Secured Transactions

Question 1

express warranty

Answer 1

(1) affirmation of fact
(2) made by a seller to a buyer
(3) that relates to the goods and
(4) is part of the basis for the bargain

Question 2

implied warranty of merchantability

Answer 2

arises when goods are sold by a merchant who deals in goods of the kind. Under the warranty, the goods are fit for the ordinary purpose for which such goods are used and will pass without objection in the trade

Question 3

implied warranty of fitness for a particular purpose

Answer 3

goods are fit for buyer’s particular purpose. Arises when (1) buyer has a particular purpose in mind; (2) buyer is relying on seller to select suitable goods; and (3) seller has reason to know both facts

no need to be a merchant

can be disclaimed by conspicuous writing, such as in a type larger than the surrounding text or in a different type, font, or color

Question 4

accord and satisfaction

Answer 4

must show:

(1) tender of the instrument was in good faith;
(2) claim was subject to dispute/unliquidated;
(3) party obtained payment;
(4) payment was accompanied with written communication containing a conspicuous statement that it was tendered as full satisfaction of the claim; and
(5) was not returned within 90 days

Question 5

types of collateral

Answer 5

Consumer goods: personal, family, or household purpose

Inventory: goods held for sale or lease in the ordinary course of business

Equipment: goods used or bought for use primarily in business

Fixture: attached to the real property and cannot be easily removed without damage

Question 6

attachment

Answer 6

process by which a security interest is created and becomes enforceable against the debtor so the creditor can repossess the collateral if the debtor does not pay; requires:

(1) pays value
(2) security agreement: the debtor gives the creditor a security interest in the collateral
(3) rights: can’t give a security interest in property unless the debtor owns it

Security agreement must:

(1) reasonably describe the collateral and,
(2) for consumer goods, must be more specific than a general reference to the goods

security agreement re: inventory and accounts will create an interest in after-acquired collateral

Question 7

Perfection

Answer 7

process by which the creditor protects the security interest from most other claimants to the same collateral

(1) possession is an act of perfection
(2) fixture: must describe the real property and filed in the office where a mortgage on the property would be recorded
(3) Purchase Money Security Interest (PMSI) for consumer goods is AUTOMATICALLY perfected

security interest must attach before perfection can occur

Question 8

effect of gift on perfection

Answer 8

collateral remains subject to the security interest in the donee’s hands, even if the donee had no knowledge of the security interest

Question 9

Purchase Money Security Interest (PMSI) Exception

Answer 9

items purchased on credit and serve as collateral for the loan. If perfected within 20 days of debtor receiving possession (or affixation of a fixture) it has priority and relates back to date the security interest attached.

Must provide notice to other creditors with interest in the same collateral before delivering the goods

PMSI in consumer goods is automatically perfected and permanent.

PMSI in fixtures prevails over any competing interest in the fixture other than a construction mortgage

Question 10

Buyer in Ordinary Course of Business

Answer 10

(1) purchased in good faith;
(2) without knowledge of any security agreement violation;
(3) goods are not farm products (equipment);
(4) bought from a person in the business of selling goods of the kind;
(5) security interest was created by the seller; AND
(6) competing creditor did not perfect by possession

good faith = honesty in fact and the observance of reasonable commercial standards

breaks the security interest if collateral is sold to BIOCB

Question 11

Proceeds from sale of collateral

Answer 11

priority of a security interest in proceeds continues automatically for 20 days after debtor’s receipt of the proceeds (unperfected after 20 days) UNLESS:

(1) proceeds are collateral in which may be perfected by filing in the same office (not cash proceeds);
(2) proceeds are cash proceeds; OR
(3) secured party perfects its interest in the proceeds within the 20 day period

Question 12

same office rule

Answer 12

if the security interest in the original collateral was perfected by filing with the SoS, the security interest in the type of collateral constituting the proceeds should be filed in the same place. Occurs when proceeds were not purchased with cash proceeds of the collateral.

Question 13

strict foreclosure

Answer 13

debtor has the ability to cure a default and regain the collateral if he demonstrates that (1) debtor consented to the strict foreclosure; and (2) no other creditor with an interest in the machine objected either within a timely manner

if the collateral is equipment and creditor keeps the collateral in full satisfaction of the debt, debtor’s failure to object within 20 days is deemed to consent

Question 14

partial strict foreclosure

Answer 14

creditor retains the collateral, but instead of calling the debt satisfied, requires debtor to pay a certain amount

forbidden for consumer goods

Question 15

right of redemption

Answer 15

can redeem the collateral if (1) creditor still has the collateral; (2) debtor tenders the unpaid balance on the collateral; and (3) debtor tenders all of creditor’s reasonable expenses and attorney’s fees

Question 16

holder in due course (negotiable instruments)

Answer 16

(1) negotiable instrument;
(2) must be a holder;
(3) no noticeable sign of alteration or forgery;
(4) took for value;
(5) acted in good faith; and
(6) without notice of any claim or defenses

Question 17

Effect of name change

Answer 17

collateral that is acquired within 4 months of the name change continues to be perfected by a prior security interest

a company’s reorganization and name change has no impact on a previous creditor’s perfection of collateral because the company owned the collateral prior to the name change

Question 18

perfecting equipment

Answer 18

equipment may be perfected by filing or possession. although other creditors may have an interest in the equipment, if the party has possession before the others have perfected, the party will prevail.

Question 19

Financing Statement

Answer 19

must include: (1) the name of the debtor; (2) the name of the secured party; AND (3) a description of the collateral covered by the financing statement

does not need to expressly include after-acquired property if the after-acquired property covered by the security agreement that fits within the financial statement’s description is automatically included

effective for 5 years; continuation statement must be filed within 6 months before expiration of the 5 year period

Question 20

Revocation (goods)

Answer 20

may revoke acceptance of defective goods if the defect was difficult to discover, and substantially impairs the value of the goods but only if: (1) done within a reasonable time after buyer discovers or should have discovered the defects; and (2) before any substantial change in the goods occurs that is not caused by the defect present at the time the seller relinquished possession

Question 21

parol evidence rule

Answer 21

provides that where the parties to a contract express their agreement in writing with the intent that it embody the final expression of the bargain, any other expressions–written or oral–made prior to the writing, as well as any oral expression contemporaneous with the writing, are inadmissible to vary the terms of the writing

Question 22

Statute of limitations (breach of K)

Answer 22

an action for breach of contract must be brought within 4 years after the cause of action accrues. a cause of action accrues when tender of delivery is made, except that when a warranty extends to future performance and discovery of the breach must await the time of performance, the cause of action accrues when the breach is or should have been discovered

Question 23

Damages (breach of K)

Answer 23

buyer is entitled to a refund, plus incidental and consequential damages

incidental damages: include expenses reasonably incurred in the inspection or transportation of goods with respect to which the buyer has rightfully revoked acceptance

consequential damages: available only if they were reasonably foreseeable to the seller at the time of the contract

Question 24

fixtures financing statement

Answer 24

must include:

(1) all the requirements for a financing statement;
(2) indicate it covers fixtures;
(3) indicate it is to be filed in the real property records;
(4) provide a description of the real property the fixture is related; and
(5) provide the name of the record owner

Question 25

priorities

Answer 25

(1) between unperfected security interests: first in time will prevail
(2) a perfected security interest will prevail over an unperfected security interest
(3) between two perfected security interests: first in time, if continued without interruption

PMSI: if PMSI is perfected within 20 days after the debtor receives the collateral, the PMSI will take priority over intervening lien creditor

Question 26

security agreement

Answer 26

(1) in writing; (2) contain a granting clause; (3) contain a description of the collateral; and (4) be authenticated by the debtor