Secured Transactions

Question 1

Security Interest, Agreements

Answer 1

A. Security interest (SI)—an interest in personal property or fixtures that secures payment or performance of an obligation

B. Agreement—a consensual agreement that provides for the SI; the substance of the
transaction controls, not the form

Question 2

Parties

Answer 2

1. Secured party—the person in whose favor the SI is created under the security agreement
2. Obligor—the person who must pay (or otherwise perform) with respect to the obligation
   that is secured by the SI
3. Debtor—the person who has interest, other than the SI or other lien, in the collateral,
   such as its sole owner (the debtor is usually also the obligor)

Question 3

Collateral – Tangible

Answer 3

property subject to the SI

Tangible collateral
• Goods—anything that is moveable at time that the SI attaches; the debtor’s principal
use at the time the SI attaches determines the class of the goods
o Consumer goods—goods acquired primarily for personal, family, or household
purposes
o Farm products—goods that are crops or livestock and include supplies that are
used or produced in farming
o Inventory—goods, other than farm products, held for sale or lease; are furnished
under a service contract; or consist of raw materials, works in process, or materials
used or consumed in a business
o Equipment—catchall class; consists of goods that are not consumer goods, farm
products, or inventory

• Software—software embedded in goods is treated as part of goods in which it is
embedded; software not embedded in goods is treated as a general intangible

Question 4

Collateral – Intangible

Answer 4

classification is determined without reference to the debtor’s use

• Chattel paper—paper that evidences your right to ongoing lease or sale

• Document—a document of title, which confers on the holder ownership rights in
goods held by a bailee

• Instruments—negotiable note or check

• Investment property—includes both certificated and uncertificated securities, as well
as securities accounts

• Accounts—the right to payment for goods sold OR services rendered

• Commercial tort claims—excludes tort claims by an individual for personal injury or
death

• Deposit accounts
• Letter-of-credit right
• General intangibles—a residual category; e.g., copyrights

Question 5

Eligible Transactions – General rule, Leases, Consignments, and Liens

Answer 5

1. General rule—Art. 9 governs a transaction that creates an SI in personal property or a
   fixture
2. Leases—covered under Art. 9 when the transaction, although in the form of a lease, is in substance a secured transaction
3. Consignments—if subject to Art. 9, the consignor’s SI in the consigned goods is treated
   as a PMSI in inventory
4. Liens—generally not generally subject to Art. 9

Question 6

Attachment of SI – In general

Answer 6

an SI that is enforceable against the debtor with respect to the collateral is said
to have “attached” to the collateral

1. Requirements—(i) value given by the secured party; (ii) the debtor has rights in the
   collateral; and (iii) the debtor has authenticated a security agreement that describes the
   collateral, or the secured party has possession or control of the collateral

Question 7

Attachment of SI – Value given by secured party

Answer 7

can be consideration sufficient to form a contract,
extending credit, accepting delivery under a preexisting contract, or in satisfaction of a
preexisting claim
1. Future advances—may also be secured by collateral

Question 8

Attachment of SI – debtor’s rights in collateral

Answer 8

1. Generally – the SI attaches only to the rights that the debtor has in the collateral
2. Consignments—if the consignor retains title to the consigned goods, the consignee does
   not have rights in them

Question 9

Attachment of SI – security agreement–How to satisfy SoF

Answer 9

the secured party must satisfy the Art. 9 Statute of Frauds (SoF)

1. Authenticated record—the security agreement must (i) be in a record; (ii) contain a
   description of the collateral; and (iii) be authenticated by the debtor
   • The description can list specific items or can identify the Art. 9 type of collateral (“all
   debtor’s equipment) unless the collateral is consumer goods or a commercial tort
   claim; a super-generic description (“all debtor’s assets”) is not sufficient
2. Possession of collateral—can satisfy the SoF; the secured party’s possession must be
   pursuant to the security agreement
3. Control of collateral—can satisfy the SoF; the secured party’s control must be pursuant to the security agreement

Question 10

Attachment of SI – after-acquired collateral

Answer 10

1. General rule—the SI may cover collateral owned when the security is granted and also
   collateral that the debtor acquires after the SI is given
2. Exceptions—an after-acquired clause is not effective for consumer goods, unless the
   debtor acquires them within 10 days after the secured party gives value, or a commercial
   tort claim

Question 11

Attachment of SI – proceeds

Answer 11

the SI attaches automatically to identifiable proceeds (i.e., whatever is acquired
upon disposition of the collateral)

Question 12

Attachment of SI – rights and duties of secured party

Answer 12

1. Duties arising from possession or control of collateral—duty of care; duty to keep collateral identifiable; duty to relinquish possession or control of collateral
2. Rights arising from possession or control of collateral—right to charge for
   reasonable expenses; risk of loss or damage is on the debtor; right to use or operate
   collateral; right to hold proceeds
3. Assignment of account rights—if the debtor assigns his right to receive payment from
   the account debtor to the secured party, the secured party may notify the account debtor to pay the secured party; upon receipt of notification, the account debtor may discharge her obligation only by paying the assignee

Question 13

Attachment of SI – rights of debtor

Answer 13

1. Accounting and other information from the secured party
2. Notification of account debtors by secured party—when account debtors are no longer required to make payments to the secured party

Question 14

Attachment of SI – purchase-money security interest [PMSI]

Answer 14

1. PMSI in goods—exists when:
   • A secured party gave value to the debtor and the debtor used the value to incur an
   obligation that enabled the debtor to acquire goods; or
   • A secured party sold goods to the debtor, and the debtor incurred an obligation to pay
   the secured party all or part of the purchase price
2. PMSI in software—exists only when the debtor acquired his interest in software in an
   integrated transaction in which the debtor also acquired an interest in goods (e.g., a
   computer), and the debtor acquired that interest in the software for the principal purpose of using the software in the goods

Question 15

Attachment of SI – Accessions

Answer 15

goods that are physically united with other goods such that the identity of the
original goods is not lost

1. SI created in collateral that becomes an accession—not lost due to the collateral
   becoming an accession; also, an SI can be created in collateral that is an accession

Question 16

Attachment of SI – Commingled Goods

Answer 16

goods that are physically united with other goods such that their identity is lost in a product or mass

1. No SI in specific goods that have been commingled—but an SI may attach to the
   product or mass that results when the goods are commingled
2. Existing SI in collateral that subsequently becomes commingled goods—the SI is
   transferred to the resulting product or mass

Question 17

Perfection of Security Interest – Methods of Perfection

Answer 17

the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Methods of perfection—filing, possession, control, and automatic perfection

Question 18

Perfection of Security Interest – Filing of Financial Statement – Financing Statement

Answer 18

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

must contain (i) the debtor’s name, (ii) the secured party’s name, and (iii) a description of collateral; it is a notice filing

• Alternatives—security agreement, mortgage

• Debtor’s name—the name on the debtor’s current driver’s license or state-issued
identification card (most states)
o Debtor’s trade name—insufficient by itself; not needed if the debtor’s name is
correctly provided
o Registered organization—the name shown on public organic records (e.g.,
articles of incorporation)
o Debtor’s change of name—the secured party has four months to amend the
financing statement; if not done, collateral acquired by the debtor after the fourmonth
period is not covered by the financing statement
o Error in debtor’s name—a financing statement is not effective unless a standard
search under the debtor’s correct name would disclose the statement
o Error in secured party’s name—an error in the name of the secured party
generally does not affect the perfection of the SI, but could subject the secured
party to estoppel in favor of another claimant

• Description of the collateral—unlike security agreement, the financing statement
may include a super-generic description of the collateral (“all debtor’s assets”) if the
description sufficiently indicates the collateral
o After-acquired property and future advances—a financing statement may be
effective to cover after-acquired property if such property falls within the collateral
described, whether mentioned or even contemplated by the parties at the time the
financing statement was authorized
o Proceeds—an SI in proceeds is perfected even if not mentioned in the financing
statement
o Error in description—the secured party must prepare a termination statement
with respect to the erroneous collateral

Question 19

Perfection of Security Interest – Filling of Financial Statement – Debtor’s Authorization, Person Entitled to File Financing Statement

Answer 19

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

2. Debtor’s authorization—required, but the debtor need not sign the financing statement
   • “Ipso facto authorization”—the debtor’s authentication of the security agreement
   serves as authorization to file the financing statement
   • The debtor’s consent to the filing is presumed when the secured party seeks to perfect
   an SI in any identifiable proceeds of collateral by filing
3. Person entitled to file financing statement—any person may do so; the signature of
   the filer is not required

Question 20

Perfection of Security Interest – Filling of Financial Statement – Filing Location

Answer 20

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Filing Location
Collateral related to real property—the office for recording a mortgage on the
related real property; local filing
• All other collateral—the secretary of state of the state of the debtor’s location;
central filing
o Individual debtor—the state in which the debtor maintains his principal residence
o Nonregistered organization (partnership) debtor—the state in which it maintains its
place of business and, if it has more than one place of business, at its chief
executive office
o Registered organization (corporation)—the state in which it is organized

Question 21

Perfection of Security Interest – Filling of Financial Statement – Effective Date of Filing

Answer 21

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Effective date of filing—upon delivery to the filing office and tender of the filing fee
• Filing office’s refusal to accept
o Justified refusal (e.g., failure to pay fee)—the financing statement is treated as
having not been filed
o Unjustified refusal—the financing statement is treated as having been filed; the
statement is effective except as to a purchaser of the collateral who gives value in
reasonable reliance upon the absence of the record from the files
• Filing office’s incorrect indexing of a statement—does not affect the
effectiveness of a filed statement; the risk of a filing-office error rests on those who
search files, not those who file the statement

Question 22

Perfection of Security Interest – Filling of Financial Statement – Length of Perfection

Answer 22

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Length of perfection—a financing statement is generally effective for five years
• Effective during this period, even though there is no obligation secured by the collateral
and no commitment to make an advance, unless a termination statement has been filed

Question 23

Perfection of Security Interest – Filling of Financial Statement – Continuation Statement

Answer 23

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Continuation statement—effective to extend perfection for an additional five years; no
need for the debtor’s signature; if not filed, the SI is treated as never having been
perfected as against a purchaser of the collateral for value

Question 24

Perfection of Security Interest – Filling of Financial Statement – Amendment of Financing Statement

Answer 24

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Amendment of financing statement—filed to add or delete collateral covered by the statement; effective from the date of filing; does not extend period of effectiveness of the financing statement

Question 25

Perfection of Security Interest – Filling of Financial Statement – Termination Statement

Answer 25

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Termination statement—terminates effectiveness of a financing statement

Question 26

Perfection of Security Interest – Possession

Answer 26

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Possession—an SI in goods, instruments, negotiable documents, money, tangible chattel paper, and certificated security may be perfected by possession; perfection exists only during the period of possession

Question 27

Perfection of Security Interest – Control

Answer 27

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Control—perfection exists only while secured party retains control

1. Collateral perfected by control—only an SI in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents
2. Letter of credit rights—generally, control is the only method of perfection, unless such rights are a supporting obligation for other collateral
3. Deposit account—control is the only method of perfection

Question 28

Perfection of Security Interest – Automatic Perfection – Indefinite Period of Perfection

Answer 28

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

1. Indefinite period of perfection
   • PMSI in consumer goods—automatically perfected upon attachment; a secured
   party does not need to file a financing statement

Question 29

Perfection of Security Interest – Non-Article 9 Rules; Notation for Vehicles

Answer 29

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Non-Article 9 rules: notation for vehicles—a non-Art. 9 statute controls the manner of perfection; filing is not sufficient if a statute requires a notation of the SI on the certificate of title

Question 30

Perfection of Security Interest – Timing of Perfection

Answer 30

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

Timing of perfection—upon (i) attachment of the SI and (ii) compliance with a method of
perfection; if there is a change in the method of perfection without a lapse, then the perfection dates from the date on which the SI is first perfected

Question 31

Priorities – Claimants and Creditors – General Creditor, Judicial Lien creditor

Answer 31

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

A. Claimants—creditors, transferees/buyers, other secured parties

B. Creditors

1. General creditor (unsecured)—has a claim, including a judgment, but no lien on or SI
   in collateral
   • Result: an SI always prevails over a general creditor’s rights in the debtor’s collateral
2. Judicial lien creditor—acquires a lien on the collateral by a judicial process

• Result: a perfected SI has priority over a judicial lien; a judicial lien has priority over
an unperfected SI unless the only reason the SI was unperfected was that the secured party had not yet given value

o PMSI exception—if a PMSI is perfected before or within 20 days after the debtor
receives possession of the collateral, the PMSI has priority over a creditor’s rights
that arose between the time of attachment of the SI and filing

o Advances—an SI securing an advance is subordinate to a lien creditor’s rights
when the advance is made more than 45 days after the person becomes a lien
creditor, unless the advance or commitment is made without knowledge of the lien

Question 32

Priorities – Transferees: General Rules, Buyer in the Ordinary Course of Business [BOCB]

Answer 32

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

1. General rules
   • Buyer’s rights v. unperfected SI—the buyer takes the collateral free of the SI if the
   buyer (i) give value, and (ii) receives delivery, (iii) without knowledge of the SI
   • Buyer’s rights v. perfected SI—the buyer generally takes the collateral subject to the SI
2. Buyer in the ordinary course of business (BOCB)—(i) buys goods (not farm products)
   by giving new value (cash, etc., not existing debt); (ii) in the ordinary course of business;
   (iii) from a merchant in the business of selling goods of that kind; (iv) in good faith; and
   (v) without actual knowledge that the sale violates another’s rights in the goods
   • Result: BOCB takes free of any SI in goods given by buyer’s seller

Question 33

Priorities – Transferees: Buyer of Negotiable Instrument or Document, Buyer not in the ordinary course of business

Answer 33

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

5. Buyer of negotiable instrument or document—the buyer takes free of any SI
6. Buyer not in the ordinary course of business—the buyer generally takes free of any
   SI that secures an advance made after the earlier of (i) the time the secured party acquires knowledge of purchase or (ii) 45 days after purchase

Question 34

Priorities – Transferees: Transferee of money/funds, Article 2 Security Interest, “Clean” certificate of title

Answer 34

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

7. Transferee of money or funds—generally takes free of an SI in money or funds; a
   debtor is not treated as a transferee
8. Article 2 security interest—an Art. 2 SI of a buyer or seller with possession of the goods
   has priority over an Art. 9 SI
9. “Clean” certificate of title—a buyer without knowledge of a prior SI not noted on the
   title takes the goods free of that SI

Question 35

Priorities – Priorities among secured parties – General rules

Answer 35

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

1. General rules
   • Perfected SI v. perfected SI—the first to file or perfect has priority; a lapse in filing or perfection restarts the clock

• Perfected SI v. unperfected SI—a perfected SI has priority over an unperfected SI

• Unperfected SI v. unperfected SI—the first to attach has priority (“first in time,
first in right” rule)

Question 36

Priorities – Priorities among secured parties – PMSI priority rules

Answer 36

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

2. PMSI priority rules
   • PMSI v. non-PMSI—generally, a PMSI has priority

• PMSI in goods other than inventory or livestock v. any SI—a PMSI has priority
if perfected before or within 20 days after the debtor receives possession of collateral

• PMSI in inventory or livestock v. any SI—a PMSI has priority if perfected by the
time the debtor receives possession of the collateral, and the purchase-money secured
party sends an authenticated notice of the PMSI to the holder of any conflicting SI that
was perfected by filing

• Perfected PMSI v. perfected PMSI—the first to file or perfect has priority
o Exception—a seller with a PMSI has priority over a lender with a PMSI

• Proceeds from PMSI in goods—priority of a PMSI in goods generally extends to the
proceeds of the original collateral, if the SI is perfected when the debtor receives
possession of collateral or within 20 days thereafter

Question 37

Priorities – Priorities among secured parties – fixtures

Answer 37

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

3. Fixtures
   • SI in fixtures versus real property interest—an SI in fixtures has priority over an
   interest in the real property with which the fixtures are associated if the SI in fixtures is
   perfected by a fixture filing before the real property interest is recorded
   • Perfected SI in fixtures versus subsequent judicial lien—a perfected SI in
   fixtures has priority
   • PMSI in fixtures v. prior real property interest—a PMSI in fixtures has priority if it
   is perfected by a fixture filing before the goods become fixtures or within 20 days
   thereafter
   • SI in fixtures v. prior construction mortgage—a prior construction mortgage has
   priority if recorded before the goods become fixtures

Question 38

Priorities – Priorities among secured parties – Proceeds

Answer 38

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

4. Proceeds
   • General rule—“first to file or perfect” rule applies; the filing or perfection date for the
   original collateral is the filing or perfection date for the proceeds
   o Proceeds of non-filing collateral—the priority of the original collateral generally
   continues in the proceeds if the SI in the proceeds is perfected and the proceeds
   are cash proceeds or proceeds of same type as the original collateral

Question 39

Priorities – Priorities among secured parties – Future advances, Accessions

Answer 39

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

5. Future advances
   • General rule—“first to file or perfect” rule generally applies; the time that an advance
   is made usually does not determine priority
6. Accessions—general priority rules govern

Question 40

Default – Circumstances Constituting Default

Answer 40

Default—undefined by Art. 9; left up to the parties

1. In general—a security agreement is a contract; contract law determines the enforceability
   of any terms in a security agreement
2. Agreement not to assert defenses against an assignee—permitted by Art. 9

Question 41

Default – Consequences of Default

Answer 41

Default—undefined by Art. 9; left up to the parties

Consequences of default—the secured party may (i) seek possession of the collateral and sell it or retain it, or (ii) sue for a judgment based on the obligation

1. Cumulative remedies, simultaneous exercise
2. Ignoring default—may be treated as waiver of the secured party’s rights
3. SI in fixtures—the secured party may remove the fixture from the real property if the SI
   has priority; the secured party is liable for repair costs
4. SI in accession—the secured party may remove the accession from other property if the accession SI has priority
5. Secured party and account debtors—upon default, the secured party may notify an
   account debtor to pay the secured party

Question 42

Default – Possession of Collateral

Answer 42

Default—undefined by Art. 9; left up to the parties

Possession of collateral—a secured party is not required to give notice of default, nor of an
intent to take possession of the collateral

1. Limitation on means of possession—no breach of the peace
2. Rendering equipment unusable—permitted

Question 43

Default – Disposition of Collateral – Standard for disposition, Price, Time of Disposition, Type of Disposition

Answer 43

Default—undefined by Art. 9; left up to the parties

1. Standard for disposition—all aspects of the disposition must be commercially reasonable (method, manner, time, and place)
2. Price—no specific price must be obtained; the mere fact that a higher price could have
   been obtained does not establish unreasonableness
3. Time of disposition—no specific time is required; immediate disposition is not always required
4. Type of disposition—disposition may be by either public or private sale, but the secured party cannot purchase the collateral at a private sale

Question 44

Default – Acceptance of Collateral [Strict Foreclosures]

Answer 44

Default—undefined by Art. 9; left up to the parties

1. Full satisfaction of obligation—(i) the debtor consents, after default, to acceptance in
   an authenticated record; or (ii) the debtor does not object to the secured party’s proposal
   to accept the collateral within 20 days after the proposal is sent
2. Partial satisfaction of obligation—the debtor consents, after default, to acceptance in an authenticated record
3. Notification of parties other than the debtor—the secured party must notify any
   other secured party or lien holder of record, or person who timely notified the secured party of a claim of an interest in the collateral
4. Special rules for consumer debtors
   • Partial satisfaction—acceptance of the collateral in partial satisfaction of the
   obligation is not permitted in a consumer transaction; the secured party can only
   accept the collateral in full satisfaction of the obligation
   • Strict foreclosure—if the consumer goods are in possession of the secured party, no strict foreclosure is permitted if the debtor has paid at least 60% of the cash price in the case of PMSI, or 60% of the obligation in the case of non-PMSI; the goods must be sold, not kept in satisfaction
   o Waiver permitted, but only after default and in an authenticated agreement

Question 45

Default – Redemption of Collateral

Answer 45

Default—undefined by Art. 9; left up to the parties

1. Method of redemption—the redeemer must fulfill all obligations secured by the collateral and reasonable expenses incurred by the secured party in retaking the collateral or preparing for its disposition; an acceleration clause can require the redeemer to tender the
   entire balance of the secured obligation
2. Time limit on redemption—redemption is not permitted after disposition or foreclosure
3. Waiver of right of redemption—only permitted after default and by an authenticated
   agreement

Question 46

Default – Remedies for a secured party’s failure to comply

Answer 46

Default—undefined by Art. 9; left up to the parties

1. Basic remedies
   • Injunctive relief—sought by debtor from a court to compel or restrain the secured
   party
   • Actual damages—any losses suffered by the debtor due to the secured party’s failure
   to comply with Art. 9
   • Consumer goods: minimum statutory damages—a debtor or secondary obligor
   may recover an amount not less than the credit service charge, plus 10% of the
   principal amount of the obligation or time-price differential, plus 10% of the cash price, even if actual damages are less
   • Limitation on deficiency for failure to comply with Art. 9
   o Commercial transactions—there is a rebuttable presumption that the secured
   party is not entitled to collect a deficiency; rebutted by showing that the deficiency
   would have nevertheless existed; no damages if the deficiency is only reduced or
   eliminated as a consequence of the secured party’s failure to comply with Art. 9
   o Consumer transactions—many courts apply the same rule as for commercial
   transactions, but some courts bar deficiency
2. Conversion action—by the debtor against the secured party for the improper possession of the collateral
3. Non-liability of secured party to unknown debtor or obligator

Question 47

Eligible Transactions – Agricultural Liens, Purchases, and Real Property Transactions

Answer 47

5. Agricultural liens—unlike other liens, generally subject to Art. 9
6. Purchases—generally, the sale of personal property is not subject to Art. 9

7. Real property transactions—not generally subject to Art. 9; but can apply to an SI in a
secured obligation (e.g., a promissory note) even though the obligation is itself secured by a transaction or interest to which Article 9 does not apply (e.g., a real property mortgage)

Question 48

Perfection of Security Interest – Automatic Perfection – Temporary Perfection

Answer 48

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

2. Temporary perfection
   • New value—if new value is given under an authenticated security agreement, an SI in
   certificated securities, negotiable documents, or instruments is automatically perfected for 20 days from attachment

• Delivery of collateral to debtor—if the collateral is delivered to the debtor for the
purpose of selling or exchanging it, the SI in the collateral remains temporarily
perfected for 20 days

• Interstate movement of collateral or debtor
o Movement of the debtor to another state—four-month grace period for a
perfected SI
o Movement of collateral to debtor in another state—one-year grace period for
a perfected SI
o Perfected possessory SI—no effect on perfection when the SI is perfected under
the new state’s laws
o Effect of a lapse of perfection—the SI generally ceases to be perfected upon the
expiration of the temporary perfection period

Question 49

Perfection of Security Interest – Automatic Perfection – Proceeds

Answer 49

Perfection of Security Interest—the SI is perfected upon attachment of that interest and
compliance with one of the methods of perfection; perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral

3. Proceeds
   • Temporary perfection—if SI in original collateral perfected, SI in proceeds perfected for 20 days from attachment

• Indefinite automatic perfection
o Cash proceeds—if the SI in the original collateral is perfected, then the SI in the
identifiable cash proceeds is perfected indefinitely
o Same office—if a filed financing statement covers the original collateral and the
proceeds are collateral in which an SI may be perfected by filing in the office in
which the financing statement has been filed, then a perfected SI in proceeds may
continue indefinitely
 Does not apply to proceeds acquired with cash proceeds
 Limitation—if the original filing ceases to be effective after the 20-day period, the SI in proceeds also ceases to be automatically perfected

Question 50

Priorities – Claimants and Creditors – Statutory/Common-Law Lien Creditor

Answer 50

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

A. Claimants—creditors, transferees/buyers, other secured parties

B. Creditors

3. Statutory or common-law lien creditor—has a possessory lien on the collateral by
   statute or common-law rule (i.e., a nonconsensual lien)

• Result: a possessory lien has priority over any SI if the lien secures payment for
goods or services furnished in the ordinary course of business (e.g., mechanic’s lien)
unless a statute provides different priority rule

Question 51

Priorities – Transferees: Consumer Buyer, Purchasers of Chattel Paper

Answer 51

Priorities—Art. 9 prioritizes claims and pays them in order; the holder of a priority can agree to subordinate his interest to another’s interest

3. Consumer buyer—(i) buys consumer goods for value; (ii) for his own personal, family, or
   household use; (iii) from a consumer seller; and (iv) without knowledge or record notice of
   the security interest
   • Result: a consumer buyer takes free of any SI in consumer goods unless a secured
   party has filed a financing statement covering the goods (“garage sale” rule)
4. Purchasers of chattel paper—(i) gives new value and has possession/control of
   collateral; (ii) purchase is made in good faith and in the ordinary course of business, and
   (iii) the chattel paper does not indicate an assignment to an identified assignee (for an SI
   claimed as proceeds of inventory), or a purchase made without knowledge that the
   purchase violates secured party’s rights (for all other SIs)
   • Result: a purchaser of chattel paper has priority over an SI in the chattel paper

Question 52

Default – Disposition of Collateral – Notice of Disposition

Answer 52

Default—undefined by Art. 9; left up to the parties

5. Notice of disposition—the secured party is generally required to send an authenticated
   notification of disposition
   • To—(i) debtor, (ii) any secondary obligor, (iii) any other secured party or lien holder
   who has an SI perfected by filing, and (iv) any party who has notified the secured
   party of a claim or interest in the collateral
   • When—at least 10 days before disposition
   • Exceptions to notification—(i) the collateral is perishable or threatens to decline
   speedily in value; (ii) the collateral is of a type customarily sold on a recognized market; (iii) the person has waived his right in an authenticated writing

Question 53

Default – Disposition of Collateral – Application Proceeds from Disposition

Answer 53

Default—undefined by Art. 9; left up to the parties

6. Application of proceeds from disposition
   • Cash proceeds—first to reasonable disposition expenses, then to satisfy the secured obligation, then to satisfy subordinate SIs (if the secured party made an authenticated
   demand before distribution is complete), and any remainder to the debtor
   • Non-cash proceeds—applied or paid over for application only if the failure to do so
   would be commercially unreasonable
   • Treatment of a surplus or deficiency—generally, the debtor is entitled to any
   surplus and is liable for any deficiency
   o Not the case for sale of accounts, chattel paper, payment intangibles, or promissory
   notes
   • “Low price” disposition to secured party—the amount of the deficiency may be
   adjusted to reflect the higher price that would have been realized from another person
   • Notice in consumer goods transaction—the secured party must send written
   notice as to any deficiency or surplus to the debtor upon demand

Question 54

Default – Disposition of Collateral – Transferee’s Rights, Warranties

Answer 54

Default—undefined by Art. 9; left up to the parties

7. Transferee’s rights—the sale of the collateral gives the purchaser at the sale all of the
   debtor’s rights in the collateral; the collateral remains subject to any senior SI
8. Warranties—the disposition of the collateral includes the warranties of title, possession,
   and quiet enjoyment; the warranties may be disclaimed or modified