Secured Transactions

Question 1

Four Types of Goods (Tangible Collateral)

Answer 1

1. Consumer Goods - goods bought primarily for personal, family, or household purposes
2. Inventory: goods held for sale/lease, goods that are to be furnished under service Ks, and materials used or consumed in a BUSINESS in a short period of time
3. Farm products: goods such as crops, livestock, and supplies used/produced in a farming operation
4. Equipment: goods other than consumer goods, inventory, or farm products. Usually these are goods that are used or bought for use in a business

Equipment is the default category for goods if no other category fits

Question 2

Intangible or Semi-Intangible Collateral

Answer 2

eight types of intangible collateral
1. instruments (e.g. promissory notes)
2. documents
3. chattel papers
4. investment property (e.g. stocks, bonds, etc.)
5. Accounts (includes a right to payment for property sold or services rendered)
6. Deposit Accounts (account maintained with a bank; generally non consumer deposit accounts)
7. commercial tort claims
8. General Intangibles (catchall category)

Question 3

Attachment (VRS)

Answer 3

attachment is how the security interest “attaches” to the collateral. The security interest is not enforceable unless it has attached

Three Requirements for Attachment:
1. VALUE must be given by the secured party (Creditor) to the Debtor
2. the debtor must have RIGHTS in the collateral (e.g. ownership)
3. there must be a binding SECURITY AGREEMENT (know the reqs for this)

Question 4

Requirements for a binding security agreement (AID)

Answer 4

1. Authentication by the debtor
2. Intent to create a security agreement
3. Description of the Collateral

Question 5

other ways to show that a security agreement has formed?

Answer 5

1. authenticated security agreement
2. creditor takes POSSESSION of collateral
3. creditor takes CONTROL if a non consumer deposit account, chattel paper, investment property

Question 6

Perfection

Answer 6

Perfection is an issue when there is more than one secured party competing for a single piece of collateral

If the question involves who has priority in the collateral, you need to discuss perfection

and remember - a security interest can NOT be perfected before it actually attaches to the collateral

Question 7

Four main methods of Perfection

Answer 7

1. Filing
2. Automatic (for PMSI in consumer goods)
3. Possession (for tangible negotiable docs, goods, instruments, money, or tangible chattel)
4. Control (for investment prop, deposit accounts, and electronic chattel paper)

Question 8

Perfection by Filing

Answer 8

perfection by filing occurs when the secured party files a FINANCING STATEMENT with the secretary of state where the debtor is located

the financing statement must include:
1. debtor’s name and mailing address
2. secured party’s name and mailing address
3. description of the collateral

a security interest may be perfected filing for all kinds of collateral EXCEPT for deposit accounts and money

Question 9

Perfection by Filing: error in debtor’s name on financial statement

Answer 9

Minor errors in the debtor’s name on the financial statement will NOT invalid a financing statement

But a seriously misleading error will invalidate the 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 the filing office’s standard search logic

Question 10

Automatic Perfection - PMSI in Consumer Goods

Answer 10

a security interest is automatically perfected upon attachment for a PMSI in consumer goods

but remember that this does NOT apply for vehicles (they have weird rule)

Question 11

Perfection for Motor Vehicles

Answer 11

security interests in motor vehicles required to be titled can ONLY be perfected by notation on the certificate of file issued by the state

Perfection by no other way will work for vehicles

EXCEPTION: if the debtor is a dealer and the vehicles at issue are inventory

Question 12

Perfection by Possession

Answer 12

security interests in most types of collateral can be perfected simply by taking possession of the collateral

the security interest is perfected only so long as the collateral is actually possessed

collateral that cannot be perfected by possession*:
- general intangibles
- deposit accounts
- etc.

generally, only tangible collateral can be perfected this way

Question 13

Perfection by Control: what type of collateral apply?

Answer 13

security interests in the following can be perfected by control:
1. investment property
2. non consumer deposit accounts
3. electronic chattel paper

security interests in non consumer deposit accounts can ONLY be perfected by control

Question 14

Perfection by Control: methods of obtaining control for a non consumer deposit account

Answer 14

the bank in which a non consumer deposit account is maintained automatically has control over the deposit account

if the secured party is not such a bank, it may obtain control over the non consumer deposit account by either:
1. putting the deposit account in the secured party’s name, or

2. control agreement (agreement b/w secured party, debtor, and bank that bank will comply with the secured party’s orders regarding the account)

Question 15

Priority: secured party vs secured party

Answer 15

when two secured parties each 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

Question 16

what is priority?

Answer 16

Priority is an issue that occurs when there are conflicting security interests in the same collateral

Priority rules determine which creditor will be first in line to get the collateral if the debtor defaults on their obligations

Question 17

Priority: unperfected party vs perfected party

Answer 17

a perfected security interests generally prevails over an unperfected security interest

Question 18

Priority: PMSI superpriority

Answer 18

PMSIs will get priority over a prior perfected security interest in the same collateral if certain conditions are met

PMSI in Equipment & Consumer Goods gets superpriority if:
-the interest is perfected before or within 20 days after Debtor gets possession of the goods

PMSI in Inventory & Livestock gets superpriority if:
1. the security interest is perfected at time the debtor gets possession of the inventory/livestock, and
2. other creditors with perfected security interests in the inventory/livestock get authenticated notice of the PMSI before the debtor receives possession of the inventory/livestock

Question 19

Default

Answer 19

default occurs when the debtor does not make the required payments to the secured party or lender

the lender then gets a statutory right to repossess the collateral pursuant to:
1. judicial process, or
2. self help (if lender does not breach the peace)

Question 20

Purchase Money Security Interest (PMSI)

Answer 20

a PMSI arises when the goods for which the loan is extended to the Debtor is the collateral for the security interest

a PMSI arises in two scenarios:
1. the secured party SELLS THE GOODS to the Debtor on credit and retains a security interest in the goods sold; or

2. the creditor loans the funds to the debtor to enable the debtor to buy specific collateral, and those funds are used by Debtor to acquire the specific collateral, and the Creditor takes a security interest in that collateral

PMSIs are important to recognize because they can create special rule situations

Question 21

Whose claim is superior between a prior owner whose property was stolen and a good faith purchaser of the property?

Answer 21

the prior owner’s claim is superior

a purchaser of goods can only acquire the title that his seller/transferor had or had power to transfer

So a thief who doesn’t actually acquire title to goods is unable to validly transfer title to a purchaser, even if the purchaser buys in good faith and for value

Therefore, the prior owner of the property should be able to have a valid claim for replevin of the goods without having to reimburse the purchaser

Question 22

Can a secured party require direct payments from account debtors after a default?

Answer 22

Yes

Situation: the Secured party has a security in X’s non-goods collateral. X then sells a good to Y on credit, so Y owes X money. X then defaults on loan from Secured Party.

The Secured Party is allowed to notify Y to make Y make payments to the secured party rather than to X

Question 23

Buyer in the Ordinary Course of Business (BIOC)

Answer 23

a BIOC is a buyer who buys goods in the ordinary course from a seller engaged in the business of selling goods of the kind purchased

a BIOC takes collateral free of any security interests in the collateral that were created by the seller, UNLESS the buyer knows that the sale violates a security agreement

Question 24

Priority: PMSI Creditor vs Lien Creditor

Answer 24

generally, if a security interest in collateral is NOT perfected at the time a lien creditor’s lien on the same collateral arises, then the lien creditor will have priority

BUT if the creditor has a PMSI and can establish a PMSI superpriority (same normal PMSI super priority rules) then the PMSI creditor will get priority over the lien creditor

Question 25

Priority: Perfected Secured Creditor vs Lien Creditor

Answer 25

Generally, a prior perfected security interest in collateral has priority over a lien creditor’s interest in the same collateral

BUT, there is an exception for future advances. If a creditor w/ a prior perfected security interest makes a future advance more than 45 days after the lien Aries, the lien creditor will have priority in the future advance unless the future advance was made:
(1) w/o knowledge of the lien, or
(2) pursuant to a commitment made w/o knowledge of the lien