secured transactions

Question 1

lease v. security interest

Answer 1

courts look at economic reality to determine if a lease is actually a security interest

lease will be security interest if
1. commitment to make payments for a term exists AND
2. either: OG term is equal to or greater than the remaining economic life of goods,
lessee must renew the lease for the remaining economic life of the goods or is forced to take ownership,
lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or
lessee has the option to become the owner of the goods for no additional consideration

Question 2

collateral: farm products

Answer 2

crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states if they are in possession of someone engaged in farming operations

Question 3

types of collateral: account

Answer 3

a right to payment of monetary obligation whether or not earned by performance

includes property that has been or is to be sold, leased, disposed of
services rendered 
policy of insurance 
secondary obligation incurred 
energy provided 
use or hire of vessel under charter or contract 
credit card debt 
lottery winnings

Question 4

types of collateral: deposit account

Answer 4

a demand, time, savings, or similar account maintained with bank (can only be perfected by control)

does not include investment property or accounts evidenced by instrument

Question 5

types of collateral: inventory

Answer 5

goods that are leased, held for sale or lease or to be given under k of service, given under k of service, or consisting of raw materials, working process, or materials used/consumed in business

does not include farm products or goods held only for repair

Question 6

types of collateral: equipment

Answer 6

goods other than inventory, farm products, or consumer goods

this is catchall category for “goods”

goods = all things moveable when the security interest attaches

certificate of title statute: some states require that security interest in car be noted on the title in order to be perfected

Question 7

types of collateral: instrument

Answer 7

pieces of paper representing the right to be paid money, like promissory note, drafts, and certificates for deposit

Question 8

types of collateral: consumer goods

Answer 8

goods purchased primarily for personal, family, or household purposes

Question 9

types of collateral: proceeds

Answer 9

the following types of property:
acquired upon sale, lease, or other disposition of collateral
collected/distributed on account of collateral
rights arising out of collateral
claims arising out of loss, nonconformity, defect, or interference with the use of collateral or
insurance payable by loss of collateral

check in exchange for collateral is cash proceeds

Question 10

types of collateral: chattel paper

Answer 10

a record that evidences a monetary obligations and a security interest in specific goods

Question 11

collateral types: accounts

Answer 11

right to payment for goods sold or services rendered

note: contract obligations arising from loan is not an account it is a general intangible

Question 12

collateral types: deposit account

Answer 12

an account maintained at a bank

only applies to nonconsumer deposit account

Question 13

collateral type: investment property

Answer 13

includes items such as stock, bonds, mutual funds, and brokerage funds

Question 14

types of collateral: general intangibles

Answer 14

any personal property not coming within other definitions - trademark, copyrights, etc.

also includes monetary obligations

this is the catchall for intangible things

Question 15

attachment and perfection

Answer 15

enforcing a security interest depends on two factors:

1. attachment = secures the creditor’s rights in the collateral, making it enforceable (security interest has been created) attachment gives creditor rights against debtor
2. perfection = gives notice of the creditors rights in collateral (determines priority of interests) gives creditor rights against the world/other creditors

security interest cannot be perfected unless it is first attached

Question 16

requirements of attachment

Answer 16

creditor extend value to debtor
debtor have rights in the collateral AND
security agreement (must be authenticated, or can be oral if collateral is in possession of creditor -i.e., pledge)

Question 17

requirements for security agreement in writing

Answer 17

1. evidenced by a record: agreement must be evidenced by record and must show an intent to create a security interest
2. agreement must be authenticated by debtor - aka signed by debtor
3. description of collateral - reasonably identifiable

Question 18

requirements of perfection

Answer 18

obtained by filing a financing statement with the secretary of state or taking possession or control of the collateral

Question 19

after acquired property clause

Answer 19

grant of security interest in property acquired in the future

this is permissible - just a provision in the security agreement that we enforce

if there is no after acquired clause in security agreement, the secured party’s interest only reaches collateral that debtor had rights in at time of signing

Question 20

future advance clause

Answer 20

grant of security agreement to secure future loans where they are contemplating such future loans
– must be in conjunction with after acquired property clause, or it only extends to present collateral owned

exceptions: security interest will auto attach without future advance clause to collateral of a type that is

rapidly depleted and replenished or
identifiable proceeds of collateral (commingled cash proceeds, lowest intermediate balance rule applies)

Question 21

proceeds

Answer 21

very broad

includes WHATEVER is received upon sale, exchange, etc., of collateral as long as it is identifiable - i.e., secured creditor can prove the proceeds can be traced back to original collateral

Question 22

lowest intermediate balance rule

Answer 22

look at bank account starting at time proceeds are deposited and ending at the time you are applying the rule - the lowest balance during that time is secured parties proceeds

cannot be more than the amount dumped into the account tho

Question 23

after acquired property clause does not apply to..

Answer 23

after acquired property clause

1. does not apply to consumer goods unless debtor acquires rights in the goods within 10 days after the creditor gives value
2. does not apply to commercial tort claims

Question 24

financing statement

Answer 24

UCC-1
document used to convey notice of security interest – best way to perfect security interest

requires

1. debtor name
   - - use of trade name is not sufficient
   - - individual debtor = the name you use is whatever is on unexpired drivers license - if no DL, then you file under the name you are known in the community
   - - error in debtor name: search correct name using standard search logic, if it would turn up the correct statement, then it is not seriously misleading. if it does not, then it is seriously misleading.
   - - name change: good under old name for 4 months - must amend in 4 months to correct name
2. describe collateral: reasonably identify the collateral
   - - does not have to mention after-acquired property to perfect interest in property if the description is broad enough to include it
   - - super generic statements are OK here, unlike in security interest (i.e., can use all debtors inventory)
3. secured party’s name
4. debtor must authorize filing of financing statement
   does not require signature to authorize - only has to authorize the creditor to file the statement
   debtor does so by any signed writing **
   **debtor automatically authorizes if debtor signs the security agreement covering the same collateral
5. lack of addresses does not make it ineffective

**if involving real property – must contain description of the related property, name of record owner (if not debtor) and indication that it is to be filed in real property records

errors are OK as long as not seriously misleading

Question 25

which state law governs perfection?

Answer 25

gen rule: law of state where debtor is located exceptions: possessory security interests/fixtures/timber to be cut = where collateral located goods covered by title = state issuing most recent certificate of title deposit accounts = state in which bank has CEO office investment property = state where certificate security is located or if un secured security, state where issuers organized governs

Question 26

methods of perfection

Answer 26

1. automatic: automatically perfected upon attachment -- this is PSMI in consumer goods 2. possession (pledge): actual possession of the collateral -- will be perfected from the moment of possession and continues as long as possession is retained (cannot apply to things you cant take physical possession of i.e., intangibles, accounts, etc.) **only way to perfect security interest in money is possession** 3. control: security interest, chattel paper, and nonconsumer deposit accounts **nonconsumer deposit accounts can ONLY be perfected by control Nonconsumer deposit account control: (3 methods) a. automatic control by bank maintaining account b. putting account in secured party's name c. control agreement - k b/t debtor, creditor, and bank where account is, giving permission to seize account if they default 4. filing: filing either electronically or in writing, a financial statement --> does not apply to deposit accounts or money **this focuses on the relationship b/t creditor and OTHER creditors NOT b/t the creditor and debtor unperfected does NOT mean they are unsecured -- security attaches at attachment - they can be an unperfected secured creditor

Question 27

PSMI

Answer 27

1. secured party sells goods to debtor on credit and retains a security interest in goods sold or 2. creditor loans the funds to the debtor to enable the debtor to buy specific collateral, those funds are used by debtor to acquire specific collateral, and the creditor takes security interest in that collateral

Question 28

perfection for motor vehicles

Answer 28

notation on the certificate of title issued by state exception: dealers (req filing financial statement to perfect)

Question 29

perfection of proceeds

Answer 29

attachment = proceeds identifiable perfection automatic for 20 days perfection continues if proceeds are cash OR same office rule applies: OG collateral is perfected by financing statement, security interest in proceeds type that would be perfected by filing in same place, and proceeds not purchased with cash proceeds from collateral

Question 30

priority between perfected secured parties

Answer 30

priority goes to whichever party was the first to either file or perfect -- whichever is earlier -- provided there is no period thereafter when there is neither filing nor perfection

Question 31

priority b/t unperfected secured parties

Answer 31

first to attach has priority

Question 32

priority b/t unperfected and perfected secured parties

Answer 32

perfected security interest prevails over an unperfected security interest

Question 33

PMSI priority

Answer 33

PMSI enjoy superpriority they are superior to prior perfected security interests in the same collateral if conditions are met: 1. PMSI in goods other than inventory and livestock - has priority over conflicting security in same goods or their proceeds if the interest is perfected before or within 20 days after the debtor receives possession of the goods * *if this doesn't apply, then you apply general priority rules 2. PMSI in inventory or livestock - priority over conflicting security interest in same inventory or their proceeds that are chattel paper, instruments, or cash if it is perfected at time debtor gets possession and secured party with interest has authenticated notification of PMSI before debtor gets possession

Question 34

priority of conflicting security interests in investment property

Answer 34

security interest perfected by control takes priority over security interest perfected by other methods in other cases, first to file or perfect controls

Question 35

deposit account priority

Answer 35

best: bank account in creditor name second: bank has control b/c of maintaining account third: control agreement

Question 36

secured party v. buyer priority

Answer 36

- - buyer takes subj to security interest unless: 1. secured creditor authorized sale free of security interest, express or implied (only implied in ordinary consumer sales where agreement is silent) 2. buyer in ordinary course takes free of security interest created by his/her seller **only take free of security interest created by SELLER** - - the seller must be in business of selling the goods you are buying - - buyer in ordinary course is in good faith, without knowledge that sale violates another rights, and seller in business of selling goods purchased 3. buyers or lessees not in the ordinary course, take subject to perfected security interests and take free from unperfected security interests unless they knew of security interest when gave value

Question 37

consumer to consumer priority sales

Answer 37

``` "garage sale rule" buyer takes free of security interest if: no knowledge of interest gives value goods are for personal use and no financing statement ```

Question 38

secured party v. judicial lien creditor priority

Answer 38

- judgment lienholder wins if lienholder arose before security interest was perfected - PMSI special rule: secured party files within 20 days after debtor takes possession, the secured party will have priority over judicial creditor

Question 39

secured creditor v statutory/possessory lien holder

Answer 39

statutory/possessory lien takes priority over all secured interest if the goods or services were provided in ordinary course of business and collateral remains in lienholder possession

Question 40

repossession

Answer 40

upon default creditor may reposses via 1. writ of court/judicial process/replevin 2. self-help -- can be done by creditor without breach of the peace (conduct that can lead to violence, generally physical presence by debtor and objection)

Question 41

strict foreclosure

Answer 41

if the creditor wants to keep the collateral and not sale it, then they have to notify all other creditors with liens on the property and debtor and if neither objects, you can keep it. if either party objects, you must sale the property

Question 42

selling collateral upon default

Answer 42

sale discharges all other junior liens, but senior liens stay on the property requires reasonable notice to all creditors and debtors within reasonable time (10 days or more before sale) **every aspect of the sale must be commercially reasonable** -- there are penalties such as losing right to deficiency, statute penalties if it is not commercially reasonable proceeds goes to: paying cost of sale, cost of debt, and then junior liens -- superior lienholders get nothing b/c they still have their lien

Question 43

right to redeem

Answer 43

debtor can get their property back if they pay entire amount owed before foreclosure sale

Question 44

perfection of fixture

Answer 44

must file a fixture filing, which is a financing statement with description of real property and filed in county where fixture is located

Question 45

priority of fixtures

Answer 45

security interest in fixtures has priority over any real estate interest that is recorded after the perfection of fixture a prior real estate interest that is properly recorded has priority over security interest that subsequently arises -- PSMI exception: PSMI takes priority over an earlier in time realty interest if perfected by fixture filing before goods become fixtures or within 20 days after

Question 46

accessions

Answer 46

goods physically united with other goods in such a manner that the original goods are still distinguishable (like tires on car) if an accession becomes part of a whole that is subject to a perfected security interest in compliance with requirements of certificate of title statute, the perfected security interest takes priority over the other interest (even when PMSI) in the accession

Question 47

perfecting interest on accession

Answer 47

perfected when collateral becomes accesssion and remains perfected in collateral