 12

To attach a security interest:

(1) Either the debtor must authenticate a security agreement granting the creditor a security interest in collateral that describes the collateral, or the creditor must take possession or control of the collateral;
(2) The creditor must give value; and
(3) The debtor must have rights in the collateral. (e.g., right to ownership or possession)

Note: An oral security agreement (a “pledge”) is ok if the secured party takes possession of the collateral.

–Any consideration sufficient to support a simple contract is “value”; even past consideration will suffice as long as the security interest is intended as security for the past consideration.

Question 13

Requirements for Authenticated Security Agreement

Answer 13

There are three requirements to create a valid written security agreement:

(1) A record (written or ESI) showing an intent to create a security interest;
(2) Authenticated (signed) by the debtor; and
(3) The agreement must contain a description of the collateral (and if the security interest covers timber to be cut, a description of the land concerned).

Note: The description of the collateral must reasonably identify the collateral. It can be described broadly by category or type (e.g., all of the debtor’s equipment) or specifically (e.g., by serial number or by saying “the debtor’s tv” if he only has one).

–Exception: Consumer goods, consumer securities accounts, and commercial torts claims cannot be described by type alone; a more specific description is needed.

–A supergeneric description of collateral (e.g., “all of the debtor’s assets” or “ all of the debtor’s personal property”) is NOT a sufficient description.

Question 14

Rights and Duties of Secured Party in Possession or Control

Answer 14

The secured party in possession must use reasonable care in storing and preserving the collateral, but is entitled to reimbursement for reasonable expenses in caring for the collateral.

–Risk of loss of property in the secured party’s possession is on the debtor to the extent of any insurance deficiency.

–The secured party in possession or control may hold any increase in value of, or profits from, the collateral (except money) as additional security, but money so received must be given to the debtor or applied against the secured obligation. The secured party in possession or control may also pledge the collateral.

Question 15

Proceeds

Answer 15

Include whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. (includes 2nd generation proceeds; insurance payable by loss or damage to the collateral unless it’s payable to someone other than the debtor or secured party; and includes claims arising out of the loss of, defects in, or damage to collateral)

–Unless otherwise agreed, a security interest automatically gives the secured party a right to identifiable proceeds. (proceeds must be identifiable)

-“Identifiable” means that the proceeds can be traced back to the original collateral

Question 16

Commingled Cash Proceeds

Answer 16

In the case of commingled cash proceeds (e.g., in a bank account), the identifiable proceeds can be traced 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 secured party’s identifiable proceeds (but the amount cannot exceed the value of the cash proceeds originally deposited.)

Question 17

Time of Perfection

Answer 17

A security interest is not enforceable against anyone until it has attached to the collateral.

If all the steps for perfection are taken before the security interest has attached, perfection will occur upon attachment.

–Remember: A security interest can’t be perfected before it attaches to the collateral.

Question 18

Methods for Perfecting a Security Interest

Answer 18

(A) Attachment; and

(B) One of the following:

–(1) Filing (in the proper place) of a financing statement describing the collateral;

–(2) Taking possession of the collateral;

–(3) Taking control of the collateral;

–(4) Automatic perfection (e.g., of a PMSI in consumer goods); or

–(5) Temporary perfection (e.g., of a security interest in proceeds received from the sale of collateral).

Question 19

Automatic Perfection

Answer 19

The only type of PMSI that is automatically perfected is a PMSI in consumer goods. (it is perfected as soon as it attaches)

Question 20

Perfection By Taking Possession

Answer 20

Security interests in most types of collateral can be perfected simply by taking possession of the collateral. (e.g., consumer goods, equipment, farm products, inventory)

–Where the secured party takes actual possession of the collateral, the security interest is perfected from the moment of possession and continues as long as possession is retained.

–Security interests in general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, certificates of title goods, and accounts CANNOT be perfected by possession. (there’s nothing to take possession of since they’re intangible goods)

–Note: You can ONLY perfect a security interest in money via possession.

Question 21

Can taking by possession and attachment occur simultaneously?

Answer 21

Yes. Taking possession can simultaneously satisfy the requirements for attachment and perfection; that is, possession may be the last thing needed for attachment, and attachment plus possession results in perfection.

Question 22

Perfection By Control

Answer 22

Security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by “control.”

–Note: The only way to perfect a security interest in deposit accounts is by control.

Question 23

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

Answer 23

By control.

Question 24

What is the only type of PMSI that is automatically perfected?

Answer 24

A PMSI in consumer goods.

Question 25

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

Answer 25

By possession.

Question 26

How do you perfect a security interest in a nonconsumer deposit account?

Answer 26

There are three ways to perfect by control of a non-consumer deposit account: (1) Automatic control by the bank maintaining the account (if the bank is the creditor); (2) Putting the account in the secured creditor's name; (3) By control agreement (agreeing in an authenticated record w/ the debtor and the bank in which the deposit account is maintained that the bank will comply w/ the secured party's orders regarding the deposit account w/o requiring the debtor's consent).

Question 27

Perfection for Motor Vehicles

Answer 27

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. --In other words, the secured party must get the relevant governmental authority (e.g., DMV) to note the secured party's lien on the certificate of title. --This most commonly applies to cars and trucks. (but don't forget about the exception)

Question 28

Exception to Perfection for Motor Vehicles

Answer 28

Security interests created by DEALERS in vehicles held in inventory for sale or lease MUST be perfected by filing a financial statement. (can't perfect any other way)

Question 29

Perfection By Filing

Answer 29

A secured party may obtain perfection by filing (either in writing or electronically) a financing statement ("UCC-1"). The financing statement must contain: (1) The debtor's name and mailing address; (2) The secured party's name and mailing address; and (3) A description of the collateral covered by the financing statement. --Note: A security interest may be perfected by filing as to all kinds of collateral EXCEPT deposit accounts and money. --Secured Party's Name: B/c searches aren't conducted under the secured creditor's name, an error in the secured party's name will NOT make the financing statement seriously misleading. --Effect of Missing Address: If a financing statement that doesn't contain the debtor's and/or secured party's mailing address is ACCEPTED by the filing office, then the financing statement is effective despite the lack of the address(es).

Question 30

Debtor's Name in Financing Statement

Answer 30

Financing statements are indexed under the debtor's name. In most states, the debtor's name should match his unexpired driver's license (if the debtor is an individual w/ an unexpired driver's license issued by the state where the financing statement is being filed). --If the debtor doesn't have such a license, then the financing statement may include the debtor's "individual name" or the debtor's personal name and surname. --If the debtor is a registered organization (e.g., a corp or LP), the debtor's name must match its most recent public organic record (that is, the publicly available record that forms or organizes the organization). --Note: Use of the debtor's trade name is insufficient.

Question 31

Effect of Error in Debtor's Name in Financing Statement

Answer 31

Minor errors in the debtor's name won't invalidate a financing statement, but seriously misleading errors will. A financing statement is not seriously misleading if it would be discovered in a filing office's search under the debtor's correct name, using the filing office's standard search logic. (Note: There is no search logic that corrects for spelling errors) --If the filing easily could be found despite the error, the financing statement will stand. --Errors by Filing Office: The failure of the filing office to correctly index a financing statement does NOT impact its effectiveness (the secured creditor is not responsible for filing office error).

Question 32

What happens if the debtor changes his name after filing a financing statement?

Answer 32

The financing statement is effective only against collateral acquired by the debtor BEFORE the name became insufficient and within 4 months after. --For collateral acquired after the 4-month period, the secured party must refile using the debtor's correct name.

Question 33

Description of Collateral in Financing Statement

Answer 33

The description of collateral in a financing statement is sufficient if it reasonably identifies the collateral, which can be broadly by category or type (e.g., "equipment") or specifically (e.g., by serial number). --Note: Unlike in authenticated security agreements, a financing statement MAY contain a supergeneric description of the collateral, such as "all assets." --The financing statement need not mention after-acquired property to perfect a security interest in such property if the description in the financing statement is broad enough to cover the after-acquired property.

Question 34

Real Property-Related Financing Statements

Answer 34

In addition to having the names and addresses of the debtor and secured party and a description of the collateral, financing statements that cover real property-related collateral (e.g., minerals, timber to be cut, fixtures) must also contain: (1) A description of the related real property; (2) The name of the record owner (if not the debtor); and (3) An indication that it is to be filed in the real property records.

Question 35

Does the debtor have to authorize the filing of the financing statement?

Answer 35

Yes. For a financing statement to be effective, the debtor must authorize the filing in any signed writing either before or after it is filed. In addition, the debtor automatically authorizes the financing statement if the debtor authenticates the financing statement OR authenticates a security agreement covering the same collateral as the financing statement. ("ipso facto" authorization) --The financing statement need not be signed, but must be authorized. --Any signed writing by the debtor will authorize the creditor to file a financing statement.

Question 36

Can the authenticated security agreement itself be filed as the financing statement?

Answer 36

Yes. The authenticated security agreement itself may be filed as the financing statement if the parties so desire. If it's filed, it must contain all of the elements necessary for the filing statement (names/addresses of both parties + description of collateral).

Question 37

Where must the financing statement be filed?

Answer 37

Generally, filing must be done "centrally" in the office of the secretary of state. Exception: But if the collateral is timber to be cut or minerals, or if the collateral is or is to become a fixture and the filing is a fixture filing, filing must be done in the county where the mortgage on real estate is filed ("locally"). --In the case of fixture filing, it is safest to file both in the real estate record and at the place that would be proper if the goods were not fixtures.

Question 38

Which state's law governs perfection?

Answer 38

The general rule is the law of the state where the debtor is located governs perfection. Therefore, the secured party must generally file the financing statement in that state. (but note there are exceptions) --If the debtor is an individual, they are located in the state of their principal residence. --If the debtor is a registered organization (e.g., Corp, LLC, or LP), the debtor is located in the state under whose laws it is organized (that is, where its articles of incorporation are filed). --If the debtor is an unregistered organization, the debtor is located in the state under whose laws it has its principal place of business.

Question 39

Exceptions to the general rule for determining which state's law governs perfection

Answer 39

--Possessory security interests and security interests in fixtures and timber to be cut: These are governed by the law of the state in which the collateral is located. --Goods covered by the certificate of title (e.g., cars and trucks): The law of the state issuing the most recent certificate of title governs perfection. --Deposit Accounts: Unless the debtor's agreements w/ the bank state otherwise, the law of the state in which the bank has its principal place of business governs perfection. --Investment Property: Certificated security = Law of state where the certificated security is located; Uncertificated security = law of state where the issuer is organized (unless agreement states otherwise); Securities account = law of state where the securities intermediary's principal place of business is located. --Exception: If a security interest in investment property is perfected by filing, or if it's automatically perfected by a securities intermediary, the law of the state where the debtor is located governs perfection. --Agricultural Liens: Governed by the law of the state in which the farm product covered by the lien is located.

Question 40

What is the effect on collateral in which perfection is governed by the debtor's location when the debtor moves?

Answer 40

If the perfection of a security interest is governed by the law of the state in which the debtor is located, and the debtor moves from one state to another, the security interest generally will become unperfected 4 months after the debtor's move... UNLESS the secured party files a financing statement in the new jurisdiction BEFORE that 4-month period is up.

Question 41

What happens if a perfected security interest in collateral is a possessory security interest and the collateral moves from one state to another?

Answer 41

If a perfected security interest in collateral is a possessory security interest (which is governed by the law of the state in which the collateral is located), and the collateral is moved from one state to another, the security interest will remain perfected w/o any further action so long as the security interest is also perfected by possession under the laws of the new state.

Question 42

What happens if collateral is transferred to a new owner who is located in a different state?

Answer 42

If collateral is transferred to a new owner who is located in a different state, the security interest will become unperfected 1 year after the collateral moves... UNLESS the secured creditor files a financing statement in the new jurisdiction before that 1-year period is up.

Question 43

Continuation Statements

Answer 43

A financing statement is valid for 5 years. A continuation statement may be filed, good for an additional 5 years. The continuation statement can only be filed within 6 months before the lapse of the filed statement. The authorization of the debtor is NOT required for a continuation statement; the secured party may authorize it.

Question 44

Termination Statements

Answer 44

Generally, a secured party is not obligated to terminate a financing statement. However, if there is no outstanding obligation of the debtor and no commitment on the part of the secured party to make further advances, or if the debtor didn't authorize the filing of the initial financing statement, the secured party must, ON DEMAND of the debtor, within 20 days, file a termination statement or provide one to the debtor. --In the case of consumer goods, the secured party must file the termination statement within 1 month after there is no obligation or commitment, or if the debtor demands it, within 20 days of the demand.

Question 45

Perfection for Proceeds

Answer 45

If a secured party has a perfected security interest in collateral, the secured party automatically has a perfected security interest in any proceeds of the collateral for 20 days after receipt of the proceeds. This security interest in proceeds will continue to be perfected beyond the 20 days if: (1) The proceeds are identifiable cash proceeds ("cash proceeds" rule); OR (2) Three requirements: --(a) The original collateral was perfected by filing a financing statement; --(b) A security interest in the type of collateral constituting the proceeds would be perfected by filing in the same place as the financing statement for the original collateral; and --(c) The proceeds were not purchased w/ cash proceeds. (this is called the "same office" rule) Remember: Perfection by filing is effective for all classes of collateral except deposit accounts and money. --Note: Inventory to accounts is a classic same office rule example.

Question 46

Perfected Secured Party vs. Perfected Secured Party

Answer 46

First to file OR perfect (whichever is earliest) wins priority. --Note: This is why sometimes you want to file your financing statement even before a security agreement is entered into.

Question 47

Unperfected Secured Party vs. Unperfected Secured Party

Answer 47

First to attach wins priority.

Question 48

Perfected Secured Party vs. Unperfected Secured Party

Answer 48

Perfected party wins

Question 49

Superpriority for PMSIs in Goods Other than Inventory and Livestock

Answer 49

PMSIs in goods other than inventory and livestock have superpriority [they jump to the front of the priority line] over conflicting security interests in the same goods (or their proceeds) if the interest is perfected immediately or within 20 days after the debtor receives possession of the goods.

Question 50

Superpriority for PMSIs in Inventory and Livestock

Answer 50

Takes priority over conflicting security interests if... Before debtor receives possession... - --(1) Secured party perfects, and - --(2) Sends authenticated notice of the PMSI to other holders, and - --(3) Notice is received within 5 years of the debtor taking possession.

Question 51

Consignor has PMSI in Inventory

Answer 51

Under Art 9, a consignor's interest in the consigned goods is considered to be a PMSI in inventory. Therefore, a consignor can acquire PMSI superpriority in consigned goods if the consignor complies w/ the requirements for gaining PMSI superpriority in inventory.

Question 52

Seller-Financed PMSI vs. Financer-Financed PMSI

Answer 52

Seller-Financed PMSI wins priority.

Question 53

When can a PMSI in equipment be perfected?

Answer 53

A PMSI in equipment can be perfected (usually by filing) any time within 20 days after the debtor gets possession of the collateral.

Question 54

When can a PMSI in inventory be perfected?

Answer 54

A PMSI in inventory must be perfected (usually by filing) by the time the debtor gets possession of the collateral -- there is NO 20-day grace period -- and others w/ a previously filed security interest in the inventory must be given notice.

Question 55

Special Priority Rules for Conflicting Security Interests in Investment Property

Answer 55

(1) Control beats other perfection methods; (2) Earlier control beats later control; (3) Debtor's intermediary beats other creditors.

Question 56

Special Priority Rules for Conflicting Security Interests in Deposit Accounts

Answer 56

Recall that the only way to perfect a security interest in a deposit account is by control. Also, recall that there are 3 different ways of perfecting by control. Each method is equal from a perfection standpoint, but some methods are better than others from a priority standpoint... The methods rank accordingly: (1) Best Method: Co-owner (when the secured party puts the deposit account in its own name) (2) Next best: Maintain account (the bank that maintains the deposit account has priority over other creditors) (3) Worst: Control agreement

Question 57

Secured Party vs. Buyer

Answer 57

When a buyer (or lessee) buys or leases something w/ a security interest on it, the security interest stays on the item. This is subject to two exceptions (see rule below). Secured party wins, unless... (1) Authorized sale; or (2) BIOC

Question 58

Authorized Sales

Answer 58

If the sale or lease of the collateral is authorized by the secured party free of the security interest, the transferee takes free of the security interest. The authorization may be express (e.g., in the security agreement), or it may be implied from the type of sale or from the seller's conduct. --Notes: (1) There is implied authorization for inventory sold to an ordinary consumer so long as the sale is NOT expressly prohibited in the security agreement. (2) Even if the security agreement provides that the debtor cannot sell the collateral, there may be implied authorization by acquiescence (in other words, the creditor waives his right if he doesn't timely object). Remember: Implied authorization is for a sale of INVENTORY to ORDINARY CONSUMERS only.

Question 59

Buyer In Ordinary Course ("BIOC") Rule

Answer 59

A buyer in the ordinary course ("BIOC") - -Takes free of a security interest - -Created by the BUYER'S SELLER BIOC means: (1) Buyer in good faith; (2) W/o knowledge of VIOLATIONS; (3) In ordinary course (4) From a seller in the business of selling goods of that kind. Note: The buyer can't have knowledge that the sale violates the secured creditor's rights (but he can have knowledge that there is a security interest on the item being bought) --This rule also applies to lessees

Question 60

Buyers Not in the Ordinary Course

Answer 60

Buyers or lessees not in the ordinary course of business: (1) Take subject to perfected security interests; (2) Take free of unperfected security interests (unless they know of it when buying).

Question 61

Consumer-to-Consumer Sales

Answer 61

In the case of consumer goods, a buyer takes free of a security interest, even though it's perfected, if the buyer buys: (1) Without knowledge; (2) For value; (3) For the buyer's personal use; (4) Before a financing statement covering the goods has been filed. --Note: The goods must be consumer goods in the hands of both the buyer and seller. --Recall: PMSIs in consumer goods are perfected automatically w/o filing. Nevertheless, holders of these security interests will still lose to consumer buyers under this rule above unless they file.

Question 62

Secured Party vs. Judgement Lienholder

Answer 62

Judgment lienholder wins if lien arose before security interest was perfected. (the key is to look at the time of perfection of the security interest vs. the time of the levy by the sheriff) The secured party has priority if the secured party perfected before the judicial lien arose. --Note: A creditor who has won a judgment in court becomes a judicial lien creditor at the time of levy (that is, seizure of the collateral by the sheriff). Therefore, look to see when the sheriff levies on the collateral and when the security interest is perfected (if at all) to determine who has priority. --HOWEVER, the secured party will also have priority if the secured party obtained a security agreement AND filed a financing statement (but did not attach and perfect) before the judicial lien arose, as long as the secured party eventually attaches and perfects - If the secured party files a financing statement w/ respect to a PMSI within 20 days after the debtor receives the collateral, the secured party will have priority over a judicial lien arising between the time the security interest attaches and the time of filing. - For a perfected future advance to gain priority over a subsequent judicial lien, the future advance must be made (1) w/o knowledge of the lien, (2) within 45 days of the lien arising, or (3) pursuant to a commitment entered into w/o knowledge of the lien.

Question 63

Secured Party vs. Statutory Lienholder

Answer 63

Statutory lienholder wins if they maintain possession of collateral.

Question 64

Default

Answer 64

The right of the secured party to proceed against collateral is triggered by default. Art 9 does not define the events that will trigger default, but the security agreement usually will define default to include events such as failure to pay or maintain insurance. --If the security agreement lacks such a provision, default is generally construed as a failure to pay or perform. --To determine if there has been a default, look out for late or missed payments. However, also look for a possible waiver by the secured party of late or missed payments.

Question 65

Self-Help Repossesion

Answer 65

After default, the secured party is entitled to take possession of the collateral w/o judicial process (that is, by "self-help") if this can be done w/o a breach of the peace. --When a secured party breaches the peace, the secured party loses the authorization to repossess, may be sued for conversion (and possibly assault, battery, trespass etc.), and is liable for actual (and frequently punitive) damages.

Question 66

Breach of Peace

Answer 66

Any conduct by the secured party that has the potential to lead to violence is a breach of the peace. --Generally, physical presence by the debtor (or a representative of the debtor) + a verbal objection by the debtor over the repossession is enough to create a breach of the peace.

Question 67

Breaking and Entering Can Be a Breach of the Peace

Answer 67

Breaking and entering of a residence is probably a breach of the peace. (this includes person's garage, and possibly even if security agreement allows creditor to enter premises at any time to repossess, depending on the circumstances) However, the breaking and entering of a commercial property is less likely to be a breach of the peace. Further, simple trespass (e.g., hot-wiring a car sitting in the driveway) is not a breach of the peace. --While breaking and entering into a business premises is not as likely to be a breach of the peace, picking a lock to enter is prob a breach of the peace.

Question 68

Replevin

Answer 68

If self-help is unavailable, the secured party can use judicial process (e.g., a replevin action) to get the goods. --Replevin = court proceeding to repossess the collateral

Question 69

Rendering Equipment Unusable

Answer 69

W/o removal, the secured party may also make equipment unusable and dispose of it on the debtor's property if the secured party can do so w/o a breach of the peace --The right is directed toward the problem of taking possession of heavy, bulky equipment that is not easily movable.

Question 70

Self-Help Accounts

Answer 70

If the debtor defaults and the collateral is an account, the secured party can notify the person owing money to the debtor (that is, the account debtor) to make payment to the secured party, rather than the debtor. --Upon notification, the account debtor MUST pay the secured party, rather than the debtor. Payment to the debtor will NOT discharge the obligation.

Question 71

Strict Foreclosure

Answer 71

Creditor keeps the collateral itself to satisfy debt (instead of selling it). However, to do this, the creditor must: (1) Notify any other creditor who has a lien in that same collateral (if they object within 20 days, the creditor can't keep it); and (2) Notify the debtor, and obtain consent by agreeing in an authenticated record after default. Or, the debtor must make an autheticated objection within 20 days. (but a debtor can't consent to a partial strict foreclosure in this manner) In either case, then the creditor can't keep the collateral (they must sell it instead). --Partial Strict Foreclosure: Creditor keeps collateral to put toward part of the debt (but it doesn't satisfy the whole thing)

Question 72

No Partial Strict Foreclosure in Consumer Transactions

Answer 72

In a consumer transaction, a secured party may NOT keep the collateral in partial satisfaction of the debt and seek a deficiency judgment. The secured party may only keep the collateral in full satisfaction of the debt.

Question 73

Consumer Goods 60% Rule

Answer 73

If the debtor has paid 60% of the cash price on a PMSI in consumer goods, or 60% of the loan on a non-PMSI in consumer goods, the secured party MUST dispose of the collateral within 90 days after repossession. --If the debtor has paid less than 60%, then the general strict foreclosure rules apply.

Question 74

Resale of Collateral (Foreclosure Sale)

Answer 74

After default, the secured party may sell, lease, license, or otherwise dispose of the collateral in its condition when repossessed or after reasonable preparation. The sale may be either public (auction) or private, and may be by one or more contracts. The sale discharges the security interest under which the sale is being made and all subordinate security interests. The purchaser, however, is still subject to superior security interests. --When there's a foreclosure sale, the foreclosing lien gets wiped off and so does any junior liens; BUT any liens that are senior to the foreclosing lien do NOT get wiped off (they stay on the property).

Question 75

Reasonable Notification Requirement for Foreclosure Sale

Answer 75

Reasonable notice that is authenticated by the secured party (that is, the notice can't be oral) must be given to all parties. --BUT notice isn't required when the collateral is perishable or threatens to decline rapidly in value or is of a kind ordinarily sold in a recognized market.

Question 76

Foreclosure Sale Must Be Commercially Reasonable

Answer 76

Every aspect of the sale (including the method, manner, time, place, and terms) must be commercially reasonable. Keep in mind that the secured party must show that they made an effort to obtain the best price for the collateral. The court will consider the following factors: (1) The sufficiency of the advertising; (2) If the collateral had a limited market, whether people in that market were contacted; (3) Whether the collateral needed cleaning or repair; and (4) If the sale was by public auction, the convenience of the time and place. Note: Low prices alone is not enough to make the sale not commercially reasonable. But if the price is very low, the court will give extra scrutiny to the other factors of the sale.

Question 77

Secured Party May Buy Collateral

Answer 77

The secured party may buy the collateral at any public sale but may buy at a private sale only if the collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations.

Question 78

Proceeds of the Sale

Answer 78

The money from a foreclosure sale 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 w/ lower priority than the foreclosing creditor. If any money is left over, the debtor gets this surplus. Note: Creditors w/ higher priority than the foreclosing creditor receive no money from the sale b/c they don't lose their liens as a result of the foreclosing sale.

Question 79

Secured Party's Right to Deficiency

Answer 79

If the collateral when sold doesn't bring in enough to pay the expenses of the sale and the secured party's debt, the secured party may recover any deficiency from the debtor. --Note: If the debtor is a consumer, then after the sale, the secured creditor must send the debtor an explanation of the calculation of any debt still owed (the deficiency) or money the debtor will receive (the surplus).

Question 80

Failure to Comply w/ Code Rules for Foreclosure

Answer 80

A secured party is liable for the actual damages caused by failure to follow any of the Code's rules. --If the collateral is consumer goods and the secured creditor violates the Code Rules on default (e.g., the sale isn't commercially reasonable), the debtor is entitled to a minimum of 10% of the cash price of the goods plus interest. --Generally, if the secured party fails to follow the Code's rules on default, there is a rebuttable presumption that the sale proceeds equal the amount of the debt. (In other words, the secured party presumptively loses any deficiency)

Question 81

Debtor's Right to Redeem

Answer 81

Any time before the secured party has resold the collateral or has entered into a contracy for its disposition, or the obligation has been discharged by the secured party's retention of the property, the debtor (as well as any surety or other secured party 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. Note: B/c most security agreements contain an acceleration clause (that is, a clause allowing the creditor to declare the entire loan balance due upon default), the debtor typically must tender the entire balance in order to redeem.

Question 82

Definition of Fixtures

Answer 82

Fixtures are goods that have become so related to real property that an interest in them arises under real property law. In general, personal property attached to real estate w/ the intent that it become a permanent part of the real estate is a fixture (e.g., A/C, built-in appliances, elevator, etc.) The distinctive aspect of a fixture is that interests in it may arise under both the Code and the law of real estate. Note: No security interest can exist in ordinary building materials (e.g., bricks, lumber, shingles, etc.) that are incorporated into an improvement of land.

Question 83

Perfection for Fixtures

Answer 83

To perfect a security interest in fixtures, a "fixture filing" (not just a financing statement) must be made in the county office where a mortgage on the real estate would be filed. In addition to the usual requirements for a financing statement, a fixture filing must reasonably identify the real estate and must show the name of the owner (if the debtor does not have an interest of record in the real estate).

Question 84

Secured Creditor's Rights Upon Default for Fixtures

Answer 84

When the security interest in the fixture has priority over all interests in the real property, the holder of the security interest in the fixture may, upon default, remove the fixture from the real property. --If the debtor does not own the property from which the collateral is removed, the creditor must reimburse the owner of the property for the cost to repair damage to the property caused by removal, but not for any other diminution in value.

Question 85

Secured Party vs. Subsequent Real Estate Interest

Answer 85

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

Question 86

Secured Party vs. Prior Real Estate Interest

Answer 86

A prior real estate interest that is properly recorded has priority over a security interest that subsequently arises. (but see rule below) --First in time wins, UNLESS the security interest is PMSI, then PMSI wins if it was perfected by a fixture filing before the goods became fixtures or within 20 days thereafter.

Question 87

Construction Mortgages

Answer 87

A construction mortgage takes priority over a subsequent PMSI in fixtures, even if the security interest is perfected bya fixture filing within 20 days of affixation. (construction lender always wins)

Question 88

When is a Fixture Filing unnecessary?

Answer 88

1) Readily Removable Collateral - A secured party need not fixture file as to readuly removable (1) factory or office machines, (2) equipment that is not primarily used or leased for use in the operation of the real estate, or (3) replacements of domestic applicances which are consumer goods. ANY method of perfection before such goods become fixtures entitles the secured party to priority. 2) Consent, Disclaimer, Or Right to Remove - A secured party need not perfect at all to have priority (1) if the encumbrancer or the owner of the real has, in an authenticated record, consented to the security interest or has disclaimed an interest in the goods as fixtures, or (2) if the debtor has a right to remove the goods as against the real estate claimant.

Question 89

Accessions and Perfection

Answer 89

Accessions are goods that are phsyically united w/ the other goods in such a manner that the identity of the original goods is not lost (e.g., tires on a car). --If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral.

Question 90

Priority for Accessions

Answer 90

General priority rules apply to accession (e.g., first to file or perfect, special PMSI rules) --Exception: a security interest in an accession is subordinate to a security interest in a whole (e.g., a car) which is perfecred by compliance w/ the requirements of a certificate-of-title statute.