Secured Transactions Flashcards
Key principle #1: so far on the MEE, when the question requires examinees to know whether Article 9
applies, the answer has been yes—even if the parties do not call the transaction a “security interest.”
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).
Key principle #2: understand the four classifications of goods.
- Consumer goods: goods that are bought for use primarily for personal, family, or household
purposes (e.g., a computer in the hands of a consumer). - Inventory: goods, other than farm products, that are held by a person for sale or lease to be
furnished under a contract of service; or raw materials, work in process, or materials used or
consumed in a business (e.g., computers sold by a computer store). - Equipment: goods, other than inventory, farm products, or consumer goods (e.g., a computer used
in a business). - Farm products: 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.
Key principle #3: Be able to articulate when attachment occurs. Recognize that attachment is a
prerequisite to a security interest arising and that three criteria must be met.
Requirements of attachment:
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) Security
agreement which requires (mnemonic=AID): authentication, intent to create a security agreement,
and a “narrow description of the collateral.”
After Acquired Property ?
- After-acquired property: the general rule is that a security agreement can cover after-acquired
property and does not need to specifically reference it to be effective.
Key principle #4: Be familiar with the methods of perfection, especially filing a financing statement and
automatic perfection (as these are the two most commonly tested methods).
Perfection can occur by filing a financing statement. It can be automatic in some cases (e.g., a PMSI
in consumer goods). Or, an interest can be perfected by possession or control.
Key principle #5: 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. Know that a perfected
security interest beats an unperfected one—even if one has an unperfected PMSI. This has been tested
multiple times!
Key principle #6: Know what happens when a debtor sells collateral subject to a security interest or if a
judicial lien creditor acquires an interest. Be able to identify that a buyer in the ordinary course of business
generally does not take the collateral subject to the security interest, whereas a buyer not in the ordinary
course of business generally does (unless the interest was not perfected and he does not otherwise know
about it).
A buyer in the ordinary course of business: A 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.)
- A buyer not in the ordinary course of business: 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.
§ Consumer to consumer goods (garage sale) exception: A buyer not in the ordinary course
of business takes free of a security interest even though perfected, if he buys withoutknowledge 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.
- When a lien creditor is involved: 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.
- Key principle #7: know the steps that a secured creditor takes to foreclose on its collateral.
Default: 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.
- Breach of peace: There are several factors to examine to determine if the lender has breached the
peace, including whether the repossession took place at the debtor’s premises and 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. - Resale: 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.)
Key principle #8: Be familiar with the debtor’s means of protecting itself and the remedies available if the
secured party fails to comply with the requirements. These are tested in detail on the MEE.
- Debtor’s means of protection #1: the sale must be commercially reasonable.
- Debtor’s means of protection #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.)
§ Timeliness of notification: 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.
§ Content of notification: In 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. 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. - Remedies if secured party fails to comply with above requirements
§ 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:
* 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.
* 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).
- Debtor’s right to redeem: the debtor can redeem prior to the disposition of the collateral by paying
everything due and owing to the creditor.
