secured transactions

Question 1

three steps for a security interest

Answer 1

1. agreement to create a security interest. (based in contract law)
2. attachment of the security interest. secured party give value, debtor has rights in the collateral, and there is an authenticated agreement or possession.
3. perfection of interest. establishes creditors priority with respect to other creditors

Question 2

Article 9 application

Answer 2

Applies to all security interests in:
1. personal property
2. fixtures by contract
3. lease agreements that are not true leases (a sale of goods whereby seller retains as ecurity interest to secure the debtors obligation)
4. promissory notes/accounts receivable

seller usually does not file a financing statement or otherwise perfect their interest on the bar exam.

Question 3

What are good, and what are the four kinds of goods?

Answer 3

Good are all things that are movable when a security interest attaches
1. consumer goods
2. inventory
3. equipment
4. farm products

Question 4

What are consumer goods?

Answer 4

Goods that used or bought for use primarly for personal, family, or household purposes.
ex. doctor purchases van to drive his kids to soccer practice

Question 5

what is inventory goods?

Answer 5

Goods other than farm products that are held by a person for sael or lease or to be furnished under a contract for service, or raw materials, work in process, or materials used or consumed in a business.
ex. seller acquires used violins to later resell them, they are considered inventory. same with any wood used in repairs

Question 6

what is farm products?

Answer 6

crops, livestock (born or unborn), or supplies produced in a farming operation, or products of crops or livestock in their unmanufactured state that are in possession of a debtor who is engage in farm work. does not include timber.

Question 7

what are equipment goods?

Answer 7

goods other than inventory, farm products, or consumer goods (such as machines used in business). ex. a machine that a shope uses to shape violins so it can later resell them is equipment.

Question 8

What are the three tested semi-intangible and intangible collateral (ie not goods)?

Answer 8

1. chattel paper - document that evidenecs a monetary obligation and a security interest (eg. a written lease for a car that evidences the right ot monthly payment).
2. account - a right to payment of a monetary obligation that is not chattel paper or anything you can touch.
3. instruments. evidence a right to payment (ex. a negotaible instrument, like a check)
4. deposit account

Question 9

What are the three requiements of attachment?

Answer 9

1. value must be given by the secured party to the debtor (eg a loan)
2. debtor has rights in the collateral (eg. he owns it or is authorized to ues it as collateral, cant use someone elses property)
3. binding security agreement. which requires:
   a. authentication - signed writing unless secured party is in possession.
   b. intent to create a security agreement. it is voluntary, (not a lien), and does not need the words “security interest”
   c. description - reasonably identifies the collateral in which a security interest is being claimed and is authenticated by borrower

security agreement can cover after-acquired property.

Question 10

What needs to happen before you perfect a security interest?

Answer 10

A. attachment has occured.
B. collateral is classified.
C. Determine whether you need to perfect under Article 9 or some other method.

Question 11

What are the four methods of perfection?

Answer 11

A. Filing a financing statement.
B. automatic.
C. possession.
D. Control.

Question 12

What is perfection by filing?

Answer 12

Perfection by filing is allowed for virtually any type of collateral except a deposit account or in money.
Filed with the SoS where the debtor is located. (if debtor moves or changes names, need to refile w/n 4 months)
Contains:
A. name of the debtor
B. Description of collateral (could be “all assets”)
C. Secured parties name.

First to file or perfect has priority. as you can pre-file (interest only attaches once you file).
If state has certificate of title statue, need to comply with that as well.

Question 13

What is automatic perfection?

Answer 13

A purchase money security interest in consumer goods automatically perfects.

Question 14

What is perfection by possession?

Answer 14

it provides notice to anyone else who wants to use the collateral as security (debtor does not have it in its possession, so the secured party should know that there might be other parties interested in collateral).

It must serve as method of protection for money, not general intangibles, accounts, chattel paper, etc.

it may serve as a method for tangible negotiable documents, goods, instruments, money, or tangible chattel paper.

Lasts only as long as posession lasts.

Question 15

What is perfection by control?

Answer 15

Investment property, deposit accounts, electronic chattel paper may be perfected by this. For deposit accounts, it must be perfected by control.

Question 16

What is priority for security interests?

Answer 16

When two secured parties have security interest in same collateral, the first to file or perfect has priority. if no one has perfect, then the first to attach has priority.

Question 17

What is a PMSI?

Answer 17

A purchase money security interest. They have superproirity over other interests so long as they are perfect.

Question 18

Perfection of PMSIs (3)

Answer 18

1. consumer goods. automatic perfection, perfected when attaches.
2. inventory. perfected when debtor receives possession of inventory. Secured party needs to send an authenticated notification to holder of hte conflicting security interest, telling them they expect to have a PMSI. Holder of conflicting interest receives the notification within 5 years before the debtor receives possession of property (6 mo for livestock)
3. equipment - first, it must attach. Second, a financing statement must be filed in the jurisdiciton where the debtor is located. no automatic perfection. twenty day grace period to perfect in goods otehr than inventory or livestock.

Question 19

Priority of creditors in security interests

Answer 19

1. PMSIs have superpriority if perfected. two competing PMSI = seller PMSI has priority over lenders PMSI.
2. secured creditors - first to file or perfect.
3. lien creditors (exceptions: 20 day rule for PMSI, 45 day rule for creditors)
4. unperfected creditors.

Question 20

What are proceeds for security interests?

Answer 20

A> proceeds are whatever is received upon the sale, lease, license, exchange or other dipsosition of collateral.

secured party will automatically have perfected security interest in proceeds for 20 days, but need to re-perfect after that unless: proceeds are identifiable cash proceeds, or proceeds of same type as the original collateral, or a financing statememtn covers the original collateral, the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statememtn has been filed, and the proceeds are not cash.

Question 21

Sale of collateral?

Answer 21

1. Sale to a buyer in ordinary course of business - buyer takes free of security interest created the by seller, even if hte security interest is perfected and the buyer knows of its existence.
2. authorized sale, if sale is authorized, the buyer will take free of the interest.
3. Consumer to consumer sale for goods (garage sale exception) - buyer takes free of a security interest even though it is perfected if he buys without knowledge of the SI, for value, and for his own personal, family, or household purposes, unless the secured party has filed a financing statement covering the goods.
4. buyer not in ordinary course of business - buyer not in ordinary couse takes subject to the perfected security interest. if unperfected, does not take in goods, tangible chattle paper, documents, or instruments if he gives value and does not know about the interest.

Question 22

What is the 45 day rule?

Answer 22

A buyer not in ordinary course of business takes free of a security interest to the extent that hte secured party gives an advance after the secured party knew about the buyers purchase or 45 days after the purchase.

Question 23

Judicial lien creditor?

Answer 23

A creditor that has acquired a lien on the property invovled by attachment, levy, or the like. garnishment lien attached upon service of wrice.

Question 24

Proceeds of a sale by foreclosure order of priority?

Answer 24

A. expenses of the sale
2. payment of lien under which the sale was held.
3. junior debotrs
4. debtor.

Question 25

Priority between secured creditor and lien creditor?

Answer 25

priority beliongs to secured, if they perfected before the lien arises. if was unsecured or only perfected after writ is served, lien creditor has priority.
Exceptions: 20 day rule for PMSI party files a financing statememtn with respect to a PMSI before or within 20 days after the debtor receives delivery of the collaterla, the security interest takes priority.
exception 45 day rule; priotity to secured parties over lien creditors if secured party makes an advance witin 45 days afteth the lien attached, without knowledge of the lien, or if advance was made pursuant to a commitment.

Question 26

What is a fixture?

Answer 26

Goods that have become so related to particular real propertty that an interest in them arises under real property law. not pure goods, not pure realty, but soemthing in between, eg. a chandelier in a house, water heater, an oven, sinks.

One needs to file a fixture filing if they want to perfect and obtain priority over real estate interests.

Question 27

What is an accession?

Answer 27

goods that are physically uniteed with other goods that the idenity of hte original goods is not lost (a new motor on a car).

Question 28

What happens if default occurs?

Answer 28

A> lender can demand payment.
B. lender can use self help to reclaim goods. Statutory right under atciel 9 to repossess collateral pursuant to judicial process or via self help so long as they do not breach the peace.

Question 29

Rule for account debtors

Answer 29

Once an account debtor receives proper notification to make future payments direct to an assignee, the account debtor may discharge its payment obligation only by payment to assignee.