Secured Transactions

Question 1

Article 9

Answer 1

Article 9 applies to all security interests in personal property or fixtures by contract.

Article 9 also applies to lease agreements that are not true leases (but instead, security interests).

The words “security agreement” do not have to be specifically stated for one to exist.

Question 2

4 Classifications of Goods

Answer 2

1. Consumer goods: Goods bought or used primarily for personal, family, or household purposes
2. Equipment: Goods bought or used for use in a business
   Also catch all category, if collateral doesn’t fit in any other category classify it as equipment even if it doesn’t meet definition
3. 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
4. Farm products: Crops or livestock used or produced in farming operations, or products of crops or livestock in their unmanufactured state if they are in the possession of a debtor engaged in farming operations

The category in which the good is placed depends on how the debtor is using the collateral

Original Use Test: A debtors original intended use of collateral governs the collaterals classification

Question 3

8 Categories of Intangible or Semi-Intangible goods

Answer 3

1. Instruments: Pieces of paper representing the right to be paid money, like promissory notes, drafts, and certificates of deposits
2. Documents: A document that represents the right to receives goods
3. Chattel Paper: A record or records which evidence both (1) a monetary obligation; and (2) a security interst in or a lease of specific goods
4. Investment Property: Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items
5. Accounts: Includes a right to payment for property sold or services rendered
6. Deposit Accounts: An account maintained with a bank
   In general can only take it with business account not residential bank account
7. Commercial Tort Claims: A tort claim where (1) the claimant is an organization; or (2) the claim arose out of the claimants business or profession
8. General Intangibles: Any personal property coming within the scope of the other definitions such as patent and trademark rights, copyright, and good will.

The category its placed in depends on the nature of the collateral(not its use)

Question 4

Purchase Money Security Interest

Answer 4

A PMSI can arise in two ways:

Seller-Financed PMSI: (1) The secured party sells the goods to the debtor on credit and (2) retains a security interest in the goods sold or

Financer-Financed PMSI: (1) The creditor loans the funds to the debtor to enable the debtor to buy specific collateral; (2) Those funds are used by the debtor to acquire the specific collateral; (3) The creditor takes a security interest in that collateral.

Question 5

Attachment

Answer 5

Requirements of attachment:
1. Value must be given by the secured party to the debtor (e.g., a loan);

2. The debtor must have rights in the collateral; and
3. There must be a binding security agreement which requires:
   a. Authenticated with debtors signature
   b. Written agreement with intent to create a security agreement , and
   c. A description of the collateral
   - No super generic descriptions: A super generic description of the collateral such as “all of the debtors assets” is not a sufficient description.

Question 6

Proceeds

Answer 6

A security interest in collateral, automatically attaches to identifiable proceeds of collateral
“Identifiable”: The proceeds can be traced back to the original collateral

Commingled Cash Proceeds: In the case of commingled cash proceeds, the identifiable proceeds can be traced using the lowest intermediate balance rule:

Lowest Intermediate Balance Rule: Lowest amount bank account drops to at time you are applying rule

Question 7

After-Acquired Property Clause

Answer 7

Future Advances: A security agreement may provide that collateral will serve as security not only for the present obligation, but also for advances the creditor makes to the debtor in the future

After Acquired Property: Without an explicit after-acquired property clause in the security agreement, the secured parties security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement.

If there is an after-acquired property clause, the security interest will attach to the property as soon as the debtor acquires an interest in the collateral

Exception: Even without clause, security agreement will attach if collateral if of a type rapidly depleted and replenished(inventory, accounts)

Question 8

Perfection

Answer 8

Perfection: There are two steps to perfection: (1) The security interest must attach and (2) one of the 5 methods of perfection must be complete

The 5 Methods of Perfection are:
1. Filing
2. Automatic perfection
3. Taking possession of the collateral
4. Control
5. Notation on Certificate of Title

Question 9

Perfection By Filing

Answer 9

A secured party may obtain perfection by filing a financing statement

Financing Statement must contain:
1. The debtors name and mailing address
- Individual: if the debtor is an individual with an unexpired drivers license issued by the state where the financing statement is to be filed, the debtors name must match the drivers license. If not then name known in the community
- Organization: If the debtor is a registered organization, the debtors name must match its most recent public organic record
- Name Change: Financing statement under old name still good on collateral receives four months or less after change
- Only seriously misleading errors in debtors name will invalidate security agreement

2. The secured parties name and mailing address; and
   - Error will not be seriously misleading
3. A description of the collateral covered by the financing statement
   - Supergeneric descriptions are fine

Question 10

Automatic Perfection

Answer 10

PMSI in consumer goods = Automatic perfection

A PMSI in consumer goods is perfected as soon as it attaches

Question 11

Perfection By Possesison

Answer 11

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

The security interest is perfected from the moment of possession and continues as long as possession is retained

Security interest in money can only be perfected by possession

Question 12

Perfection By Control

Answer 12

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

Nonconsumer Deposit Accounts: The bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account. Security interest in non consumer deposit accounts can only be perfected by control

If the secured party is not such a bank, it may obtain control by either:
1. Putting the deposit account in the secured parties name; or
2. Control Agreement: 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 parties orders regarding the deposit account without requiring the debtors consent

Question 13

Notation on Certificate of Title

Answer 13

Motor Vehicles: Security interest in motor vehicles required to be titled can only be perfected by notation on the certificate title issued by the state.
Perfection by another method won’t work

Exception: 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 even if a certificate of title covering the vehicle is outstanding

Question 14

Priority

Answer 14

Perfected Vs Perfected Security Interests: First to file or perfect

Perfected vs Unperfected: Perfected wins

Unperfected vs Unperfected: First to attach wins

Question 15

PMSI Superpriority Rules

Answer 15

PMSI’s enjoy a super priority, meaning they’re superior to prior perfected security interests in the same collateral if certain conditions are met.

PMSI in Goods Other than Inventory and Livestock: A PMSI in goods other than inventory and livestock has priority over conflicting security interests in the same goods or their proceeds if the interest is perfected before or within 20 days after debtor receives possession of the goods

PMSI In Inventory and Livestock: A PMSI in inventory/livestock collateral has priority over a conflicting security interest in the same inventory or proceeds of the inventory if:
1. It is perfected at the time the debtor gets possession of the inventory and
2. 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 state that the purchase money party has or expects to take a PMSI in inventory of the debtors described by any type.

The notification is effective for deliveries of the same type of collateral for 5 years

Question 16

Secured Party vs Buyer Priority Rules

Answer 16

General Rule: When a buyer buys or leases something with a security interest on it, the security interest stays on the item and the secured party wins

Exception: A buyer in the ordinary course of business takes free of a nonpossessory security interest in the goods created by the buyers sellers, even though the security interest is perfected and even though the buyer knows of the security interest.

A buyer in ordinary course is one who buys goods:
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

Consumer-To-Consumer Sales: In the case of consumer goods, a buyer takes free of a security interest, even though its perfected, if the buyer buys:
1. Without knowledge of the security interest
2. For value
3. For the buyers own personal, family, or household purposes; and
4. Before a financing statement covering the goods has been filed.
NOTE: The goods must be consumer goods in the hands of both the buyer and the seller

Question 17

Secured Party vs Judgement Lienholder

Answer 17

Judgement Lienholder: A creditor who won a judgment in court

Secured Party v Judgement Lienholder: A judgement lienholder prevails over the holder of a security interest in collateral if the lien creditor becomes such before the security interest is perfected

PMSI Exception: 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 loan arising between the security attaches and the time of filing

Question 18

Default: Self-Help

Answer 18

General Rule: After default, the secured party is entitled to take possession of the collateral without judicial process, if this can be done without a breach of the peace

Breach of the Peace: Any conduct by the secured party that has the potential to lead to violence is a breach of the peace.
- General, physical presence by the debtor plus a verbal objection by the debtor over repossession is enough to create a breach of the peace
- Breaking and entering of a residence is probably a breach of the peace
- Simple trespass however is not a breach of the peace

May also self help by making equipment unusable(taking keys)

You need consent to enter home at the time of entry, prior consent in the security agreement is not enough
Picking lock into commercial residence a breach of the peace unless they relock doors on way out

Question 19

Default: Resale of Collateral

Answer 19

The secured party may sell or dispose of the collateral in a commercially reasonable way.

The security interest is discharged when this occurs, but the debtor is liable for any deficiency. The obligation owed to the disposing secured party and any junior liens are paid off. (Senior liens
remain on the collateral.)

Liability for Actual Damages: A secured party is liable for the actual damages caused by failure to follow any of the Codes rules.

Minimum Recovery For Consumer Goods: If the collateral is consumer goods and the secured party violates the Codes rules on default(not commercially reasonable), the debtor is entitled to a minimum of 10% of the cash price of the goods plus an amount equal to all the interest charged to be paid over the life of the loan

Loss of deficiency judgment: If the secured party fails to follow the Codes rules on default, there is a rebuttable presumption that the sale proceeds equal the amount of the debt. (Not commercially reasonable=no deficiency judgment)

Question 20

Debtors Right to Redeem

Answer 20

Any time before the secured party has resold the collateral or has entered into a contract for its disposition, the debtor(as well as any surety or other secured party) may redeem the collateral.
To do so the debtor must pay everything owed to the creditor, plus additional reasonable expenses

Question 21

Fixtures

Answer 21

Fixtures: Goods that have become so related to real property that an interest in them arises under real property law

To perfect a security interest, a fixture filing must be made in the office where a mortgage on the real estate would be filed
Requires information from financing statement + description of real property + name of owner

Right on Default: When the security interest in the fixture has priority over all interests in the real property, the holder of the security interest may upon default, remove the fixture from the real property.

Secured Party v Subsequent Real Estate interest: 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

Secured Party v Prior Real Estate Interest: A prior real estate interest that is properly recorded has priority over a security interest that subsequently arises

PMSI Exception: A PMSI take priority over an earlier in time realty interest if its perfected by a fixture filing before the goods become fixtures or within 20 days thereafter

Construction Mortgages Exception: 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

A secured party need not file as to 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
4. Any method of perfection before such goods become fixtures entitles the secured party to priority

Question 22

Accesions

Answer 22

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

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

Priority: As a general rule, the rules for priority previously discusses(first to file or perfect, special PMSI rule) apply to ascensions

Special Priority Rule- Vehicles: A security interest in an accession is subordinate to a security interest in a whole(car) which is perfected by compliance with the requirements of a certificate of title statue

Removal and Reimbursement: 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 cause of repair of any physical injury to the whole or the other goods