Secured Transactions

Question 1

Requirements for Attachment

Answer 1

1) 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; and

2) Value must be given by the secured party; and

3) The debtor must have rights in the collateral

Question 2

Form of the Authenticated Security Agreement

Answer 2

A) Evidenced by a Record - The agreement must be evidenced by a record (that is, a written or electronically stored information) and must show an intent to create a security interest.

B) Agreement Must Be Authenticated - The agreement must be authenticated by the debtor. This usually means that it is signed by the debtor. Any symbol, including an electronic symbol, that is made with the presnent intent to authenticate the record will work.

C) Description of Collateral - The agreement must contain an description of the collateral. The description must reasonably identify the collateral. Collateral can be described broadly by category or type, or specifially. NO SUPERGENERIC DESCRIPTIONS.

Question 3

Lowest Intermediate Balance Rule

Answer 3

In the case of commingles cash proceeds (for example, in a bank account), the identificable proceeds can be traced using the lowest intermediate balance rule.

Under that rule, you will look at the bank account starting at the time the proceeds are deposited and ending at the time you are applying the rule. The lowest balance during that time period is the secured party’s identifiable proceeds (but the amount cannot exceed the value of the cash proceeds originally deposited).

Question 4

Methods of Perfection

Answer 4

1) Filing
2) Taking possession of the collateral
3) Control
4) Automatic perfection
5) Temporary perfection

Question 5

Automatic Perfection

Answer 5

A PMSI in CONSUMER GOODS is perfected as soon as it attaches.

Question 6

Perfection by Control

Answer 6

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

Note that security interests in NONCONSUMER deposit accounts can ONLY be perfected by control (unless they’re perfected as proceeds of collateral.

Question 7

Methods of Obtaining Control

Answer 7

1) The bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account.

2) Putting the deposit account in the secured party’s name.

3) Agreeing in an authenticaled record (control agreement) 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 8

Perfection for Motor Vehicles

Answer 8

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.

Question 9

Requirements of a Filing Statement

Answer 9

1) The debtor’s name and mailing address,
2) The secured party’s name and mailing address, and
3) A description of the collateral covered by the financing statement (may contain a supergeneric description of the collateral).

Question 10

Debtor Authorization of the Filing Statement

Answer 10

For a financing statement to be effective, the debtor must authorize the filing in any signed writing either before or after it is filed.

In addition, the debtor automatically authorizes the financing statement if the debtor authenticates the financing statement or authenticates a security agreement covering the same collateral as the financing statement.

Question 11

Perfection for Proceeds

Answer 11

If a secured party has a perfefcted 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 20 days if:
1) The proceeds are identifiable cash proceeds,
2) 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 procees were not purchased with cash proceeds of the collateral, or
3) The security interest in the proceeds is perfected within the 20-day period.

Question 12

PMSI in Goods Other than Inventory and Livestock

Answer 12

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 the debtor recevies possession of the goods.

Question 13

PMSI in Inventory

Answer 13

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:
>It is perfected at the time the debtor gets possession of the inventory, and
>Any secured party who had filed their security interests 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 14

Conflicting PMSIs

Answer 14

If more than one party has PMSI superpriority in collateral, the following rules apply:
>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 in the same collateral as a lender (a financer-financed PMSI)
>Otherwise, the first secured party to file or perfect prevails

Question 15

Understanding Secured Transactions

Answer 15

Secured transactions involve transactions based on credit and are governed by UCC Art. 9. How it generally works:
>One party (debtor) receives something from another party (creditor or secured party) without paying immediately
>To ensure debtor will pay eventually, debtor gives creditor rights to a piece of debtor’s property as collateral (i.e., a security interest)
>Security interest (“SI”) = right given to creditor in debtor’s property
»Collateral = property in which creditor obtains rights
»Right allows creditor to take or sell property if debtor fails to fulfill the credit obligation
»Arrangement memorialized in a security agreement

Attaching & perfecting security interests:
>Attachment - process of creating a security interest
»Effect - once a SI attaches, creditor has a right to take the collateral if debtor defaults
>Perfection - process by which creditor secures her rights in the collateral as it relates to third parties
»Relevant where third parties also have an interest in the same piece of collateral
»Creditor must perfect her SI to have priority in the collateral over third parties

Question 16

Identifying & Classifying Collateral

Answer 16

Classifying the type of collateral involved in a transaction is important in determining how it’s secured and perfected; the main categories are as follows:

Tangible goods - four types classified based on how the debtor is using them:
1) Farming products - items used/produced in farming
2) Consumer goods - items used or bought for personal, household purposes
3) Inventory - goods held for sale or lease
4) Equipment - catchall for tangible items that do not fit above

Intangibles - most common types:
1) Instruments - writings representing the right to be paid money (e.g., promissory notes, checks, etc.)
2) Documents - writings representing the right to receive goods (e.g., bills of lading, receipts, etc.)
3) Chattel paper - record evidencing an obligation and SI in goods or a lease of goods (e.g., a promissory note and security agreement)
4) Accounts - a right to payment of a monetary obligation (not evidenced by an instrument or chattel paper) for property sold or services rendered
»E.g., money owed to a dentist after seeing a patient
»Does not include deposit accounts, investment property, or commercial tort claims
5) Deposit accounts - bank accounts
6) General intangibles - e.g., patent rights, software

Question 17

Creation & Attachment of Security Interests

Answer 17

SIs are created by contract (security agreement), and security agreements are typically in writing, signed by the debtor and include a description of the collateral
>Once a SI attaches, the creditor is secured, meaning creditor has a right to take the collateral if debtor defaults

Requirements for attachement - three requirements for a SI to attach:
1) Valid security agreement - agreement memorializing SI
>May be evidenced by (1) authenticated security agreement or (2) an oral security agreement in conjunction with creditor’s possession or control of collateral
>Authenticated security agreement - record authenticated by debtor that describes collateral
»Signing, initialing, etc. is adequate proof of authentication
»Agreement must reasonably identify collateral
2) Value - secured party (i.e., creditor) must give value to create a SI
>E.g., creditor laons debtor money or delivers equipment in exchange for SI
>Almost any consideration is sufficient
3) Rights in collateral - debtor must have rights in property he offers as collateral
>Ownership or possessory interest is usually sufficient

Question 18

Security Agreement Provisions (After-Acquired Property, Future Advances, & Specification Clauses)

Answer 18

UCC Art. 9 generally gives discretion to parties to create their own terms regarding security agreements. Below are common issues:

After-acquired property clauses - extends the SI to property acquired by the debtor after signing the security agreement

Future advances - security agreements may contemplate future loans/advances from creditor to debtor based on debtor’s present collateral or collateral to be acquired in the future
>In such cases, a new security agreement is not required

Specification clauses - parties may includes clauses specifying terms and/or creating provisions for potential events
>E.g., parties may define what consitututes a default, may provide for acceleration of payments upon the happening of a certain event (e.g., one missed payment), etc.

Question 19

Perfection of Security Interests

Answer 19

A single piece of the debtor’s property may serve as collateral for multiple creditors who all have their own security interest; perfection is relevant to priority of the interests
>I.e., once a SI is attached it is enforceable against the debtor, but it must typically be perfected to give its holder (creditor) superior priority over the other potential SIs to which collateral may be attached.

Significance of perfection - a perfected SI has maximum priority over collateral as compared to other unperfected SIs in that collateral

Attachment as a prerequisite - attachment is a prerequisite for perfection

Methods of perfection
1) Filing
2) Taking possession
3) Automatic perfection (PMSI)
4) Control

Question 20

Methods of Perfecting Security Interests

Answer 20

There are three primary ways a SI can be perfected:
1) Filing financing statement - usually filed with state office
>Requirements - financing statement must:
»i. Identify debtor - name must match publicly filed articles
»ii. Identify secured party/creditor
»iii. Contain an adequate description of collateral
>Authorization for filing must be obtained from debtor (usually a signed security agreement itself satisfies the requirement)
2) Taking possession (“pledged collateral”) - secured party may perfect a SI in many types of collateral simply by taking possession
>E.g., goods (pawnshop), negotiable documents, instruments
>Certain intangible collateral cannot be perfected by possession (e.g., accounts, electronic chattel paper, general intangibles)
3) Automatic perfection & PMSIs - in some transactions, once collateral is attached, perfection occurs automatically
>PMSI = purchase money security interest

Motor vehicles - SIs in vehicles are perfected by notation on the vehicle’s certificate of title

Question 21

Automatic Perfection & PMSIs

Answer 21

In some transacctions, SIs are perfected automatically oncce attached; automatic perfection occurs with the following:

PMSI in consumer goods - PMSI arises where a creditor sells goods on credit to debtor and/or advances funds to debtor to buy goods, reserving a SI in the goods themselves
>Consumer goods only - automatic perfection only occurs for PMSIs in consumer goods; a PMSI in inventory or equipment can be perfected by filing or possession
>Limitation - motor vehicles and fixtures:
»Motor vehicles - notation on vehicle title is required for perfection
»Fixture filings - consumer goods that are to become fixtures require a fixture filing to obtain priority over an interest in the real property to which fixture is affixed

Question 22

Temporary Perfection of Proceeds

Answer 22

SIs in proceeds from original collateral is perfected automatically for 20 days from the debtor’s receipt of the proceeds, but may become unperfected on the 21st day
>Arises where debtor sells property used as collateral; Art. 9 gives creditor an automatic SI in identifiable proceeds from the sale of collateral

Identifiable proceeds - SI in proceeds from collateral is automatically perfected for 20 days from debtor’s receipt of goods

Continuing perfection beyond 20 days - a perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds unless:
a) a filed financing statement cover the original collateral;
b) the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and
c) the proceeds are not acquired with cash proceeds

Question 23

Priority of Security Interests

Answer 23

Almost any Secured Transaction MEE question will involve issues of priority; note:
>Type of collateral involved
>Type of parties invovled

Priority between parties
>Secured creditor vs. unsecured creditor - SI prevails
»Note - beware of scendariors where someone signed a security agreement but have not given value or has no rights in the collateral
>Perfected vs. unperfected SI - perfected SI prevails
»Applies even if perfected party takes interest with knowledge of earlier unperfected interest
>Perfected vs. perfected SI - first to file or perfect prevails
»When there are conflicting perfected SIs, priority goes to party that first filed or perfected (usually will be first to file)
»Where collateral is not subject to filing requirements (or cannot be filed), first to perfect obtains priority
»Knowledge of prior unperfected SI will not prevent a prospective secured party from filing first to obtain priority

Question 24

Priority in PMSIs

Answer 24

PMSIs are superpriorities, meaning they are superior to prior perfected SIs in the same goods, subject to the below conditions

PMSI in inventory - has priority over other SIs in the inventory or certain proceeds (instruments, chattel paper, identifiable cash proceeds) if:
1) PMSI is perfected when debtor takes possession of inventory; and
2) Other parties who filed their SIs in inventory receive authenticated notification of the PMSI before debtor takes possession of inventory
>Notification must state that PMSI will be taken in debtor’s inventory and describe the kind and type of inventory

PMSI in goods other than inventory and livestock - has priority over other SIs in the same goods and their proceeds if PMSI is perfected before or within 20 days after debtor receives possession of the collateral
>No requirement that secured party notify other SI holders

Conflicting PMSIs - where there are multiple PMSIs in the same collateral, priority goes to:
a) Secured party who has a PMSI as the seller of the collateral (as opposed to the lender), or
b) Otherwise, first secured party to file or perfect

Question 25

Priority in Proceeds

Answer 25

Perfected SIs in proceeds generally have the same date of priority as the SI in the original collateral that generated the proceeds

Question 26

Priority of Buyers vs. Third-Party Creditors

Answer 26

Where a buyer purchasese goods without knowledge that the sale of goods violates the rights of a secured creditor, buyer can take free of SI
>Two situations where this arises - buyers vs. unperfected secured party and buyers in the ordinary course of business (“BIOC”) vs. a perfected secured party

Buyer vs. unperfected secured party - buyer iwll prevail if, before collateral is perfected, he:
1) Gives value and receives delivery; and
2) Has no knowledge of the SI

Buyer vs. perfected secured party - generally, perfected SI prevails
>BIOC exception - buyer prevails over nonpossessory perfected SI if:
»1) Buyer has no knowledge that the sale violates terms of seller’s security agreement; and
»2) Buyer is a BIOC (i.e., buyer is one who buys in the ordinary course of business from seller, who is in the business of selling goods of that kind)
>PMSI in consumer goods - where buyer purchases consumer goods subject to a PMSI and sells the goods to another consumer, second buyer takes free fo the SI if he buys:
»1) Without knowledge of the SI;
»2) For value; and
»3) Before financing statement covering the goods has been filed

Question 27

Secured Parties vs. Judicial Lien Creditors

Answer 27

Judicial lien creditors (“JLCs”) are those who acquire a lien on collateral through judicial attachment, levy, etc.

Perfected secured party vs. JLC - prior perfected SI prevails
>I.e., JLC prevails only if they become JLCs before a secured party files or perfects
>Future advances - if secured party makes future advances to debtor, secured party has priority over future advances if:
»a) Future advance was made before, or within 45 days, after lien arose, or
»b) Future advance was made without knowledge of the lien

Unperfected secured party vs. JLC - JLC prevails
>PMSI grace period exception - secured party who attaches a PMSI in collateral before JLC acquires an interest in collateral has priority if it files within 20 days after debtor receives collateral

Question 28

Default & Right to Repossess or Collect

Answer 28

Upon default, a secured party may take possession of collateral without judicial process or collect on non-goods via authenticated notification
>Note - default is defined in security agreement; not defined by Art. 9

Reclaiming possession - reclaiming possession through self-help is allowed as long as no breach of the peace occurs
>Breach of the peace = repossession made over debtor’s protest
»Violence, threats of violence, breaking and entering, etc. will likely consitute a breach of the peace
»Simple trespass in order to repossess property is permissible
»>E.g., permissible to unlock and hot wire a car used as collateral if the car is sitting in a driveway

Collection rights - when collateral is non-goods, upon default the secured party can notify the person owing the debtor (account debtor)
>Secured party must send authenticated notification to account debtor stating that amount due has been assigned and payment must be made to secured party
»Upon notification, account debtor can only discharge his obligation to payment to secured party

Question 29

Post-Default Disposition of Collateral by Secured Party

Answer 29

Upon default, a secured party can dispose of collateral (i.e., sell, lease, etc.) as long as it is done in a commercially reasonable manner

Notice - notice of sale must be given to debtor in authenticated writing
>Must be sent in a reasonable time before sale/disposition

Effect of sale - sale discharges SI under which sale is being made, as well as any subordinate SIs and liens
>Purchaser of collateral becomes the outright owner in collateral

Surplus or deficiency - where amount collected from sale varies from amount of obligation remaining on the SI
>Surplus - sale generates more than remaining obligation; secured party must pay debtor any surplus
>Deficiency - sale generates less than remaining obligation; debtor is still liable for amount remaining
>Exception - neither party is liable for surplus or deficiency if underlying transaction involves: accounts, chattel paper, payment intangibles, or promissory notes

Right to redeem - until secured party has sold collateral or discharged debt by retaining collateral, debtor or any other secured party may redeem collateral by paying all remaining obligations plus reasonable expenses incurred for repossession

Question 30

Strict Foreclosure

Answer 30

In a strict foreclosure, upon default the foreclosing party may keep collateral (as opposed to selling it) to fully or partially satisfy the debt

Requirements:
1) Debtor must consent to strict foreclosure - two ways to consent:
>a) Debtor agrees to strict foreclosure in authenticated record, or
>b) Debtor fails to object in writing within 20 days after secured party sent notice of strict foreclosure
2) Secured party must send notice of intent to keep collateral
>Authenticated notice must state that collateral being kept is in satisfaction of the debt
>Notice must be sent to debtor and any other secured party who:
»i. Provided notice of a claim to the collateral, and
»ii. Perfected a SI in the collateral by filing a financing statement or making a notation on a title certificate
3) No notified party objects within 20 days - if a notified party objects, collateral must be disposed of through sale

Exceptions:
>Consumer transactions - secured party may not keep collateral in partial satisfaction of debt, then seek deficiency judgment for remaining unpaid balance
>Consumer goods - where debtor has paid at least 60% of a PMSI or loan, secured party must sell collateral within 90 days after repossession unless debtor waives rights requiring sale

Question 31

Liability for Art. 9 Violations

Answer 31

Secured parties are liable for failure to comply with Art. 9

Remedies available:
>Actual damages - debtor can recover damages reasonably calculated to put her in the position she would be in had no violation occurred
>Damages for consumer goods - if collateral involved is consumer goods, debtor is entitiled to at least 10% of the cash price of the goods plus interest charges to be paid over the life of the loan
>Loss of deficiency judgment - secured party may lose right to deficiency judgment
»Non-consumer transactions - rebuttable presumption rule:
»>Value of collateral seized is presumed equal to debt owed unless the secured party proves otherwise
»Consumer transactions - courts take one of these three approaches:
»>1) Follow rebuttable presumption rule;
»>2) Deny secured party deficiency judgment, or
»>3) Allow secured party to recover deficiency minus actual damages debtor can prove

Question 32

Governing Law & Debtor Location

Answer 32

Governing law - law of the state where debtor is located generally governs perfection of a SI and priority
>Individual debtors - location is place of principal residence
>Registered organization debtors - location is state under whose laws it is organized
>Unregistered organization debtors (e.g., partnership) - location is place of business or chief executive office if more than one place of business

Common exceptions:
>Certificate of title - where goods are covered by a certificate of title (e.g., automobile), the state issuing the most recent certificate of title governs perfection
>Agricultural liens - governed by the law of state in which farm product is located
>Possessory SIs - governed by law of state in which collateral is located

Question 33

Interstate Movement of Debtor or Collateral

Answer 33

Issues arise where debtor or collateral moves from one state to another
>SI generally remains temproarily perfected
»Gives secured party time to perfect in new state
»If secured party fails to perfect in new state, interest becomes unperfected and thus loses its time of priority

Relocation of debtor - SI remains perfected for four months
>To remain continuously perfected, secured creditor must file in the new jurisdiction before the four month period expires

Possessory SI - if collateral in one state perfected by a possessory SI in that state is moved to a new state, SI remains perfected as long as it would be perfected by possession under laws of the new state

Cars/vehicles & certificate of title - if moved from one state and the new state issues a title certificate, the original perfected SI lasts as long as it would have if new title had not been issued

New debtor in different state - arises where a new debtor becomes bound by another’s SI in a different state
>If collateral is transferred to a new debtor located in a different state, SI remains perfected until one year after sale of collateral or until perfection in original state lapses, whichever occurs first