Secured Transactions

Question 1

Steps in Secured Transactions

Answer 1

1. attachment (violet roses smell amazing) - The creation of a security interest
2. perfection (Famous People Can’t Avoid Attention) - Providing notice of a security interest to establish a claim superior to other parties who may wish to claim the same collateral
3. priority - Rules for resolving priority disputes between multiple claimants to the same collateral.
4. enforcement - Rights and duties of a secured party who enforces its interest in the collateral.

Question 2

How to Approach a Typical Secured Transactions Question

Answer 2

1. read the call to question
2. ID and classify the property at issue
3. Determine which parties have or claim an interest in the collateral.
4. For each security interest, assess (a) attachment, and (b) perfection
5. use this info to find the appropriate priority rule
6. Apply the priority rule to the facts and resolve the dispute

Question 3

Parties to a Secured Transaction

Answer 3

secured party: a creditor who obtains a security interest in the debtor’s property

obligor: a party that must pay or perform the obligation that the collateral secures
debtor: has an interest, other than a security interest, in the collateral (Usually, the debtor is the owner of the collateral.)

Question 4

agricultural liens definition

Answer 4

an interest in farm products that secures payment or performance of an obligation for:

1. goods or services furnished with respect to a farming operation; or
2. rent on real property in connection with a farming operation.

Question 5

first step in classifying collateral

Answer 5

To properly classify collateral, look to the debtor’s principal use at the time the security interest is created.

As collateral passes from debtor to debtor, or the principal use changes, the classification of a piece of collateral can change.

Question 6

What are the Types of Collateral

Answer 6

Goods (Cats Get Furry Paws Into Everything)

• consumer goods
• farm products
• inventory (includes goods furnished under service Ks, raw materials, works in progress)
• equipment (catchall)

Rights to Payment (Chicago Police Investigate Alleys Prevent Incidents)

• Chattel Paper (a record w/ (i) monetary obligation (ii) security interest or lease)
• Instruments (promissory notes)
• Accounts (right of $ payment for goods sold etc.)
• Payment Intangible (catchall
  generally: 3rd P (account debtor) owes $ to debtor, right to receive $ is collateral

Other Types of Collateral

• documents of title
• investment property (stocks, bonds)
• deposit accounts (i.e. bank accounts)
• commercial tort claims
• letters of credit rights
• general intangible (residual category)

Question 7

Reqs for Attachment

Answer 7

Violet Roses Smell Amazing

1. Value (given by the secured party)
   - -includes binding agreement to extend credit)
2. Rights (debtor has rights in collateral)
   - -includes voidable title if could convey to GF purchaser
3. Security Agreement, either
   (a) authenticated security agreement that describes the collateral OR
   (b) secured party has or control of the collateral pursuant to an oral or unauthenticated security agreement

Question 8

Authenticated Security Agreement reqs

Answer 8

Security agreements are RAD!

1. Record (Need not be written on paper, but must be stored in a tangible medium that people can look up)
2. Authenticated by debtor (Need signature or other symbol that shows intent of debtor to be bound)
3. Describe the collateral
   - -For consumer goods and commercial tort claims, the collateral must be identified with particularity (not “all my consumer goods”)
   - -A super generic description, such as “all of the debtor’s assets” or “all of the debtor’s personal property” does not reasonably identify the collateral for attachment.

Question 9

Rights and Duties of the Secured Party in Possession

Answer 9

1. The secured party must act with reasonable care with respect to the collateral
2. Must keep the collateral identifiable
3. Must relinquish the collateral once the obligation has been satisfied.
4. May charge the debtor for reasonable expenses for storing and maintaining the collateral.

Question 10

what is the only way a creditor can secure interest in property acquired after the agreement is authenticated?

Answer 10

after-acquired property clause

Typical Language: “all of the debtor’s existing and after-acquired [collateral]” or “all of the [collateral] now owned or hereafter acquired.”

If there is no reference to after-acquired property, the security interest only attaches to the collateral that exists at the time that the security agreement is executed

Exception: In most states, if the security agreement describes inventory or accounts there is a rebuttable presumption that the description includes after-acquired inventory and accounts.

Question 11

Accessions vs. Commingled Goods

Answer 11

Accessions: physically united w/ other goods but ID not lost –> security interest continues. Can get interest in property w/ which accession is united as well if provided for in agreement

Commingled Goods: Goods that are physically united with other goods to the point that their identity is lost in a product or mass –> security interest lost for original good but will attach to the larger product or mass that results.

Question 12

Rights to Proceeds

Answer 12

Proceeds are whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of.

If a security interest attached to the original collateral, it attaches to the proceeds automatically, whether or not the security interest states that it covers proceeds.

Question 13

Purchase Money Security Interests (PMSI)

• what does it apply to?
• what are its components?
• what are the types?

Answer 13

A security interest qualifies as a PMSI only if the collateral is goods or software

For Non consumer-goods transactions, partial PMSIs are permitted.

A PMSI has two components:

1) The value given allows the debtor to acquire the goods or software; and
2) The goods or software acquired secure the loan

Lender PMSI—The lender loans money to the debtor so that the debtor can acquire goods.
-The value is actually used to acquire the goods.
-The lender takes a security interest in those same goods
to secure the loan.

Seller PMSI - goods bought on credit

Question 14

Methods for Perfection

Answer 14

Famous People Can’t Avoid Attention

1. filing (i.e. financing statement)
2. possession
3. control
4. alternate perfection systems
5. automatic perfection

Question 15

what is filing perfection applicable to?

Answer 15

Applicable to perfect security interests in all collateral EXCEPT: (a) deposit accounts (b) money (c) letters of credit (d) and collateral subject to other perfection methods

Question 16

where to file for perfection?

Answer 16

In the central filing office, often the secretary of state’s office in the state where debtor is located

Exception: Security interests in real estate related collateral

• -Filed in the local real property records in the county where the property is located
• -Includes fixtures, such as extracted collateral, including oil and gas, and timber to be cut

Question 17

req info for filing for perfection

Answer 17

1) name of debtor
2) name of secured party
3) description of collateral
4) Additional requirements for real property-related collateral:
(a) The financing statement must indicate that a security agreement covers this type of collateral.
(b) It must note that it is to be filed in the local real property records
(c) Describe the real property to which the collateral relates
(d) Name the record holder of the real property, if the debtor is not the person who has an interest in the real property

Required but non-essential information (A filing office will refuse to accept a financing statement that does not include the following):

a) addresses for both the debtor and the secured party, and
b) An indication of whether the debtor is an individual or an organization.

Question 18

authentication req. for perfection by filing (and consequences of failure)

Answer 18

debtor must authenticate, signature not necessary
-If the debtor authenticates a security agreement, that authentication authorizes the secured party to file a financing statement.

-Failure to obtain authorization before filing a financing statement can result in the secured party being liable for actual and statutory damages.

Question 19

debtor’s name rules for perfection by filing

Answer 19

must be correct legal name

Registered organization debtor: use the name on the articles of incorporation, or last public organic record filed with the state
–Cannot file under the trade name (no d/b/a)

Individual debtor:

• -Majority of states look to the driver’s license (If debtor has a non-expired driver’s license or state issued I.D., the only correct name is the name on that card. (If debtor does not have state issued I.D., use legal name.))
• -Minority rule: Driver’s license or state ID is a safe harbor, but other legal names might be sufficient to perfect.

Question 20

desc of collateral rules for perfection by filing

Answer 20

Secured parties have two options for describing collateral:

1) Use the same types of descriptions used for a security agreement
2) Unlike a security agreement, a financing statement can have a super generic description.

Financing statement does not need to mention proceeds or indicate that it covers after-acquired property or future advances.

Question 21

errors in financing statement

Answer 21

General rule is that minor errors in a financing statement do not affect perfection UNLESS they make the financing statement seriously misleading (then not perfected)

Errors in the debtor’s name are almost always seriously misleading; BUT, if the search for the correct name of the debtor would uncover the financing statement with the error, the error is not seriously misleading.

Question 22

What collateral can be perfected by possession?

Answer 22

• money (prefection only through possession)
• goods
• instruments
• negotiable documents
• tangible chattel paper

Question 23

What collateral can be perfected by control?

Answer 23

• deposit accounts (exclusive means of perfection)
• investment property
• electronic documents
• electronic chattel paper
• letter of credit rights (exclusive means of perfection)

Question 24

Control can be obtained over a deposit account in which ways?

Answer 24

1) The secured party is the bank that has the deposit account (i.e., the lender and the bank are the same party).
2) The secured party, the bank, and the debtor agree in an authenticated record that the lender has control over the deposit account (i.e., a deposit account control agreement).
3) The secured party can become the bank’s customer with respect to the deposit account.

Question 25

Perfection Under Alternate Perfection Systems

Answer 25

When another statute (non-Article 9) governs how a security interest is perfected, you must follow the rules of that statute.

Most likely to be tested: perfection under a state certificate of title statute
o Applicable to cars, motorcycles, or other vehicles that have a title
o Perfect by noting a security interest on that certificate of title.

Question 26

collateral that perfects automatically

Answer 26

1. PMSI in consumer goods (and only consumer goods)
   - -EXCEPTION: if a certificate of title statute governs
2. Casual or isolated assignments of accounts that do not transfer a significant part of the outstanding accounts receivable
3. Sales of payment intangibles or promissory notes

Question 27

Post perfection: name change of debtor

Answer 27

if name change causes financing statement to become seriously misleading, secured party has 4 months to discover and file an amendment

if fails to amend:

• collateral acquired after the 4 month period isn’t covered by the financing statement
• everything before the name change AND 4 month period remains perfected

Question 28

post perfection: debtor moves out of state

Answer 28

perfected security interest remains perfected for 4 months (unless financing statement lapses earlier)

The filed financing statement will cover collateral purchased within the four-month window after the move.

secured party must refile financing statement w/in 4 month window to remain continuously perfected

if fails, perfection is lost prospectively, and against another secured party or purchaser for value, the security interest is deemed never to have been perfected.

Question 29

post perfection: collateral moves out of state

Answer 29

If the debtor still owns the collateral, no refiling is necessary.

If the collateral is transferred to a new debtor who lives out of state, the secured party has one year to file a financing statement listing the new debtor.

if fails, perfection is lost prospectively, and against another secured party or purchaser for value, the security interest is deemed never to have been perfected.

Question 30

post perfection: secured party perfected by possession gives the collateral back to the debtor

Answer 30

The secured party is only perfected so long as it actually has physical possession of the property.

Limited exception: Temporary Automatic Perfection—If a security interest is perfected by possession in an instrument, negotiable document, certificated security, or good, the secured party can give the collateral back to the debtor for limited purposes:
(a) to sell
(b) to exchange OR
(c) to enforce the debtor’s rights in the collateral
…then the secured party is perfected for 20 days. the party needs to file a financing statement or repossess w/in 20 days to remain continuously perfected

Question 31

Perfection of proceeds

Answer 31

temporary automatic perfection for 20 days after collateral is sold

Beyond 20 Days, perfection will lapse unless one of the following circumstances is present:

(1) Secured party takes necessary steps to amend the financing statement (or the original financing statement is broad enough to encompass the proceeds)
(2) Cash proceeds: perfection continues forever so long as they are identifiable
(3) Same Office Rule: A security interest in proceeds will be perfected (as long as the original financing statement remains effective) when:
- -(a) financing statement covers the original collateral
- -(b) proceeds are collateral in which the security interest may be perfected by filing in the same office as the original financing statement
- -(c) proceeds aren’t acquired with cash proceeds

Question 32

priority rules for proceeds of non-filing collateral

Answer 32

If collateral is of the type that is typically perfected other than by filing, priority continues in the proceeds provided that:
(a) The security interest in proceeds is perfected; and
(b) The proceeds are either cash proceeds or the same
type of collateral as the original collateral.

Question 33

priority: Perfected security interest v. lien creditor

Answer 33

perfected SI wins

Question 34

priority: Unperfected security interest v. lien creditor

Answer 34

lien creditor wins

Exception: the filed but unattached security interest exception. If the debtor has authenticated a security agreement listing the collateral and a financing statement is on file but the secured party has not yet given value, the secured party will take priority

Question 35

priority: Security Interest v. Statutory Lien

Answer 35

A statutory lien has priority over a security interest (even if it is perfected) as long as:

1. The effectiveness of the lien depends on the lienholder’s possession of the goods; AND
2. The lien secures payment or performance of an obligation for services or materials furnished in the ordinary course of the person’s business (for example, a mechanic’s lien).

Question 36

priority: Secured party v. lien creditor over future advances

Answer 36

if a secured party’s advance is made w/in 45 days of the lien creditor’s lien arising, the secured party has priority.

Advances made more than 45 days after the person becomes a lien creditor are subordinate to the lien creditor unless:

(a) The advance is made w/in knowledge of the lien, OR
(b) The advance is made pursuant to a commitment entered into without knowledge of the lien.

Question 37

priority: Secured party v. secured party over future advances

Answer 37

Article 9 gives priority to the first party to file or perfect with respect to future advances, even if that secured party has knowledge of the competing security interest when the future advance is made.

Question 38

priority: Buyer v. Perfected Security Interest

Answer 38

General rule: Unless the secured party authorizes the sale free and clear of its security interest, a buyer takes subject to a perfected security interest.

Exception 1: Buyer in the ordinary course of business takes free and clear if…

(a) buys goods from a merchant
(b) in the merchant’s ordinary course of business
(c) merchant is in the business of selling goods of this kind and is NOT a pawnbroker AND
(d) The buyer acts in good faith and without actual notice that the sale violates the rights of others in the same goods.

Exception 2: Consumer to Consumer: A buyer of consumer goods will take free a security interest, even if it is perfected, if:
(a) The buyer buys consumer goods for value,
(b) For their own personal or household use,
(c) From a consumer seller, AND
(d) Without knowledge of the security interest,
UNLESS the secured party has filed a financing statement covering the goods before the purchase occurred.

Question 39

priority: Buyer v. Unperfected Security Interest

Answer 39

General rule: Unless a secured party authorizes the sale free and clear of the security interest, the buyer takes subject to a security interest.

Exception: A buyer will take free of an unperfected security interest if the buyer
o gives value,
o Receives delivery of the collateral, and
o without knowledge of the preexisting interest.

Question 40

Buyers and Future Advances

Answer 40

When applies
o If a buyer takes subject to a security interest AND
o after the sale the secured party makes a future advance to the seller.

Rule: the buyer will take free of that future advance if:
o The secured party had knowledge of the buyer’s purchase when it made the advance; OR
o The future advance is made 45 days or more after the purchase.

Question 41

priority: Transferees of Money or Funds

Answer 41

A transferee of money or funds from a deposit account takes free of security interests unless the transferee acts in collusion with the debtor to violate the rights of a secured party.

Question 42

priority: PMSI v. Lien Creditor

Answer 42

generally, follow rules for security interest v. lien creditors

PMSIs have a 20 day grace period to perfect
starting when the debtor receives possession of the collateral

Question 43

priority: PMSI v. security interest

Answer 43

PMSI in goods other than inventory takes priority over all other security interests (super-priority) if perfects w/in 20 days. Otherwise 1st to perfect wins

A PMSI in inventory will have priority over all other security interests in that same inventory if a secured party:
(a) Perfects before the inventory is delivered to the debtor; AND
(b) Sends an authenticated notification of the PMSI to other secured parties.
Otherwise 1st to perfect wins

If a PMSI has priority over a competing secured party in goods other than inventory, then that super priority will extend to the proceeds of the collateral.

If a PMSI has priority over a competing secured party in inventory, then the priority will only extend to proceeds that are cash down payments for the inventory sold.

A seller PMSI beats a lender PMSI.

Question 44

priority: Fixtures v. Real Property Interest

Answer 44

A security interest in fixtures has priority over an interest in real property if the secured party files a fixture filing (w/ local real property records) before the real property interest is recorded.

A PMSI in fixtures has priority over a real property interest if:

(a) The debtor has an interest of record in the real property or is in possession of the real property; AND
(b) The security interest is perfected by a fixture filing, either before the goods become fixtures or w/in 20 days after the goods become fixtures.

Exception (Construction Mortgage v. PMSI): A construction mortgage has priority over any subsequent security interest in fixtures, including PMSIs in fixtures, if it is recorded before the goods become fixtures and the goods become fixtures before completion of the construction.

Question 45

lease transactions that are secured transactions

Answer 45

Bright Line Test with Two Elements:

(1) The “lessee” is obligated to pay the full obligation under the lease, whether or not they terminate the lease early, AND

(2) One of the following outcomes is present:
(a) The original term of the lease is equal to or greater than the remaining economic life of the goods. (i.e., the goods are used up during the lease term)
(b) The lessee is bound to the lease for the remaining economic life of the goods. (i.e., the lessee is obligated to extend the lease until the goods are used up.).
(c) The lessee has the option to renew the lease for the remaining economic life of the goods for no or nominal additional consideration. (i.e. they would be crazy not to renew the lease until the goods are used up)
(d) The lessee has the option to become owner of the goods for no or nominal additional consideration (i.e. the lessee would be crazy not to buy the goods at the end of the lease term).

Result: If the bright line test is met, Article 9 will govern these transactions. That means that the lessor will be treated as a secured party and needs to file or otherwise perfect his interest in the goods.

If above test not met, courts will determine whether a “lease” is actually a secured transaction by looking at the facts of the case

Question 46

Consignors

Answer 46

A party (the consignor) has ownership of goods but gives possession of the goods to another party (the consignee) for the purpose of allowing the consignee to sell the goods.

risk is that consignee might be mistaken for owner

Consignor treated as a secured party (i.e. must perfect) if…

(a) The consignor must deliver goods to a merchant, who deals in goods of the kind, for the merchant to sell;
(b) The merchant is not generally known by its creditors to be substantially engaged in the business of selling goods to others;
(c) The value of the goods must be at least $1000 in each delivery; AND
(d) The goods must not be consumer goods immediately before the delivery.

Question 47

Examples of conduct that generally will not constitute a breach of the peace for self-help repo:

Answer 47

The repossession agent tresspasses on land; or

The repossession occurs without a confrontation

Question 48

what must a secured party not do if resorting to self-help in event of breach?

Answer 48

cannot breach the peace

Question 49

rule for disposition of collateral

Answer 49

Commercially Reasonable Standard: Once a secured party takes possession of the collateral after default, that party may sell, lease, license, or otherwise dispose of the collateral, so long as everything about the disposition is commercially reasonable

reasonable as a matter of law if:

• -Sold in the usual manner in a recognized market;
• -Sold at the price current in that market; or
• -Otherwise in conformity with the reasonable commercial practices among dealers in that type of collateral.

Question 50

notice reqs for disposition of collateral

Answer 50

must give notice to:

• debtor
• secondary obligors (i.e., co-signers or guarantors)
• other secured parties
• Anyone else from whom the secured party has received notice of a claim or interest in the collateral.

must include:

1) The secured party and the debtor’s names;
2) A description of the collateral;
3) how, when, where the collateral is to be disposed of; and
4) A statement that the debtor is entitled to an accounting for the unpaid indebtedness.

Additional contents for consumer goods transactions:

5) Describe any liability for the deficiency; and
6) telephone number that the debtor can call to obtain additional information, including the amount they would need to pay to redeem the collateral.

Exceptions: notice not required if…
…the collateral is perishable or threatens to decline speedily in value;
…the collateral is sold on a recognized market; or
…Notice is waived after default.

Question 51

reqs for accepting strict foreclosure in full satisfaction

Answer 51

o The debtor must consent to the acceptance in an authenticated record; or
o Acceptance by silence is permitted if the debtor doesn’t object to the secured party’s proposal to accept the collateral within 20 days after the proposal is sent.

o Additional requirements for consumer goods transactions:

• –The secured party can only accept the collateral in full satisfaction of the obligation.
• –60% Rule: If the goods are consumer goods and the debtor has paid back 60%+ of the debt or the value of the collateral, then the goods must be sold. Acceptance is not permitted.
• –A debtor can waive this rule after default in an authenticated record.

Question 52

reqs for accepting strict foreclosure in partial satisfaction

Answer 52

o The debtor must after the default to the acceptance in an authenticated record.
o Consent by silence is not permitted
o Remember, acceptance in partial satisfaction will not work in consumer transactions

Question 53

special rule for redemption

Answer 53

debtor cannot waive right to redemption before default