Secured Transactions High Priority Topics

Question 1

Lease vs SI

Answer 1

Courts look at the economic reality to determine if a lease is actually a security interest.

A lease is an SI if a commitment to make payments for a term exists AND either:

• the original term is equal to or greater than the remaining economic life of the goods;
• lessee must renew the lease for the remaining economic life of the goods;
• Lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration; or
• lessee has the option to become the owner of the goods for no additional consideration

Question 2

Valid SI

Answer 2

To obtain a valid security interest in collateral, a creditor MUST attach the collateral and perfect its interest.

Attachment secures the creditor’s right in the collateral and perfection gives notice of the creditor’s rights in the collateral.

Perfection cannot happen without attachment.

Question 3

Attachment

Answer 3

Attachment requires that:
- the creditor extend value to the debtor;
- the debtor must have rights in the collateral; AND
-Either:
An authenticated record or security agreement;
Possession; or
Control

Question 4

Perfection

Answer 4

Perfection is obtained by filing a financing statement with the Secretary of State or taking possession or control

Question 5

Financing Statement

Answer 5

An effective financing statement must include;

• the name of the debtor and secured party;
• indicate the collateral covered; and
• be filed by a person authorized by the debtor

**Substantial compliance is required and minor errors are permissible unless they make the statement seriously misleading.

Question 6

PMSI

Answer 6

A PMSI is created when a creditor extends value to the debtor for the purpose of enabling the debtor to acquire rights in the collateral.

A PMSI is consumer good has automatic perfection

A PMSI for non-consumer goods takes priority if the creditor files a financing statement before/within 20 days after debtor receives delivery of the collateral

Question 7

SI in Sale of Collateral

Answer 7

A security interest will continue despite a sale, lease, or other disposition of collateral unless the secured party authorizes a transfer free of the security interest.

A perfect SI will attach to any identifiable proceeds from the disposition or collateral.
-However, that interest will become unperfected on the 21st day after attachment. UNLESS:

Proceeds are identifiable cash

SI is perfected when it attaches to the proceeds or within 20 days; or

If OG collateral was perfected under the general filing rule, the proceeds are collateral that may be perfected by filing, and proceeds are not acquired with cash proceeds.

Question 8

Transfer of Collateral

Answer 8

A buyer receives ALL of the rights the seller had upon the transfer of goods

A seller who did not have title to goods cannot transfer title to a buyer (unless an exception applies)

Exceptions: Shelter Rule, BIOCB or sale from consumer to consumer

Question 9

Buyer in the Ordinary Course of Business

Answer 9

Takes free of a security interest

1. Buyers goods in good faith
2. Without knowledge that the sale violates the right of another person, and
3. Is in the ordinary course from a merchant

Question 10

Consumer to Consumer Rules

Answer 10

Buyers of consumer goods take free of a security interest if the goods are bought

• without knowledge of the SI;
• for value;
• from a consumer; and
• before filing of a financing statement.

Question 11

Priority Rules

Answer 11

Perfected v Unperfected: perfect wins

Unperfected v Unperfected: first creditor to attach wins

Perfected v Perfected: First to perfect wins

PMSI v Perfect: PMSI in consumer goods winds, treat PMSI in non-consumer goods as Perfected v Perfected

Question 12

Judgment Liens

Answer 12

Judgment lien creditors have priority over conflicting security interests ONLY if the person became a judgment lien creditor before the security was perfected

Question 13

Right to Take possession of collateral

Answer 13

After default, secured party MAY take possession of the collateral or render equipment unusable and dispose of collateral on a debtor’s premises

Question 14

Right to Dispose of Collateral

Answer 14

After default, a secured party may sell, lease, or otherwise dispose of the collateral in any reasonably commercial manner.

Question 15

Disposition at a Foreclosure Sale

Answer 15

The sale:

Transfers all of the debtor’s rights in the collateral to a transferee for value;

Discharges the security interest; AND

Discharges any subordinate security interests

Sale must be commercially reasonable

• Usual manner on any recognized market
• Current price in any recognized market; or
• In conformity with reasonable commercial practices

Question 16

Damages for Secured Party’s Filure to Comply with Applicable Rules

Answer 16

Actual Damages: caused by failure to comply

$500 in Statutory Damages

Civil Penalty: applies to consumer goods and debtor may recover damages for loss and either the amount not less the credit service charge plus 10% of the principal obligation or the time-price differential plus 10% of the cash price

Retrain Collection: court may retrain collection, enforcement, or a proper sale of the collateral if a secured party is not proceeding in accordance with the law

Question 17

Deficiency Judgment

Answer 17

A deficiency judgment may be limited when a secured party fails to comply with UCC Art 9.

Consumer Goods: are left for the court to determine. Some states apply the Absolute Bar rule which does not allow for the collection of any deficiency. Other states apply a Rebuttable Presumption that the proceeds equal the total debt owed unless proved otherwise by the Secured Party

Non-Consumer Goods: if a debtor places a secured party’s compliance at issue and the secured party fails to prove disposition was proper, then the deficiency amount recoverable is limited to an amount by which the total debt exceeds the greater of the Proceeds of the disposition OR amount that would have been realized had the secured party complied with UCC art 9.