Secured Transactions Under UCC Art. 1-9

Question 1

Secured Transactions - General UCC Principals - Security Interest

Answer 1

Security interest = an interest in personal property or fixtures that secures payment or performance of an obligation.

Question 2

Secured Transactions - General UCC Principals - Secured Party/Obligor/Debtor

Answer 2

Secured Party = the person in whose favor a security interest is created under the security agreement.

Obligor = the person who must pay or perform with respect to the obligation that is secured by a security interest in collateral.

Debtor = the person who has an interest, other than a security interest or other lien, in the collateral. Debtor is usually also the obligor.

Question 3

Secured Transactions - General UCC Principals - Collateral

Answer 3

Collateral = property subject to a security interest. Types include tangible collateral/”goods” (such as consumer goods, inventory, farm products, equipment, fixtures, crops, etc.) and other collateral (such as chattel paper, documents of title, instruments, investment property, software-not-part-of-goods, etc.).

Question 4

Secured Transactions - General UCC Principals - Classification of Collateral

Answer 4

How collateral is characterized can affect the validity of a security interest, the way in which a security interest is perfected, and the rights of third parties.

Question 5

Secured Transactions - Application of Art. 9 - Security Agreement

Answer 5

Application = UCC Art. 9 applies to agreement that provides for a security interest (i.e. if the substance of the transaction is the creation of a security interest).

Question 6

Secured Transactions - Application of Art. 9 - Eligible Transactions

Answer 6

Eligible transactions include: a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract; agricultural lien; sale of accounts, chattel paper, payment intangibles or promissory notes; certain consignments.

Question 7

Secured Transactions - Application of Art. 9 - Excluded Transactions

Answer 7

Excluded transactions include: non-agricultural liens, sales of accounts etc. as part of the sale of the business out of which they arose, assignment for the purpose of collections only, etc.

Question 8

Secured Transactions - Application of Art. 9 - Special Cases

Answer 8

Some special cases include: a transaction in the form of a lease that is actually a sale with a retained security interest in substance; a consignment where certain conditions are met so consignor’s interest is treated as a purchase-money security interest in inventory; a security interest in a secured obligation (e.g. a promissory note) even though the obligation is itself secured by real property.

Question 9

Secured Transactions - Attachment of Security Interest - Value

Answer 9

Value = consideration sufficient to support a contract + some other special cases.

Question 10

Secured Transactions - Attachment of Security Interest - Requirements

Answer 10

Requirements =

i) value has been given by the secured party;
ii) the debtor has rights in the collateral; and
iii) the debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement.

Question 11

Secured Transactions - Attachment of Security Interest - Debtor’s Rights in Collateral

Answer 11

Debtor must have rights in collateral and the security interest attaches only to the rights the debtor has.

Question 12

Secured Transactions - Attachment of Security Interest - Security Agreement

Answer 12

Requirements for security interest to attach to collateral = security agreement established by debtor’s authentication of the agreement or secured party’s possession and control of the collateral (requirements to satisfy the Statue of Frauds).

Question 13

Secured Transactions - Attachment of Security Interest - Debtor’s Authentication

Answer 13

Requirments = authentication must be in a record (e.g. writing, electronic), must contain a description sufficient to reasonably identify the collateral. Must authenticate the record, e.g. by signing it.

Must at least describe the type of collateral (e.g. “all equipment”). General description like “all personal property” is not sufficient.

Question 14

Secured Transactions - Attachment of Security Interest - After-Acquired Collateral/Proceeds/Accessions/Commingled Goods

Answer 14

Security interest may also apply to collateral debtor acquires in the future (e.g. “all inventory owned now or hereafter acquired”). After-acquired clause does not apply to consumer goods acquired more than 10 days after secured party gives value. After-acquired clause does not apply to a commercial tort claim.

Automatically attaches to identifiable proceeds (e.g. proceeds from sale of collateral, promise to pay following sale of collateral, insurance payments due after loss of collateral, commercial tort claim for destruction of collateral, etc.)

Can have security interest in goods that are accessions or become accessions (e.g. tires on a car). No security interest in specific goods that have been commingled, but may be interest in the product that results (e.g. security interest in inventory of manufacturer who makes brass by combining copper and zinc).

Question 15

Secured Transactions - Attachment of Security Interest - Purchse-Money Security Interest (PMSI)

Answer 15

PMSI = special type of security interest that may have special rules with respect to priority. Can only exist with respect to goods (including fixtures) and software.

Question 16

Secured Transactions - Perfection - General Definition

Answer 16

Perfection occurs on attachment of interest + compliance with one of the methods of perfection. Perfection creates superior rights in the collateral for the secured party over the rights of third parties. Perfection has no relevance to the secured party’s rights against the debtor.

Question 17

Secured Transactions - Perfection - Methods of Perfection

Answer 17

Methods = filing of financing statement, possession of the collateral, control over the collateral, automatic perfection.

Question 18

Secured Transactions - Perfection - Filing of Financing Statement

Answer 18

Filing statement = a method of perfection for any security interest except a deposit account, money, or letter-of-credit rights.

Question 19

Secured Transactions - Perfection - Requirements for Financing Statement

Answer 19

Requirements = debtor’s name + description of the collateral.

Question 20

Secured Transactions - Perfection - Debtor’s Authorization for Financing Statement

Answer 20

Required but the debtor need not sign the financing statement. Debtor’s authentication of the security agreement serves as authorization to file the financing statement. Debtor consent presumed when secured party seeks to perfect a security interest in any identifiable proceeds of collateral by filing.

Question 21

Secured Transactions - Perfection - Length of Perfection for Financing Statement

Answer 21

Length of perfection = 5 years. Can be extended by filing continuation statement.

Question 22

Secured Transactions - Perfection - Perfection by Possession

Answer 22

For security interest in goods, instruments, negotiable documents, money, tangible chattel paper, etc. security interest may be perfected by possession. Perfection only exists during the period of possession.

Question 23

Secured Transactions - Perfection - Perfection by Control

Answer 23

For deposit accounts and letter-of-credit rights, control is the only method of perfection. Investment property, electronic chattel paper, or electronic documents, may also be perfected by control. Perfection only exists while the secured party retains control.

Question 24

Secured Transactions - Perfection - Automatic Perfection

Answer 24

Automatic perfection exists for PMSI in consumer goods. Secured party does not need to file a financing statement.

Automatic perfection also gives a temporary grace period after new value is given, gives a temporary grace period after collateral is given to the debtor for the purpose of sale, and gives a temporary grace period when there is interstate movement of collateral or debtor.

Automatic perfection also gives a temporary grace period for proceeds from perfected collateral and there is an indefinite automatic perfection for cash proceeds, if the financing statement is broad enough or amended within 20 days to cover proceeds, or if the proceeds are within the same filing office jurisdiction.

Question 25

Secured Transactions - Perfection - Notation for Vehicles

Answer 25

A non-Art. 9 statute controls the manner of perfection; filing is not sufficient if a statute requires a notation of the security interest on the certificate of title.

Question 26

Secured Transactions - Perfection - Notation for Vehicles

Answer 26

A non-Art. 9 statute controls the manner of perfection; filing is not sufficient if a statute requires a notation of the security interest on the certificate of title.

Question 27

Secured Transaction - Priority - General

Answer 27

Art. 9 sets out rules governing the priorities of conflicting interests in collateral. Claims are prioritized and paid in order. A holder of priority can agree to subordinate his interest to another’s interest.

Question 28

Secured Transactions - Priority - Two Steps for Determination of Priority

Answer 28

i) identify the status of each claimant; and

ii) apply the appropriate priority rule.

Question 29

Secured Transactions - Priority - Two Steps for Determination of Priority

Answer 29

i) identify the status of each claimant; and

ii) apply the appropriate priority rule.

Question 30

Secured Transactions - Priority - General Creditor

Answer 30

General creditor = has claim, including judgment, but no lien or security interest in collateral.

Result = security interest always prevails over general creditor’s rights in the debtor’s collateral.

Question 31

Secured Transactions - Priority - Judicial Lien Creditor

Answer 31

Judicial lien creditor = acquires lien on collateral by judicial process.

Priority = perfected security interest has priority over a judicial lien; judicial lien has priority over unperfected security interest, unless the reason its unperfected is the secured party had not given value.

Question 32

Secured Transactions - Priority - PMSI Exception to Judicial Lien Creditor’s Priority

Answer 32

Exception = if PMSI is perfected within 20 days of the debtor receives the collateral, PMSI has priority over creditor’s rights that arose between attachment and filing.

Question 33

Secured Transactions - Priority - Advances Exception to Judicial Lien Creditor’s Priority

Answer 33

Exception = SI securing an advance is subordinate to a lien creditor’s rights when the advance is made more than 45 days after the person becomes a lien creditor, unless the advance is made without knowledge of the lien.

Question 34

Secured Transactions - Priority - Statutory/Common Law Lien Creditor

Answer 34

Statutory/common law lien creditor = has possessory lien on the collateral by state or common lay rule.

Priority = a possessory lien has priority over any SI if the lien secures payment for goods or services furnished in the ordinary course of business (e.g. mechanic’s lien) unless a statute provides a different priority rule.

Question 35

Secured Transactions - Priority - Transferees

Answer 35

Transferee = obtains full title to collateral as a result of transfer from the debtor.

Priority = SI generally continues in the collateral unless the secured party authorized the transfer free of the SI.

Buyer vs. unperfected SI = buyer takes collateral free of SI if buyer gave value and received delivery without knowledge of the SI.

Buyer vs. perfected SI = buyer generally takes the collateral subject to SI.

Question 36

Secured Transactions - Priority - Buyer in the Ordinary Course of Business

Answer 36

BOCB = buys goods (not farm products) by giving new value in the ordinary course from a seller in the business of selling goods of that kind in good faith and without actual knowledge that the sale violates another’s rights.

Priority = BOCB takes free of any SI in goods given by seller.

Question 37

Secured Transactions - Priority - Consumer Buyer

Answer 37

Consumer buyer = buys consumer goods for value for his own personal, family, or household use, from a consumer seller, without knowledge of SI.

Priority = consumer buyer takes free of security interest unless secured party has filed a financial statement covering the goods.

Question 38

Secured Transactions - Priority - Purchase of Chattel Paper

Answer 38

Purchaser of chattel paper = gives new value and has possession/control of collateral, purchase is made in good faith and in the ordinary course of business, paper does not indicate an assignment (proceeds of inventory) or purchase made without knowledge that if violates secured party’s rights.

Priority = purchaser has priority over SI in the chattel paper.

Question 39

Secured Transactions - Priority - Negotiable Instruments/Transferee of Money or Funds/”Clean Certificate of Title

Answer 39

Priority = takes free of SI; a debtor is not treated as a transferee.

For “clean” certificate of title, priority = takes free of SI if not noted on the title and buyer has no knowledge.

Question 40

Secured Transactions - Priority - Art. 2 SI vs Art. 9 SI

Answer 40

Priority = Art. 2 SI of a buyer or seller with possession of the goods has priority over an Art. 9 SI.

Question 41

Secured Transactions - Priority - Art. 2 SI vs Art. 9 SI

Answer 41

Priority = Art. 2 SI of a buyer or seller with possession of the goods has priority over an Art. 9 SI.

Question 42

Secured Transactions - Priority - Among Secured Parties

Answer 42

Perfected vs perfected = first to file or perfect; lapse in filing restarts the clock.

Perfected vs unperfected = perfected has priority.

Unperfected vs. unperfected = first to attach has priority (“first in time, first in right”).

Question 43

Secured Transactions - Priority - PMSI vs Other Secured Parties

Answer 43

PMSI vs. non-PMSI = generally PMSI has priority.

PMSI in inventory or livestock vs. any SI = PMSI has priority if perfected by the time debtor receives possession of the collateral and the purchase money secured party sends an authenticated notice to the holder of any conflicting SI before the debtor receives possession of the collateral (notice only requires if SI was perfected by filing).

Other PMSI vs. any SI = PMSI has priority if perfected within 20 days after the debtor receives possession of the collateral.

Perfected PMSI vs perfected PMSI = first to file or perfect; but exception in that seller with PMSI has priority over lender with PMSI.

Proceeds from PMSI in goods = priority extends to proceeds if SI is perfected when debtor receives possession of the collateral or within 20 days thereafter.

Question 44

Secured Transactions - Priority - Fixtures

Answer 44

Priority if: (i) SI in fixtures perfected before interest in associated real property is recorded, (ii) perfected SI in fixtures vs. subsequent judicial lien, (iii) PMSI in fixtures vs prior real property interest if perfected before goods become fixtures or within 20 days thereafter, (iv) prior construction mortgage has priority if recorded before the goods become fixtures (unperfected SI in fixtures).

Question 45

Secured Transactions - Priority - Proceeds

Answer 45

With “first to file or perfect rule”, perfection date of the original collateral becomes the perfection date for the proceeds.

For non-filing collateral, the priority of the original collateral generally continues in the proceeds if the SI in the proceeds is perfected and the proceeds are cash or proceeds of the same type as the original collateral.

Question 46

Secured Transactions - Priority - Investment Property/Deposit Accounts

Answer 46

Priority = SI held by party with control over the collateral has priority over a secured party without control.

Question 47

Secured Transactions - Default - Determining Default

Answer 47

Not defined by Art. 9; look to the party’s contract.

Question 48

Secured Transactions - Default - Determining Default

Answer 48

Not defined by Art. 9; look to the party’s contract; remember contract law determines enforceability of any terms.

Question 49

Secured Transactions - Consequences of Default - General

Answer 49

Consequences = secured party can seek possession of the collateral to retain or sell it, or secured party can sue for a judgment based on the obligation.

Cumulative remedies, simultaneous exercise.

Question 50

Secured Transactions - Default - General Consequences

Answer 50

Consequences = secured party can seek possession of the collateral to retain or sell it, or secured party can sue for a judgment based on the obligation.

Cumulative remedies, simultaneous exercise.

Question 51

Secured Transactions - Default - Ignoring Default

Answer 51

May be treated as a waiver of secured party’s rights.

Question 52

Secured Transactions - Default - Removal of Fixtures

Answer 52

Can remove if secured party has priority; liable for repair costs.

Question 53

Secured Transactions - Default - Removal of Accession

Answer 53

Can remove if priority.

Question 54

Secured Transactions - Default - Notification of Account Debtors

Answer 54

Upon default, can notify an account debtor to pay the secured party.

Question 55

Secured Transactions - Default - Possession of Collateral

Answer 55

No requirement for notice of default or of intent to take collateral. “No breach of the peace” limitation on means of possession. Rendering equipment unusable is permitted.

Question 56

Secured Transactions - Default - Disposition of Collateral

Answer 56

Requirements = all aspects of disposition must be commercially reasonable (method, manner, time, place); no specific price must be obtained and mere fact that a higher price could have been maintained does not establish unreasonableness.

Limitation on private sale = secured party cannot purchase the collateral at a private sale.

Question 57

Secured Transactions - Default - Notice of Disposition

Answer 57

Requirements = send an authenticated notice of disposition at least 10 days before disposition.

Send to debtor, secondary obligors, any other secured party or lien holder who has SI perfected by filing, any party who has notified of a claim or interest in the collateral.

Exceptions to notification = perishable or time-sensitive collateral (speedy decline in value), recognized market for the collateral (e.g. stock exchange), waiver of right to notice in authenticated writing.

Question 58

Secured Transactions - Default - Proceeds from Disposition

Answer 58

Cash proceeds = first to reasonable disposition expenses, then to satisfy secured obligation, then to satisfy subordinate secured party’s (who made an authenticated demand before distribution), any remainder to debtor.

Non-cash proceeds = applied or paid over for application only if failure to do so would be commercially unreasonable.

Question 59

Secured Transactions - Default - Surplus or Deficiency from Disposition

Answer 59

Rule = debtor generally entitled to any surplus and liable for any deficiency.

Exception = non the case for sale of accounts, chattel paper, payment intangibles, or promissory notes.

“Low-price” disposition to secured party = amount of deficiency may be adjusted to reflect a higher price that would have been realized from another person.

Notice in consumer goods transaction = secured party must send notice of any surplus or deficiency to the debtor upon demand.

Question 60

Secured Transactions - Default - Transferee’s Rights After Disposition

Answer 60

Sale of collateral gives the buyer all the debtor’s rights in the collateral; the collateral remains subject to any senior SI.

Question 61

Secured Transactions - Default - Warranties

Answer 61

Disposition of the collateral includes the warranties of title, possession, and quiet enjoyment; the warranties may be disclaimed or modified.

Question 62

Secured Transactions - Default - Acceptance of Collateral (Strict Foreclosure)

Answer 62

Full satisfaction requirements = debtor consents in authenticated record after default, or the debtor does not object to proposal within 20 days after the proposal is sent.

Partial satisfaction requirements = debtor consents in authenticated record after default.

Requirement to notify other parties = must notify other secured party or lien holder of record or person who notified the secured party of a claim or an interest in the collateral.

Question 63

Secured Transactions - Default - Special Rules for Acceptance of Collateral for Consumer Debtors

Answer 63

Partial satisfaction not permitted = secured party can only accept the collateral in full satisfaction.

Strict foreclosure = if the consumer goods are in the possession of the secured party, no strict foreclosure is permitted if the debtor has paid at least 60% of the case price (PMSI) or 60% of the obligation (non-PMSI); goods must be sold, not kept in satisfaction. Waiver permitted, but only after default in authenticated record.

Question 64

Secured Transactions - Default - Redemption of Collateral

Answer 64

Method = redeemer must fulfill all obligations secured by the collateral and reasonable expenses incurred by the secured party in retaking the collateral or preparing for its disposition; an acceleration clause can only require the redeemer to tender the entire balance of the secured obligation.

Time limit = redemption not permitted after disposition or foreclosure.

Waiver = waiver of right to redemption only permitted after default and by an authenticated agreement.

Question 65

Secured Transactions - Default - Secured Party’s Failure to Comply

Answer 65

Remedies = injunction, actual damages, conversion action.

Minimum statutory damages for consumer goods = debtor or secondary obligor may recover an amount ot less than the credit service charge + 10% of the principal + 10% of the cash price, even if actual damages are less.