Secured Transactions Flashcards
What is the key principle regarding Article 9 and security interests?
Article 9 applies to all security interests in personal property or fixtures by contract, regardless of the terminology used.
This includes lease agreements that are not true leases, they function as security interests.
Define consumer goods.
Goods that are bought for use primarily for personal, family, or household purposes.
Example: A computer used by a consumer.
What constitutes inventory?
Goods, other than farm products, that are held for sale or lease to be furnished under a contract of service; or raw materials, work in process, or materials used or consumed in a business.
Example: Computers sold by a computer store.
What are examples of equipment?
Goods used in a business that are not inventory, farm products, or consumer goods.
Example: A computer used in a business.
What are farm products?
Crops, livestock, and supplies produced in a farming operation or products of crops or livestock in their unmanufactured state in possession of debtor who is engaged in a farming operation.
What are the three criteria for attachment to occur?
Requirements of attachment:
1) Value must be given by the secured party to the debtor (e.g., a loan);
2) Debtor must have rights in the collateral
3) There must be a binding security agreement (which requires mnemonic AID: authentication, intent to create a security agreement, and a description of the collateral)
What is the general rule regarding after-acquired property?
The general rule is that a security agreement can cover after-acquired property and does not need to specifically reference it to be effective.
What methods of perfection should one be familiar with?
Perfection can occur by:
- Filing a financing statement;
- Automatic perfection in some cases (e.g., a PMSI in consumer goods);
- Perfection by possession or control
These are the most commonly tested methods.
How is priority determined when two secured parties have a security interest in the same collateral?
The first to file or perfect has priority; if no party perfects, the first to attach has priority.
Know that a perfected security interest beats an unperfected one, even if one has an unperfected PSMI.
What happens when a debtor sells collateral subject to a security interest?
A buyer in the ordinary course of business generally does not take the collateral subject to the security interest.
Conversely, a buyer not in the ordinary course of business typically does take it subject to (unless the interest was not perfected and he does not otherwise know about it)
What is the consumer to consumer goods (garage sale) exception?
A buyer not in the ordinary course takes free of a security interest even though perfected if he buys without knowledge of it; for value; and for personal use, family or household purposes.
Unless the secured party has filed a financing statement covering the goods before they get them or within 20 days of attachment.
What is the general rule regarding secured parties and lien creditors?
The general rule is that, as between a secured party and a lien creditor, priority belongs to the secured party provided it perfects before the lien arises.
If the interest was unsecured or only perfected after the lien creditor served the writ, then the lien creditor has priority.
What can a secured creditor do if a default occurs?
The lender can demand payment or use self-help to reclaim the goods, as long as it does not breach the peace.
Breach of peace can occur if repossession is contested by the debtor.
What must be examined to determine if a lender has breached the peace?
There are several factors to examine to determine if the lender has breached the peace, including whether:
- the repossession took place at the debtor’s premises; and
- Debtor objected.
Some courts also look if trickery was used.
Some courts consider any objection, even slight or only verbal, as a breach of the peace.
What happens after the secured creditor takes to foreclose on its collateral?
The secured party may sell or dispose of the collateral in a commercially reasonable way.
The secured interest is discharged when this occurs, but the debtor remains liable for any deficiency.
The obligation owed to the disposing secured party and any junior liens are paid off, but senior liens remain on the collateral.
What is one means of protection for a debtor regarding the sale of collateral?
The sale must be commercially reasonable.
This is crucial for the debtor’s protection.
What is required for notification to the debtor regarding the sale?
The debtor must receive written notification of the sale, including details about the collateral and the secured party.
Timeliness is typically considered reasonable if sent 10 days or more before the sale.
What remedies are available if a secured party fails to comply with requirements?
Damages, including consequential damages, but the debtor has a duty to mitigate.
This can vary based on the situation.
What must a secured party provide to the consumer regarding the amount owed?
A telephone number or mailing address for additional information about the disposition and obligation
This is essential for consumer rights and transparency in transactions.
What is Remedy #1 if the secured party fails to comply with the requirements?
Damages (including consequential damages, with a duty to mitigate)
Statutory damages are awarded if the collateral constitutes consumer goods.
What does Remedy #2 entail?
A court may order a sale
This can happen when the secured party does not comply with specific requirements (#1 sale must be commercially reasonable; #2 debtor must receive written notification of the sale)
What is the rebuttable presumption in nonconsumer transactions?
If there is a failure to comply with the requirements and the secured party fails to show the sale was commercially reasonable, then there is a rebuttable presumption that the collateral is worth the amount of the debt and the debtor’s deficiency is nothing.
The debtor’s deficiency is considered nothing in this case.
What are the two approaches courts follow in consumer transactions regarding noncompliance?
- Absolute bar rule
- Rebuttable presumption rule
The absolute bar rule means the creditor’s noncompliance bars any recovery of deficiency.
What is the debtor’s right to redeem?
The debtor can redeem prior to the disposition of the collateral by paying everything due and owing to the creditor
This right is crucial for protecting debtor interests.
What are the four classifications of good?
1) Consumer goods;
2) Inventory;
3) Equipment; and
4) Farm products.
PSMI: Purchase Money Secured Interest
It happens when a party gives money to buy a good or asset that becomes the collateral (e.g., getting money to buy a car).
Attachment and Perfection
Attachment protects the creditor against the debtor;
Perfection protects the creditor against the debtor and other parties.
Priority of the PMSI
PMSI gives priority over all other secured interests in the same collateral.
Except in the rare occasion when the PMSI is unperfected
