Commercial Paper/Secured Transactions

Question 1

Define a secured transaction

Answer 1

Secured transaction - Business deal, generally a loan of money, plus a “security interest” in personalty (not realty): If borrower doesn’t repay the loan, lender can grab the asset (collateral) and sell it to create value to pay off the borrower’s debt. UCC Article 9.
movable personal property, not mortgages/land

Question 2

How is collateral used/categorized generally?

Answer 2

Collateral is categorized based on the use to which the D to which the debtor is putting.
Items do not have an inherent categorization. An item use by one D can be in a certain category and that very same item used by another D can be in a different category. Thus, we categorize the collateral based on how the D is using i

Question 3

How are tangible things categorized?

Answer 3

Tangible = moveable things

1. Inventory = tangible goods held by a business for sale/lease and any raw or consumable materials (e.g., flour, sugar, chemicals, cleaning supplies).
2. Equipment = catch-all; any tangible thing owned by a business not within another category (not for sale or lease)
   - e.g., the parrot mascot
3. Agribusiness seldom tested, but farm products are livestock and unmanufactured farm goods (eggs, grain, apples, wool, honey, etc.).
   a. Farmers have inventory, too (processed farm products; e.g., cheese) and equipment.
4. Consumer goods: tangible things (1) used OR (2) bought for use primarily for personal, family, or household use. *Focus on primary intended use when security interest granted.
5. Consumer goods are the one category where an item can be both a consumer good and something else with respect to different Cs
   a. The D at one point in time can buy an item and intend to use it for personal, family, or household use in which case it’s a consumer good to the C who takes a security interest in the item at that time and then later change her mind and start using it for business purposes in which case its equipment to the C who takes a security interest in the item at that time. Therefore, focus on the D’s intended/actual use at the time when each C security interest in that item arises.

Question 4

Define Inventory

Answer 4

tangible goods held by a business for sale/lease and any raw or consumable materials (e.g., flour, sugar, chemicals, cleaning supplies).

Question 5

Define Consumer Goods

Answer 5

Consumer goods: tangible things (1) used OR (2) bought for use primarily for personal, family, or household use. *Focus on primary intended use when security interest granted.

1. Consumer goods are the one category where an item can be both a consumer good and something else with respect to different Cs
   a. The D at one point in time can buy an item and intend to use it for personal, family, or household use in which case it’s a consumer good to the C who takes a security interest in the item at that time and then later change her mind and start using it for business purposes in which case its equipment to the C who takes a security interest in the item at that time. Therefore, focus on the D’s intended/actual use at the time when each C security interest in that item arises.

Question 6

Define Equipment

Answer 6

Equipment = catch-all; any tangible thing owned by a business not within another category (not for sale or lease)
- e.g., the parrot mascot

Question 7

Intangible Categories under Art 9

Answer 7

1. Accounts: right to collect on a promise to pay the debtor later on a monetary obligation after sale or lease of a non-land related thing (among other items).
   a. Anytime D sells something to a 3rd party on credit an account is created
2. Deposit Account: bank account (technically, the bank’s promise to give you back money that you put on deposit). You must distinguish the two “account” terms.
   a. ONLY COMMERCIAL DEPOSIT ACCOUNTS are governed by Article 9, NOT consumer accounts.
3. Instrument: promise to pay memorialized in a note or certificate of deposit(check)
4. Chattel paper: paper(s) representing both a promise to pay and a property right. Two most common examples:
   (1) Any lease of a moveable (right to collect future rent + reversionary right); and
   (2) Retail installment sale agreement, RISA, promissory note + security agreement

Both the lease and RISA are chattel paper in the hands of the dealer**

5. Investment property: stocks/bonds, certificated/uncertificated, securities accounts.
6. General intangibles: Other intangible rights not otherwise categorized, including rights in intellectual property (copyrights, trademarks, patents), business goodwill, non- monetary contract rights.
   a. Non-monetary rights→ all other contracts rights D has to recieve anything other than money
   (1) D’s contract right to take delivery of an item he ordered

Question 8

Define General Intangibles

Answer 8

General intangibles: Other intangible rights not otherwise categorized, including rights in intellectual property (copyrights, trademarks, patents), business goodwill, non- monetary contract rights.

a. Non-monetary rights→ all other contracts rights D has to recieve anything other than money
(1) D’s contract right to take delivery of an item he ordered

Question 9

Define Chattel Paper

Answer 9

Chattel paper: paper(s) representing both a promise to pay and a property right. Two most common examples:

(1) Any lease of a moveable (right to collect future rent + reversionary right); and
(2) Retail installment sale agreement, RISA, promissory note + security agreement

Both the lease and RISA are chattel paper in the hands of the dealer**

Question 10

Define Investment Property

Answer 10

Investment property: stocks/bonds, certificated/uncertificated, securities accounts.

Question 11

Define an intrument

Answer 11

3. Instrument: promise to pay memorialized in a note or certificate of deposit(check)

Question 12

Define Deposit Account

Answer 12

Deposit Account: bank account (technically, the bank’s promise to give you back money that you put on deposit). You must distinguish the two “account” terms.
a. ONLY COMMERCIAL DEPOSIT ACCOUNTS are governed by Article 9, NOT consumer accounts.

Question 13

Define Accout

Answer 13

Accounts: right to collect on a promise to pay the debtor later on a monetary obligation after sale or lease of a non-land related thing (among other items).
a. Anytime D sells something to a 3rd party on credit an account is created

Question 14

Attachment

Answer 14

Attachment” OCCURS WHEN THE LAST OF 3 REQUIREMENTS HAS OCCURRED → (1)value given to D; (2) D has rights in collateral; AND (3) D authenticated the security agreement that has an adequate description of the collateral

Question 15

Oral security agreements-enforceable?

Answer 15

b. Oral agreement O.K. if debtor agreed to put the collateral in the creditor’s possession or “control” (rare).

Question 16

Description for security agreement purposes

Answer 16

c. “Description of collateral” must simply “reasonably identify,” generally by categories discussed earlier (e.g., inventory, equipment, accounts), not “all assets.”

(1) Ex: “ D grants C a security interest in all of his equipment”
(2) Consumer goods must be described more specifically – can’t use category

Question 17

When must the description be more specified in a security agreement?

Answer 17

e. In consumer transactions, the description must be more specific (not using broad categories), and after-acquired-collateral clauses apply to consumer goods only if the consumer acquires the property within 10 days of the secured value having been given.

Question 18

Rules regarding proceeds

Answer 18

C. Proceeds: Whether or not the security agreement says so, a security interest attaches automatically to whatever the debtor receives for or on account of the collateral; i.e., its proceeds, as long as the proceeds are somehow “identifiable” as linked to original collateral.

1. Proceeds are not specifically described in the security agreement
2. If the items of property are proceeds of collateral in which a secured C had a security interest in, the C will automatically have a security interest in those proceeds of the original collateral
   - Ex: If D sells inventory and C has a security interest in D’s inventory, and that is the only description of the collateral in the security agreement, as soon as D sells that item of inventory in exchange for a 3rd party’s promise to pay later D now has an account, the C would now have an interest in that account b/c the account is a proceed of the original collateral.

D. A perfected security interest follows property into the hands of other people who acquire the collateral from the debtor unless the creditor consents to a release of the security interest.

Question 19

Release

Answer 19

A perfected security interest follows property into the hands of other people who acquire the collateral from the debtor unless the creditor consents to a release of the security interest.

Question 20

Transaction dealing with land that are governed under article 9

Answer 20

Rights in Real Property: (land & buildings) are NOT governed by Art. 9, but a couple of important types of Article 9 collateral involve things closely related to realty:
1. Fixtures: Any movable thing that is so incorporated into (affixed to) an immovable that it becomes part of the realty under property law, e.g., heaters, lights, etc.

2. As-extracted collateral: rights in oil and gas and other minerals reserved before extraction, so that the security interest will attach to the oil, etc., as soon as it is extracted.

Question 21

what is a Drag Net Clause?

Answer 21

B. Drag Net Clause- Future Loans: future obligations can be secured. Usually, “all indebtedness.” Present property used as collateral can secure any future loans

Question 22

When someone claims property ownership, what are one of the deals that are treated as a security interest despite the parties’ intent: consignment

Answer 22

When someone delivers non-consumer goods worth more than $1000 to a merchant (the debtor) for sale, law treats “consignor” not as owner with right of return, but creditor with security interest in goods, if merchant (D) (1) acts under its own separate name, (2) is not an auctioneer, AND (3) is not generally known to sell other people’s goods (goods secretly consigned rather than sold to a merchant treated as belonging to merchant-consignee).

Question 23

When someone claims property ownership, what are one of the deals that are treated as a security interest despite the parties’ intent: lease disguised as a sale

Answer 23

2 common deals treated as security interests despite parties’ desire (creditor likely treated as unperfected secured creditor, loses priority): i.e. when someone claims they are the owner of the property

1. “Lease” as Disguised Sale: Lease of a movable thing to debtor, structured so lessor has no expectation of reversion of value, treated as installment sale with security interest (rather than rental payment and right of eviction/reversion), e.g., (1) lease term over entire useful life of thing, or (2) option to buy leased thing at lease end for “nominal” value ($1).
2. Consignment

Question 24

Perfection

Answer 24

Perfection occurs ONLY AFTER attachment has occurred AND one of various steps for perfection taken properly: filing statement, possession, control, Certificates of Title (require a different way), automatic in PMSI consumer goods upon attachment, and perfection as a matter of law in proceeds

Question 25

What receives automatic perfection upon attachment?

Answer 25

PMSI IN CONSUMER GOODS. ***NOTE WELL: Not all PMSIs are auto-perfected, only those in consumer goods. Purchase-Money Security Interest (PMSI): A purchase-money security interest (“PMSI”) is a security interest that secures repayment of whatever portion of a loan (usually 100%, but perhaps less) actually used by the debtor to purchase the collateral. Consumer goods - bought or used primarily for personal, family, or household use.

Question 26

What is a PMSI?

Answer 26

Purchase-Money Security Interest (PMSI): A purchase-money security interest (“PMSI”) is a security interest that secures repayment of whatever portion of a loan (usually 100%, but perhaps less) actually used by the debtor to purchase the collateral. Two scenarios: bank creditor lends money to allow debtor to buy the collateral, or seller of the collateral extends credit to allow debtor to buy the collateral.

Question 27

When is control applicable as a means to perfect?

Answer 27

This is NOT possession. Perfection by control is superior to filing. Control is the exclusive method of perfecting an interest in COMMERCIAL DEPOSIT ACCOUNTS. Control is an alternative method for perfecting an interest in investment property, though perfection by control in investment property BEATS perfection in any other way. -Control of Deposit Accounts: Perfected in 1 of 3 ways: (1) If the secured creditor is the bank where the deposit account is held, it has control; (2) Primary method - Control agreement in which the bank agrees to follow the secured creditor’s instructions with respect to the money in the account; OR (3) The creditor can become the bank’s customer with respect to the deposit account by adding the creditor’s name to the account. - Control of Investment Property: Depends upon which of 3 specific forms of holding the investment represents: (1) *Certificated Securities: If an individual’s stock or bond holding is represented by a paper certificate in the possession of the D or the D’s broker. - The way to achieve control over a certificated security: is by taking delivery. Taking delivery means →transfer of possession of the certificate to the creditor and proper indorsement or re-registration in creditor’s name on the company’s books. - Stock = fractional ownership percentage of a company - Bond = Fractional participation in a loan made to a company. (you get your money back) (2) Uncertificated Securities: Only way to achieve control→ “delivery,” official transfer on issuer’s books into the creditor’s name. - No certificate involved, there is just a computer entry on the registrar’s books for that company indicating you own X amount of shares of that company’s stock (3) *Indirect Holdings - Securities Accounts and Security Entitlements: Securities held through broker (Charles Schwab or A.G. Edwards) in securities account. Control just like control over deposit account (see above): i.e. When Debtor has a securities account with a broker, to prefect by control treat it like a commercial deposit account - 1) Broker holding the entitlement or account automatically has control; - 2) **Control agreement, where broker agrees to follow C’s orders; OR - 3) C listed as securities account holder (on the books of the broker). MEE TIP: look for signals with respect to what the investment property looks like to tell you how control is achieved

Question 28

Perfection: Control of Deposit Accounts:

Answer 28

Control of Deposit Accounts: Perfected in 1 of 3 ways: (1) If the secured creditor is the bank where the deposit account is held, it has control; (2) Primary method - Control agreement in which the bank agrees to follow the secured creditor’s instructions with respect to the money in the account; OR (3) The creditor can become the bank’s customer with respect to the deposit account by adding the creditor’s name to the account.

Question 29

Control of investment property for perfection purposes

Answer 29

Control of Investment Property: Depends upon which of 3 specific forms of holding the investment represents: (1) *Certificated Securities: If an individual’s stock or bond holding is represented by a paper certificate in the possession of the D or the D’s broker. - The way to achieve control over a certificated security: is by taking delivery. Taking delivery means →transfer of possession of the certificate to the creditor and proper indorsement or re-registration in creditor’s name on the company’s books. - Stock = fractional ownership percentage of a company - Bond = Fractional participation in a loan made to a company. (you get your money back) (2) Uncertificated Securities: Only way to achieve control→ “delivery,” official transfer on issuer’s books into the creditor’s name. - No certificate involved, there is just a computer entry on the registrar’s books for that company indicating you own X amount of shares of that company’s stock (3) *Indirect Holdings - Securities Accounts and Security Entitlements: Securities held through broker (Charles Schwab or A.G. Edwards) in securities account. Control just like control over deposit account (see above): i.e. When Debtor has a securities account with a broker, to prefect by control treat it like a commercial deposit account - 1) Broker holding the entitlement or account automatically has control; - 2) **Control agreement, where broker agrees to follow C’s orders; OR - 3) C listed as securities account holder (on the books of the broker). - MEE TIP: look for signals with respect to what the investment property looks like to tell you how control is achieved

Question 30

Define Proceeds and its perfection if included in the financing statement

Answer 30

Occurs where the C has a security interest and it is perfected only by operation of law. As a matter of the proceeds rules, not only does the C have a security interest in the proceeds but it is perfected. Automatic attachment to proceeds of collateral (and proceeds’ proceeds, etc.). If interest in original collateral perfected, automatic interest in proceeds also perfected automatically for a 20-day grace period. After that, perfection continues in 3 ways without further action (filing a new UCC-1) by the creditor: 1. The original financing statement might describe the proceeds: meaning the UCC-1 describes the category in which the proceeds fall into. (e.g., by category, “inventory” or “equipment” - not the word “proceeds”) [unlikely]

Question 31

What if the financing statement does not include proceeds? (rules for cash proceeds)

Answer 31

If the proceeds are NOT described in the original financing statement. So, is the secured C’s S.I in the proceeds perfected? It can be perfected as a matter of law in two ways: If the proceeds are identifiable cash proceeds: (1) Secured C’s security interest→ continuous automatic perfection: (2) Cash proceeds include: money, checks, deposit accounts, or the like - Look for the phase “ D sells inventory, gets a check and deposits it” you should know C has a S.I and its perfected in the deposit account

Question 32

What if the proceeds are something other than cash proceeds?

Answer 32

But what if the proceeds are something other than cash proceeds? (Particularly an account) Then, Use the 3 part test to see if the S.I is perfected If the D sells inventory in exchange for an account and the UCC-1 doesn’t mention accounts is the secured Cs automatic interest in that account as proceeds of the inventory automatically perfected as well? Answer – yes b/c of the 3 part test Perfection as a matter of law per three-part test: IF (1) The original security interest was perfected by filing, (almost always true) (2) The proceeds are collateral in which a security interest can be perfected by filing in the same office as the original filing, (almost always true) and (3) The proceeds were not acquired with cash proceeds. (meaning there was a direct exchange for the original collateral and the proceeds, no cash involved)

Question 33

Lien Creditors

Answer 33

2. Lien Creditors: creditors who acquire right through judicial process; e.g., by serving a Citation to Discover Assets to enforce a judgment against the debtor, or the trustee in bankruptcy (TIB) of the debtor’s bankruptcy case: “lien creditors.” If the secured creditor’s interest is perfected before the lien arises (CDA is served or bankruptcy petition filed), the secured creditor wins; if not, lien creditor wins. - First in time to get their right

Question 34

As between security interest holders, who gets priority

Answer 34

A. First to File (or Perfect Otherwise): After attachment and perfection, the last question is easy: Who has top priority to the value of the collateral if there’s not enough for everyone? 1. As btw 2 Perfected Secured Creditors: first creditor to have filed a financing statement wins. a. If even the first to file C interest was created later b. (except control of investment property or possession of notes or chattel paper) - Beats out earlier filed Creditor

Question 35

Priority: Fixtures

Answer 35

3. Fixtures: Even if a fixture filing was not made (rather, normal UCC filing), perfection by any method (e.g., normal filing) is effective with respect to “lien creditors.” - i.e. Any method of filing by a voluntary Creditor for fixture will beat a later arising lien Creditor

Question 36

Priority: Buys in Due Course

Answer 36

Buyers in Ordinary Course (BIOC): A perfected security interest follows collateral into the hands of a buyer with one important exception: Inventory sold in the ordinary course of the debtor’s business is generally no longer subject to the debtor’s lender’s security interests. - In other words, Buyer of inventory in the ordinary course D’s of business (selling that inventory) takes free even over a prior perfected security interest - Remember: Secured Creditor vs. BIOC – BIOC wins - Note: buyers who pay for and take delivery of collateral before perfection are unaffected by security interest

Question 37

Priority Rules Specifically for PMSI

Answer 37

PMSI exceptions to first-in-time rule for perfection. 1. PMSI IN CONSUMER GOODS: automatically perfected 2. NON-INVENTORY COLLATERAL (EQUIPMENT): PMSI in non-inventory collateral will beat everybody if its perfected within 20 days of delivery of collateral to the debtor - Beats all other secured creditors and lien creditors. - If these conditions not met, ordinary “first-to-file” rule still applies. 3. PMSI *Inventory Collateral: Must do 2 things before the collateral is DELIVERED to the debtor: (1) Perfect the PMSI AND (2) Notify any secured creditor with a filed-perfected competing interest in after- acquired inventory in writing that PMSI creditor has/expects to have a PMSI in described inventory.

Question 38

Priority Rules for PMSI in Inventory

Answer 38

* Inventory Collateral: To get super-priority in inventory, a PMSI creditor must do 2 things before the collateral is delivered to the debtor: (1) Perfect the PMSI AND (2) Notify any secured creditor with a filed-perfected competing interest in after- acquired inventory in writing that PMSI creditor has/expects to have a PMSI in described inventory.

Question 39

Priority Rules for PMSI in Non-Inventory

Answer 39

NON-INVENTORY COLLATERAL = EQUIPMENT: PMSI in non-inventory collateral will beat everybody if its perfected within 20 days of delivery of collateral to the debtor - Beats all other secured creditors and lien creditors. - If these conditions not met, ordinary “first-to-file” rule still applies.

Question 40

Priority for PMSI in consumer goods

Answer 40

PMSI IN CONSUMER GOODS: is automatically perfected and therefore will likely have priority over anyone else

Question 41

Redemption

Answer 41

debtor can “redeem” the repossessed collateral (take it back) by paying off the debt plus the creditor’s repossession expenses and fees. The debtor has to exercise her right to redeem before that right is formally foreclosed or debtor waives, only after default.

Question 42

In a foreclosure or other sale, what is required of the creditor to give effective notice?

Answer 42

Notice: creditor must send notice to a number of people, and creditors’ failure to do this properly is a common problem on the bar exam and in the real world. a. Notice to (1) the debtor, (2) any secondary obligor (guarantors), and (3) if the collateral isn’t consumer goods, other parties whom the disposing creditor actually or constructively (through UCC-1 filing) knows have interests in the collateral. Debtor can waive notice, but only ¬¬after default. b. Notice isn’t required if the collateral is perishable, will depreciate quickly, or is of a type customarily sold on a recognized market (stock) c. The notice must be sent “reasonably” timely. In non-consumer cases, 10 days before disposition is sufficient, with no specific rule for consumer cases.

Question 43

Disposition of Sale Proceeds

Answer 43

In order: (1) Creditor’s costs of sale, including prep, (2) Secured debt to disposing creditor, (3) Debt to subordinate secured creditor who notifies the disposing creditor of its interest, and (4) Any excess returns to the debtor, though more commonly the debtor remains liable for any deficiency.

Question 44

Strict Foreclosure

Answer 44

Strict” Foreclosure: Creditor negotiates to buy collateral from the debtor: 1. Proposal: The creditor sends the debtor (and other parties, see below) a “proposal” for retaining the collateral in exchange for forgiveness of some or all of the debt. 2. Notice: Creditor must also notify other creditors whom the creditor actually or constructively (through UCC-1 filing) knows have interests in the collateral (along with secondary obligors for partial satisfaction proposals). 3. Assent: Proposal accepted if, within 20 days of sending, debtor assents by failure to make written objection, and no other notice party objects. a. If the proposal is for only partial satisfaction, the debtor must send a record of assent. 4. Consumer Exceptions: a. In consumer cases, three exceptional rules apply: (1) Only full satisfaction of the debt (no partial satisfaction proposals); (2) Collateral cannot be in the debtor’s possession at time of proposal; and (3) No strict foreclosure for consumer goods if the debtor has paid 60% of the principal amount of the secured loan (debtor can waive this restriction after default).

Question 45

Remedies for Creditors failure to comply with the enforcement of the default

Answer 45

Actual damages for anyone actually injured. 1. Loss of Deficiency: creditor must prove it complied with rules and a deficiency nonetheless remains. In non-consumer cases, presumed that a commercially reasonable sale would have left no deficiency. No clear rule in consumer cases, courts vary. 2. Statutory Damages in Consumer Cases: damage award in every violation (or series of violations) in consumer cases: at least 10% of the original principal of the secured loan plus all interest paid over the life of the loan (the “credit service charge”).