Secured Transactions

Question 1

What does it mean to be secured?

Answer 1

A secured transaction involves a relationship between two parties, typically a debtor and a creditor, where the debtor has given certain assurances in the form of a security interest in specific property to assure that the obligation will be performed.

Question 2

What is a security interest?

Answer 2

An interest in personal property or fixtures that secures payment or performance of an obligation.

Question 3

What is a security agreement?

Answer 3

A CONSENSUAL AGREEMENT that creates a security interest.

Question 4

Define debtor.

Answer 4

A person who has an interest, other than a security interest or other lien, in the collateral, such as the sole owner of the collateral.

Question 5

Who is the obligor?

Answer 5

A person who must pay with respect to the obligation that is secured by a security interest in the collateral.

Question 6

What is collateral?

Answer 6

Property subject to a security interest - MAY BE TANGIBLE OR INTANGIBLE.

Question 7

Stewie loans Peter $1,000 and takes a security interest in Peter’s guitar. What is Peter? What if Peter sells his guitar to Brian? What if Lois guarantees the loan?

Answer 7

The guitar is the collateral here and Peter is both the obligor and the debtor.

If Peter subsequently sells his guitar to Brian without Stewie’s authorization, Peter is still the obligor BUT NOW BRIAN IS THE DEBTOR (not the obligor though).

If Lois guarantees the loan, she becomes an obligor, but not a debtor.

Question 8

T/F - Classification of goods can affect the validity of a security interest, the way it can be perfects, and the rights of third parties (buyer in the ordinary course of business).

Answer 8

True.

Question 9

How is the classification of a good made?

Answer 9

Based on the DEBTOR’S PRINCIPLE USE AT THE TIME WHEN THE SECURITY INTEREST ATTACHES.

Question 10

What are the four different types of goods?

Answer 10

Goods are ANYTHING that is “movable at the time that a security interest attaches.” Includes fixtures, standing timber that is to be cut, unborn animals, growing or unharvested crops, and manufactured homes.

FOUR CLASSES:

1) CONSUMER GOODS - Those acquired primarily for personal, family, or household purposes;
2) FARM PRODUCTS - Goods that are crops or livestock and include supplies that are used or produced in farming;
3) INVENTORY GOODS - Goods, other than farm products, that are 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;
4) EQUIPMENT - The catch-all class, consisting of goods that are NOT consumer goods, farm products, or inventory (example: delivery trucks).

Question 11

Brian is a dairy farmer. He milks his cows and delivers the milk to Family Milk, Inc. which pasteurizes the milk, cartons it and sells it to the local grocery store. Stewie buys the milk to pour on his cereal. What is the milk classified as?

Answer 11

Brian - Farm Product

Grocery Store - Inventory

Stewie - Consumer Good

Question 12

How are intangible goods classified?

Answer 12

CLASSIFICATION DOES NOT TURN ON MANNER IN WHICH DEBTOR USES THE PROPERTY.

Question 13

What are goods that are tangible enough to be possessed but aren’t goods?

Answer 13

QUASI-INTANGIBLE GOODS - this is property usually defined by a WRITING.

Question 14

What are the different classes of quasi-intangible and intangible property?

Answer 14

QUASI-INTANGIBLE:

1) Documents - a document of title, which confers on the holder ownership rights in goods;
2) Instruments - Negotiable instruments such as notes and checks AND Non-Negotiable instruments that evidence a right to payment of a monetary obligation and are transferred in the ordinary course of business by delivery, such as a certificate of deposit from a bank (I.O.U).
3) Investment Property - Includes both certificated and uncertificated securities, such as stocks and bonds;
4) Chattel Paper - Consists of one or more records that evidences both: (a) monetary obligation and (b) a security interest in specific goods or a lease of specific goods.

TRUE INTANGIBLE:

1) Accounts - includes the right to payment of a monetary obligation for goods or services. NOT A CHECKING ACCOUNT! Think Accounts Receivable here;
2) Deposit Account - Includes a savings, passbook, time, or demand account maintained with a bank (such as a checking account);
3) Commercial Tort Claims - Tort claims possessed by an organization, or by an individual, that arose in the COURSE OF THE INDIVIDUAL’S BUSINESS (malpractice is an example). PERSONAL TORT CLAIMS ARE NOT COVERED!;
4) General Intangibles - Residual category of personal property that is not included in other types of collateral (examples: copyrights, trademarks).

Question 15

What does Article 9 of the UCC govern?

Answer 15

Transactions that create, by contract, a security interest in personal property or a fixture.

Question 16

What are “true leases” governed by?

Answer 16

Article 2A has priority.

Question 17

What are disguised sales?

Answer 17

These are NOT “true leases.” A lessee must pay consideration to the lessor and this payment obligation CANNOT BE TERMINATED BY THE LESSEE, PLUS one of the following four conditions is also met:

1) The original term of the lease is equal to or greater than the remaining economic life of the goods;
2) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become owner of the goods;
3) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon completion of the lease; OR
4) The lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon completion of the lease.

Question 18

Do consignments fall under Article 9?

Answer 18

Some do such as a purchase-money security interest in consigned inventory. The following must be true:

1) A person (consignor) must deliver goods to a merchant, WHO DEALS IN GOODS OF THAT KIND, for the merchant to sell (and who does not operate under the same name as the consignor);
2) The merchant is not generally known by its creditors to be substantially engaged in selling goods for others or is not an auctioneer;
3) The value of the goods delivered in each delivery must be AT LEAST $1,000; AND
4) The goods must not be consumer goods immediately before delivery.

NOTE: To protect their interests, consignors must perfect their interests like any other security interest.

Question 19

Are liens subject to Article 9?

Answer 19

Statutory Liens in services and materials (mechanic’s liens) are NOT subject to Article 9. EXCEPTION - The priority provision in Article 9 over other liens.

Agricultural Liens ARE subject to Article 9. These include an interest in farm products that secures payment for either (i) goods or services furnished with respect to the debtor’s farming operation (livestock feed sold to a rancher) OR (ii) rent on real property leased by a debtor in connection with a farming operation.

Question 20

Are sales of receivables covered under Article 9?

Answer 20

Yes

1) Chattel Paper;
2) Promissory Notes;
3) Accounts; and
4) Payment intangibles

The buyer of these receivables is the secured party; the seller is the debtor.

HOWEVER, Article 9 is INAPPLICABLE to some sales and assignments that by their nature do not concern commercial financing transactions. Two notable examples that ARE NOT governed by Article 9 are Sales of Business and Assignment of a Single Receivable in satisfaction of a preexisting debt.

Question 21

Are real property transactions subject to Article 9?

Answer 21

No

HOWEVER, if an Article 9 receivable is secured by real property, then it will still be subject to Article 9.

Question 22

What is the Texas Assignment of Rents Act?

Answer 22

Under Texas law, an assignment of rents arising from real property creates a presently effective security interest in the accrued and unaccrued rents.

Question 23

What is attachment?

Answer 23

A security interest that is enforceable against the debtor with respect to the collateral is said to have ATTACHED to the collateral.

THREE CONDITIONS MUST EXIST:

1) Value has been given;
2) Debtor has rights in the collateral; AND
3) Debtor has AUTHENTICATED a security agreement with a DESCRIPTION of the collateral OR the secured party has POSSESSION OR CONTROL of the collateral pursuant to the security agreement.

Question 24

What classifies as value?

Answer 24

The same consideration needed for contract to be valid BUT NO NEW VALUE NEEDS TO BE GIVEN.

For instance, if you have a loan, and later want to attach a security interest, you don’t need to make another loan to do so.

Question 25

What is needed to have an enforceable security agreement?

Answer 25

THREE THINGS:

1) Record - can be any tangible medium or in electronic form;
2) Describes Collateral - must REASONABLY describe collateral, such as by class but CANNOT be super generic; AND
3) Authenticated - normally a signature but can be any symbol adopted by the debtor such as an email moniker.

NOTE: Consumer goods CANNOT be described by class - so “all Brian’s consumer goods” would not be an acceptable description.

Question 26

What are the alternatives to a written security agreement?

Answer 26

Possession (for tangible collateral) OR Control (for certain intangible collateral) but BOTH must still be pursuant to a security agreement.

A secured party that opts for possession or control owes a duty of REASONABLE CARE with respect to the collateral as well as a duty to keep the collateral identifiable and to relinquish the collateral once the underlying obligation has been satisfied.

Question 27

How does a PMSI arise?

Answer 27

LENDER’S PMSI - Secured party gives value to the debtor in order to enable the debtor to acquire rights in or use of the goods, and the value given was so used.

SELLER’S PMSI - A secured party sold goods to the debtor, and the debtor incurs an obligation to pay the secured party all or part of the purchase.

NOTE: In both of the above situations, the security interest MUST still attach BEFORE a PMSI is created.

NOTE: In a CONSIGNMENT OF GOODS, there is a PMSI in inventory.

Question 28

Explain a PMSI in software.

Answer 28

Exists only where the debtor acquired its interest in software in an integrated transaction in which the debtor also acquired an interest in goods (such as a computer), and the debtor acquired that interest in the software for the principle purpose of using the software in goods.

Question 29

What are dual-status PMSIs?

Answer 29

In a NON-CONSUMER GOODS transaction, collateral does not lose its PMSI status merely because it:

1) Also secures another obligation;
2) The underlying obligation is also secured by other non PMSI collateral; OR
3) The underlying obligation has been renewed, refinanced, or restructured.

Question 30

Explain Accessions v.s. Commingled Goods.

Answer 30

Accessions - are goods that are physically united with other goods in such a manner that the identity of the original goods is NOT LOST. The fact that collateral is or becomes an accession does NOT destroy the security interest in the particular collateral.

Commingled goods - are goods that are physically united with other goods in such a manner that their identity is LOST in the product or mass. Commingled goods LOSE their identity BUT the security interest will now attach to the product or mass.

Question 31

Explain After-Acquired Property v.s. Proceeds.

Answer 31

AFTER-ACQUIRED PROPERTY - A security interest attaches ONLY to the collateral described in the agreement. Thus, if a creditor wishes to also have an interest attach to collateral acquired subsequent to attachment, the creditor must include an AFTER-ACQUIRED PROPERTY CLAUSE.

EXCEPTION - A majority of courts find that the simple description of INVENTORY implies that it includes after-acquired inventory due to the high turnover inherent in inventory.

PROCEEDS - No additional clause in the security agreement is necessary to reach proceeds as attachment of collateral gives the secured party the rights to proceeds automatically.

Proceeds are broadly defined by the UCC as:

1) Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;
2) Whatever is collected on, or distributed on account of, collateral;
3) Rights arising out of collateral;
4) Legal claims arising out of the collateral; OR
5) Insurance claims arising out of the collateral.

NOTE: Further action may still be required to perfect in the proceeds as will be discussed later.

Question 32

Explain attachment vs. perfection.

Answer 32

ATTACHMENT: Describes the process by which a security interest becomes enforceable against the debtor with respect to collateral.

PERFECTION: Generally gives the secured party SUPERIOR RIGHTS in the collateral to an unperfected secured party (and possibly priority over other secured parties).

Question 33

T/F - Attachment does not always mean perfection, and vice versa.

Answer 33

True.

Question 34

What is the process for determining perfection?

Answer 34

ASK:

1) Was the interest attached?; AND
2) Was the interest perfected?

PERFECTION REQUIRES ONE OF THE FOLLOWING:

1) Filing a financing statement;
2) Possession of the collateral;
3) Control over the collateral; OR
4) Automatic (either temporary or permanent).

These four methods vary depending on the type of collateral and security interest.

Question 35

When is filing sufficient for perfection?

Answer 35

Filing is sufficient for ANY collateral EXCEPT:

1) Deposit Accounts;
2) Money; and
3) Letter-of-Credit

Question 36

In filing, what must the financing statement contain? Further, what is the purpose of the financing statement? Is there a difference for real property?

Answer 36

MUST have the following THREE pieces of information:

1) The Debtor’s name;
2) Secured Party’s name; AND
3) A description of the collateral.

PURPOSE: to put other potential creditors on notice that there may be a security interest. This is called NOTICE FILING.

FILING FOR REAL PROPERTY - Additional information is required for real property related collateral such as fixtures, extracted collateral such as oil, and timber to be cut. The following ADDITIONAL information must be included:

4) An indication that it covers this type of collateral;
5) An indication that it is to be filed in the real property records;
6) A description of the real property to which the collateral relates; AND
7) Name of a record owner of the real property if the debtor does not have an interest of record in the real property.

Question 37

What is sufficient for a debtors name on a financing statement?

Answer 37

The debtor’s name must be its CORRECT LEGAL NAME and CANNOT be seriously misleading. If the debtor’s name is not correct, it could VOID the financing statement filing.

SAFE HARBOR - If debtor’s name is incorrect, the statement is nonetheless valid IF a search for the correct legal name in the filing office would uncover the misleading financing statement.

TEXAS INDIVIDUALS - If the individual has a state-issued driver’s license or identification card, the financing statement is correct ONLY if it provides the name of the individual on the driver’s license or identification card (most recent if multiple have been issued). IF NO LICENSE OR ID, the financing statement must contain the surname and first personal name of the debtor.

CORPORATIONS - If debtor is a REGISTERED ORGANIZATION, the debtor’s name for the purposes of the financing statement is the name shown on the public registration records (CERTIFICATE OF FORMATION). FILING UNDER A TRADE NAME IS INSUFFICIENT. FAILING TO LIST A TRADE NAME ALSO RENDERS THE FILING INSUFFICIENT.

Question 38

What if a debtor changes their name?

Answer 38

This causes the filed statement SERIOUSLY MISLEADING, and the SECURED PARTY HAS FOUR MONTHS IN WHICH to filed an AMENDMENT to the financing statement reflecting the new name. FAILURE TO DO SO means that any collateral acquired by the debtor AFTER the four-month period is NOT COVERED by the financing statement.

Question 39

What is required for a secured party’s name?

Answer 39

An error in the name of the secured party on a financing statement DOES NOT AFFECT the perfection of the security interest. BUT the secured party who files a financing statement with such an error may be subject to estoppel in favor of a holder of a conflicting claim in the collateral.

Question 40

Is a financing statement required to be authorized?

Answer 40

The debtor is NOT required to sign the financing statement BUT they MUST AUTHORIZE BY FILING AN AUTHENTICATED RECORD.

An Authenticated Security Agreement AUTOMATICALLY AUTHORIZES a filing with respect to the collateral covered in the agreement.

Question 41

Where does one file a financing statement?

Answer 41

GENERALLY - With the Secretary of State of the state where the debtor is located.

For individuals, this is where they have their principle residence. For organizations, it is the state where they are registered.

For unregistered organizations (partnerships), it is the state where they maintain their place of business. If more than one place of business, then the organization is located where it has its CHIEF EXECUTIVE OFFICE.

EXCEPTION: REAL PROPERTY RELATED COLLATERAL - E.g., Fixtures. These are filed in the real property records in the county where the property is located. This also perfects security interests in rents arising from real property under the Texas Assignments of Rents Act.

Question 42

What additional information is required in a filing but will not destroy effectiveness if absent?

Answer 42

1) Address of both the debtor and the secured party; AND
2) Identify whether the debtor is an individual or an organization.

IF ONE OF THE ABOVE IS MISSING, IT WILL STILL BE ACCEPTED. Should have at least one.

Question 43

What is the effect of filing errors?

Answer 43

The filing office may REJECT the financing statement and it is treated as having not been filed.

HOWEVER, if the filing office’s refusal is UNJUSTIFIED, the statement is treated as having been filed, EXCEPT with respect to a purchaser who gives VALUE IN REASONABLE RELIANCE UPON THE ABSENCE OF THE RECORD from the files. “Purchaser” covers subsequent secured parties.

The filing office’s incorrect indexing of a financing statement DOES NOT AFFECT the effectiveness of the filed financing statement.

Question 44

What is the duration of a financing statement?

Answer 44

EFFECTIVE FOR FIVE YEARS FROM THE DATE OF FILING.

To CONTINUE beyond five years, a CONTINUATION STATEMENT MUST BE FILED WITHIN SIX MONTHS PRIOR TO THE EXPIRATION OF THE FINANCING STATEMENT.

TERMINATION - The effectiveness of a financing statement may be terminated prior to the five-years time-frame by the filing of a TERMINATION STATEMENT.

Question 45

Explain perfection by possession.

Answer 45

A secured party may perfect a security interest in most tangible collateral by taking possession of the collateral. The following collateral may be perfected by possession:

1) Goods;
2) Instruments;
3) Negotiable Documents; and
4) Tangible Chattel Paper

Question 46

T/F - Possession is the EXCLUSIVE method for perfecting money.

Answer 46

True.

Question 47

What is perfection by control?

Answer 47

A secured party may perfect a security interest in specific collateral by taking control of the collateral. The following collateral can be perfected by control:

1) Deposit Accounts;
2) Investment Property;
3) Electronic Documents or Electronic Chattel Paper; and
4) Letter-of-Credit Rights.

NOTE: For Letter-of-Credit rights and deposit accounts (such as checking accounts), control is the EXCLUSIVE METHOD FOR PERFECTION. A secured party can gain control over a deposit account in ONE OF THREE WAYS:

1) The secured party is the bank maintaining the account;
2) The debtor, secured party, and bank have authenticated a record agreeing that the secured party has control; OR
3) The secured party’s name is added to the debtor’s account.

Question 48

When is perfection automatic?

Answer 48

Some types of perfection can occur UPON ATTACHMENT. There are two types:

1) Indefinite Period of Perfection - The major type of indefinite period of perfection is a PMSI IN CONSUMER GOODS. Perfection is automatic upon attachment. NOTE: A PMSI in other goods such as inventory, equipment, or automobiles is NOT automatically perfected (need title).
2) Temporary Period of Perfection - THREE WAYS:
(a) When the secured party perfects by possession and subsequently gives the collateral over to the debtor for resale;
(b) When either the debtor or collateral moves from one state to another; OR
(c) When the collateral is exchanged for or gives rise to proceeds.

When the secured party is perfected, and makes collateral available to the debtor for the purpose of selling or exchanging the collateral, the security interest in the collateral remains perfected for 20 DAYS.

Example: Stewie is perfected via possession in Brian’s inventory of bicycles. Brian requests them for sale. Stewie delivers them. Stewie is perfected in the bicycles for 20 DAYS. IF STEWIE WISHES TO REMAIN PERFECTED, he must file a financing statement or repossess the inventory.

Question 49

What is the effect of inter-state movement of debtor or collateral?

Answer 49

MOVEMENT OF DEBTOR - A perfected security interest remains perfected for FOUR MONTHS after the debtor’s change in location. Further perfection requires a filing in the new state of debtor’s residency. REMEMBER - This also applies to collateral that is acquired subject to a security interest, such as by operation of an after-acquired property clause, within the four month window.

MOVEMENT OF COLLATERAL - When collateral is transferred to a person located in another state who becomes a debtor, a perfected security interest generally remains perfected for ONE YEAR AFTER THE TRANSFER.

FAILURE TO RE-FILE IN THE NEW STATE within the temporary perfection period will result in no perfection at the end of the period. Any new perfectors will be treated as if the first perfector never filed.

Question 50

How are proceeds perfected?

Answer 50

A security interest in proceeds enjoys TEMPORARY PERFECTION and may also be entitled to indefinite automatic perfection.

TEMPORARY - When the security interest in the original collateral is perfected, a security interest in proceeds is perfected for 20 DAYS from the time it ATTACHES.

INDEFINITE AUTOMATIC - Regardless of the above, a security interest in proceeds may continue to be automatically perfected beyond the 20-day period in the following TWO CIRCUMSTANCES:

1) Cash Proceeds - Where the proceeds are identifiable cash proceeds and the security interest in the original collateral is perfected, the perfected security interest in the proceeds continues indefinitely.
2) Same Office - A perfected security interest in proceeds may also continue indefinitely when: (a) the filed financing statement covers the original collateral; (b) the proceeds are collateral in which a security interest may be perfected by filing in the same office in which the original financing statement has been filed; AND (c) the proceeds are NOT acquired with cash proceeds.

Example: A takes SI in B’s sewing machine and properly files describing the collateral as “sewing machine.” B later trades sewing machine for a piano. A’s security interest in the piano remains perfected. HOWEVER, if B sells sewing machine for cash, then uses the cash to buy the piano, then A has 20 DAYS to file an amendment.

NOTE: IF THE ORIGINAL FINANCING STATEMENT DESCRIBES THE COLLATERAL BROADLY ENOUGH, THERE IS NO NEED TO INVOKE THE SAME OFFICE RULE.

Question 51

How does a Certificate of Title affect perfection?

Answer 51

When property is subject to a special statute in lieu of Article 9’s rules on perfection, such as a certificate of title statute for automobiles, the statute dictates the manner of perfection.

Question 52

What are the different types of creditors?

Answer 52

General Unsecured Creditors - One who has a claim, including a judgment, but who has no lien or security interest with respect to the property in question.

Judicial Lien Creditor - One who acquires a lien on the collateral by a judicial process, rather than by operation of law.

Secured Creditor - For priority purposes, there are three major types of secured creditors: (1) those who have perfects, (2) those that have not (unperfected), and (3) those that have perfected a PMSI.

Question 53

Who wins: Unperfected Secured v. General Unsecured?

Answer 53

Secured party will ALWAYS PREVAIL over a general unsecured creditor with respect to the debtor’s collateral.

Question 54

Who wins: Unperfected v. Judicial Lien?

Answer 54

Judicial lien creditor ALWAYS HAS PRIORITY over an unperfected security interest.

HOWEVER, if a judgment lien is acquired AFTER attachment of a security interest, the judicial lien creditor must NOT HAVE KNOWLEDGE of the security interest at the time the lien attaches.

Question 55

Who wins: Perfected v. Judicial Lien?

Answer 55

A judicial lien creditor is a subordinate to a perfected security interest.

Question 56

Who wins: PMSI v. Judicial Lien?

Answer 56

If the secured party has a PMSI that perfects BEFORE OR WITHIN 20 DAYS AFTER the debtor receives possession of the collateral, the perfection will REVERT BACK to the date the debtor receives possession for priority purposes.

Example: A sells B a piano on credit. Five days later, C has the sheriff levy on the piano. A properly files a financing statement 15 days after the original transaction. Despite C’s intervening interest, A’s priority will RELATE BACK to day one.

Question 57

What are advances?

Answer 57

An amount of money lent AFTER the security agreement attaches. Advances made WITHIN 45 DAYS of the lien creditor becoming such will have priority.

Advances made MORE THAN 45 DAYS after the person becomes a lien creditor, are subordinate to the lien creditor UNLESS:

1) The advance is made without knowledge of the lien, OR
2) Is made pursuant to a commitment entered into without knowledge of the lien.

BASICALLY, this gives the secured party a 45 day window to advance money regardless of knowledge.

Question 58

What if you have two separate secured interests?

Answer 58

The GENERAL RULE IS FIRST TO FILE OR PERFECT WINS.

1) Perfected v. Unperfected - The perfected interest takes priority over the unperfected interest regardless of the date the security agreement was signed or the interest attached.
2) Unperfected v. Unperfected - The “first in time, first in right” rule applies with the critical time being the TIME OF ATTACHMENT.
3) Perfected v. Perfected - The first to file or perfect has priority. When both security interests are perfected, priority dates from the time of the filing or perfection, WHICHEVER OCCURS FIRST.

Question 59

What are the four kinds of PMSIs?

Answer 59

1) Consumer Goods - perfection is AUTOMATIC;
2) Equipment / Fixtures - perfections requires a filing WITHIN 20 DAYS of either the debtor receiving the goods or the goods becoming fixtures;
3) Inventory - Perfection requires that a filing must be made PRIOR to the debtor receiving possession of the inventory and the secured party must notify all conflicting security interest holders of the PMSI PRIOR to the debtor receiving possession.

Question 60

What priority does a PMSI have?

Answer 60

As long as the PMSI is properly perfected, it will generally have priority over ALL OTHER SECURITY INTERESTS subject to the following EXCEPTION:

1) PMSI v. PMSI - First to file or perfect rule applies EXCEPT a SELLER’S PMSI TAKES PRIORITY OVER A LENDER’S PMSI.

Question 61

Explain a PMSI in Fixtures vs. Other Interests in Real Property.

Answer 61

A PMSI in fixtures has priority over a prior interest in the real property with which the fixtures are associated IF:

1) The debtor has an interest of record in the real property (owner) or is in possession of the real property (lessee); AND
2) The security interest is perfected by a fixture filing before the goods become fixtures or WITHIN 20 DAYS thereafter.

EXCEPTION: A construction mortgage has priority over a subsequent PMSI in a fixture IF:

1) The construction mortgage is recorded BEFORE the goods become fixtures, AND
2) It only covers goods that become fixtures before the completion of the construction.

Question 62

BIG PICTURE OF PMSIs

Answer 62

1) CONSUMER GOODS - Perfected: AUTOMATICALLY. Priority: EVERYONE BUT BIOCB AND CONSUMER-TO-CONSUMER TRANSACTIONS.
2) NON-CONSUMER/NON-INVENTORY/NON-FIXTURE GOODS - Perfected: FILING WITHIN 20 DAYS OF DEBTOR RECEIVING COLLATERAL. Priority: EVERYONE BUT BIOCB.
3) FIXTURES - Perfected: FILING A FIXTURE FILING PRIOR TO OR WITHIN 20 DAYS OF GOODS BECOMING FIXTURES. Priority: EVERYONE BUT A CONSTRUCTION MORTGAGE.
4) INVENTORY - Perfected: FILING PRIOR TO DEBTOR RECEIVING POSSESSION AND SENDING PROPER NOTICE TO CONFLICTING SI. Priority: EVERYONE BUT BIOCB.

Question 63

T/F - Certain types of purchasers take collateral free and clear of a security interest.

Answer 63

True.

Question 64

Who wins: Buyer vs. Unperfected?

Answer 64

A buyer takes free of any unperfected security interest PROVIDED THAT:

1) The buyer PAYS VALUE;
2) Receives delivery of the collateral; AND
3) Buys WITHOUT KNOWLEDGE of the preexisting security interest.

Question 65

Who wins: Buyer vs. Perfected?

Answer 65

Generall, the buyer of goods takes SUBJECT TO a perfected security interest UNLESS the security interest holder authorizes the sale.

HOWEVER, this rule is subject to some EXCEPTIONS even if the SI is perfected and the buyer knows of its existence if the FOLLOWING CONDITIONS ARE MET:

1) Buyer buys goods (not including farm products);
2) From a MERCHANT who is IN THE BUSINESS OF SELLING GOODS OF THAT KIND; AND
3) In GOOD FAITH and WITHOUT ACTUAL KNOWLEDGE that the sale violates the rights of another in the same goods.

NOTE: Buyer does NOT have to buy in the ordinary course of their own business. The focus is on the SELLER.

Question 66

Who wins: Consumer Buyer vs. Secured?

Answer 66

GARAGE SALE RULE - A buyer of consumer goods takes free of a security interest, even if perfected, UNLESS prior to the purchase, the secured party has FILED A FINANCING STATEMENT covering the goods. To qualify under this rule, however, the CONSUMER MUST:

1) Buy consumer goods for VALUE;
2) For his own PERSONAL, FAMILY, OR HOUSEHOLD USE;
3) From a CONSUMER SELLER; AND
4) WITHOUT KNOWLEDGE of the security interest.

NOTE: A PMSI with automatic protection would NOT be protected under the garage sale rule.

Question 67

Who wins: Purchaser vs. Future Advances?

Answer 67

A purchaser who does not qualify as a BIOCB may STILL take free of a security interest to the extent that it secures an advance made AFTER the EARLIER OF:

1) The time the secured party acquires knowledge of the buyer’s purchase; OR
2) 45 DAYS AFTER the purchase.

Question 68

What are the consequences of default?

Answer 68

Secured party may choose to seek to possess the collateral either through:

1) Judgment - secured party goes to court, proves up default, and gets a judgment.
2) Non-judicial Re-Possession - after default, a secured party is entitled to take possession of the collateral through self-help repossession.
3) In the case of accounts, the secured party has the option to step into the debtor’s shoes for third parties that owe the debtor; secured party can collect directly this way.
4) In the case of fixtures, the secured party is entitled to repossess (remove) the fixture. HOWEVER, if the real property owner to which the fixture is attached is someone OTHER THAN THE DEBTOR, the secured party must REIMBURSE the owner for any DAMAGES CAUSED BY THE REMOVAL but NOT FOR ANY DIMINUTION IN VALUE caused by the absence of the goods.

Question 69

How is collateral disposed?

Answer 69

A secured party may sell, lease, license, or otherwise dispose of all or any collateral so long as the disposition is in all ways COMMERCIALLY REASONABLE. A secured party may dispose of the collateral publicly or privately.

Question 70

What does it mean for a disposition to be commercially reasonable?

Answer 70

A disposition is commercially reasonable if the collateral:

1) Is sold in the usual manner on a recognized market (stock exchange);
2) At the price current in any recognized market at the time of the disposition; OR
3) Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

Question 71

What is the effect of a “commercially unreasonable price?”

Answer 71

Price alone does not establish that the disposition was not commercially reasonable. HOWEVER, a low price can trigger careful scrutiny by the court of all aspects of the disposition and its reasonableness.

Question 72

What is a “commercially reasonable time?”

Answer 72

Article 9 does not mandate a specific time in which a disposition must occur. Instead, surrounding circumstances may dictate what is a commercially reasonable time for disposition.

Question 73

What notice is due by the secured party on disposition?

Answer 73

TO:

1) The debtor;
2) Any other secured party or lienholder that was perfected by filing or pursuant to a statute; AND
3) Any other party from whom the secured party has received authenticated notice of a claim or interest in the collateral.

TIMELY: The notice must be given in a REASONABLE TIME PERIOD. Article 9 provides a safe harbor that 10 DAYS NOTICE PRIOR TO DISPOSITION IS REASONABLE.

CONTENT:

1) The debtor and the secured party’s name;
2) A description of the collateral;
3) How, when, and where the collateral will be disposed; AND
4) A statement that the debtor is entitled to an accounting of the unpaid indebtedness and the charge, if any, for providing that accounting.

IN THE CASE OF CONSUMER GOODS, NOTICE MUST ALSO CONTAIN (in addition to the above):

1) A description of any liability for a deficiency of the person to whom the notification is sent;
2) The telephone number from which the redemption amount is available; AND
3) The telephone number or mailing address from which additional information concerning the disposition and secured obligation is available.

Question 74

What happens to the proceeds of disposition?

Answer 74

A secured party must apply , or pay over for application, cash proceeds of a disposition in the following ORDER:

1) Reasonable expenses for collection and enforcement, including reasonable attorney’s fees (if provided for in the security agreement); then
2) To satisfy the debt owed to the foreclosing secured party; then
3) To satisfy any subordinate security interests (provided that the junior secured party makes a demand prior to the distribution of the proceeds); then
4) The remainder of the proceeds to the debtor.

SHORT HAND - Reasonable Expenses, Secured Party, Subordinate Liens, Debtor.

Question 75

What if the proceeds are insufficient to pay the underlying obligations?

Answer 75

The secured party can seek a deficiency judgment for the remaining amount (but may be an unsecured creditor for that amount).

NOTE: Senior liens do NOT get any of the proceeds. Instead, they continue to have a security interest in the collateral. Junior liens are extinguished by the sale.

Example: Brian, Peter, and Stewie all have a perfected security interest in Lois’s piano. Brian the senior most lien, followed by Peter, and Stewie is last. Lois defaults on her payments to Peter and Stewie (but not Brian). Peter forecloses and sells the piano for $1,000. These proceeds go first to pay Peter’s reasonable expenses, and then would go toward satisfying Peter’s security interest. If there is any left over money, it will go to Stewie and the remainder will go back to Lois. Brian gets nothing but continues to have a security interest in the piano (now in the hands of a third-party).

Question 76

Explain acceptance of collateral.

Answer 76

FULL SATISFACTION - A secured party may accept collateral in full satisfaction of an obligation secured by the collateral when:

1) The debtor consents, after default, to the acceptance in an authenticated record; OR
2) Debtor does not object to the secured party’s proposal to accept the collateral WITHIN 20 DAYS after the proposal is sent.

PARTIAL SATISFACTION - A secured party may accept collateral in partial satisfaction of an obligation secured by the collateral when the debtor consents after default to the acceptance in an authenticated record.

NOTE: For either of the two methods above, the secured party must send notice to the other secured parties who have an interest in the same collateral and cannot accept the collateral in full or partial satisfaction IF it receives objection to the proposed acceptance WITHIN 20 DAYS after such notice was sent.

EXCEPTION 1: CONSUMER DEBTORS - A secured party can accept the collateral only in full satisfaction of the obligation.

EXCEPTION 2: THE 60% RULE - If the goods are CONSUMER GOODS AND DEBTOR HAS PAID 60% of the cash price in the case of a PMSI, OR 60% of the obligation secured in a non-PMSI case, then the goods MUST BE SOLD UNLESS the debtor waives this right to force a sale of the collateral provided it is done AFTER DEFAULT in an AUTHENTICATED AGREEMENT.

Question 77

What is redemption?

Answer 77

Up to any point before the Secured Party has disposed of (or entered into a contract to dispose of) the collateral, the debtor can fulfill all obligations and redeem the collateral. This fulfillment of obligations includes reasonable expenses for repossession.

Question 78

What if a secured party fails to comply with article 9, such as by breaching the peace during a repossession, failing to give proper notice, failing to dispose in a commercially reasonable matter, etc.?

Answer 78

This can lead to injunctive relief, damages, and the reduction of any deficiency judgment sought by the secured creditor.

Question 79

What damages are available for secured party’s failure to comply?

Answer 79

ACTUAL DAMAGES - Any loss caused by the secured party’s failure to comply. May include loss resulting from the debtor’s inability to obtain alternative financing, or the increased cost of obtaining such financing.

STATUTORY MINIMUM FOR CONSUMER GOODS - If the collateral is consumer goods, a debtor may recover an amount NOT LESS THAN the credit service charge, PLUS 10% OF THE PRINCIPLE AMOUNT of the obligation or the time-price differential, PLUS 10% of the cash price, even if the actual damages are less.

REDUCTION OF DEFICIENCY IN NON-CONSUMER TRANSACTION - There is a rebuttable presumption that the secured party is NOT ENTITLED to collect a deficiency which can be overcome by showing that the deficiency would have existed even had the secured party complied with Article 9.

REDUCTION OF DEFICIENCY IN CONSUMER TRANSACTION - In Texas, if the transaction is a consumer transaction and a secured party’s collection, enforcement, disposition, or acceptance is not in accord with Article 9, courts apply AN ABSOLUTE BAR RULE, under which the non-complying secured party CANNOT recover a deficiency. NOTE: THIS IS A RULE IN TEXAS - TEXAS IS IN THE MINORITY IN THIS REGARD.

CONVERSION ACTION FOR IMPROPER REPOSSESSION - When a secured party improperly repossesses collateral, the debtor may be able to pursue a conversion action under non-UCC law.

Question 80

Explain repossession.

Answer 80

A secured party is required to use judicial process (e.g., a replevin action) to obtain possession of the collateral unless possession can be obtained without breach of the peace. “Breach of the peace” is not defined by Article 9 of the UCC; rather, it is left to judicial interpretation.

Anything that would constitute the commission of a crime typically constitutes breach of the peace. An exception is generally made for trespass with respect to the collateral itself (e.g., entering a car) or the debtor’s land (e.g., seizing a car from the debtor’s driveway); however, a breach of the peace is generally found when there is a trespass on the debtor’s residence or garage.

If the debtor physically objects to the seizure of the collateral, that seizure constitutes a breach of the peace; the courts are in disagreement over whether merely verbal objections constitute a breach of the peace.

Question 81

Can the secured party purchase the collateral in a foreclosure sale?

Answer 81

A secured party may purchase the collateral at a public sale, but it cannot do so at a private sale unless the collateral is of a kind that is customarily sold on a recognized market or is the subject of widely distributed standard price quotations.