Test 2 (Article 9 Secured Transaction Law)

Question 1

What law falls under article 9?

Answer 1

secured transactions law

Question 2

What are the steps to collect unsecured debt?

Answer 2

1- File a lawsuit (legal fees)

2- Win the lawsuit

3- Get a writ of execution issued to the Sheriff ordering him to look for and seize non-exempt property

4- If non-exempt property found then have public sale

5- If no non-exempt property found then court hearing scheduled to question debtor about employment and property

6- If any found from step five then repeat 3 and 4

Question 3

What are steps under article 9 secured transaction law?

Answer 3

1- Default occurs

2- Creditor pursues self-help repossession of the pre-designated collateral without any court- or sheriff-supervision.

3- Creditor either 1) sells, 2) leases, or 3) keeps the collateral in full satisfaction of the debt. (no lawyer fees involved)

Question 4

What are the three options a creditor has with collateral under article 9 secured transaction law?

Answer 4

1- sell
2- lease
3- keep the collateral in full satisfaction (limitations apply)

Question 5

What are the two major concerns for creditors under article 9?

Answer 5

1- Can the debt be satisfied out of specific property? (attachment issue)

2- Who has priority among competing claimants? (perfection issue)

Question 6

How does article nine help lower interest rates for debtors?

Answer 6

It reduces the risk to creditors by favoring them (overruling state laws/ favored position in bankruptcy), so they can reduce rates.

Question 7

Who is favored under article 9 (creditors or debtors), and in what two ways

Answer 7

Creditors are favored

1- Most state laws favoring debtors don’t apply

2- Creditors have a favored position in bankruptcy

Question 8

Define the following term: Security Interest (SI)

Answer 8

every interest in personal property or fixtures

Question 9

Define the following term: Secured Party (

Answer 9

the party protected by the security interest (SI)

Question 10

Define the following term: Security Agreement (SA)

Answer 10

the agreement that creates the security interest (SI)

Question 11

Define the following term: Collateral

Answer 11

the subject of the security interest (SI)

Question 12

What are the two distinct phases of Security Interests?

Answer 12

1- Attachment

2- Perfection

Question 13

What is the phase of attachment?

Answer 13

when the creditor has done everything required to allow him to grab (w/ out need of court supervision) the collateral upon default.

Question 14

What is the phase of perfection?

Answer 14

When the creditor has done everything required to maximize his chances for priority among competing claimants in a fight over the same collateral. This is for the fight against other “creditors”.

Question 15

What are the 3 (4) requirements of attachment?

Answer 15

1- There is either (a) a written or authenticated security agreement, or (b) the creditor has possession / control of the collateral.

2- The secured party gave value (executory promises or antecedent debt)

3- Debtor has right in the collateral (ownership or possession)

(4 possibly- if a document of title is involved, the creditor must appear on it as a lienholder.)

Question 16

For the first requirement of attachment, what needs to be specifically described for there to be a “written or authenticated security agreement”?

Answer 16

It must describe the collateral + signed/authenticated by the debtor.

Phrases like “all property” and similar all-encompassing statements will probably not suffice as a valid description.

Question 17

In regards to the second requirement of attachment, do executory promises count as value? Does antecedent debt?

Answer 17

Yes and yes

Question 18

When is a PMSI (purchase money security interest) created?

Answer 18

When the debt was created in order for the debtor to acquire what is serving as the collateral?

Question 19

What is the significance of a PMSI to the creditor?

Answer 19

1- it gives automatic perfection in consumer goods

2- it allows the PMSI holder to jump to the head of the line of priority regarding prior perfected SI holders with floating liens over the debtor’s after acquired property

3- one of the requirement in the rule regarding when a creditor can keep the consumer’s collateral in lieu of selling it.

Question 20

When can perfection take place before attachment?

Answer 20

It cant. They can happen simultaneously, but perfection can’t happen first.

Question 21

Why is perfection usually critical?

Answer 21

It is critical in determining priorities between competing claimants over the same collateral.

Question 22

What two things two things determine a secured party’s perfection options?

Answer 22

1- the nature of the collateral

2- the debtors intended us of the collateral (personal, business equipment, business inventory, etc)

Question 23

What are the three methods of perfection? Why are they important?

Answer 23

1- Possession / Control (not usually practical)

2- Mere attachment (PMSI’s in consumer goods)

3- Filing a financing statement (FS): most common method

Question 24

What is Chattel Paper (CP)?

Answer 24

a writing or group of writing evidencing both a debt and a security interest in specific goods (ex. a negotiable instrument + a security interest = CP)

Question 25

What are the three requirements for financing statements?

Answer 25

1- Legal names and addresses of both debtor and creditor

2- Description of the collateral by type or item (less specificity needed here compared to security agreement)

3- File

Question 26

Where is a financing statement (FS) filed?

Answer 26

Corporations, LLC’s, LLP’s, LP’s: in the state of chartering or creation

Individuals: state of principle residence

Other entities (general partnerships, trusts, etc): state where business is located, or if in more than one, where chief executive office is located.

Question 27

How does a name change by a debtor effect a creditor in a financing statement (FS) situation?

Answer 27

The creditor must catch the change and file an amended FS within 4 months after the formal name change, or become unperfected as to collateral first obtained after the 4 month period.

However, this has no effect on a creditors perfection on property owned by the debtor before the name change, or acquired with in the first four months after the name change.

Question 28

What is the floating lien concept?

What does it apply to?

Answer 28

Since the mix of a debtor’s assets change regularly, the UCC provides for an Article 9 SI to hover, so to speak, over that changing mix of property.

This applies to proceeds (entering a building that a lien is on, etc), after-acquired property other than proceeds, and collateral moved out of state.

Question 29

What is counted as proceeds?

Answer 29

Whatever is received when collateral is sold, exchanged, collected or otherwise disposed of.

Question 30

In a situation where a negotiable instrument is proceeds, who wins between a holder in due course (HDC) and a prior perfected article 9 secured party?

Answer 30

The HDC would beat out the secured party

Question 31

How long are proceeds automatically covered and continuously perfected for after they are received?

Answer 31

20 days

Question 32

Regarding the automatically covered and continuously perfected proceeds, what are the three ways that the normal period can be extended? What is the normal period?

Answer 32

1- Within the 2- day perioed, either file a FS on those proceeds or take possession of them

2- When the original perfection was thru filing and either (a) the proceeds are still identifiable cash (rare) or (b) are the type of property that could also be perfected thru filing at that same office where the original FS was filed

3- If the original security agreement provides for extended coverage in regards to the proceeds.

20-days

Question 33

What is “after-acquired property other than proceeds”? When is this especially useful?

Answer 33

Any personal property acquired after the execution of the security agreement.

this is especially useful with inventory filings

Question 34

Is there automatic perfection like with proceeds? If not how must it be covered?

Answer 34

No it is not automatically perfected.

For this it must be covered by the security interest agreement

Question 35

What kind of property does article 9 cover?

Answer 35

Personal property

Question 36

If a creditor in the future gives more can the original collateral still be used?

Answer 36

Yes so long as the security agreement provides for this

Question 37

How long is a financing statement (FS) good for?
Can they be renewed? How many times? How often?
If yes when and how?
Is the debtors signature required on any renewal?

Answer 37

• they are good for 5 years
• they can be renewed every 5 years indefinitely
• a continuation statement must be filed within 6 months prior tot the end of each 5 year period
• The debtors signature does not have to be on a continuation statement

Question 38

What happens when an individual moves out of the state with the collateral that the original financing statement was filed?

Answer 38

Perfection continues automatically in the new state for 4 months. To extend the creditor must file a FS in the new state (no need for signature from debtor) before the 4 months is out AND before the old FS expires.

Question 39

What happens when a corporation moves its collateral out of state?

Answer 39

nothing. the FS only has to be in state of incorporation

Question 40

In determining priority among competing claimants, who wins when there are two article 9 secured parties?

Answer 40

• The first to file or perfect wins, unless its a PMSI who will jump to the front of the line (regarding only its purchase money collateral)
• If neither has perfected then the first to attach wins

Question 41

In determining priority among competing claimants article 9 claimants, who wins when neither has perfected?

Answer 41

The first to attach wins in this situation.

Question 42

What happens when the collateral turns into commingled or processed goods that different creditors have claim to? (ex. if someone uses bakers wheat as collateral and another the inventory ie bread)

Answer 42

Then the finished good is sold and split proportionally to the creditors based on the value of the inputs.

If wheat is 1/3 of value of bread then that creditor gets 1/3 of value.

Question 43

What hoops must a PMSI jump through in order to jump to the head of the priority line with inventory?

Answer 43

The creditor must perfect and give written notice to all other creditors before the inventory that is serving as collateral is delivered.

Question 44

What hoops must a PMSI jump through in order to jump to the head of the priority line with non-inventory?

Answer 44

The creditor must perfect no late than 20 days after the debtor takes possession of the collateral.

Question 45

In determining priority among competing claimants, who wins when there is a article 9 secured party vs a general unsecured creditor?

Answer 45

The article 9 secured party wins whether or not perfected

Question 46

In determining priority among competing claimants, who wins when there is a article 9 secured party versus a lien holder?

Answer 46

If liens occurred first: lien holders win

If Liens occurred second:

• If statutory Lien then lien holder wins
• If non-statutory lien then prior perfected article 9 secured party wins

Question 47

What is a statutory lien?

Answer 47

possessory artisan liens

Question 48

In determining priority among competing claimants, who do unperfected article 9 secured parties lose against (3)

Answer 48

1- Perfected article 9 SP

2- Lien Holders no matter when they arise

3- Good faith bulk purchasers (someone who bought the entire business) and other buyers who give value and take without knowledge of the security interest

Question 49

In determining priority among competing claimants, who generally wins between article 9 secured parties and purchasers of the collateral from the debtor?

Answer 49

Generally the Article 9 SP wins

Question 50

What are the exceptions to the rule in determining priority among competing claimants when there is a article 9 secured parties and purchasers of the collateral from the debtor?

Answer 50

1- Buyers in the ordinary course of business

2- Consumer to consumer resales when the SP just relied upon attachment for perfection

3- Article 3 Holders in Due Course regarding negotiable instruments (even mere holders win if the requirements are met)

Question 51

In regards to competing claimants being an article 9 secured party and a purchaser, what makes someone a “buyer in the ordinary course of business”?

Answer 51

1- buy from one who normally sells goods of this kind

2- buy in good faith AND

3- buy without any actual knowledge of the seller’s breach of the underlying security agreement

ex. when you buy something at Walmart you don’t have to worry about a creditor asking for it later.

Question 52

In regards to competing claimants being an article 9 secured party and a purchaser, what is needed for the “consumer to consumer resale exception” to work in the purchaser’s favor?

Answer 52

This only applies when the creditor qualified for automatic perfection upon attachment and chose to do nothing more than that in order to become perfected. (ex. a PMSI in consumer goods)

The SP will lose when the collateral was sold to someone who:

1-also intends to use the goods for personal, family, or household use

2- buys for value

3- buys without an actual knowledge of the creditor’s underlying security interest in the collateral, AND

4- buys before the seller’s creditor files a FS

Question 53

What are the two basic remedies available to a creditor when a debtor defaults?

Answer 53

1- repossess & retain in full satisfaction of a consumer debt or

2- repossess and sell or lease & apply the proceeds against the debt.

Question 54

When a creditor pursue’s self-help repossession after a default they are not allowed to “breach the peace”. What are two ways that most states would find such a breach?

Answer 54

1- the creditor or his agent has to break and enter the debtor’s home or outbuildings or

2- the debtor physically resists the efforts (back off and try again later). (In some states just trespassing is enough to be an issue)

Question 55

What are some tips if you become delinquent on a secured debt?

Answer 55

• Contact the creditor and try to work with them. They will be more willing if they see your effort
• If you see you cant pay then put the collateral up for sale. you will likely get more than the bank would when the take the collateral, and thus you will not have to cover as big a difference between collateral sales price and debt owed. You also don’t have to cover the costs the bank would incur to sale.
• Don’t try to hide your assets.

Question 56

What type of goods is there a restriction in retaining it by a creditor? (they have to sell, cant keep)

How many days does it have to sell?

What three things qualify the goods to meet the restriction?

Answer 56

• Consumer goods
• 90 days
• 1) Consumer goods, 2) it has a PMSI in them, AND 3) the debtor has paid (principal & interest) at least 60% of the good’s cash price (before financing charges)

Question 57

Why is there a restriction on creditors retaining consumer goods?

Answer 57

The value of the collateral at the time of default will probably exceed the amount of the outstanding debt if the consumer has paid at least 60% of the cash price. This way the debtor gets money back if there is excess

Question 58

In the disposition procedures of collateral what types of sale are okay? Is there any limitations?

Answer 58

• Fire sale and public or private sales are all ok.

- The only limitation is commercial reasonability

Question 59

Usually a debtor must be notified when collateral is being sold. What are the 3 exceptions?

Answer 59

1- the goods are perishable

2-market value is declining rapidly or

3-the sale takes place through a recognized market mechanism (ex. stock exchange, auto auctions, etc)

Question 60

What are redemption rights?

Answer 60

This means the debtor can redeem the collateral by paying off all the creditors’ costs, principal and interest. So can junior creditors with respect to the senior creditors

Question 61

Once a debtor has paid off the debt, how long does a creditor have to file a termination statement for…

Consumer good?

Non-consumer goods?

What is the punishment to the creditor for non compliance?

Answer 61

Consumer:

• Within one month after full payment
• or within 20 days of the debtor’s demand

Non-Consumer goods:
-within 20 days of the debtor’s demand

Non Compliance
-$500 fee + damages

Question 62

How long does a creditor have to respond to a confirmation request from a debtor?

What is the penalty for not?

Answer 62

The creditor must respond within 14 days of receiving the request

The penalty is $500 + any resulting loss