Secured Transactions

Question 1

Elements of Attachment

Answer 1

• To be enforceable, i.e. for a SI to attach to collateral, three things must be satisfied:
  
  • Creditor gives value
  • Debtor has rights in the collateral
  • Authenticated security agreement that describes the collateral or secured party has possession or control of the collateral

Question 2

Requirements for valid security agreement

Answer 2

• (1) be in a record, (2) contain a description of the collateral, and (3) be authenticated by the debtor.
• Description cannot be super-generic, but can just refer to an Article 9 defined category.

Question 3

Is after-acquired collateral valid?

Answer 3

• Allowed, but must be indicated in security agreement.
  
  • EXCEPTION: some states allow inventory to include after acquired collateral
  • NOT allowed in consumer goods unless acquired within 10 days after executing the security agreement

Does NOT need to be listed in financing statement.

Question 4

Define PMSI

Answer 4

PMSI in goods exist when the funds advanced are used to purchase the collateral by which the obligation is secured. Either purchasing on credit (seller PMSI) or getting a loan to buy the property (lender PMSI)

Question 5

Accession vs. Commingled Goods

Answer 5

• Accession - goods that are physically united with other goods, but the identity is not lost. Therefore, the SI is not lost.
• Commingled - goods that are physically united such that there identity is lost. SI does not continue in that collateral but attaches to the whole.

Question 6

Perfection by Filing - What is required in the financing statement?

Answer 6

• (1) the debtor’s name, (2) the secured party’s name, (3) a description of the collateral

Debtor’s authorization required (Security Agreement counts)

Filing location - RP - local, PP - Debtor’s state of residence

Perfected for 5 years

Question 7

Perfecting by possession

Answer 7

• If something can be possessed, then you can probably perfect by having it in your possession.

This is the ONLY way to perfect an SI in cash

Question 8

Perfecting by Control

Answer 8

• Letter of credit rights or deposit account - this is the only way to perfect

Question 9

Automatic Perfection (Three types)

Answer 9

• PMSI in consumer goods
• Temporary perfection (move of collateral or debtor)
• Proceeds (temporary sometimes, permanent other)

Question 10

Automatic perfection in proceeds

Answer 10

• Automatically attach and are perfected for 20 days following the disposition
• Indefinitely perfected in following situations:
  • Financing statement covers the proceeds
  • Cash proceeds are perfected indefinitely
  • Same office rule - if proceeds can be perfected by filing in same office, then automatically perfected. But does not include things bought with cash proceeds.

Question 11

How can you perfect in a vehicle?

Answer 11

• Vehicles can only be perfected by a notation on the title. Filing a financing statement is not enough.

Question 12

Priority of a judicial lien creditor

Answer 12

Generally, Perfected SI wins. Unperfected SI loses (unless only reason unperfected is because no value given).

Special rules:
PMSI - if perfected within 20 days, it wins.

Future Advancements - if made 45+ days after lien creditor attaches, then it will not have priority. But if made within 45 days, it will have priority

Question 13

Statutory Lienholder (mechanics lien)

Answer 13

• Possessory lien has priority over any SI if it secures payment for goods or services

Question 14

Priority of Transferees

Answer 14

Generally, SI follows the collateral, subject to three main exceptions:

BFP

BIOCB

Garage Sale

Question 15

When does Buyer take free of SI? (BFP exception)

Answer 15

Buyer (1) gives value, (2) receives delivery, and (3) without notice of the SI. Takes free of SI

Question 16

Buyer in the ordinary course of business exception

Answer 16

BIOCB - (1) buys goods by giving new value, (2) in the ordinary course, (3) from a seller in the business of selling goods of that kind, (4) in good faith, and (5) without knowledge that the sale violates secured party’s rights.

Question 17

Consumer buyer (garage sale) exception

Answer 17

• Consumer buyer (garage sale) - (1) buys consumer goods for value, (2) for his own personal, family, or household use, (3) from a consumer seller, (4) without knowledge of the security interest.
  • Important, the secured party can file a financing statement and then the consumer buyer will not take free.

Question 18

PMSI Super-Priority

Answer 18

PMSI in non-inventory or non-livestock - priority over all other SI if perfected within 20 days of receipt

PMSI in inventory or livestock - super-priority if (1) perfected at time of possession, and (2) prior notice given to all other secured parties.

Importantly, proceeds from PMSI sale retain super-priority.

Question 19

Priority in fixtures rule

Answer 19

• Fixture SI beats RP SI if fixture filing filed before RP recorded
• Perfected SI in fixtures has priority over judicial lien
• PMSI in fixtures - has priority over RP if perfected upon receipt or within 20 days
• EXCEPTION: Prior construction mortgage beats fixtures

Question 20

Priority for Deposit Accounts

Answer 20

SP with control has priority over SP without control.

Question 21

Consequence of Default (secured transaction)

Answer 21

• Secured Party may
  
  • seek possession of collateral and retain or sell it
  • sue for a judgment based on the obligation

Question 22

Dispossion of collateral upon default

Answer 22

commercially reasonable

SP cannot buy collateral if private sale (public sale OK)

Notice must be given to debtor and other SP UNLESS goods are perishable, threatens to speedily decline in value, or is of a type sold in a recognized market and person has waived right to notice. Failure to give notice can forfeit right to deficiency.

Surplus or deficiency, unless collateral is accounts, chattel paper, promissory notes, or payment intangibles

Question 23

Acceptance of collateral upon default

Answer 23

Effective to discharge obligation IF:

• Full satisfaction - (1) debtor consents in authenticated record, or (2) debtor does not object to proposal within 20 days
• Partial satisfaction - only if debtor consents in authenticated record (not allowed for consumer transactions)
• Foreclosing secured party MUST provide notice to other secured parties

Limit for consumer goods: cannot do this strict foreclosure if paid more than 60% of obligation.

Question 24

Debtor’s right to redemption (secured transactions)

Answer 24

Cannot be exercised after sale has taken place

Question 25

What happens when a debtor changes their name?

Answer 25

Interest continues to be perfected for four months.

After four months, if they don’t change their name on financing statement, then it is unperfected after that.

Question 26

Errors by filing office

Answer 26

If unjustified refusal of financing statement, it will still be perfected, but not against BFPs

If error in filing, it is still effective against everyone. Risk of error is on those who search files.

Question 27

Timelines for movement of collateral or debtor

Answer 27

Debtor moves to another state - four month grace period

Collateral moves to another debtor in another state - one year grace period

Question 28

Four types of goods

Answer 28

Consumer goods

Inventory - consumed in ordinary course of business

Farm products

Equipment - anything that is not consumer goods, inventory, or farm products.

Question 29

When is a lease a security interest, as opposed to a true lease?

Answer 29

Lease payment made for full term

Not subject to termination

Lessee has option to purchase collateral at the end for nominal amount