Secured Transactions

Question 1

What does Article 9 of the UCC govern?

Answer 1

Any transaction, regardless of its form, that creates a security interest.Substance over form controls (how the parties classify the transaction is immaterial).Priority: HIGH

Question 2

When is a transaction labeled a “Lease” deemed a security interest?

Answer 2

1. If a commitment to make payments for a term exists;AND2. Either:* The original lease term is greater or equal to the remaining economic life of the goods;* The lessee renews the lease for the remaining life of the goods; OR* The lessee has an option to renew or become the owner for no additional consideration.Priority: HIGH

Question 3

_Collateral_What is an Account?

Answer 3

A right to payment arising from:* Property that has been sold, leased, or disposed of;* Services rendered;* A policy of insurance issued;* A secondary obligation incurred;* Energy provided;* The use/hire of a vessel under charter/contract;* A debt from a credit card; OR* Winnings in a lottery.Priority: HIGH

Question 4

_Collateral_What is a Deposit Account?

Answer 4

A demand, time, savings, or similar account maintained with a bank.Does NOT include investment property or accounts evidenced by an instrument.Priority: Low

Question 5

_Collateral_What does Inventory mean?

Answer 5

Goods which are:* Leased by a person as lessor;* Held by a person for sale/lease;* Given by a person under contract of service; OR* Consist of raw materials, work in process, or materials used/consumed in a business.Does NOT include: Farm products or Goods being held for repair.Priority: HIGH

Question 6

_Collateral_What does Equipment mean?

Answer 6

Goods other than inventory, farm products, or consumer goods.Goods = all things that are movable when a security interest attaches.Priority: HIGH

Question 7

_Collateral_What is a “Certificate-of-Title” Statute?

Answer 7

It requires the security interest to be noted on the title of the vehicle for it to be perfected.Priority: HIGH

Question 8

_Collateral_What are Consumer Goods?

Answer 8

Goods purchased primarily for personal, family, or household purposes.Priority: HIGH

Question 9

_Collateral_What do “Proceeds” refer to?

Answer 9

The following property:* Anything acquired upon the sale, lease, or disposition of collateral;* Anything distributed/collected on account of collateral;* Rights arising out of collateral;* Claims arising out of the loss, nonconformity, defect, or interference with the use of collateral; OR* Insurance payable by the result of the above.Priority: HIGH

Question 10

_Collateral_What is Chattel Paper?

Answer 10

A record that evidences both:1. A monetary obligation; AND2. Either:* Security interest in specific goods (with or without a software license used in the goods); OR* A lease of specific goods.*Monetary obligation = obligation to pay money that is secured by the goods or owed under a lease of goods.Priority: Medium

Question 11

Enforcing a security interest depends on what 2 factors?

Answer 11

1. Attachment (secures the creditors rights to the collateral);AND2. Perfection (gives notice of rights to other parties).*Perfection is obtained by the creditor filing a financing statement with the Secretary of State.Priority: HIGH

Question 12

What does Attachment require?

Answer 12

1. Creditor extends value to the debtor;2. Debtor has rights in the collateral; AND3. One of the following: * an authenticated record/security agreement – it must (i) be authenticated by the debtor and (ii) reasonably identify the collateral; * collateral is in the secured party’s possession; * collateral is a certificated security in registered form and the security certificate has been delivered to the secured party; OR * the secured party has control of certain types of collateral (deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights).Priority: HIGH

Question 13

Perfection is obtained by the creditor filing a Financing Statement.What must a Financing Statement contain?

Answer 13

To be effective, is must:1. State the name of the debtor and secured party;2. Indicate the collateral covered by the statement;AND3. Be filed by a person authorized by the debtor in an authenticated record, security agreement, or upon acquisition of the collateral.*Unless seriously misleading, minor errors DO NOT render the statement ineffective.Priority: HIGH

Question 14

What is a Purchase Money Security Interest?Why is a PMSI in consumer goods special?

Answer 14

A PMSI occurs when a creditor extends value to the debtor for the purpose of enabling them to acquire rights in the collateral.A PMSI in consumer goods enjoy AUTOMATIC perfection (there is no need to file a financing statement to perfect).Priority: HIGH

Question 15

Interests in proceeds (from the disposition of collateral) will become unperfected on the 21st day after attachment, unless what happens?

Answer 15

• The proceeds are identifiable cash proceeds;* The security interest in the proceeds is perfected when the interest attaches to the proceeds or within 20 days; OR* If all of the following conditions are satisfied: * Original collateral was perfected under the general filing rule; * The proceeds are collateral that may be perfected; * The proceeds are not acquired with cash proceeds.Priority: HIGH

Question 16

What is a Consignment?

Answer 16

A transaction in which:1. A person delivers goods to a merchant for the purpose of sale;2. The merchant deals in goods of that kind;3. The aggregate value is $1,000 or more;4. The goods are NOT consumer goods (before delivery); AND5. The transaction does not create a security interest.Priority: Low

Question 17

When does a secured party have “control” of a Deposit Account?

Answer 17

If:* The secured party is the bank where the account is maintained;* The debtor, secured party, and bank all have agreed (in an authenticated record) that the bank WILL comply with the secured party’s instructions for deposit without further consent needed; OR* The secured party becomes the bank’s customer with respect to the deposit account.Priority: Low

Question 18

What is the Shelter Principle?

Answer 18

If a buyer acquires property free of a security interest, then any subsequent transfer is also free of the security interest.Priority: Medium

Question 19

Who is a Buyer in the Ordinary Course of Business?

Answer 19

A person that:1. Buys goods in good faith,2. Without knowledge that the sale violates the rights of another person in the goods,3. In the ordinary course from a merchant.*They take free of any security interest.Priority: HIGH

Question 20

When do buyers of consumer goods take free of a security interest under the Consumer-to-Consumer Rule?

Answer 20

When the goods are bought:1. Without knowledge of the security interest;2. For value;3. From a consumer who purchased them for personal, family, or household purposes; AND4. Before the filing of a financing statement covering the goods.Priority: Medium

Question 21

_Priorities_Perfected Interest vs. Unperfected Interest

Answer 21

A perfected security interest has PRIORITY over a conflicting unperfected security interest in the same collateral.Priority: HIGH

Question 22

_Priorities_Unperfected Interest vs. Unperfected interest

Answer 22

When there are two competing unperfected security interests, the first to attach will prevail.Priority: HIGH

Question 23

_Priorities_Perfected Interest vs. Perfected Interest

Answer 23

“First in time, first in right” controls – the first creditor to prefect by filing has priority.Priority: HIGH

Question 24

_Priorities_What is a Possessory Lien?

Answer 24

An interest (other than security) that:1. Secures payment/performance of an obligation for services/materials furnished by another in the ordinary course of their business;2. Is created by statute or rule of law in favor of the person; AND3. Whose effectiveness depends on the person’s possession of the goods.Example = mechanic’s lienPriority: Low

Question 25

_Priorities_When does a Possessory Lien have priority?

Answer 25

It has priority over another security interest UNLESS the lien is created by a statute that expressly states otherwise.Priority: Low

Question 26

_Priorities_When do Judgment Lien Creditors have priority over conflicting security interests?

Answer 26

If they became a lien creditor BEFORE the conflicting security interest was perfected.Priority: HIGH

Question 27

_Priorities_An ownership interest in real property has priority over conflicting interests in fixtures.What are the two exceptions?

Answer 27

Exceptions:1. A perfected PMSI in the fixture.2. A fixture filing.Priority: Medium

Question 28

_Priorities_When does a perfected PMSI in fixtures have priority over a conflicting ownership interest in real property?

Answer 28

If:1. The debtor has an interest of record or is in possession of the real property;2. The ownership interest arose before the goods became fixtures; AND3. The PMSI was perfected before the goods became fixtures or within 20 days thereafter.Priority: Medium

Question 29

_Priorities_What is a Fixture Filing?

Answer 29

A financing statement that:1. Covers goods that are/will become fixtures;2. Satisfies all general rules for financing statements; AND3. States that it covers a fixture, is filed in the real property records, gives a description of the property, and provides the name of the record owner.Priority: Medium

Question 30

What may a secured party do after default?

Answer 30

The secured may:1. Take possession of the collateral; AND2. Without removal, render equipment unusable and dispose of collateral on a debtor’s premises.*They may proceed with or without judicial process.Priority: HIGH

Question 31

What must a secured party do if they want to dispose of collateral?

Answer 31

They MUST send an authenticated notice of the disposition to the debtor (and any secondary obligors), or else they are liable for damages.Exception – If the collateral:* is perishable;* threatens to decline speedily in value; OR* is customarily sold on a recognized market.Priority: HIGH

Question 32

What does disposition of collateral at a foreclosure sale do?

Answer 32

It:1. Transfers all of the debtor’s rights to the transferee for value;2. Discharges the security interest; AND3. Discharges any subordinate security interests.Priority: HIGH

Question 33

What are the damages available to the debtor if a secured party fails to comply with the applicable rules?

Answer 33

A secured party is liable for the debtor’s actual damage for the amount of any loss caused by their failure to comply.The damages for loss are generally equal to expectation damages, and may include losses resulting from the debtor’s inability to obtain alternative financing.Priority: HIGH

Question 34

What is a debtor’s Right of Redemption?

Answer 34

A debtor has the right to repay/reclaim property held by a secured party. To redeem collateral, a debtor must:1. Fulfill ALL obligations secured by the collateral; AND2. Pay reasonable expenses and attorney’s fees.Priority: Medium

Question 35

_Deficiency Judgments_Absolute Bar Rulevs.Rebuttable Presumption Rule

Answer 35

Absolute Bar Rule: Secured party is barred from collecting any remaining deficiency after the disposition of collateral when they fail to comply with disposition provisions.Rebuttable Presumption Rule: If the secured party fails to comply, it is presumed that the proceeds from the disposition are equal to the debt owed.Can be rebutted if the secured party shows the debt owed is greater than the fair market value of the collateral.Priority: HIGH

Question 36

_Deficiency Judgments_If a debtor places a secured party’s compliance in issue and the secured party fails to prove that the disposition was proper, then what is the amount recoverable in deficiency?

Answer 36

It is limited to an amount by which the total debt exceeds the greater of:* The proceeds of the disposition; OR* The amount that would have been realized had the secured party complied with the applicable provisions.Priority: HIGH