Secured Transactions

Question 1

Article 9 - UCC

HIGH

Answer 1

Article 9 of the UCC governs any transaction regardless of its form that creates a secuirty interest.

Article 9 applies to a security interest regardless of whether title to the collateral is in the name of the secured party.

A seller cannot retain or serve title to goods that have been delivered or shipped, any attept to retain is limited in effect to a reservation of a security interest.

Question 2

Lease vs. Security Interest

HIGH

Answer 2

A transaction labeled as a lease may be deemed a security interest.

Courts consider the economic realities of the transaction, not the intent of the parties.

A transaction lableled a “lease” creates a security interest if:
* a commitment to make payments for a term exists AND
* either (i) the original term of the lease is equal to or greater than the remaining economic life of the goods, (ii) the lessee must renew the lease for the remaining economic life of the goods (or is forced to take ownership); (iii) the lessee has an option to renew the lase for the remaining econoomic life of the goods for no additional consideratio; or (iv) the lessee has an option to become the owner of the goods for no additional consideration

Question 3

Accounts
(Types of Collateral)

HIGH

Answer 3

An account is a right to payment of a monetary obligation (whether or not earned by performance) for any of the following:
* property that has been or is to be sold, leased or otherwise disposed of
* services rendered
* a policy of insurance issued
* a seconddary obligation incurred
energy provided
the use or hire of a vessel under a charter or other contract
* a debt arising ouf of the use of a credit card OR
* winnings in a lottery or other game of chance sponsored by a State

Question 4

Deposit Accounts

Low

Answer 4

A deposit account is a demand, time, savings, or similar account maintained within a bank.

This does not include investment property or accounts evidenced by an intstrument.

A depost account cna only be perfected by control.

Question 5

Inventory
(Type of Collateral)

HIGH

Answer 5

Inventory means goods that:
* are leased by a person as lessor
*are held by a person for sale/lease or to be given under a contract of service or
* consist of raw materials, work in process, or materials used or consumed in a business.

Inventory does not include farm products or goods that are only being held for repair.

Question 6

Equipment
(Type of Collateral)

HIGH

Answer 6

Equipment consists of goods other than investory, farm products or consumer goods.

Some statees require that the security interest be noted on the title of vehicle for the interst to be perfected - filing a financing statement is insufficient to perfect the security interest.

Question 7

Consumer Goods
(Types of Collateral)

HIGH

Answer 7

Consumer goods are those used or purchased primarily for personal, family or household purposes.

Question 8

Proceeds
(Types of Collateral)

HIGH

Answer 8

Proceeds refer to the following property:
* anything acquired upon the sale, lease, or other disposition of collateral
* anything collected/distributd on account of collateral
* rights asrising out of collateral
* claims arising out of the loss, nonconformity, defect, or inteference with the use of collateral or
* insurance payable by reason of the loss/nonconformity defects or damage to the collateral.

A check given in exchange for secured goods is deemed to be cash proceeds.

Question 9

Chattel Paper
(Types of Collateral)

MED

Answer 9

Chattel paper is a record that evidences both
* monetory obligation AND
* either a security interest in specific goods OR a security interest in specific goods with software or a software license used in the goods.

A monetary obligation is an obligation to pay money that is secured by the goods or owed under a lease of the goods.

Question 10

Attachment and Perfection
(General Rules)

HIGH

Answer 10

Under Article 9 of the UCC, a creditor may properly obtain a security interest in collateral as a means to secure a loan given to a debtor.

Enforcing a security interest depends on two factors: attachment and perfection.

Attachment: secures the creditor’s rights in the debtor’s collateral, making the security interest valid and enforceable against the debtor and third parties.

Perfection: gives notice of the creditor’s rights in the collateral to other parties who may have claims to the same, and usually determines which party has priority to the collateral.

A security interest cannot be perfected untless it has first attached.

Question 11

Attachment

HIGH

Answer 11

Attachment requires:
* that the creditor extend value to the debtor
*the debtor must have rights in the collateral AND
* one of the following –>

• an authenticated record/security agreement memorializing the security interest (must be authenticated by the debtor and reasonably identify the collateral).
• the collateral is the secured party’s possession pursuant to a security agreement
• the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party pursuant to a security agreement OR
• the secured party has control of certai ntypes of collateral pursuant to a security agreement

Note: A security agreement is an agreement that creates or provides for a security interest. It may be an oral agreement.

Question 12

Perfection

HIGH

Answer 12

Perfection is obtained by the creditor filing a fiancing statement with the Secretary of State that identifies the collateral and their security interest in it.

Perfection may also be obtained by taking possession or control of the collateral that is providing the security interest.

Consumer purchase money security interests are automatically perfected.

Note: An effective financing statement doesnot cure an ineffective security agreement.

Question 13

Financing Statements

HIGH

Answer 13

An effective financing statement must:
* provide the name of the debtor and secured party
* reasonably identify the collateral covered by the financing statement AND
* be filed by a person authorized by the debtor in an authenticated record, securit yagreement or upon acquisition of the collateral.

Minor errors or omissions will not render a statement ineffective unless the errors make the statment seriously misleading.

A financing statement that fails to sufficiently provide the name of the debtor is deemed seriously misleading unless the statement would be discoverable in a search of the records of the filing office under the debtor’s correct name.

Question 14

Purchase Money Security Interests

HIGH

Answer 14

When a creditor extends value to the debtor for the purpose of enabling the debtor to acquire rights in the collateral, a purchase money security interest arises.

Consumer Goods: PMSIs in consumer goods enjoy automatic perfection. The creditor need not file a financing statement. The UCC gives special protection to PMSI holder to encourage lending to consumers.

Non-Consumer Goods: If a financing statment is filed before or within 20 days after debtor receives delivery of the collateral, then the security interest takes prioroty over conflicting interests which arise between the time the security interest attaches and the time of filing.

Question 15

Sale of Collateral - Security Interest

HIGH

Answer 15

A security interest will continue despite any sale, lease or other disposition of the collateral, unless the secured party authorizes the disposition free of the security interst.
* a security interest will not be deemed invalid because debtor has right to use or dispose of the collateral.

Question 16

Identifiable Proceeds - Security Interest

HIGH

Answer 16

A perfected security interest will attach to any identifiable proceeds from the disposition of collateral.

However, the interest in proceeds will become unperfected on the 21st day after attachment to the same unless:
* the proceeds are identifiable cash proceeds
the security interest in the proceeds is perfected when the security interest attaches to the proceeds or within 20 days thereafter OR
* if all of the following conditions are satisfied: (i) the original collateral was perfected under the general filing rule, (ii) the proceeds are collateral that may be perfected under the general rule and (iii) the proceeds are not acquired with cash proceeds.

Question 17

Future Advances

MED

Answer 17

A security agreement may provide that the collateral secures future advances, whether or not the advances are mandatory.

Question 18

After-Acquired Property

MED

Answer 18

A security agreement may create for a security interest in after-acquired collateral.

AN after-acquired property clause is not effective for:
* a commercial tort claim OR
* consumer goods

unless debtor acquires righs in them within 10 days after secured party gives value.

Question 19

Transfers of Collateral

MED

Answer 19

A buyer receives all of the righs the seller had upon transfer of the goods, including all ownership or enforcement rights - therefore seller without title cannot transfer title.

Question 20

Shelter Principle

MED

Answer 20

IF a buyer acquires property free of a security interest, than any subsewuent trnasfer by the buyer to someone else is also free of the security interest.

Question 21

Buyers in the Ordinary Course of Business

HIGH

Answer 21

Buyers in the ordinary course of business take free of a security interest created by the seller.

If a person entrusts goods to a merchant who deals in goods of that kind, the merchant has power to transfer title to a buyer in the ordinary course of business (even though the merchant seller did not have title to the goods.

A buyer in the ordinary course of business is a person that:
* buys goods in good faith
* without knowledge that the sale violates the rights of another person in the goods AND
* in the ordinary course form a merchant

Question 22

Consumer to Consumer Rule

MED

Answer 22

Under the Consumer to Consumer Rule, buyers of consumer goods take free of a securit yinterest if the goods are bought:
* without knowledge of the security interest
* for value
* from a consumer who purchased the goods primarily for personal, family or household purposes AND
* before the filing of a financing statment covering the goods.

Question 23

Perfected vs Unperfected Interest
(Priority)

HIGH

Answer 23

A perfected security interest has priority over a conflicting unperfected security interest in the same collateral.

A creditor’s prior kowledge of an unperfeced interest is irrelevant to determine priority.

Question 24

Unperfected vs Unperfected Interest
(Priority)

HIGH

Answer 24

When there are two competing unperfected security interests, the first to attach will prevail.

Question 25

Perfected Interst vs. Perfected Interest
(Priority)

HIGh

Answer 25

The “First in time, first in right” controls. The first creditor to perfect by filing has priority.

Question 26

Purchase Money Security Interest vs. Perfected/Unperfected Interest
(Priority)

HIGH

Answer 26

A purchase money security interest in consumer goods enjoys automatic perfection.

Consumer Goods: Therefore a purchase money security interest in consumer goods takes priority over another perfected or unperfected interest.

Non-Consumer Goods: For purchse money security interests in non-consumer goods, a financing statment must be filed in order to perfect the interest, otherwise the security interest is unperfected.

Question 27

Priority of Judgment Lean Creditors

HIGH

Answer 27

Judgment lien creditors have priority over conflicting security interests if the person became a lien creditor befor the conflicting security interest was perfected.

A creditor’s prior perfected security interest will habve priority over a subsequent judicial-lien creditor.

Priority also extends to future advances secured more than 45 days after the person became a lient creditor Unless the advance is made without kowledge of the lein. This rule does not apply to a security interest held by a buyer of accounts or a consignor.

Question 28

Priority of Judgment Lien Creditors - Exception

HIGH

Answer 28

Even if a security interest was not yet perfected, a secured party will still have priority over a judicial lien creditor if:
* the secured party filed a financing statement
* the security interest is ultimately attached and perfected AND
* one of the following is present (i) there is an authenticated security agreement, (ii) collateral is in possession of he creditor, (iii) collateral is a certificated security in registered form and the security certificate has been delivered to the secured party or (iv) the secured party has control of certain types of collateral.

Question 29

Fixtures

MED

Answer 29

An ownership interest in real property has priority over conflicting security interests in fixtures.

Exceptions:

A perfected purchase moneyy security interest in fixtures has priority over a conflicting ownership interest if:
* debtor has an interest of record or is in possession of the real property
* the ownership interest arose before the goods became fixtures AND
* the purchase money security interest was perfected before the goods become fixtures or within 20 days thereafter

A fixture filing, which is the filing of a financing statement that:
* covers goods that are or will become fixtures AND
* satisfies all general rules for financing statements, plus the following

• stae that it covers a fixture
• be filed in the real property records
• provide a sufficient description of the real propety AND
• provide the name of a record owner

Question 30

Taking Possession of Collateral
(Secured Party’s Rights)

HIGH

Answer 30

After default, a secured party may:
* take possession of thecollateral AND
* wihtout removal, render equipment unusuable and dipsose of collateral on a debtor’s premises.

Secured party may proceed either pursuant to:
* judical process OR
* without judical process (if proceeds without a breach of hte peace)

To determine whether repossession was peaceful, coursts examine:
* Where the possesion took place
* who was present AND
* whether any protests were made.

Note: Breaking into locked propery is a breach of the peace.

Question 31

Disposal of Collateral - General
(Secured Party’s Rights)

HIGH

Answer 31

Afer 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.

A debtor is liable to the extent that the proceeds from the disposition are not sufficient to satisfy the debt owed.

Question 32

Disposal of Collateral - Notice
(Secured Party’s Rights)

HIGH

Answer 32

A secured party that disposes of collateral must send an authenticated notification of the dispositoin to the debtor and any secondary obligor. Secured party is liable for damages for failing to provide notice, even if the debtor had actual knowledge of the disposition.

Notice requirement doesn ot apply if he collateral:
* is perishable
* threatens to decline speedily in value or
* is of a type customarily sold on a recognized market

Question 33

Disposal of Collateral - Foreclosure Sale
(Secured Party’s Rights)

HIGH

Answer 33

The disposition of collateral at a foreclosure sale:
* transfers all of the debtor’s rights in the collateral to a transferee for value
* discharges the security interest AND
* discharges any subordinate security interests (senior interests are not discharged

A transferee that acs in good faith takes free of the rights of the debtor, even if the secured pazrty fails to comply with the rules governing disposition.

Question 34

Disposal of Collateral - Commercially Reasonable Sale
(Secured Party’s Rights)

HIGH

Answer 34

Every aspect of a disposition of collateral, including the method, mannter, time, place and other terms must be commercially reasonble.

Courts consider facts and circumstances such amount of advertising performed, normal commercial praces etc in determining comercial reasonableness.

A disposition of collaterla is deemed commercially reasonable by law if made:
* in the usual manner on any recognizedm arket
* at thecurrent price in any recognized market at the time of the disposition OR
* in conformity with reasonable commercial practices among dealers in similar property.

Question 35

Disposal of Collateral - Purchase of Collateral
(Secured Party’s Rights)

HIGH

Answer 35

Unless agreed otherwise, a secured party may purchase the collateral at:
* a public sale
* private sale only if the collateral is of a kind that is cutomarily sold on a recognized market or the subject of widely distributed standard price quotations.

Question 36

Direct Collection from Account Debtor
(Secured Party’s Rights)

HIGH

Answer 36

A secured party has theright to collect a debt direclty form an account debtor if agreed or after default.

Once the account debtor receives notification of an assignment, the account debtor can no longer discharge its obligation by payments to the assignor.

Account debtor can only discharge its obligation by paments to the assignee.

Account debtor may request proof of the assignment.

Question 37

Damages to Debtor for Secured Party’s Failure to Comply w/ Applicable Rules
(Debtor’s Rights in Default)

HIGH

Answer 37

A secured party is liable for the debtor’s actual damages for the amount of any loss caused by their failure to comply with applicable rules concerning secured transactions.

Damages for loss are generally equal to expectation damages, and may include loss resulting form the debtor’s inability to obtain alternative financing.

A debtor may recover $500 in statutory damages for a secured party’s failure to comply with specific provisions of Article 9 of the UCC.

A civil penalty is applied if the collateral is consumer goods wherein a debtor may recover damages for for loss and not less than the credit service charge plus 10% of the principal amount of the obligation.

A court may also order or restain collection, enforcement or a proper sale of collateral if a secured part yis not proceeding in accordance with applicable rules.

Question 38

Debtor’s Right of Redemption

MED

Answer 38

A debtor has the right to repay obligations and reclaim property held by the secured party (known as redemption).

To redeem collateral, a debtor must:
* fulfill all obligations secured by the collateral AND
* pay reasonble expenses and attorney’s fees.

Deadline: A redemption may occur at any time before a secured party has:
* collected the collateral
* disposed of he collateral or entred into a contract for its disposition OR
* accepted collateral in full or partial satisfactio of the obligation it secures

Question 39

Deficiency Judgments

HIGH

Answer 39

Consumer Goods Transaction: The impact of non-compliance with Article 9 on recovery of a deficiency in a consumer goods transaction is left to the court to determine.

• Absolute Bar Rule: Secured party is barred from collecting any deficiency remaining after the disposition of collateral when the secured party fails to comply with applicable provisions for a disposition.
• Rebutable Presumption Rule: If the secured party fails to comply with applicable provisions for disposition, it is presumed that the proceeds from the disposition ae equal to the debt owed. This presumption can be rebutted if the secured party shows that the debt owed is greater than the fair market falue of the collateral at the time of disposition.

For non-consumer transactions, Article 9 of the UCC provides that:
* if a debtor places a secured party’s compliance in issue AND
* a secured party fails to prove that the disposition was proper, then the amount redoverable in deficiency is limited to an amount by which the total debt exceeds the greater of:
* the proceeds of the disposition OR
* the amount that would have been realied if the secured party complied with the applicable provisions

The amount of proceeds that woudl have been realized is equal to the toal debt UNLESS the secured party proves that complying with the rules would have yielded a smaller amount.