6. Secured Transactions

Question 1

What is a Purchase Money Security Interest (PMSI)?

Answer 1

The creditor lends money (either as seller OR third party financer) to buy specific goods and then RETAINS a security interest in the goods that were bought with the loan funds

• Two kinds - seller financed PMSI and financer financed PMSI

Question 2

What is the critical distinction between attachment and perfection?

Answer 2

1. Attachment - when done per legal requirements officially SECURES the creditor and creates proper interest vis-a-vis the DEBTOR
2. Perfection - when done per legal requirements creates valid interest vis-a-vis THE REST OF THE WORLD

Question 3

What are the four types of goods that are collateral?

Answer 3

1. Consumer goods - used or bought for use for personal, family, household purposes
2. Equipment - used or bought for use in business (CATCH ALL)
3. Farm products - things used for farming operations (including livestock)
4. Inventory - held by debtor for sale or lease or equipment that has high consumption rate

Question 4

What are the eight types of semi-intangible and tangible collateral?

Answer 4

1. Instruments - negotiable instruments (promissory notes, deposit notes)
2. Documents - right to receive GOODS (bill of lading or warehouse receipt)
3. Chattel Paper - literally a written security interest that identifies collateral
4. Investment property - stocks, bonds
5. Accounts - these are accounts receivable, the right to receive money for services or products rendered
6. Deposit Account - business deposit bank accounts
7. Commercial tort claim - not personal injury or death
8. General intangibles - patents, trademarks, copyrights (CATCH ALL)

Question 5

What are the three requirements for an effective ATTACHMENT (aka security interest)?

Answer 5

1. Valid security agreement
2. Value given by Creditor
3. Debtor has rights to the collateral

• When all three established, the security right is ATTACHED

Question 6

What are the three ways to establish a security agreement?

Answer 6

1. In writing
2. Possession of the collateral
3. Control (three types of collateral only!)

Question 7

What are the three types of collateral that can be perfected with control?

Answer 7

1. Deposit accounts
2. Investment property
3. Electronic chattel paper

Question 8

What are the three requirements for a valid written security agreement?

Answer 8

1. Language of INTENT to create security interest;
2. Authenticated by debtor (signed - any symbol)
3. Description of Collateral - TEST - does it reasonably identify the collateral?

Question 9

What are the rules for after acquired property and descriptions of collateral in a security agreement?

Answer 9

General rule – security agreement description does not extend to after acquired property absent EXPLICIT after acquired property clause

Exception – court implies after acquired property collateral for collateral with HIGH TURNOVER

This same rules apply to future advances (need a clause)

Question 10

When do the proceeds of collateral fall under a description of collateral for security agreement purposes?

Answer 10

RULE – all IDENTIFIABLE proceeds are included in collateral description (unless specified otherwise) and creditor therefore has security interest in them

Identifiable = traceable to original collateral

Question 11

What is the appropriate remedy to apply if there is commingling of proceeds with non proceeds?

Answer 11

Test - lowest intermediate balance test

The lowest identifiable balance of a bank account AFTER deposit is the traceable proceeds (and therefore security interest). Cannot exceed the amount that was deposited

Question 12

Generally speaking, when has a security interest been perfected?

Answer 12

When both of the following occur:

1. The security interest is attached; and
2. One of five perfection methods are used

Question 13

What are the five methods of protection?

Answer 13

1. Automatic perfection - PMSI in customer goods is perfected at attachment
2. Possession of collateral - perfection lasts as long as possession retained. Mandatory method for perfection of cash
3. Control - Three types of collateral with three ways to control a deposit account (only way to perfect deposit account)
4. Notation of lien on certificate of title - ONLY WAY to perfect interest in cars/trucks/vehicles
5. Filing of Financing Statement (the big boy)

Question 14

What are the three ways to perfect with “control” of deposit accounts?

Answer 14

In order of perfection strength:

1. Account placed in creditor’s name;
2. Creditor is hosting bank of the account;
3. Assignment agreement that passes rights to creditor not debtor

Question 15

What are the contents of the financing statement?

Answer 15

1. Debtor’s name (special rules)
2. Describe collateral (special rules)
3. Secured Party’s Name
4. Real-property financing statements (if applicable)
5. Debtor authorization (special rules)

See pgs 7-9 of outline for essential traits of financing statements

Question 16

What are the rules for debtor’s name requirements in filing of public financing statement?

Answer 16

Must file according to name on driver’s license in same state, otherwise use community name

RULE - if error in name, still binding if name error not misleading (i.e., third parties can still see the debt)

RULE - if name change, creditor has four months to amend filing before losing perfection

Question 17

What are the rules for collateral description in financing statement?

Answer 17

Must “reasonably identify” the collateral

TIP - less strict than security agreement rules because super generic descriptions WILL satisfy and will therefore also satisfy after acquired property as security

Question 18

What are the rules for debtor authorization of a financing statement?

Answer 18

Debtor will authorize EITHER by:

1. signing; or
2. authenticating a security agreement

Tip - different from authentication requirements for SA because must have some form of mark or writing

Question 19

What are the location filing requirements for a financing statement?

Answer 19

General rule - secretary of state office; BUT

If real property attached (fixture) - in the county office of location of property

Question 20

What are the considerations of having multiple states involved in a perfected security interest through financing statement?

Answer 20

1. if individual = file in state of residence
2. If corporation = state of incorporation
3. If non corporate entity = state of business operations

If debtor moves, must amend within four months to maintain perfection

If collateral moves, must amend within 1 yr to maintain perfection

Question 21

What are the perfection rules for proceeds?

Answer 21

RULE - Proceeds are automatically perfected for 20 days IF source collateral was already perfected

How to extend the perfection?

1. Automatically extended if proceeds are cash
2. Automatically extended under Same Office Rule IF
   (a) source collateral had financing statement; and
   (b) can the proceeds be perfected in the same place (i.e., office) as the source?
3. Otherwise amend the financing statement within 20 days

Question 22

What is the exam steps to analyzing a priority of claim problem?

Answer 22

1. Classify the creditor types; and
2. Determine who has priority

BE MECHANICAL DON’T JUMP THE GUN ON THE FIRST

Question 23

Who wins if both creditors are perfected and secured?

Answer 23

First creditor to either:

(a) record financing statement; or
(b) perfect

Question 24

Who wins of both creditors are secured but NEITHER is perfected?

Answer 24

The first creditor to attach

Question 25

Who wins between a perfected creditor and a non-perfected creditor?

Answer 25

The perfected one, dumbass

Question 26

What is the special rule for priority of a PMSI in goods OTHER than inventory and livestock?

Answer 26

Rule - has priority over other perfected security interests SO LONG AS perfected by debtor within 20 days of possession by debtor Otherwise follow first to file/perfect

Question 27

What is the special rule for priority of a PMSI in inventory or livestock?

Answer 27

Rule - has priority over other perfected security interests SO LONG AS: 1. Perfection BEFORE possession; 2. Notice sent to competing security holders; 3. Notice is received within 5 yrs of possession

Question 28

What is the special rule for priority of competing PMSIs?

Answer 28

Seller financed always beats financer financed

Question 29

what is the special rule for priority of perfection of investment property?

Answer 29

Perfection by control takes priority over other forms of perfection Otherwise, use general rule for perfection

Question 30

What is the hierarchy of priority for methods of control over non-consumer deposit accounts?

Answer 30

General rule - control beats other perfected PROCEEDS placed in account But if two competing control perfections: 1. account in name of creditor; 2. creditor is the maintaining bank of the account; 3. control agreement btwn debtor, creditor, and bank

Question 31

What are the rules for a secured party's rights vs a buyer of the collateral?

Answer 31

General rule - attached lien remains with the collateral bought by third party Exceptions: 1. Authorized Sale Exception 2. Unauthorized Sale Exceptions

Question 32

What is the authorized sale exception to the general rule that a buyer takes subject to an attached security interest?

Answer 32

Creditor can authorize sale of goods without the attached security either EXPRESSLY or IMPLIEDLY Express - it's contained in the security agreement Implied - sale of INVENTORY is presumed to be sellable to an ordinary CONSUMER (person) without attached security UNLESS expressly forbidden by creditor; OR - Creditor has ACQUIESCED to repeated non-attached sales in the past

Question 33

What are the unauthorized sales exceptions to the general rule that a buyer takes subject to an attached security interest?

Answer 33

There are THREE 1. Buyer in Ordinary Course Rule - good faith buyer in the ordinary course of business takes free of security interest CREATED BY SELLER so long as the seller IS IN THE BUSINESS of selling those goods. - Cannot claim good faith BIOC if knows that the sale violates someones security rights (but its okay to know about the lien) 2. Non buyer in ordinary course - always takes perfected security interest but NOT unperfected security agreement UNLESS they know about the lien 3. Consumer to Consumer sales (garage sale rule) - IF the goods are CONSUMER GOODS in the hands of BOTH buyer and seller, buyer takes free of security interest UNLESS - perfected by financing statement or buyer has knowledge

Question 34

What is the priority rule between a perfected and secured creditor and a judgment lienholder?

Answer 34

If creditor perfects BEFORE lienholder has sheriff levy on property (seize) then creditor wins and vice versa BUT beware of PMSI creditors - will beat ANY judgment lien if perfected within 20 days of possession by debtor

Question 35

What is the rule on self help repossession?

Answer 35

RULE - Secured creditor can repossess collateral so long as can be done without breach of the peace Breach of the peace = any conduct that has potential to lead to violence - Physical conduct by debtor + verbal objection - unauthorized entry into a HOME - failure to re-lock a business after entering

Question 36

When may a debtor retain collateral (strict foreclosure and not sale)?

Answer 36

1. Notice to competing lienholders and no objection within 20 days; and 2. Notice to debtor and no objection within 20 days

Question 37

What are the requirements for a valid resale of collateral by a seizing creditor?

Answer 37

1. Notice Requirements - notice a REASONABLE time before sale (at least 10 days for non-consumer goods) to: - Debtor - Secured parties perfected - Secured parties who notified creditor * note no notice requirements for perishable goods 2. The sale must be COMMERCIALLY REASONABLE in manner, method, time, place, and terms - Test = did the creditor harm the debtor by screwing up the sale?

Question 38

What order to proceeds from a collateral sale go to?

Answer 38

1. Costs of repossession and sale 2. Pay off seizing debtor's balance in full 3. Balance to junior creditors 4. Any balance to debtor * senior creditors not extinguished * * remember right to deficiency judgment

Question 39

What is the result if seizing creditor fails notice or sale requirements?

Answer 39

1. Actual damages 2. Statutory damages for consumer goods 3. Rebuttable presumption that no right to deficiency judgment (sale proceeds paid entirety of debt)

Question 40

How does a creditor perfect a security interest in a fixture?

Answer 40

- Financing statement in the county where the real property is located INCLUDING: (a) Identity of real property; and (b) identity of the real property owner Exceptions: - Readily removable property - Not primarily used on property - consumer goods

Question 41

What are the priority rules for a security interest in a fixture?

Answer 41

General rule = first in time for perfected fixture interest vs. interest in the property PMSI exception = PMSI for fixture will jump ahead if perfected within 20 days of installation of fixture Construction mortgage exception = ALWAYS beats fixture security interest (same as statutory liens)

Question 42

What is the priority rule for an accession?

Answer 42

A security interest in an accession is subordinate to a security interest in the whole, unless the accession is distinguishable and readily removable