SECURED TRANSACTIONS RULES!

Question 1

Security Agreement

Answer 1

A security agreement is a contract b/w creditor & debtor where creditor gives some value to debtor in exchange for debtor’s promise to perform (repay) & in which creditor takes a security interest on the debtor’s collateral.

Question 2

PMSI

Answer 2

Seller-Financed where secured party sells debtor collateral & retains security interest in item.

Financer-Financed where secured party gives loan to debtor that enables him to buy specific collateral & creditor takes security interest that specific collateral. Loan must be used to buy it.

Question 3

Goods – Type of Collateral

Answer 3

Consumer Goods used or bought for use primarily for personal, family, household purposes. Equipment used or bought for use primarily in business. Farm Products are crops, livestock, supplies used or produced in farm operations. Inventory held for sale or lease, or materials used/consumed in business for short period of time.

Question 4

Instruments – Type of Collateral

Answer 4

Any writing evidencing right to payment & in ordinary course of business transferred by delivery.

Question 5

Chattel Paper – Type of Collateral

Answer 5

Promissory note that is coupled with a security interest

Question 6

Accounts – Type of Collateral

Answer 6

A right to payment NOT evidenced by an instrument or chattel paper for goods or services (account receivable).

Question 7

Deposit Accounts – Type of Collateral

Answer 7

A non-consumer bank account and such accounts that are claimed as proceeds of other collateral.

Question 8

Commercial Tort Claims – Type of Collateral

Answer 8

Tort claim where P is an organization OR if individual & claim arose in his business & not for PI or death.

Question 9

General Intangibles – Type of Collateral

Answer 9

Personal property no coming within the scope of other collateral definitions (software/patent/goodwill).

Question 10

Security Interest Disguised as Lease

Answer 10

Even if the terms of contract state that it is a lease, it is a Security Interest if, at the time of contract, it was not reasonably likely that “lessor” would get item back when it still had meaningful economic value.

Question 11

Attachment

Answer 11

Must have security agreement, consideration (even past), & collateral that debtor has rights to. Security instrument must be (1) in writing, (2) signed by debtor, & (3) describe with reasonable identification.

Question 12

After- Acquired Property – Not Applicable for Tort Claims

Answer 12

Unless otherwise explicit, security interest only reaches collateral debtor had rights in at the time he signed agreement. Exceptions: (1) courts imply if collateral is rapidly depleted/replenished, or (2) if consumer goods, this clause does not apply unless debtor acquires rights in them w/in 10 days after secured party gives value.

Question 13

Proceeds

Answer 13

Proceeds are whatever is received upon sale, exchange, or disposition of collateral or proceeds. Unless opt out, SI automatically gives secured party a right to identifiable proceeds. Identifiable means that creditor can prove that proceeds came from its original collateral; thus, secured party has burden of proof.

Question 14

Proceeds Comingled

Answer 14

If proceeds comingled in acct with non-proceeds, under the lowest-intermediate balance test, the secured party’s identifiable proceeds = LOWEST amount in acct beginning at time proceeds deposited & ending at time of test.

Question 15

Automatic Perfection

Answer 15

With PMSI on consumer goods, the security interest is automatically perfected upon attachment.

Question 16

Perfection by Control

Answer 16

Security interest in non-consumer bank accts can only be perfected by control. To obtain, the account must be placed in secured party’s name or by executing a control agreement with debtor & bank. Bank has auto control.

Question 17

Perfection of Automobile

Answer 17

Secured party perfects by noting its lien on certificate of title. If leased or inventory, must file finance statement.

Question 18

Perfection by Filing Financing Statement – Form UCC 1

Answer 18

Must contain (1) creditor & debtor’s name, & (2) a reasonable description of collateral. No signature, but debtor must authorize it which is automatic upon signing security agreement (ipso facto auth).

Question 19

Contents of Financing Statement – Debtor’s Name

Answer 19

Not responsible for filing officer. If change, effective to perfect in collateral acquired by debtor 4 months after.

Question 20

Contents of Financing Statement – Secured Party’s Name

Answer 20

Although secured party’s name must be on filing, any error is not misleading as its indexed under debtor name.

Question 21

Contents of Financing Statement – Description of Collateral

Answer 21

It must reasonably identify, but broad language with filing statement is fine (all assets & all personal property).

Question 22

Contents of Financing Statement – Real Property Related

Answer 22

With fixtures, financing statement must reasonably describe the realty too, & filed in ROD where property is.

Question 23

Where to File Financing Statement

Answer 23

State debtor is located. Individual: principle residence. Corp: organized state. Partnership: principle place.

Question 24

Debtor Moves

Answer 24

If out of state, secured party unperfected 4 months after unless it files in new state before 4 month period ends.

Question 25

Collateral Moves

Answer 25

If moves into NC, secured party unperfected 1 year after it moves unless files in NC before 1 year period ends.

Question 26

Termination of Financing Statement

Answer 26

Effective for 5 years, but can be extended by filing continuation statement w/in last 6 months of 5 year term.

No obligation for secured party to terminate it unless debtor makes signed/written demand to do so; then secured party must provide debtor w/ a termination statement w/in 20 days. However, consumer goods, secured party MUST file termination statement within 1 month after obligation ends or w/in 20 days after demand.

Question 27

Perfecting Proceeds

Answer 27

If perfected, it automatically transfers to proceeds for 20 days unless it perfects again. NOT applicable for identifiable cash proceeds OR if trading collateral for equipment (same office rule).

Question 28

Secured Party v. Secured Party

Answer 28

The general rule is that the first to file OR perfect, whichever occurs first, has priority. If neither party files, the first to attach gets priority. Look for (1) filing before attachment, and (2) PMSI in consumer goods is automatic.

Question 29

PMSI in Goods other than Inventory or Livestock

Answer 29

A PMSI in goods has priority over a conflicting security interest in same goods or its proceeds, if the PMSI is perfected at the time the debtor received possession of the collateral or within 20 days thereafter.

Question 30

PMSI in Inventory or Livestock

Answer 30

A PMSI in inventory/livestock has priority over a conflicting security interest in same goods or identifiable proceeds if, before debtor receives possession, secured party (1) perfects, & (2) sends signed notification to holders of previously filed conflicting security interests in the same collateral.

Question 31

Seller PMSI v. Financer PMSI

Answer 31

Seller has priority over financer (B buys 10k equip from S & borrows 500 down from F, both PMSI, S will win)

Question 32

Investment Property

Answer 32

A security interest perfected by control has priority over a security interest perfected by any other method.

Question 33

Deposit Accounts

Answer 33

Security interest perfected by control has priority over one perfect by proceeds. If control by name, he wins.

Question 34

Purchaser of Instruments

Answer 34

Has priority over perfected security interest in the instrument if purchaser gives value & takes possession of the instrument in good faith & without knowledge that the purchase violated the rights of the secured party.

Question 35

Secured Party v. Buyer of the Collateral

Answer 35

If authorized by secured party, Buyer takes free of SI; implied based on type of sale or seller conduct/waiver.

Question 36

Unauthorized Sale of Collateral

Answer 36

Buyer in ordinary course takes free of SI created by his seller even though its perfected and buyer knows of it.

Ordinary Course: B buys goods in good faith, w/o knowledge that sale violates rights of another in goods, & in the ordinary course from person in business of selling goods of kind (knowledge is fine; business to consumer)

Buyers NOT in Ordinary Course of Business: take subject to perfected security interest. Free from if not perfected unless they know of the security interest (Look for consumer selling goods to a business).

Question 37

Consumer to Consumer Sales

Answer 37

With consumer goods, buyer takes free of SI even though perfected if he buys without knowledge of the SI UNLESS the secured party has filed a financing statement covering such goods prior to the sale.

Question 38

Secured Party v. Judgment Lien Holders

Answer 38

If SI is perfected before the lien is levied (by sheriff), the security interest has priority & vice-versa.

Question 39

PMSI v. Lien Creditor

Answer 39

If secured party files with respect to a PMSI w/in 20 days after debtor receives possession of the collateral, the PMSI party takes priority over the rights of alien creditor which arises after delivery but before filing.

Question 40

Priority for Future Advances

Answer 40

Future advance has priority over lien creditor if advance is made (1) w/o knowledge of the lien, OR (2) within 45 days of the lien arising, OR (3) pursuant to a commitment entered into without knowledge of the lien.

Question 41

Default Generally

Answer 41

Absent a provision in SI, default is restricted to failure to perform/pay obligation when due. Look for waiver.

Question 42

Self Help Repossession

Answer 42

Secured party can repo if it can be done w/o breach of the peace which is any conduct that has potential to lead to violence. Presence by debtor plus verbal objection is enough to create BOP. Commercial property less likely.

Question 43

Resale of Collateral

Answer 43

Secured party must sell, lease, or otherwise dispose of collateral in condition when repossessed or after reasonable preparation. The sale discharges the security interest.

Question 44

Resale Procedure

Answer 44

Signed notice must be given to debtor, surety & other perfected secured parties, and sent w/in reasonable time before sale (10 days). If public, provide time/place. If private, notice of time after sale will occur (after May 1). Every aspect of sale, including the method, manner, time, place, & terms, must be commercially reasonable.

Question 45

Secured Party Buying Collateral

Answer 45

Yes at any public sale; may buy at private sale if collateral is of a type customarily sold in a recognized market.

Question 46

Secured Party Right to Deficiency

Answer 46

Yes, unless secured party fails to conduct commercially reasonable sale. Creates rebuttable presumption that sale proceeds EQUAL the amount of the debt; thus, no deficiency unless he overcomes the presumption.

Question 47

Right to Redeem

Answer 47

Debtor may redeem any time before collateral is resold or creditor has entered into contract for its disposition.

Question 48

Fixtures

Answer 48

A good that has become so related to particular real property that an interest in it arises under real property law. Generally, it must be attached to real estate w/ the intent it become permanent part of it.

Question 49

Perfection of Fixture

Answer 49

To perfect a SI in a fixture, must file fixture filing in the ROD office where property is located.

Priority – Secured Party v. Subsequent Real Estate Interest

Security interest in fixture has priority over any real estate interest that arises after perfection of fixture SI.

Question 50

Secured Party v. Prior Real Estate Interest

Answer 50

Prior real estate interest, properly recorded, has priority over fixture SI that arises after. HOWEVER, a PMSI takes priority over an earlier real estate interest if perfected before goods become fixture or w/in 20 days thereafter. NOTE: CONSTRUCTION MORTGAGE TAKES PRIORITY OVER EVERYTHING

Question 51

Fixture Filing Unnecessary

Answer 51

A fixture filing not required as to readily removable (1) factor or office machines, (2) unordinary equipment used or leased on real estate, or (3) replacement of domestic appliances which are consumer goods.

Question 52

Accessions

Answer 52

Accessions are goods that are physically united with other goods in such a manner that the identity of them is lost (tires on a car). Same rules apply EXCEPT with cars & removal may be done if does not damage the whole.