Secured Transactions

Question 1

What is the SCOPE of Article 9?

Answer 1

Consensual security interests in personalty and fixtures. If collateral is real estate, apply law of mortgages.

Question 2

How does a creditor create an enforceable security interest in debtor’s collateral, meaning, how does the creditor ATTACH?

Answer 2

VCR

1. Value given by creditor (i.e., Loan proceeds)
2. Contract (also called a security agreement or record) that evidence is the secured transaction unless secure party has taken possession of collateral.
3. Rights: debtors must have rights in the collateral

Question 3

Once attached, how does the creditor attain PERFECTION?

Answer 3

Putting world on record notice of existence

Question 4

When more than one creditor has a stake in the same collateral, what are the rules of PRIORITY?

Answer 4

Within any category, first in time, first in right

Question 5

What if the debtor DEFAULTS on the debt or obligation?

Answer 5

Lender has statutory and judicial remedies

Question 6

Giorgio Armani borrows $2 million from Bank. He grants Bank a security interest in his business equipment. Are we within the
scope of Article 9?

Answer 6

Yes because this is a voluntary grant of a security interest in debtor’s goods

Question 7

To attach, what must the contract (security agreement) contain?

Answer 7

Authenticated by debtor’s signature or electronic mark and reasonably identify the collateral

Question 8

Secured Party lends $500,000 to Staples Stores, taking a security interest “in all of Staples’ inventory, whether now held or
hereafter acquired.” is this enforceable?

Answer 8

Yes, this is an after acquired collateral clause or floating Lien which is enforceable.

Question 9

What are the three methods by which a creditor can perfect its security interest?

Answer 9

1. Take possession of the collateral
2. PMSI: purchase money security interests in consumer goods perfect automatically upon attachment.
3. Filing notice of the security interest with secretary of state (the security agreement or more commonly UCC-1) where debtor resides (individual) or is organized (organization) or if timber, then rolls, or fixtures in the county where the collateral is located.

Question 10

What must the UCC-1 financing statement contain?

Answer 10

1. Debtor’s name and address
2. Creditors name and address
3. Description of collateral (may be super generic such as “all of debtor’s assets”)

Question 11

Each claimant is entitled to satisfaction in full before a subordinated claimant is entitled to take. T or F?

Answer 11

T

Question 12

What is the order of priorities when it determining who is entitled to the debtor’s collateral?

Answer 12

1. Buyer in ordinary course
2. Perfected attached creditor
3. Lien creditor
4. Non-ordinary course buyer
5. Attached unperfected creditor
6. General unsecured creditor

Question 13

Who is a buyer in the ordinary course?

Answer 13

Someone who purchases the collateral from a merchant’s inventory. E.g., I buy Motor Oil from Lowe’s for my snow blower.

Question 14

Who is a Perfected attached creditor?

Answer 14

Article 9 creditor who succeeds in attaining perfection.

Question 15

Who is a Lien creditor?

Answer 15

general unsecured creditor who goes to court to get a judicial lien on the collateral.

Question 16

Who is a Non-ordinary course buyer?

Answer 16

someone who purchases the collateral outside the ordinary stream of commerce. For example, buying a guitar from auto mechanic.

Question 17

Who is a Attached unperfected creditor?

Answer 17

Article 9 creditor who creates an enforceable security interest, i.e., it attaches, but either never bothers to perfect or tries to perfect but botches the effort, perhaps by filing in the wrong place.

Question 18

On Jan. 1, Calista begins negotiating with Robert about lending him $10,000. On Jan. 1, Calista files a financing statement covering Robert’s Rolex. The negotiations continue. Later, Barry lends Robert $10,000, and on Feb. 1, Barry perfects a security interest in the Rolex. On March 1, Calista and Robert finally reach an agreement and Calista lends him the $10,000 and Robert signs an appropriate security agreement granting Calista a security interest in the Rolex. Who has first priority in the watch and why?

Answer 18

A9 allows for early filing, even at the
onset of loan negotiations. If an early filer subsequently attaches, she is allowed the benefit of her early filing. Priority will relate back to the early filing date.

Even though both are perfected attached creditors and even though Calista’s security interest attached later, Calista has priority to watch because she filed first.

Question 19

Who has priority: the after-acquired collateral financier or the purchase money security interest holder?

Answer 19

PMSI, however, how it achieves its priority depends on whether the collateral is equipment or inventory:

1) If equipment, PMSI has priority if it files properly within 20 days after debtor takes possession.
2) If inventory, PMSI has priority if it (a) files properly before debtor takes possession and (b) notifies the after-acquired collateral financier.

Question 20

Who has priority: the buyer in ordinary course or the perfected attached creditor?

Answer 20

PAC loses to BIOC. A buyer in the ordinary course of business takes free of a perfected security interest in seller’s inventory.

Question 21

What are the options for a creditor when the debtor has defaulted on the loan and is in breach of contract?

Answer 21

1. Self help repossession
2. Repossession by judicial action
3. Strict foreclosure
4. The sale
5. Action for deficiency judgment

Question 22

When is self help repossession permissible?

Answer 22

Creditor cannot breach peace, which occurs when the secured party’s actions are likely to cause violence. Repossession made over any protest by debtor constitutes breach of peace. Constructive force (for example, by impersonating a law enforcement officer) is considered a breach of peace.

Question 23

May a creditor attempting Self-Help repossession enter the debtor’s home?

Answer 23

The home enjoys a zone of privacy and security party cannot enter without voluntary and contemporaneous consent.

Question 24

How does a secured party go about repossession by judicial action when debtor is in default?

Answer 24

Get a judicial writ ordering the sheriff to obtain possession of the collateral and deliver it to the secured party

Question 25

Other than for consumer goods, how does a secured party go about satisfying debt by strict foreclosure when debtor is in default?

Answer 25

Secured a party retains the collateral and full satisfaction of the debt and provides notice.

If any of the notified parties objects within 20 days after the notice is sent, strict foreclosure will not be allowed. Instead, the
collateral must be disposed of by sale.

Question 26

If the collateral is consumer goods, how is notice made in strict foreclosure?

Answer 26

by sending the proposal to retain collateral to the debtor and any secondary obligor (guarantor).

Question 27

If the collateral is not consumer goods, how is notice made in strict foreclosure?

Answer 27

notice is sent to deter and secured parties and secondary obligors.

Question 28

For consumer goods, what special rule applies to a secured party seeking to satisfy debt by strict foreclosure when debtor is in default?

Answer 28

If the collateral is consumer goods and the debtor has paid 60% of the loan in the event of a non-PMSI or 60% of the cash price in the event of a PMSI, strict foreclosure is not allowed. Instead, the secured party must
sell the collateral within 90 days or be liable in conversion.

Question 29

How does a secured party go about satisfying the debt by sale of collateral when debtor is in default?

Answer 29

1. Every aspect of the sale must be commercially reasonable.

2. Reasonable notice must be sent.

Question 30

What additional information must be included in the secured party’s notice when it goes about satisfying the debt by sale of consumer goods when debtor is in default?

Answer 30

Calculation of any deficiency and how debtor can redeem.

Question 31

If a secured party sells collateral at a low price to an insider buyer, what price is used in calculating the deficiency?

Answer 31

Independent third party price rather than the actual amount paid

Question 32

What must a debtor do to redeem the collateral?

Answer 32

Before the secured party sells or completes a strict foreclosure, debtor must pay the amount owed (full amount if acceleration clause) plus any interest and creditor’s reasonable expenses, including attorneys fees.