Secured Transactions (j)

Question 1

What is the scope of Article 9?

Answer 1

Applies to CONSENSUAL security interests in personalty and fixtures

Question 2

How does a creditor create an enforceable security interest in debtor’s collateral? How does the creditor attach?

Answer 2

(1) Value must be given by creditor
(2) Contract, called security agreement, must evidence the secured transaction (unless creditor has possession of it)
- the record must be signed (or electronically marked) by debtor AND reasonably identify the collateral
(3) Rights in the collateral (debtor must have)

Question 3

Once attached, how does the creditor attain perfection?

Answer 3

Place the world on record notice of its existence.

Question 4

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

Answer 4

First in time, first in right.

- generally, the first to perfect takes first.

Question 5

Debtor

Answer 5

The party who owes the money

Question 6

Secured Party (Secured Creditor)

Answer 6

The party who lends the money

Question 7

Security Agreement

Answer 7

Contract or Record

Question 8

Security Interest

Answer 8

The right that creditor has in debtor’s collateral

Question 9

Collateral

Answer 9

• The personalty or fixtures that the creditor can look to for satisfaction.
• Collateral can be tangible or intangible

Question 10

Tangible Collateral

Answer 10

(1) Consumer Goods
(2) Equipment
(3) Inventory
(4) Farm Products
(5) Fixtures

• the classify tangible collateral, determine what the primary use of it is in the hands of the debtor

Question 11

Consumer Goods (tangible collateral)

Answer 11

Those items used for personal or familial purposes

Ex: oven, car, blender, furniture

Question 12

Equipment (tangible collateral)

Answer 12

Items used in business

Ex. cash registers, ovens, machines

Question 13

Inventory (tangible collateral)

Answer 13

goods held for sale or lease

Question 14

Farm Products (tangible collateral)

Answer 14

Crops, livestock and supplies used in farming operations

ex. eggs, corn, cows in possession of a farmer

Question 15

Fixtures (tangible collateral)

Answer 15

Items annexed to realty

Ex. lighting, sprinkler systems, furnaces

Question 16

Intangible or Semi-Intangible Collateral

Answer 16

ex. patents, trademarks, stocks, bonds, proceeds from sale of collateral, accounts payable, promissory notes and drafts

Question 17

Attachment

Answer 17

Establishes secured party’s rights in the collateral as against the debtor

Question 18

After-Acquired Collateral Financier

Answer 18

A secured creditor who takes as collateral a security interest “in all of Debtor’s [business equipment, inventory, etc], whether now held or hereafter acquired”

Question 19

Perfection

Answer 19

Establishes secured party’s rights in the collateral as against third parties:

(1) Attachment, and
(2) One of the following:
(i) Filing of a financing statement describing the collateral with Sec. of State where the debtor is located;
(ii) Taking possession;
(iii) Taking control of the collateral;
(iv) Automatic for PMSI; or
(v) Temporary Perfection

Question 20

Purchase Money Security Interest (PMSI)

Answer 20

A security interest that enables the debtor to purchase the goods. It is 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 21

Financing Statement

Answer 21

A very simple document whose only purpose is to provide interested parties with sufficient information to make follow-up inquiries. 
Requisite Components:
(1) debtor's name and address
(2) Creditor's name and address, and
(3) a description of the collateral

Question 22

Priority

Answer 22

When more than one party stakes a claim to the same collateral. Each claimant is entitled to satisfaction in full before subordinated claimant entitled to take.
Order: BIOC-PAC-LC-NOCB-AUPC-GUC

Question 23

Attached Unperfected Creditor (AUPC)

Answer 23

Article 9 creditor who creates an enforceable security interest but either never bothers to perfect or tries to perfect but botches the effort

Question 24

Lien Creditor (LC)

Answer 24

General unsecured creditor who goes to court to get a judicial lien on collateral

Question 25

Perfected Attached Creditor (PAC)

Answer 25

Article 9 creditor who succeeds in attaining perfection

- PAC defeats all except (1) PAC who filed first, (2) certain PMSI holders and (3) BIOC

Question 26

Non-Ordinary Course Buyer (NOCB)

Answer 26

Someone who purchases the collateral outside the ordinary stream of commerce

Question 27

Buyer in Ordinary Course (BIOC)

Answer 27

Someone who purchases collateral from a merchant’s inventory

Question 28

General Unsecured Creditor (GUC)

Answer 28

The lender who never bothered to take collateral

Question 29

Early Filer who Subsequently Attaches

Answer 29

Can file first and attach later. Priority relates back to filing date.

For purposes of determining priority, Art. 9 gives special effect to filing; it allows for early filing, even at the onset of negotiations, and if an early filer subsequently attaches, she is allowed the benefit of her early filing and priority will relate back to the early filing date.

Question 30

Default

Answer 30

Debtor has breached.

Look to the agreement/contract to determine what constitutes a breach

Question 31

In case of debtor default, what can Art. 9 creditor do?

Answer 31

(1) Self-Help Repossession
(2) Repossession by Judicial Action
(3) Strict Foreclosure
(4) Sale
(5) Action for Deficiency Judgment

Question 32

Self-Help Repossession

Answer 32

Self-help repossession is permissible so long as the creditor does not breach the peace.

Question 33

Breach of Peace (in self-help repo)

Answer 33

A breach of the peace occurs when the secured party’s actions are likely to cause violence. The question is not whether violence occurred, but whether the secured party did something provocative.
Examples:
- a repossession over ANY protest by the debtor
- if the repossessor misuses the color of the law (impersonates an officer)
- civil and criminal penalties apply to creditor’s misconduct
- the home enjoys a zone of privacy and secured party may not enter debtor’s home without voluntary + contemporaneous consent

Question 34

Repossession by Judicial Action

Answer 34

Go to court and get a judicial writ of replevin, ordering the sheriff to obtain possession of the collateral and deliver it to the secured party.

Question 35

Strict Foreclosure

Answer 35

Occurs when the secured party retains the collateral in full satisfaction of the debt.

Question 36

How is strict foreclosure accomplished?

Answer 36

(1) Secured party must send a written proposal to retain the collateral in satisfaction of the debt.
- if consumer goods, send to debtor and secondary obligors.
- if not, send to debtor, secondary obligors, perfected creditors and other secured parties who have told the foreclosing creditor of their security interest
- if any of the parties objects within 20 days after notice is sent, SF will not be allowed (disposed of by sale instead)
- if collateral is consumer goods and debtor has paid 60%, SF not allowed- instead, secured party must sell the collateral within 90 days or be liable in conversion.

Question 37

Sale of Collateral

Answer 37

Secured party may sell the collateral and apply the sale proceeds to the debt.

• the secured party chooses whether the sale will be public or private
• every aspect of the sale must be commercially reasonable
• prior to the sale, reasonable notice must be sent
• for consumer goods, additional consumer protective provisions are mandatory- including how to calculate any deficiency and how debtor can redeem
• secured party may buy at a public sale but not at a private one

Question 38

Action for a Deficiency Judgment

Answer 38

If outstanding debt exceeds the value obtained by sale of the collateral, secured party can proceed against the debtor for a deficiency judgment.
- however, if a secured party sells at a low price to an inside buyer, the price than an independent tp will be used in calculating the deficiency

Question 39

Debtor’s Limited Right of Redemption

Answer 39

Debtor’s right to redeem the collateral is cut-off once the secured party has resold or completed a strict foreclosure
- to redeem, debtor must pay the amount owed plus any outstanding interest, as well as creditor’s reasonable expenses, which include attorney’s fees.