Secured Transactions

Question 1

Secured transactions involve transactions based on credit and are governed by UCC Art. 9. How it generally works:

Answer 1

• One party (debtor) receives something from another party (creditor or secured party) without paying immediately
• To ensure debtor will pay eventually, debtor gives creditor rights to a piece of debtor’s property as collateral (i.e., a security interest)
• Security interest (“SI”) = right given to creditor in debtor’s property
» Collateral = property in which creditor obtains rights (see card 3)
» Right allows creditor to take or sell property if the debtor fails to fulfill the credit obligation (i.e., debtor doesn’t pay creditor)
» Arrangement memorialized in a security agreement.

Question 2

Attaching security interests:

Answer 2

Attachment - process by which collateral is used to secure the creditor’s interest
» Effect - once a Sl attaches, creditor has a right to take the collateral if debtor defaults.

Question 3

Perfecting Security Interests

Answer 3

Perfection - process by which creditor secures her rights in the collateral as it relates to third parties
» Arises where third parties also have an interest in the same piece of collateral
» Creditor must perfect her SI to have a greater interest in the collateral over third parties.

Question 4

Tangible goods - four types:

Answer 4

1. Farming goods - items used/produced in farming (e.g., crops)
2. Consumer goods - items used for personal, household purposes
3. Inventory - goods kept for sale or lease
4. Equipment - catchall for tangible items that do not fit above (e.g., factory machinery).

Question 5

Intangible goods - most common of many types:

Answer 5

1. Instruments - writings representing the right to be paid money (e.g., promissory notes, checks, etc.)
2. Documents - writings representing the right to receive goods (e.g., bills of lading, receipts, etc.)
3. Chattel paper - record evidencing an obligation and SI in goods or a lease of goods (e.g., a promissory note and security agreement)
4. Accounts - a right to payment not evidenced by an instrument or chattel (i.e., accounts receivable)
   » E.g., money owed to a dentist after seeing a patient
   » Does not include deposit accounts, investment property, or commercial tort claims
5. Deposit accounts-bank accounts
6. General intangibles - e.g., patent rights, software.

Question 6

Creation & Attachment of Security Interests

Answer 6

Sis are created by contract (security agreement), and security agreements are typically in writing. signed by the debtor and include a description of the collateral
• Once a Sl attaches, it is secured, meaning creditor has a right to take the collateral if debtor defaults (i.e., fails to pay)

Question 7

Requirements for attachment - three requirements for a SI to attach:

Answer 7

1. Valid security agreement - agreement memorializing SI (see card 6)
   » May be evidenced by (1) an authenticated security agreement or (2) creditor’s possession or control of collateral
   » Authenticated security agreement - record authenticated by debtor that describes collateral
   • Signing, initialing, etc. is adequate proof of authentication
   • Agreement must reasonably identify collateral
2. Value - secured party (i.e., creditor) must give value to create a SI
   » E.g. creditor loans debtor money or delivers equipment in exchange for SI
   » Almost any consideration is sufficient
3. Rights in collateral - debtor must have rights in property he offers as collateral
   » Ownership or possessory interest is usually sufficient.

Question 8

After-acquired property clauses

Answer 8

extends the SI to property acquired by the debtor after signing the security agreement

Question 9

Future Advances

Answer 9

security agreements may contemplate future loans/advances from creditor to debtor based on debtor’s present collateral or collateral to be acquired in the future
• In such cases, a new security agreement is not required
E.g. L loans $2000 to D secured by inventory in D’s business; security agreement provides for future advances; D may get additional loans in the future from L

Question 10

Specification Clauses

Answer 10

parties may include clauses specifying terms and/or creating provisions for potential events
• Eg. parties may define what constitutes a default, may provide for acceleration of payments upon the happening of a certain event (eg, one missed payment), etc.

Question 11

Perfection of Security Interests

Answer 11

A single plece of the debtor’s property may serve as collateral for multiple creditors who all have their own security interest; perfection is relevant to priority of the interests
* lie, once a SI is attached it is enforceable, but it must be perfected in order to give its holder (creditor) priority over other potential Sis to which collateral may be attached

Significance of perfection - a perfected SI has maximum priority over collateral as compared to other unperfected SIs in that collateral

Attachment as a prerequisite - attachment is a prerequisite for perfection

Question 12

Methods of Perfecting Security Interests

Answer 12

There are three primary ways a SI can be perfected:

1. Filing financing statement
2. Taking possession (“pledged collateral”)
3. Automatic perfection & PMSIs - in some transactions, once collateral is attached, perfection occurs automatically.
   » PMSI = purchase money security interest

Question 13

Filing financing statement

Answer 13

usually filed with state office
» Requirements - financing statement must:

1. Identify debtor - name must exactly match (if debtor is business org., name must match Art. of Incorporation)
2. Identify secured party/creditor
3. Contain an adequate description of collateral

»Authorization for filing must be obtained from debtor (usually security agreement itself satisfies this requirement)

Question 14

Taking possession (“pledged collateral”)

Answer 14

secured party may perfect a SI in many types of collateral simply by taking possession
» E.g., goods (pawnshop), negotiable documents, instruments
»
Certain intangible collateral cannot be perfected by possession
• E.g., accounts, certificate of title goods, electronic chattel paper, general intangibles

Question 15

Motor Vehicles Perfection

Answer 15

Sis in vehicles are perfected by notation on the vehicle’s certificate of title

Question 16

Automatic Perfection and PMSI’s

Answer 16

PMSI in consumer goods - PMSI arises where a creditor sells goods to debtor and/or advances funds to debtor to buy goods, reserving a SI in the goods themselves
• E.g., A sells B a TV on credit; once the SI is created and attached (i.e., when B receives the goods), A has a PMS in goods that is automatically perfected
• Consumer goods only - automatic perfection only occurs for PMSIs in consumer goods; a PMSI in inventory or equipment must be filed to be perfected
.
Limitation = motor vehicles and fixtures:
» Motor vehicles - notation on the vehicle title is required for perfection
Fixture filings - consumer goods that are to become fixtures require a fixture filing to obtain priority over an interest in the real property to which fixture is affixed.

Small assignment of accounts - SI perfects automatically when:
1. Accounts or payment intangibles are assigned; and
2. Assignment does not transfer a significant portion of the assignor’s outstanding accounts or intangibles.

Question 17

Temporary Perfection of Proceeds

Answer 17

Sls in proceeds from original collateral is perfected automatically for 20 days from the debtor’s receipt of the proceeds, but may become unperfected on the 21st day
.
Arises where debtor sells property used as collateral; Art. 9 gives creditor an automatic SI in proceeds from the sale of collateral

Question 18

Identifiable proceeds

Answer 18

SI in proceeds from collateral is automatically perfected for 20 days from debtor’s receipt of goods
• E.g., TV store takes a loan and puts up TV inventory as collateral; store can continue selling
TVs but creditor has an automatically perfected SI in store’s TV proceeds for 20 days.

Question 19

Continuing perfection beyond 20 days-a perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds unless:

Answer 19

a. a filed financing statement covers the original collateral;
b. the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and
c. the proceeds are not acquired with cash proceeds.

Question 20

Priority of Security Interests

Answer 20

Almost any Secured Transaction MEE question will involve issues of priority; note:
• Type of collateral involved - i.e., goods, inventory, livestock, equipment, etc.
Type of parties involved - i.e., secured party vs. secured party, secured party vs. unsecured party, secured party vs. lien creditor, etc.

Question 21

Priority between parties

Answer 21

• Attached vs/unattached/unsecured interest - attached SI prevails
» Note - beware of scenarios where someone signed a security agreement but has not given value or has no rights in the collateral

• Perfected vs. unperfected SI - perfected SI prevails
» Applies even if perfected party takes interest with knowledge of earlier unperfected interest
.
Perfected vs. perfected SI - first to file or perfect prevails
» When there are conflicting perfected Sis, priority goes to party that first filed or perfected (usually will be first to file)
» Where collateral is not subject to filing requirements (or cannot be filed), first to perfect obtains priority
» Knowledge of a prior unperfected SI will not prevent a prospective secured party from filing first to obtain priority

Question 22

Priority in PMSIs

Answer 22

PMSIs are superpriorities, meaning they are superior to prior perfected Sis in the same goods, subject to the below conditions

Question 23

PMSI in inventory

Answer 23

has priority over other SIs in the inventory or proceeds (instruments, chattel paper, identifiable cash proceeds) if:
1. PMSI is perfected when debtor takes possession of inventory; and
2. Other parties who filed their SIs in inventory receive authenticated notification of the PMSI before debtor takes possession of inventory
» Notification must state that PMSI will be taken in debtor’s inventory and describe kind and type of inventory

Question 24

PMSI in goods (non-inventory or livestock)

Answer 24

has priority over other Sis in the same goods and their proceeds if PMSI is perfected before or within 20 days after debtor receives possession of the collateral
• No requirement that secured party notify other SI holders

Question 25

Conflicting PMSIs

Answer 25

where there are multiple PMSIs in the same collateral, priority goes Secured party who has PSI as the seller of the collateral (as opposed to lender), or Otherwise, first secured party to file or perfect
* Eg. A takes $300 loan from bank to buy $500 TV, giving bank SI in TV, then A signs credit agreement with TV store to complete purchase; store, as seller of collateral, has priority over bank as lender.

Question 26

Priority in Proceeds

Answer 26

Perfected Sls in proceeds generally have the same date of priority as the SI in the original collateral that generated the proceeds

Proceeds from varying categories of collateral - where multiple Sis exist in proceeds, the type of collateral that generated the proceeds can determine priority
Filing collateral - secured party would normally achieve priority by filing financing statement (e.g., goods, accounts, general intangibles)
• Non-filing collateral - secured party would normally achieve priority by possession or control, not filing (e.g., cash, chattel paper, negotiable documents, instruments)

Question 27

Security Interests in Fixtures, Accessions, & Crops

Answer 27

Fixtures - goods that become attached to real property, such that an interest in them arises under real property
• Priority - first to file or record prevails
» Where a SI in fixtures competes again an interest in the real property containing the attached fixture, the first party to file a fixture filing or record its real property interest prevails
» Fixture filing = filing a financial statement where the mortgage on the real property would be recorded
• Exception - PMSIs
» PMSI secured parties who make a fixture filing within 20 days of affixation prevail over a real property interest recorded prior to affixation

Question 28

Accessions

Answer 28

collateral that does not lose its identity when physically united with other goods
• E.g., a hard drive serving as collateral does not lose its identity when installed in a laptop
• SIs can be created in the collateral and continue when collateral becomes an accession
Crops - perfected S1 in crops has priority over an interest in the land on which crops are planted,
regardless of time of filing or perfection

Question 29

Priority of Buyers vs. Third-Party Creditors

Answer 29

Where a buyer purchases goods without knowledge that the sale of goods violates the rights of a secured creditor, buyer can take free of SI
• Two situations where this arises - buyers vs. unperfected secured party and buyers in the ordinary course of business (“BIOC”) vs. a perfected secured party

Question 30

Buyer vs. unperfected secured party

Answer 30

buyer will prevail if, before collateral is perfected, he:
1 Gives value and receives delivery; and
2. Has no knowledge of the SI

Question 31

Buyer vs. perfected secured party

Answer 31

generally, perfected SI prevails
.
BIOC exception - buyer prevails over nonpossessory perfected Si if:
1. Buyer has no knowledge that the sale violates terms of seller’s security agreement; and
2. Buyer is a BIOC (i.e., buyer is one who buys in the ordinary course of business from seller, who is in the business of selling goods of that kind)

Question 32

PMSI in consumer goods

Answer 32

where buyer purchases consumer goods subject to a PMSI and sells the goods to another consumer, second buyer takes free of the SI if he buys:
1. Without knowledge of the SI;
2. For value; and
3. Before financing statement covering the goods has been filed

Question 33

Secured Parties vs. Judicial Lien Creditors

Answer 33

Judicial lien creditors (“JLCs”) are those who acquire a lien on collateral through judicial attachment, levy, etc.
Perfected secured party vs. JLC - prior perfected SI prevails
• I.e., JLC prevails only if they become JLCs before a secured party files or perfects
Future advances - if secured party makes future advances to debtor, secured party has priority over/future advances if:
a. Future advance was made before, or within 45 days, after lien arose, or
b. Future advance was made without knowledge of the lien
Unperfected secured party vs. JLC - JLC prevails .
PMSI grace period exception - secured party who attaches a PMSI in collateral before JLC acquires an interest in collateral has priority if it files within 20 days after debtor receives collateral

Question 34

Default & Right to Repossess or Collect

Answer 34

Upon default, a secured party may take possession of collateral without judicial process or collect on non-goods via authenticated notification
• Note - default is defined in security agreement; not defined by Art. 9

Reclaiming possession - reclaiming possession through self-help is allowed as long as no breach of the peace occurs
.
Breach of the peace = repossession made over debtor’s protest
» Violence, threats of violence, breaking and entering, etc. will likely constitute a breach of the peace
Simple trespass in order to repossess property is permissible
• E.g, permissible to unlock and hot wire a car used as collateral if the car is sitting in a driveway

Question 35

Collection rights

Answer 35

when collateral is non-goods (e.g., accounts or instruments), upon default the secured party can notify the person owing the debtor (account debtor)
• Secured party must send authenticated notification to account debtor stating that amount due has been assigned and payment must be made to secured party
» Upon notification, account debtor can only discharge his obligation by payment to secured party
• E.g. A loans B $10,000, for which A receives a promissory note; A takes out a loan from C for $5,000 using B’s promissory note as collateral; A defaults on C’s loan; C may notify B of A’s default and require that B pay C on the promissory note.

Question 36

Post-Default Disposition of Collateral by Secured Party

Answer 36

Upon default, a secured party can dispose of collateral (i.e., sell, lease, etc.) as long as it is done in a commercially reasonable manner

Question 37

Notice

Answer 37

notice of sale must be given to debtor in authenticated writing
• Must be sent in a reasonable time before sale/disposition

Question 38

Effect of sale

Answer 38

sale discharges SI under which sale is being made, as well as any subordinate Sis and liens
• Purchaser of collateral generally takes debtor’s rights in collateral

Question 39

Surplus or deficiency

Answer 39

where amount collected from sale varies from amount of obligation remaining on the SI
• Surplus - sale generates more than remaining obligation; secured party must pay debtor any surplus
.
Deficiency - sale generates less than remaining obligation; debtor is still liable for amount remaining
• Exception - neither party is liable for surplus or deficiency if underlying transaction involves: accounts, chattel paper, payment intangibles, or promissory notes

Question 40

Right to redeem

Answer 40

until secured party has sold collateral or discharged debt by retaining collateral (i.e., strict foreclosure - see card 19), debtor or any other secured party may redeem collateral by paying all remaining obligations plus reasonable expenses incurred for repossession

Question 41

Strict Foreclosure

Answer 41

In a strict foreclosure, upon default the foreclosing party may keep collateral (as opposed to selling it) to fully or partially satisfy the debt

Question 42

Strict Foreclosure Requirements

Answer 42

1. Debtor must consent to strict foreclosure - two ways to consent:
   a. Debtor agrees to strict foreclosure in authenticated record, or
   b. Debtor fails to object within 20 days after secured party sent notice of strict foreclosure
2. Secured party must send notice of intent to keep collateral
   » Authenticated notice must state that collateral being kept is in satisfaction of the debt
   » Notice must be sent to debtor and any other secured party who:
   i. Provided notice of a claim to the collateral; and
   ii. Perfected a SI in the collateral by filing a financing statement or making a notation on
   a title certificate
3. No notified party objects within 20 days - if a notified party objects, collateral must be disposed of through sale

Question 43

Strict Foreclosure Exceptions

Answer 43

Consumer transactions - secured party may not keep collateral in partial satisfaction of debt, then seek deficiency judgment for remaining unpaid balance
.
Consumer goods - where debtor has paid at least 60% of a PSI or loan, secured party must sell collateral within 90 days after repossession unless debtor waives rights requiring sale

Question 44

Liability for Art. 9 Violations

Answer 44

Secured parties are liable for failure to comply with Art. 9.

Remedies available:
• Actual damages - debtor can recover damages reasonably calculated to put her in the position she would be in had no violation occurred
.
Damages for consumer goods - if collateral involved is consumer goods, debtor is entitled to at least 10%/of the cash price of the goods plus interest charges to be paid over the life of the oan
• Loss of deficiency judgment - secured party may lose right to deficiency judgment
» Non-consumer transactions - rebuttable presumption rule:
• Value of collateral seized is presumed equal to debt owed unless the secured party proves otherwise
• » - Consumer transactions - courts take one of three approaches:
1. Follow rebuttable presumption rule,
2. Deny secured party deficiency judgment, or
3. Allow secured party to recover deficiency minus actual damages debtor can prove

Question 45

Governing Law & Debtor Location

Answer 45

Governing law - law of the state where debtor is located generally governs perfection of a SI
• Individual debtors - location is place of principal residence
• Registered organizational debtors - location is state under whose laws it is organized (e.g., where Articles of Incorporation filed)
• Unregistered organizational debtors (e.g. partnership) - location is place of business or chief executive office if more than one place

Common exceptions:
* Certificate of title - where goods are covered by a certificate of title (e.., autorobile), the state issuing the most recent certificate of title governs perfection
Agricultural liens - governed by law of state in which farm product is located
.
Possessory Sis - governed by law of state in which collateral is located

Question 46

Interstate Movement of Debtor or Collateral

Answer 46

Issues arise where debtor or collateral moves from one state to another
• SI generally remains temporarily perfected
» Gives secured party time to perfect in new state
» If secured party fails to perfect in new state, interest becomes unperfected and thus loses its time of priority

Question 47

Relocation of debtor

Answer 47

SI remains perfected for four months
• To remain continuously perfected, secured creditor must file in the new jurisdiction before the four month period expires

Possessory SI.- if collateral in one state perfected by a possessory SI in that state is moved to a new state, SI remains perfected as long as it would be perfected by possession under laws of the new state

Cars/vehicles & certificate of title - if moved from one state and the new state issues a title certificate, the original perfected SI lasts as long as it would have if new title had not been issued

New debtor in different state - arises where a new debtor becomes bound by another’s security agreement in a different state
• If collateral is transferred to a new debtor located in a different state, SI remains perfected until one year after sale of collateral or until perfection in original state lapses, whichever occurs first