Secured Transactions

Question 1

Scope of Article 9

Answer 1

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 (secured party) the right to sell a debtor’s property in order to satisfy a debt.

Question 2

Collateral

Answer 2

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 3

Types of Collateral

Answer 3

1. Goods. Goods are all things that are moveable when a security interest attaches.
2. Consumer Goods. Consumer goods are goods that are used mainly for personal, family, or household purposes.
3. Inventory. Inventory includes goods that are kept by a person for sale or lease.
4. 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 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 4

Requirements for Attachment

Answer 4

1. There is a valid security agreement memorializing the security interest;
2. The debtor possesses rights in collateral beyond mere possession; AND
3. The creditor extends value to the debtor.
   => Security Interest is Enforcable

Question 5

Perfection Defined

Answer 5

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.

Question 6

Three methods to Perfect a security Interest

Answer 6

Filing, Possession, and Automatic Perfection

Question 7

Perfection by Filing

Answer 7

The filing of a financing statement or the security agreement with the state by an authorized party is the primary method of perfection.

Question 8

Perfection By Taking Possession

Answer 8

A secured party may perfect a security interest in negotiable documents, goods, instruments, or money by taking mere possession of such items.

Question 9

Automatic Perfection

Answer 9

a. A purchase-money security interest in consumer goods; AND

b. An assignment of accounts that does not transfer a significant part of the assignor’s outstanding accounts.

Question 10

Priority: Perfected vs. Unperfected

Answer 10

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

Question 11

Priority: Multiple Perfected Creditors

Answer 11

The first to file or perfect obtains priority
knowledge of a prior unperfected interest will not prevent a potential secured party from filing first to obtain priority.

Question 12

Exception to Priority Rules:

Buyer in the Ordinary Course of Business

Answer 12

Protected, even though their interest in the property is created after the attachment or perfection of a security interest.

Buyers in the ordinary course of business take the collateral free of the security interest created by the seller.

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

Question 13

Buyer in the Ordinary Course, Defined

Answer 13

A person who:

1. In good faith and without knowledge that the sale to him is in violation of the security interest of a third party;
2. Buys in the ordinary course from a person in the business of selling goods of that kind.

Question 14

Exception to Priority Rules:

Buyer of Consumer Goods

Answer 14

Takes 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 15

Exception to Priority Rules:

PMSI

Answer 15

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

Question 16

PMSI Defined

Answer 16

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 17

PMSI Exception Exception

Answer 17

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.

Question 18

Rights of the Secured Party

Answer 18

RIGHT TO REPOSSESS: Upon default, 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.
RIGHT TO DISPOSE: 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 19

Rights of the Debtor

Answer 19

Recover in case of non-complying disposition
Redemption
Access to surplus

Question 20

Recovery after non-complying disposition

Answer 20

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 21

Redemption

Answer 21

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 fees.

Question 22

Surplus/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.