Secured Transactions

Question 1

What is the scope of Art. 9?

Answer 1

Applies to consensual security interests in personalty and fixtures i.e. chattel. When collateral is real estate, we’re dealing w/ mortgages.

Question 2

How does a creditor create an enforceable security interest in debtor’s collateral i.e. how does the creditor attach?

Answer 2

Attachment means SI is enforceable. Requires: value, contract, rights in collateral

Question 3

Once attached, how does the creditor attain perfection?

Answer 3

Putting world on record notice of its existence.

Question 4

When more than one creditor has a stake in the same collateral, what are the rules of priority?

Answer 4

Generally, first in time first in right.

Question 5

What if debtor defaults on debt or obligation?

Answer 5

Art. 9 lender has statutory and judicial remedies.

Question 6

Under Art. 9, what kind of collateral can we deal with?

Answer 6

1) Tangible goods: consumer goods, EQU, INV, farm products or fixtures. To determine what kind of good we’re dealing w/, look to the PRIMARY USE of the good in hands of the DEBTOR (subjective)
2) Intangibles or semi-intangibles: patents, trademarks, copyright, stocks, bonds, proceeds of sale, accounts, promissory notes, and drafts.

Question 7

For purposes of attachment, what is the value requirement?

Answer 7

Creditor must give value to debtor.

Question 8

For purposes of attachment, what is the contract requirement?

Answer 8

A security agreement (record) must evidence the secured transaction unless the secured party has taken possession of the collateral. If debtor is in possession of the collateral, record must:

1) be authenticated by debtor i.e. signed or marked AND
2) reasonably identify collateral

Question 9

What are after-acquired collateral clauses and are they enforceable?

Answer 9

They are clauses such as SI “in all A’s INV, whether now held or hereafter acquired.” Like a floating lien in TANGIBLE goods. This is enforceable.

Question 10

For purposes of attachment, what is the rights requirement?

Answer 10

Debtor must have rights in the collateral in order to assign an interest.

Question 11

What is perfection of a security interest?

Answer 11

Putting the world on record or constructive notice of the secured party’s existence. Proper perfection helps to protect the secured party from competing creditors.

Question 12

What are the three main ways to attain perfection of an SI?

Answer 12

1) Secured party takes possession of collateral
2) Auto perfection for PMSI in consumer goods
3) Secured party files notice of SI in public records, putting potentially competing creditors on record or constructive notice of filer’s claim.

Question 13

What is a purchase money security interest?

Answer 13

SI that enables D to purchase goods. Because we want to encourage lending to consumers, perfection is automatic for consumer goods PMSIs.

Question 14

If perfection is by filing, what must be filed?

Answer 14

Typically, a financing statement, which is a simple document containing:

1) D’s name and address
2) C’s name and address
3) Description of collateral
* *The only purpose is to provide interested parties w/ sufficient info to make further inquiries. Art. 9 encourages e-filing, but is “media neutral.”

Question 15

Where must a financing statement be filed?

Answer 15

File w/ State Corporation Commission in the state where debtor is located.
*If debtor is an individual, he is located in state of residence.
**If debtor is a registered organization, it is located in state under whose laws it is organized.
EXCEPT: if collateral is timber, mineral, or fixture, file locally in count where Blackacre is located.

Question 16

When there is more than one creditor, in what order do parties have priority in the collateral?

Answer 16

1) Buyer in the OCOB
2) Perfectly attached creditor
3) Lien creditor
4) Non-ordinary course buyer
5) Attached unperfected creditor
6) General unsecured creditor

Question 17

In a contest between an attached unperfected creditor v. the world, who wins?

Answer 17

AUPie’s interest is enforceable against debtor, and he will defeat any subsequent AUPie or general unsecured creditor. BUT AUPie will lose to a perfected attached creditor, lien creditor or any buyer w/o notice of the SI.

Question 18

When does a perfectly attached creditor not win?

Answer 18

1) Another PAC filed first
2) certain PMSI holders
3) buyer in OCOB

Question 19

What is the special effect that Art. 9 gives for early filing?

Answer 19

If an early filer subsequently attaches, she is allowed the benefit of her earlier filing. Priority will related back to the early filing date.

Question 20

Who is an after-acquired collateral financier and who is a PMSI holder?

Answer 20

AACF: takes as collateral a security interest in all of D’s EQU, INV, etc., whether now held or hereafter acquired.
PMSI: enables D to purchase specific goods.

Question 21

How does the AACF collide w/ the PMSI?

Answer 21

When collateral is EQU, if A is an AACF and B extends funds to create a PMSI, B must file properly w/in 20 days to take priority.

When collateral is INV, if A is an AACF and B extends funds to create a PMSI, B must:

1) File properly before D takes possession AND
2) Notify A of the PMSI before D takes possession.

Question 22

What is default?

Answer 22

Debtor breaches the contract i.e. default is whatever the security agreement says it is.

Question 23

Once debtor has defaulted, what are a creditor’s remedies?

Answer 23

1) Self-help repossession, as long as creditor doesn’t breach the peace/do anything provocative or likely to cause violence. If D protests, there’s a breach.
2) C may get a judicial writ, ordering sheriff to obtain possession of collateral and deliver to secured party.
3) Strict foreclosure
4) Sale
5) Action for deficiency judgment

Question 24

When may a creditor engage in self-help repossession?

Answer 24

1) If collateral is D’s home, SP can’t enter w/o D’s voluntary, contemporaneous consent because the home is a zone of privacy.
2) If collateral is outside the home, SP may take collateral so long as there’s no D objection.
* *Civil and criminal penalties attach to creditor’s misconduct.**

Question 25

What is strict foreclosure?

Answer 25

Occurs when SP retains the collateral in full satisfaction of the debt still owed. C lawfully retains collateral and debt in turn is cancelled.

Question 26

How may a party strictly foreclose?

Answer 26

Secured party must send a written proposal to retain collateral in satisfaction of debt.

1) When collateral is consumer goods, notice sent to debtor + secondary obligors.
2) When collateral is not consumer goods, notice sent to debtor + other secured parties who told foreclosing creditor of SI + perfected creditors + secondary obligors.
* If any notified party objects w/in 20 days after the notice is sent, strict foreclosure won’t be allowed. Collateral must be disposed of by sale.*

Question 27

What is the 60% rule with respect to consumer goods?

Answer 27

If collateral is consumer goods and D paid 60% of loan in event of non-PMSI or 60% of cash price in event of PMSI, strict foreclosure isn’t allowed. Secured party must sell the collateral w/in 90 days or be liable in conversion.

Question 28

What is the sale remedy?

Answer 28

Secured party may sell the collateral and apply proceeds to the debt. Secured party chooses whether the sale will be public or private.
TWO REQUIREMENTS: 1) every aspect of sale must be commercially reasonable; 2) prior to sale, notice must be sent.

Question 29

What are the Art. 9 standard notice forms that a presumptively reasonable?

Answer 29

1) If collateral is consumer goods, notice must be sent to debtor + 2d obligors
2) W/ other types of collateral, notice to debtor + secured parties who advised foreclosing C of interest + perfected Cs + 2d obligors
3) If notice of public sale, must state time and place of sale.
4) If notice of private sale, must state time after which sale will be made.
5) In consumer goods, must notify of how to calculate deficiency and how D can redeem.
6) In a nonconsumer transaction, 10+ days notice is “reasonable.”

Question 30

May the secured party buy at the sale?

Answer 30

If public sale, yes.

If private sale, not unless there are external market checks.

Question 31

What if a secured party sells collateral at a low price to an insider buyer?

Answer 31

Price that an independent 3d party would have paid, rather than the actual amount paid, is the price that will be used in calculating the deficiency.

Question 32

What is debtor’s limited right of redemption?

Answer 32

1) Right to redeem the collateral is cut off once SP has resold or completed a strict foreclosure.
2) To redeem, D must pay the missed payments plus, any interest + C’s reasonable expenses including attorney’s fees.
3) If SA contains an acceleration clause, to redeem the debtor must pay off the entire debt + interest + expenses.