Secured Transactions

Question 1

Secured Transactions

Answer 1

Carrot Cake secures a transaction with Hugh
CC: “Will you lend me 5 soccer balls for cats?”
Hugh: “Though you are quite cute CC I must protect my interests in this transaction, therefore you must put down collateral. What do you own of value?”
CC: “I own this magnificent dead plant leaf.”
Hugh: “Perfect! We can use that. I will procure a binding security agreement.”
Hugh writes up a contract
Hugh: “Ok CC, this contains a lenghthy description of our agreement as well as a description of the dead plant leaf. I will need your paw print.”
Carrot Cake signs the contract with gusto
Hugh: “Alright sir here are the 5 soccer balls for cats.”

Question 2

Key principle #1

Answer 2

So far on the MEE, when the question requires examinees to know whether Article 9 applies, the answer has been yes—even if the parties do not call the transaction a “security interest.”

Question 3

What does article 9 apply to?

Answer 3

It applies to all security interests in personal property or fixtures by contract. The words “security agreement” do not have to be specifically stated for one to exist. Article 9 also applies to lease agreements that are not true leases (but instead, security interests). (F2023, J2020, J2017, J2011, F2010, J2009)

Question 4

How many classifications of goods are there?

Answer 4

4

Question 5

1) Consumer goods:

Answer 5

Goods that are bought for use primarily for personal, family, or household purposes (e.g., a computer in the hands of a consumer). (F2013, F2011, F2000)

Question 6

2) Inventory:

Answer 6

Goods, other than farm products, that are held by a person for sale or lease to be furnished under a contract of service; or raw materials, work in process, or materials used or consumed in a business (e.g., computers sold by a computer store). (F2015, J2012, J2011, F2011, F2010, F2006)

Question 7

3) Equipment:

Answer 7

Goods, other than inventory, farm products, or consumer goods (e.g., a computer used in a business). (F2022, J2020, J2016, F2015, J2008, F2000)

Question 8

4) Farm products:

Answer 8

Crops, livestock, supplies produced in a farming operation or products of crops or livestock in their unmanufactured state in possession of debtor who is engaged in a farming operation.

Question 9

Key principle #3:

Answer 9

Be able to articulate when attachment occurs. Recognize that attachment is a prerequisite to a security interest arising and that three criteria must be met.

Question 10

Requirements of attachment:

Answer 10

(1) value must be given by the secured party to the debtor (e.g., a loan); (2) the debtor must have rights in the collateral; and (3) there must be a binding security agreement which requires (mnemonic=AID): authentication, intent to create a security agreement, and a description of the collateral. (F2023, F2022, F2021, J2020, F2020, F2019, J2017, J2016, F2016, F2015, F2014, F2013, J2011, F2011, F2010, F2008, F2006, J2005, F2000, J1995)

Question 11

After-acquired property:

Answer 11

The general rule is that a security agreement can cover after-acquired property and does not need to specifically reference it to be effective. (J2020, F2020, J2011, F1998, F1996, F1995)

Question 12

Key principle #4:

Answer 12

Be familiar with the methods of perfection, especially filing a financing statement and automatic perfection (as these are the two most commonly tested methods).

Question 13

Perfection:

Answer 13

Perfection can occur by filing a financing statement. It can be automatic in some cases (e.g., a PMSI in consumer goods). Or, an interest can be perfected by possession or control. (F2023, F2022, F2021, J2020, F2019, J2017, J2016, F2014, F2013, J2011, J2009, J2008, F2008, F2007, F2000, F1996)

Question 14

Secured creditor priority key principles

Answer 14

When two secured parties 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. Know that a perfected security interest beats an unperfected one—even if one has an unperfected PMSI. (F2022, F2021, J2020, F2019, J2017, F2014, J2012, J2011, F2010, J2009, F2007, J2001, F2000, F1998, F1997, J1996, J1995)

Question 15

Key principle #6:

Answer 15

Know what happens when a debtor sells collateral subject to a security interest or if a judicial lien creditor acquires an interest. Be able to identify that a buyer in the ordinary course of business generally does not take the collateral subject to the security interest, whereas a buyer not in the ordinary course of business generally does (unless the interest was not perfected and he does not otherwise know about it).

Question 16

A buyer in the ordinary course of business:

Answer 16

A buyer in the ordinary course of business generally takes free of any security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. (Note that the buyer is not in the ordinary course of business if he knows that the sale is in violation of a term in the security agreement.) (F2016, F2015, J2012, F2011, J2001, F1996)

Question 17

A buyer not in the ordinary course of business:

Answer 17

A buyer not in the ordinary course of business takes collateral subject to a perfected interest. Generally, he does not take subject to an unperfected interest if he gives value and does not know about the interest. (F2016, F2014, F2013, F1997)

Question 18

Consumer to consumer goods (garage sale) exception:

Answer 18

A buyer not in the ordinary course of business takes free of a security interest even though perfected, if he buys without knowledge of the security interest; for value; and for his own personal, family, or household purposes unless, prior to the purchase, the secured party has filed a financing statement covering the goods. The goods must be consumer goods both when the seller has them and when the buyer buys them for this to apply.

Question 19

When a lien creditor is involved:

Answer 19

The general rule is that, as between a secured party and a lien creditor, priority belongs to the secured party, provided it perfects before the lien arises. If the interest was unsecured or only perfected after the lien creditor served the writ, then the lien creditor has priority. (F2021, F2015, F2008, F2005, F2004, F2002)

Question 20

Key principle #7:

Answer 20

Know the steps that a secured creditor takes to foreclose on its collateral.

Question 21

Default:

Answer 21

If a default occurs, the lender can demand payment or use self-help to reclaim the goods so long as it does not breach the peace. (F2020, F2019, J2016, J2009, J2005, J2003, J2002)

Question 22

Breach of peace:

Answer 22

There are several factors to examine to determine if the lender has breached the peace, including whether the repossession took place at the debtor’s premises and whether the debtor objected. Some courts also look at whether trickery was used. Some courts say that any objection (even if slight and even if only verbal) amounts to a breach of the peace.

Question 23

Resale:

Answer 23

The secured party may sell or dispose of the collateral in a commercially reasonable way. The security interest is discharged when this occurs, but the debtor is liable for any deficiency. The obligation owed to the disposing secured party and any junior liens are paid off. (Senior liens remain on the collateral.) (J2009, J1996)

Question 24

Key principle #8:

Answer 24

Be familiar with the debtor’s means of protecting itself and the remedies available if the secured party fails to comply with the requirements. These are tested in detail on the MEE.

Question 25

Debtor’s means of protection #1:

Answer 25

The sale must be commercially reasonable. (F2019, J2006, F1999) *

Question 26

Debtor’s means of protection #2:

Answer 26

The debtor must receive written notification of the sale. The
debtor and perfected secured parties (or secured parties who have notified the secured party of their interest) must know when the chance to redeem the collateral is going to pass. (This is not necessary if the collateral threatens to decline rapidly.) (F2019, J2006, J2005)

Question 27

Timeliness of notification:

Answer 27

This is generally a question of fact, but in a nonconsumer transaction, a notification sent 10 days or more before the disposition (sale) is considered reasonable.

Question 28

Content of notification:

Answer 28

In nonconsumer transactions, the notification of disposition should describe the debtor and the secured party and the collateral, state the method of disposition, and state that the debtor is liable for unpaid indebtedness as well as a charge for accounting. In consumer transactions, the notification must additionally contain a description of any liability for a deficiency, a telephone number that the consumer can call to discover the amount owed, and a telephone number or mailing address from which the consumer can get additional information about the disposition and the obligation.

Question 29

How many remedies are for debtor if the secured party fails to comply with requirements?

Answer 29

3:
* Damages
* Sale
* Rebuttable presumption

Question 30

Remedy #2:

Answer 30

Sale. A court may order a sale. (J2006)

Question 31

Remedy #1:

Answer 31

Damages (including consequential damages, but the debtor has a duty to mitigate). If the collateral constitutes consumer goods, statutory damages are awarded. (F2019, J2006, J2005, J2003, F1999)

Question 32

Remedy #3
Rebuttable presumption:

Answer 32

• Nonconsumer transaction: If there is a failure to comply with these requirements and the secured party fails to show that the sale was commercially reasonable, then there is a rebuttable presumption that the collateral is worth the amount of the debt and the debtor’s deficiency is nothing. (J2005)
• Consumer transaction: There are two approaches that courts follow: the absolute bar rule (the creditor’s noncompliance bars any recovery of deficiency) or the rebuttable presumption rule (same as previous bullet point). (J2006, F1999)

Question 33

Debtor’s right to redeem:

Answer 33

The debtor can redeem prior to the disposition of the collateral by paying everything due and owing to the creditor. (J2006, J2003)