Secured Transactions

Question 1

How is a security interest created?

Answer 1

A valid security agreement; control by the creditor; possession by the creditor

Question 2

What is the purpose of a security interest?

Answer 2

Arises when a party (the debtor) uses certain property as collateral to secure repayment of funds to another party (the SP) - by using property as collateral, if the debtor defaults on repayment of the funds, the creditor can take possession of the collateral and apply it to the funds owed. Interest in collateral = security interest.

Question 3

When does UCC Art 9 apply?

Answer 3

Applies to:
1. Any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
2. Agricultural liens;
3. Sales of accounts receivable, chattel paper, negotiable instruments, promissory notes, and payment intangibles;
4. consignments; and
5. certain lease-purchase agreements

Question 4

What are the types of collateral?

Answer 4

1. Consumer Goods = items used for personal purposes
2. Inventory = goods held for sale or lease
   >can be raw materials, work in process (like software awaiting packaging at a warehouse), or materials used or consumed in business. Includes timber to be cut.
3. Equipment = items used in a business
4. Farm products = crops, livestock, supplies in farming operations
5. fixtures = items annexed to reality
   - To classify = primary use is in the hands of the debtor (subjective test).

Question 5

When is a SI enforceable against the debtor?

Answer 5

Upon attachment -
(a) Value given by SP
(b) debtor has rights in collateral
(c) there is a security agreement, or the secured party has possession or control of the collateral

Question 6

What must be in the security agreement?

Answer 6

Needs to satisfy the SOF -
i. be in a record
ii. contain a description of the collateral and
iii. be authenticated by the debtor (signed/adopt symbol)

Question 7

Description of collateral in security agreement

Answer 7

Can list specific items or identify an Art 9 type of collateral, like “all debtors equipment” UNLESS it is consumer goods or a commercial tort claim - a super generic description like (“all debtors assets”) is not sufficent.

Question 8

After-acquired collateral/clause

Answer 8

The SI may cover collateral owned when the security is granted and also collateral that the debtor acquires after the SI is given.
EXCEPTION: an after-acquired clause is not effective for consumer goods, unless the debtor acquires them within 10 days after the SP gives value, or a commercial tort claim.

Question 9

VA Distinction with After-Acquired Collateral

Answer 9

Sellers of consumer goods are PROHIBITED from taking a SI in any property other than goods sold; does NOT apply to vehicles subject to a certificate of title statute or to goods purchased with an open-end credit plan

Question 10

Proceeds

Answer 10

the SI attaches automatically to identifiable proceeds - AKA whatever is acquired upon disposition of collateral

Question 11

Attachment

Question 12

Perfection

Answer 12

Consumer goods & other collateral = financing statement
Money = possession
Deposit accounts = control
Perfection by possession does not apply to letters of credit

Question 13

PSMI

Answer 13

Created when (1) debtor borrows money to purchase goods (2) which are to be used as collateral (3) actually uses those funds to purchase the collateral.

Do not need financing statement for SI to be perfected. HOWEVER, for a PMSI automatic permanent perfection it MUST BE IN CONSUMER GOODS. Other collateral like equipment is only temporarily automatically perfected.
PMSI in fixtures requires filing.

Question 14

Control of a deposit account exists where…

Answer 14

the SP is the bank where the account is held. Security interests in deposit accounts are perfected only by control, and cannot be perfected by filing.

Question 15

A secured party must file ____ when the debtor has fulfilled his obligation to the secured party pertaining to consumer goods

Answer 15

termination statement.

SP must file termination statement within a month after obligation is fulfilled, or within 20 days after receiving an authenticated demand for termination statement from the debtor.

Question 16

If a debtor has moved out of state, a secured party must file a new financing statement within…

Answer 16

four months of a debtors move out of state, or risk the financing statement becoming ineffective and the security interest becoming unperfected (thus loosing priority against other secured parties).

Question 17

If a consumer defaults an obligation to a retailer which is secured by a purchase money security interest, the retailer may

Answer 17

repossess the goods.

Does not extend to other goods that are presently owned by the debtor or to future goods that the debtor acquires.

Question 17

When a person retains a security interest in goods he cosigns to a retailer for sale by the retailer, what kind of security interest does the person have?

Answer 17

A PMSI in inventory.

Question 18

What is a consignment?

Answer 18

A transaction in which a person (the consignor) delivers goods to a merchant for the purpose of sale by the merchant. When a cosigner retains a SI in cosigned goods, the person has a PMSI in inventory.

Question 19

Under the dual status rule, a PMSI obligation does not lose its PMSI status when…

Answer 19

the PMSI obligation has been renewed, refinanced, consolidated, or restructured.

Why? Bc the debtor cannot relieve himself of his obligation to the SP by simply changing the terms of the loan securing the PMSI goods.

Question 20

Commingled goods are…

Answer 20

goods that are physically united with other goods in such a manner that their identity is lost. A security interest does not exist PER SE in commingled goods, but attaches to the product that results when goods become commingled. So long as the security interest is perfected before the collateral is commingled, the interest in the product is also perfected.

Question 21

Generally, a SI in collateral survives the sale of the collateral - meaning that the buyer of the collateral takes subject to the security interest. However, there are some exceptions to this rule…

Answer 21

1. Consumer-to-consumer/garage sale exception - buyer of consumer goods takes free of a security interest, even if the interest is perfected.
   — Buyer of goods from a person who used/bought goods for use primarily for personal, family, or household purposes, takes free of a SI even if perfected, IF THE BUYER BUYS (1) without knowledge of SI; (2) for VALUE (3) primarily for the buyer’s personal use (4) before the filing of a financing statement covering the goods.

Question 22

Tangible intangible

Answer 22

Certain intangibles, such as a K obligation to hold or deliver goods, pay money, and ownership in goods or business entites, are commonly reduced to written form. Transferring the writing operates to transfer the intangible.
Varieties of tangible intangible – chattel paper, instruments, documents.
Chattel paper

Question 23

Chattel Paper

Answer 23

is a record evidencing both a monetary obligation and a security interest in, or lease of, specific goods.

Question 24

Financing Statement

Question 25

A fixture filing must contain..

Answer 25

(1) all the information required in a financing statement,
(2) indicate that it covers fixtures,
(3) indicate that it is to be recorded in the real property records,
(4) provide a description of the real property to which the fixture is related, and
(5) provide the name of the record owner if the debtor does not have an interest of record in the real property.

Question 26

A buyer in the ordinary course of business…

Answer 26

takes free of a SI created by the seller. A buyer in the OCOB is one who buys the goods in good faith, (1) without knowledge that the sale violates the rights of another person in the goods, and (2) buys in the ordinary course of business from a person in the business of selling goods of that kind.

Question 27

A perfected SI in crops growing on real property prevails over a conflicting interest of an encumbrancer or owner of the real property if….

Answer 27

the debtor has an interest of record or is in possession of the real property - I.E. if another SP perfected.

Question 28

A debtor has the right to redeem the collateral by

Answer 28

tendering to the secured party the amount of the obligation, including interest, together with reasonable expenses and atty’s fees caused by the default (unless the debtor has agreed otherwise in writing after the default). However, redemption must be effected BEFORE the collateral has been collected - therefore, the debtor is not entitled to the collateral if redemption occurred after SP repossessed.

Question 29

While debtors must be sent a reasonable authenticated notice of disposition of the collateral being sold, this requirement is waived when…

Answer 29

the collateral is perishable.

Question 30

All aspects of disposition of collateral must be….

Answer 30

commercially reasonable, including the method, manner, time, place, and other terms. A sale is considered commercially reasonable if it is made in the usual manner on any recognized market, at market price, or otherwise in conformity with reasonable commercial practices among dealers in the type of property that was sold.

ALSO, any $ decficency at the sale b/w how much it was sold for and how much is still owed must be paid by the debtor, BUT the sale must have been commercially reasonable.

Question 31

A secured party has the right to repossess tangible collateral if it can do so without a breach of the peace, as defined as….

Answer 31

any act that is likely to lead to violence.

Entry into a home or fenced area is considered breach of the peace.
Entry into an open drive way is not necessarily breach.