Secured Transactions

Question 1

Seller-financed Purchase Money Security Interest

Answer 1

A seller-financed PMSI is a special type of security interest in goods. The secured party sells the goods to the debtor on credit and retains a security interest in the goods sold.

Question 2

Financer-financed Purchase Money Security Interest

Answer 2

A financer-financed PMSI is a special type of security interest in goods. The creditor loans the funds to the debtor to enable the debtor to buy specific collateral, those funds are used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral.

Question 3

TYPE OF GOODS: Consumer Goods

Answer 3

Goods used or bought primarily for personal, family, or household purposes.

Question 4

TYPE OF GOODS: Equipment

Answer 4

Goods that are used or bought for use in a business.

ExamTip: Equipment is the default category for goods. If collateral fits none of the other categories, it is considered equipment.

Question 5

TYPE OF GOODS: Farm Products

Answer 5

Crops, livestock, or supplies used or produced in farming operations in the possession of a debtor engaged in farming operations.

Question 6

TYPE OF GOODS: Inventory

Answer 6

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

TYPES OF INTANGIBLE COLLATERAL

Answer 7

1. Instruments:Pieces of paper representing the right to be paid money (e.g., promissory notes)

**2. Investment Property: **Stocks, bonds, mutual funds, and brokerage accounts

**3. Accounts: **A right to payment for property sold or services rendered (i.e., “accounts receivable”)

**4. Deposit Accounts: **An non-consumer (i.e., business) account maintained with a bank

**5. Chattel Paper: **A record which evidences (1) a monetary obligation; and (2) a security interest in specific goods. E.g., A finances a car and grants a security interest in the new car.

6. General Intangibles: Any personal property that doesn’t fall under one of the above categories. Patents, trademarks, copyrights, and goodwill are general intangibles.

Question 8

Scope of Article 9 of the UCC

Answer 8

Article 9 applies to any transaction that creates a security interest in personal property or fixtures by contract. Article 9 applies based on substance and not form of a transaction.

Question 9

Secured Sale Disguised as a Lease

Answer 9

A lease that is intended to serve as a security arrangement will be subject to Article 9.

A lease where:

(1) the lease term is equal to or greater than the remaining economic life of the goods;

(2) the lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life of the goods OR

(3) at the end of the lease, the lessee has an option to purchase the goods or renew the lease for the remaining economic life of the goods for no consideration.

Question 10

Attachment

Answer 10

A party has no security interest in a debtor’s collateral without attachment.

ATTACHMENT REQUIRES:

1. Agreement of parties to create a security interest (“security agreement”)
2. Value must be given by the secured party; AND
3. Debtor must have rights in the collateral

Question 11

Authenticated Security Agreement

Answer 11

A security agreement must be:
1. Evidenced by a record
2. Show an intent to create a security interest
3. Authenticated by the debtor (i.e., signed)
4. Contain a description of collateral
5. Description must reasonably identify the collateral

ExamTip: In lieu of an agreement, the creditor can take possession or control of the collateral.

ExamTip: Collateral can be described broadly by type (“all inventory”)

Question 12

Future Advances

Answer 12

A security agreement may provide that the collateral will serve as a security not only for the present obligation, but also for advances the creditor makes to the debtor in the future.

Question 13

After-Acquired Property

Answer 13

A security agreement may create a security interest in after acquired collateral. After-acquired property will be subject to an security interest ONLY IF the security agreement explicitly provides for it.

A financing statement need not mention after-acquired property to perfect a security interest in such property if the description is broad enough to cover the after-acquired property

ExamTip: Even in the absence of an explicit clause, a security interest will attach automatically to collateral that is rapidly depleted such as accounts & inventory. E.g., All of the debtor’s equipment, now owned or later acquired.

Question 14

Proceeds

Answer 14

A security interest in collateral automatically attaches to identifiable proceeds of the collateral.

Proceeds include whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.

ExamTip: Proceeds are “identifiable” if they can be traced back to the original collateral.

Question 15

Lowest Intermediate Balance Rule

Answer 15

In the case of commingled cash proceeds, identifiable proceeds can be traced using the lowest intermediate balance rule.

The lowest balance between the time proceeds are deposited and the application of the rule are considered identifiable proceeds.

ExamTip: The lowest balance can NEVER exceed the value of the cash proceeds originally deposited.

Question 16

Perfection

Answer 16

Perfection maximizes secured party’s rights in the collateral as against third-parties. A security interest is not enforceable against anyone until it has attached to the collateral.

PERFECTION CAN HAPPEN BY:
1. Filing of a financing statement describing the collateral
2. Taking possession of the collateral
3. Taking control of the collateral
4. Automatic perfection

Question 17

Automatic Perfection

Answer 17

A security interest is automatically perfected upon attachment.

PMSI in consumer goods are perfected automatically.

ExamTip: Only type of PMSI that automatically perfects is consumer goods.

Question 18

Perfection by Taking Possession

Answer 18

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

ExamTip: Perfection begins at the moment of possession AND continues as long as possession is retained.

Question 19

Perfection by Control

Answer 19

Security interests in the following may be perfected by control:

(1) investment property
(2) business deposit accounts [control is the only way to perfect]
(3) electronic chattel paper

Question 20

Perfection of Nonconsumer Deposit Accounts

Answer 20

A nonconsumer deposit account can only be perfected by control:

(1) Bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account.

(2) Debtor puts the deposit account in the secured party’s name; or

(3) Authenticated control agreement between the debtor, bank, and the secured party that the bank will comply with the secured party’s orders regarding the deposit account without debtor’s consent.

Question 21

Perfection for Motor Vehicles

Answer 21

Security interests in motor vehicles can only be perfected by notation on the certificate of title issued by the state.

Exception: Security interests created by dealers in vehicles held as inventory for sale or lease can be perfected by filing a financing statemeent.

Question 22

Perfection by Filing

Most Frequently Tested

Answer 22

A secured party may obtain perfection by filing a financing statement with the secretary of state that contains:

(1) Debtor’s name and mailing address
(2) Secured party’s name and mailing address, and
(3) Description of the collateral covered by the financing statement. [reasonably identifies collateral, even a supergeneric description is OK]
(4) Authorization by the Debtor [signature on a security agreement authorizes financing statement automatically]

ExamTip: Clerical errors by the filing office will not invalidate a financing statement. E.g., Secured party is coded as the debtor

Question 23

Debtor’s Name and Address

Perfection by Filing

Answer 23

Financing statements are indexed under the debtor’s name. If the debtor is an individual with an unexpired driver’s license issued by the state where the financing statement is to be filed, the debtor’s name on the financing statement must match the license.

If registered organization, then debtor’s name on public record filed with the secretary of state

Name Change: If the debtor’s name changes after a financing statement is filed, the statement is effective only against collateral acquired by the debtor before the name change AND within 4-months after.

Seriously Misleading Errors: A minor error in the debtor’s name will NOT 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 the officer’s standard search logic.

ExamTip: Trade name is INSUFFICIENT.

Question 24

Law Applicable To Perfection

Answer 24

The law of the state where the debtor is located generally governs perfection of the security interest. The financing statement must generally be filed in the debtor’s state

If individual = principal residence
If a registered organization = state of organization (i.e., incorporation)
If an unregistered organization = chief executive office / principal place of business.

ExamTip: Debtor relocates to another state, the security interest will become unperfected within 4-months after the move unless the secured party files a new financing statement in the new jx.

ExamTip: Collateral is transferred to a new owner located in a different strate. The security interest will become unperfected 1-year after the collateral moves unless the secured party files a new statement.

Question 25

Financing Statements

Answer 25

A financing statement is valid for 5-years. A continuation statement, if filed, will perfect a statement for an additional 5-years for a total of 10-years.

If demanded by debtor, a secured party must file a termination statement within 20-days, provided that the debtor has paid off the debt.

Question 26

Temporary Perfection

Answer 26

If a secured party has a perfected security interest in collateral, they have an automatically perfected security interest in any proceeds of the collateral for 20-days after receipt of the proceeds.

Security interest continues to be perfected IF:
(1) Proceeds are identifiable cash proceeds

(2) SAME OFFICE RULE:Security interest in the type of collateral constituting the proceeds would be filed in the same office as the financing statement for the original collateral, the proceeds were not purchased with cash proceeds of the collateral.

E.g., *S loans money to D, takes security interest in D’s inventory, files a financing statement. D swaps his inventory for equipment = S has a perfected security interest in the equipment under the same office rule *

E.g. 2, Same facts as above, except D sells inventory, receives cash, and uses cash to purchase equipment = S does not have a perfected security interest beyond 20-days and must filed a financing statement

(3) Security interest in the proceeds is perfected within the 20-day period.

Question 27

Change in Use of Collateral

Answer 27

If the debtor changese its use of the collateral (e.g., from equipment to inventory), the filed financing statement remains effective to perfect the security interest.

Secured creditor has NO DUTY to monitor the collateral or to amend the financing statement.

Question 28

Priority Between Perfected Secured Parties

Answer 28

If there are conflicting perfected security interests in the same collateral, priority goes to whichever party was the first to either file or perfect

Question 29

Priority Between Unperfected Secured Parties

Answer 29

When two unperfected security interests conflict, the first to attach has priority.

Question 30

PMSI Superpriority

Answer 30

PMSIs enjoy superpriority, meaning they are superior to prior perfected security interests in the same collateral if the following conditions are met:

(1) PMSI in **equipment or consumer goods ** has priority over conflicting security interests if the interest is perfected before or within 20-days after the debtor receives possession of the goods.

(2) PMSI in inventory and livestock collateral has priority over a conflicting security interest in the same inventory IF: (i) it is perfected at the time the debtor gets possession of the inventory (i.e., filing occurs before debtor takes possession) AND (ii) any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory.

ExamTip: PMSI in inventory must be perfected and notification sent BEFORE debtor receives possession.

Question 31

Priority Between Conflicting PMSIs

Answer 31

If more than one party has PMSI superiority in collateral,
(1) A seller-financed PMSI has priority over a financer-financed PMSI.

or

(2) The first secured party to file or perfect prevails.

Question 32

Priority of Conflicting Security Interests in Deposit Accounts

Answer 32

(1) A security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method.

(2) A secured party who has obtained control by putting the deposit account in the party’s name has priority over all other secured parties with control

AND

(3) A bank that has control because it maintains the deposit account has priority over all secured parties with control except the party who has obtained control by putting the account in their name.

Question 33

Authorized Sales

Secured Party vs. Buyer (or Transferee)

Answer 33

Generally, a buyer buys or leases something with a security interest on it, meaning the security interest stays on the item.

Exceptions:
(1) Authorized Sales: If the sale or lease of the collateral is authorized by the secured party free of the security interest, the transferee takes free of the security interest. [authorization may be express or implied from seller’s conduct]

E.g., S has a security interest in applicance stores inventory. Store sells a fridge to an “ordinary consumer” = Implied authorization.

E.g. 2, Same facts as above except that the store sells all of the inventory to a liquidation warehouse = No authorization

Question 34

Buyers in the Ordinary Course

Secured Party vs. Buyer (or Transferee)

Answer 34

A buyer in the ordinary course (“BIOC”) takes free of a nonpossessory security interest in the goods created by the buyer’s seller. This is true even if the security interest is perfected and even if the buyer knows of the interest.

A BIOC is one who buys goods (1) in good faith; (2) without knowledge that the sale violates rights of another person in the goods; and (3) in the ordinary course of business from a merchant.

Question 35

Consumer-to-Consumer Sales
(“Garage Sale Rule”)

Answer 35

In the case of consumer goods, a buyer takes free of a security interest, even though it is perfected, if the buyer buys:

(1) without knowledge of the security interest,
(2) for value
(3) for the buyer’s own personal, family, or household purposes AND
(4) before a financing statement covering the goods has been filed.

ExamTip: Notice / knoweldge defeats the garage sale rule.

Question 36

Secured Party vs. Judicial Lien Creditor

Answer 36

A judicial lien creditor prevails over the holder of a security interest IF the lien creditor becomes such before the security interest is perfected.

A prior perfected interest has priority over a judicial lien.

PMSI Grace Period: If the secured party files a financing statement with respect to a PMSI within 20-days after the debtor receives the collateral, the secured party will have priority over a judicial lien arising in the interim.

ExamTip: A person becomes a judicial lien creditor at the time of levy (i.e., sheriff’s seizure of collateral)

Question 37

Secured Party vs. Possessory (Statutory) Lien Holder

Answer 37

A possessory lien imposed by other state law in favor of those who supply goods or services (e.g., car repairmen) has priority over a perfected 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 38

Self-Help Repossession

Answer 38

Following default, the secureted party is entitled to take possession of the collateral without judicial process (i.e., “self help”). Self-help is available only if it can be done without a breach of the peace

Breach of the peace: Any conduct by the secured party that has a the potential to lead to violence is a breach of the peace. (1) Physical presence by the debtor plus (2) a verbal objection by the debtor over the repo is sufficient to breach the peace.

ExamTIp: Unauthorized breaking and entering into a home is a breach of the peace. A business is less likely to be a breach. simple trespass is not necessarily a breach (e.g., hotwiring a car sitting on a driveway).

Question 39

Default by Debtor

Answer 39

The right of the secured party to proceed against collateral is triggered by default. Default ususally occurs when the debtor fails to make a payment that is due.

Question 40

Rendering Equipment Unusable

Answer 40

Without removal, the secured party may also make equipment unusuable and dispose of it on the debtor’s property if the secured party can do so without a breach of the peace.

E.g., Taking engine wires to incapacitate heavy, bulky equipment

Question 41

Self-Help in Deposit Accounts

Answer 41

If the debtor default and the collateral is in a deposit account, the secured party can notify the person owin the money to the debtor to make payment to the secured party, rather than to the debtor. Upon notification, the account debtor must pay the secured party.

Question 42

Strict Foreclosure

Answer 42

After default and repossession, the secured party may retain the collateral in full or partial satisfaction of the debt by:

(1) Secured party must send its proposal to retain the collateral to any other secured party or any other party with a perfected security interest in the collateral

(2) Secured party must obtain debtor’s consent. Debtor consents in an (i) authenticated record or (ii) in case of a full strict foreclosure, by failure to object within 20-days.

ExamTIp: If any one of these parties objects within 20-days, the collateral must be disposed of by sale.

Question 43

Resale of Collateral

Answer 43

After default, the sale of a collateral discharges the security interest under which the sale is being made and ALL subordinate security interests.

ExamTIp: The purchaser is still subject to the superior security interests.

Question 44

Commercial Reasonableness Test

Answer 44

IN A RESALE OF COLLATERAL, EVERY ASPECT OF THE SALE MUST BE COMMERCIALLY REASONABLE INCLUDING THE METHOD, MANNER, TIME, PLACE, AND TERMS

Factors that are relevant to determining sufficient include:
(1) Sufficiency of the advertising
(2) If the collateral had a limited market, whether people in that market were contacted
(3) Whether the collateral needed cleaning or repair and
(4) If the sale was by public auction, the convenience of time and place.

Question 45

Deficiency Judgment

Answer 45

If the proceeds from the collateral do not satisfy a debt in full, the secured party may recover any deficiency from the debtor.

However, if the secured party fails to follow the Code’s rules, they lose their right to a deficiency judgment.

Question 46

Debtor’s Right to Redeem

Answer 46

Any time before the collateral is resold, the debtor may redeem the collateral by tendering payment for all obligations secured by the collateral

Question 47

Fixtures

Answer 47

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

Generally, personal property attached to real estate with the intent that it become a permanent part of the real estate is a fixture E.g., central AC, elevators.

Question 48

Perfection of Security Interests in Fixtures

Answer 48

In order to perfect a security interest in fixtures, a fixture filing must be made in the office where a mortgage on the real estate would be filed.

A fixture filing must identify the real estate and name the owner.

Question 49

Rights on Default

Fixtures

Answer 49

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 may remove the fixture from the real property.

Question 50

Priority of Secured Interests in Fixtures

Answer 50

**Secured Party v. Subsequent Real Estate Interest: **A security interest in fixtures has priority over any real estate interest that is recorded subsequently.

Secured Party vs. Prior Real Estate Interest: A prior real estate interest that is properly recorded has priority over a security interest that subsequently arises.

Exception: A PMSI takes priority over an earlier-in-time realy interest if it is perfected by a fixture filing before the goods become fixtures or within 20-days.