Secured Transactions

Question 1

Secured Transaction

Answer 1

A transaction intended to create a security interest in personal property or fixtures, governed by Art. 9 of the UCC.

Question 2

Security Interest

Answer 2

An interest in personal property or fixtures that secures payment or performance of an obligation. It is a contingent property interest in the debtor’s collateral that the debtor grants to the creditor and springs to life when default occurs.

Question 3

Purchase-Money Security Interest (PMSI)

Answer 3

A special security interest in goods that can arise in two ways:
1. The secured party sells the goods to the debtor on credit and retains a security interest in goods sold
2. Creditor loans the funds to the debtor to enable the debtor to buy specific collateral, those funds are used to buy the specific collateral, and the creditor takes a security interest in that collateral.

Question 4

After-acquired property clause

Answer 4

A clause that grants a security interest not only in the debtor’s present property, but also in property that the debtor will obtain in the future.

If this clause exists, the security interest will attach to the property as soon as the debtor acquires an interest in the collateral.

Question 5

Future advance clause

Answer 5

A clause that secures future loans to the debtor in the present security agreement. A new security agreement will not be needed when the future advance is made.

Question 6

Goods

Answer 6

All things movable at the time the security interest attaches. The category depends on how the debtor is using the collateral, and there are four subcategories:
1. Consumer goods - used or bought primarily for personal, family, or household purposes
2. Equipment - goods that are used or bought for use in business (the catch-all, so if anything does not fall into one of the other subcategories of goods, it is equipment)
3. Farm Products - crops or livestock, supplies, products of farming operations in their unmanufactured states if in possession of a debtor farmer
4. Inventory - goods held for sale or lease, goods to be furnished under service contracts, and materials used or consumed in a business in a short period of time

Question 7

Intangible/Semi-intangible collateral categories

Answer 7

Categorization depends on the nature of the collateral, rather than its use. Eight categories:
1. Instruments - pieces of paper representing the right to be paid
2. Documents - document represents right to receive goods (receipt)
3. Chattel Paper - record or records evidencing both (1) a monetary obligation and (2) a security interest in or a lease of specific goods
4. Investment Property - stocks, bonds, mutual funds, brokerage accounts
5. Accounts - right to payment for property sold or services rendered
6. Deposit Accounts - account maintained with a bank
7. Commercial tort claims - tort claim where claimant is organization or claimant is individual and claim arose out of claimant’s business/profession and no damages for personal injury or death are sought.
8. General intangibles - any personal property not within the scope of the other categories, includes IP and payment intangibles.

Question 8

When might a secured transaction be disguised as a lease?

Answer 8

When the rental obligation is not terminable by the lessee and one of the following applies:
1. lease term is equal or greater to remaining economic life of goods
2. lessee is bound to purchase the goods at the end of the lease or to renew for remaining economic life
3. At the end of the lease, lessee can purchase or renew for nominal consideration

Question 9

Attachment

Answer 9

Establishes creditor’s rights against the debtor and marks the point of enforceability. Attachment is when the last of the following occurs:
1. Parties agree to create the security interest, evidenced by creditor taking possession, authenticated security agreement, or creditor taking control;
2. Value given by secured party; AND
3. Debtor has rights in the collateral

Question 10

What is required for an authenticated security agreement?

Answer 10

1. Agreement is evidenced by record and shows intent to create a security interest
2. Agreement is authenticated (signed) by the debtor
3. Agreement description reasonably identifies collateral, such as by category or type or specifically - supergeneric descriptions will not work.

Question 11

Does a security interest attach to proceeds?

Answer 11

Yes, a security interest in collateral automatically attaches to the identifiable proceeds of that collateral (must be able to trace them back).

Question 12

How do you trace commingled cash proceeds?

Answer 12

Use the lowest intermediate balance rule. Look at the bank account starting at the time the proceeds are deposited, and the lowest balance during that time period is the identifiable proceeds (not to exceed the value of proceeds originally deposited).

Question 13

What is perfection?

Answer 13

How the creditor acquires rights in the collateral against third parties. Perfection requires attachment plus any other necessary perfection steps depending on the type of collateral.

Question 14

What security interest automatically perfects?

Answer 14

A PMSI in consumer goods is perfected upon attachment.

Question 15

How does perfection by possession work?

Answer 15

Security interest is perfected from the moment of possession and continues as long as possession is retained. Money can ONLY be perfected in this way.

Can basically take possession of any physical thing (not general intangibles, deposit accounts, electronic chattel paper, accounts, certificate of title goods)

Question 16

What is perfection by control?

Answer 16

Security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper can be perfected by control. There are different procedures based on the type of collateral.

Question 17

How do you obtain control of a nonconsumer deposit account?

Answer 17

1. The bank in which the account is maintained automatically has control;
2. Put deposit account in secured party’s name; OR
3. Agree in authenticated record that bank will comply with secured party’s orders requiring the deposit account without the debtor’s consent.

Question 18

How do you perfect an interest in motor vehicles?

Answer 18

Under the state certificate of title law, perfection can ONLY occur through notation on the certificate of title (unless the security interest is created by debtor-dealer in vehicles held in inventory for sale/lease).

Question 19

To perfect by filing, what information is required in the financing statement?

Answer 19

1. Debtor’s name and mailing address
2. Secured party’s name and mailing address
3. Description of collateral covered by financing statement

Question 20

What is the effect of an error in the debtor’s name?

Answer 20

A seriously misleading error will invalidate a financing statement. A financing statement is not seriously misleading if it would be discovered in a filing office search under the debtor’s correct name, using standard search logic.

Question 21

What happens if the debtor changes their name?

Answer 21

The financing statement will only be effective against collateral acquired by the debtor before or within 4 months of the name change. To cover later-acquired collateral, the secured party must refile.

Question 22

When is the description of collateral in a financing statement sufficient?

Answer 22

When it complies with the reasonably identifies standard of a security agreement, but also when there is a supergeneric description.

Question 23

How can a debtor authorize the filing of a financing statement?

Answer 23

By signing a security agreement, authenticating the financing statement itself, or authorizing in any other signed writing.

Question 24

Where do you file a financing statement?

Answer 24

In the office of the secretary of state, unless it is fixtures or some other real property-related collateral, in which case it must be filed in the county where the land is located.

Question 25

Which state’s law governs perfection?

Answer 25

The law of the state where the debtor is located. The debtor is located…
-Individual: principal residence
-Registered org: state where organized
-Unregistered org: at place of business, or if more than one place of business, at its chief executive office

Question 26

What if the debtor or the collateral moves to a different state?

Answer 26

-Debtor relocation: security interest will become unperfected 4 months after debtor’s move unless secured party files in the new jurisdiction
-Collateral transferred to new owner in different state: security interest will become unperfected one year after collateral moves unless secured party files in the new state.

Question 27

Continuation Statement

Answer 27

A financing statement is valid for five years. A continuation statement can be filed to renew the security interest for another five years, but it can only be filed within 6 months before the lapse of the filed financing statement.

Question 28

When is a secured party perfected in proceeds?

Answer 28

If they were perfected in the collateral, they are automatically perfected in proceeds for 20 days after receipt of proceeds. They will continue to be perfected beyond that 20 days if:
1. Proceeds are identifiable cash proceeds;
2. Same office rule: security interest in original collateral was perfected by filing and perfecting the proceeds would require a filing in the same office, SO LONG AS there was not cash interval; OR
3. The security interest in proceeds is perfected within the 20-day period.

Question 29

Will a filed financing statement become ineffective if the debtor changes its use of the collateral?

Answer 29

Yes, it will remain effective to perfect the security interest.

Question 30

Who has priority between two perfected secured parties?

Answer 30

Whichever party was the first to file OR perfect.

Question 31

Who has priority between two unperfected secured parties?

Answer 31

First to attach

Question 32

Who has priority between an unperfected and perfected secured party?

Answer 32

A perfected security interest will prevail over an unperfected one.

Question 33

What is PMSI superpriority?

Answer 33

PMSIs are superior to prior perfected security interests in the same collateral if certain conditions are met:
1. PMSI in goods other than inventory/livestock: Priority over same goods or proceeds if interest is perfected before or within 20 days after debtor receives possession of goods.
2. PMSI in inventory and livestock: priority over conflicting interest in same inventory or cash/chattel paper/instrument proceeds if it is perfected at time debtor takes possession and authenticated notification (good for five years) was sent to other secured parties.

Question 34

As between two PMSIs, who has priority?

Answer 34

The seller-financed PMSI has priority over the lender-financed PMSI. Otherwise, first secured party to file or perfect wins.

Question 35

What method of perfection is preferred for investment property?

Answer 35

A security interest perfected by control will have priority over a security interest perfected by any other method.

Question 36

Control is the preferred method of perfection for deposit accounts, but which method of control will prevail?

Answer 36

The security interests will rank according to time of obtaining control, except:
1. Secured party who obtained control by getting account in their name has highest priority
2. Bank where deposit account is maintained will have second highest priority

Question 37

What happens when a buyer buys something with a security interest on it?

Answer 37

The security interest stays on the item, unless an exception applies to allow them to take free.

Question 38

What are the take free rules for buyers?

Answer 38

1. Authorized sales - secured party expressly or impliedly (think inventory sale to ordinary consumer, prior acquiescence) authorizes sale free of security interest.
2. Buyer in the ordinary course takes free of nonpossessory security interests in goods created by the buyer’s seller
3. Garage sale rule: for goods that are consumer goods in the hands of both the buyer and seller, the buyer takes free of a perfected security interest if they buy without knowledge, for value, for personal or household purposes, and before a financing statement has been filed.

Question 39

What is a buyer in the ordinary course of business?

Answer 39

One who buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course of business from a seller in the business of selling goods of the kind purchased.

Question 40

Who will win between a secured party and a judicial lien creditor?

Answer 40

A judicial lien creditor will prevail if the lien creditor becomes such before the security interest is perfected.

Exceptions:
-Secured party will have priority if they obtained a security agreement and filed a financing statement before the judicial lien arose
-PMSI grace period: A PMSI will have priority if a financing statement is filed within 20 days after the debtor receives collateral
-Future advances: A perfected future advance will have priority if made (1) without knowledge of lien, (2) within 45 days of lien arising, OR (3) pursuant to a commitment entered into without knowledge of a lien.

Question 41

Who will win between a secured party and a statutory lien holder?

Answer 41

A possessory statutory lien holder will have priority over a security interest as long as the goods or services were provided in the ordinary course of business and the collateral remains in the lien holder’s possession.

Question 42

What is default?

Answer 42

Not defined by Art. 9, but rather by the security agreement. Typically failure to pay or otherwise perform.

Question 43

What are the secured party’s options in the event of default?

Answer 43

1. Self help repossession, so long as it does not breach the peace
2. Use judicial process (such as replevin) to get the goods
3. Render equipment unusable on the debtor’s property
4. Accounts - notify account debtor, who must then pay secured party rather than debtor.

Question 44

Strict Foreclosure

Answer 44

The secured party may retain the collateral in full or partial satisfaction of the debt. Requires:
1. Sending proposal to retain collateral to other secured parties in the collateral. They have 20 days to object, and if they object, collateral must be disposed of by sale.
2. Obtaining the debtor’s consent (authenticated record only for partial strict foreclosure, failure to object within 20 days for full strict foreclosure)

Question 45

What is the effect of a resale of the collateral?

Answer 45

The sale discharges the security interest under which the sale is being made and all subordinate security interests. The purchaser will be subject to superior security interests.

Question 46

What are the requirements of a resale of collateral?

Answer 46

1. Reasonable notification to the debtor and any other secured parties who have notified or filed a financing statement, which must be reasonable (10 days usually sufficient)
2. Every aspect (method, manner, time, place, terms) must be commercially reasonable.

Question 47

When may the secured party buy the collateral at a sale?

Answer 47

Any public sale, or at a private sale if the collateral is of a type customarily sold in a recognized market or has standard price quotations.

Question 48

Where do the proceeds of the sale go?

Answer 48

1. Costs of repossession and sale
2. Pay off debt of foreclosing creditor
3. Pay off debt of creditors with lower priority
4. Surplus to debtor

*Creditors may recover a deficiency from the debtor

Question 49

If the secured party fails to follow Code rules, what may be the consequence?

Answer 49

-Liability for actual damages caused by failure to follow rules
-Minimum recovery for consumer goods if there is a violation of default rules
-Loss of deficiency judgment if failure to follow rules on default (rebuttable presumption that sale proceeds equal the amount of the debt)

Question 50

What is the debtor’s right to redeem?

Answer 50

At any time before the secured party has disposed of the collateral, the debtor or another secured party/lienholder may redeem collateral by tendering fulfillment of all obligations secured by the collateral plus additional reasonable expenses.

*If there is an acceleration clause, the entire remaining balance must be tendered to redeem

Question 51

Fixture

Answer 51

Goods that have become so related to real property that an interest arises in them under real property law.

Question 52

How do you perfect a security interest in fixtures?

Answer 52

File in the office where a mortgage on real estate would be filed.

Question 53

What are the secured creditor’s rights on default of a fixture?

Answer 53

If the security interest in the fixture has priority over all interests in the real property, the holder of the security interest in the fixture can remove the fixture from the real property. They must pay for damages from removal if the debtor does not own the real property.

Question 54

Who would win between a secured party with an interest in fixtures and a subsequent real estate interest?

Answer 54

The security interest in fixtures would have priority over the subsequent real estate interest.

Question 55

Who would win between a secured party with an interest in fixtures and a prior real estate interest?

Answer 55

The prior real estate interest would have priority. Exceptions:
1. PMSIs - prevail if perfected by fixture filing before or within 20 days after the goods become fixtures (but construction mortgages can take priority over subsequent PMSIs).

Question 56

What is an accession?

Answer 56

Goods that are physically united with other goods in such a manner that the identity of the original goods is lost.

Question 57

How do you perfect an accession?

Answer 57

If a security interest is perfected when collateral becomes an accession, the security interest remains perfected.

Question 58

What are the priority rules for accessions?

Answer 58

-Typically, same rules will apply as other collateral
-Vehicles: security interest in an accession is subordinate to security interest in a whole which is perfected by compliance with the requirements of a certificate of title statute.

Question 59

May a secured party remove an accession?

Answer 59

Yes, if the security interest in the accession has priority over the claims of every person having an interest in the whole. They must pay cost of repair of physical injury to the whole or other goods.