Top MEE Rules

Question 1

What does Article 9 of the UCC do? What types of transactions does it cover? (63%)

Answer 1

Article 9 of the UCC applies to ANY transaction intended to create a security interest in personal property or fixtures (not mortgages on real property). A security interest gives a creditor the right to sell a debtor’s property in order to satisfy a debt.

Generally, in an Article 9 transaction, personal property or fixtures secure the payment of a debt or insure performance of a contract obligation with the property serving as collateral.

Question 2

Who are the parties to an Article 9 transaction? (63%)

Answer 2

There are three main parties to an Article 9 transaction:

(1) Secured Party. The secured party is the creditor who possesses the benefit of the security interest.
(2) Debtor. The debtor is the party who has an ownership interest or other sufficient interest in the personal property securing the obligation.
(3) Obligor. The obligor is the party held responsible for the underlying obligation (usually also the debtor, but could be a type of guarantor).

Question 3

What is collateral, and what are the different types defined in Article 9? (14.8%)

Answer 3

“Collateral” refers to property subject to a security interest, as well as identifiable proceeds from the property. Article 9 covers:

A. Tangible Collateral:“Goods,” i.e. anything that is “moveable at the time that a security interest attaches.” There are four classes of goods:

(1) Consumer Goods. Consumer goods are goods that are used mainly for personal, family, or household purposes.
(2) Farm Products. “Farm products” are goods that are crops or livestock and include supplies that are used or produced in farming. For goods to be considered farm products, the obligor must be engaged in a farming operation.
(3) Inventory. “Inventory” includes goods, other than farm products, that are held for sale or lease; are furnished under a service contract; or consist of raw materials, works in process, or materials used or consumed in a business. This term usually refers to goods that are consumed in a business, e.g., gasoline used to run the machines in a factory. It does not include goods that are only being held for repair.
(4) Equipment. “Equipment,” a catchall class, consists of goods that are not consumer goods, farm products, or inventory. It usually refers to goods that are used or bought for use primarily in a business, such as employees’ desks or machinery used in manufacturing.

Note: When the obligor uses the property for multiple purposes, the principal use to which the obligor puts the property determines the class of the goods.

B. Intangible Collateral: Intangible collateral covered by Article 9 includes:

(1) Accounts. A security interest in a debtor’s “accounts” covers any right to payment of a monetary obligation, whether or not earned by performance, for goods (to be) sold, property licensed, or services rendered (i.e., accounts receivable, i.e. money owed to the debtor). Also included is a right to payment for the issuance of an insurance policy, the use of a credit or charge card, or winning a lottery. A secured party can collect directly from the person who owes the debtor if the debtor defaults.
(2) Deposit accounts. A “deposit account” includes a savings, passbook, time, or demand account maintained with a bank.

Question 4

What is attachment, and what does a valid attachment require? (51.9%)

Answer 4

Attachment is essentially how a security interest is created. A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.

A valid attachment requires that: [Attached to the idea of Virtual Reality Androids/PCs]

(1) The secured party has given value to the debtor (almost any consideration will suffice);
(2) The debtor has rights in the collateral (or the power to transfer rights in the collateral to a secured party); AND
(3) Either:
(a) the debtor has authenticated a security agreement that describes the collateral, OR
(i) To authenticate, the debtor must provide the secured party with a reasonable description of the collateral in writing. Signature, thumbprint, initials, mechanical reproductions, etc., are all adequate proof of authentication of the security agreement so long as the debtor possessed the intent to authenticate the writing.
(b) the secured party has possession or (especially for intangible property) control of the collateral pursuant to an oral or unauthenticated security agreement.

Question 5

What may a security agreement provide about after-acquired property? (5.6%)

Answer 5

After-acquired property clauses may be included in security agreements and are generally enforceable, allowing property acquired after the attachment of the security interest to be secured in favor of the secured party.

Exception: Note that an after‐acquired clause is not effective if the collateral is consumer goods, unless the debtor acquires them within 10 days after the secured party gives value.

If there is no reference to after-acquired property, the security interest only attaches to the collateral that existed when the security agreement was executed.

Exception: In most states, if the security agreement describes inventory or accounts, there is a rebuttable presumption that the description includes after-acquired inventory or accounts.

Question 6

What is a purchase money security interest?

Answer 6

A PMSI gives lenders a security interest in goods that have been purchased with funds borrowed from them OR purchased on credit from them. A PMSI is subject to special rules with respect to perfection and priority.

A PMSI may exist only with respect to two types of collateral: goods (including fixtures) and software. A PMSI in goods exists when:

(a) A secured party gave value (e.g., made a loan) to the debtor and the debtor uses the loan to acquire rights in or use of the collateral; or
(b) A secured party sells the collateral to the debtor, and the debtor enters an agreement requiring it to pay the secured party all or part of the purchase price (i.e., a sale of goods on credit).

Question 7

What is the effect of perfecting a security interest, and what are the methods of perfecting? (50%)

Answer 7

Perfection of the interest enhances the secured party’s rights to the property serving as collateral. While attachment gives the SP rights against the debtor, perfection is relevant for determining the SP’s rights against third parties. Perfection is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties.

A security interest is “perfected” upon attachment of that interest AND compliance with one of the methods of perfection. If the security interest does not attach, then it CANNOT be perfected. There are several methods in which a security interest may be perfected: by Filing, by Possession, by Control, Automatically, or by Statute [Aiming For Perfection Can Sting].

Question 8

Perfection by filing (50%)

Answer 8

Filing. The filing of a “financing statement” or the security agreement with the state is the primary method of perfection. The primary objective of filing is to give interested parties notice of the existence of the security interest. The filing MUST be filed by an authorized party (authorization is presumed by the debtor’s authentication of the security agreement).

Minor errors will not invalidate the financing statement unless the error makes it seriously misleading (e.g. error in debtor’s name, unless a standard search of the filing office records under the debtor’s correct name would disclose the financing statement). Note that perfection by filing is NOT applicable to a deposit account, money, or letter‐of‐credit rights that are not a supporting obligation, or to a car (unless the car is inventory).

The filing must contain:

(a) The debtor’s name (or if a registered organization, the official registered name of the organization);
(b) The secured party’s name (or name of SP’s representative);
(c) An adequate description of the collateral; AND
(d) The filing fee.

Question 9

Perfection by control (50%)

Answer 9

Control Over the Collateral. A secured party may perfect a security interest in investment property, deposit accounts, letter‐of‐credit rights, electronic chattel paper, or electronic documents by taking control of the collateral. The security interest remains perfected only while the secured party retains control. Note that a security interest in a deposit account can be perfected only by control. A secured party has control of a deposit account if:

(i) The secured party is the bank with which the deposit account is maintained;
(ii) The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party; or
(iii) The secured party becomes the bank’s customer with respect to the deposit account.

Question 10

Automatic perfection (50%)

Answer 10

Automatic Perfection. The following security interests are perfected automatically when they attach:

(a) A PMSI in consumer goods (note that a PMSI in other types of goods or in automobiles is not automatically perfected);
(b) An assignment of accounts which does NOT by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts; AND
(c) Sales of payment intangibles or promissory notes.

Question 11

Perfection by (a) taking possession and (b) statute (50%)

Answer 11

(a) Taking Possession. A secured party may perfect a security interest in negotiable documents, goods, instruments, or money by taking mere possession of such items.
(b) Statute. If there is another statute that governs perfection of a security interest, that statute may provide another method of perfection.

Question 12

Between a perfected security interest and an unperfected security interest, which has priority? (22.2%)

Answer 12

A perfected security interest has priority over a conflicting unperfected security interest in the same collateral (even if the unperfected interest is a purchase-money security interest in inventory).

Lien creditors (5.6%): Lien creditors possess virtually the same status as perfected secured creditors. Accordingly, if a party becomes a lien creditor before a secured party files or perfects, the lien creditor will enjoy priority over that party. Their priority also extends to future advances secured:

(a) Before the lien arose;
(b) Within 45 days of the lien; OR
(c) Without knowledge of the lien.

PMSIs:

Perfected PMSI vs. unperfected security interest: A PMSI always has priority over an unperfected, non‐PMSI security interest.

Unperfected PMSI versus perfected security interest:

Grace Period for Non-Inventory PMSI. An PMSI in goods other than inventory or livestock prevails over all other security interests in the collateral, even if the other security interests perfected earlier, so long as the PMSI is perfected before or within 20 days after the debtor receives possession of the collateral (i.e., the creditor has a 20-day grace period to file upon receipt of the collateral). This does not apply to PMSIs in consumer goods, which are perfected automatically.

Inventory PMSI: An unperfected PMSI in inventory does NOT have priority over a perfected security interest in the same collateral and does NOT have a grace period to perfect. To have priority over a perfected security interest, the PMSI must be perfected at the time the debtor receives possession and notice is provided to prior creditors.

Question 13

Between multiple perfected security interests, which has priority? (20.4%)

Answer 13

Between multiple perfected creditors, the first to file obtains priority (even if a party files before they perfect for priority purposes).

Some collateral is not subject to the state filing system or cannot otherwise be filed. In these instances, the first to perfect obtains priority.

Generally, knowledge of a prior unperfected interest will not prevent a potential secured party from filing first to obtain priority.

Question 14

Between multiple unperfected security interests, which has priority?

Answer 14

If neither interest is perfected, then the first interest to attach or become effective has priority. A PMSI always has priority over an unperfected, non‐PMSI security interest, even if the PMSI is not perfected.

Question 15

Between a lien creditor and a secured party, which has priority? (5.6%)

Answer 15

Lien creditors possess virtually the same status as perfected secured creditors. Accordingly, if a party becomes a lien creditor before a secured party files or perfects, the lien creditor will enjoy priority over that party. Their priority also extends to future advances secured:

(1) Before the lien arose;
(2) Within 45 days of the lien; OR
(3) Without knowledge of the lien.

Question 16

Between a non-buyer transferee and a secured party, which has priority?

Answer 16

If the collateral is transferred from the debtor to the transferee and the transferee is not a buyer, the security interest continues in the collateral unless the secured party authorized the transfer free of the security interest. In other words, the secured party still has a security interest in the collateral.

Question 17

Between an unsecured buyer and a perfected security interest, which has priority? (22.3%)

Answer 17

When a buyer purchases collateral, the buyer takes it subject to a perfected security interest, unless the secured party authorizes the sale free and clear of its security interest. Exceptions:

(1) BOCB (16.7%): A buyer in the ordinary course of business is a person who buys in the ordinary course from a person in the business of selling goods of that kind. A BOCB takes the item free of a security interest created by the buyer’s seller even if the security interest is perfected and the buyer knows of its existence.
(2) Consumers Buying From Consumers (5.6%): A buyer of consumer goods takes the goods free of a security interest, even if perfected, UNLESS prior to the purchase, the secured party filed a financing statement covering the goods. A consumer buyer is a person who buys consumer goods:
(i) From another consumer
(ii) Without knowledge of the security interest;
(iii) For value; AND
(iv) Primarily for the buyer’s personal, family, or household purposes.
(3) PMSI in Consumer Goods: A PMSI in consumer goods is automatically perfected upon attachment. Perfection through filing a financial statement is not required, but a party with a PMSI should still file a financing statement to protect their interest against consumer buyers:
(a) If a financing statement for a PMSI in consumer goods is not filed, and the consumer buyer does not know of the PMSI, then he will take free of the security interest.
(b) If the party holding the PMSI in consumer goods does in fact file, then his security interest will be good even against a consumer buyer.

Question 18

SP’s right to repossess (7.4%)

Answer 18

After default, a secured party is entitled to take possession of the collateral. Unless the security agreement provides otherwise, a secured party is not required to give notice of default or of his intent to take possession of the collateral.

The secured party may attempt to take possession of the collateral without judicial process so long as they do not commit a breach of the peace. Article 9 does not define what actions constitute a breach of the peace; however, breaking into locked property will generally suffice. Some case law suggests that ANY opposition to the entry or seizure, however slight, normally results in a breach of the peace.

Question 19

SP’s right to dispose of collateral (9.3%)

Answer 19

Upon default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral. Within limits, the secured party may keep the collateral (strict foreclosure) in full or partial satisfaction of the obligation.

(1) Commercially Reasonable—All aspects of the disposition of collateral (method, manner, time, and place) must be conducted in a commercially reasonable manner. A disposition is commercially reasonable when conducted:
(a) In the usual manner on a recognized market, such as a stock exchange, that has standardized price quotations for fungible goods;
(b) At the price current in any recognized market at the time of the disposition; or
(c) Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.
(2) Price—There is not a specific price that must be obtained in disposing of the collateral. The mere fact that a higher price could have been obtained by disposing of the collateral in a different manner or at a different time does not establish that the disposition was not commercially reasonable. A low price may trigger scrutiny by the court of the disposition and its reasonableness.
(3) Sale (Non-Judicial Foreclosure)
(a) Disposal. A secured party may dispose of collateral in its possession by way of a sale so long as it is commercially reasonable as to method, manner, time, place, and terms.
(b) Purchase. A secured party may purchase the collateral at a public sale, but she cannot do so at a private sale unless the collateral is of a kind that is customarily sold on a recognized market (e.g., the New York Stock Exchange) or the subject of widely distributed standard price quotations. A secured party cannot purchase the collateral at a private sale when the prices are individually negotiated or when items are not fungible in a recognized market.
(4) Notice of Disposition—A secured party is generally required to send an authenticated notification of disposition. The notification is required to be reasonable as to its content, the manner in which it is sent, and its timeliness.
(a) Notification of disposition is required to be sent to (i) the debtor, (ii) any secondary obligor, and, in the case of non‐consumer goods, (iii) any other secured party or lien holder who held a security interest that was perfected by filing or pursuant to a statute, and (iv) any other party from whom the secured party has received authenticated notice of a claim or interest in the collateral.
(b) Timeliness of notice: In general, the test for the timeliness of a notification of a disposition is reasonableness. The notification should be sent sufficiently far in advance of the disposition to allow the notified party to act on the notification. In a transaction other than a consumer transaction, when a secured party sends a notification of disposition after default and at least 10 days before the earliest time for disposition set forth in the notification, the timeliness of the notice is reasonable, provided that the notice is sent in a commercially reasonable manner.

Question 20

SP’s right to collect directly (7.4%)

Answer 20

Upon default, a secured party has the right to collect directly from the account debtor (the person who owes the debtor on the account). To exercise this right, the secured party must send an authenticated notification to the account debtor informing the account debtor that the amount due has been assigned and that the payment is to be made to the assignee. Upon receipt of proper notification, the account debtor may discharge its payment obligation ONLY by payment to the assignee (the secured party).

Question 21

Debtor’s rights (non-complying disposition of collateral) (9.3%)

Answer 21

When a creditor makes a non-complying disposition of collateral under Article 9, the debtor can:

(1) Recover actual damages;
(a) Actual damages are those reasonably calculated to put an eligible claimant in the position that it would have occupied had no violation occurred.
(2) Recover statutory damages; OR
(a) If the collateral involved is consumer goods, the amount of minimum statutory damages must be at least: the credit loan interest amount + 10% of the loan’s principal amount.
(b) $500 in statutory damages is also recoverable for each violation of certain Article 9 provisions.
(3) Be subject to judicially mandated disposition of the collateral.
(a) If the creditor is attempting to improperly dispose of collateral, a court may order or restrain collection, enforcement, or disposition of the collateral on appropriate terms and conditions (e.g., the court could order the creditor to allow the debtor to redeem the collateral, conduct a public sale, etc.).

Question 22

Right of redemption (5.6%)

Answer 22

Generally, a debtor or any secondary obligor has the right to redeem (i.e., reclaim) collateral until the secured party has disposed of it or entered into a contract for its disposition. To redeem collateral, the debtor must:

(1) Fulfill all obligations secured by the collateral; AND
(2) Pay the reasonable expenses and attorney’s fees.

Question 23

Surplus or deficiency from disposition (9.3%)

Answer 23

After a secured party sells or disposes of collateral, and the required payments and applications of proceeds have been made, the remaining amount collected may present a SURPLUS or a DEFICIENCY as compared to the underlying obligation.

(1) Surplus: The secured party generally must pay the surplus to the debtor.
(2) Deficiency: The obligor generally is liable for the deficiency. Exceptions:
(a) Neither side is liable for any surplus or deficiency if the underlying transaction involves the sale of accounts, chattel paper, payment intangibles, or promissory notes.
(b) Article 9 does not expressly address the right of a creditor to recover any deficiency in a consumer goods transaction after violating Article 9. Different jurisdictions have adopted the following two rules to address this issue:
(i) Absolute Defense. Some jurisdictions deny the secured creditor ANY deficiency if they violate Article 9.
(ii) Rebuttable Presumption Rule. In some jurisdictions, if the secured creditor violates Article 9, it is presumed that the proceeds from the disposition (i.e., sale) are equal to the debt owed. In order to rebut, the secured creditor then has the burden to show that even at a complying disposition, the collateral is worth less than the amount owed by the debtor. (For non-consumer goods transactions, Article 9 expressly applies the rebuttable presumption rule.)