Secured Transactions

Question 1

Intro - What Is a Secured Transaction?

Answer 1

UCC Article 9

Business deal, generally a loan of money plus “security interest” in personalty (not realty):

If borrower doesn’t repay the loan, lender can grab the asset (collateral) and sell it to create value to pay off the borrower’s debt.

Question 2

Collateral - Property Focus of Secured Transactions - Tangible Items

Answer 2

Property is judge on how debtor uses it.

Tangible = moveable things:

1. Inventory = goods held by a business for sale/lease and any raw or consumable materials (i.e. flour, sugar, chemicals, etc).
2. Equipment = catch-all; any tangible thing owned by a business not w/in another category (i.e. anything else that’s not inventory must be tangible).
3. Agribusiness (seldom tested), its farm products like livestock and eggs, grain, apples, etc (unmanufactured). Farmers have inventory too (like cheese) and equipment.

Question 3

Collateral - Property Focus of Secured Transactions - Consumer Goods

Answer 3

Tangible Things:

1. Used; or
2. Bought for use PRIMARILY for personal, family, or household use.
3. Focus on PRIMARY intended use WHEN SECURITY granted to determine what it is.

Question 4

Collateral - Property Focus of Secured Transactions - Rights in Real Property

Answer 4

Not governed by Article 9. However…Article 9 collateral…

Fixtures:
1. Moveable thing so incorporated into (affixed to) an immovable that it becomes part of the realty under property law. Even though item can be moveable again.

As-Extracted Collateral:
1. Oil/gas/coal/minerals, S.I. attach at extraction.

Question 5

Collateral - Property Focus of Secured Transactions - Intangible Rights (6 Types)

Answer 5

1. An Account - Right to collect on a promise of another to pay debtor later on a monetary obligation after sale or lease of non-land related thing.
2. Deposit Account - COMMERCIAL bank account (bank promises to give back money deposited.
3. Instrument - Promise to pay memorialized in a note or certificate of deposit.
4. Chattel Paper - Papers representing both a promise to pay AND a prop right:
   (i) Any lease of a moveable (right to collect + reversionary right) - Ex. Car dealer lease of a car to a person is chattel paper.
   (ii) Retail installment sale agreement, RISA, promissory note + security agreement - Ex. Buyer agrees to installment payments + take car if not payment is chattel paper.
5. Investment Prop - stocks/bongs, certificated/uncertificated, security agreement.
6. General Intangibles - Intellectual property, biz’s goodwill, non-monetary K rights.

Question 6

Creating Rights Valid Against the Debtor - Attachment

Answer 6

Three Requirements:

1. Value must be given (past or present loan, binding promise of future loan);
2. Debtor must have rights in the collateral; and
3. Debtor must’ve have “authenticated” (see slide 7 for more) a security agreement.

Question 7

Creating Rights Valid Against the Debtor - Attachment - “Authentication” Requirements

Answer 7

1. Authenticated = signed or otherwise indicated assent in some perceivable form, i.e. sending an email or voicemail.
2. Oral agreement okay if debtor agreed to put collateral in the creditor’s possession or “control” (rare).
3. Description of collateral - Simply “reasonably identity,” generally by categories (inventory, equipment, accounts). ALL ASSETS too vague.
4. After-acquired collateral - The description doesn’t have to be limited to present collateral, can be future prop.
5. Consumers Transactions -

(i) Description must be more specific
(ii) After-acquired collateral clauses apply only if consumer acquires prop w/in 10 days of secured value having been given.

Question 8

Creating Rights Valid Against the Debtor - Attachment - Future Loans

Answer 8

Future obligations can be secured, i.e. all indebtedness. Don’t be put off by aggressive creditors.

Question 9

Creating Rights Valid Against the Debtor - Attachment - Proceeds

Answer 9

Proceeds:

1. Whether or not the security agreement says, A S.I. ATTACHES AUTOMATICALLY to whatever the D receives FOR OR ON ACCOUNT of the collateral, i.e. PROCEEDS;
2. The proceeds are somehow “identifiable” as linked to original collateral.

Question 10

Creating Rights Valid Against the Debtor - Attachment - S.I. & Prop Transfer

Answer 10

A perfected S.I. follows property into the hands of other people who acquire collateral from the D UNLESS the creditor consents to a release of the S.I.

May create a priority dispute.

Question 11

Creating Rights Valid Against the Debtor - Attachment - Inadvertent - and Undesired - Attachment

Answer 11

Despite parties desire, these are treated as S.I.’s

1. “Lease” as Disguised Sale - Lease of a moveable thing:

(i) structured so lessor has no expectation of reversion of value;
(ii) treated as installment sale w/ S.I. (rather than rental payment and right of eviction/reversion.

Simplified:

1. Lease term of over entire USEFUL life of thing; OR
2. Option to buy leased thing at end for “nominal” value ($1).
3. LESSOR TREATED AS SELLER.
4. Consignment - When delivering non-consumer goods worth more than $1000 to a merchant for sale, treated as consignor not as owner with right of return, but creditor with S.I. in goods, IF MERCHANT:
5. Acts under its own separate name;
6. Is not an auctioneer; and
7. Is not generally known to sell other people’s goods (goods

Question 12

Making Rights Enforceable Against 3rd Persons - Perfection

Answer 12

ENFORCEABLE ONLY AFTER ATTACHMENT HAS OCCURRED AND ONE OF VARIOUS STEPS FOR PERFECTION TAKEN PROPERLY

Question 13

Making Rights Enforceable Against 3rd Persons - Perfection - Filing & Requirements

Answer 13

Filing a financing statement:

1. Most common perfection method, filing this simple one page form w/ Sec. of State on form UCC-1.
2. ONLY record notice to 3rd parties, doesn’t create rights.

Requirements:

1. Debtor’s name.
2. Secured creditor’s name (not tested).
3. Description of chattel

Question 14

Making Rights Enforceable Against 3rd Persons - Perfection - Filing & Debtor’s Name

Answer 14

Financing statements are indexed by D’s name:

1. Full, accurate legal name of D (trade names, nick names, insufficient).
   (i) Driver’s license name for individuals, Sec. of State will have this. Most recent, even if mistakenly misspelled.
   (ii) Business’s name as listed on its “public organic record” forming the entity. For other businesses just go w/ their regular name.
2. If misspelled/wrong name not found by searching on the correct full legal name, fin. state. is “seriously misleading,” “ineffective” and S.I. unperfected.
3. If debtor’s name changes to make fin. state. “seriously misleading” NO EFFECT on EXISTING COLLATERAL, but fin. state. INEFFECTIVE TO PERFECT a S.I. in any new collateral acquired after 4 months of name change. Prospective effect.
   (i) Most often after incorporation of a sole proprietorship OR merger.

Question 15

Making Rights Enforceable Against 3rd Persons - Perfection - Filing & Description of Collateral

Answer 15

Super generic description like “all of D’s prop” or “all assets” okay, BUT…

1. To be effective, a UCC-1 filing must have been “authorized” in an “authenticated record” by the D, i.e. security agreement covering that same collateral.
2. If fin. state. describes collateral more broadly than the security agreement, the filing is likely unauthorized to the extent of the overbroad description of collateral not mentioned in sec. agreement.

Question 16

Making Rights Enforceable Against 3rd Persons - Perfection - Fixture Filing

Answer 16

IF collateral is related to land - fixture or extracted collateral - fin. state should be filed as a fixture filing.

1. Filed in the mortgage records, not Sec. of State, of county where the land is.
2. More info:
   (i) Describe real prop w/ sufficient detail to support a mortgage.
   (ii) State that it covers fixtures; and
   (iii) Identify the owner of the realty if other than the owner of the fixture.

Question 17

Making Rights Enforceable Against 3rd Persons - Perfection - Effective for all Transactions 5 Years

Answer 17

Properly filed UCC-1 state. perfects ANY S.I. in described collateral in ANY secured loan b/w creditor and debtor.

1. Lapse - This effect lasts for 5 years after filing. Unless the statement is “continued” it lapses and is treated in most cases as if the statement had never been filed.
2. Continuation - To cont. UCC-1’s effectiveness beyond 5 years, one must file a form “continuation statement” in the same office where the original UCC-1 was filed during the 6-month period below expiration - no earlier!

Question 18

Making Rights Enforceable Against 3rd Persons - Perfection - Interstate Transactions & Filing Locations (Choice of Law)

Answer 18

Law governing perfection is the law of the jurisdiction where the D is (regardless of collateral is for non-land related collateral):

1. Individuals are located in the state of their principal place of residence (same for sole proprietorships).
2. “Registered Organizations” formed by filing/issuance of a “public organic record” - Corp’s, LP’s, LLC’s, (NOT LLP’s)
   (i) located in their state of registry, not PPOB.
3. Organizations not formed on pub. org. record located where office is, if more than one, its chief executive office.
4. If the D moves to a new state creditor has 4 months to discover the move and refile in the new state’s Sec. of State office, otherwise the UCC-1 filed in the previous state is retroactively ineffective as to other creditors.

Question 19

Making Rights Enforceable Against 3rd Persons - Perfection - Certificates of Title

Answer 19

For public roadway vehicles covered by a cert. of title, PERFECT ONLY by applying to DMV to have the lien noted on the cert. of title. Includes cars, motorcycles, boats, pleasure craft.

Exception - New or used cars at dealership are inventory so perfection needs UCC-1.

Question 20

Making Rights Enforceable Against 3rd Persons - Perfection - Possession

Answer 20

Creditor in possession of collateral by agreement, possession satisfies BOTH the writing requirement for attachment & the perfection step. Possession superior perfection to filing for instrument or chattel paper.

Question 21

Making Rights Enforceable Against 3rd Persons - Perfection - Automatic Perfection Upon Attachment - Purchase-Money Security Interest (PMSI)

Answer 21

PMSI in consumer goods are auto-perfected, but only in consumer goods.

PMSI:

1. This is a S.I. that secures repayment of whatever portion of a loan (usually 100%, perhaps less) ACTUALLY USED to PURCHASE THE COLLATERAL.
   (i) Bank creditor lends $ to allow debtor to buy the collateral. Chase gives $ to buy a car.
   (ii) Seller of the collateral extends credit to allow D to buy the collateral. Sears gives $ to D to buy a dryer from Sears is PMSI.
2. Consumer goods - bought or used primarily for personal, family, or household use.

Question 22

Making Rights Enforceable Against 3rd Persons - Perfection - Control

Answer 22

EXCLUSIVE method of perfecting an interest in commercial deposit accounts (alternative method for perfecting an interest in investment property, though perfection by control in investment prop beats perfection in any other way).

Question 23

Making Rights Enforceable Against 3rd Persons - Perfection - Control - Control of Deposit Accounts

Answer 23

1. If the secured creditor is the bank where the deposit is held; it has control.
2. Gets a control agreement in which the bank agrees to follow the secured’s creditor’s instructions w/ respect to the $$$ in the account; or
3. The creditor can become the bank’s customer w/ respect to the deposit account by adding to the creditor’s name to the account.

Question 24

Making Rights Enforceable Against 3rd Persons - Perfection - Control - Control of Investment Prop

Answer 24

Three Forms of Holding the Investments:

1. Certificated Securities - If a person’s stock or bond holding is represented by a paper certificate - transfer of possession of the certificate to the creditor and proper indorsement or re-registration in creditor’s name on the comp’s books is perfected by delivery.
2. Uncertificated Securities - “delivery,” official transfer on issuer’s books into the creditor’s name.
3. Indirect Holdings - Securities Accounts & Security Entitlements SEE pg 8 in h/o book

Question 25

Making Rights Enforceable Against 3rd Persons - Perfection - Perfection As a Matter of Law in Proceeds

Answer 25

Automatic attachment to proceeds of collateral (and proceeds’ proceeds, etc). If interest in original collateral perfected, automatic interest in proceeds also perfected automatically for a 20-day grace period.

After that, perfection continues in 3 ways w/o further action by creditor:

1. The original financing statement might describe the proceeds (by category, inventory, equipment - NOT the word proceeds).
2. If the proceeds are identifiable cash proceeds, continuous automatic perfection: “money, checks, deposit accounts, or the like.”
3. SEE NEXT SLIDE 26.

Question 26

Making Rights Enforceable Against 3rd Persons - Perfection - Perfection As a Matter of Law in Proceeds

Answer 26

Three Part Test:

1. If original S.I. was perfected by filing;
2. The proceeds are collateral in which a S.I. can be perfected by filing in the same office as the original filing; and
3. The proceeds were not acquired w/ cash proceeds (D sold inventory w/ promise to be paid “on account”, i.e. no cash used b/c inventory used).

Hypo on pg. 9 of h/o explains this.

Question 27

Priority Battles - Who Wins? - First to File - Secured Creditors

Answer 27

Easy analysis if its set up correctly.

1. First to file (or perfect otherwise) - After attachment and perfection, the last Q is easy: who has top priority to the value of the collateral if there’s not enough for everyone
   (i) Secured creditors = 1st creditors to have filed fin. state. wins (except control of investment prop or possession of notes or chattel paper)
   (ii) Note - If PMSI involved THIS IS A PERFECTION THAT WILL BE FIRST TO FILE, PMSI IS FILING FOR S.I.’s PURPOSES!!!

Question 28

Priority Battles - Who Wins? - First to File - Lien Creditors

Answer 28

(ii) Lien creditors - creditors who acquire right through judicial process, i.e. by serving a citation to discover assets to enforce a judgment against the D or the trustee in bankruptcy of the D’s bankruptcy case, i.e. “lien creditors.” If the secured creditor’s interest is perfected before the lien arises the secured creditor wins, if not, lien creditor wins.

Question 29

Priority Battles - Who Wins? - First to File - Fixtures

Answer 29

Even if a fixture filing was NOT made (rather UCC filing) perfection by ANY method is effective w/ respect to lien creditors.

Question 30

Priority Battles - Who Wins? - First to File - Buyers in Ordinary Course (BIOC)

Answer 30

A perfected S.I. follows collateral into the hands of a buyer (buyers who pay for and take delivery of collateral before perfection are unaffected by S.I.).

Exception - Inventory sold in the ordinary course of the D’s business is generally no longer subject to the debtor’s lender’s S.I.’s. Protects retail market.

Question 31

Priority Battles - Who Wins? - Purchase-Money (PMSI) Exceptions

Answer 31

Business Context

1. Non-inventory collateral (equipment): If PMSI perfected w/in 20 days of D’s receiving delivery of collateral beats all other secured creditors and lien creditors. If conditions not met, first to file rule.
2. Inventory Collateral - To get super priority in inventory a PMSI creditor must do 2 things before collateral is delivered to D:
3. Perfect the PMSI; and
4. Notify any secured creditor w/ a filed-perfected competing interest in after-acquired inventory in writing that PMSI creditor has/expects to have a PMSI in described inventory (tells them PMSI will win)

Question 32

Enforcement of S.I.’s

Answer 32

Default - gateway to enforcement defined by agreement, not law.

Grabbing & Squeezing!

Question 33

Enforcement of S.I.’s - Repossession

Answer 33

After default secured creditor can repossess the collateral (or render it unusable so the D can’t move it pending sale)

1. W/o notice; and
2. by any means so long as the creditor avoids breaching the please. Will probably be obvious. Creditor can liable for actual damages if it happens.

Question 34

Enforcement of S.I.’s - Repossession - Collecting Accounts

Answer 34

D’s right to collect $ from D’s debtors (“on account”) can be repossessed by telling D’s debtors to pay creditor directly.

Question 35

Enforcement of S.I.’s - Redemption

Answer 35

D can “redeem” the repossessed collateral (take it back) by paying off the C plus the creditor’s repo expense and fees. D has to exercise her right to redeem before that right is formally FORECLOSED or D waives, only after default.

Question 36

Enforcement of S.I.’s - Foreclosure by Sale or Other Disposition

Answer 36

Creditor will sell collateral:

1. Every aspect of sale must be commercially reasonable. Price is one factor, language is vague, judge determined.
2. Notice - creditor must send notice to a number of people, and creditor’s failure to do this properly is a common problem on the BAR exam. See slide 37 for more.
3. Disposition of Sale Proceeds - see slide 38.

Question 37

Enforcement of S.I.’s - Foreclosure by Sale or Other Disposition - Notice

Answer 37

Notice:

1. D;
2. Secondary obligors (guarantors); and
3. If the collateral isn’t consumer goods, other parties whom the disposing creditor actually or constructively (through UCC-1 filing) knows have interests in the collateral.
4. D can waive notice but only after default occurred.

Notice isn’t required if collateral is perishable, will depreciate quickly, or is of a type customarily sold on a recognized market.

Question 38

Enforcement of S.I.’s - Foreclosure by Sale or Other Disposition - Disposition of Sale Proceeds

Answer 38

In this order:

1. Creditor’s costs of sale, including prep.
2. Secured debt to disposing creditor.
3. Debt to subordinate secured creditor who notifies the disposing creditor of its interest.
4. Any excess returns to the D, though more commonly the D remains liable for any deficiency.
5. Surplus goes to D - not likely though.

Question 39

Enforcement of S.I.’s - Strict Foreclosure

Answer 39

Creditor negotiates to buy collateral from the D:

1. Proposal - C sends D a proposal for retaining collateral in exchange for forgiveness of some or all of the D.
2. Notice - Other C’s must get notice whom C actually or constructively knows have interests in the collateral.
3. Assent - Proposal if accepted w/in 20 days of sending D assents by failure to make written objection, and no other notice party objects.
4. Consumer exceptions - In consumer cases
   (i) only full satisfaction of the debt (no partial satisfaction)
   (ii) collateral cannot be in the D’s possession at time of proposal: and
   (iii) No strict foreclosure for consumer goods if the D has paid 60% of the principal amount of the secured loan (D can waive this restriction after default).

Question 40

Enforcement of S.I.’s - Remedies for C’s Failure to Comply

Answer 40

Actual damages for anyone actually injured:

1. Loss of deficiency - C must prove it complied w/ rules and a deficiency nonetheless remains. In non-consumer cases, presumed that a commercially reasonable sale would have left no deficiency. No clear rule in consumer cases, courts vary.
2. Statutory damages in consumer cases - damage award in every violation (or serious of violations) in consumer cases: at least 10% of the original principal of the secured loan plus all interest paid over the life of the loan (credit service charge).