Secured Transactions

Question 1

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Attachment of the Security Interest

Answer 1

A valid Attachment requires:
(1) The secured party extends value to the debtor (almost any consideration will suffice.)
(2) The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; AND
(3) Either the **security agreement is **authenticated OR the secured party takes possession or control of the collateral.

Question 2

Authentication

Answer 2

A security agreement is authenticated by the debtor providing the secured party with a reasonable description of the collateral in writing. Signature, thumbprint, initials, mechanical reproductions, etc. are all adequate proof of authentication.

Question 3

Cosignment

Answer 3

A transaction in which a person delivers goods to a merchant for the purpsoe of sale in which:
(1) The merchant:
(a) Deals in goods of that kind under a name other than the name of the person making delivery;
(b) Is NOT an auctioneer; AND
(c) Is NOT generally known by its creditors to be substantially engaged in selling the goods of others.
(2) The aggregate value of the goods is $1000 or more at each delivery;
(3) The goods are NOT consumer goods immediately before delivery;
(4) The transaction does NOT create a security interest that secures an obligation.

Question 4

Future Advances

Answer 4

A security interest may provide that collateral secures future advances, whether or not the advances are mandatory, so long as the security agreement explicitly includes a future advances clause.

Question 5

After-Acquired Property Clause

Answer 5

An after-acquired property clause may be included in a security agreement and are generally enforceable, allowing the after-acquired property to be secured in favor of the secured party (does not apply to consumer goods unless the debtor acquires rights in them within 10 days after the** secured party gives value**).

Question 6

Specificiation Clauses

Answer 6

1. Default.: The parties may specifically define what constitutes a default;
2. Acceleration: The parties may provide for the acceleration of payments upon the happening of certain events;
3. Covenants: The parties may covenant certain things to each other regarding the collateral (e.g., the secured party may require the debtor to maintain insurance covering the collateral property.)

Question 7

Perfection

Answer 7

There are three different methods in which a security interest may be perfected: FAT

(1) Filing;

(2) Automatic Perfection;

(3) Taking Possesion

Question 8

Filing (Perfection)

Answer 8

(1) Filing: The filing of a financing statement or the security interest is the primary method of perfection. The filing MUST be filed by an authorized party (authorization is presumed by the debtor’s authentication of the security interest).
Filing Must Contain:
(a) The debtor’s name;
(i) If the debtor is an organization, must have registered name.

(b) The secured party’s name
(c) An adequate description of the collateral; AND
(d) The filing fee

Question 9

Taking Possession

Answer 9

A secured party must perfect a security interest in negotiable documents, instruments, or money by taking mere possesion of such items.

Question 10

Automatic Perfection

Answer 10

The following security interests are perfected automatically when they attach:
(a) A purchase-money security interest in consumer goods; AND
(b) An assignment of accounts which does NOT by itself or in conjunction with other’s assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts.

Question 11

Priority: Perfected vs. Unperfected Interests

Answer 11

A perfected security interest has priority over a conflicting security interest in the same collateral

Question 12

Multiple Perfected Creditors

Answer 12

a) Between multiple perfected creditors, the first to file gains priority;
b) Some collateral is not subject to the state filing system or otherwise cannot be filed. In such case First to perfect gains priority;
c) Generally, knowledge of a prior unperfected interest will not prevent a potential secured party from filing first to obtain priority.

Question 13

Lien Creditors

Answer 13

Lien creditors possess virtually the same status as perfected secured creditors. Accordingly if a party becomes a lien creditor before a secured party files or perfects, the lien creditor will enjoy priority over that party.

Question 14

Buyers in the Ordinary Course of Business (BICOB)

Answer 14

A buyer in the ordinary course of business is a person who buys in the ordinary course from a person in the business of selling goods of that kind. A **buyer in the ordinary course of business takes the item free of a security interest **created by the buyer’s seller even if the security interest is perfected and the buyer knows of it’s existence.

Shelter Principle: The protected buyer may sell the purchased collateral to a third party free of the secured party’s security interest.

Question 15

Consumers Buying from Consumers

Answer 15

A buyer of consumer goods will take the goods free of a security interest, even perfected, if the buyer buys:
(1) Without knowledge of the security interest;
(2) For value;
(3) Primarily for the buyer’s personal, family, or household purposes; AND
(4) Before the filing of a financing statement covering the goods

Question 16

Purchase Money Security Interest (PMSI)

Answer 16

Generally, PMSI’s have priority over prior perfected security interest if the PMSI is properly executed.
A PMSI is either:

(1) A security interest held by the seller of collateral to secure payment of all or part of the price; OR
(2) A **security interest of a person **that gives value to a debtor so that the debtor may acquire rights in or the use of collateral.

Question 17

Right to Dispose of Collateral

Answer 17

Upon default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or in any commercially reasonable manner.

Sale/Non-Judicial Foreclosure: Article 9 requires the party send reasonable notification of the time and place of any public sale to the debtor and any secondary obligor in a timely manner such that the debtor and any secondary obligor have sufficient time to protect their interests.

Strict Foreclosure unless otherwise agreed, a secured party may purchase the collateral at a public or private sale ONLY If the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distrubuted standard price quotations.

Question 17

Secured Party’s Right to Repossess

Answer 17

Upon default, a secured party may attempt to take possesion of the collateral without judicial process, so long as they do not commit a breach of the peace.

Question 18

Surplus and Deficiency

Answer 18

If the sale of collateral brings in MORE than the underlying obligation, the secured party must pay the debtor for any surplus.
Conversely, the obligor is liable for any deficiency.

Neither side is liable for any deficiency or surplus if the transaction is for the sale of accounts, chattel paper, payment intangibles or promissory notes.

Question 18

Right of Redemption

Answer 18

Generally, a debtor or any secondary obligor has the right to redeem (i.e., reclaim) collateral until the secured party has disposed of it or entered into a contract for its disposition.
(1) Fulfill all obligations secured by the collateral;
(2) Pay the reasonable expenses and attorney’s fees.

Question 18

Right to Collect Directly

Answer 18

Upon default, a secured party has the right to collect directly from the account debtor. To exercise this right, the secured party must send an authenticated notification to the account debtor that the amount due has been assigned and that the payment is to be made to the assignee.

Question 18

Inventory, Consumer Goods or Non-Inventory PMSIs

Answer 18

1. Inventory Collateral. A PMSI in inventory collateral has **priority **over a conflicting security interest in the same collateral if the PMSI is perfected at the time the debtor receives possession of the collateral and notice is provided to prior creditors.

**2. Non-Inventory. ** A PMSI in non-inventory collateral (e.g., regular goods) has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the same time the debtor receives possession of the collateral or within 20 days thereafter.

**3. Consumer Goods. ** A PMSI in consumer goods perfects automatically upon attachment.

Question 19

Debtor’s Rights in Non-Complying Disposition of Collateral

Answer 19

When a creditor makes a non-complying disposition of collateral, the debtor can:
**1. Recover Actual Damages: **reasonably calculated to put an eligible claimant in the position it would have occupied had no violation occurred.
**2. Recover Statutory Damages: **
(a) If the collateral involved is consumer goods, the amount of minimum statutory damages must be atleast: the credit loan interest amount + 10% of the loan’s principal.
(b) $500 in statutory damages available for certain article 9 provisons.
3. Be subject to judicially mandated disposition of the collateral.
(a) court can order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions.