Secured Transactions

Question 1

When does Article 9 of the UCC apply?

Answer 1

Article 9 applies to all security interest 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

Every secured transactions essay answer must include

Answer 2

1. analysis of attachment
2. analysis of perfection

Question 3

Classifications of goods

Answer 3

1. consumer goods
2. inventory
3. equipment
4. farm products
5. fixtures

Question 4

Consumer goods

Answer 4

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

Question 5

Inventory

Answer 5

Inventory is:

1. goods, other than farm products, that are held by a person for sale or lease to be furnished under a contract of service; or
2. raw materials,
3. work in process, or
4. materials used or consumed in a business (e.g. computers sold by a computer store).

Question 6

Equipment

Answer 6

Equipment is goods OTHER than inventory, farm products, or consumer goods (e.g. a computer used in a business).

Question 7

Farm products

Answer 7

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

Question 8

Attachment

Answer 8

A prerequisite to a security interest arising.

Criteria:

1. Value must be given by the secured party to the debtor (e.g. a loan);
2. The debtor must have rights in the collateral;
3. There must be a binding security agreement.

Question 9

Components of a security agreement

Answer 9

1. Authentication,
2. Intent to create a security agreement, and
3. Description of the collateral

(AID)

Question 10

After-acquired property

Answer 10

A security agreement can cover after-acquired property and does not need to specifically reference it to be effective.

Question 11

Methods of perfection

Answer 11

1) filing a financing statement
2) automatic (as in a PMSI in consumer goods)
3) possession or control

Question 12

Priority between security interests

Answer 12

When two secured parties have a security interest in the same collateral, the first to file or perfect has priority.

If no party perfects, then the first to attach has priority.

A perfected security interest beats an unperfected one, even if one has an unperfected PMSI.

Question 13

What happens when a debtor sells collateral subject to a security interest or if a judicial lien creditor acquires an interest?

Answer 13

A buyer in the ordinary course of business generally takes collateral free of the security interest.

A buyer not in the ordinary course of business takes subject to the security interest (unless the interest was not perfected and he does not otherwise know about it).

Question 14

Buyer in the ordinary course of business

Answer 14

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 15

Buyer not in the ordinary course of business

Answer 15

Takes collateral subject to a perfected interest (meaning the perfected interest remains attached to the collateral). Generally, does not take subject to an unperfected interest if the buyer gives value and does not know about the interest.

However, beware the garage sale exception.

Question 16

Garage sale exception

Answer 16

(Consumer-to-consumer goods exception)

A buyer NOT in the ordinary course of business takes free of a security interest even though perfected, if he buys from a consumer seller, 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 has them for this to apply.

Question 17

Who has priority between a secured party and a lien creditor?

Answer 17

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 18

default

Answer 18

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 19

breach of peace

Answer 19

There are several factors to examine to determine if the lender has breached the peace, including i) whether the repossession took place at the debtor’s premises and ii) 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 20

effect of resale of collateral

Answer 20

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 21

debtor’s means of protection in a foreclosure sale of the collateral

Answer 21

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

Question 22

requirements for written notification of sale

Answer 22

1. Timeliness: this is generally a question of fact, but in non-consumer transactions, notification sent 10 days or more before the disposition is considered reasonable
2. Content of notification:
   
   1. In non-consumer 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.
   2. In 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 23

Remedies if a secured party fails to comply with the requirements

Answer 23

1. Damages, including consequential damages but the debtor has a duty to mitigate). Also includes statutory damages if the collateral constitutes consumer goods 2. Sale (by court order) 3. Rebuttable presumption (different for non consumer and consumer transactions)

Question 24

Rebuttable presumptions available to debtor if secured party fails to comply with the debtor’s means of protection in a foreclosure sale of the collateral

Answer 24

1. Non consumer transactions: If there is a failure to comply with the 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. 2. Consumer transaction: There are two approaches that courts follow: the absolute bar rule—the creditor’s noncompliance bars any recovery of deficiency The rebuttable presumption rule—same as the rule for non consumer transactions, the collateral is presumed to be worth the amount of the debt and the debtor’s deficiency is nothing

Question 25

Debtor’s right to redeem

Answer 25

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

Question 26

Rule statement for attachment

Answer 26

Generally, in order for a security interest to be enforceable against a debtor, the security interest must have “attached” to the collateral. Attachment occurs when 1) value is given by the lender to the debtor, 2) the debtor has an ownership interest in the collateral, and 3) a security agreement that identifies the collateral with specificity is signed by the buyer.

Question 27

Rule statement for perfection

Answer 27

Perfection of a security interest is generally necessary for the secured party to have rights in the collateral that are superior to any other rights claimed by third parties. A secured party can perfect a security interest by i) filing a financing statement, ii) possessing the collateral, iii) controlling the collateral, iv) perfecting automatically.

Question 28

Rule statement for PMSI

Answer 28

A purchase money security interest (PMSI) is a special type of security interest in goods that generally has priority over other security interests in the same goods. A PMSI arises when a creditor sells goods on credit to a debtor and retains a security interest in the goods, or when the creditor advances funds, which are then used to purchase the goods and the seller reserves a security interest in those goods.

A PMSI generally perfects automatically upon attachment. However, a PMSI does not have priority over a consumer buyer’s interest in the collateral if the secured party does not file a financing statement covering the goods before the consumer buyer’s purchase of the goods.

Question 29

Rule statement for perfection of a PMSI

Answer 29

A PMSI in consumer goods perfects automatically upon attachment.

Question 30

Rule statement for debtor’s transfer of collateral, not for value

Answer 30

If collateral is transferred and the transferee of the collateral is not a buyer, the security interest generally continues in the collateral, unless the secured party has authorized its sale free of the security interest.