Secured Transactions Rule Language

Question 1

Article 9 Language

Answer 1

“Article 9 applies to all security interests in personal property or fixtures by contract.”

Question 2

Classification of Collateral (Generally–not each class)

Answer 2

Classification of the collateral is important because many provisions of Article 9 (particularly those dealing with perfection and priorities) make legal distinctions based on the type of collateral.

Question 3

Original Use Test for Classifying Collateral

Answer 3

Under the original use test, a debtor’s original intended use of collateral governs the collateral’s classification.

Question 4

Consumer Goods

Answer 4

These are goods that are bought for use primarily for personal, family, or household purposes

Question 5

Inventory

Answer 5

Goods, other than farm products, that are held by a person for sale or lease to be furnished under a contract of service; or raw materials, work in process, or materials used or consumed in a business

Question 6

Equipment

Answer 6

Goods, other than inventory, farm products, or consumer goods

Question 7

Farm products

Answer 7

Crops, livestock, supplies produced in farming operation or products of crops of livestock in their unmanufactured state in possession of debtor who is engaged in a farming operation

Question 8

Attachment (Definition)

Answer 8

“Attachment deals with those steps legally required to give the secured party a security interest in the collateral that is effective as against the DEBTOR.”

“Once a security interest attaches, it is effective against the debtor and the creditor has all of the rights of a secured creditor under Article 9. A creditor is not a secured creditor until attachment.”

Question 9

Requirements for Attachment

Answer 9

1. value must be given by the secured party to the debtor (e.g., a loan)
2. the debtor must have rights in the collateral; and
3. there must be a binding security agreement.

Question 10

Requirements for a binding Security Agreement

Answer 10

AID
1. Authentication
2. Intent to create a security agreement, and
3. A description of the collateral

Question 11

After acquired property

Answer 11

“The general rule is that a security agreement can cover after acquired property and does not need to specifically reference it to be effective.”

“If a security agreement includes an after acquired collateral clause, the security interest attaches when the debtor obtains an interest in the property.”

Question 12

Perfection (Definition)

Answer 12

“Perfection deals with those steps legally required to give the secured party an interest in the collateral that is effective as against the WORLD.

“To obtain rights against another claimant to a debtor’s collateral, a secured part must also perfect its security interest.”

“In general, perfection is the process of giving public notice of the security interest to the world.”

Question 13

Methods of perfection (5)

Answer 13

1. Filing a financing statement
2. Automatic (PMSI in consumer goods)
3. Control
4. Possession
5. Temporary Perfection

Question 14

Perfection by Filing

Answer 14

Generally, a perfected security interest prevails over an unperfected security interest in the same collateral. In the case of conflicting perfected security interests, the party that files or perfects first has priority.

The UCC provides for perfection by simple “notice” filing for all kinds of collateral except deposit accounts and money.

For collateral other than real estate, a financing statement is filed centrally with the secretary of state. This financing statement must contain: (i) the name and mailing address of the debtor, (ii) the name and address of the secured party, and (iii) an indication of the collateral covered by the financing statement.

Question 15

PMSI (Definition)

Answer 15

“A purchase money security interest (PMSI) is created when a creditor advances credit or provides the funds needed to make a purchase possible and takes a scrutiny interest in the goods purchased.”

Question 16

Errors in Financing Statement

Answer 16

The financing statement must not contain any seriously misleading errors.

If the debtor is a registered organization, the debtor’s name must match the name on the organization’s public organic record. Use of a debtor’s trade name is insufficient.

However, an incorrect name will not be treated as seriously misleading if the financing statement would be discovered in a filing office search under the debtor’s correct name.

Question 17

Buyer in Ordinary Course of Business (BIOC) Definition

Answer 17

A “buyer in the ordinary course” is one who buys goods (1) in good faith,
(2) without knowledge that the sale violates the
rights of another person in the goods, and
(3) in the ordinary course of business from a seller in the business of selling goods of the kind purchased.

The typical case of the buyer knowing that the sale violates the rights of another is where the buyer knows that the sale violates the security agreement.

Question 18

BIOC Rules on Security Interests

Answer 18

A BIOC generally takes free of any security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

NOTE: The buyer is NOT in the ordinary course of business if he knows that the sale is in violation of a term in the security agreement.

Question 19

NON-BIOC Rules on Security Interests

Answer 19

A buyer NOT in the ordinary course of business takes collateral subject to a perfected interest. Generally, he does not take subject to an unperfected interest if he gives value and does not know about the interest.

Question 20

Consumer to Consumer Goods (Garage Sale) Exception

Answer 20

A buyer NOT in the ordinary course of business takes free of a security interest even thou perfected, if he buys without knowledge of the security interest; for value; and for his own personal, family, or household purpose unless, prior to the purchase, the secured party has filed a financing statement covering the goods.

NOTE: The goods MUST BE consumer goods both when the seller has them and when the buyer buys them for this exception to apply.

Question 21

Lien Creditor Priority

Answer 21

The general rules is that, as between a secured party and a lien creditor, priority belongs to the secured party, provided it perfects before the lien arises.

If the interest was unsecured or only perfected after the lien creditor served the writ, then the lien creditor has priority.

Question 22

What happens if a default occurs:

Answer 22

If a default occurs, the lender can demand payment or use self help to reclaim the goods so long as it does not brach the peace.

Question 23

Breach of peace factors

Answer 23

There are several factors to examine to determine if the lender has breached the peace, including whether the repossession took place at the debtor’s premises and whether the debtor objected.

Question 24

Resale

Answer 24

The secured party may sell or dispose of the collateral in a commercially reasonable way.

Question 25

Debtor’s means of protection during resale (2)

Answer 25

1. The sale must be commercial reasonable.
2. The debtor must receive written notification of the sale.

Question 26

Requirements of Notification of Resale (of collateral) to Debtor

Answer 26

1. Timeliness of notification: this is generally a question of fact, but in a non consumer transaction, a notification sent 10 days or more before the disposition (sale) is considered reasonable
2. Content of notification: in non consumer transactions, the notification of disposition should describe the debtor and the secured party and the collateral, state the method of sale, and state tat the debtor is liable for unpaid indebtedness as well as accounting
   –> For consumer transactions, the notification must additionally contain a description of any liability for a deficiency, a telephone number, and address where the consumer can get additional info about the sale and the obligation.

Question 27

Debtor’s remedies if secure party fails to comply with resale requirements (3)

Answer 27

1. Damages
2. Sale
3. rebuttable presumption (IOW, if the creditor broke the rules, there is a rebuttable presumption in favor of the debtor that the collateral is worth the amount of the debt and the debtor’s deficiency is nothing)

Question 28

Debtor’s Right to Redeem

Answer 28

The debtor can redeem prior to the disposition of the collateral by paying everything due and owing to the creditor.

Question 29

Accessions

Answer 29

“Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost.”

“Article 9’s general priority rules apply to accessions.”

“However, if the accession becomes part of a whole that is subject to a security interest perfected in compliance with the requirements of a certificate-of-title statute, the security interest in the whole has priority over the security interest of the accession.”