Secured Transactions

Question 1

What is required for a security interest to attach

Answer 1

Debtor must
(1) have paid value
(2) have rights in the collateral
(3) there must be a security agreement describing the collateral or the creditor must have possession or control over the collateral

NOTE: A security interest attaches to the collateral as soon as the three requirements are satisfied, unless the parties expressly agree to postpone the time for attachment

Question 1

What is a PMSI

Answer 1

A transaction in which a seller transfers property to a buyer and retains a security interest in that property as collateral is called a seller “purchase money security interest” (seller PMSI).

Question 2

Creditor (Definition)

Answer 2

Creditor (secured party): party that extends value to a debtor in exchange for security interest in debtor’s collateral property

Question 3

Debtor

Answer 3

Debtor: party with property right in the collateral, who made a security agreement with creditor

Question 4

Obligor

Answer 4

Obligor: party under obligation to furnish money or services due (often also the debtor)

Question 5

What is collateral

Answer 5

property subject to a security interest that a creditor can look to satisfy the debt

Question 6

Types of Collateral

Answer 6

IIFFACE
I: Inventory
I: Intangibles / semi intangibles
F: Farm Products
F: Fixtures
A: Accessions
C: Consumer Goods
E: Equipment

Question 7

Inventory

Answer 7

goods for sale or lease to others in the ordinary course of business, or raw materials, work in process, or materials used or consumed in business

Question 8

Accessions

Answer 8

goods physically united with other goods while retaining separate identity (e.g., GPS unit installed in car)

Question 9

Farm Products

Answer 9

goods used for or produced by farming operation, except uncut timber (includes growing/grown crops and born/unborn livestock)

Question 10

Fixtures

Answer 10

goods that are attached to real property such that an interest in them arises under real property law (e.g., chandelier, sprinkler system, furnace)

Question 11

Consumer Goods

Answer 11

goods used primarily for personal, family, household purposes

Question 12

Equipment

Answer 12

goods (for business) other than consumer goods, inventory, farm products

Question 13

Intangibles / Semi Intangibles

Answer 13

include intellectual property, financial instruments (e.g., stocks, bonds, cash proceeds), accounts (right to payment), promissory note / chattel paper (record of monetary obligation and security interest in or lease of specific goods)

Question 14

A valid security interest requires?

Answer 14

A valid security interest in collateral against debtors requires (1) attachment to collateral, and (2) against others requires perfection of the interest
NOTE: Perfection cannot occur until all of the requirements for attachment have also been satisfied

Question 15

Security Agreement

Answer 15

Debtor must authenticate a security agreement granting the creditor security interest in collateral + reasonably identify collateral (including any after-acquired property) EXCEPT for creditor in possesion

Question 16

Creditor In Possession

Answer 16

If the creditor has taken possession of the collateral, authentication of the security agreement that evidences the secured transaction is not needed

Question 17

After Acquired Property (Attachment)

Answer 17

(e.g., “all equipment now owned and hereinafter acquired”) can create a security interest in property that the debtor does not currently own but may or will acquire in the future

The creditor’s security interest automatically attaches when the debtor acquires rights in collateral (not currently owned) in the future
1. EXCEPTION: Will not attach to CONSUMER GOODS UNLESS debtor acquired the rights within 10 days after creditor extended value
ii. Clause not required when collateral is inventory or accounts receivable

Question 18

Rights in Collateral (Attachment)

Answer 18

Debtor must have rights in the collateral
a. Possession alone is insufficient to show debtor’s rights in the collateral
b. Show rights via ownership, possession via contract, or identification in a contract

Question 19

Perfection (different ways)

Answer 19

1. Automatic
2. Filing of Notice
3. Possession
4. Control

Question 20

Automatic Perfection of Security Interest (PMSI’)

Answer 20

PMSI in consumer goods: automatically perfected upon attachment

PMSI in equipment: To perfect, creditor must file a financing statement within 20 days after debtor is in possession of collateral

PMSI in inventory: To perfect, creditor must file by the time debtor is in possession of collateral + give notice to others with security interest

Question 21

Automatic Perfection of Security Interest (Other)

Answer 21

Small-scale assignment of account receivable that does not alone transfer a significant part of outstanding accounts or payments to creditor

Non-consumer deposit accounts (e.g., corporate accounts) do not require filing. Must perfect by control (e.g., bank gets debtor’s bank acct as collateral)

Question 22

Filing of Notice

Answer 22

Creditor files with a public office (e.g., Secretary of State of debtor’s state) a financing statement that identifies the security interest and the collateral covered
Financing statement should include debtor’s address and correct name (e.g., no trade name). Filed name should not be so misleading so as to be undiscoverable
b. Filing location: state of individual’s principal residence; state where registered organization (e.g., corporation, LLC) organized; county of timber, mineral, fixture
c. If a statute requires perfection by other means (e.g., notation on certificate of title), security interest is perfected by doing so. State issuing the most recent certificate of title governs perfection of goods covered by a certificate of title
i. EXCEPTION: Interests created by dealers in vehicles for sale/lease may be perfected by filing (or upon possession or control)

Question 23

Possession

Answer 23

Creditor takes possession over the collateral, shown by physical control over the property sufficient to put 3Ps on notice of the secured party’s interest in the collateral
a. Perfection is effective upon and for the duration of possession
b. Not applicable to intangible goods—but see control over collateral below

Question 24

Control

Answer 24

Creditor has control over the collateral a. Security interest in a non-consumer deposit account is perfected by control (e.g., bank where an account maintained in automatically has control over account) b. What is control? For bank deposit accounts, have or change name on account to that of creditor. For financial instruments, creditor receives certificate. For electronic chattel papers, copy of electronic chattel paper designates creditor as assignee, is maintained by creditor, and can only be changed by creditor

Question 25

Proceeds

Answer 25

Security interest in proceeds (from sale or other disposition of collateral) remains automatically and temporarily perfected for 20 days from when debtor receives the proceeds A security interest will continue after a sale, lease, license, exchange, or other disposition

Question 26

Security interest in proceeds may be effective beyond the 20 days if…

Answer 26

a. Cash proceeds: Proceeds are identifiable cash proceeds b. Financing statement in same office: For non-cash proceeds, the financing statement covering the proceeds would be filed in the same office as the financing statement for the original perfected security interest in collateral c. Perfected within 20 days: Security interest in proceeds is actually perfected, e.g., by identifying in financial statement for collateral “all of debtor’s property”

Question 27

When reperfection is needed

Answer 27

1. Lapse: A perfected security interest lasts 5 years. Perfected secured party must file a continuation statement within six months before the expiration of the 5-year period. Otherwise, the perfection lapses, and the perfection procedure must be repeated 2. Debtor or collateral moves out of state: Perfection continues in the other jurisdiction for 4 months (debtor) or 1 year (collateral), respectively. Perfection is continuous from the original perfection date if the security interest is reperfected (e.g., financing statement filed) in the new jurisdiction within the 4 months or 1 year, respectively

Question 28

Priority (General Rule)

Answer 28

Each superseding creditor is entitled to payment in full before a subordinate claimant

Question 29

Buyer in Ordinary Course of Business

Answer 29

Buyer in the ordinary course of business (BIOC) takes free of a security interest held by a secured creditor in the inventory (i.e., has priority over the creditor). A BIOC is a party that buys goods in good faith, without knowledge that the sale violates rights of another party, in the ordinary course from a person in the business of selling goods of that kind i. Think innocent consumer, who can rest assured of having good title to the inventory ii. Buyer takers free even if buyer had knowledge of interest, but only if purchased in good faith iii. Shelter rule: If BIOC takes free of security interest, subsequent transfers are also free of interest

Question 30

Perfected > Unperfected

Answer 30

Perfection gives secured party priority over competing unperfected creditors i. Between perfected creditors, first to file or perfect (complete security interest) has priority 1. Relation back: Creditors may file even before the security interest attaches to collateral. When determining priority between perfected creditors, see whose filing date precedes a. Note that consumer goods PMSI perfects automatically

Question 31

Prior perfected > lien. (Priority)

Answer 31

Prior perfected creditors have priority over lien creditors. Judgment/judicial lien creditors have priority over conflicting interests only if they became lien creditor before security perfected

Question 32

Priority Between Unperfected Creditors

Answer 32

Between unperfected creditors, first to attach has priority over later unperfected creditors (and over general unsecured creditors, who did not take collateral from debtor in exchange for loan)

Question 33

Specific cases that may supersede general priorities above

Answer 33

Accession vs. whole: If an accession becomes part of a whole that is subject to a perfected security interest, security interest in the whole has priority over security interest in the accession After-acquired equipment vs. PMSI in same equipment: PMSI in equipment has priority over a conflicting security interest (regardless of earlier priority date) if PMSI is perfected when debtor receives possession of collateral (or perfected within 20 days of debtor receiving possession) Mortgage interest vs. security interest in fixture: Creditor with interest in fixture must perfect in 20 days, or holder of mortgage interest will prevail

Question 34

Secured Parties Rights

Answer 34

1. Take possession of collateral 2. Dispose of collateral

Question 35

Secured party’s right to dispose of collateral

Answer 35

Via sale: After default by debtor, a secured party may sell, lease, or otherwise dispose of the collateral in a “commercially reasonable” manner (and apply the sale proceeds to the debt)

Question 36

Secured party’s right to take possession of collateral

Answer 36

Via self-help: After default by debtor, a secured party may take possession of the collateral if done so without “breach of the peace” Via judicial process: Get a judicial writ ordering sheriff to obtain and deliver collateral to creditor Via strict foreclosure: Secured party may keep collateral in full satisfaction of outstanding debt

Question 37

Notification (Foreclosure)

Answer 37

Notification: Secured party must send a written proposal to retain the collateral in full satisfaction of outstanding debt If any notified party objects w/in 20 days of notice, strict foreclosure is not allowed. Instead, collateral must be disposed of by sale For consumer goods, if debtor has paid 60% of cash price or loan, creditor must instead sell the collateral within 90 days or be liable for conversion (can’t keep collateral)

Question 38

Receipt of Notification (Foreclosure) Consumer Goods vs. Non-consumer goods (also applies to sale of goods as well)

Answer 38

Consumer Goods: Debtor + any secondary obligors Non-consumer goods: Debtor + any secondary obligors + other secured parties who told foreclosing creditor of their interest + creditors perfected 10 days before the notification date

Question 39

"Commercially Reasonable" Sale

Answer 39

1. Every aspect of sale must be commercially reasonable: usual manner, current price, etc. 2. Sale by a secured party may be public or private 3. Purchase by secured party may be public—but generally not private, unless collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations (reliable external market to check the sale price against) 4. Notification: Prior to sale, secured party must send reasonable notice a. Contents should include time and place of public sale, or time after which private sale will be made (e.g., “after MM/DD/YYYY, the following collateral will be sold”) b. A secured party that fails to provide notice may be liable for damages regardless of the debtor having actual knowledge of the disposition 5. Proceeds of sale go to expenses, then to debt, then to subordinate interests (if left over) 6. After sale of collateral after default, its security interest and all subordinate interests in the collateral sold are discharged, UNLESS bad faith by purchaser

Question 40

Via Deficienty Judgement

Answer 40

Secured party may proceed against the debtor for a deficiency judgment if sale proceeds from the collateral are insufficient to satisfy the debtor’s obligations 1. Amount of deficiency is calculated based on amount of sale and outstanding debt 2. Debtor’s right to redeem: Debtor may redeem the collateral by paying the obligated amount owed plus any interest and secured party’s reasonable expenses after default (including attorney’s fees). Redemption may only occur before a sale or strict foreclosure a. Waiver: Right to redeem collateral may be waived only after default. An agreement that includes a waiver of right to redeem is invalid 3. Secured party in breach of rules may be unable to seek deficiency from debtor

Question 41

RIGHTS OF THIRD PARTY

Answer 41

(debtor may also recover damages) (1) Alienability of debtor’s rights: A debtor’s rights may be transferred to a third party. Any agreement that prohibits a transfer does not prevent the transfer (2) A secured party may be liable to debtor for actual damages caused by failure to follow an Article 9 rule i. However, the debtor has a duty to mitigate damages (e.g., could place bid at sale of collateral) c. A secured party that breaches an Article 9 rule may be prohibited from collecting deficiency from debtor i. UNLESS the secured party can show that the breach did not cause the deficiency 1. For example, if debtor had enough funds to pay the debt before a sale, or the sale was commercially reasonable