Secured Transactions

Question 1

What is the law that applies in secured transactions problems?

Answer 1

Article 9

Question 2

What does Article 9 apply to?

Answer 2

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).

Question 3

Four classifications of goods

Answer 3

• consumer goods
• inventory
• equipment
• farm products

Question 4

Consumer goods

Answer 4

Goods that are bought for use primarily for personal, family, or household purposes.

Question 5

Inventory

Answer 5

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.

Question 6

Equipment

Answer 6

Goods other than inventory, farm products, or consumer goods

Question 7

Farm products

Answer 7

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 8

Attachment is a prerequisite to:

Answer 8

A security interest arising.

Question 9

Requirements of attachment

Answer 9

(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 (AID): Authentication, Intent to create a security agreement, and a Description of the collateral.

Question 10

What is required for a binding security agreement?

Answer 10

(AID): Authentication, Intent to create a security agreement, and a Description of the collateral.

Question 11

Can a security agreement cover after-acquired property?

Answer 11

General rule: a security agreement can cover after-acquired property and does not need to specifically reference it to be effective.

Question 12

Methods of perfection

Answer 12

• filing a financing statement
• automatic (PMSI in consumer goods)
• possession
• control

Question 13

When two secured parties have a security interest in the same collateral, which party has priority?

Answer 13

The first to file or perfect. If no party perfects, then the first to attach has priority.

Question 14

A ___ security interest beats a ___ security interest.

Answer 14

Perfected; unperfected—even if one has an unperfected PMSI.

Question 15

What happens when a debtor sells collateral subject to a security interest or a judicial lien creditor acquires an interest?

Answer 15

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 generally takes…

Answer 16

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: 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.

Question 17

A buyer not in the ordinary course of business takes…

Answer 17

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.

Note: garage sale exception

Question 18

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

The general rule is that, as between a secured party and a lien creditor, priority belongs to:

Answer 19

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.

Question 20

Default

Answer 20

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.

Breach of peace: factors, including whether the repossession took place at the debtor’s premises and whether the debtor objected. Some courts look at whether trickery was used. Some say that any objection (even if slight and even if only verbal) amounts to a breach of the peace.

Question 21

Resale

Answer 21

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.)

Question 22

Debtor’s means of protecting himself:

Answer 22

The sale must be commercially reasonable;
The debtor must receive written notification of the sale. The debtor and perfected secured parties must know when the chance to redeem the collateral is going to pass.
- timeliness of notification: generally a notification sent 10 days before sale is reasonable
- content of notification: nonconsumer transactions—describe debtor and secured party and collateral, method of disposition, and state that the debtor is liable for unpaid indebtedness a well as a charge for accounting; consumer transactions—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 23

Remedies if secured party fails to comply with requirements of commercially reasonable sale and debtor’s receipt of written notification of sale.

Answer 23

Damages (including consequential, but debtor has a duty to mitigate) and statutory damages for consumer goods.
Sale.
Rebuttable presumption: nonconsumer transaction—collateral is worth the amount of the debt and the debtor’s deficiency is nothing; consumer transaction—absolute bar rule (creditor’s noncompliance bars any recovery of deficiency) or rebuttable presumption rule (collateral worth the amount of the debt and the debtor’s deficiency is nothing).

Question 24

Debtor’s right to redeem

Answer 24

The debtor can redeem prior to the disposition of the collateral by paying everything due and owing to the creditor.

Question 25

Definition of Secured Transaction

Answer 25

A secured transaction is a transaction intended to create a security interest in personal property or fixtures. It generally involves a sale on credit or a loan in which the seller or the lender obtains a lien on some or all of the debtor’s property as security for payment.

Look for (1) a credit transaction and (2) an agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt.

Question 26

Debtor

Answer 26

The person who owes payment or performance of the obligation secured

Question 27

Secured party

Answer 27

A lender, seller, or other person in whose favor there is a security interest

Question 28

Security agreement

Answer 28

The agreement between the debtor and the secured party that creates the security interest

Question 29

Security interest

Answer 29

An interest in personal property or fixtures which secures payment or performance of an obligation. Contingent property interest in the debtor’s collateral that the debtor grants to the creditor. When the contingency, which is default, occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral.

Question 30

Collateral

Answer 30

The property subject to a security interest. Property that the secured party can repossess upon default to ensure that the debt is paid.

Question 31

Purchase money security interest (2 kinds)

Answer 31

1. Seller-financed PMSI: secured party sells debtor collateral on credit and retains a security interest in the item sold
2. Financier-financed PMSI: a loan to a debtor for the purpose of enabling the debtor to buy specific collateral, which is used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral.

Question 32

After-acquired property clause

Answer 32

Secured party often will want to obtain a security interest not only in debtor’s present property, but also in property that the debtor will obtain in the future. This is permissible. Security agreements typically contain these clauses.

Question 33

Future advance clause

Answer 33

A secured party often contemplates making future loans to the debtor and wants to secure these future advances in the present security agreement. This is permissible. Security agreements typically contain a future advance clause in which case a new security agreement is not needed when a future advance is made.

Question 34

Attachment

Answer 34

Steps legally required to give the secured party a security interest in the collateral that is effective as against the debtor. Once a security interest attaches, it is effective against the debtor and the creditor has all of the rights of a secured creditor under Article 9. A creditor is not a secured creditor until attachment.

Basically means the security interest has been created.

Question 35

Perfection

Answer 35

Steps legally required to give the secured party an interest in the collateral that is effective as against the world. In general, perfection is the process of giving public notice of the security interest to the world.

Question 36

Financing statement

Answer 36

Document generally used to provide public notice of the security interest, and so to perfect the security interest.

Question 37

Instruments

Answer 37

Pieces of paper representing the right to be paid money, like promissory notes, drafts, and certificates of deposit.

Question 38

Documents

Answer 38

A document that represents the right to receive goods

Question 39

Chattel paper

Answer 39

Record/records which evidence both a monetary obligation and a security interest or a lease of specific goods.

Record: Information that is stored in either a tangible medium or intangible medium.

Question 40

Investment property:

Answer 40

Stocks, bonds, mutual funds, and brokerage accounts containing such items.

Question 41

Accounts

Answer 41

Right to payment (not evidence by an instrument or chattel paper) for property sold or services rendered.

Question 42

Deposit accounts

Answer 42

Account maintained with a bank.

In general, Article 9 applies to security interests in nonconsumer deposit accounts

Question 43

Commercial tort claims

Answer 43

Claim arising in tort with respect to which (1) the claimant is an organization or (2) the claimant is an individual and the claim arose in the claimant’s business or profession and does not include damages for personal injury or the death of an individual.

Question 44

General intangibles

Answer 44

Any personal property not within the scope of other definitions.

Question 45

To distinguish the true lease from the disguised sale, ask

Answer 45

Whether the transaction is, in substance, a lease or a sale. In a lease, the lessor is going to receive the item back at the end of the lease term when the item still has meaningful economic value. In a sale, the buyer is the owner and is generally going to drain all economic value from the item.

Relevant question: at the time the parties entered into the transaction, was it reasonably likely that the lessor would get the item back when it still had meaningful economic value? Yes—true lease; no—sale with a security interest in substance governed by Article 9.

Question 46

Written security agreement requirements

Answer 46

(1) intent to create a security interest; (2) signed by the debtor—any symbol, including electronic, made with the intent to authenticate the record will work; and (3) containing a description of the collateral—reasonably identifiable.

Question 47

Without an explicit after-acquired property clause in the security agreement, the secured party’s security interest reaches

Answer 47

Only collateral that the debtor had rights in at the time the debtor signed the security agreement.

Exception: even when there is not an explicit after-acquired property clause, the courts will often imply an after-acquired property clause when the collateral is of a type that is rapidly depleted and replenished. The courts assume that the parties must have meant to cover after-acquired property, or the security interest will reach nothing.

Question 48

Proceeds

Answer 48

Includes whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. If collateral is insured and money is received from the insurance company on account of loss or damage to the collateral, the money is a proceed of the collateral unless it is payable to someone other than the debtor or the secured party claiming it.

Any claims arising out of the loss of, defects in, or damage to collateral are proceeds of the collateral.

Question 49

Does property secured generally include proceeds?

Answer 49

Yes—unless otherwise agreed, a security interest automatically gives the secured party a right to identifiable proceeds.

Identifiable: secured creditor can prove that the proceeds can be traced back to the creditor’s original collateral.

Question 50

Automatic perfection for PMSI in consumer goods

Answer 50

Automatically perfected upon attachment.

Question 51

When is possession of collateral by the secured party impossible for perfection?

Answer 51

With items you can’t take possession of (deposit accounts, general intangibles, etc.).

Question 52

Security interests in nonconsumer deposit accounts can only be perfected by:

Answer 52

Control.

(1) the bank in which the account is maintained automatically has control over the deposit account
(2) if the secured party is not such a bank, it can obtain control over the deposit account by either (a) putting the deposit account in the secured party’s name or (b) agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will follow the secured party’s orders without further consent by the debtor.

Question 53

How to perfect a security interest in an item covered by a certificate of title statute?

Answer 53

Only by the secured party getting the relevant governmental authority to note the secured party’s lien on the certificate of title.

Ex: cars and trucks.

Exception: if the debtor is holding the car/truck as inventory (debtor is a dealer), then a secured party must perfect by filing a financing statement against inventory. Noting its lien on the certificate of title will not work.

Question 54

Notice filing

Answer 54

Notice must indicate merely that a person may have a security interest in the collateral indicated.

Question 55

Contents of the financing statement

Answer 55

(1) debtor’s name
(2) description of collateral—reasonably identifies—super generic descriptions are valid
(3) secured party’s name
(4) real-property-related financing statements: real property records filing; description of the property; record owner
(5) NO SIGNATURE REQUIRED, though debtor must authorize the filing.
(6) authenticated security agreement itself may be filed

Question 56

Is a signature required for a financing statement?

Answer 56

No—the debtor must authorize the filing. The authorization may be in any signed writing. The debtor automatically authorizes the financing statement if she authenticates a security agreement covering the same collateral (“ipso facto authorization”).

Question 57

What happens to the filed financing statement if the debtor changes its use of the collateral?

Answer 57

It remains effective to perfect the security interest. The secured creditor has no duty to monitor the collateral or to amend the financing statement even if it knows that the description is seriously misleading.

Question 58

As between two perfected secured creditors, ______ has priority.

Answer 58

The first to file or perfect, whichever occurs first.

Question 59

As between two unperfected secured creditors, ______ has priority.

Answer 59

The first to attach.

Question 60

As between a perfected secured creditor and an unperfected secured creditor, ______ has priority.

Answer 60

The perfected secured creditor.

Question 61

Purchase money security interests in goods other than inventory or livestock—priority rule

Answer 61

Has priority over a conflicting security interest in the same goods or its identifiable proceeds if the purchase money security interest is perfected at the time the debtor received possession of the collateral or within 20 days thereafter.

Question 62

A _____ purchase money security interest has priority over a _____ purchase money security interest.

Answer 62

Seller-financed; financier-financed.

Question 63

Generally, if you buy something with a security interest on it, ___.

Answer 63

The security interest stays on it.

There are a few exceptions.

Question 64

If the sale is authorized by the secured party free of the security interest, the buyer takes…

Answer 64

Free of the security interest. This authorization may be express or implied from the type of sale or from the seller’s conduct.

Question 65

The sale of inventory to an ordinary consumer is implicitly authorized when…

Answer 65

Sale is not expressly prohibited.

Note: must be an ordinary consumer, not to something like a liquidation company.

Question 66

A buyer in the ordinary course of business takes….

Answer 66

Free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.

Question 67

Buyer in the ordinary course is:

Answer 67

A person who buys in good faith, without knowledge that the sale violates the rights of another person (usually the secured party) int eh goods, and in the ordinary course from a person in the business of selling goods of that kind.

When you buy from a store, you will frequently be a buyer in the ordinary course.

Doesn’t matter whether you know there is a security interest—only matters that you know that the sale is a violation of the security agreement.

Question 68

Buyers not in the ordinary course of business take…

Answer 68

Subject to perfected security interests. They take free from unperfected security interests unless they know of the security interest.

Question 69

Consumer-to-consumer sales

Answer 69

In the case of consumer goods, a buyer takes free fo a security interest even though it is 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 such goods.

The goods must be consumer goods in the hands of both the buyer and the seller.

Question 70

Secured party vs. judgment lien holders

Answer 70

An unperfected security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfected. If the security interest is perfected before the person becomes a lien creditor, the security interest has priority.

Question 71

Secured party v statutory lien claimants

Answer 71

A statutory lien beats out even a perfected security interest.

Question 72

What happens when a secured party breaches the peace during self-help repossession?

Answer 72

The secured party loses the authorization to repossess, may be sued for conversion (and possibly assault/battery/trespass), and is liable for actual (and frequently punitive) damages.

Question 73

What constitutes a “breach of the peace”?

Answer 73

Any conduct by the secured party that has the POTENTIAL to lead to VIOLENCE.

Generally, physical presence of the debtor (or a representative of the debtor) plus verbal objection is enough to create a breach of the peace.

Question 74

How to perfect a security interest in fixtures?

Answer 74

A “fixture filing” must be made in the office where a mortgage on the real estate would be filed. In addition to the usual requirements for a financing statement, a fixture filing financing statement must reasonably identify the reason estate and must show the name of the owner.

Question 75

Secured party vs subsequent real estate interest

Answer 75

A security interest in fixtures has priority over any real estate interest that arises subsequent to the perfection of the security interest by fixture filing.

Question 76

Secured party vs. prior real estate interest

Answer 76

A prior real estate interest that is properly recorded has priority over a security interest that subsequently arises.

Exception: a purchase money security interest takes priority over an earlier-in-time realty interest if it is perfected by a fixture filing before the goods because fixtures or within 20 days thereafter.

Question 77

Accessions

Answer 77

Goods that are physically united with other goods in such a manner that the identity of the original goods is not lost (e.g., tires on a car).

Question 78

Perfection—accessions

Answer 78

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

Question 79

Financing Statement requirements

Answer 79

Filed centrally with the secretary of state.

Must contain (1) the name and mailing address of the debtor; (2) the name and address of the secured party and (3) an indication of the collateral covered by the financing statement.

Must not contain seriously misleading errors.

Question 80

Financing Statement requirements for debtor that is a registered organization:

Answer 80

Debtor’s name must match the name on the organization’s public record–use of the debtor’s trade name is insufficient.

Question 81

An incorrect name in a financing statement will not be treated as seriously misleading if:

Answer 81

the financing statement would be discovered in a filing office search under the debtor’s correct name.

Question 82

Account and how to perfect it.

Answer 82

Account: right to payment for goods and services

Perfection typically through filing.