Secured Transactions

Question 1

Debtor

Answer 1

The person who owes payment

Question 2

Secured party

Answer 2

A lender, seller or other person in whose favor there is a security interest

Question 3

Security agreement

Answer 3

The agreement between the debtor that creates the security interest in the debtor’s property

Question 4

Security interest

Answer 4

Dormant interest until default. An interest in personal property or fixtures which secures payment or performance of an obligation. It is a contingent property interest in the debtor’s collateral that the debtor grants to the creditor. When the contingency, which is default, occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral.

Question 5

Collateral

Answer 5

The property subject to a security interest (here, inventory). Collateral is property that the secured party can repossess upon default to ensure that the debt is paid.

Question 6

Seller-financed purchase money security interest

Answer 6

1. Secured party sells debtor collateral on credit and
2. retains a security interest in the item sold. D buys inventory from B on credit and B retains a security interest in the inventory.

Question 7

Financer-financed purchase money security interest

Answer 7

1. A loan to a debtor for the purpose of enabling the debtor to buy specific collateral,
2. which is used by the debtor to acquire the specific collateral, and
3. the creditor takes a security interest in that collateral.

Question 8

Financer-financed PMSI does not exist if…

Answer 8

Debtor does not use that exact money to purchase the item. Still creates a security interest but doesn’t create a PMSI.

Question 9

After-acquired property clause

Answer 9

A security agreement is just a contract btw D and C. Can add clause (AAPC): A secured party often will want to obtain a security interest not only in debtor’s present property, but also in property that the debtor will obtain in the future. This is permissible.

Question 10

Future advance clause

Answer 10

A secured party often contemplates making future loans to the debtor and wants to secure these future advances in the present security agreement. This is permissible. Security agreements typically contain a future advance clause, in which case a new security agreement is not needed when a future advance is made. “Your explorer is not only going to be loan for loan i’m making you today, but also collateral for any loan I might make you in the future.”

Question 11

Attachment

Answer 11

The security interest has been created. Deals with those steps legally required to give the secured party a security interest in the collateral that is effective as against the debtor. Once a security interest attaches, it is effective against the debtor and the creditor has all of the rights of a secured creditor under Article 9. A creditor is not a secured creditor until attachment. Compare with perfection (rights against other creditors).

Question 12

Perfection

Answer 12

Steps necessary to create security interest effective against the world (instead of just debtor). Deals with those steps legally required to give the secured party an interest in the collateral that is effective as against the world. In general, perfection is the process of giving public notice of the security interest to the world. Use financing statement to perfect.

Question 13

Financing statement

Answer 13

Document generally used to provide public notice of the security interest, and so to perfect the security interest.

Question 14

Goods

Answer 14

Tangible, moveable, personal property. All things which are movable at the time the security interest attaches and include the unborn young of animals and growing crops. Goods also include fixtures.

Question 15

Goods classifications

Answer 15

1. Consumer goods
2. Equipment
3. Farm products (must be in possession of farmer)
4. Inventory

Question 16

Consumer goods

Answer 16

Used or bought for use primarily for personal, family or household purposes.

Question 17

Equipment

Answer 17

Used or bought for use in business.
This is also the default category for goods. In other words, Article 9 says that if the collateral is a good, and it doesn’t fit the definition of consumer goods, inventory, or farm products, it gets classified as equipment.

Question 18

Farm products

Answer 18

Crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk and eggs) if they are in the possession of a debtor engaged in farming operations.

Question 19

Inventory

Answer 19

Held by a person who holds them for sale or lease or to be furnished under service contracts;
materials used or consumed in a business in a short period of time.

Question 20

Semi-intangible and intangible property (8 types)

Answer 20

1. Instruments
2. Documents
3. Chattel paper
4. Investment property
5. Accounts
6. Deposit accounts
7. Commercial tort claims
8. General intangibles

Question 21

Instruments

Answer 21

Pieces of paper representing the right to be paid money, like promissory notes, drafts (e.g., checks), and certificates of deposit.

Question 22

Documents

Answer 22

A document that represents the right to receive goods (e.g., bill of lading, warehouse receipt).

Question 23

Chattel paper

Answer 23

Promise to pay + Security interest. A record or records which evidence both a monetary obligation and a security interest in or a lease of specific goods. A “record” is information that is stored in either a tangible medium (e.g., written on paper), or an intangible medium (e.g., electronically stored). Chattel paper that is stored in an electronic medium also is called “electronic chattel paper.”

Question 24

Investment property

Answer 24

Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items.

Question 25

Accounts

Answer 25

Right to payment for property sold and services rendered. Includes a right to payment [not evidenced by an instrument or chattel paper] for property sold or services rendered. A contractual obligation arising from a loan of money is not an account—it is a general intangible.

Question 26

Deposit accounts

Answer 26

An account maintained with a bank. Note: In general, Article 9 applies to security interests in nonconsumer deposit accounts and account monies that are claimed as proceeds of other collateral.

Question 27

Commercial tort claims

Answer 27

A claim arising in tort with respect to which (1) the claimant is an organization (e.g., partnership or corporation), or (2) the claimant is an individual and the claim arose in the claimant’s business or profession and does not include damages for personal injury or the death of an individual.

Question 28

General intangibles

Answer 28

Any personal property not coming within the scope of the other definitions (e.g., software, patent and trademark rights, copyrights, goodwill). A general intangible under which the account debtor’s principal obligation is a monetary obligation is a payment intangible.

Question 29

Three reqs for attachment:

Answer 29

1. Security agreement (99% of time, SA is in writing) 2. Value given 3. Debtor has rights in collateral

Question 30

Ways to create a security agreement

Answer 30

99% of time, in writing. Otherwise: 1. Possession: If the collateral is in the possession of the secured party pursuant to an oral security agreement (e.g., I’ll loan you $50 but we agree that I will keep your watch until you pay me back; if you don’t pay me back, we agree that I can sell your watch), this meets the “security agreement” requirement. Such an arrangement is called a pledge. 2. Control: if the collateral is a nonconsumer deposit account, electronic chattel paper, or investment property, the security agreement may be evidenced by control.

Question 31

Reqs of written sec agreement

Answer 31

1. an intent to create a security interest (no magic language necessary) 2. authenticated by debtor (sign but basically any marking) 3. description of the collateral (reasonably identify--normal vocab or A9 categories like chattel papers; NOT "all debtor's property")

Question 32

Value given for attachment

Answer 32

Common law consideration, AND past consideration is enough. Both parties have to give value. Every debtor is giving value bc promises to repay debt!

Question 33

Debtor rights in collateral

Answer 33

Debtor must have RIGHTS in the collateral, can't offer up random bus across the street. Must own the property.

Question 34

When does attachment occur?

Answer 34

The instant the three requirements are complete, whichever element comes last.

Question 35

Future advance clause

Answer 35

Loan with future advance clause can encompass security for future loans.

Question 36

After-acquired property

Answer 36

Without explicit AAP clause, sec interest only reaches collateral debtor had rights in AT TIME of signing sec agreement. Have to be explicit that it encompasses property acquired later.

Question 37

When will courts imply an after-acquired property clause?

Answer 37

When the collateral is of a type that is rapidly depleted and replenished (e.g., inventory or accounts). Bails a creditor out bc inventory turns over rapidly.

Question 38

Proceeds

Answer 38

“Proceeds” includes whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. When a piece of secured inventory is sold, the IDENTIFIABLE proceeds are AUTOMATICALLY secured property. This is always true unless the parties otherwise agree.

Question 39

What if cash proceeds are commingled with other cash and can't distinguish?

Answer 39

Lowest intermediate balance test: Determines what money remaining in commingled bank account is identifiable. Lowest amount in account between time of deposit and time test is applied. Can't be above amount of proceeds.

Question 40

Methods of perfection (5)

Answer 40

1. Automatic perfection 2. Possession of collateral by secured party 3. Perfection by control 4. Notation of lien on certificate of title 5. Filing a finance statement

Question 41

Perfection requires:

Answer 41

1. Attachment | 2. One of the five methods of perfection

Question 42

Automatic perfection

Answer 42

Automatically perfect upon attachment. Most common: PMSI in CONSUMER goods not otherwise covered by title statute (car/truck)

Question 43

Possession of collateral by secured party

Answer 43

The security interest is perfected from the moment of possession by secured party until possession is relinquished. Impossible with items you can't take possession of (accounts, electronic chattel paper, etc.)

Question 44

Perfection by “control”

Answer 44

Security interests in investment property and electronic chattel paper may be perfected by control. Security interests in nonconsumer deposit accounts can only be perfected by control (account either within creditor bank, you put the creditor as a name on the account, or you tell bank that creditor can take money w/o permission ("control agreement")).

Question 45

Notation of lien on certificate of title

Answer 45

The ONLY way to perfect a security interest in an item covered by a certificate of title statute (e.g., cars and trucks) is for the secured party to get the relevant governmental authority to note the secured party’s lien on the certificate of title. Car dealers can perfect by just filing ONE piece of paper (financing statement) instead of title for every single car.

Question 46

Filing a financing statement (UCC-1) contents

Answer 46

1. Debtor's name 2. Description of collateral (same as sec agree EXCEPT here super generic descriptions OK including statements that might encompass after-acquired property) 3. Secured party's name (errors OK bc we search for debtor, not creditor) 4. If real property, real-property related financing stmt 5. No sig required on financing stmt but debtor must sign some doc, no sig required if debtor signed sec agreemt 6. Can file sec agreemt as financing stmt if it contains all of the above

Question 47

Debtor's name under financing statement

Answer 47

For individuals, name on unexpired DL in the jdx, no trade names Mistakes okay as long as not seriously misleading, spelling errors usually fatal If office accidentally puts creditor as debtor, it's okay. If debtor changes name, still okay to perfect w/in four months after change. Not later than four months unless name amended w/in four month period.

Question 48

Where to file financing statement

Answer 48

If real property, county where property is. Everything else, sec of state.

Question 49

Multistate secured transactions

Answer 49

General rule, file in state where debtor is domiciled. Unorganized businesses (partnerships and llps) where business is.

Question 50

What if debtor moves across state lines

Answer 50

Secured party will become unperfected four months after debtor's move unless new financing statement filed w/in 4 months of move

Question 51

Collateral transferred across state lines

Answer 51

Secured party will become unperfected one year after collateral moves unless files financing statement filed w/in one year.

Question 52

How long is financing statement effective and how extended?

Answer 52

5 years from date of filing, can file continuation statement w/in last 6 months of financing stmt life (not another financing statement)

Question 53

Perfecting a security interest in proceeds

Answer 53

If a secured party has a perfected security interest in collateral, a secured party automatically has a perfected security interest in whatever proceeds the debtor receives in exchange for that collateral for 20 days. To remain perfected in those proceeds beyond 20 days, the secured party must take new action to perfect its interest unless: 1. the proceeds are identifiable cash proceeds; or 2. Same office rule: Original collateral was perfected by financing stmt, sec interest in proceeds would be perfected by filing in same place (sec of state), and the proceeds were not purchased with cash proceeds (ex: debtor sells inventory on credit and creates accounts, bartering, swapping inventory for equipment)

Question 54

How to terminate agrmt

Answer 54

When there is no outstanding obligation of the debtor and no commitment on the part of the secured party to make further advances, the secured party, upon receiving an authenticated demand by the debtor, must within 20 days provide the debtor with a termination statement to the effect that the secured party no longer claims a security interest under the financing statement.

Question 55

What if debtor changes their use for the collateral (I.e. equipment turns into inventory)

Answer 55

Creditor doesn't have to do anything to perfect financing stmt, even if it's now seriously misleading.

Question 56

Priority

Answer 56

Secured party + third party are claiming same collateral

Question 57

Perfected secured party v. perfected secure party

Answer 57

First to file OR perfect

Question 58

Unperfected secured party v. unperfected secure party

Answer 58

Whoever attaches first

Question 59

Perfected secured party v. unperfected secure party

Answer 59

Perfected wins

Question 60

Priority rule for PMSI in goods other than inventory or livestock (ex: equipment, consumer goods, etc.)

Answer 60

Has priority over conflicted security interest in same goods or identifiable proceeds IF perfected w/in 20 days of debtor getting possession

Question 61

Priority rule for PMSI in inventory or livestock

Answer 61

Has priority over conflicting sec interest if: 1. Before debtor receives possession 2. Sends authenticated notice to other holders, and 3. Notice received within five years of debtor getting possession

Question 62

seller-financed pmsi v. fincancer-financed pmsi

Answer 62

seller-financed wins

Question 63

Priority rule for investment property

Answer 63

(1) Perfection by control beats other perfection methods (2) Earlier control beats later control (3) A security interest granted to a debtor’s intermediary has priority over a security interest granted by the debtor to another secured party (unless the intermediary agrees otherwise). (4) Except as provided in (1), (2), or (3) above, the first to file or perfect rule governs priority questions.

Question 64

Priority rules for deposit accounts

Answer 64

(1) A security interest perfected by control has priority over a security interest perfected via proceeds. (2) If conflicting interests each were perfected by control, they rank according to the time of obtaining control. (3) A secured party who has obtained control by putting the deposit account in its own name has priority over all other secured parties with control. (4) A bank that has control because it maintains the deposit account has priority over all other secured parties with control except a secured party who has obtained control by putting the deposit account in his name.

Question 65

Priority rules for secured party v. buyer

Answer 65

General rule: If you buy something with a security interest on it, the security interest stays on it. There are a few exceptions: 1. Sale authorized by creditor free of security interest. May be express or implied. Implied exists when inventory sold to ordinary consumer if sec agreemt is silent. Implied also exists through acquiescence (lots of sales even tho sec agreemt says can't sell, and creditor doesn't object). 2. Unauthorized sales/BIOC (see later card) 3. Buyers not in ordinary course of business (see later card) 4. Consumer to consumer sales (see later card(

Question 66

Unauthorized sales/Buyer in ordinary course exception

Answer 66

A buyer in the ordinary course of business takes free of a security interest created by his seller even though the security interest is perfected and/or even though the buyer knows of its existence. A BIOC means a person who buys goods in good faith, without knowledge that the sale violates the rights of another person (usually the secured party) in the goods, and is buying from a person in the business of selling goods of that kind..

Question 67

Buyer not in ordinary course of business

Answer 67

Take subject to perfected security interests. They take free from unperfected security interests (and unperfected agricultural liens) unless they KNOW of the security interest.

Question 68

Consumer to consumer sales

Answer 68

buyer takes free of a security interest even though it is perfected if he buys without knowledge of the security interest, for value, and for his own personal, family, or household purposes, unless prior to the purchase the secured party has filed a financing statement covering such goods (automatic perfection for PMSI in consumer goods does not affect)

Question 69

Secured party v. judgment lien holders

Answer 69

Time of perfection of sec interest v. time of seizure (levy) by sheriff. Whichever is first wins.

Question 70

judgment lien holder

Answer 70

Someone with a judgment against a debtor who needs to pay them, got sheriff to seize property

Question 71

PMSI v. Lien Creditor

Answer 71

If secured party files w/ respect to PMSI w/in 20 days after debtor receives possession, gets priority over lien creditor that arises btw time interest attaches and time of filing.

Question 72

Secured party v. statutory lien claimant

Answer 72

Statutory lien beats even a perfected security interest so long as statutory lienholder maintains possession.

Question 73

Statutory lien claimant

Answer 73

Some one who gets a lien through statute (like auto mechanic who gets lien on car when customer doesn't pay)

Question 74

Default

Answer 74

The right of the secured party to proceed against collateral when debtor violates security agreement. 1. Look for late or missed payments 2. Also look for a possible waiver by the secured party of late or missed payments.

Question 75

Self help reposession

Answer 75

Allowed as long as they don't breach the peace

Question 76

What is a breach of the peace

Answer 76

Any conduct by the secured party that has the potential to lead to violence is a breach of the peace. Generally, physical presence by the debtor (or a representative of the debtor) plus verbal objection is enough to create a breach of the peace. Unauthorized entry into a home is likely a breach. Doesn't matter if sec agreemt authorizes.

Question 77

Strict foreclosure

Answer 77

After default and repossession, the secured party may propose retaining the collateral in full or partial satisfaction of the debt. But if any other creditor with a lien on that item objects or the debtor objects, you can't keep it. You have to sell it.

Question 78

Resale of collateral

Answer 78

After default, the secured party may sell, lease, license, or otherwisedispose of the collateral in its condition when repossessed or afterreasonable preparation. The sale may be either public (auction) or privateand may be by one or more contracts. The sale discharges the security interest under which the sale is beingmade and all subordinate security interests. The purchaser, however, is stillsubject to superior security interests.

Question 79

Resale of collateral: Commercially reasonable sale

Answer 79

Every aspect of the sale (including the method, manner, time, place and terms) must be commercially reasonable.

Question 80

Resale of collateral: Failure to comply with Code rules (not commercially reasonable)

Answer 80

A secured party is liable for the actual damages caused by failure to follow ANY of the Code’s rules. There's a minimum recovery for consumer goods (kind of like a penalty). If the secured party fails to follow the Code’s rules on default, there is a rebuttable presumption that the sale proceeds equal the amount of the debt. In other words, the secured party presumptively loses any deficiency.

Question 81

Debtor's right to redeem (after default/repossession)

Answer 81

Acceleration clause: Have to pay creditor everything creditor is owed before creditor sells your property.

Question 82

Fixtures

Answer 82

Personal property attached to real estate with the intent that it become a permanent part of the real estate

Question 83

Perfecting a security interest in a fixture

Answer 83

Fixture filing (not just financing statement) normally needed. 1. Info from financing statement 2. description of real property 3. name of owner Make it as a county filing bc it's real estate

Question 84

Rights on default for fixture

Answer 84

If sec interest in fixture has priority, creditor can remove the fixture.

Question 85

Fixtures: Secured party v. subsequent real estate interest

Answer 85

A security interest in fixtures has priority over any real estate interest that arises subsequent to the perfection of the security interest by fixture filing.

Question 86

Fixtures: Secured party v. prior real estate interest

Answer 86

General rule: A prior real estate interest that is properly recorded has priority over a security interest that subsequently arises. Exception: A purchase money security interest takes priority over an earlier in time realty interest if it is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter.

Question 87

Accessions

Answer 87

Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost (e.g., tires on a car).

Question 88

Perfection of accession

Answer 88

If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral.

Question 89

Priority of accessions

Answer 89

Same as earlier rules (including pmsi exceptions) EXCEPT: A security interest in an accession is subordinate to a security interest in the whole which is perfected by compliance with the requirements of a certificate-of-title statute.

Question 90

Top 5 things to know:

Answer 90

- Article 9 categories of collateral - Attachment reqs (3) and sub-requirements for sec agreemt req - Five ways to perfect sec interest - Priority rules - PMSI rules