Secured Transactions / Article 9

Question 1

• Scope of Article 9

Answer 1

applies to consensual security interests in personalty and fixtures. Doesn’t apply to statutory or mechanics liens.

Question 2

how does creditor attach?

Answer 2

o VCR – Value, Contract, Rights – in the collateral attachment = security interest is enforceable

Question 3

• Once attached, how does creditor attain perfection?

Answer 3

o By putting the world on record notice of its existence, typically by filing.

Question 4

• When more than one creditor has a stake in the same collateral, what are the rules of priority?

Answer 4

o First in time, first in right.

Question 5

• What if debtor defaults?

Answer 5

o Statutory and judicial remedies

Question 6

• Collateral could be –

Answer 6

o Tangible collateral or goods, meaning:
 Consumer goods
 Equipment
 Inventory
 Farm products
 Fixtures – items annexed to realty, such as lighting fixtures, sprinkler systems, furnaces
o Intangibles or semi-intangibles – patents, trademarks, copyrights, stocks, bonds, mutual funds, proceeds from sale of collateral, accounts, promissory notes and drafts

Question 7

Attachment

Answer 7

Creating Enforceable Security Interest
• Attachment means security interest in enforceable
• 3 requirements (VCR):
o V – Value must be given to creditor;
o C- Contract – called security agreement, must evidence secured transaction unless secured party has taken possession of the collateral.
 Note – if secured party is in possession of collateral, no need for record. By contrast, if debtor is in possession of collateral, need a writing.
 Record must be:
• Authenticated by debtor; and
• Must reasonably identify the collateral its now encumbering (generic descriptions, not cool:
o R – Rights – in collateral – debtor must have rights in collateral.
• After-acquired collateral clauses – are enforceable – floating lien

Question 8

Perfection

Answer 8

best understood as publicity device – puts the world on record or constructive notice of secured party’s existence. Proper perfection helps protect secured party from competing creditors.

Question 9

How to attain perfection

Answer 9

o By secured party’s taking possession of collateral
o Automatic perfection for purchase money security interests (PMSIs) in consumer goods (helps encourage lending to consumers)
 PMSI – security interest that enables debtor to purchase the goods
o Most Common Route to Perfection – secured party files notice of the security interest in public records: proper filing puts world of potentially competing creditors on record or constructive notice of filer’s claim.

Question 10

 What is filed to put world on notice?

Answer 10

• Security agreement could be filed but rarely is. Document typically filed is called a financing stmt. Simple doc whose purpose is to provide interested parties with sufficient info to make follow up inquiries. Art 9 aims to encourage electronic filing, and is media neutral (old fashioned or electronic).

Question 11

 Requisite contents of a financing stmt:

Answer 11

• Need only contain 1) debtors name and address; 2) creditors name and address; and 3) description of collateral
• In financing stmt, super generic descriptions of the collateral such as “all of debtors assets” are ok.

Question 12

 Where is the financing stmt filed?

Answer 12

• Filing done centrally with secretary of state in state where debtor located;
• If debtor is an individual, he or she is located in state of principal residence;
• If debtor is registered org, it is located in state under whose laws its organized;
• Exception to central filing: if collateral is timber, minerals or fixtures, file locally, in the country where the realty is located.

Question 13

Cast of Characters (priority)

Answer 13

 AUPie (Attached Unperfected Creditor) - Art 9 creditor who creates an enforceable security, i.e., it attaches, but either never bothers to perfect or tries to perfect, but botches the effort, perhaps by filing in the wrong place
 LC (lien creditor) - General unsecured creditor who goes to court to get a judicial lien on the collateral
 PAC (Perfected Attached Creditor) - Article 9 creditor who succeeds in attaining perfection
 NOCie (Non-Ordinary Course Buyer) - Someone who purchases the collateral outside the ordinary stream of commerce
 BIOC (Buyer in Ordinary Course) - S/o who buys collateral from merchant’s inventory.
 GUC (General Unsecured Creditor) - Lender who never bothered to take collateral.

Question 14

o This is how the Cast usually ranks (MEMORIZE):

Answer 14

	BIOC
	PAC
	LC
	NOCie
	AUPie
	GUC

Question 15

Priority determination

Answer 15

o For purposes of determining priority, Art 9 gives special effect to filing. IT allows for early filing, even at the onset of loan negotiations. If early filer subsequently attaches, she is allowed the benefit of her early filing. Priority will relate back to early filing date.

Question 16

o PMSI holder

Answer 16

 Relevant priority contest is b/w the after-acquired collateral financier (AACF) and the holder of a purchase-money security interest (PMSI).
 AACF – A secured creditor who takes as collateral a security interest “in all of Debtor’s [business equipment, or inventor], whether now held or hereafter acquired.”
 PMSI – a security interest that enables the debtor to purchase the goods. It’s an extension of value by a lender who takes as collateral a security interest in the very item that its loan enables the debtor to acquire.

Question 17

o How does debtor collide with PMSI holder

Answer 17

 1) the AACF v. PMSI holder when the collateral is equipment – PMSI holder must file properly within 20 days after buyer takes possession of the equipment to achieve first priority.
 2) AACF v. PMSI holder when collateral is inventory – PMSI holder must: 1)file properly before debtor Macy’s takes possession; AND 2) Notify bank before Macy’s takes possession.

Question 18

• Default rememdies - repossession

Answer 18

o Self help repossession – is permissible as long as credit doesn’t breach the peace (when secured party’s actions are likely to cause violence.
 A repossession made over any protest by the debtor, however mild the protest, constitutes a breach of the peace.
 Can’t impersonate law enforcement
 Can’t enter debtors home without voluntary and contemporaneous consent
• Repossession by Judicial Action – if the secured party chooses not to resort to self-help repossession, he or she may get a judicial writ, ordering sheriff to attain possession of the collateral

Question 19

strict foreclosure

Answer 19

when secured party retains the collateral in full satisfaction of the debt still owed. Debt then cancelled.
o To accomplish – secured party must send a written proposal to retain the collateral in satisfaction of the debt.
 When consumer good – goes to debtor and secondary obligors (guarantor)
 When not consumer good – notice goes to debtor and other secured parties who’ve told the foreclosing creditor of their security interest in the collateral as well as the perfected creditors and secondary obligors.
 If any of the notified parties objects within 20 days after notice is sent, strict foreclosure not allowed. Instead, has to be disposed of by sale. (piss ant rule)
o Consumer goods and the 60 percent rule – if collateral is consumer goods and the debtor has paid 60% of the loan in the event of a non-PMSI or 60 percent of the cash price if PMSI, strict foreclosure not allowed. Secured party must sell collateral within 90 days or be liable for conversion.

Question 20

• Sale

Answer 20

o Secured party may sell the collateral and apply the sale proceeds to the debt. The secured party chooses whether the sale will be public (public auction) or private.
o 2 governing guideposts:
 Every aspect of the sale must be commercially reasonable
 Prior to sale, reasonable notice must be sent. Article 9 provides that standard notice forms are presumptively commercially reasonable.
• If the collateral is consumer goods, notice must be sent to debtor and secondary obligors;
• Other types of collateral, notice must be sent to debtor and those secured parties who’ve advised the foreclosing creditor of their security interest, as well as perfected creditors and secondary obligors.
• Content of the notice depends on the sale – disposition by public sale, notice must state time and place of sale. If disposition is private, notice must state time after which the sale will be made.
• For consumer goods, additional consumer protective provisions are mandatory including how to calculate and deficiency and how debtor can redeem.
• How much notice required—no bright line. Standard is commercial reasonableness. However, in nonconsumer transaction, notice is reasonable if 10 days or more before time of sale.
• Secured party can buy at public sale, but not at private sale without external mkts check (self-dealing potential).

Question 21

• Action for Deficiency Judgment

Answer 21

o IF sale isn’t enough to cover what’s owed, secured party can proceed against debtor for deficiency judgment.
o If secured party sells collateral at a low price to an insider buyer the price that an independent 3rd party would have paid, rather than actual amount paid, is the price that will be used in calculating deficiency.

Question 22

• Debtor’s Limited Right of Redemption

Answer 22

o Debtor has right to redeem the collateral is cut off once the secured party has resold or completed a strict foreclosure.
o To redeem, debtor must pay missed payments plus: accrued interest and creditors reasonable expenses and attys fees.
o IF the security agreement contains acceleration clause, to redeem, the debtor must pay off the entire debt plus interest plus expenses.