Secured Transactions

Question 1

What does Art 9 of UCC govern?

Answer 1

Article 9 of the UCC governs ANY TRANSACTION, REGARDLESS OF ITS FORM THAT CREATES A SECURITY INTEREST, including security interests in personal property, consignments, a sale of accounts, chattel paper, and promissory notes.

Question 2

Attachment

Answer 2

Under Article 9, for a security interest to be enforceable against a debtor, the interest must attach to the collateral.

For attachment, three conditions must be met: (i) value must be given by the secured party;

(ii) the debtor had rights in the collateral; and

(iii) the debtor authenticated a security agreement that describes the collateral (or the secured party has possession or control of the collateral pursuant to a security agreement).

Question 3

Perfection

Answer 3

Perfection of a security interest is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties.

A security interest is perfected upon attachment and compliance with one of the methods of perfection.

Question 4

General rule for buyer of collateral subject to a perfected security interest

Answer 4

A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that interest, unless the secured party has authorized its sale free of the security interest.

subject to exceptions

Question 5

Buyer in the Ordinary Course of Business

Answer 5

BOCB takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

A BOCB is a person who (i) buys goods,

(ii) in the ordinary course of business,

(iii) from a merchant who is in the business of selling goods of that kind,

(iv) in good faith, and

(v) without knowledge that the sale violates the rights of another in the same goods.

Question 6

Does a security interest in collateral attach to proceeds from sale of collateral?

Answer 6

Typically, security interest only attaches to the collateral set out in the SA.

However, a security interest in collateral automatically attaches to identifiable proceeds from collateral.

Proceeds include that which is acquired upon the sale, exchange, or other disposition of collateral.

Question 7

If a SI in the original collateral was perfected, and attached to proceeds, are the proceeds perfected?

Answer 7

Yes, temporarily for 20 days after the proceeds were acquired

Question 8

Same Office Rule

Answer 8

A perfected security interest in proceeds may continue indefinitely when:

(i) the filed financing statement covers the original collateral,

(ii) the proceeds are collateral in which a security interest may be perfected by filing in the same office as the financing statement, and

(iii) the proceeds are not acquired with cash proceeds.

Question 9

Perfected Security Interest v. Judicial Lien Creditor

Answer 9

Perfected SI has priority

Question 10

UnPerfected Security Interest v. Judicial Lien Creditor

Answer 10

Judicial Lien creditor takes priority

Question 11

A purchase money security interest (PMSI)

Answer 11

A special kind of Security Interest. A PMSI arises when a creditor sells goods to a debtor on credit and retains a security interest in those goods, or the creditor advances funds, which are then used to purchase the goods and the creditor reserves a security interest in those goods.

Question 12

Priority of PMSI in inventory

Answer 12

A PMSI in inventory has priority only if: (i) the PMSI is perfected by the time the debtor receives possession of the collateral; and (ii) the purchase-money secured party sends an authenticated notification of the PMSI to the holder of any conflicting security interest before the debtor receives possession of the collateral.

Question 13

Methods of Perfection

Answer 13

Under Article 9, there are four ways by which a secured party can perfect a security interest:

i) Filing of a financing statement;

ii) Possession of the collateral;

iii) Control over the collateral; and

iv) Automatic perfection (either temporary or permanent).

security interest in money may be perfected only by possession.

A deposit account or letter-of-credit rights that are not a supporting obligation may be perfected only by control.

A security interest in accounts may be perfected only by filing

Question 14

Financing Statement (Perfection)

Answer 14

A financing statement (sometimes referred to as a “UCC1”) must contain the following information:

i) The debtor’s name;

ii) The name of the secured party or a representative of the secured party; and

iii) The collateral covered by the financing statement (can be broad statement)

also kinda required but will still be effected w/o:

i) Contain the addresses of both the debtor and the secured party; and

ii) Identify whether the debtor is an individual or organization.

Question 15

Extra Reqs for a financing statement in collateral related to real property

Question 16

Name on Financing Statement

Answer 16

Name on FS must be name on the debtor’s current (i.e., unexpired) driver’s license or state-issued identification card (issued by the state in which the financing agreement will be filed).

If the debtor does not have a driver’s license, the filer must

filer must use either the individual name of the debtor (i.e., the debtor’s current legal name) or the debtor’s surname and first personal name.

Question 17

Errors in the debtors name

Answer 17

Because financing statements are indexed under the name of the debtor, a financing statement that fails to accurately contain the debtor’s name is seriously misleading and therefore not effective to perfect the security interest.

However, when a standard search of the filing office records under the debtor’s correct name would disclose such a financing statement, the erroneous name does not make the financing statement seriously misleading.

Question 18

Debtor’s change of name

Answer 18

the secured party has four months to amend the
financing statement; if not done, collateral acquired by the debtor after the fourmonth period is not covered by the financing statement

Question 19

Where to file financing statement

Answer 19

Generally, for collateral that may be perfected by filing, the financing statement must be filed with the secretary of state (“central filing”) of the state of the debtor’s location.

Question 20

Perfection by control

Answer 20

Perfection by control of the collateral may only be achieved with respect to a security interest in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents. Gaining control for purposes of attachment also suffices for purposes of perfection

Question 21

Automatic Perfection: PMSI in Consumer Goods

Answer 21

Automatically perfected upon attachment; a secured
party does not need to file a financing statement

Indefinite perfection

Question 22

Automatic, But temporary perfection: new value

Answer 22

If new value is given under an authenticated security agreement, a security interest in certificated securities, negotiable documents, or instruments is automatically perfected for 20 days from the time it attaches without filing or the taking of possession.

Question 23

Automatic, But temporary perfection: delivery to debtor

Answer 23

if the collateral is delivered to the debtor for the
purpose of selling or exchanging it, the SI in the collateral remains temporarily
perfected for 20 days

Collateral subject to this rule includes certificated securities, negotiable documents, instruments, and goods in the possession of a bailee and for which a negotiable document has not been issued

negotiable documents = checks, promissory notes, bills of exchange, and money orders.

Question 24

Effect of lapse in perfection

Answer 24

the SI generally ceases to be perfected upon the
expiration of the temporary perfection period

Question 24

Automatic, But temporary perfection: Interstate movement of collateral or debtor

Answer 24

Debtor moves to another state = 4 month grace period for perfection in the new state

If collateral is transferred to a person located in another state who becomes a debtor (i.e., takes the collateral subject to the security interest) = then a perfected security interest generally remains perfected for one year after the transfer

Perfected possessory SI—no effect on perfection when the SI is perfected under
the new state’s laws

Question 25

Temporary Perfection: Proceeds

Answer 25

A security interest in proceeds enjoys temporary perfection and may also be entitled to indefinite automatic perfection. FS does not need to mention the proceeds.

Temporary: If the security interest in the original collateral is perfected, then a security interest in proceeds is temporarily perfected for 20 days from the time it attaches

Question 26

Indefinite Perfection: Proceeds

Answer 26

1. pursuant to financing statement - if the original financing statement is broad
   enough to cover proceeds or the secured party amends the financing statement to
   cover proceeds within 20 days, then the SI in proceeds continues to be perfected
2. cash proceeds - —if the SI in the original collateral is perfected, then the SI in the
   identifiable cash proceeds is perfected indefinitely
3. same office rule - see other card

Question 27

Proceeds: Same office rule

Answer 27

i) A filed financing statement covers the original collateral;

ii) 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

iii) The proceeds are not acquired with cash proceeds

 Limitation—if the original filing ceases to be effective after the 20-day period,
the SI in proceeds also ceases to be automatically perfected

Question 28

Certificate of title statutes

Answer 28

a non-Art. 9 statute controls the manner of
perfection; filing is not sufficient if a statute requires a notation of the SI on the certificate of
title

Question 29

Timing of Perfection

Answer 29

A security interest is perfected upon (i) attachment of that interest and (ii) compliance with one of the methods of perfection.

won’t necessarily happen in this order ^^

Question 30

Priority problems

Answer 30

The determination of priority involves two steps:

i) Identify the status of each claimant; and

ii) Apply the appropriate priority rule.

Question 31

General Unsecured Creditor v. Secured Party

Answer 31

A secured party will always prevail over a general creditor with respect to the debtor’s collateral.

A general creditor is one who has a claim, including a judgment, but who has no lien or security interest with respect to the property in question.

Question 32

Judicial Lien Creditor v. Perfected Security Interest

Answer 32

Perfected SI wins

Question 33

Judicial Lien Creditor v. Unperfected SI

Answer 33

Judicial Lien Creditor wins
–> unless the only reason the SI was unperfected was that the secured party had not yet given value

Question 34

Statutory Lien Creditor

Answer 34

Has a possessory lien on the collateral by statute or common-law rule (i.e., a nonconsensual lien)

Result: a possessory lien has priority over any SI if the lien secures payment for
goods or services furnished in the ordinary course of business (e.g., mechanic’s lien)
unless a statute provides different priority rule

Question 35

After-Acquired Property

Answer 35

Ater-acquired property clauses may be included in security agreements and are
generally enforceable allowing the after-acquired property to be secured in favor of the
secured party

BUT –>does not apply to consumer goods unless the debtor acquires rights in
them within 10 days after the secured party gives value).

Question 36

Accessions

Answer 36

An accession is collateral that does not lose its identiyty when physically united with other goods (.e.g. jet engine installed in a jet). A SI may be created in the property that does not lose its identiy and continues in the accession collateral

Question 37

Commingled Goods

Answer 37

Commingled goods is collateral that loses its identity when physically united with other goods. e.g. 100 pounds of flour loses its identity when physically united with other ingredients to form cake. If collateral becomes commingled with other goods, a SI attaches to the product that results.

Question 38

Perfection

Answer 38

Attachment + compliance with one of the methods of perfection: Filing, possession, control, automatic.

Question 39

Filing Statement - Reqs for perfection

Answer 39

a) The debtor’s name;

    (i) If the debtor is a registered organization, the financing statement must provide the official registered name of the organization. not trade name

(b) The secured party’s name;

(c) An adequate description of the collateral; AND

(d) The filing fee.

Minor errors will not invalidate the financing
statement unless the error makes it seriously misleading

Question 40

Perfected v. Perfected

Answer 40

First to file FS
OR
Perfect gets priority

Question 41

Unperfected v. Unperfected

Answer 41

If neither interest is perfected, then the “first in time, first in right” rule applies with the critical time being the time of attachment.

Question 42

General rule RE transferees of the collateral

Transferee versus secured party with a security interest

Answer 42

If the collateral is transferred and transferee of the collateral is not a buyer, the security interest generally continues in the collateral unless the secured party authorized the transfer free of the security interest.

Question 43

Buyer v. secured party with an unperfected security interest

Answer 43

A buyer, other than a secured party, of collateral that is goods, tangible chattel paper, tangible documents or a security certificate takes free of an unperfected security interest in the same collateral if the buyer:

i) Gives value; and

ii) Receives delivery of the collateral;

iii) Without knowledge of the existing security interest.

if intangible, tey dont need to receive delivery

Question 44

Buyer v. secured party with a perfected security interest

Answer 44

A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that interest, unless the secured party has authorized its sale free of the security interest.

But, BOCB…

Question 45

BOCB

Answer 45

BOCB takes free of security interest, even if SI is perfect and buyer knows of it existence

i) Buys goods (other than farm products);

ii) In the ordinary course;

iii) From a seller who is in the business of selling goods of that kind;

iv) In good faith; and

v) Without actual knowledge that the sale violates the rights of another in the same goods.

UCC §§ 1-201(9), 9-320. A buyer does not receive BOCB status if the merchant is a pawnbroker.

Question 46

Shelter principle: What if BOCB sells to second buyer?

Answer 46

If a buyer obtains goods under the BOCB exception free of the security interest in the goods created by the buyer’s seller, the buyer may, in turn, sell the goods to a second buyer who also takes the goods free of that security interest. UCC § 2-403(1). The second buyer is not required to qualify as a BOCB.

However, if a buyer obtains goods under the BOCB exception and then GIVES (not sells) the goods to a third party, the third party does not take the goods free of a security interest created by the buyer’s seller.

Question 47

Consumer-Buyer / Garage Sale Rule

Answer 47

A consumer buyer of consumer goods takes free of a SI, even if perfected, unless prior to the purchase, the secured party filed a financing statement cover the goods.

Consumer buyer:

1. Buys consumer goods for valie
2. For his own personal, family or household use
3. From a consumer seller and
4. Without knowledge of the security interest

If this is all met, the CB take free of SI, however, secured party retains security interest in proceeds of sale!

Question 48

Consumer Buyer of goods that are subject to PMSI in consumer goods

Answer 48

If a PMSI in consumer goods is not filed, and the consumer buyer does not know of the PMSI, then he will take free of the security interest. If the party holding the PMSI in consumer goods does in fact file, then his security interest will be good even against a consumer buyer.

Question 49

PMSI Priority rules

Answer 49

A PMSI can achieve priority over a prior non-PMSI security interest.

Depends on what type of PMSI

Question 50

PMSI In Goods Other than Inventory or Livestock

Answer 50

A PMSI in goods other than inventory or livestock prevails over all other security interests in the collateral, even if they were previously perfected, if the pmsi security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.

Question 51

PMSI in Inventory and Livestock

Answer 51

A PMSI in inventory collateral has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time the debtor receives
possession of the collateral and authenticated notice is provided to prior perfected (by filing) creditors.

However, an unperfected PMSI in
inventory will NOT have priority over a perfected security interest in the same collateral.

Question 52

PMSI v. PMSI

Answer 52

The first-to-file-or-perfect rule generally governs priority.

But there are some exceptions

Question 53

Rights of Secured Party on Default

Answer 53

After default, a secured party MAY:

1) take possession of the collateral OR
2. render equipment unusable
and dispose of collateral on a debtor’s premises.

The secured party may proceed pursuant to:
a) judicial process (replevin); OR
b) without judicial process (if it’s without a breach
of the peace).

Question 54

Lender PMSI v. Seller PMSI

Answer 54

the PMSI taken by the seller has priority over the PMSI taken by the lender.

Question 55

During RePo, what is a breach of the peace?

Answer 55

Article 9
does not define what constitutes breach of peace. Up to court.

however, breaking into
locked property will generally suffice.
Criminal acts

Some case law suggests that ANY opposition to
the entry or seizure, however slight, normally results in a breach of the peace.

Question 56

Right to Dispose of Collateral

Answer 56

Upon default, a secured party may sell, lease, license, or otherwise dispose of any or all
of the collateral in its present condition or in any commercially reasonable manner.

Question 57

Sale (nonjudicial)

Answer 57

Notice – Secured party MUST send an authenticated notification of the disposition to the debtor and any secondary obligor such that these parties can adequately protect their interests.

notice must include time and place, and in a timely manner/reasonable time

Question 58

What is a commercially reasonable manner?

Answer 58

1. on a recgonized market
2. at a price current in any recognized market

3 Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

Question 59

Strict foreclosure

Answer 59

A secured party may purchase the collateral at a public sale, but she cannot do so at a private sale unless the collateral is of a kind that is customarily sold on a recognized market (e.g., the New York Stock Exchange) or the subject of widely distributed standard price quotations.

Question 60

Disposition at Foreclosure Sale

Answer 60

Disposition at Foreclosure Sale – The sale:
1) Transfers all of the debtor’s rights in the
collateral to a transferee for value;
2) Discharges the security interest; AND
3) Discharges any subordinate security interests
(senior interests are not discharged).
*A transferee that acts in good faith takes free of the rights of the debtor, even if the secured party failed to comply with the rules governing dispositions.

Question 61

Right to Collect Directly from Debtor

Answer 61

Upon default, a secured party has the right to collect directly from the account debtor
(the person who owes the debtor on the account). To exercise this right, the secured
party must send an authenticated notification to the account debtor informing the
account debtor that the amount due has been assigned and that the payment is to be
made to the assignee. Upon receipt of proper notification, the account debtor may
discharge its payment obligation ONLY by payment to the assignee (the secured party).

Question 62

Debtor’s Remedies for SP’s Failure to Comply with applicable statute

Answer 62

Actual Damages
Statutory Damages

OR

Restrain disposition of the collateral

Question 63

Actual Damages for SP’s failure to comply

Answer 63

Actual damages are those reasonably calculated to put an eligible
claimant in the position that it would have occupied had no violation
occurred.

Question 64

Statutory damages for SP’s failure to conply

Answer 64

(a) If the collateral involved is consumer goods, the amount of minimum
statutory damages must be at least: the credit loan interest amount +
10% of the loan’s principal amount.
(b) $500 in statutory damages is also recoverable for each violation of
certain Article 9 provisions.

Question 65

Right of Redemption

Answer 65

Generally, a debtor or any secondary obligor has the right to redeem (i.e., reclaim)
collateral until the secured party has disposed of it or entered into a contract for its
disposition.

To redeem collateral, the debtor must:

(1) Fulfill all obligations secured by the collateral;

AND

(2) Pay the reasonable expenses and attorney’s fees.

Question 66

Surplus after disposition of collateral v. Deficiency

Answer 66

If theres a surplus, the secured party must pay the debtor for any surplus.

If LESS than the underlying obligation, the obligor is liable for any
deficiency.

However, neither side is liable for any surplus or deficiency if the underlying
transaction involves the sale of accounts, chattel paper, payment intangibles, or
promissory notes

Question 67

Is deficiency judgment limited if SP failed to comply with UCC art 9???

Answer 67

A deficiency judgment may be limited when a secured party fails to comply with UCC Art. 9.

Question 68

Deficiency for consumer goods after SP violated art. 9

Answer 68

Art 9 does not explicitly address.

Different jurisdictions have
adopted the following two rules.

Some States→Absolute Bar Rule – bars collecting any deficiency.

− Other States→Rebuttable Presumption Rule
– presumed that the proceeds equal the total debt owed (unless the secured party proves otherwise).

Question 69

Deficiency for non-consumer goods after SP violated art. 9

Answer 69

For non-consumer goods transactions, Article 9 expressly applies the
rebuttable presumption rule.

– presumed that the proceeds equal the total debt owed (unless the secured party proves otherwise).

to