Secured Transactions

Question 1

Security interest

Answer 1

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

Question 2

Goods

Answer 2

Anything that is movable at the time the SI attaches

Categories

• Consumer goods (personal/household use)
• Farm products (crops or livestock)
• Inventory (held for sale/lease)
• Equipment (catch-all)

Question 3

Accounts

Answer 3

The right to payment for property sold, leases, or licensed, or services rendered

Question 4

Leases

Answer 4

Covered under Article 9 when the transaction, although in the form of a lease, is in substance a secured transaction

Treated as creating SI when:

• Lessee must pay consideration for the right to possess/use goods
• Payment obligation cannot be terminated, and
• One of the four conditions is also met:
• Lessee has an option to become the owner of the goods upon completion of the lease agreement

Question 5

Attachment

Answer 5

SI that is enforceable against the debtor with respect to the collateral

Requirements

• Value has been given by secured party
• Debtor has rights in the collateral
• Debtor has authenticated security agreement

Question 6

Security agreement

Answer 6

Necessary for a SI to attach; must

• Be in a record
• Contain a description of the collateral (NOT super generic)
• Be authenticated by the debtor (or by the secured party’s possession of control)

Question 7

After-acquired collateral

Answer 7

SI may cover collateral owned when security is granted and also collateral that the debtor acquires after it is given

Exception
- Consumer goods, unless the debtor acquires them within 10 days after secured party gives value

Question 8

Proceeds

Answer 8

SI attaches automatically to identifiable proceeds (i.e., whatever is acquired after disposition of collateral)

Question 9

PMSI

Answer 9

PMSI in goods – exists when

• Secured party gave value to the debtor and the debtor used the value to incur an obligation that enabled the debtor to acquire the goods
• Secured party sold goods to the debtor and the debtor incurred an obligation to pay the secured party all or part of the purchase price

Question 10

Accessions

Answer 10

Goods that are physically untied with other goods such that the identity of the original goods (and SI) is not lost

Question 11

Commingled goods

Answer 11

Goods that are physically united with other goods such that their identity is lost in product or mass
- Existing SI in collateral that subsequently becomes commingled goods – the SI is transferred to resulting product or mass

Question 12

Perfection – financing statement

Answer 12

Filing if financing statement (notice) – must contain

1. Debtor’s name,
   - Trade name insufficient; if change, four months to amend
   - If error, FS not effective unless standard search under correct name would disclose the statement
2. Secured party’s name, and
3. Description of the collateral (super generic OK)
   - May cover after-acquired collateral, whether mentioned or even contemplated

Length of perfection – five years; must file continuation statement to extend perfection
- If not filed, SI is treated as never having been perfected as against purchaser of collateral for value

Amendment of FS – effective from date of filing

Question 13

Perfection – possession

Answer 13

SI in goods, instruments, negotiable documents, money, tangible chattel paper, and certificated security may be perfected by possession

• Perfection exists only during time of possession
• Possession is the only method for MONEY

Question 14

Perfection – control

Answer 14

Perfection exists only while the secured party retains control
- Control is the only method for DEPOSIT ACCOUNTS and LETTER-OF-CREDIT RIGHTS

Question 15

Automatic perfection – indefinite

Answer 15

PMSI in consumer goods – automatically perfected upon attachment

Question 16

Automatic perfection –temporary

Answer 16

1. New value – if new value is given under authenticated SA, then SI in certificated securities, negotiable documents, or instruments is automatically perfected for 20 days from attachment
2. Delivery of collateral to debtor for sale/exchange – SI remains perfected perfected for 20 days
3. Interstate movement of collateral/debtor
   - Debtor to another state – 4-month grace period
   - Collateral to debtor in another state – one-year grace period

Question 17

Automatic perfection –proceeds

Answer 17

Temporary perfection – if SI in original collateral perfected, SI in proceeds perfected for 20 days from attachment

Indefinite automatic perfection

• If original FS is broad enough to cover proceeds, or secured party amends it to cover, then the SI in proceeds continues to be perfected
• If SI in original collateral is perfected, then SI in identifiable cash proceeds is perfected indefinitely

Question 18

Priorities – creditors

Answer 18

General creditor (unsecured) – no lien or SI in collateral
- Result – SI > general creditor

Judicial lien creditor – lien on collateral by judicial process

• Result – perfected SI > judicial lien > unperfected SI (unless just not yet given value)
• PMSI exception – if PMSI perfected before/within 20 days after debtor receives possession, PMSI has priority over creditor’s rights

Statutory or CL lien creditor (e.g., mechanic’s lien)
- Result – possessory lien > any SI if lien secures payment for goods or services furnished in ordinary course of business

Question 19

Priorities – transferees

Answer 19

Obtain full title to collateral as a result of a transfer from the debtor

Transferee vs. secured party with SI – SI generally continues unless secured party authorized transfer free

Buyer vs. unperfected – buyer takes collateral free of SI if

1. Gives value, and
2. Receives delivery
3. Without knowledge of SI

Buyer vs. perfected – buyer generally takes subject to SI

Question 20

Buyer in the ordinary course of business

Answer 20

• Buys goods by giving new value
• In the ordinary course of business
• From merchant in business of selling goods of that kind
• In good faith, and
• Without actual knowledge that sale violates another’s rights

Result – buyer takes free of any SI in goods given by buyer’s seller

Question 21

Consumer buyer

Answer 21

• Buys consumer goods for value
• For his own personal, family, or household use
• From a consumer seller, and
• Without knowledge or record notice of SI

Result – buyer takes free of SI unless FS was filed

Question 22

Priorities – secured parties

Answer 22

Perfected SI vs. perfected SI – first to file or perfect
Perfected SI vs. unperfected SI – perfected > unperfected
Unperfected SI vs. unperfected SI – first to attach

Question 23

Priorities – PMSIs

Answer 23

PMSI vs. non-PMSI – PMSI

PMSI in goods other than inventory/livestock vs. any SI – PMSI if perfected before or within 20 days after debtor receives possession

PMSI in inventory/livestock vs. any SI – PMSI if perfected by the time the debtor receives possession of the collateral and secured party sends notice to holder of any conflicting SI

Perfected PMSI vs. perfected PMSI – first to file or perfect

Question 24

Priorities – fixtures

Answer 24

SI in fixtures vs. real property interest – SI > real property interest if SI is perfected by filing before real property interest is recorded

Perfected SI in fixtures vs. subsequent judicial lien – perfected SI

PMSI in fixtures vs. prior real property interest – PMSI if perfected by filing before goods become fixtures or within 20 days thereafter

SI in fixtures vs. prior construction mortgage – prior construction mortgage if recorded before goods become fixtures

Question 25

Priorities – proceeds

Answer 25

General rule – first to file or perfect (for the original collateral)
- Proceeds of non-filing collateral – priority generally continues in proceeds if SI in proceeds is perfected and are cash proceeds or proceeds of same type

Question 26

Priorities – future advances

Answer 26

General rule – first to file or perfect

Question 27

Default – consequences

Answer 27

• Seek possession of collateral and sell/retain it, or
• Sue for judgment based on obligation

Ignoring default – may be treated as waiver of rights

Question 28

Default – possession

Answer 28

Secured party is not required to give notice of default nor of an intent to take possession

• Limitation on means – breach of the peace
• Rendering equipment unusable – permitted

Question 29

Default – disposition

Answer 29

Standard – all aspects must be commercially reasonable

Type – secured party cannot purchase at private sale

Notice – must be sent to debtor, any secondary obligor, any other secured party, and any party who has notified secured party of claim or interest

• Must be at least 10 days before disposition
• Exceptions – perishable; type customarily sold on recognizing market; person has waived right in authenticated writing

Question 30

Default – application of proceeds

Answer 30

• Reasonable disposition expenses
• Secured obligation
• Subordinate SIs
• Any remainder to debtor

Debtor is entitled to any surplus and L for any deficiency

Question 31

Redemption of collateral – method

Answer 31

Redeemer must fulfill all obligations secured by collateral and reasonable expenses incurred by the secured party in retaking the collateral or preparing for its disposition

Generally not permitted after disposition or foreclosure

Waiver of right permitted after default by authenticated record