Secured Transactions

Question 1

Scope of Article 9: General

Answer 1

Article 9 applies to consensual/voluntary security interest in PERSONALTY and FIXTURES

Article 9 does NOT apply to

(a) Statutory liens
(b) Mechanics liens

(When the collateral is real estates, apply the law of land mortgages)

Question 2

Scope of Article 9: Personalty

Answer 2

Personalty equals goods

Question 3

Scope of Article 9: Cast of Characters

Answer 3

(1) Debtor: entity who owes the money
(2) Secured party or secured creditor: entity who lends the money
(3) Security agreement: Contract or record - authentication of collateralization
(4) Security interest: Right creditor has in a debtor’s personalty or fixture
(5) Collateral: the personalty or fixtures that creditor can look to for satisfaction

Question 4

Scope of Article 9: Collateral

Answer 4

Collateral is the personalty or fixtures that creditor can look to for satisfaction

(1) Tangible collateral or goods:
(a) Consumer goods: items used for personal or familial purposes (e.g., home, car, blender)
(b) Equipment: items used in business (e.g., cash register, dental chair, painting on wall)
(c) Inventory: goods held for sale or lease (e.g., stock of clothing, furniture)
(d) Farm products: crops, livestock, supplies used in farming operations (e.g., cows, eggs)
(e) Fixtures: items annexed to realty (e.g., lighting fixtures, sprinkler system)

(2) Intangible or semi-tangibles:
(a) Patents, copyright, trademark
(b) Stocks, bonds, mutual funds
(c) Accounts (right to payment for goods or services)
(d) Proceeds from sale of collateral
(e) Promissory notes, drafts (pieces of commercial papers, writings evidencing a right to payment)

Question 5

Attachment: Definition

Answer 5

Attachment is the creation of an enforceable security interest in a debtor’s collateral

Question 6

Attachment: Requirements

Answer 6

In order to attach, need VCR:

1) Value
(2) Contract (or possession
(3) Rights in the collateral

Question 7

Attachment: Requirements - Value

Answer 7

Value must be given by creditor

Question 8

Attachment: Requirements - Contract

Answer 8

A contract, called the SECURITY AGREEMENT must evidence the secured transaction UNLESS the secured party has taken possession of the collateral

If the secured party is in possession of the collateral, there is no need for a record.

If the debtor is in possession of the collateral, we need a security agreement/record/contract.

Record must:

(1) Be authenticated by the debtor (signed or electronically marked), and
(2) The record must reasonably identify the collateral

Question 9

Attachment: Requirements - Rights in the Collateral

Answer 9

Debtor must have rights in the collateral

Question 10

Attachment: After-Acquired Collateral Clauses

Answer 10

After-acquired collateral clauses are enforceable

Question 11

Perfection: Definition

Answer 11

Perfection is best understood as a publication device

It is something that the SECURED party does to put the world on notice of the secured party’s existence. Proper perfection helps to protect the secured party from competing creditors.

Question 12

Perfection: How to Attain Perfection

Answer 12

Three ways to attain perfection

(1) Secured party takes possession of the collateral

(2) Automatic perfection:
(a) For purchase money security interest (PMSI) in goods: automatic perfection upon attachment (PMSI is a security interest that enables the debtor to purchase the goods)
(b) For security interests in small-scale assignment of account or payment intangible that does not alone transfer a significant part of the assignor’s outstanding accounts or payment intangibles to the creditor

(3) Secured party files notice of the security interest in public record. Puts possible competing creditors on record or synonymous notice of filer’s claim
(a) Document filed: (i) Financing statement; (ii) Security agreement rarely filed
(b) No perfection for filing money or deposit accounts

Question 13

Perfection: How to Attain Perfection - Financing Statement, requirements

Answer 13

Financing statement is a simple document with sufficient information allow interested parties to make follow up inquiries

A financing statement is ineffective if it contains any seriously misleading errors (e.g., misspelling debtor’s name, unless search for correct name would pull up the name spelled erroneously)

Need only contain:

(1) Debtor’s name (for corporation, public record) and address (trade name does not count)
(2) Creditor’s name and address (more room for mistake)
(3) Description of the collateral (super generic descriptions are okay)

Question 14

Perfection: How to Attain Perfection - Financing Statement, where to file

Answer 14

(1) Filing is done centrally with the state Secretary of State in the state where the debtor is located
(a) If the debtor is an individual, he is located in the state of his principal residence
(b) If the debtor is a register organization (e.g., corporation, LLC, LLP), it is located in the state under whose laws it is organized

(2) Exception: if the collateral is timber, minerals, or fixtures, file locally in the county where the realty is located

Question 15

Priority: Basic Concept

Answer 15

If more than one party stakes a claim to the same collateral, who gets to take first, second etc.?

Piggish norm: Each claimant is entitled to satisfaction in full before a subordinated (junior) claimant is entitled to take

Question 16

Priority: Cast of Characters

Answer 16

(1) Attached Unperfected Creditor (AUPie): creates an enforceable security interest (attaches), but either does not perfect for fails to perfect properly
(2) Lien creditor (LC): General unsecured creditor who goes to court to get a judicial lien on the collateral
(3) Perfected Attached Creditor (PAC): Art. 9 creditor who succeeds in attaining perfection
(4) Non-Ordinary Course Buyer (NOCie): Someone who purchases collateral outside ordinary stream of commerce
(5) Buyer in Ordinary Course (BIOC): Someone who purchases collateral from merchant’s inventory
(6) General Unsecured Creditor (GUC): Lender who never bothered to take collateral

Question 17

Priority: General Ranking

Answer 17

1. Buyer in ordinary course (BIOC)
2. Perfected attached creditor (PAC)
3. Lien creditor (LC)
4. Non-ordinary course buyer (NOCie)
5. Attached unperfected creditor (AUPie)
6. Generalized unsecured creditor (GUC)

Question 18

Priority: Attached Unperfected Creditor (AUPie) v. The World

Answer 18

(1) AUPie’s interest is enforceable against debtor
(2) AUPie will defeat any subsequent later in time AUPie
(3) AUPie will defeat any generalized unsecured creditor (GUC)
(4) AUPie will lose to perfected attached creditor (PAC), lien creditor (LC), and buyer without knowledge of the security interest

Question 19

Priority: Perfected Attached Creditor (PAC) v. The World

Answer 19

Basic rule, PAC defeats all EXCEPT (1) PAC who filed first, (2) certain purchase-money security interest (PMSI) holders, and (3) buyer in ordinary course (BIOC)

Question 20

Priority: Early Filing

Answer 20

If an early filer (e.g., during negotiations) subsequently attaches, she is allowed the benefit of hear early filing – priority relates back to the early filing date

Question 21

Priority: Perfected Attached Creditor (PAC) v. The World - PAC v. PAC

Answer 21

PAC v. PAC who filed first: first in time, first in right

Question 22

Priority: Perfected Attached Creditor (PAC) v. The World - PAC v. PMSI-Holders

Answer 22

After-acquired collateral financier (AACF) PAC v. PMSI-holder –> PSMI-holder wins if satisfies recording requirements

(a) AACF: secured creditor who takes as collateral a security “in all of Debtor’s [e.g. inventory]
(b) PMSI: security interest that enables debtor to purchase the goods; extension of value by lender who takes as collateral a security interest in the very item that its loan enables the debtor to acquire

Scenarios:
(1) When collateral is equipment: PMSI gets priority if files properly within 20 days after debtor takes possession

(2) When collateral is inventory: PMSI gets priority if (a) properly records before debtor and (b) creditor notifies bank before debtor takes possession

Question 23

Priority: Perfected Attached Creditor (PAC) v. The World - PAC v. Buyer in Ordinary Course (BIOC)

Answer 23

General rule: PAC loses to BIOC

Question 24

Default: Definition

Answer 24

Default occurs when debtor has breached the contract

Not defined in Article 9 – defined in the parties’ security agreement

Question 25

Default: Secured Party’s Remedies

Answer 25

(1) Self-help repossession
(2) Repossession by judicial action
(3) Strict foreclosure
(4) Sale
(5) Action for a deficiency judgment

Question 26

Default: Secured Party’s Remedies - Self-Help Repossession

Answer 26

Self-help repossession is permissible SO LONG AS creditor does not breach the peace

A breach of the peace occurs when…

(a) The secured party’s actions are likely to cause violence
(b) Repossession is made over any protest by the debtor
(c) Repossessor misuses color of law
(d) Repossessor uses constructive force
(e) Enter debtor’s home without voluntary and contemporaneous consent

If there is a breach of the peace, civil and criminal penalties attach to creditor’s misconduct

Question 27

Default: Secured Party’s Remedies - Repossession by Judicial Action

Answer 27

If the secured party chooses not to resort to self-help repossession, he or she may get a judicial writ, ordering the sheriff to obtain possession of the collateral and deliver it to the party

Question 28

Default: Secured Party’s Remedies - Strict Foreclosure

Answer 28

(1) Definition: Strict foreclosure occurs when the secured party retains the collateral in full satisfaction of the debt still owed (SP lawfully retains collateral, debt is cancelled)

(2) How to strictly enforce: secured party must send a written proposal to retain collateral in satisfaction of debt; if any notified parties object within 20 days after notice is sent, not allowed and must use sale instead
(a) Consumer goods: notice sent to debtor and secondary obligors (guarantor of debt)
(b) Not consumer goods: notice sent debtor, other secured parties (who told foreclosing SP of interest in collateral), perfected creditors, secondary obligors

(3) Consumer goods and the 60% rule: if collateral is consumer goods and debtor has paid 60% of loan (non-PMSI) or 60% of cash price (PMSI), strict foreclosure not allowed
(a) SP must sell collateral within 90 days or be liable in conversion

Question 29

Default: Secured Party’s Remedies - Sale

Answer 29

Secured party may sell the collateral and apply the sale proceeds to the debt. SP chooses whether sale will be public (public auction) or private.

Guideposts:

(1) Every aspect of the sale must be commercially reasonable

(2) Prior to the sale, reasonable notice must be sent (Art. 9 provides standard notice forms, which are presumptively commercially reasonable)
(a) Who?
(i) Consumer goods: notice must be sent to debtor and secondary obligors
(ii) Non-consumer goods: notice must be sent to debtor, SP who advised foreclosing party of interest, perfected creditors, and secondary obligors
(b) Content of notice depends on type of sale:
(i) Public: time and place
(ii) Private: time after which the sale will be made
(c) For consumer goods, additional consumer-protective provisions are mandatory, including how to calculate deficiency and how debtor can redeem
(d) How much notice? No bright line, just commercial reasonableness. In non-consumer transaction, reasonable if sent 10 days or more before time of sale
(e) Can SP buy?
(i) At public sale, yes
(ii) At private sale, absent external market checks, no

Question 30

Default: Secured Party’s Remedies - Action for a Deficiency Judgment

Answer 30

If the outstanding debt exceeds the amount obtained from the sale of collateral, secured party can proceed against the debtor for a deficiency action

BUT if SP sells collateral at a low price to an insider buyer, the price an independent third party would have paid (rather than the amount actually paid) is the price that will be used in calculating the deficiency

Question 31

Debtor’s Limited Right of Redemption

Answer 31

Debtor’s right to redeem the collateral is cut off once the secured party has (1) resold it or (2) completed strict foreclosure

To redeem, the debtor must pay the missed payment(s) plus any interest and creditor’s reasonable expenses, including attorney’s fees

If the security agreement contains an acceleration clause (which permits the creditor to declare the full balance due in the event of default), to redeem the debtor must pay off the entire debt plus interest plus expenses

Question 32

Original Use Test

Answer 32

The debtor’s original intended use of collateral governs the collateral’s classification

(not a rule that is always used)

Question 33

Perfection: Money or Deposit Account

Answer 33

A security interest in a non-consumer (e.g., corporate) deposit account is perfected by control (don’t need to file).

Ways to gain control:

(1) A bank in which the non-consumer deposit account is maintained automatically has control over a deposit account.
(2) Putting the deposit account in the secured party’s name
(3) Agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will comply with the secured party’s orders regarding the account without the debtor’s further consent

Question 34

PMSI in Inventory

Answer 34

PMSI in inventory takes priority over conflicting security interest (perfection not automatic) IF

(1) It is perfected at the time debtor gets possession of the inventory (filing before inventory delivered) AND
(2) Any secured party who has perfected his security interest in the same inventory receives written notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects to take a PSMI in the inventory of the debtor described by kind or type

Question 35

PSMI in Livestock

Answer 35

Similar to PMSI in inventory

Question 36

PMSI in Goods Other Than Inventory and Livestock (i.e. Equipment)

Answer 36

PMSI in equipment has priority over conflicting security interests in the same goods or their proceeds if the interest is perfected before or within 20 days after after the debtor receives possession of the goods

Question 37

Conflicting PMSIs

Answer 37

(a) A secured party who has a PMSI in collateral as a seller has priority over a secured party who has a PMSI in the same collateral as a lender
(b) Otherwise, the first secured party to file or perfect prevails