Secured Transactions

Question 1

What is a secured transaction?

Answer 1

A secured transaction under Uniform Commercial Code (UCC) Article 9 involves a loan or purchase that is secured by collateral. The debtor gives the creditor a security interest in the debtor’s specific property (collateral) to assure that the debtor will perform (repay the loan, pay the purchase price).

Question 2

What are the types of collateral?

Answer 2

• Goods (anything movable at the time that a security interest attaches)
• Includes Consumer Goods (personal/household purposes), Farm Products, Inventory (goods held for sale or lease/consumed in a business), and Equipment
• Intangible Collateral (includes Accounts and Deposit Accounts)

Question 3

When is a lease subject to Article 9?

Answer 3

If the lessor doesn’t get anything meaningful back at the end of the lease term (e.g. lease payments must be made for the full term of the lease and are not subject to termination and the lessee has an option to become the owner of the goods for nominal (a small amount of money) consideration at the conclusion of the lease agreement)

Question 4

When does a security interest attach (become enforceable)?

Answer 4

• Value has been given by the secured party; (doesn’t have to be consideration)
• The debtor has rights in the collateral; and
• The debtor has authenticated a security agreement that describes the collateral, or the secured arty has possession or control of the collateral pursuant to a security agreement.

Question 5

What is a PMSI?

Answer 5

Purchase Money Security Interest: A PMSI gives lenders a security interest in goods that have been purchased with funds borrowed from them or purchased on credit from them.
* A secured party gave value (e.g., made a loan) to the debtor and the debtor uses the loan to acquire rights in or use of the collateral; or
* A secured party sells the collateral to the debtor, and the debtor enters an agreement requiring it to pay the secured party all or part of the purchase price (i.e., a sale of goods on credit).

Question 6

What is perfection?

Answer 6

“Perfection” of a security interest is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties. A security interest is “perfected” upon attachment of that interest and compliance with one of the methods of perfection.

Question 7

What are the methods of perfection?

Answer 7

• Filing of a financing statement
• Possession of the collateral
• Control over the collateral
• Automatic perfection
• Statute (e.g. certificate of title for cars)

Question 8

What does a financing statement have to contain to be valid?

Answer 8

• The debtor’s name;
• The name of the secured party or a representative of the secured party; and
• The collateral covered by the financing statement.

NOTE: A financing statement that fails to accurately contain the debtor’s name may be “seriously misleading” and therefore not effective to perfect the security interest

Question 9

What type of good can only be perfected by control and how so?

Answer 9

A security interest in a deposit account can be perfected only by control. A secured party has control of a deposit account if:
 The secured party is the bank with which the deposit account is maintained;
 The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party; or
 The secured party becomes the bank’s customer with respect to the deposit account.

Question 10

In what goods does a security interest automatically perfect upon attachment?

Answer 10

PMSI in consumer goods (not any other type).

Question 11

How does a security interest follow cash proceeds?

Answer 11

If a security interest in collateral is perfected, and then the collateral is sold for cash proceeds (or checks or deposit account), the secured party will have a
perfected security interest in the proceeds.

Question 12

What are judicial lien creditors and what priority do they have?

Answer 12

A judicial lien creditor is a creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law. A perfected security interest has priority over a judicial lien creditor, but the judicial lien creditor had priority over an unperfected security interest.

Even if the security interest is unperfected at the time the judicial lien comes into existence, the secured party will have priority if the only reason why it was unperfected was that the secured party had not yet given value.

Question 13

What rights does have a transferee have vs a secured party?

Answer 13

If the collateral is transferred from the debtor to the transferee and the transferee is not a buyer, the security interest continues in the collateral unless the secured party authorized the transfer free of the security interest. In other words, the secured party still has a security interest in the collateral.

Question 14

What priority does a buyer have vs a security interest?

Answer 14

If unperfected, takes free of interest if:
* Gives value; and
* Receives delivery of the collateral;
* Without knowledge of the existing security interest.

If perfected, remains subject to interest unless:
* security party authorizes sale free of interest
* BOCB exception
* Consumer Buyer exception

Question 15

What is the BOCB exception?

Answer 15

Buyer in the Ordinary Course of Business:

A BCOB takes the goods free of a security interest that the seller gave to the creditor in the goods, even if the security interest is perfected and the buyer knows of its
existence. A BOCB is a person who:
o Buys goods (not including farm products);
o In the ordinary course of business;
o From a merchant who is in the business of selling goods of that kind;
o In good faith; and
o Without knowledge that the sale violates the rights of another in the same goods.

Question 16

What is the consumer buyer exception?

Answer 16

A consumer buyer of consumer goods takes free of a security interest, even if perfected, unless prior to the purchase, the secured party filed a financing statement covering the goods. A consumer buyer is a person who:
 Buys consumer goods for value;
 For his own personal, family, or household use;
 From a consumer seller; and
 Without knowledge of the security interest.

NOTE: If a financing statement for a PMSI in consumer goods is not filed, and the consumer buyer does not know of the PMSI, then he will take free of the security interest.

If the party holding the PMSI in consumer goods does in fact file, then his security interest will be good even against a consumer buyer.

Question 17

What is the priority between two perfected security interests?

Answer 17

First to file or perfect

Question 18

Priority between two unperfected interests?

Answer 18

First to attach

Question 19

When does a PMSI take priority?

Answer 19

A PMSI in goods other than inventory or livestock prevails over all other security interests in the collateral, even if the other security interests perfected earlier, so long
as the PMSI is perfected before or within 20 days after the debtor receives possession of the collateral.

For Inventory or Livestock: if (i) the PMSI is perfected by the time the debtor receives possession of the collateral, and (ii) the purchase‐money secured party sends an authenticated notification of the PMSI to the holder of any conflicting security
interest before the debtor receives possession of the collateral, includes description

Question 20

When does PMSI priority extend to proceeds?

Answer 20

The priority of a PMSI in goods generally extends to the identifiable proceeds of the original collateral, but only as to proceeds in which the security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter

Question 21

What is the priority of a construction mortgage?

Answer 21

A construction mortgage (i.e., a mortgage that secures an obligation incurred for the construction of an improvement on land, including the cost of acquiring the land, and that indicates it is a construction mortgage in the real property records) has priority over a subsequent security interest in a fixture, including a PMSI in a fixture. The construction mortgage must be recorded before the goods become fixtures, and it covers only goods that become fixtures before completion of the construction.

Question 22

What are a secured party’s options upon default?

Answer 22

o Seek possession of the collateral and, in order to satisfy the obligor’s outstanding obligation, either:
 Sell the collateral; or
 Retain it in full or partial satisfaction of the obligation;
o Initiate a judicial action to obtain a judgment based on that obligation; or
o Subject to statutory limitations, pursue any course of action to which the debtor and obligor have agreed.

Question 23

What are a secured party’s rights as to fixtures?

Answer 23

When a secured party’s security interest has priority over owners and individuals who encumber real property, that secured party may remove the fixture from the real property. With respect to an owner or encumbrancer who is not the debtor, the secured party is liable for the cost of repairing any physical object damaged by the removal but not for any reduction in the value of the real property due to the removal.

Question 24

How can collateral be properly disposed of?

Answer 24

All aspects of the disposition of collateral
(method, manner, time, and place) must be conducted in a commercially reasonable manner. A disposition is commercially reasonable when conducted:
o In the usual manner on a recognized market, such as a stock exchange, that has
standardized price quotations for fungible goods;
o At the price current in any recognized market at the time of the disposition; or
o Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition

A secured party cannot purchase the collateral at a private sale when the prices are individually negotiated or when items are not fungible in a recognized market.

Question 25

Who must receive notice of the disposition of collateral?

Answer 25

Notification of disposition is required to be sent to (i) the debtor, (ii) any secondary obligor, and, in the case of non.consumer goods, (iii) any other secured party or lien holder who held a security interest that was perfected by filing or pursuant to a statute, and (iv) any other party from whom the secured party has received authenticated notice of a claim or interest in the collateral

Question 26

What is the order of priority for cash proceeds of the disposition of collateral?

Answer 26

• Reasonable expenses for collection and enforcement, including reasonable attorney’s fees and other legal expenses; then
  o Satisfaction of obligations secured by the security interest; then
  o Satisfaction of any subordinate security interests, provided that the junior secured party made an authenticated demand for proceeds before distribution of the proceeds is complete; then
  o The remainder of the proceeds to the debtor.