Secured Transactions

Question 1

DEFINITION OF SECURED TRANSACTION

Answer 1

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.

Question 2

To spot a secured transaction, look for:

Answer 2

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

Question 3

Debtor

Answer 3

The debtor is the person who owes payment or performance of the obligation secure

Question 4

Secured Party

Answer 4

The secured party (also called the “creditor”) is a lender, seller, or other person in whose favor there is a security interest (here, First Bank).

Question 5

Security Agreement

Answer 5

The security agreement is the agreement between the debtor (Hilda) and the secured party (First Bank) that creates the security interest.

Question 6

Security Interest

Answer 6

• A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation.
• It’s a contingent property interest in the debtor’s collateral that the debtor grants to the creditor.
• When that contingency (which is default) occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral.

Question 7

Collateral

Answer 7

• Collateral is the property subject to a security interest
• It is property that the secured party can repossess upon default to ensure that the debt is pai

Question 8

A PMSI can arise in two ways:

Answer 8

(1) Seller-Financed PMSI: The secured party sells the goods to the debtor on credit an
retains a security interest in the goods sold, or
(2) Financier-Financed PMSI: The creditor loans the funds to the debtor to enable the debtor to buy specific collateral, those funds are used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral. The PMSI secures whatever portion of the purchase price still has to be paid.

Question 9

After-Acquired Property Clause: Security agreement

Answer 9

A 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

Question 10

Future Advance Clause

Answer 10

• 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 (as in the hypo above), in which case a new security agreement is not needed when a future advance is made.

Question 11

Attachment

Answer 11

• Attachment deals with those 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

Question 12

Perfection

Answer 12

• Perfection deals with those 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 13

Financing Statement

Answer 13

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

Question 14

TYPES OF COLLATERAL (high level)

Answer 14

• Goods
• Intangible or Semi-Intangible Collateral

Question 15

“Goods” include ____

Answer 15

all things which are movable at the time the security interest attaches (including unborn animals and growing crops).
-> Goods also include fixtures (discussed below).

Question 16

The category into which the good is placed depends on _____

Answer 16

how the debtor is using the collateral.

Question 17

Category of goods:

Answer 17

1. Consumer goods: goods used or bought primarily for personal, family, or household purposes
2. Equipment—goods that are used or bought for use in a business. (+fallback category)
3. Farm products—crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk, and eggs) if they are in the possession of a debtor engaged in farming operations
4. Inventory—goods held for sale or lease, goods that are to be furnished under service contracts, and materials used or consumed in a business in a short period of time

Question 18

The category into which intangible or semi-intangible collateral is placed depends on _____

Answer 18

the nature of the collateral (rather than its use)

Question 19

Intangible or Semi-Intangible Collateral - Categories

Answer 19

1. Instruments—Pieces of paper representing the right to be paid money, like promissory notes, drafts (for example, checks), and certificates of deposit
2. Documents—A document that represents the right to receive goods (for example, a bill of lading, a warehouse receipt)
3. Chattel paper—A record or records which evidence both (1) a monetary obligation, and (2) a security interest in or a lease of specific goods. A “record” is information that is stored in either a tangible medium (for example, written on paper), or an intangible medium (for example, electronically stored).
4. Investment property—Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items
5. Accounts—Includes a right to payment (that is not evidenced by an instrument or chattel paper) for property sold or services rendered.
   -> Note: A contractual obligation arising from a loan of money is not an account—it is a general intangible (see below).
6. Deposit accounts—An account maintained with a bank.
   -> Note: In general, Article 9 only applies to security interests in non-consumer deposit accounts and account monies that are claimed as
   proceeds of other collateral.
7. Commercial tort claims—A tort claim where (1) the claimant is an organization (for example, a partnership or corporation), or (2) the claimant is an individual, the claim arose out of the claimant’s business or profession, and the claim does not include damages for personal injury or the death of an individual (note that Article 9 also applies to noncommercial tort claims that are claimed as proceeds of other collateral)
8. General intangibles—Any personal property not coming within the scope of the other definitions, such as patent and trademark rights, copyrights, and goodwill. A general intangible under which
   the account debtor’s principal obligation is a monetary obligation is a payment intangible.

Question 20

Instruments

Answer 20

Pieces of paper representing the right to be paid money, like promissory notes, drafts (for example, checks), and certificates of deposit

Question 21

Documents

Answer 21

A document that represents the right to receive goods (for example, a bill of lading, a warehouse receipt)

Question 22

Chattel paper

Answer 22

A record or records which evidence both (1) a monetary obligation, and (2) a security interest in or a lease of specific goods. A “record” is information that is stored in either a tangible medium (for example, written on paper), or an intangible medium (for example, electronically stored).

Question 23

Investment property

Answer 23

Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items

Question 24

Accounts

Answer 24

Includes a right to payment (that is not evidenced by an instrument or chattel paper) for property sold or services rendered.

Question 25

Deposit accounts

Answer 25

An account maintained with a bank.
-> Note: In general, Article 9 only applies to security interests in non-consumer deposit accounts and account monies that are claimed as
proceeds of other collateral.

Question 26

Commercial tort claims

Answer 26

A tort claim where (1) the claimant is an organization (for example, a partnership or corporation), or (2) the claimant is an individual, the claim arose out of the claimant’s business or profession, and the claim does not include damages for personal injury or the death of an individual (note that Article 9 also applies to noncommercial tort claims that are claimed as proceeds of other collateral)

Question 27

General intangibles

Answer 27

Any personal property not coming within the scope of the other definitions, such as patent and trademark rights, copyrights, and goodwill. A general intangible under which the account debtor’s principal obligation is a monetary obligation is a payment intangible.

Question 28

Scope = Article 9 applies to the following transactions:

Answer 28

• A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract
• A seller’s retention of title—if a seller and buyer of goods agree that the seller will retain title to the goods after they are delivered until the buyer has paid for them, the agreement will be treated as the seller’s retention of a security interest
• Agricultural liens—that is, non-possessory liens on farm products that are created by state statute in favor of persons providing goods, services, or rental land to farmers (only the perfection and priority of agricultural liens are governed by Article 9; creation and enforcement of the liens are governed by state statutes)
• Sales of accounts, chattel paper, payment intangibles, and promissory notes
• Commercial consignments of goods (that is, where the consignor did not use the goods for personal, family, or household purposes) worth a total of $1,000 or more to persons who (1) deal in goods
  of that kind under a name other than the consignor’s, (2) are not auctioneers, and (3) are not generally known by their creditors to be substantially engaged in selling the goods of others
• A secured sale disguised as a lease—that is, leases that are intended to serve as security arrangements (but not true leases); and a lease where the rental obligation is not terminable by the lessee and either: (1) the lease term is equal to or greater than the remaining economic life of the goods, (2) the lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life of the goods, or (3) at the end of the lease, the lessee has an option to purchase the goods or
  renew the lease for the remaining economic life of the goods for no or nominal consideration

Question 29

There are three requirements for attachment, which must coexist:

Answer 29

1. The parties must agree to create the security interest (that is, they must enter into a security agreement), and
2. Value must be given by the secured party, and
3. The debtor must have rights (for example, ownership) in the collateral

Question 30

Requirements to create security interest

Answer 30

The parties must agree to create the security interest (that is, they must enter into a security agreement), as evidenced by:
(1) the creditor taking possession of the collateral,
(2) an authenticated security agreement, or
(3) the creditor taking control of nonconsumer deposit accounts, electronic chattel paper, and investment property

Question 31

Form of the Authenticated Security Agreement

Answer 31

1 - The agreement must be evidenced by a record (that is, written or electronically stored information) and must show an intent to create a security interest
2 - The agreement must be authenticated by the debtor (usually means that it is signed by the debtor, any symbol, including an electronic symbol, that is made with the present intent to authenticate the record will work)
3 - The agreement must contain a description of the collateral (and if the security interest covers timber to be cut, a description of the land concerned).
–> The description must reasonably identify the collateral.

Question 32

Collateral can be described broadly by ____(for example, “all of the debtor’s equipment”) or specifically (for example, by serial number or by saying “the debtor’s television” if the debtor has only 1 television)

Exception: _____ cannot be described by type alone; a more specific description is needed.

Answer 32

category or type

Consumer goods, consumer securities accounts, and commercial tort claims

Question 33

In the case of commingled cash proceeds (for example, in a bank account), the identifiable proceeds can be traced using ____

Answer 33

the lowest intermediate balance rule.

Question 34

The attachment of a security interest in accounts, chattel paper, documents, general intangibles, instruments, and investment property automatically extends to _____

Answer 34

a supporting obligation (for example, a surety) for that collateral.

Question 35

Methods of perfection:

Answer 35

(1) filing
(2) taking possession of the collateral;
(3) control;
(4) automatic perfection; and
(5) temporary perfection.

Question 36

A security interest is not enforceable against anyone until it has attached to the collateral. If all of the steps for perfection are taken before the security interest has attached, perfection will occur ____.

Answer 36

upon attachment

Question 37

AUTOMATIC PERFECTION

Answer 37

• In certain situations, a security interest is automatically perfected upon attachment.
• The most common such situation is a PMSI in consumer goods.

Question 38

Limitations on AUTOMATIC PERFECTION

Answer 38

A security interest in motor vehicles can be perfected only by notation on the vehicle’s certificate of title and a PMSI in fixtures will have priority over an encumbrancer of the real estate only if the PMSI holder files a fixture filing

Question 39

PERFECTION BY TAKING POSSESSION (PLEDGE)

Answer 39

Security interests in most types of collateral can be perfected simply by taking possession of the collateral.

Question 40

PERFECTION BY TAKING POSSESSION (PLEDGE) - Time of Perfection

Answer 40

Where the secured party takes actual possession of the collateral, the security interest is perfected from the moment of possession and continues as long as possession is retained.

Question 41

Where the collateral (other than certificated securities and goods covered by a document) is in the hands of a bailee, the secured party is deemed to be in possession from _____

Answer 41

the moment the bailee authenticates a record acknowledging that it is holding the collateral for the secured party’s benefit.

Question 42

Collateral that Cannot Be Pledged

Answer 42

Security interests in general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, certificate of title goods, and accounts cannot be perfected by possession.

Question 43

PERFECTION BY CONTROL

Answer 43

Security interests in investment property, non-consumer deposit accounts, and electronic chattel paper may be perfected by “control.”

-> Note that security interests in non-consumer deposit accounts can only be perfected by control (unless they’re perfected as proceeds of collateral)

Question 44

Methods of Obtaining Control: Non-consumer Deposit Accounts

Answer 44

• The bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account
• Putting the deposit account in the secured party’s name
• Agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will comply with the secured party’s orders regarding the deposit account without requiring the debtor’s consent

Question 45

Methods of Obtaining Control: Investment Property

Answer 45

Basically, a secured party has control of an item of investment property when the secured party has taken whatever steps are necessary to be able to have the investment property sold without further action from the owner.

Question 46

PERFECTION FOR MOTOR VEHICLES

Answer 46

Under the state’s certificate of title law, security interests in motor vehicles required to be titled can only be perfected by notation on the certificate of title issued by the state.
-> Perfecting by another method won’t work!

Question 47

Methods of Obtaining Control: Electronic Chattel Paper

Answer 47

A party has control over electronic chattel paper when a system put in place to show the transfer of interests in chattel paper reliably establishes the secured party as the assignee.

Question 48

Exception to PERFECTION FOR MOTOR VEHICLES rule

Answer 48

Security interests created by dealers in vehicles held in inventory for sale or lease are perfected by filing a financing statement under the ordinary Code rules, even if a certificate of title covering the vehicle is outstanding.

Question 49

A secured party may obtain perfection by filing (either in writing or electronically) a financing statement. The financing statement must contain:

Answer 49

• The debtor’s name and mailing address,
• The secured party’s name and mailing address, and
• A description of the collateral covered by the financing statement

Question 50

A security interest may be perfected by filing as to all kinds of collateral except _____

Answer 50

deposit accounts and money.

Question 51

Financing statements are indexed under the debtor’s name.
- In most states, if the debtor is _____ where the financing statement is to be filed, the debtor’s name on the financing statement must match the
license.
- If the debtor doesn’t have such a license, then the financing statement may include the _____ or the debtor’s ____.
- If the debtor is a registered organization (for example, a corporation or limited partnership), the debtor’s name must ____

Answer 51

an individual with an unexpired driver’s license issued by the state

debtor’s individual name (which Article 9 does not define); personal name and surname

match its most recent public organic record (that is, the publicly available record that forms or organizes the organization).

Question 52

Debtor’s name: Use of the debtor’s ____ is insufficient.

Answer 52

trade name

Question 53

Effect of Error in Debtor’s Name

Answer 53

• Minor errors in the debtor’s name won’t invalidate a financing statement, but seriously misleading errors will.
  –> A financing statement is not seriously misleading if it would be discovered in a filing office search under the debtor’s correct name, using the filing office’s standard search logic (spelling error would never meet this)

Question 54

The failure of the filing office to correctly index a financing statement _____ its effectiveness.

Answer 54

does not impact

Question 55

If the debtor’s name as indicated on a filed financing statement becomes insufficient and thus seriously misleading (for example, because the debtor changed their name), the financing statement is effective only ____

Answer 55

against collateral acquired by the debtor before the name became insufficient and within 4 months after.
-> For collateral acquired after the 4-month period, the secured party must refile using the debtor’s correct name.

Question 56

Although Article 9 provides specific rules for how a
debtor’s name must be listed on a financing statement, remember that the financing statement becomes invalid only if _____

Answer 56

the name is seriously misleading.

Question 57

As with an authenticated security agreement, the description of collateral in a financing statement is sufficient if ____

Answer 57

it reasonably identifies the collateral, which can be broadly by category or type (for example, “equipment”) or specifically (for example, by serial number).

Question 58

For an authenticated security agreement a _____ of collateral such as “all of the debtor’s assets” or “all of the debtor’s personal property” is not a sufficient description.

Answer 58

super-generic description

Question 59

Enlike the requirements for an authenticated security
agreement, a financing statement may contain a _____ of the collateral, such as “all assets.”

Answer 59

supergeneric description

Question 60

After-Acquired Property: Financing Statement

Answer 60

The financing statement need not mention after-acquired property to perfect a security interest in such property if the description in the financing statement is broad enough to cover the after-acquired property.

Question 61

Secured Party’s Name: Financing Statement

Answer 61

Because searches aren’t conducted under the secured party’s name, an error in the secured party’s name will not make the financing statement seriously misleading.

Question 62

Real Property-Related Financing Statements:

Answer 62

In addition to the requirements discussed above (that is, the names and addresses of the debtor and secured party and a description of the collateral), financing statements that cover real property-related
collateral (that is, minerals, timber to be cut, and fixtures) must also contain:
(1) a description of the related real property,
(2) the name of the record owner (if not the debtor), and
(3) an indication that it is to be filed in the real property records.

Question 63

For a financing statement to be effective, the debtor must ___

Answer 63

authorize the filing in any signed writing either before or after it is filed.

Question 64

The debtor automatically authorizes the financing statement if ____

Answer 64

the debtor authenticates the financing statement or authenticates a security agreement covering the same collateral as the financing statement.

Question 65

The authenticated security agreement itself may be ____

Answer 65

filed as the financing statement if the parties so desire.
-> If it’s filed, it must contain all of the elements described above.

Question 66

Effect of Missing Address - Financing Statement

Answer 66

If a financing statement that doesn’t contain the debtor’s and/or secured party’s mailing address is accepted by the filing office, the financing statement is effective despite the lack of the address(es).

Question 67

Place of Filing - General Rule

Answer 67

Generally, filing must be done “centrally” in the office of the secretary of state

Question 68

Place of Filing - Exception to central office

Answer 68

• If the collateral is timber to be cut or minerals, or if the collateral is or is to become a fixture and the filing is a fixture filing, filing is in the county where a mortgage on real estate is filed (“locally”).
• In the case of fixture filing, it is safest to file both in the real estate records and at the place that would be proper if the goods were not fixtures.

Question 69

WHICH STATE’S LAW GOVERNS PERFECTION - General Rule

Answer 69

The law of the state where the debtor is located generally governs perfection of the security interest.
-> Therefore, the secured party must generally file the financing statement in that state.

Question 70

Location of Debtor

Answer 70

• If the debtor is an individual, they are located in the state of their principal residence.
• If the debtor is a registered organization, the debtor is located in the state under whose laws it is organized (that is, where its articles of incorporation are filed).
• If the debtor is an unregistered organization (for example, a general partnership), it is located at its place of business if it only has one place of business or at its chief executive office if it has more than one place of business.

Question 71

WHICH STATE’S LAW GOVERNS PERFECTION -Exceptions (to general rule of debtor’s domicile)

Answer 71

• Possessory Security Interests and Security Interests in Fixtures and Timber to Be Cut: governed by the law of the state in which the collateral is located.
• Goods Covered by Certificate of Title: the law of the state issuing the most recent certificate of title governs perfection.
• Deposit Accounts: unless the debtor’s agreements
  with the bank provide otherwise, the law of the state in which the bank has its chief executive office governs perfection.
• Investment Property: Separate rules (other card)
• Agricultural Liens: governed by the law of the state in which the farm product covered by the lien is located.

Question 72

General rules: Governing law for perfection of Investment Property

Answer 72

• If the collateral is a certificated security, the law of the state where the certificated security is located governs perfection.
• If the collateral is an uncertificated security, unless the debtor’s agreements with the issuer provide otherwise, the law of the state where the issuer was organized governs perfection.
• If the collateral is a securities account, unless the debtor’s agreements with the securities intermediary provide otherwise, the law of the state where the securities intermediary’s chief executive office is located governs perfection.

Question 73

Exception: Governing law for perfection of Investment Property

Answer 73

If a security interest in investment property is perfected by filing, or if it’s automatically perfected by a securities intermediary, the law of the state where the debtor is located governs perfection.

Question 74

Collateral in Which Perfection Is Governed by Debtor’s Location: Relocation of Debtor

Answer 74

The security interest generally will become unperfected 4 months after the debtor’s move unless the secured party files a financing statement in the new jurisdiction before that 4-month period is up.

Question 75

Collateral in Which Perfection Is Governed by Debtor’s Location: Debtor in Different State

Answer 75

If collateral is transferred to a new owner who is located in a different state, the security interest will become unperfected one year after the collateral moves unless the secured creditor files a financing statement in the new jurisdiction before that one-year period is up.

Question 76

If a perfected security interest in collateral is a possessory security interest (which is governed by the law of the state in which the collateral is located), and the collateral is moved from one state to another, the security interest will ____

Answer 76

remain perfected without any further action as long as the security interest is also perfected by possession under the laws of the new state.

Question 77

If a vehicle is moved from one state to another and is covered by a certificate of title issued by the new state, a security interest in the vehicle that was properly perfected in the original state _____

Answer 77

lasts as long as it would have if the vehicle had not been covered by the new certificate of title.

Question 78

If a vehicle subject to a perfected security interest in one state is moved to a new state and is covered by a certificate of title issued by the new state, the security interest in the original state is perfected as against a purchaser for value of the vehicle only until the earlier of:

Answer 78

• The time when the security interest would have become unperfected in the original state if the vehicle had not been covered by the new certificate of title (same rule as the general rule), or
• 4 months after the vehicle is covered by the new certificate of title

Question 79

If the certificate of title issued in the new state does not note the secured party’s interest in the vehicle, the following parties have priority over the secured party:

Answer 79

• A buyer of the vehicle who is not in the business of selling vehicles who purchases for value and receives delivery of the vehicle without knowledge of the security interest, and
• A secured party who perfects a security interest in the vehicle without knowledge of the other security interest after the clean certificate of title is issued in the new state

Question 80

If the bank, issuer, or securities intermediary moves to a new state, perfection of an interest in the deposit account, uncertificated security, or securities account continues until the earlier of:

Answer 80

• The time when the security interest would have become unperfected in the original state if the bank, issuer, or securities intermediary had not moved to the new state, or
• 4 months after the bank, issuer, or securities intermediary moves to the new state

Question 81

A financing statement is valid for ____.

Answer 81

5 years

Question 82

Continuation Statements

Answer 82

• A continuation statement may be filed, good for an additional 5 years.
• The continuation statement can only be filed within 6 months before the lapse of the filed statement.
• The authorization of the debtor is not required for a continuation statement; the secured party may authorize it.

Question 83

Termination Statements

Answer 83

• Generally, a secured party is not obligated to terminate a financing statement.
• However, if there is no outstanding obligation of the debtor and no commitment on the part of the secured party to make further advances, or if the debtor didn’t authorize the filing of the initial financing statement, the secured party must, on demand of the debtor, within 20 days, file a termination statement or provide one to the debtor.

Question 84

Termination Statements: Timing for Consumer Goods

Answer 84

In the case of consumer goods, the secured party must file the termination statement within 1 month after there is no obligation or commitment, or if the debtor demands it, within 20 days of the demand.

Question 85

TEMPORARY PERFECTION (AND CONTINUATION FOR PROCEEDS) - General categories

Answer 85

• Perfection for Proceeds
• Temporary Perfection for Instruments, Negotiable
  Documents, and Certificated Securities

Question 86

Perfection for Proceeds

Answer 86

If a secured party has a perfected security interest in collateral, the secured party automatically has a perfected security interest in any proceeds of the collateral for 20 days after receipt of the proceeds.

The security interest in proceeds will continue to be perfected beyond the 20 days if:
- The proceeds are identifiable cash proceeds
- The security interest in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral, or
- The security interest in the proceeds is perfected within the 20-day period

Question 87

Where new value is given under an authenticated security agreement for instruments, negotiable documents, or certificated securities, perfection is valid for ____

Answer 87

20 days after attachment; neither filing nor
possession is necessary.

Question 88

Where the creditor who has perfected their security interest by possession delivers instruments, negotiable documents, certificated securities, or goods in the possession of a bailee to the debtor
for disposition (for example, where the creditor gives the debtor a promissory note, which is serving as collateral, so that the debtor can present the note to its maker for payment), perfection is valid for
____, after which the creditor ____

Answer 88

20 days; must re-perfect (by filing or taking possession) or lose their perfection

Question 89

Financing Statement: CHANGE IN USE OF COLLATERAL

Answer 89

• The filed financing statement (with the
  description of “equipment”) 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 the creditor knows that the description is seriously misleading.

Question 90

Priority Between Perfected Secured Parties

Answer 90

Priority goes to whichever party was the first to either file or perfect—whichever is earlier—provided that there is no period thereafter when there is neither filing nor perfection.

Question 91

Priority Between Unperfected Secured Parties

Answer 91

When two unperfected security interests conflict, the first to attach has priority.

Question 92

Priority Between Unperfected and Perfected Secured Parties

Answer 92

A perfected security interest generally prevails over an unperfected security interest.

Question 93

PMSI Superpriority (two categories)

Answer 93

• PMSI in Goods Other than Inventory and Livestock
• PMSI in Inventory and Livestock

Question 94

A PMSI in goods other than inventory and livestock (for example, equipment) has priority over conflicting security interests in the same goods or their proceeds if _____

Answer 94

the interest is perfected before or within 20 days after the debtor receives possession of the goods

Question 95

A PMSI in inventory collateral has priority over a conflicting security interest in the same inventory or proceeds of the inventory that are chattel paper, instruments, or cash if:

Answer 95

• It is perfected at the time the debtor gets possession of the inventory (filing must take place before the inventory is delivered to the debtor), and
• Any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects
  to take a PMSI in inventory of the debtor described by kind or type. The notification is effective for deliveries of the same type of collateral for 5 years.

Question 96

Under Article 9, a consignor’s interest in the consigned goods is considered to be a ____.

Answer 96

PMSI in inventory
-> Therefore, a consignor can acquire PMSI superpriority in consigned goods if the consignor complies with the above requirements for gaining PMSI superpriority in inventory.

Question 97

If more than one party has PMSI superpriority in collateral, the following rules apply:

Answer 97

• A secured party who has a PMSI in collateral as a seller (a seller-financed PMSI) has priority over a secured party who has a PMSI inthe same collateral as a lender (a financer-financed PMSI)
• Otherwise, the first secured party to file or perfect prevails

Question 98

Special Priority Rules for Conflicting Security Interests in Investment Property

Answer 98

• A security interest perfected by control has priority over a security interest perfected by any other method (that is, by filing or automatic
  perfection).
• For conflicting security interests perfected by control, they rank according to the time of obtaining control (unless one of the secured parties with control is a securities intermediary, in which case the securities intermediary will prevail).
• In all other cases, the “first to file or perfect” rule governs priority questions for investment property.

Question 99

Special Priority Rules for Conflicting Security Interests in Deposit Accounts

Answer 99

• A security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method (namely, as proceeds of other collateral).
• If there are conflicting security interests that are perfected by control, they rank according to the time of obtaining control, subject to the following exceptions:
  –> A secured party who has obtained control by putting the deposit account in the party’s name has priority over all other secured parties with control, and
  –> A bank that has control because it maintains the deposit account has priority over all secured parties with control, other than the party who has obtained control by putting the account in their name

Question 100

If a debtor transfers money or deposit account funds (for example, by writing a check or making an electronic funds transfer) to a person, that person takes free of any security interest in the money or funds, unless ____

Answer 100

the transferee acts in collusion with the
debtor in violating the rights of the secured party.

Question 101

Special rule for Chattel Paper Purchasers Priority

Answer 101

If a purchaser of chattel paper in good faith gives new value and takes possession of the chattel paper in the ordinary course of business (or takes control of electronic chattel paper), the purchaser has priority over:
- A security interest in chattel paper that arises merely as proceeds of inventory, as long as the chattel paper doesn’t indicate that it has been assigned to anyone other than the purchaser, and
- Any other security interest in the chattel paper, as long as the chattel paper purchaser acquired their interest without knowledge that its purchase violated the rights of the secured party.

Question 102

A chattel paper purchaser also has priority in the proceeds of the chattel paper if either:

Answer 102

(1) the purchaser would have had priority
under the general priority rules (the purchaser was the first party to file or perfect), or
(2) the proceeds are the specific goods covered by the chattel paper or cash proceeds of the specific goods.

Question 103

Special rule for Instrument Purchasers Priority

Answer 103

A purchaser of an instrument has priority over a perfected security interest in the instrument if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party.

Question 104

For purposes of determining the priority of security interests in proceeds, the Code divides collateral into “filing collateral” and “non-filing collateral.” (define these terms)

Answer 104

• Filing collateral is collateral in which a secured
  party would normally achieve priority by filing a financing statement (for example, goods, accounts, commercial tort claims, general intangibles, and nonnegotiable documents).
• Non-filing collateral is collateral in which a secured party would normally achieve priority by possession or control, rather than filing (for example, cash, chattel paper, nonconsumer deposit accounts, negotiable documents, instruments, and investment property).

Question 105

Priority in Proceeds: General Rule

Answer 105

Generally, a perfected security interest in proceeds will have the same date of priority as the perfected security interest in the original collateral (for example, under the “first to file or perfect” rule), as long
as the perfection of the security interest in the proceeds extends beyond the 20-day temporary perfection period (see 4.10, above).
-> Recall that there are also special superpriority rules for certain proceeds of collateral subject to PMSIs (see Section 5.4, above).

Question 106

Priority in Proceeds: Special Rule for Certain Proceeds of Non-Filing Collateral

Answer 106

Because the rules governing priority in non-filing collateral contain many exceptions to the “first to file or perfect” rule (for example, a party with control over a deposit account has priority over a party without control, regardless of when control was obtained), the
Code contains a special priority rule for certain proceeds of that collateral.

A secured party has priority in the proceeds of non-filing collateral if: (1) the secured party has priority in the original collateral, (2) their security interest in the proceeds is perfected, and (3) the proceeds are cash proceeds or proceeds of the same type as
the original collateral.
-> If the proceeds are proceeds of proceeds, all intervening proceeds must be cash proceeds, proceeds of the same type as the original collateral, or accounts relating to the collateral.

Question 107

If a security interest in original collateral that is non-filing collateral is perfected by a method other than filing, and the proceeds of the original collateral are filing collateral, the ____ has priority in the proceeds.

Answer 107

first secured party to file a financing statement covering the proceeds

Question 108

SECURED PARTY VS. BUYER OR OTHER TRANSFEREE: General Rule

Answer 108

• When a buyer (or lessee) buys or leases something with a security interest on it, the security interest stays on the item.
• There are a few exceptions to this rule, discussed below.

Question 109

Exceptions to the rule that secured interest stays on item when transferred to buyer (high level)

Answer 109

• Authorized Sales
• Buyers in the Ordinary Course
• Consumer-to-Consumer Sale

Question 110

Authorized Sales Exception to (SECURED PARTY VS. BUYER OR OTHER TRANSFEREE)

Answer 110

• If the sale or lease of the collateral is authorized by the secured party free of the security interest, the transferee takes free of the security interest.
• The authorization may be express, or it may be implied from the type of sale or from the seller’s conduct (often covers inventory)

Question 111

A buyer in ____ takes free of a nonpossessory security interest in the goods created by the buyer’s seller, even though the security interest is perfected and even though the buyer knows of the security interest.

Answer 111

the ordinary course of business (“BIOC”)

Question 112

A “buyer in the ordinary course” is one who buys goods:

Answer 112

(1) in good faith,
(2) without knowledge that the sale violates the rights of another person in the goods, and
(3) in the ordinary course of business from a seller in the business of selling goods of the kind purchased.

Question 113

Buyers or lessees not in the ordinary course of business:

Answer 113

• Take subject to perfected security interests, and
• Take free from unperfected security interests unless they know of the security interest when they give value or take delivery

Question 114

A buyer or lessee not in the ordinary course of business has priority over future advances or commitments to make future advances made by a secured party either after _____

Answer 114

the secured party learns of the purchase or lease or more than 45 days after the purchase or lease.

Question 115

If a secured party attaches a PMSI in the debtor’s collateral before the buyer or lessee without knowledge pays value and receives delivery, the secured party will have priority over the buyer or lessee if _____

Answer 115

the secured party files within 20 days after
the debtor receives the collateral.

Question 116

In the case of consumer goods, a buyer takes free of a security interest, even though it’s perfected, if the buyer buys

Answer 116

(1) without knowledge of the security interest,
(2) for value,
(3) for the buyer’s own personal, family, or household purposes, and
(4) before a financing statement covering the goods has been filed.
-> *Note that the goods must be consumer goods in the hands of both the buyer and the seller.

Question 117

PMSIs in consumer goods are perfected
automatically without filing. Nevertheless, holders of
these security interests will still lose to consumer buyers under this rule (Consumer-to-Consumer Sales) unless ____

Answer 117

they file.

Question 118

Secured Party vs. Holder in Due Course or the Like

Answer 118

A holder in due course of a negotiable instrument (and similar holders of negotiable documents of title or securities) has priority over a security interest in the negotiable instrument.

Question 119

Secured Party vs. Judicial Lien Creditor

Answer 119

• A judicial lien creditor (that is, a person who has acquired a lien on the collateral through judicial attachment, levy, or the like, or a bankruptcy trustee) prevails over the holder of a security interest
  in collateral if the lien creditor becomes such before the security interest is perfected.
• On the other hand, a prior perfected security interest has priority over a judicial lien.

Question 120

A creditor who has won a judgment in court becomes a judicial lien creditor at the time of ____.

Answer 120

levy (that is, seizure of the collateral by the sheriff)
-> Therefore, look to see when the sheriff levies on the collateral and when the security interest is perfected (if at all) to determine who has priority.

Question 121

As noted above, the secured party has priority if the secured party perfected before the judicial lien arose. However, the secured party will also have priority if the secured party obtained a security agreement and filed a financing statement (but did not attach and perfect) before the judicial lien arose, as long as ____

Answer 121

the secured party eventually attaches and perfects.

Question 122

Secured Party vs. Judicial Lien Creditor: PMSI Grace Period Exception

Answer 122

If the secured party files a financing statement with respect to a PMSI within 20 days after the debtor receives the collateral, the secured party will have priority over a judicial lien arising between the time the security interest attaches and the time of filing.

Question 123

For a perfected future advance to gain priority over a subsequent judicial lien, the future advance must be made

Answer 123

(1) without knowledge of the lien,
(2) within 45 days of the lien arising, or
(3) pursuant to a commitment entered into without knowledge of the lien.

Question 124

Secured Party vs. Possessory (Statutory) Lien Holder

Answer 124

A possessory lien imposed by other (that is, non-Code) state law in favor of those who supply goods or services (for example, an artisan’s lien or a materialman’s lien) has priority over a security interest (even if perfected) as long as the goods or services were provided in the ordinary course of business and the collateral remains in the lien holder’s possession.

Question 125

SECURED PARTY VS. ARTICLE 2 CLAIMANT

Answer 125

If Article 2 grants a buyer or seller a possessory security interest in goods (for example, if the buyer rightfully revokes acceptance of goods), the Article 2 claimant has priority over an Article 9 secured party as long as the Article 2 claimant retains possession of the goods.

Question 126

Excluding investment property and nonconsumer
deposit accounts, in which the party with control generally has priority, the ranking is as follows:

Answer 126

• Buyer in the ordinary course of business, if the security interest is created by the buyer’s seller
• Holder in due course and the like of a negotiable instrument
• Transferee of money or funds from deposit accounts
• Certain purchasers of chattel paper or instruments who have possession or control
• Possessory lienholder
• Article 2 claimant with possession of goods
• PMSI (except that a consumer purchaser from a consumer—such as a neighbor buying from a neighbor—has priority over an automatically perfected PMSI in the consumer goods)
• Perfected security interests and judicial liens that have attached to the collateral (including trustees in bankruptcy as of the date the bankruptcy petition is filed)
• As between perfected security interests in the same collateral, the first to file or perfect has priority
• As between a perfected security interest and an attached lien, the attached lien generally has priority if it attached before the security interest was perfected. Otherwise, the security interest has priority
• Purchaser of collateral who buys for value and receives delivery without notice of any unperfected security interest
• Unperfected security interests (rank in priority according to order of attachment)
• Debtor

Question 127

The right of the secured party to proceed against collateral is triggered by ____

Answer 127

default.

Question 128

Article 9 does not define the events that will trigger a default, but ______

Answer 128

the security agreement usually will define default to include events such as failure to pay or maintain insurance.

Question 129

If the security agreement lacks such a provision, “default” is generally construed as _____

Answer 129

a failure to pay or perform.

Question 130

To determine if there has been a default, look out for late or missed payments. However, also look for ____

Answer 130

a possible waiver by the secured party of late or missed payments.

Question 131

SELF-HELP REPOSSESSION

Answer 131

• After default, the secured party is entitled to take possession of the collateral without judicial process (that is, by “self-help”) if this can be done without a breach of the peace.
• When a secured party breaches the peace, the secured party loses the authorization to repossess, may be sued for conversion (and possibly assault, battery, trespass, etc.), and is liable for actual (and frequently punitive) damages.

Question 132

Breach of the Peace

Answer 132

• Any conduct by the secured party that has the potential to lead to violence is a breach of the peace.
• Generally, physical presence by the debtor (or a representative of the debtor) plus a verbal objection by the debtor over the repossession is enough to create a breach of
  the peace.

Question 133

If self-help is unavailable, the secured party can use ____

Answer 133

judicial process (for example, a replevin action) to get the goods.

Question 134

Without removal, the secured party may also _____

Answer 134

make equipment unusable and dispose of it on the debtor’s property if the secured party can do so without a breach of the peace.
-> This right is directed toward the problem of taking possession of heavy, bulky equipment that is not easily movable.

Question 134

After default and repossession, the secured party may retain the collateral in full or partial satisfaction of the debt (in other words, the secured party may make a full or partial strict foreclosure) if the secured party does the following:

Answer 134

• The secured party must send its proposal to retain the collateral to (1) any other secured party from whom the foreclosing party has received notice of a claim to the collateral, and (2) any other secured party who has perfected a security interest in the collateral by filing a financing statement or noting its security interest on a certificate of title.
  –> If a notified party objects within 20 days after the secured party sends the notice, the collateral must be disposed of by sale.
• The secured party must also obtain
  the debtor’s consent. The debtor consents by either: (1) agreeing in an authenticated record after default, or (2) in the case of a full strict foreclosure, failing to make an authenticated objection within 20 days after the secured party sends notice (a debtor can’t consent to a partial strict foreclosure in this manner)

Question 134

RESALE OF COLLATERAL - Notice

Answer 134

Reasonable notice that is authenticated by the secured party (that is, the notice can’t be oral) must be given (1) to the debtor and any sureties on the debt, and (except in the case of consumer goods) (2) to any other secured parties who have notified the secured party of their interests, and (3) to any secured parties who have perfected by filing a financing statement or making a notation on a certificate of title.

Question 134

Default: In a consumer transaction, a secured party may not _____

Answer 134

keep the collateral in partial satisfaction of the debt and seek a deficiency judgment.
-> The secured party may keep the collateral only in full satisfaction of the debt.

Question 135

RESALE OF COLLATERAL - Timing of notice

Answer 135

• The notice must be sent within a reasonable time before the sale (a question of fact).
• In non-consumer transactions, notice is deemed to be sent within a reasonable time if it’s sent 10 days or more before the sale.

Question 135

The sale discharges the security interest under which the sale is being made and _____. The purchaser, however, is _____

Answer 135

all subordinate security interests

still subject to superior security interests

Question 135

RESALE OF COLLATERAL - Notice Exceptions

Answer 135

This notice isn’t necessary when the collateral is perishable or threatens to decline rapidly in value or is of a kind ordinarily sold in a recognized market (for example, stock).

Question 135

Self-Help in Accounts

Answer 135

• If the debtor defaults and the collateral is an account, the secured party can notify the person owing money to the debtor (that is, the account debtor) to make payment to the secured party, rather than to the debtor.
• Upon notification, the account debtor must pay the secured party, rather than the debtor.
• Payment to the debtor will not discharge the obligation

Question 135

Default: If the debtor has paid 60% of the cash price on a PMSI in consumer goods, or 60% of the loan on a non-PMSI in consumer goods, the secured party must _____

Answer 135

dispose of the collateral within 90 days after repossession.
-> If the debtor has paid less than 60%, the general rules, above, apply.

Question 135

Every aspect of the sale of collateral (including the method, manner, time, place, and terms) must be ___

Answer 135

commercially reasonable.

Question 136

RESALE OF COLLATERAL

Answer 136

• After default, the secured party may sell, lease, license, or otherwise dispose of the collateral in its condition when repossessed or after reasonable preparation.
• The sale may be either public (auction) or private, and may be by one or more contracts.

Question 136

After default, the debtor or the surety may waive the right to ____

Answer 136

notice in an authenticated agreement.

Question 136

In the sale of collateral the secured party must show ____

Answer 136

that they made an effort to obtain the best price for the collateral.
-> low price alone is not enough to make the sale not commercially reasonable, but if the price is very low, courts will give extra scrutiny to the other circumstances of the sale.

Question 136

RESALE OF COLLATERAL - Contents of notice

Answer 136

The content of the notice depends on the type of sale and type of collateral.
-> For a public sale, notice of the time and place of sale is required.
-> For a private sale, notice of the time after which the sale will occur must be given. The notice must also describe the parties and the collateral.
+ Extra info is required for consumer goods

Question 137

Factors for determining if sale is commercially reasonable:

Answer 137

• The sufficiency of the advertising,
• If the collateral had a limited market, whether people in that market were contacted,
• Whether the collateral needed cleaning or repair, and
• If the sale was by public auction, the convenience of the time and place

Question 138

The secured party may buy the collateral at any ____ but may buy at a private sale only if ____.

Answer 138

public sale

the collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations

Question 139

Proceeds of the Foreclosure Sale

Answer 139

The money from a foreclosure sale goes first to repay the costs of the repossession and sale, then to pay off the debt of the foreclosing creditor, and then to pay off the debt of creditors with lower priority than the foreclosing creditor. If any money is left over, the debtor gets this surplus.
-> Creditors with higher priority than the foreclosing creditor receive no money from the sale because they don’t lose their liens as a result of the foreclosure sale.

Question 140

If the collateral when sold doesn’t bring in enough to pay the expenses of the sale and the secured party’s debt, the secured party may ____

Answer 140

recover any deficiency from the debtor.

Question 141

If the debtor is a consumer, then after the sale, the secured creditor must send the debtor an ____

Answer 141

explanation of the calculation of any debt still owed (the deficiency) or money the debtor will receive (the
surplus).

Question 142

A secured party is liable for the _____ caused by failure to follow any of the Code’s rules.

Answer 142

actual damages

Question 143

If the collateral is consumer goods and the secured creditor violates the Code’s rules on default (for example, the sale isn’t commercially reasonable), the debtor is entitled to ____

Answer 143

a minimum of 10% of the cash price of the goods plus an amount equal to all the interest charges to be paid over the life of the loan.

Question 144

Generally, if the secured party fails to follow the Code’s rules on default, there is a rebuttable presumption that _____

Answer 144

the sale proceeds equal the amount of the debt.
-> In other words, the secured party presumptively loses any deficiency.

Question 145

Any time before the secured party has resold the collateral or has entered into a contract for its disposition, or the obligation has been discharged by the secured party’s retention of the collateral, the debtor (as well as any surety or other secured party or lienholder) may ____.

To do so, the debtor must _____

Answer 145

redeem the collateral;

tender fulfillment of all obligations secured by the collateral, plus additional reasonable expenses.

Question 146

Because most security agreements contain an acceleration clause (that is, a clause allowing the creditor to declare the entire loan balance due upon default), the debtor typically must tender ____ in order to redeem.

Answer 146

the entire balance (not just missed payments)

Question 147

DEFINITION OF FIXTURE

Answer 147

• Fixtures are goods that have become so related to real property that an interest in them arises under real property law.
• In general, personal property attached to real estate with the intent that it become a permanent part of the real estate is a fixture (for example, central air conditioning, built-in appliances, elevators, etc.).
• The distinctive aspect of a fixture is that interests in it may arise under both the Code and under the law of real estate.

Question 148

No security interest can exist in _____ that are incorporated into an improvement on land.

Answer 148

ordinary building materials (for
example, bricks, lumber, shingles, etc.)

Question 149

Fixtures - Perfection

Answer 149

• To perfect a security interest in fixtures, 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 real estate and must show the name of the owner (if the debtor does not have an interest of record in the real estate).

Question 150

Fixtures: Rights on default

Answer 150

• When the security interest in the fixture has priority over all interests in the real property, the holder of the security interest in the fixture may, upon default, remove the fixture from the real property.
• If the debtor does not own the property from which the collateral is removed, the creditor must reimburse the owner of the property for the cost to repair damage to the property caused by removal, but not for any other diminution in value.

Question 151

PRIORITY: Secured Party v. Subsequent Real Estate Interest

Answer 151

A security interest in fixtures has priority over any real estate interest that is recorded subsequent to the perfection of the security interest by fixture filing (in other words, what is filed first)

Question 152

PRIORITY: Secured Party v. Prior Real Estate Interest

Answer 152

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

Question 153

PRIORITY: Secured Party v. Prior Real Estate Interest = PMSI rule

Answer 153

A PMSI takes priority over an earlier in time realty interest if it’s perfected by a fixture filing before the goods become fixtures or within 20 days thereafter.

Question 154

PRIORITY: Secured Party v. Prior Real Estate Interest = Construction mortgages

Answer 154

A construction mortgage takes priority over a subsequent PMSI in fixtures, even if the security interest is perfected by a fixture filing within 20 days of affixation. (super priority rule!)

Question 155

A secured party need not fixture file as to _____

Answer 155

readily removable (1) factory or office machines, (2) equipment that is not primarily used or leased for use in the operation of the real estate, or (3) replacements of domestic appliances which are consumer goods.
-> Any method of perfection before such goods become fixtures entitles the secured party to priority.

Question 156

A secured party of fixtures need not perfect at all to have priority _____

Answer 156

(1) if the encumbrancer or owner of the real estate has, in an authenticated record, consented to the security interest or has disclaimed an interest in the goods as fixtures, or
(2) if the debtor has a right to remove the goods as against the real estate claimant.

Question 157

DEFINITION OF ACCESSION

Answer 157

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

Question 158

Accession: Perfection

Answer 158

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

Question 159

Accession: Priority

Answer 159

As a general rule, the rules for priority previously discussed (for example, first to file or perfect, special PMSI rules) apply to accessions.

Question 160

Accession: Special Priority Rule

Answer 160

A security interest in an accession is subordinate to a security interest in a whole (for example, a car) which is perfected by compliance with the requirements of a certificate-of-title statute.

Question 161

Accession: REMOVAL AND REIMBURSEMENT FOR PHYSICAL
INJURY TO THE WHOLE

Answer 161

• A secured party may remove an accession from other goods if the
  security interest in the accession has priority over the claims of every person having an interest in the whole.
• The secured party
  removing the accession is responsible for the cost of repair of any physical injury to the whole or the other goods.
• A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse.

Question 162

Automatic Perfect in accounts

Answer 162

• Perfection may occur automatically, without filing, in the case of a security interest in a small-scale assignment of an account or payment intangible.
• This rule applies to an assignment of accounts or payment intangibles that does not alone, or in conjunction with other assignments to the same assignee, transfer a significant part of the assignor’s outstanding accounts or payment intangibles to the creditos.