Priority/Accessions/Secured Party and Debtor's Rights/Remedies

Question 1

Perfected Interest vs. Unperfected Interest

Answer 1

A perfected interest has priority over a conflicting unperfected interest

Question 2

Unperfected interest vs. Unperfected Interest, who wins?

Answer 2

The first creditor to attach will prevail.

Question 3

Perfected Interest vs. Perfected Interest, who wins?

Answer 3

Rule of “first in time, first in right” controls, first to perfect has priority.

Question 4

PMSI (in consumer goods) vs. Perfected/Unperfected Interest, who wins?

Answer 4

A PMSI in consumer goods enjoys automatic perfection, so it has priority.

Question 5

PMSI (non-consumer goods) vs. Perfected/Unperfected Interest, who wins?

Answer 5

A PMSI in non-consumer goods requires filing a financing statement, so the standard priority rules apply (depending if the interest was perfected or unperfected).

Question 6

What is the priority of possessory liens arising by law?
(i.e., mechanic’s lien)

Answer 6

A possessory lien on goods has priority over a security interest in goods UNLESS the lien is created by a statute that states otherwise.

Question 7

What is a possessory lien interest?

Answer 7

1. secures payment/performance of an obligation for services or materials furnished by a person in the ordinary course of business;
2. is created by statute or rule of law in favor of the person; AND
3. whose effectiveness depends on the person’s possession of the goods

Question 8

When does a judgment lien have priority over a conflicting security interest?

Answer 8

ONLY if the person became a judgment lien creditor before the security interest was perfected.

ALSO applies to future advances secured more than 45 days after the person became a lien creditor unless advance is made without knowledge of the lien, but does not apply to a buyer of accounts or a consignor.

Question 9

Priority of Fixtures

Answer 9

An ownership interest in real property has priority over security interests in fixtures unless an exception applies.

Question 10

Fixture Exception #1

Answer 10

Perfected PMSI in a Fixture has priority if:
1. debtor has an interest of record or is in possession of the real property;
2. ownership interest arose before the the goods became fixtures; AND
3. PMSI was perfected before the goods became fixtures (or within 20 days thereafter)

Question 11

Fixture Exception #2

Answer 11

1. filing a financing statement that covers goods that are or will become fixtures;
2. satisfies the general rules for financing statements (names of debtor/secured party, indicates collateral); AND
3. satisfies real property filing rules: (a) state that it covers a fixture; (b) filed in real property records, and (c) provides the name of the record owner (if debtor does not have an interest of record in the real property)

Question 12

What are accessions?

Answer 12

Goods that are physically united with other goods, but still retain their separate identity.

Security interest in the separate goods continues in the accession collateral.

If perfected when the collateral became an accession, the interest remains perfected.

Question 13

What is comingling?

Answer 13

An accession of two goods that are each subject to a different security interest.

General priority rules govern except when an interest is perfected by compliance with a certificate of title statute (that takes priority over all other interests)

Question 14

What are a secured party’s rights upon default?

Answer 14

May:
1. take possession of the collateral; and/or
2. without removal, render equipment unusable and dispose of collateral on a debtor’s premises

Question 15

Does a secured party have a right to dispose of collateral?

Answer 15

After default, a secured party may sell, lease, or otherwise dispose of the collateral in any reasonably commercial manner.

Question 16

What notice is required when a secured party disposes of collateral after a default?

Answer 16

Must send an authenticated notification of the disposition to the debtor and any secondary obligor UNLESS the collateral is:
1. perishable;
2. threatens to decline speedily in value; or
3. is customarily sold on a recognized market.

The secured party will be liable for damages for failing to provide notice even if the debtor had actual knowledge of the disposition.

Question 17

What is the disposition at a foreclosure sale?

Answer 17

1. transfers all the debtor’s rights in the collateral to the transferee for value;
2. discharges the security interest; AND
3. discharges any subordinate security interests (senior interests are NOT discharged)

A transferee that acts in good faith takes free of the rights of the debtor even if the secured party failed to comply with the rules governing dispositions.

Question 18

Commercially reasonable sale

Answer 18

When the sale is made:
1. in the usual manner on any recognized market;
2. at the current price in any recognized market at the time of disposition; OR
3. in conformity with reasonable commercial practices among dealers in similar property

Question 19

Can a secured party purchase the collateral from default of the debtor?

Answer 19

Unless otherwise agreed, the secured party may purchase the collateral at a:
1. public sale; OR
2. private sale, but ONLY if the collateral is: (a) customarily sold on a recognized market; or (b) the subject of widely distributed standard price quotations.

Question 20

What are the secured party’s rights to collect from an Account Debtor?

Answer 20

The secured party has a right to collect a debt directly from an account debtor (the person obligated on an account, chattel paper, or general intangible), if so agreed OR after default.

Question 21

What are the Debtor’s rights upon default?

Answer 21

If the secured party failed to comply with applicable rules, it is liable to the debtor for:
1.Actual damages (includes expectation damages and may include losses from inability to obtain or the increased cost of alterative financing;
2. $500 in statutory damages
3. Civil penalty (applies to consumer goods) and debtor may recover damages for: loss; and either the amount not less that (a) the credit service charge plus 10% of the principal obligation OR (b) the time-price differential plus 10% of the cash price; and
4. Restrain collection - a court may order or restrain collection, enforcement, or a proper sale of the collateral if a secured party is not proceeding in accordance with the law.

Question 22

What is the Right of Redemption?

Answer 22

Debtor has right to repay and reclaim property held by the secured party.

Question 23

To redeem collateral, what must the debtor do?

Answer 23

1. fulfill all obligations; and
2. pay reasonable expenses and attorney’s fees

Question 24

When may redemption occur?

Answer 24

Any time before a secured party has:
1. collected the collateral;
2. disposed of the collateral (or entered into a contract to dispose of collateral); or
3. accepted the collateral in full/partial satisfaction of the debt

Question 25

When may a deficiency judgment be limited?

Answer 25

When a secured party fails to comply with UCC Article 9

Question 26

For Consumer Goods Transactions, what is the absolute bar rule?

Answer 26

In some states, this rule will bar the secured party from collecting any deficiency.

Question 27

For Consumer Goods transactions, what is the Rebuttable Presumption Rule?

Answer 27

it is presumed that the proceeds of sale upon default equals the total debt owed unless the secured party proves otherwise

Question 28

What is the primary option for limiting deficiency judgments for a secured party’s failure to comply with UCC Article 9?

Answer 28

left for the court to determine

Question 29

How do courts limit deficiency judgments for non-consumer transactions where the secured party failed to comply with UCC Article 9

Answer 29

1. Debtor places secured party’s compliance at issue; and
2. the secured party fails to prove disposition was proper; THEN
3. the deficiency amount recoverable is limited to an amount by which the total debt exceeds the greater of:
   (a) proceeds of the disposition; or
   (b) amount that would have been realized had the secured party complied with UCC Article 9

Total proceeds = total debt unless proven compliance would yield less $$