Secured Transactions (Smart Sheets)

Question 1

CHATTEL PAPER:

Answer 1

A record that evidences:
i. a monetary obligation; AND
ii. either 1) a security interest in specific goods, 2) a lease of specific goods, or 3) a security interest in specific goods with software.

Question 2

Monetary Obligation

Answer 2

an obligation to pay money that is a) secured by the goods OR b) owed under a lease of the goods.

Question 3

PROCEEDS

Answer 3

Anything:
i. acquired upon the sale, lease, or other disposition of collateral;
ii. collected/distributed on account of collateral;
iii. rights arising out of collateral;
iv. claims arising out of the loss, nonconformity, defect, or interference with the use of collateral; OR
v. insurance payable by loss of collateral.

A check given in exchange for collateral is “cash proceeds”

Question 4

CONSUMER GOODS

Answer 4

Goods purchased primarily for personal, family, or household purposes

Question 5

EQUIPMENT

Answer 5

Goods other than inventory, farm products, or consumer goods.
Goods are all things movable when the security interest attaches (fixtures, timber, unborn young of animals, and manufactured homes).

Question 6

INVENTORY

Answer 6

Goods that are:
i. leased;
ii. held for sale/lease;
iii. given under contract of services; OR
iv. consisting of raw materials, work in process, or materials used/consumed in a business.

DOES NOT include farm product or goods held only for repair.

Question 7

DEPOSIT ACCOUNT

Answer 7

A demand, time, savings, or similar account maintained with a bank.

Does not include investment property or accounts evidenced by an instrument.

Question 8

ACCOUNT

Answer 8

A right to payment of a monetary obligation (whether or not earned by performance).

Includes:
i. property that has been or will be sold, leased, or disposed of;
ii. services rendered;
iii. policy of insurance;
iv. secondary obligation incurred;
v. energy provided;
vi. use or hire of a vessel under charter/contract;
vii. credit card debt; and
viii. lottery winnings.

Question 9

Attachment

Answer 9

Secures the creditors rights in the collateral against the debtor, making it enforceable.

Question 10

Requirements of attachment

Answer 10

i. that creditor extend value to the debtor;
ii. debtor must have rights in the collateral; AND
iii. one of the following:
a. An authenticated record or security
agreement (authenticated by debtor +
reasonably identify the collateral);
b. Secured party has possession of the
collateral;
c. Certificated security in registered form
+ security certificate delivered to the
secured party; OR
d. Control for deposit accounts, electronic
chattel paper, investment property, or
letter-of-credit rights.

Question 11

Perfection

Answer 11

Gives notice of the creditor’s rights in the collateral (determines priority of interests).

Question 12

Requirements of perfection

Answer 12

i. filing a financing statement with the proper secretary of state office (must identify the collateral and security interest); OR
ii. taking possession or control of the collateral.

Question 13

Financing statement requirements

Answer 13

an effective financing statement must:
i. provide the name of the debtor and secured party (if the debtor is an organization, must provide the official registered name);
ii. indicate and collateral; AND
iii. be filed by the person authorized by the debtor.

Question 14

Financing statement: substantial compliance

Answer 14

• errors are okay unless they render the financing statement seriously misleading

Question 15

Incorrect name of the debtor

Answer 15

are seriously misleading unless the statement is still discoverable in a search of the records of the filing office under debtor’s correct name

Question 16

Purchase Money Security Interest (PMSI)

Answer 16

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

Question 17

PSMI in consumer goods

Answer 17

Automatically perfected

Question 18

PMSI in non consumer goods

Answer 18

takes priority if the creditor files a financing statement before/within 20 days after debtor receives delivery of the collateral

Question 19

Perfected security interest and identifiable proceeds

Answer 19

A perfected security interest will attach to any identifiable proceeds from the disposition of collateral

BUT that interest will become unperfected on the 21st day of attachment unless:
i. proceeds are identifiable cash proceeds,
ii. security interest is perfected when it attaches to the proceeds or within 20 days OR
iii. all of the following:
a. original collateral was perfected under
the general filing rule;
b. proceeds are
collateral that may be perfected by filing;
and
c. proceeds are not acquired with
cash proceeds.

Question 20

Security interest in the sale of collateral and identifiable proceeds

Answer 20

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

Question 21

Consignment

Answer 21

Treated like a PMSI in inventory.

A consignment is a transaction in which:
1) A person delivers goods to a merchant for the purpose of sale;
2) Merchant deals in goods of the kind, is not an auctioneer, and is generally not known by his creditors to be substantially engaged in selling goods of others;
3) Value of goods is $1,000 or more at the time of delivery;
4) Goods are not consumer goods immediately before delivery; AND
5) Transaction does not create a security interest.

Question 22

Control (of a deposit account)

Answer 22

A secured party has “control” if:
a) The secured party is the bank where the
account is maintained;
b) The debtor, secured party, and bank have
agreed as such in an authenticated record; OR
c) The secured party becomes the bank’s
customer with respect to the deposit account.

Question 23

Future advances

Answer 23

A security agreement may provide
that the collateral secures future advances (whether or
not the advances are mandatory).

Question 24

After-acquired property

Answer 24

A security agreement may
create (or provide for) a security interest in afteracquired
collateral.
− Exceptions → (a) commercial tort claim; OR
(b) consumer goods (other than accessions
given as additional security) unless the debtor
acquires rights within 10 days.

Question 25

Transfers of collateral

Answer 25

A buyer receives ALL of the rights the seller had upon the transfer of goods.
Thus, a seller who did not have title to goods CANNOT transfer title to a buyer (unless an exception applies).
− Exceptions → (1) Shelter Principle, (2) Buyer in the Ordinary Course of Business, (3) Consumer-to-Consumer Rule.

Question 26

Shelter Rule

Answer 26

If a buyer acquires property free of a security interest, then any subsequent transfer is also free of the security interest.

Question 27

Buyer in the Ordinary Course of Business

Answer 27

takes free of a security interest.

a person:
1) that buys goods in good faith,
2) without knowledge that the sale violates the rights of another person, AND
3) is in the ordinary course from a merchant (a person in the business of selling goods of that kind).

Question 28

Consumer to consumer rule

Answer 28

Buyers of consumer goods take free of a security interest if the goods are bought:
1) without knowledge of the security interest;
2) for value;
3) from a consumer who primarily bought the
goods for personal/family/household purposes;
AND
4) before the filing of a financing statement
covering the goods.

Question 29

Perfected Interest vs. Unperfected Interest

Answer 29

Perfected interest has priority over a conflicting unperfected interest.

Question 30

Unperfected Interest vs. Unperfected Interest

Answer 30

The first creditor to attach will prevail.

Question 31

Perfected Interest vs. Perfected Interest

Answer 31

Rule of “first in time, first in right” controls – first creditor to perfect has priority.

Question 32

PMSI vs. Perfected/Unperfected Interest

Answer 32

A PMSI in consumer goods enjoys automatic perfection, so it has priority.

PMSI’s in non-consumer goods require filing a
financing statement to be perfected → so apply the appropriate priority rule above (depending if the interest was perfected or unperfected).

Question 33

Judgment liens

Answer 33

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

Question 34

Fixtures

Answer 34

An ownership interest in real property has
priority over conflicting security interests in fixtures.
− BUT, see exceptions.

Question 35

Exception #1 → Perfected PMSI in a Fixture has priority if:

Answer 35

1) Debtor has an interest of record or is in
possession of the real property;
2) Ownership interest arose before the goods
became fixtures; AND
3) PMSI was perfected before the goods
became fixtures (or within 20 days thereafter).

Question 36

Exception #2 → Fixture Filing requires:

Answer 36

1) Filing a financing statement that covers
goods that are or will become fixtures;
2) Satisfy the general rules for financing
statements (names of debtor, name of secured party/representative, and indicate collateral);
AND
3) Satisfy real property filing rules: (i) state that it covers a fixture; (ii) filed in real property records;
(iii) sufficient description of the real property; and
(iv) provide the name of a record owner (if the
debtor does not have an interest of record in the real property).

Question 37

Accessions

Answer 37

Goods that are physically united with
other goods, but still retain their separate identity.

− Security interest in the separate goods
continues in the accession collateral.
− If perfected when the collateral became an
accession, the interest remains perfected.

Question 38

Commingling

Answer 38

An accession (combining) of two
goods that are each subject to a different security interest.

− General priority rules govern EXCEPT when
an interest is perfected by compliance with a
Certificate-of-Title Statute (that takes priority
over all other interests).

Question 39

Right to take Possession of Collateral

Answer 39

After default, a secured party MAY:
1) take possession of the collateral; AND/OR
2) without removal, render equipment unusable and dispose of collateral on a debtor’s premises.

The secured party may proceed pursuant to:
a) judicial process; OR
b) without judicial process (if it’s without a breach of the peace).

Question 40

Right to dispose of collateral

Answer 40

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

Question 41

Disposition at Foreclosure Sale

Answer 41

The sale:
1) Transfers all of the debtor’s rights in the
collateral to a transferee for value;
2) Discharges the security interest; AND
3) Discharges any subordinate security interests (senior interests are not discharged).

*A transferee that acts in good faith takes free of the rights of the debtor, even if the secured party failed to comply with the rules governing dispositions.

Question 42

Notice

Answer 42

Secured party MUST send an authenticated
notification of the disposition to the debtor and any secondary obligor.

− Notice requirement DOES NOT apply → if the collateral: (a) is perishable; (b) threatens to decline speedily in value; or (c) is customarily sold on a recognized market.

− Secured party will be liable for damages for
failing to provide notice even if the debtor had actual knowledge of the disposition.

Question 43

Commercially Reasonable Sale

Answer 43

Every aspect of the disposition MUST be commercially reasonable.

A sale is deemed commercially reasonable by law if made:
a) in the usual manner on any recognized market;
b) at the current price in any recognized market at the time of disposition; OR
c) in conformity with reasonable commercial
practices among dealers in similar property.

Question 44

Secured Party’s Purchase of Collateral

Answer 44

Unless otherwise agreed, the secured party MAY purchase the collateral at a:
a) Public sale; OR
b) Private sale, BUT ONLY IF the collateral is (i)
customarily sold on a recognized market, or (ii) the subject of widely distributed standard price quotations.

Question 45

Right to Collect Directly from an Account Debtor

Answer 45

A secured party has the right to collect a debt directly from account debtor (the person obligated on an account, chattel paper, or general intangible).
− If so agreed or after default.

Once the account debtor receives proper notification of an assignment, it can no longer discharge the debt by payments to the original creditor (the assignor).
− It can only discharge its obligation by payments to the secured party (the assignee).

Question 46

Damages for a Secured Party’s Failure to Comply with Applicable Rules

Answer 46

A secured party is liable to
debtor for:
− Actual Damages
− $500 in Statutory Damages.
− Civil Penalty
− Restrain Collection

Question 47

Actual damages

Answer 47

caused by a failure to comply with applicable rules. Includes expectation damages, and may include losses from an inability to obtain (or the increased cost of) alternative financing.

Question 48

Civil Penalty

Answer 48

Applies to consumer goods, and debtor may recover:
(1) damages for loss; and
(2) either the amount not less than (a) the credit service charge, plus 10% of the principal obligation, or (b) the time-price differential, plus 10% of the cash price.

Question 49

Restrain Collection

Answer 49

A court may order or restrain collection, enforcement, or a proper sale of the collateral if a secured party is NOT
proceeding in accordance with the law.

Question 50

Right of redemption

Answer 50

A debtor has the right to repay
and reclaim property held by the secured party (known as redemption).

To redeem collateral, the debtor MUST:
1) fulfill all obligations; AND
2) pay reasonable expenses and attorney’s fees.

Question 51

When can redemption occur?

Answer 51

at any time before a secured party has:
a) Collected the collateral;
b) Disposed of the collateral (or entered into a
contract to dispose of it); OR
c) Accepted the collateral in full/partial satisfaction of the debt.

Question 52

Deficiency judgment

Answer 52

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

Question 53

Deficiency judgments for consumer goods

Answer 53

Left for the court to determine.
− Some States → Absolute Bar Rule – bars
collecting any deficiency.
− Other States → Rebuttable Presumption Rule
– presumed that the proceeds equal the total
debt owed (unless the secured party proves
otherwise).

Question 54

Deficiency judgments for non-consumer transactions

Answer 54

If (1) a debtor places a secured party’s compliance at issue AND (2) 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:
a) Proceeds of the disposition; OR
b) Amount that would have been realized had the secured party complied with UCC Art. 9.

*The amount of proceeds = the total debt unless it’s proven that compliance would have yielded a smaller amount.