UCC Secured Transactions

Question 1

HIGH

**SCOPE OF ARTICLE 9

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

HIGH

**SECURED PARTY

Answer 2

The secured party is the creditor who possesses the benefit of the security interest.

Question 3

HIGH

**DEBTOR

Answer 3

The debtor is the party who has an ownership interest or other sufficient interest in the personal property securing the obligation.

Question 4

HIGH

**OBLIGOR

Answer 4

The obligor is the party held responsible for the underlying obligation (usually also the debtor, but could be a type of guarantor).

Question 5

HIGH

**COLLATERAL

Answer 5

Collateral refers to the property in which a security interest is created, and it extends to identifiable proceeds from the property that serves as collateral.

Question 6

HIGH

**ARTICLE 9 “GOODS”

Answer 6

Article 9 defines “goods” as all things that are moveable when a security interest attaches.

Question 7

HIGH

**ARTICLE 9 “CONSUMER GOODS”

Answer 7

Article 9 defines “consumer goods” as goods that are used mainly for personal, family, or household purposes.

Question 8

HIGH

**ARTICLE 9 “INVENTORY”

Answer 8

Article 9 defines “inventory” as goods that are kept by a person for sale or lease (does not include goods that are only being held for repair).

Question 9

HIGH

**ARTICLE 9 “ACCOUNTS”

Answer 9

A security interest in a debtor’s “accounts” covers any right to payment of a monetary obligation, whether or not earned by performance, for property that has been or is to be sold (i.e., accounts receivable). A secured party can collect directly from the person who owes the debtor if the debtor defaults.

Question 10

HIGH

**ATTACHMENT (3)

Answer 10

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:

1. The secured party extends 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. A UCC Sec. 9-203(b)(3) condition is met.

Question 11

HIGH

**PERFECTION (3)

Answer 11

Once the security interest attaches, it is enforceable. Perfection of the interest only enhances the secured party’s rights to the property serving as collateral.

Generally, there are three different methods in which a security interest may be perfected:

1. The filing of a financing statement or the security agreement with the state by an authorized party;
2. Taking mere possession of a security interest in negotiable documents, goods, instruments, or money; OR
3. Automatic perfection.

Question 12

HIGH

**AUTOMATIC PERFECTION (2)

Answer 12

The following security interests are perfected automatically when they attach:

1. A purchase-money security interest in consumer goods; AND
2. An assignment of accounts that does NOT transfer a significant part of the assignor’s outstanding accounts.

Question 13

HIGH

**PRIORITY OF PERFECTED vs. UNPERFECTED INTERESTS

Answer 13

Generally, a perfected security interest has priority over a conflicting unperfected security interest in the same collateral.

Question 14

HIGH

**PRIORITY OF MULTIPLE PERFECTED CREDITORS

Answer 14

Between multiple perfected creditors, the first to file obtains priority.

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 15

HIGH

**PRIORITY OF BUYERS IN THE ORDINARY COURSE OF BUSINESS

Answer 15

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 buyer in the ordinary course of business 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.

Shelter Principle. The protected buyer may sell the purchased collateral to a third-party free of the secured party’s security interest.

Question 16

MED

*PRIORITY OF BUYERS OF CONSUMER GOODS (4)

Answer 16

A buyer of consumer goods take the goods free of a security interest, even if perfected, if the buyer buys:

1. Without knowledge of the security interest;
2. For value;
3. Primarily for the buyer’s personal, family, or household purposes; AND
4. Before the filing of a financing statement covering the goods.

Question 17

HIGH

**PRIORITY OF PURCHASE- MONEY SECURITY INTERESTS (PMSIs) (2)

Answer 17

Generally, PMSIs have priority over prior perfected security interests if the PMSI is properly executed.

A PMSI is either:

1. A security interest held by the seller of collateral to secure payment of all or part of the price; OR
2. A security interest of a person that gives value to a debtor so that the debtor may acquire rights in or the use of collateral.

Question 18

HIGH

**PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS IN INVENTORY COLLATERAL
Inventory vs. Non-Inventory

Answer 18

A PMSI in inventory collateral has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time the debtor receives possession and notice is provided to prior creditors.

However, an unperfected PMSI in inventory will NOT have priority over a perfected security interest in the same collateral.

A PMSI in non-inventory collateral has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time the debtor receives possession of the collateral or within 20 days thereafter (i.e., the debtor has a 20-day grace period to file upon receipt of the collateral).

Question 19

MED

*SECURED PARTY’S RIGHT TO DISPOSE OF COLLATERAL

Answer 19

Upon default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or in any commercially reasonable manner.

Question 20

MED

*SECURED PARTY’S RIGHT TO COLLECT DIRECTLY FROM THE ACCOUNT DEBTOR

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

MED

*CREDITOR’S NON-COMPLYING DISPOSITION OF COLLATERAL (3)

Answer 21

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

1. Recover actual damages;
2. Recover statutory damages; OR
3. Be subject to judicially mandated disposition of the collateral.

Question 22

MED

*SURPLUS AND DEFICIENCY

Answer 22

Generally, when a secured party sells or disposes of collateral, the amount collected varies from the amount of the obligation. If the sale brings in MORE than the underlying obligation, the secured party must pay the debtor for any surplus.

Conversely, when the sale brings in LESS than the underlying obligation, the obligor is liable for any deficiency.