Secured Transactions Flashcards
1
Q
What law governs secured transactions?
A
UCC Article 9
2
Q
What should you look for in a secured transaction question?
A
1) a credit sale or a loan AND
2) an agreement that creates a lien on debtor’s collateral to secure the debt
3
Q
Definition of debtor?
A
The person who owes payment or performance of the obligation secured. Don’t have to worry about the debtor/obligor distinction for the bar exam
4
Q
Definition of the secured party?
A
The lender, seller, or person who has the security interest in their favor
5
Q
Definition of security agreement?
A
Security agreement is the agreement between the debtor and the secured party that creates the security interest. Just a special kind of contract.
6
Q
Definition of security interest?
A
An interest in personal property or fixtures that secures payment or performance of an obligation. It’s a contingent property interest in the collateral that springs to life when the default occurs
7
Q
Definition of collateral?
A
The property subject to the security interest
8
Q
What is a purchase money security interest?
A
PMSI is a security interest that is created either:
1) by a seller of goods on credit in the goods sold
OR
2) created by a lender of $ to a debtor who uses the $ to buy specific property with that specific $ which property the collateral for the loan
9
Q
What is an after acquired property clause?
A
A secured party can take an interest in the property the debtor has not and also property that they acquire in the future (typical arrangement)
10
Q
What is a future advance clause?
A
A future advance clause allows future loans to be made under the present security agreement. No need for future security agreements once one with a future advance clause is signed
11
Q
What is attachment?
A
Attachment refers to the legal steps needed to give a secured party a security interest in the collateral that is effective AGAINST THE DEBTOR
12
Q
What makes a creditor a secured creditor?
A
Attachment of a security interest
13
Q
What is perfection?
A
Perfection refers to the legal steps required to make a security interest effective AGAINST THIRD PARTIES (gives public notice)
14
Q
What is a financing statement?
A
A document used to provide public notice of the security interest/perfect the security interest
15
Q
*HIGHLY TESTED
What are goods under Article 9?
What are the 4 subtypes of goods?
What is the classification based on?
A
All tangible, movable, personal property PLUS fixtures, unborn animals, and growing crops
4 Types:
1) Consumer goods (goods used/bought for personal/family/household purposes)
2) Equipment (goods used/bought for use in a business or any good that doesn’t fit one of the other 3 types - it’s the default)
3) Farm Products (crops/livestock products thereof if in possession of the farmer debtor)
4) Inventory (goods used/bought for sale or lease OR used/consumed in a business in a short period of time including raw materials)
The classification is based on how the DEBTOR USES the collateral (not the nature of the collateral)
16
Q
If you think a piece of collateral falls into more than one UCC category on the bar exam what should you do?
A
You should state the couple of things you think it might be, give the definitions and say why.
17
Q
*HIGHLY TESTED
What are the 8 types of intangible or semi-intangible collateral? What is the classification based on?
A
The classification is based on the NATURE of the collateral (not how the debtor uses it)
1) Instruments (paper representing the right to be paid $ - promissory notes, CDs)
2) Documents (right to receive goods - bill of lading/warehouse receipt)
3) Chattel Paper (record which evidences a monetary obligation AND a security interest/lease in specific goods. Record is a permanent storage)
4) Investment Property (stocks, bonds, etc.)
5) Accounts (right to payment for property sold/services rendered, but debtor’s owing for a loan is a payment intangible which is a general intangible)
6) Deposit Accounts
7) Commercial tort claims (tort claims by orgs - or - by individuals related to their business and not for personal injury/death)
8) General Intangibles (default category - personal property not within the scope of other definitions - patents, trademarks, copyrights, goodwill, payment intangibles= debtor’s owing of $ on a loan or a contract where $ is owed)
18
Q
Does Art 9 apply to noncommercial tort claims?
A
Only as proceeds of other collateral
19
Q
What is the difference in an instrument, an account, a payment intangible, and a general intangible?
A
An account is a receivable from goods sold or services rendered.
An instrument is a right to be paid $ like a promissory note or a check
A payment intangible is the debt of an account debtor that is principally monetary like a loan of $. Type of General Intangible
20
Q
Not highly tested*
To what does Art 9 apply?
A
~ To a transaction that creates a security interest in personal property or fixtures by contract (regardless of phrasing/form
- Seller’s retention of title in a sale of goods
- Nonpossessory agricultural liens (perfection and priority only)
- Sales of accounts, chattel paper, payment intangibles, promissory notes
- Commercial consignment (consignment where the consignee’s creditors might think the consigned property is owned by the debtor and not the consignor)
- Secured sale disguised as a lease (if at time of least, not reasonably likely that lease will end and lessor will get goods back with meaningful economic value left, then disguised sale)
21
Q
Do you have to use the terms article 9 or security interest to create a security interest?
A
No, and conversely, not using them does not allow you to dodge the formalities of Art 9 (saying “contractual lien” allowing sale of your stuff on default doesn’t work)
22
Q
HIGHLY TESTED
What are the 3 requirements for attachment?
When does attachment occur?
A
These 3 must COEXIST:
1) Agreement to create a security interest by either a) taking possession b) authenticating a security agreement or c) taking control
2) Value given by secured party (and value given by debtor to creditor but this is rarely a problem)
3) Debtor must have rights in the collateral
Attachment occurs when the last of the 3 elements - even if there is a lag in time
23
Q
HIGHLY TESTED
What is required of an authenticated security agreement?
A
Need all of
1) a record evidencing an intent to create a security interest (no magic words needed)
2) agreement authenticated by the debtor (signed or marked with intent to authenticate)
3) description that “REASONABLY IDENTIFIES” the collateral - by UCC category or type ok (but consumer goods, consumer securities accounts, and commercial tort claims cannot be listed by type)
24
Q
Does “all of the debtor’s assets” or “all of the debtor’s personal property” work for purposes of a security agreement description of the collateral?
A
No, that’s a “supergeneric description”
25
Does past consideration work for purposes of giving value for attachment?
Yes, any consideration for a contract works or past consideration if it is clear that the security interest is given as security for the past consideration
26
What rights does the debtor have to have in the collateral to grant a security interest in it?
Debtor only has to have some kind of rights - doesn't have to have title
27
What responsibility does a creditor with possession or control have to exercise with regard to the collateral? What happens to profits/proceeds from the collateral?
Who bears the risk of loss?
Secured party in possession must use reasonable care to store/preserve the collateral but can get these expenses reimbursed by the debtor. Secured party can also hold profits/proceeds as additional security except cash which must be given to the debtor or applied toward the secured obligation
Risk of loss is on the debtor to the extent of any deficiency in the creditor's insurance
28
Can you have an oral security agreement?
Yes, it's called a "pledge" and the oral agreement must convey intent to create a security interest if the creditor also has possession or control of the collateral. Only need one of 1) record security agreement 2) possession 3) control in addition to the value and rights in the collateral requirements
29
Without an after acquired property clause, what is the secured party's collateral limited to?
Property that the debtor had rights in at the time the debtor signed the security agreement (and proceeds of that property)
30
Will a court ever imply an after acquired property clause?
Yes, a court will often imply an after acquired property clause if the collateral is of a type that is rapidly depleted or replenished (e.g. inventory, accounts) such that the parties must have intended it.
31
Is an after acquired property clause required to obtain a security interest in property that the debtor acquires later?
Generally yes, but the security interest automatically continues into proceeds of the original collateral even without an after acquired property clause
32
If a security agreement has an after acquired property clause, what categories of future collateral will NOT be subject to the security interest?
After acquired property clauses don't apply to consumer goods for longer than 10 days after the creditor gives value and don't apply to commercial tort claims at all
33
What are proceeds?
Proceeds are IDENTIFIABLE proceeds received upon the sale, exchange, collection, or other disposition of collateral OR other proceeds.
E.g. insurance $ payable by reason of loss of collateral is proceeds if payable to the debtor or secured party
34
What is meant by "identifiable" proceeds?
It means that the SECURED CREDITOR can prove that the proceeds are TRACEABLE back to the original collateral.
35
What is the rule for determining how much of cash in a commingled bank account is cash proceeds?
The Lowest Intermediate Balance Rule applies to determine what portion of the account is identifiable proceeds. From the time the proceeds are deposited to the time you are applying the rule, find the lowest balance and that's the cap on cash proceeds. In other words, assume personal funds are spent first
36
What is a "supporting obligation" to some piece of collateral? Does the secured party have a security interest in that supporting obligation?
A supporting obligation is like a guarantee/surety for the collateral.
Security interests in a piece of collateral automatically extend to include supporting interests of the collateral.
37
HIGHLY TESTED
| What are the 5 methods of perfection?
1) Filing
2) taking possession of the collateral
3) control
4) automatic perfection
5) temporary perfection
38
If all of the steps for perfection are satisfied before the attachment of a security interest, when is the security interest perfected?
The security interest is perfected upon attachment
39
Unperfected DOES NOT MEAN UNSECURED
Perfection and secured status against the debtor are totally different
40
What is required for perfection?
Attachment and following the proper steps for perfection
41
What is the only type of security interest that automatically perfects? (and what is the key limitation)
A PMSI in CONSUMER GOODS perfects upon attachment (but security interests in motor vehicles can be perfected only by notation on the certificate of title)
42
When is a security interest perfected as of if the perfection is by possession?
The security interest is perfected as of the secured party's taking of possession as long as possession is retained
43
How does a secured party perfect by possession if the goods are in the hands of a bailee?
the bailee must authenticate a record acknowledging that it is holding the collateral for the secured party's benefit
44
When does possession NOT perfect a security interest?
When can you perfect by possession?
Cannot perfect by possession in general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, goods with certificates of title, and accounts
Can perfect by possession in any kind of goods, instruments, certificated securities, negotiable documents.
45
How do you perfect a security interest in money?
ONLY by possession
46
In what kind of collateral can you perfect your security interest by control?
In what kind of collateral can you ONLY perfect by control?
Investment property, nonconsumer deposit accounts, and electronic chattel paper.
Can only perfect by control in nonconsumer deposit accounts (unless the account is proceeds)
47
What is the only way to perfect a security interest in a deposit account?
Control
48
What are the three methods of taking control of a deposit account?
Do one of the following:
1) Be the bank (then control automatic)
2) Put the account in the secured party's name
3) Agree in an authenticated record with the debtor and the bank that the bank will comply with the secured party's orders regarding the account without the debtor's consent ("control agreement")
49
How does a secured party take control of a piece of investment property?
Secured party must take what ever steps are necessary to have the investment property sold without further action by the owner/debtor
50
How does a secured party take control of a piece of electronic chattel paper?
Secured party must put a system in place to show the transfer of interests in the chattel paper that "reliably establishes" the secured party as the assignee.
51
How do you perfect a security interest in property that has a certificate of title?
ONLY by notation on the certificate of title via the appropriate govt agency UNLESS the debtor holds the vehicle in inventory, then can ONLY perfect by filing a financing statement
*PMSIs in titled consumer goods do not perfect automatically - have to get govt to note on certificate of title
52
What details must be included on a financing statement?
1) Debtor's name and address
2) Secured party's name and address
3) Description of the collateral
53
What kinds of security interests can be perfected by filing a financing statement?
All kinds of collateral except for titled items, deposit accounts, and money
54
What is the purpose of notice filing?
The purpose of notice filing is to put the world on notice that a person may have a security interest in the debtor's property
55
What is the rule for what name must be put on the financing statement for a debtor that is an individual? For a debtor that is a registered organization?
Is a trade name good enough?
Must use the name on their unexpired drivers license issued by the state where the financing statement is to be filed. Or if not, then the name by which you're known in the community
Must use the name listed on the public organic record available for that organization
Use of a trade name is not good enough for a person or a business
56
Will an error in the debtor's name invalidate a financing statement?
Only if the error is "seriously misleading" which means someone searching under the debtor's correct name under the standard search logic would not find the financing statement
57
Secured creditor files a financing statement and the filing office botches the filing such that it could not be found in a search?
The financing statement is still effective - error by the filing office does not impact its effectiveness
58
What is the effectiveness of a financing statement filed against a debtor who changes their name after the financing statement is filed?
If the name change is such that the FS becomes seriously misleading, then the FS is effective only against the property that the debtor had at the time of the name change AND property acquired within 4 months after the name change.
If a person changes their name but not on their DL, not seriously misleading because the DL name is still the name for UCC purposes.
59
What is required of the description of the collateral in a financing statement?
Must REASONABLY IDENTIFY the collateral. Can be by normal language, type, or a supergeneric description like "all assets"
60
Does a financing statement have to reference after acquired property?
No as long as the description is broad enough to cover the after acquired property
61
Will an error in the secured party's name make a financing statement seriously misleading?
No because searches are conducted under the debtor's name, the financing statement will not be seriously misleading and will remain effective
62
What should you remember when you see a financing statement on collateral that is related to real property? What is collateral related to real property?
When you see fixtures, timber to be cut, minerals, you should remember that the financing statement must contain all of the usual requirements PLUS
1) a description of the related real property
2) name of the record owner (if property owned by someone that is not the debtor)
3) indication that it is to be filed in the real property records
63
Is a signature required on the financing statement?
No, but the debtor must authorize the filing
64
When must the debtor authorize a financing statement filed against him?
Either before or after the filing of the financing statement
65
How does the debtor authorize a financing statement to be filed against them?
Can be authorized in any signed writing either before or after the FS is filed.
FS is automatically authorized if the debtor authenticates the FS or a security agreement covering the same collateral as the FS ("ipso facto authorization")
66
Can a secured party file the security agreement itself as a financing statement?
Yes, if it contains the same information as the financing statement form requires
67
What is the effect of a missing address for the debtor? For the secured party?
If it is accepted by the filing office, it is effective despite the omission
68
What is the general rule for where a financing statement should be filed? What is the exception?
General rule: file with the secretary of state
Exception: File on timber to be cut, minerals and fixtures ("fixture filings") in the county real property records.
But for fixtures, smart creditors will file in the UCC system and real property system in case it's not actually a fixture
69
Which state's law governs perfection? What is the key implication of this?
The state where the debtor is located governs perfection, so you should generally file the FS in the state where the debtor is located
But if fixture/mineral/timber to be cut, then must file in the real property records where the property is located
70
Where is the debtor located for purposes of determining which state's law applies (and generally where should you file the FS)?
If individual -> debtor located in the state of their principal residence
If registered organization -> debtor located in the state under whose laws it is organized
If Unregistered organization-> location at place of business (or if more than one, the chief executive office)
71
In what state should you perfect if the property has a certificate of title?
In the state where the most recent certificate of title is issued
72
If the collateral is a deposit account which state's law applies to govern perfection?
The state where the bank has its chief executive office
73
Where should you perfect if the collateral is…
- a certificated security
- an uncertificated security
- a securities account
- farm products?
-------------
If a bank, issuer of securities, or securities intermediary moves to a new state, how long is perfection in the deposit account, uncertificated security or securities account good for?
Certificated security -> The state where the certificated security is located
Uncertificated security -> state where the issuer is organized
Securities account -> state where the securities intermediary's chief executive office is located
Farm products -> State where the farm products are located
-----------------------
Good until the earlier of 4 months and when the interest would have lapsed anyway
74
What is the effect on perfection if the debtor moves states if the collateral is such that the location of the debtor determines what law applies?
The security interest becomes unperfected 4 months after the debtor's move unless the secured party files a financing statement in the new state within the 4 months
75
What is the effect on perfection if collateral is transferred to a new owner in a different state and the collateral is of the type where the debtor's location determines perfection?
The security interest remains perfected for one year unless the secured party files a new financing statement in the collateral against the new owner
76
Time periods rapid fire…
- How long is a FS good for if debtor name change?
- How long is an FS good for if debtor transfers collateral to out of state owner?
- How long is an FS good for if debtor moves out of state?
- How long is a creditor automatically perfected in proceeds of collateral in which they have a perfected security interest?
- How long does a PMSI in non-inventory have to perfect to retain superpriority status?
Name Change -> 4 mo.
Debtor Move -> 4 mo.
Collateral Move -> 1 year
20 days
20 days
77
If a security interest is perfected by possession of the collateral, which state's law governs?
What happens of the collateral is moved to a different state but is still in possession of the secured party?
The state where the collateral is located's law governs
The security interest remains perfected as long as the security interest in the collateral can be perfected by possession in the new state
78
If a security interest is perfected in a piece of titled property and the property is titled in a new state, how long is the perfection in collateral good for in the new state (assuming the notation IS transferred to the new title)?
The security interest remains perfected for as long as it would have been perfected in the original state if there was no move,
BUT is only perfected against a BFP until the earlier of when perfection would have lapsed in the original state and 4 months after the vehicle is covered by the new car certificate of title
79
If a security interest is perfected in a piece of titled property and the property is titled in a new state, how long is the perfection in collateral good for in the new state (assuming the notation IS NOT transferred to the new title)?
Perfection not good at all against:
- BFP who takes delivery and is not a car dealer
- a secured party without knowledge who perfects after the clean title is issued in the new state
80
How long is a financing statement good for?
5 years
81
When can a continuation statement be filed?
How long is a continuation statement good for?
Within 6 months of the lapse of the financing statement
Continuation statement is good for 5 years from when it is filed
82
Does a debtor have to authorize the filing of a continuation statement?
No
83
Can a financing statement be extended beyond 5 years by fling another financing statement?
No
84
When does a secured party have to terminate their financing statement?
On demand if there is no obligation from the debtor and no commitment to make future advances OR if the debtor didn't authorize the financing statement in the first place.
Unless demand is made, there is no obligation to terminate the financing statement unless the FS is on consumer goods. If on consumer goods, then secured party must file within 1 month of there being no outstanding obligation
85
How long does perfection in collateral automatically extend to perfection in proceeds of that collateral?
When does perfection continue beyond that time period?
20 days automatically
Continues beyond 20 days IF:
- proceeds are identifiable cash proceeds or
- all of (a) security interest in original collateral was perfected by filing an FS (b) the perfection in the proceeds would be by filing an FS in the same office AND (c) WAS NOT PURCHASED USING THE CASH PROCEEDS OF THE COLLATERAL (d) if FS does not already cover the proceeds, would need to amend it ("same office rule" - usually comes up in barter transactions) or
- Security interest in the proceeds is perfected within the 20 day period
86
What is the most famous example of the same office rule?
How does this example meet the same office rule?
Famous example is when inventory (collateral) is sold on credit and seller receives an "account" as proceeds
Same office rule is met because (a) security interest in inventory is perfected by filing, (b) perfecting against accounts would be accomplished by filing a financing statement in the same office as inventory AND (c) the account was not purchased using cash
87
How long is a security interest automatically perfected in instruments, negotiable documents, or certificated securities?
Automatic perfection for 20 days if the secured creditor gave new value under a security agreement. (This is because you can perfect by possession in these and the 20 days gives time for transport to the secured party)
88
What is the effect on perfection if a debtor changes their usage of collateral such that the description in the financing statement becomes seriously misleading?
No effect - secured creditor has no obligation to monitor the collateral or amend the financing statement even If the description becomes seriously misleading.
89
Who wins in a perfected secured party vs perfected security party priority contest?
The first to file or perfect
| *remember you can file before you perfect
90
Who are the potential competitors for priority?
another secured party, PMSI, purchaser, lien/judgment creditor
91
For every priority contest what are the two steps you should do?
0) Confirm attachment and priority date
1) Identify the competitors (are they secured/judgment/buyer/PMSI)
2) Apply the priority rule
92
Who wins in a unperfected secured party vs unperfected secured party priority contest?
The first to attach has priority
93
Who wins in a perfected secured party vs unperfected secured party priority contest?
The perfected party has priority
94
Highly Tested
Who wins in a PMSI vs prior perfected secured creditor?
The PMSI wins in goods that are not inventory/livestock AND PROCEEDS THEREOF if perfects within 20 days of debtor receiving the collateral
----------------------
PMSI in inventory/livestock has priority over a conflicting security interest in the same inventory (or proceeds that are chattel paper, instruments, cash) IF
- PMSI perfected at the time debtor gets possession AND
- any secured creditor who has filed their security interest in the same inventory receives an authenticated notification of the PMSI before the debtor receives possession. notice good for 5 years
95
What kind of security interest does a consignor have in inventory?
Consignor has a PMSI (and so can take super priority if complies with the requirements)
96
Who wins in a seller financed PMSI and a financer financed PMSI?
The seller financed PMSI wins
97
```
Highly Tested
What is necessary for perfection in a PMSI in…
- consumer goods?
- equipment?
- inventory?
```
Consumer goods - nothing, automatically perfected
Equipment - can be perfected any time within 20 days of debtor receiving the collateral to get superpriority
Inventory - perfected by the time debtor gets possession and notice given to any prior perfected creditors with floating inventory liens
98
Who wins in a priority contest between a security interest perfected by control vs security interest perfected by any other method?
Security interest perfected by control wins
99
Who wins in a priority contest between a security interest in a deposit account perfected by control vs other perfected security interest in the funds that entered that deposit account? What's the common application of this?
----------
Who wins in a contest between two or more security interests perfected by control in a deposit account?
The security interest perfected by control in the deposit account wins (the common application is that perfection by control trumps over security interest someone else might take in proceeds even if that interest was perfected before control was taken)
---------
Best: Secured party's name is listed on the account
2nd Best: Be the Bank
3rd Best: Authenticated agreement with debtor/bank/creditor giving control
100
Does a transferee of funds out of a deposit account that is subject to a security interest take those funds subject to the security interest?
No, unless the transferee is colluding with the debtor to undermine the security interest
101
For purposes of analyzing priority in proceeds of collateral, who wins?
Generally, a security interest in proceeds will have the same date of priority as the security interest in the collateral
BUT a secured party has priority in non-filing collateral (collateral which is not perfected in using a filing) IF:
- the secured party has priority in the original collateral
- security interest in proceeds is perfected AND
- proceeds are cash/accounts or of the same type as the original collateral
102
What is the general rule for purchasing something with a security interest on it?
The security interest generally stays on the item, but some exceptions exist
103
When does a purchaser of an item of collateral take free of that security interest?
1) if the secured party authorized the sale (Express or implied)
2) Buyer in ordinary COB in good faith and without knowledge of violation of secured party's rights takes free of security interest created by buyer's seller
3) Buyers not in the ordinary COB where security interest is not perfected
4) Garage Sale Exception
^ you should consider each of these in sequence when answering a question involving a sale of collateral
104
What are the ways that a secured party can authorize sale of collateral free from a security interest?
Can be express in the security agreement or other communication or implied from conduct/acquiescence/type of sale (e.g. there is implied auth of sale of inventory in ordinary COB to a consumer unless expressly prohibited)
105
If a sale in ordinary COB is not authorized by the secured party, when does a buyer take free of the security interest?
Buyer takes free of a security interest CREATED BY THE BUYER'S SELLER if buyer:
1) is in good faith
2) without knowledge that the sale violates the rights of another person in the goods (i.e. knows it violates the security agreement - but buyer can know of the security interest)
3) buys in ordinary COB from a seller who's in the business of selling goods of the kind (seller must be in ordinary COB, buyer can be buying under any kind of circumstance)
106
Does a buyer NOT in the ordinary course of business take free of a lien?
If the lien is perfected, no (takes subject to the lien)
If the lien unperfected, yes (take free of lien UNLESS…
THEY KNOW OF the security interest when they give value or take delivery OR
the 20 day PMSI grace period applies and secured creditor perfects)
107
HIGHLY TESTED
| Does a buyer in the ordinary course of business take free of a PMSI?
If a secured party attaches a PMSI in the debtor’s collateral before a buyer/lessee without knowledge pays value and takes delivery, the secured party has priority over the buyer if secured party files within 20 days after debtor receives collateral
108
What is the garage sale exception for consumer to consumer sales?
Does the garage sale exception allow a buyer to take free of a PMSI? [Highly Tested]
A buyer takes free of a PERFECTED OR UNPERFECTED security interest if a buyer buys:
1) CONSUMER GOODS (in the hands of the buyer and the seller)
2) without knowledge of the security interest
3) for value
4) before a financing statement covering the goods has been filed
------------
A buyer under the garage sale exception can take free of a PMSI (even though a PMSI in consumer goods automatically perfects) unless the secured party files a FS
109
If you're selling consumer goods on credit and taking a security interest, is there any benefit to filing a financing statement?
For purposes of perfection no, BUT filing a financing statement does allow the seller to beat the garage sale exception and enforce the security interest against a buyer that would otherwise take free
110
Who is a lien creditor?
A judgment lien creditor is a person who has acquired a lien on the collateral through judicial attachment, levy or bankruptcy trustee
111
When does the holder of a judgment become a lien creditor?
At the time the sheriff levies on the property.
112
Who wins in a contest between a lien creditor and an art 9 secured creditor who is unperfected?
Who wins in a contest between a lien creditor and an art 9 secured creditor who is perfected?
A lien creditor prevails against any art 9 interest that is unperfected at the time of levy.
A lien creditor is subordinate to any art 9 interest that is perfected at the time of the levy
113
Is there ever a circumstance when a lien creditor loses to a secured creditor who had not perfected at the time of levy?
Yes, a lien creditor loses to an art 9 secured creditor who has filed and obtained a security agreement at the time of the levy as long as the security interest eventually attaches or perfects
114
Who wins in a contest between a judicial lien creditor who levied during the 20 day grace period for a PMSI secured creditor to file?
The PMSI secured creditor wins if they file within that 20 day grace period
115
Who wins in a priority contest between a judicial lien creditor who levied before a future advance was made and a creditor who has a prior perfected financing statement?
The future advance creditor wins if made 1) without knowledge of the lien 2) within 45 days of the lien OR 3) under a commitment that was entered into without knowledge of the lien
116
In a priority contest between a secured party and a statutory lien creditor who wins?
What is a statutory lien creditor?
A statutory lien creditor has priority over an art 9 interest EVEN IF PERFECTED as long as the goods/services were provided in the ordinary COB and collateral remains in the lienholder's possession
A statutory lien creditor is a possessory lien created by state law that is not art 9 in favor of those who supply goods or services (e.g. artisan's lien or materialman's lien or mechanic's lien)
117
What document defines default? What is the significance of default?
Art 9 doesn't define default, but usually the security agreement defines default. If it doesn't, default is usually late or missed payments
Default triggers the secured creditor's right to proceed against the collateral (unless default has been waived)
118
When can a secured creditor take the collateral without judicial process?
If the secured creditor can take the property without a breach of the peace
119
What is the effect if a secured creditor takes the collateral without judicial process despite breaching the peace?
Secured party can be sued for conversion, assault, battery, trespass, etc. for actual and often punitive damages
120
What is a breach of the peace for purposes of self-help repossession?
Does entry onto the premises have to be authorized? Can the debtor give permission for entry in the security agreement?
Any conduct by the secured party that has the potential to lead to violence (physical presence by the debtor plus verbal objection is enough to create breach of the peace)
Simple trespass is not a breach of the peace. Unauthorized entry of a residence (or closed garage) is probably a breach of the peace. Breaking and entering a commercial property is less likely to be a breach of the peace.
Debtor cannot give permission to enter the premises to repossess in the security agreement
121
If the creditor can't do a self-help repossession, what can they do?
They can file an action for replevin, get an order for the sheriff to repossess the property for them.
122
What is an alternate way to perform a self help repossession of equipment?
Can make it unusable and dispose of it on the debtor's property (unless doing so would breach the peace)
123
What is an alternate way to perform a self help repossession of an account?
The secured creditor can direct the party that owes the account ("account debtor") to pay them directly instead of the debtor. Then the account debtor must pay the secured party and payment to the debtor will not discharge the account
124
What is a strict foreclosure? What is a full vs partial strict foreclosure?
A strict foreclosure is when the creditor keeps the collateral for itself rather than sell it to satisfy the debt.
Strict foreclosure can be full or partial. Full strict foreclosure is secured creditor keeping the collateral in satisfaction of all of the debt. Partial strict foreclosure is keeping the collateral and seeking a deficiency judgment
125
What is procedurally required for a strict foreclosure?
1) secured party must send its proposal to retain the collateral to any other secured party. If another secured creditor objections within 20 days, collateral must be disposed of by sale
2) secured party must also obtain the debtor's consent either through their authentication of a record agreeing to it after default or (if full strict foreclosure) failing to make an authenticated record objection within 20 days
126
When is strict foreclosure not available?
~ Strict foreclosure is not available in consumer transactions if the creditor wants to seek a deficiency judgment. Creditor can only do a strict foreclosure if it's in full satisfaction of the debt
~ Consumer Goods 60% Rule (if the debtor paid 60% of the cash price/loan on a PMSI, the secured creditor must dispose of the property within 90 days after repo)
127
If a sale of collateral is conducted, which security interests are discharged?
The security interest under which the sale is being held and all subordinate security interests are discharged, but any senior security interests remain on the collateral
128
Who must be notified before collateral is sold? How must they be notified?
When is notice not required?
What amount of time for notice before the sale is required?
~ Must be notified in writing by the secured creditor conducting the sale
Must notify:
- the debtor and any sureties on the debt unless the collateral is consumer goods
- any other secured parties who have notified the secured party of their interest
- any secured parties who have filed a financing statement or made notation on the certificate of title
Notice is not required if the collateral is perishable or threatens to decline rapidly in value or is readily sold in an organized market (e.g. stock). Debtor and surety can waive notice in writing after the default
Notice must be given in a reasonable time (10 days deemed reasonable for nonconsumer collateral)
129
What are the two methods of selling collateral? What is required in the notice given for each?
Private Sale - notice must state a time after which the property will be sold
Public sale - notice of time and place of sale is required
130
What is required of a private sale of collateral by a secured creditor?
EVERY ASPECT OF THE SALE MUST BE *COMMERCIALLY REASONABLE*
| - method, manner, time, place, terms
131
Under what circumstances can the secured party buy the collateral when it is sold?
A) in a public sale OR
| B) in a private sale where there is a generally recognized market or widely distributed price quotations
132
What is the flow of money from a foreclosure sale?
Money must flow first to repay the costs of the repossession and sale and then to pay off the debt of the foreclosing creditor and then to pay off lower priority secured debts and then to the debtor
Creditors with higher priority debts get nothing because their lien survives
133
After a sale of collateral, what must the secured creditor send the debtor IF THE DEBTOR IS A CONSUMER?
Must send the debtor a calculation of deficiency or a calculation of the surplus (the $ debtor will receive)
134
What is the penalty for a secured creditor conducting a sale in a manner that is not commercially reasonable (or otherwise violates the UCC's rules)?
Secured creditor is liable for actual damages.
If the collateral is consumer goods, the debtor is entitled to a min of 10% of the cash price of the goods plus an amt of all the interest charges paid over the life of the loan
There is also a rebuttable presumption that the secured creditor loses any deficiency judgment (i.e. sale price presumed to be sufficient to pay off the debt)
135
When can the debtor/surety/other secured party exercise their right to redeem?
What does a party have to do to redeem the collateral?
Any time before the foreclosure sale or debt has been discharged by strict foreclosure
A party can redeem the collateral if they fulfill *ALL* obligations secured by the collateral to the creditor (this is usually the full balance because most security agreements have acceleration clauses)
136
Who has the right to redeem?
The debtor, any surety, any other secured creditor
137
What is a fixture?
A fixture is goods (personal property) that has become so attached to the real estate that it has become a permanent part of the real estate
138
Can a security interest be taken in the building materials that have been incorporated into an improvement on the land?
No
139
Where do you perfect a security interest in fixtures? What do you have to file?
In the office where a mortgage on the real estate would be filed. You have to file a "fixture filing" which is like a regular FS but also requires details about the real estate and the owner of the real estate (if the debtor does not own an interest in the real estate)
140
What are a secured creditor's rights when their collateral is a fixture (and the creditor secured by the fixture has priority)?
Can repossess the fixture, and if the debtor does not own the real estate, must reimburse the owner for damage caused by removal but not for diminution in value. No need to reimburse the debtor for damage caused by removal if debtor owns the real estate
141
Who has priority: a prior perfected security interest in fixtures or a later perfected security interest in real estate?
A security interest in fixtures prevails over any later perfected security interest in real estate
142
Who has priority: a prior perfected security interest in real estate or a later perfected security interest in fixtures? What if the fixture security interest is a PMSI?
The prior perfected security interest in real estate prevails UNLESS the fixture security interest is a PMSI perfected within 20 days
143
What is special about a construction mortgage?
Construction mortgage ALWAYS WINS
A construction mortgage takes priority over a subsequent PMSI in fixtures even if the PMSI is perfected within the 20 days of affixation
144
When is a fixture filing not necessary?
Any regular kind of perfection works (even though the collateral is fixtures) if the collateral is READILY REMOVABLE:
- office/factory machines,
- equipment not used/lease for use in operation of the real estate or
- replacements of domestic appliances that are consumer goods
A secured creditor does not need to perfect at all to have priority if the owner of the real estate has consented to the security interest or disclaimed any interest in the property as fixtures in an authenticated record OR debtor has the right to remove the fixtures as against the owner of the real estate
145
What is an accession?
Goods that are physically united with other goods such that the identity of the original goods is NOT lost (e.g. tires on a car)
146
How is a security interest perfected in collateral that becomes an accession?
If the security interest is perfected before the collateral becomes an accession, it remains perfected in the collateral (but only the collateral, not the big thing it is attached to)
147
What priority rules apply to competitions between a creditor secured by the accession and the creditor secured by the larger property? What if the security interest in the accession is a PMSI?
Same rule on first to file or perfect applies. A PMSI still has a 20 day grace period for filing BUT
A security interest in an accession (including a PMSI) is subordinate to a security interest in a whole WHICH IS PERFECTED BY NOTATION ON THE TITLE. (if not perfected by notation on title, PMSI wins)
148
When can a creditor with a security interest in an accession remove its collateral from the whole?
What liability does this secured creditor face for damage to the whole that they cause in removal? How can the parties potentially entitled to payment enforce this right?
It must have priority over every creditor with a security interest in the whole.
The secured creditor is liable for any damage caused by removing the accession to the owner of the larger thing. To enforce this right the owners of the larger thing can refuse the accession secured creditor permission to remove until they provide adequate assurances that they will perform on their obligation to reimburse if needed.
