Secured Transactions

Question 1

What are secured transactions/what is this essay topic about?

Answer 1

Secured transactions involve credit transactions, usually when the debtor buys something on credit from another party but does not pay immediately. To ensure payment, creditor takes a security interest in specific personal property of the debtor.

See Article 9.

Question 2

What are a potential creditor’s options?

Answer 2

A potential creditor can outright refuse to lend money or goods/services on credit, obtain the promise to pay (unsecured or general), obtain surety, or obtain collateral (property).

Question 3

How should secured transactions essays be approached (6 steps)?

Answer 3

1. Is the transaction within Article 9?
2. What’s the collateral at issue?
3. Is there a security interest and has it been attached?
4. Has the security interest been perfected?
5. Who is making claims to the collateral?
6. Apply proper priority rules and rules regarding default and repossession.

Question 4

What transactions are within the scope of Article 9?

Answer 4

(a) contractual security interests, aka interests in personal property or fixtures that secure payment or performance of an obligation
(b) sales of accounts, chattel papers, payment intangibles, and promissory notes
(c) commercial consignments of goods at least $1,000 to people who (i) deal in goods of that kind in a name other than consignor’s, (ii) aren’t auctioneers, and (iii) aren’t generally known by their creditors to be substantially engaged in selling the goods to others
(d) agricultural liens (perfection + priority covered), which include non-possessory liens on farm products
(e) disguised sales/aka not true leases
(f) seller’s retention of title to delivered goods (treated as security interest for price)

Question 5

How does a purchase money security interest (PMSI) arise?

Answer 5

It arises when either:

(i) creditor sells the goods to debtor on credit, retaining a security interest in goods for purchase price or
(ii) creditor advances debtor the funds used to buy goods and creditor takes a security interest in the goods

Question 6

How do non-consumer purchase money security interest (PMSIs) retain their status as PMSIs?

Answer 6

Non-consumer PMSIs do not lost their status as PMSIs if:

(a) security interest is secured by property that was not purchased with loan $ or credit;
(b) collateral secures advances that were not made for purchase of the collateral; OR
(c) PMSI has been refinanced, consolidated, etc.

Question 7

How is collateral classified, broadly?

Answer 7

1. Tangible collateral
   (a) consumer goods
   (b) inventory
   (c) farm products
   (d) equipment
2. Intangible or Semi-Intangible Goods
   (a) instruments
   (b) documents
   (c) chattel paper
   (d) accounts
   (e) deposit accounts
   (f) investment property
   (g) commercial tort claims
   (h) general intangibles
3. Proceeds

Question 8

What are the classifications of tangible collateral?

Answer 8

After determining that this concerns Article 9, determine what type of collateral is at issue. Of tangible collateral, there are:

(a) consumer goods = personal, family, or household purposes
(b) inventory = held for sale or lease in ordinary course of business, raw material and work in progress, or consumed materials (used in process of doing business)
(c) farm products = crops and livestock; must be in possession of farmer engaged in farming operations AND in an unmanufactured condition
(d) equipment = for business purposes, whether it is a firm or government. Default category.

Question 9

T/F: Any particular item can only be one type of collateral.

Answer 9

True. But a creditor will likely protect against multiple types of collateral in case there is possible confusion as to what category the item be in from debtor’s possession.

Question 10

Standing tinder (trees), growing crops, and unborn young of animals are what type of collateral?

Answer 10

These collateral are considered goods, likely all would fall under farm products.

Question 11

What is excluded from Article 9?

Answer 11

• rights governed by federal law
• real property (except fixtures)
• tort claims (except commercial tort claims)
• deposit accounts in consumer transactions
• statutory liens (e.g. MMLs)
• wage assignments

Question 12

What are the classifications of intangible collateral?

Answer 12

After determining that this concerns Article 9, determine what type of collateral is at issue. Of intangible collateral, there are:

(a) instruments: notes, drafts, and negotiable certificates of deposit; $
(b) documents: written or electronic representation of goods (documents of title), like warehouse receipts, bill of lading (goods in transit)
(c) chattel paper: writing shows monetary obligation (e.g. promissory note) + security interest in or lease of goods (e.g. written security agreement)
(d) accounts: any right to payment of $ for goods sold or leased for services rendered not evidenced by instrument or chattel paper. Typically, accounts receivable of a business.
(e) deposit accounts: non-consumer only OR consumer deposit accounts that are claimed as proceeds of other collateral
(f) investment property: stocks, bonds, mutual funds, etc.
(g) commercial tort claims: claims that do not involve personal injury
(h) general intangibles = other types of personal property like IP rights

Question 13

How are proceeds classified?

Answer 13

Proceeds are a type of collateral and are whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.

Question 14

Which of the following collateral is consumer goods?

A - A razor kept at an office for grooming prior to business meetings.

B - A razor sold at a store.

C - A razor kept at home.

D - A sharp tool on a farm used to harvest corn.

Answer 14

A razor kept at home is considered to be a consumer good because it is used for personal, family, or household purposes.

If a debtor maintains razor in his or her office for business purposes, it is equipment. If a debtor opens a store and puts the razor in stock to sell, it is considered inventory. Supplies used or produced in farming operations are considered farm products. The category into which the collateral is placed depends on the primary use of that collateral.

Question 15

T/F: A pre-existing debt is sufficient in certain instances to create the value required for the attachment of a security interest.

Answer 15

True. Value must be given by the secured party before a security agreement will be effective to create a secured interest. Any consideration sufficient to support a simple contract will suffice. Pre-existing debt normally is not consideration, but it is considered to be value given if the security interest is intended as security for the pre-existing debt.

Question 16

At which point does a security interest attach?

Answer 16

(1) when secured party or creditor gives value or consideration;
(2) when the parties create a security agreement; and
(3) when the debtor has rights in the collateral.

Question 17

What is a floating lien?

Answer 17

The security interest will attach to the after-acquired property as soon as debtor acquires an interest in the property. Such an interest may be created only by specifically including an after-acquired property clause, such as “this agreement is secured by the debtor’s inventory now owned and after-acquired.”

Any transaction which is intended to create a security interest in personal property or a fixture is considered a collaterized transaction. If the property used as collateral is to be acquired with a loan, it is then considered to be a purchase-money security interest (PMSI).

Question 18

Within which time period must a secured party refile a financing statement in the event of a debtor name change, to perfect their secured interest in debtor’s after-acquired collateral?

Answer 18

4 months. Perfection of a secured interest may be achieved by filing a financing statement. Financing statements are indexed under the debtor’s name, and the statement must not contain seriously misleading errors, such as an incorrect name.

If the debtor’s name as indicated on a filed financing statement becomes insufficient, such as due to the debtor’s name change, the financing statement is effective only against collateral acquired by the debtor before the name became insufficient and within 4 months after. The secured party must refile using the debtor’s new and correct name to perfect a security interest in collateral acquired after the 4-month period.

Question 19

T/F: The description of the collateral in a financing statement, however, may be broader in terms than the security agreement, and may include descriptions such as “all assets” or “all of debtor’s personal property.”

Answer 19

True.

Question 20

Security interests in which of the following collateral may NOT be perfected by possession?

A - Consumer Goods.

B - Inventory.

C - Electronic documents.

D - Equipment.

Answer 20

Electronic documents cannot be perfected by possession. Accounts, deposit accounts, non-negotiable documents, electronic documents, and general intangibles cannot be perfected by possession.

Question 21

How are security interests in money perfected?

Answer 21

Perfected by possession. Security interests in money, other than proceeds, can be perfected only by taking possession. Perfection by any other method is ineffective and loss of possession equates to loss of perfection.

Question 22

T/F: A purchase money security interest (PMSI) in consumer goods is perfected as soon as it attaches.

Answer 22

True.

Question 23

T/F: A perfected creditor always prevails over an unperfected creditor.

Answer 23

True.

Question 24

T/F: Priority goes to whichever party first filed or first perfected.

Answer 24

True.

Question 25

Within which time period must a Purchase Money Security Interest ("PMSI") creditor in goods, other than inventory or livestock, perfect her security interest once the debtor takes possession of the collateral?

Answer 25

20 days

Question 26

Which statement correctly categorizes the collateral described? A - TVs in the debtor’s office lobby are consumer goods. B - Eggs at the debtor’s poultry farm are inventory. C - Computer terminals in the debtor’s Internet café are equipment. D - Bags of manure sold by the debtor’s agricultural supply depot are farm products.

Answer 26

C. Computer terminals in the Debtor's Internet cafe are equipment. Equipment is goods that are not consumer goods, farm products, or inventory, e.g., durable goods used in business or paintings on an office wall. TVs and computer terminals are equipment. Consumer products are goods bought for personal, family, or household purposes. Farm products are crops, livestock, un-manufactured products of livestock, e.g., eggs, and supplies used or produced in farming operations or in the possession of or used by a farmer. Here, the eggs fall under this. Inventory includes goods held for sale or lease, goods furnished under a contract of service, supplies used in manufacturing, materials consumed in a business, and work in progress. Bags of manure are inventory.

Question 27

What is attachment?

Answer 27

Attachment is the process by which a security interest is created and becomes enforceable against a debtor. Three elements: V(alue), C(contract - security agmt), and R(ights) After determining that the transaction falls under Article 9 and classifying the collateral at issue, you should determine if there is a security interest (attachment has occurred). Then you would look to see if the security interest has been perfected, who is making claims on the collateral, and apply the proper priority rules and rules regarding default and repossession.

Question 28

What are the elements of attachment?

Answer 28

V: value has been given; lending $ or goods on credit C: contract (security agreement is agreed to orally, an authenticated record, or demonstrated by control) R: rights in collateral

Question 29

What is a security agreement?

Answer 29

A security agreement is a contract between the debtor and creditor, and gives the creditor a security interest in the collateral. For attachment to occur, there must also be value given and rights in the collateral. A security agreement can be oral, an authenticated record, or demonstrated by control.

Question 30

Can a security agreement be oral?

Answer 30

Yes, but only if the collateral is in the creditor's possession. This is referred to as a pledge.

Question 31

What is an authenticated record?

Answer 31

An authenticated record is a written or electronic record (signed or marked electronically) with present intent to identify the debtor and adopt the agreement. The description must reasonably identify the property and make clear what property the creditor can repossess.

Question 32

T/F: Consumer goods and commercial tort claims cannot be described by type alone; the description in the authenticated record must be more specific.

Answer 32

True.

Question 33

Can a security agreement be demonstrated by control?

Answer 33

Yes, if the collateral is non-consumer deposit accounts, electronic chattel paper, or investment properties. Control means that the creditor has the right to sell or cash in the collateral without debtor's input.

Question 34

Can a debtor use new property as collateral for an old loan?

Answer 34

Yes, this is referred to as a floating lien and is very common with inventory. The debtor can agree that new acquisitions of property will serve as additional collateral for an old loan.

Question 35

Bank loaned Store $50,000 and took a security interest in Store's inventory. The parties signed a security agreement which described the collateral as "all inventory now owned and after-acquired." Has the inventory been attached?

Answer 35

Bank's security interest will not attach until Store actually buys the inventory. Until then, the security interest cannot attach because Store, the debtor, will not have any rights in the collateral. Attachment requires: value given (in current inventory), contract (security agreement signed), but there are no rights in the not-yet-acquired inventory.

Question 36

Loan Co. loaned Consumer $5,000 and made her sign a security agreement giving Loan Co. a security interest in Consumer's TVs "now owned or after-acquired." A month later, Consumer purchased a big screen TV with their income tax refund. If Consumer fails to make a payment on the loan, can Loan Co. repossess the new TV?

Answer 36

No. The security interest has not attached because the new TV was not acquired by the Consumer within 10 days after the loan. This is a consumer good exception - limits creditor from giving value after 10 days.

Question 37

T/F: After-acquired property clauses will apply to commercial tort claims.

Answer 37

False. After-acquired property clauses do not apply to commercial tort claims.

Question 38

What is a line of credit arrangement?

Answer 38

The debtor agrees that the collateral will serve as collateral for new loans, as well as the current loan.

Question 39

Is having rights in collateral the same as having title to the collateral?

Answer 39

No. Having title to goods matters only for consignments. For attachment, a limited right in collateral (e.g. right to possession) is sufficient.

Question 40

A credit can obtain control over what kind of collateral?

Answer 40

- non-consumer deposit accounts - electronic chattel paper - electronic documents - investment property Control means that the creditor has the right to sell or cash in the collateral without debtor's input. This can evidence the "contract" (security agreement) element of VCR needed for attachment.

Question 41

T/F: A secured party obtains control over a certified stock or bond by taking delivery (possession) of certificate if it is in bearer form.

Answer 41

True. If it is in registered form, the security party must take delivery and certificate must be endorsed or registered by the issuer.

Question 42

What is the difference between attachment and perfection?

Answer 42

Attachment establishes the secured party's rights in the collateral as against the debtor. It requires VCR - value given, contract (evidenced by possession, authenticated record, or control), and rights. Perfection establishes the secured party's rights in the collateral as against third parties. It requires attachment and one of the following: - filing of a financing statement describing collateral - taking possession of collateral - taking control of collateral - automatic perfection - temporary perfection

Question 43

T/F: Perfection and attachment can occur simultaneously.

Answer 43

True, but perfection cannot occur before attachment. If one of the five methods of perfection has occurred before attachment, then perfection occurs once the security interest has been attached.

Question 44

What are the five methods of perfection?

Answer 44

After attachment has occurred, perfection requires one of the following: - filing - taking possession - control - automatic perfection - temporary perfection

Question 45

What is perfection by filing?

Answer 45

Perfection by filing is when a secured party obtains perfection by filing (written or electronic) a financing statement, which contains: (i) debtor's name and address (ii) secured party's name and address (iii) indication of the collateral covered by the financing statement; and (iv) if concerns real property - a description of the related real property, name of record, and indication it is to be filed in real property records This is effective for 5 years, unless it is a recorded real property mortgage covering fixtures.

Question 46

What is perfection by taking possession (pledge)?

Answer 46

When the secured party takes actual possession of the collateral, and the security interest is perfected from moment of perfection and until possession is lost.

Question 47

What is perfection by control?

Answer 47

If perfected by control, "control" means that creditor has the right to sell or cash in the collateral without input from the debtor. This covers the following chattel: investment property, non-consumer deposit accounts, electronic documents, and electronic chattel paper.

Question 48

What is perfection by automatic perfection and what are its limitations?

Answer 48

A purchase money security interest (PMSI) in consumer goods is perfected as soon as it attaches. Limitations: - security interest in cars can be perfected only by notation on car's certificate of title - PMSI in fixtures will have priority over an encumbrancer of the real property only if PMSI holder files

Question 49

What is perfection by temporary perfection?

Answer 49

This is temporary perfection in the following collateral: (a) Proceeds are automatically perfected for 20 days from debtor's receipt of the proceeds. (b) Creditor is automatically perfected for 20 days if new value for instruments, negotiable documents, and certified securities. (c) interstate shipments (debtor moved to new state and debtor's new state governs perfection, the collateral is temporarily perfected in new state) (e. g. of a security interest in proceeds received from the sale of collateral)

Question 50

T/F: Almost all collateral may be perfected by possession.

Answer 50

True, except accounts, deposit accounts, electronic chattel paper, electronic documents, and general intangibles cannot be perfected by perfect.

Question 51

What happens if the creditor no longer has possession of collateral?

Answer 51

If the creditor no longer has possession of collateral, generally this means that perfection is lost.

Question 52

T/F: A PMSI in inventory or equipment is automatically perfected.

Answer 52

False. Only a PMSI in consumer goods is automatically perfected. A PMSI in inventory or equipment requires filing.

Question 53

How can a security interest in proceeds continue to be perfected beyond 20 days?

Answer 53

If: (a) "same office" rule: security interest in original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral; (b) proceeds are identifiable cash proceeds; or (c) security interest in the proceeds is perfected within 20-day period

Question 54

How can a security interest in proceeds continue to be perfected beyond 20 days?

Answer 54

If: (a) "same office" rule: original security interest perfected by filing and a financing statement covering the proceeds would be filed in the same place as the original collateral; (b) proceeds are identifiable cash proceeds; or (c) security interest in the proceeds is perfected within 20-day period

Question 55

In which instances does the creditor not need to follow the law of the collateral's location?

Answer 55

(a) security interests perfected by possession (b) fixtures (c) timber (d) agricultural liens (where farm products covered by lien is at issue) (e) certificate of title items = law of state which issued most recent certificate of title controls (f) deposit accounts = law of state in which bank has CEO

Question 56

What is a subordination agreement?

Answer 56

A subordination agreement is when parties have agreed to a priority order different from the normal rules.

Question 57

T/F: Between a secured creditor and an unsecured (general) creditor, the secured creditor will have priority over the collateral.

Answer 57

True and the preferred status of the secured creditor is irrelevant.

Question 58

Between two secured parties, how do you determine who wins and has priority over the collateral?

Answer 58

Between two secured parties who are unperfected, the first to attach wins. If one creditor has perfected, that perfected creditor wins.

Question 59

In 2013, Debtor granted Bank a security interest in its equipment. Bank did not file a financing statement or otherwise perfect its interest. In 2014, Debtor granted Another Bank a security interest in the same equipment. Debtor told Another Bank that it had already granted Bank a security interest in the equipment. Another Bank perfected. If Debtor stops paying Bank and Another Bank, who has priority over the equipment?

Answer 59

Another Bank has priority over the collateral because it is perfected.

Question 60

Between two creditors that have perfected, how do you determine who wins and has priority over the collateral?

Answer 60

The general rule is that the first creditor to file or perfect (not both) will win.

Question 61

T/F: The purchase-money security interest (PMSI) creditor in goods other than inventory and livestock will beat a perfected creditor.

Answer 61

True. PMSI creditor prevails (even if second) concerning goods other than inventory and livestock, if it is perfected: - at time debtor receives possession of the collateral - within 20 days of when debtor received possession of collateral

Question 62

On May 1, Debtor gave a security interest in all his office equipment now owned or after-acquired to Bank A. Bank A filed a financing statement and lent Debtor money on the same day. Later, Debtor bought a new copy machine from Office Store, which took a security interest in the purchase to secure payment of the purchase price. Office Store gave Debtor possession of machine on September 10. A Although second to file or perfect, Office Store has priority over Bank A if it perfects by?

Answer 62

September 30. A purchase-money security interest (such as gaining a security interest in the new copy machine) creditor like Office Store will prevail against Bank A, which had already perfected, because Debtor already has possession of the collateral. Office Store has 20 days (until September 30), which is when Debtor received possession of the collateral, to win over Bank A.

Question 63

What is the priority of a creditor who has purchase-money security interest (PMSI) in inventory?

Answer 63

A PMSI in inventory creditor will prevail if: - PMSI creditor perfected at time debtor received possession of the inventory, and - proper notice to holders of conflicting interest. Authenticated notification to all creditors who have already filed with respect to collateral and contains: creditor is obtaining a PMSI in inventory, collateral description, and is given before debtor receives possession.

Question 64

What is the priority of a creditor who has purchase-money security interest (PMSI) in livestock?

Answer 64

A PMSI in livestock creditor will prevail if: - PMSI creditor perfected at time debtor received possession of the inventory, and - proper notice to holders of conflicting interest. Authenticated notification to all creditors who have already filed with respect to collateral and contains: creditor is obtaining a PMSI in inventory, collateral description, and is given before debtor receives possession.

Question 65

If both parties have perfected, how is priority determined for deposit accounts?

Answer 65

The secured party with control prevails. Control means that the creditor has the right to sell or cash in the collateral without debtor's input.

Question 66

If both parties have perfected, how is priority determined for investment property?

Answer 66

The secured party who has control over investment property has priority over a secured party who does not have control. Control means that the creditor has the right to sell or cash in the collateral without debtor's input.

Question 67

Debtor borrows from A and grants A a security interest in a variety of collateral, including all of Debtor's investment property. At the time, Debtor owns 1,000 shares of XYZ for which Debtor has a certificate. A perfects by filing. Later, Debtor borrows from B and grants B a security interest in the 1,000 shares of XYZ. Debtor delivers the certificate, indorsed in bearer form, to B. A and B both have a perfected security interest in the same stock. Who will prevail?

Answer 67

Here, two parties have perfected investment property (XYZ stock). The party that controls the investment property has priority over a secured party who does not have control (e.g. secured party who perfected by filing). B will win because it has control of the delivery and properly indorsed the certificate, instead of just filing like A.

Question 68

Between a secured creditor and a donee, who will have priority over collateral?

Answer 68

A secured creditor - the donee will lose.

Question 69

Between a secured party and purchaser, who has priority over collateral?

Answer 69

Generally the secured party will prevail. But if the debtor has permission to sell, the purchaser will prevail.

Question 70

Concerning priority between a secured party and a purchaser, what is the general rule for a secured party that is unperfected at the time of purchase?

Answer 70

If a secured party is unperfected at time of purchase, the purchaser wins if buyer gives value, received delivery of the item, and had no knowledge of security interest at time of delivery. EXCEPTION: if PMSI creditor perfects within 20 days after debtor receives collateral but after the debtor sells collateral to purchaser, creditor will prevail over "gap" purchaser.

Question 71

T/F: A buyer in the ordinary course of business can prevail over a perfected creditor.

Answer 71

True, but only if: - honest effect and observance of reasonable commercial standards (good faith) - no knowledge of a security interest violation - purchase is of goods that aren't farm products - purchase must be from a person in business of selling goods of the kind - security interest created by seller - creditor not perfected by possession

Question 72

How can a consumer purchaser of consumer goods win priority over a secured party?

Answer 72

The purchaser will win if: - consumer goods in seller's hands - consumer goods in buyer's hand - buyer has no knowledge of security interest - buyer pays value - creditor not perfected by possession - creditor's interest is unfiled prior to purchase

Question 73

Consumer bought a TV on credit from Store, which took a purchase money security interest in the TV. Before the TV was paid for, Consumer sold it to his sister. If the sister buys without notice of the store's interest and store has not filed a financing statement, who has priority over the TV?

Answer 73

The sister has priority and takes the TV free of Store's security interest.

Question 74

Who has priority between a secured party and a buyer not in the ordinary course of business (future advances)?

Answer 74

This is when the creditor gave more $ to debtor based on collateral that debtor has already sold to purchaser who does qualify as a buyer in the ordinary course of business. The buyer can win over a secured creditor for future advance amounts (not prior ones) made after the first of these events occurs: (a) secured creditor obtains knowledge of the purchase (b) 45 days have elapsed from date of purchase

Question 75

T/F: A holder in due course will win over earlier perfected interests in the negotiable instrument.

Answer 75

True.

Question 76

What is a lien creditor?

Answer 76

A lien creditor is an unsecured creditor who has acquired a judicial lien by a levy on the debtor's property. This also includes a bankruptcy trustee.

Question 77

Between a secured creditor and a lien creditor, who has priority?

Answer 77

If the secured creditor is unperfected at time lien attached, the lien creditor will win. If the secured creditor is perfected at time lien attached, the secured party will win.

Question 78

Bank loaned Debtor $10,000 and made the debtor sign a security agreement giving Bank a security interest in Debtor's business equipment. Bank never filed a financing statement. A few weeks later, one of Debtor's other creditors recovered a judgment against Debtor and had the sheriff seize the business equipment. This seizure created a judicial lien on the property. Who has priority over the business equipment?

Answer 78

The lien creditor prevails and is entitled to be paid first when the equipment is sold because the Bank's interest was unperfected. If the secured creditor is unperfected at time lien attached, the lien creditor will win.

Question 79

C bought a typewriter for her law office on credit on July 10, giving Seller (creditor) a security interest in the machine. On July 12, another creditor obtained and levied on a judgment against her. On July 14, Seller properly filed a financing statement. Who has priority over the typewriter?

Answer 79

Although the judicial lien came prior to Seller's perfection, Seller prevails because of the 20-day grace period for purchase money security interests (PMSI) which allows the perfection to occur within 20 days of the debtor receiving possession of the collateral.

Question 80

Debtor grants Bank a security interest in copy machine. Bank properly perfects. March 1: P obtains a valid judicial lien on the machine and immediately tells Bank about lien. April 1: Bank loans Debtor $1,000. May 1: Bank loans Debtor $500. Who has priority over what?

Answer 80

$1000: Bank will have priority because although it knew of the judicial lien, 45 days had not elapsed. $500: Bank will not have priority because Bank knew of the judicial lien and 45 days have passed from date of the lien. (March 1 = lien, May 1 = $500)

Question 81

Between a secured creditor and a statutory mechanic lien, who has priority?

Answer 81

A secured creditor. But a statutory mechanic lien can prevail if: (a) person furnished services or materials with respect to goods covered by security interest; (b) furnishing was in ordinary course of business; and (c) collateral is in possession of statutory lien holder

Question 82

Bank had a perfected security interest in Consumer's car. When the car broke down, Consumer took it to Garage and had it repaired. Who has priority?

Answer 82

Garage's statutory mechanic's lien has priority over Bank's security interest as long as Garage retains possession of the car. This is because a statutory mechanic lien prevails if: (a) person furnished services or materials with respect to goods covered by security interest; (b) furnishing was in ordinary course of business; and (c) collateral is in possession of statutory lien holder

Question 83

T/F: Priority for the proceeds is the same as the priority in the original collateral as long as the security interest in the proceeds is perfected.

Answer 83

True.

Question 84

What are fixtures?

Answer 84

Fixtures are ordinary building materials (e.g. brick, lumber, nail, pipes, etc.) cease to be goods when incorporated into a structure and are real property. Basically, a fixture can be removed from the building but some damage will occur to the realty. e.g. HVAC, furnace, AC unit.

Question 85

Between a secured party and holder of real property, who has priority over fixtures?

Answer 85

Generally, a secured party may win if: (a) perfected before real estate interest recorded; and (b) perfected with a fixture filing - financing statement that describes the real property and is filed in office where a mortgage would be recorded

Question 86

Is there a PMSI exception when it comes to priority over fixtures?

Answer 86

Of course. A PMSI creditor, even if perfected after real property interest is of record, can win if: (a) PMSI creditor perfected by fixture filing; (b) perfected within 20 days of good becoming a fixture, aka installation; and (c) competing real estate interest is not a real estate mortgage (aka enabled whole building process to begin)

Question 87

What's the difference between a fixture and a readily removable collateral?

Answer 87

A fixture is ordinary building material (e.g. brick, lumber, nail, pipes, etc.) that ceases to be goods when incorporated into a structure and are real property. Basically, a fixture can be removed from the building but some damage will occur to the realty. e.g. HVAC, furnace, AC unit. Whereas, a readily removable collateral is readily movable and is treated as a good. This includes a fridge and copy machine.

Question 88

T/F: A security interest in fixtures that is perfected in any manner prevails over a later-acquired judicial lien, even if the perfection was not done via a fixture filing.

Answer 88

True.

Question 89

T/F: A perfected security interest in crops has priority over a conflicting interest in the land on which the crops are growing.

Answer 89

True. It doesn't matter who filed or perfected first.

Question 90

Upon debtor's default, the creditor may repossess. What rules does the creditor have to follow in repossession?

Answer 90

The creditor can repossess without judicial process or notice to debtor. The only rule the creditor must follow is to not breach the peace.

Question 91

T/F: If the rep person breaches the peace, the creditor is strictly liable.

Answer 91

True, even if the rep person was an independent contractor. This liability could be for conversion of repossessed item, actual damages, and even punitive damages.

Question 92

What are the creditor's choices after a proper (no breach of peace) repossession?

Answer 92

Creditor can choose between: (a) resell collateral - sue for deficiency and then give surplus to debtor (b) strict foreclosure - keep collateral and call things done

Question 93

What is the process if a creditor, after proper repossession, resells the collateral?

Answer 93

Generally, notice of sale is required UNLESS the collateral is perishable, will decline speedily in value, or is customarily sold on a recognized market. Notice's requirements include: (a) description of debtor and secured party (b) description of collateral (c) method of sale (d) statement that debtor is entitled to accounting and charge, if any (e) time and place of public sale until it becomes private (f) if collateral is consumer goods - that debtor is liable for deficiency, # of person to obtain amount needed to reform collateral, and where to get additional info Notice must be sent a reasonable amount of time before the sale, which is 10+ days before sale.

Question 94

if a creditor, after proper repossession, resells the collateral, who receives notice of the sale?

Answer 94

Generally, notice of sale is required UNLESS the collateral is perishable, will decline speedily in value, or is customarily sold on a recognized market. Who receives notice: 1. debtor receives notice unless the debtor has waived it in an authenticated agreement after default; 2. sureties; and 3. if collateral is not a consumer good, creditors who have perfected by filing, notation on certificate of title, or who have given notice to reselling creditor

Question 95

How can a debtor cure the default and regain collateral that was up for resale?

Answer 95

(a) creditor has not sold or entered into contract to sell collateral (b) strict foreclosure has not occurred (c) debtor has not waived right to redeem after default (d) debtor must tender fulfillment of ALL obligations secured by collateral (not just late payments) (e) debtor must tender creditor's reasonable expenses

Question 96

If collateral is being sold because the debtor defaulted, can the creditor purchase?

Answer 96

If at a public sale (auction), yes. If at a private sale, generally no. The creditor can purchase if the collateral is customarily sold in a recognized market or collateral is subject to widely distributed standard price quotations.

Question 97

T/F: The reselling creditor warrants title, possession, and quiet enjoyment of the collateral by the purchaser unless the creditor takes steps to disclaim the warranties.

Answer 97

True.

Question 98

How are resale proceeds distributed?

Answer 98

1. reasonable expenses of reselling creditor 2. satisfaction of debt 3. satisfaction of subordinate creditors 4. if any surplus, to debtor

Question 99

What are the penalties for not complying with resale requirements?

Answer 99

a. The liability could be to debtor or to another creditor. b. If concerning consumer goods, the creditor is automatically liable for amount equal to finance charge plus 10% of the principal.

Question 100

What happens in strict foreclosure?

Answer 100

The creditor retains collateral and the debt is totally satisfied. In non-consumer situations, the creditor may retain the collateral in total or partial satisfaction of the debt. Strict foreclosure is only possible with express consent (debtor agreed in an authenticated record after default) or implied consent (failure to object to proposal to strictly foreclose within 20 days of notice). EXCEPTION: if debtor paid 60% of price, resale necessary within 90 days of repossession (cannot have strict foreclosure)