Secured Transactions

Question 1

Scope of Article 9

What does Article 9 govern?

Answer 1

Article 9 governs security interests and applies to any transaction that creates a security interest in personal property or fixtures by contract. It also applies to other transactions such as agricultural liens, consignments, and sales of accounts or promissory notes. Secured transactions must be consensual, and involve personal property or fixtures that are not real estate.

Question 2

Scope of Article 9

Does Article 9 apply to a sale of rights payment?

Answer 2

Yes, Article 9 applies to certain sale of rights payment including (1) chattel papers, (2) promissory notes, (3) accounts, and (4) payment intangibles.

Question 3

Scope of Article 9

Is payment by an account allowed?

Answer 3

Yes, Article 9 covers the right to be repaid money by a third party that the debtor then uses as a collateral for a loan. An account includes the rights to payment for property sold, leased, licensed, or for services rendered.

Question 4

Scope of Article 9

Lease of Goods Issue

Answer 4

A true lease of goods does not create a security interest. But, a transaction that appears to be in the form of a lease may actually be a secured transaction disguised as a lease. The transaction may be categorized as a secured transaction if the “lessee” must pay consideration to the “lessor” for the right to possess and use the goods for the term of the lease, the payment obligation cannot be terminated 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 for remaining life of the goods, or at the end of the lease, the lessee has an option to purchase the goods renew the lease for no or nominal consideration.

Question 5

Types of Collateral

Consumer Goods…

Answer 5

are goods used or bought for primarily personal use, such as automobiles or jewelry.

Question 6

Types of Collateral

Equiptment…

Answer 6

are goods meant for use by a business that are not normally sold by the business, like chairs at a restraunt.

Question 7

Types of Collateral

Inventory…

Answer 7

are goods held for sale or lease by a business, but also are materials used or consumed in a business in a short period of time.

Think cars at a dealership
OR
Water bottles at a dealership.

Question 8

Types of Collateral

Farm Products…

Answer 8

are goods unique to farming operations.

Include crops, livestock, feed, and agriculture products.

Question 9

Types of Collateral

Fixtures…

Answer 9

is property that is affixed to buildings so that they are sometimes considered real property

Think brick oven in pizza kitchen

Question 10

Types of Collateral

Accounts…

Answer 10

typically unsecured obligations owed to the person for goods or services rendered

Include right to payment for good sold, property licensed, or services rendered.

Question 11

Types of Collateral

Chattel Paper…

Answer 11

references obligations that facilitate smaller transactions. (1) Monetary obligation (someone made a promise to repay the loan and security interest is in something else), and (2) a security interest or a lease.

Question 12

Types of Collateral

Deposit Accounts

Answer 12

are property such as bank savings or checking accounts.

Question 13

Types of Collateral

Investment Property…

Answer 13

includes stocks, bonds, and similar types of property traded on a securities exchange.

Question 14

Types of Collateral

Instrument

Answer 14

are pieces of paper representing the right to be paid money

Promisorry notes, checks, etc.

Question 15

Attachment

Generally

Answer 15

For a secured party to have a calid interest in the collateral, it must first attach. Upon attachment the security interest becomes enforceable against the debtor’s collatereal.

Question 16

Attachement

Requirements

Answer 16

Attachment requires (1) value given by the secured party, that the debtor has rights in the collateral (some property interest), and (3) the parties enter into a security agreement.

Question 17

Attachment

Ways to show there was a security agreement

Answer 17

1. Creditor takes possession of the collateral (tangible)
2. There is an authenticated security agreement
3. Creditor takes control of the collateral (intangible)

Question 18

Attachment

Authenticated Security Agreement

Answer 18

Requires (1) a record (can be written or esi) showing intent to create a security interest, (2) record must be signed by the debtor (any symbol made with present intent to authenticate), (3) a description of the collateral that reasonably identifies it (can be general or specific), and (4) no supergeneric descriptions (all assets)

Question 19

Attachement

After Acquired Interest

Answer 19

A debtor may give a security interest in future rights. This interest is created by an “after-acquired property clause” in the security agreement. Security interest for after-acquired property attaches as soon as the debtor obtains interest in that property.

Without an AAPC, the SI only attaches to the collateral that existed at the time the security agreement was executed.

Question 20

Attachement

Exception to the explicit after-acquired property clause requirement

Answer 20

Even without an AAPC, a SI will attach automatically to collateral of a type that is reapidly depleted and replenished, such as accounts, inventory, and identiafiable proceeds of collateral.

Question 21

Attachment

Future Advances

Answer 21

A future advance clause anticipates that the secured party may extend additional credit to the debtor after the first loan. If that occurs, the security interest relates back to the original transaction.

Question 22

Attachment

Accessions

Answer 22

Goods that are physically united with other goods so that the identity of the original good is not lost. If collateral becomes an accession a security interest in that collateral is not lost, it continues with the accession.

Question 23

Attachment

Commingled Cash Proceeds

Answer 23

When cash becomes physically united with other cash to the point that the identifiable proceeds identity is lost. The courts will implement the lowest intermediate balance rule. Under that rule, look at the bank account starting at the time the proceeds are deposuted and ending at the time you are applying the rule. The lowest balance during that time peropd is the creditor’s identifiable proceeds (amount can not exceed the cash proceeds originally deposited.)

Question 24

Perfection

Generally,

Answer 24

for the secured party to have superior rights over third parties that have security interests in the same collateral the party must perfect its security interest. The party must have attached and complied with one of the following methods for perfection: (1) filing a financing statement, (2) possessing the collateral, (3) controlling the collateral, or (4) perfecting automatically.

Question 25

Perfection

Filing

Answer 25

The filing of a financing statement or the authenticated security agreement with the state is the primary method of perfection. The filing MUST be authorized by the debtor in writing. (debtor automatically authorizes the financing statment if the debtor authenticates the filing statement or the security agreement covering the same collateral.)

Question 26

Perfection

Financing Statement

Answer 26

The financing statement must contain:
1. the debtor’s name and address (if the debtor is a registered org, the financing statement must provide the official registered name)
2. The secured party’s name and address; AND
3. A description of the collateral covered by the financing statement. (may contain supergeneric description)

Question 27

Perfection

Taking Possession

Answer 27

A secured party may perfect a security interest in most types of collateral by taking mere possession of such items.

Can’t for general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, certificate of title goods, and accounts

Question 28

Perfection

Automatic Perfection

Answer 28

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

Question 29

Perfection

What came first?

Answer 29

Typically, a security interest attaches and is then perfected. But if necessary steps for perfection can be taken prior to attachment, then the security interest is perfected upon attachment.

Question 30

Perfection

Errors in the Financing Statement

Answer 30

Generally, a minor error in a financing statement will not affect perfection unless it makes the financing statement seriously misleading. A financing statement is not seriously misleading if it would be found in a filing office search under the debtors correct name.

Errors in the debtor’s name (spelling) are almost always seriously misleading.
Errors by the filing office to correctly index a financing statement does not impact its effectiveness.

Question 31

Perfection

Under the same office rule…

Answer 31

a perfected security interest in proceeds may continue indefitely when: (1) filed financing statement covers the collateral, (2) the proceeds are collateral in which a security interest may be perfected by filing in the same office as the financing statement, and (3) the proceeds are not acquired with cash proceeds.

Question 32

Perfection

Length of Filing Statements

Answer 32

A Filing Statement lasts for 5 years unless filing of a continuation within 6 months before the financing statement lapses.