Secured Transactions

Question 1

What is a security interest?

Answer 1

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

Question 2

What kinds of collater is subject to a security interest and how is it classified?

Answer 2

• Goods
  
  • Consumer Goods (personal, family, household)
  • Farm Products
  • Inventory (inc. raw materials & works in process)
  • Equipment (catch all)
• Intangible Collateral
  
  • Chattel paper
  • Document of title
  • Instruments
  • Investment Property (stocks/bonds)
  • Accounts (receivable)
  • Deposit Accounts (checking/savings)
  • General Intangibles (catch all)

Question 3

How does a security interest attach to collateral?

Answer 3

3 elements to attachment.

1. Value given by secured party
   
   • Can be future advances
2. Debtor has rights in collateral, and
   
   • Only attaches to whatever rights debtor owns
3. Security agreement: 3 elements (or possession/control)
   
   • In a record
   • Description of collateral
   • Authenticated (signed)

Question 4

How specific does the description of collater have to be in a security agreement?

Answer 4

Description of collateral can be generic “all debtor’s equipment.”

Cannot be “all debtor’s assets,” too generic

Cannot be “all consumer goods”

Question 5

What rights and duties does a secured party have when in possession or control of collateral?

Answer 5

Duties

• Duty of care
• Duty to keep collateral identifiable
• Duty to relinquish possession or control of collateral

Rights

• Right to charge reasonable expenses
• Right to use or operate collateral
• RIght to hold proceeds

Question 6

What is a PMSI?

Answer 6

A purchase-money security interest (PMSI) is a special type of security interest that is accorded special rules with respect to perfection and priority.

• A PMSI arises when a secured party makes a loan to the debtor in order to enable the debtor to acquire rights in the goods, or when the debtor incurs an obligation to the seller/secured party for all or part of the purchase price of goods (sale on credit).

Question 7

What happens when secured goods are combined with other goods?

Answer 7

It depends on whether the original good is still identifiable.

• Accession - The original good is still identifiable. SI not lost.
• Comingled - The original good is not identifiable. SI now held in the combined good.

Question 8

What does perfecting do and what methods are there?

Answer 8

Perfection of a security interest is generally necessary for the secured party to have rights in the collateral that are superior to the rights of third parties. Perfection occurs upon attachment and method of perfection. 4 types.

1. Filing a financing statement
2. Possession
3. Control
4. Automatic

Question 9

What must be included in a financing statement

Answer 9

1. Debtor’s name
   
   • DL if person
   • Registered organization name
   • Error not effective unless search of correct name discloses financing statement.
2. Secured Party’s name
   
   • Error does not generally affect.
3. Description of the collateral
   
   • Can be super generic “all assets.”

• Debtor does not have to sign the financing statement.
• Debtor’s authorization of security agreement serves as authorization to file financing statement.
• Automatic perfection in proceeds and future advances

Question 10

Where must a financing statement be filed and how long does it last?

Answer 10

• Property - Where the property is located
• Other - State where debtor resides (usually SOS)
• Good for 5 years.
• Can file a continuation statement for an additional 5 years.
• Can be terminated with a termination statement.

Question 11

What is the effect of filing refusal or incorrect indexing?

Answer 11

• If filing office refuses:
  
  • Justified = treated as if not filed
  • Unjustified = treated as if filed
• If filing office indexes incorrectly
  
  • Treated as if filed correctly

Question 12

What kinds of collateral can be perfected by possession?

Answer 12

• Goods
• Instruments
• Negotiable DOcuments
• Money
• Chattel Paper
• Certified Security

Question 13

What kinds of collateral can be perfected automatically?

Answer 13

• PMSI in consumer goods (indefinite)
• Securities, negotiable documents, instruments automatically perfected temporarily for 20 days from attachment.
• Delivered collateral is delivered to debtor to sell or exchange, temporary perfection for 20 days.

Question 14

What happens to a security interest if the debtor moves to another state?

Answer 14

• If debtor moves to another state, 4 month grace period to file in that state.

Question 15

How does attachment and perfection occur with proceeds?

Answer 15

Attachment is automatic with proceeds. Perfection is temporary for 20 days from attachment (unless cash, perfected indefinitely).

Question 16

What interests have priority over other interests?

Answer 16

• Secured creditor > unsecured creditor
• Perfected secured creditor > secured creditor
• Unperfected vs. Unperfected > first to attach
• Perfected vs. Perfected = First to file or perfect

Question 17

When does a PMSI have priority over other creditors?

Answer 17

• PMSI perfected secured > Non-PMSI
• PMSI in anything other than inventory/livestock = Priority if perfected before 20 days after debtor receives possession.
• PMSI in inventory/livestock = priority if perfected
• PMSI vs. PMSI = Seller PMSI > Lender PMSI

Question 18

Which has priority, a judicial lien or a perfected security interest?

Answer 18

• A perfected security interest has priority over judicial lien if the perfected SI occurred before the lien.

Question 19

What happens when someone purchases goods subject to a security interest?

Answer 19

• Unperfected - Buyer takes free of SI when buyer:
  
  • i) gives value, ii) receives delivery, iii) without knowledge of SI.
• Perfected - Buyer takes subject to SI
• Consumer buyer - “garage sale rule”
  
  • i) Consumer buys goods for value, ii) for personal, family, household use, iii) from consumer seller, and iv) w/o knowledge or record notice of security interest
• Buyer in the ordinary course of business -
  
  • i) buys goods for value, ii) in ordinary course of business, iii) from merchant in business of selling goods of that kind, iv) in good faith, v) w/o actual knowledge the xfer violates rights of SI.

Question 20

What are the consequences of a default of a security agreement?

Answer 20

• Security agreement is governed as normal contract.
• Secured party may i) possess collateral and sell/keep it or ii) sue for judgment (not both).
• Secured party does not have to give notice of default nor intent to repossess collateral.
• Repossession can not breach the peace.
• The standard for disposing of collateral is “commercially reasonable.”
• Secured party must give notice of intent to dispose.

Question 21

What kind of notice must a secured party give before disposing of collateral?

Answer 21

Notice must be given to:

• Debtor and other obligors
• Any secured party or lien holder who is perfected by filing or notified secured party of interest in collateral.
• In a reasonable time w/ enough advance notice of disposition to act on the notification.
• Safe Harbor Rule - 10 days without communication is deemed reasonable time to dispose.

Proceeds - Expenses > satisfy obligation > Satisfy other SI > remainder to debtor.

Question 22

How does strict foreclosure work?

Answer 22

A secured party can accept collateral for full or partial satisfaction of the debt.

• Full satisfaction: i) debtor consents, after default, in writing, or ii) debtor does not object w/in 20 days of proposal to accept for full satisfaction.
• Partial satisfaction: debtor consents, after default, in writing.

Consumer debtors

• No partial satisfaction in consumer transactions.
• No full satisfaction if 60% paid. (waiver by written agreement after default).

Question 23

How does a debtor/obligor redeem collateral?

Answer 23

• Fullfillment of all obligations on collateral including reasonable expenses incurred by secured party BEFORE disposition or foreclosure.
• Only waivable in writing after default.

Question 24

What remedies are available if secured party botches default rules?

Answer 24

• Injunctive relief, actual damages.
• If consumer good, additional 10% of obligation amount.
• Failure to comply limits deficiency judgment
  
  • Commercial - rebuttable presumption not entitlted to collect deficiency.
  • Consumer - Absolute bar from deficiency judgment.