Secured Transactions

Question 1

If someone owes you money, to feel more “secure” that you will be paid, you will want the other side to agree that some of their personal property will be ____________ for the debt owed to you.

Answer 1

collateral

Question 2

If the debtor fails to pay you, you will want to be able to…

Answer 2

repossess the collateral, sell it, and apply the proceeds to your expenses and the debt owed to you (and any excess would go back to the debtor)

Question 3

How do you establish priority as a creditor?

Answer 3

In general, each State has a filing system, usually overseen by the Secretary of State’s Office in each State, where a creditor can file.

Question 4

What do you file as a creditor?

Answer 4

One Page (Form UCC1***)

Question 5

Who makes the shipping agreements?

Answer 5

Seller unless otherwise agreed to

Question 6

In general, can the buyer reject a late shipment?

Answer 6

Not unless buyer faces material delay or loss.

Question 7

Standards preferred by?

Answer 7

realists

Question 8

rules preferred by

Answer 8

formalists

Question 9

UCC Article 9 concerns

Answer 9

personal property secured financing

Question 10

Fast N. Furious misses a few car payments, and the bank’s agent repossess the car. Although the bank did not have to provide notice before it took the car, after the repo it has to give Fast reasonable notice of a future sale of the car (it likely has to be at least

Answer 10

10 days notice

Question 11

When the bank sells the car and collects the proceeds, it has to apply the proceeds as follows:

Answer 11

First, to cover the expenses of the repossession;
Second, to cover the expenses of the sale (such as the cost of the auctioneer);
Third, to cover any attorney fees;
Fourth, the bank can apply the proceeds against the debt owed, and
Fifth, the bank must pay any excess to the debtor [Frank N. Furious]

Question 12

If Frank N. Furious sends a request, the bank must send a statement explaining the disposition of the proceeds from the sale within ___ days?

Answer 12

14

Question 13

The parties can agree to apply the law of any State “when the transaction [has] a

Answer 13

reasonable relation [or relationship] to the State.” UCC 1-301(a)

Question 14

Does the UCC define “transaction”?

Answer 14

no

Question 15

Since a transaction can be within the scope of Article 9 “regardless of its form,” we should focus on

Answer 15

the substance of the transaction

Question 16

security interest

Answer 16

An interest in personal property or fixtures which secures payment or performance of an obligation.”

Question 17

Conditional Sales Contract

Answer 17

When the contract provides that the seller will deliver possession of the goods to the buyer, but retain title to the goods until the buyer pays the total purchase price.

Question 18

Thus, the “substance” of a Conditional Sales Contract is

Answer 18

a sale of the goods, with the seller retaining a security interest in the goods to secure payment of the purchase price.

Question 19

Another transaction within the Scope of Article 9

Answer 19

a “sale of accounts, chattel paper, payment intangibles, or promissory notes”

Question 20

a Form UCC-1 is only effective to establish priority for

Answer 20

5 years.

Question 21

a Form UCC-1 is only effective to establish priority for

Answer 21

5 years.

Question 22

A continuation Form UCC-1 can be filed

Answer 22

6 months before the expiration.

Question 23

Deb-Jo Construction case: The failure of an attorney to file a financing statement (also called a “Form UCC-1”) in the manner required to perfect the security interest is

Answer 23

malpractice as a matter of law

Question 24

Before Article 9, this area of the law was described as

Answer 24

chaos because (i) different rules applied depending on the type of collateral, and (ii) there was no agreed-upon central filing system.
Item #2: Article 9 is often praised because it created an orderly system of prioritizing

Question 25

one area still outside Article 9 is taking a security interest in intellectual property, such as

Answer 25

patents, copyrights, and trademarks.

Question 26

the difficulty of collecting if you are an unsecured creditor (such as a creditor making a “signature loan”) when the debtor refuses to pay.

Answer 26

First, you would need to file a lawsuit and prevail, thereby obtaining a judgment; at that point, you have become a judgment creditor, but you are still an unsecured creditor.
Second, with the judgment, you would have to get a type of “writ” (or similar document) from the clerk of the court;
Third, you would need to deliver that writ to the Sheriff’s Office, and they would need to seize or otherwise secure part of the debtor’s property for you. This may be difficult because a substantial part of the debtor’s assets may qualify for exemptions from seizure, garnishment or levy. Assets exempt from seizure would include part of the value of a residence, one or more cars, as well as the debtor’s household furnishings (or furniture), appliances, and other belongings.
Fourth, you would need to prove that no other creditor had superior rights in that property being held by the Sheriff’s Office.

Question 27

in the Mark LaCasse case, seller failed to make a reasonable contract with the common carrier because:

Answer 27

First Reason: The seller insured goods worth $1,663 for only $200.
Second Reason: The seller misaddressed the package.
Third Reason: The seller sent the package fourth class with the U.S. Postal Service.
Fourth Reason: The seller shipped the valuable calculators in a box clearly proclaiming the contents.

Because the seller failed to make a reasonable contract with the common carrier, the risk of loss remained on the seller until the goods were actually delivered to the buyer.

Question 28

• Which one is by land (truck)?

Answer 28

FOB

Question 29

• Which one is by sea (ship)?

Answer 29

• FAS

Question 30

The place designated after the fancy abbreviations is where the risk of loss shifts from the seller to the buyer. [For example, if the seller is in Buffalo, the buyer is in Boston, and the contract provides “F.O.B. Buffalo,” while the goods are in transit the risk of loss will be on the [choose one: buyer/seller].

Answer 30

buyer

Question 31

UCC 2-510 basically provides that if the shipment fails to conform to the contract specifications, the buyer can reject the goods,

Answer 31

and the risk of loss will stay with the seller.
POLICY: Since the goods shipped were not the goods the customer ordered, the customer should not have to pay, even if the goods were damaged in transit.

Question 32

if the buyer had insurance on the goods and collected on the insurance when the goods were lost, stolen, or destroyed in transit, the buyer could

Answer 32

only sue the seller for damages in excess of the insurance coverage.

Question 33

In order for a seller to take advantage of the general rule that the risk of loss is on the buyer (while the goods are in transit), the seller must

Answer 33

“duly deliver” the goods to the carrier.

Test #1: Make a reasonable contract with the carrier (e.g. refrigerate the strawberries; “water the livestock”);
Test #2: Promptly deliver any documents necessary to ensure the buyer can take possession of the goods (e.g. if the goods will be delivered to a port or dock, provide bills of lading); and
Test #3: Promptly notify the buyer of the shipment (POLICY—This is essential so that the buyer can purchase insurance covering the goods in transit)

Question 34

• Is the test of “promptly notifying” better described as a rule or standard?

Answer 34

standard

Question 35

“The majority of transactions involving Article 9 [which involves a security interest in personal property in both substance and form] are

Answer 35

(i) lonas (by a bank or other creditor), or (ii) sales on credit ,” where the seller is allowing the buyer to make payments over time.”

Question 36

no collateral, Steps Needed to Collect on a Signature Loan, also Called a Personal Claim:

Answer 36

Step #1: When the debtor fails to voluntarily pay, you sue to obtain a judgment for money damages.
Step #2: If you win a judgment, you have become a judgment creditor (but you are still unsecured). At this point, to try to collect, you need to use a “legal process” to obtain, through the court clerk’s office, a document or “writ” for attachment, garnishment, replevin, etc.).
Step #3: You then deliver the document/writ to the Sheriff’s Office with a request to seize any of the debtor’s available property.

Question 37

Things that may prevent the Sheriff’s Office from seizing property:

Answer 37

exemptions from garnishment, levy, or other collection procedures.

Question 38

Things that may prevent you from being entitled to the seized items

Answer 38

claims of other creditors (specifically secured creditors).

Question 39

The “exemptions” from collection can include

Answer 39

some amount of value of the debtor’s residence, at least one or more cars, a substantial amount of household furnishings [or furniture] and belongings, and their retirement accounts.

Question 40

A loan that is unsecured (for which there is no collateral)

Answer 40

Signature Loans

Question 41

Often the seller of the goods extends credit to the buyer (ex. payments over time)

Answer 41

Equipment & Fixture financing

Question 42

Often acquired when making a loan (or other financing arrangement) secured by A/R or inventory

Answer 42

Floating Lien in After Acquired property

Question 43

Historically “factors” purchased these assets, but today the lender may use the form of a loan and security agreement.

Answer 43

Accounts Receivable Loan

Question 44

The security interest in particular goods will vanish as the debtor sells assets to purchasers in the ordinary course of business

Answer 44

Inventory Loans

Question 45

A financing arrangement frequently used for car dealerships; as each car is sold, a portion of the proceeds is used to pay off the loan made for that particular car.

Answer 45

Floor Planning

Question 46

Federal loans may grant a super-priority to those who finance these particular activities (including raising livestock

Answer 46

Agricultural financing

Question 47

It’s often said the “acid test” for a security interest is

Answer 47

bankruptcy

Question 48

an enforceable security interest is created between

Answer 48

creditor and debtor

Question 49

default

Answer 49

An action (or inaction) by the borrower that grants the creditor the right to take a collection action.

Question 50

Priority Dispute

Answer 50

When creditors have conflicting claims in the same collateral

Question 51

Consumer goods

Answer 51

goods used primarily for personal, family or household use immediately before delivery.

Question 52

A preliminary definition of “perfection”

Answer 52

obtaining priority over competing creditor claims.

Question 53

5 Transactions that may not be a “security interest in form, but will be treated as within the scope of Article 9:

Answer 53

Item #1: Agricultural Liens

Item #2: Disguised Rental Agreements [Prof Note: The parties may call it a “rental agreement” or “lease,” but Article 9 will treat it as a sale and the retention of a security interest.]

Item #3: Sale of Accounts (historically referred to as “factoring the receivables”)

Item #4: Conditional Sales Agreements

Item #5: Consignments

Question 54

The consignment will not be treated as creating a security interest in the following situations:

Answer 54

Situation #1: The consignee is not a merchant.
Situation #2: The consignee does not deal in goods of that kind.
Situation #3: The consignee is an auctioneer.
Situation #4: The consignee is known by its creditors to be regularly engaged in the selling of other people’s goods.
Situation #5: For each delivery, the aggregate value of the goods is less than $1,000.

Question 55

Item #1: Under UCC 1-203(a), “Whether a transaction in the form of a lease creates a [true] lease [or is a disguised sale with a ] security interest is [a question of (choose one: fact or law)].

Answer 55

fact

Question 56

the relevant rules of UCC 1-203(b) for purposes of Marhoefer Packing are as follows:

Answer 56

It may be a disguised sale (with a security interest) if the renter/lessee is obligated to pay rent for the right of possession for a fixed term (without an ability to terminate) if

• The term of the lease is equal to or greater than the remaining economic life of the goods; OR
• The renter/lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement

UCC 1-203(d): “Additional consideration” is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised.

Additional consideration is NOT nominal if . . . when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.

Question 57

there are 4 special transactions that do not appear to create a security interest in form, but they are treated as creating a security interest in substance (and therefore are subject to Article 9).

Answer 57

Sale of Accounts Receivable (A/R), Promissory Notes, Chattel Paper, and Payment Intangibles (specifically included under Article 9 by UCC 9-109(a)(3))

Conditional Sales Contracts.

Consignments:

Question 58

Sale of Accounts Receivable (A/R), Promissory Notes, Chattel Paper, and Payment Intangibles (specifically included under Article 9 by UCC 9-109(a)(3))

Answer 58

Historically, a purchaser of accounts receivables was called a factor.
The details may vary from deal-to-deal, but generally a purchaser of A/R, in form, would be the owner of the A/R. Conflicts could arise because another creditor, in form, could loan money and agree to take a security interest in the same A/R. (see page 37 top) UCC 9-109(a)(3) specifically applies Article 9 to a “sale of accounts,” so both creditors would be subject to the filing, priority, and other rules of Article 9.
Item #11: The same rule (UCC 9-109(a)(3)) applies to the sale of promissory notes, chattel paper (such as a retail installment payment contract when you purchase a car), and payment intangibles (such as a tax refund).

Question 59

Conditional Sales Contracts.

Answer 59

As we have discussed before, these are transactions when a seller of goods delivers possession of the goods to the buyer, but the parties agree that the seller will retain title to the goods until the buyer makes all the payments to the seller required under the deal.
UCC 2-401(1) provides that “Any retention or reservation by the seller of the title in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest.” [Prof Note: These are specifically made subject to Article 9 under UCC 9-109(a)(5) and UCC 9-110.]

Question 60

Consignments:

Answer 60

In a consignment, the owner of the goods transfers possession of the goods to a merchant that agrees to try to sell the goods. If the party is successful and sells the goods, it typically will retain a fee and remit the balance of the sale proceeds back to the consignor. UCC 9-109(a)(4) specifically brings a consignment into the scope of Article 9.
Item #14: Again, the policy is that other potential creditors may be misled if these transactions were not treated as security interests. The goods on consignment may be commingled with the merchant’s regular inventory, so a potential creditor might over-estimate the extent of the merchant’s inventory.

Question 61

Consignments Excluded from Article 9:

Answer 61

• the merchant [choose one: does not] deal in goods of that kind; [In the Fabers case, this exception was narrowly interpreted; specifically an ordinary seller of rugs could be treated as dealing in expensive Persian rugs because they are in the “floor covering” business.]
• the merchant is an auctioneer
• the merchant is generally known by its creditors to be substantially engaged in the business of selling goods on consignment
• with respect to each delivery, the aggregate value of the goods is less than [choose one: $1,000] at the time of delivery

Question 62

The test under UCC 1-203 can be summarized as follows:

Answer 62

It may be a disguised sale (with a security interest) if the renter/lessee is obligated to pay rent for the right of possession for a fixed term (without an ability to terminate) if

The term of the lease is equal to or greater than the remaining economic life of the goods; OR

The renter/lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement

[UCC 1-203(d) Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised.

Additional consideration is NOT nominal if . . . when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.

Question 63

In Marhoefer Packing, the Bankruptcy Trustee’s argument that the term of the lease was equal to or greater than the economic life of the goods failed because

Answer 63

the lessee (Marhoefer Packing) had the option to terminate after 4 years (and the machine was expected to be useful for at least 8 years).

Question 64

In Marhoefer Packing, the Bankruptcy Trustee’s other argument—that the lessee could purchase at the end of the fixed 4-year lease term for nominal additional consideration [choose one: failed because

Answer 64

because when the [choose one: contract was entered into the option price was a reasonable estimate of the fair market value.
Nevertheless, the court emphasized there is no bright line for determining whether the option price will be adequate in a close case.

Question 65

Item #5: In Marhoefer Packing, the court concluded that the lessor could recover the equipment when Marhoefer Packing went bankrupt (even though the lessor failed to file a Form UCC-1) because the arrangement was a [choose one: true lease/disguised sale with a security interest].

Answer 65

true lease

Question 66

The following transactions do not involve a security interest within the scope of Article 9:

Answer 66

• Transactions involving ships, airplanes, and railcars
• Liens created by State law for services or materials, such as mechanics liens, garage liens (such as for auto repairs), and tow yard liens.
• A sale of accounts receivables or promissory notes in connection with the sale of a related business.

Question 67

There are 3 general requirements for attachment (a/k/a creation of a valid security interest under UCC 9-203(b)):

Answer 67

Requirement #1: Value: The creditor must give value which is generally any consideration, including a mere agreement or commitment; to extend credit (as well as actually transferring/loaning cash or selling goods on credit).
* Making a gift [choose one: would/would not] qualify as giving value.
* A lender is also treated as giving value when taking security for a pre-existing claim. UCC 1-204(2).
The lender’s ability to provide “value” before actually transferring cash or goods is important because the time of attachment can set the time of perfection of the creditor’s security interest, which can determine if the lender has priority.
UCC 1-204 (4) described “value “ as including any consideration sufficient to support a simple contract.
Item #9: Requirement #2: Rights: The debtor must be able to transfer rights in the collateral—the debtor could own the collateral, or the owner of the property could authorize the debtor to use the property as collateral.
On a sale on credit, the buyer acquires sufficient “rights’ in the purchased goods when the goods are identified to the contract under UCC 2-501.

Item #10: Requirement #3: Agreement/Description: There must be a voluntary agreement to grant a lien/security interest, and the agreement must describe the collateral. UCC 9-203(b)(3)(A).
The security agreement can be a separate document, or it could be part of a loan agreement or a purchase and sale agreement, or it could be very informal—a simple letter from the buyer/debtor, or a settlement agreement

Question 68

Required Elements of a Valid Security Agreement:

Answer 68

Element #1: Description of the Collateral
Element #2: Identification of the Parties
Element #3: Description of the Obligation Secured

Question 69

UCC 9-108 describes when a description will be sufficient—generally, it merely must

Answer 69

“reasonably identify” the collateral and need not be specific.

Question 70

Inadequate descriptions include

Answer 70

(i) “all assets;” (ii) “all personal property,” and (iii) “all commercial tort claims.” UCC 9-108(c) & (e)

Question 71

Stocks & Bonds

Answer 71

Investment Property

Question 72

Partnership or LLC Interest, Tax Refund

Answer 72

General Intangibles

Question 73

Promissory Notes, Checks & Drafts

Answer 73

instruments

Question 74

Retail Installment Contracts (like when buying a car)

Answer 74

chattel paper

Question 75

Bank Accounts (or Accounts at Other financial institutions)

Answer 75

Deposit accounts

Question 76

As demonstrated in the Troupe case, the description/classification of the collateral under the UCC can impact how the creditor can

Answer 76

perfect in its security interest

Question 77

In Troupe, the creditor did not need to file a Form UCC-1 to perfect its security interest in a tractor because the tractor was described as

Answer 77

a consumer good

Question 78

collateral may be sold in either

Answer 78

public or private setting

Question 79

Safe-Harbors for a “Commercially Reasonable Disposition

Answer 79

• In the usual manner on a recognized market
• At the current price in any recognized market
• Otherwise in conformity with reasonable commercial practices among dealers in the type of property
• A disposition approved in a judicial proceeding [or in a bona fide creditors’ committee—presumably in bankruptcy]

Question 80

If a creditor fails to satisfy a safe-harbor, then it must prove

Answer 80

that every aspect of the sale was commercially reasonable

Question 81

“reputable dealer” test.]

Answer 81

In keeping with prevailing trade practices among reputable and responsible businesses . . . engaged in the same business.”

Question 82

Factors that may indicate a sale was not “commercially reasonable”

Answer 82

include (i) the sale was poorly publicized; (ii) it was sparsely attended; (iii) the auctioneer was sub-par, and/or (iv) it was inconveniently located.

Question 83

If the secured party fails to meet a safe-harbor (such as the “reputable dealer” test), then the secured party must prove that “every aspect” of the disposition, including

Answer 83

including the method, manner, time, place, and other terms were commercially reasonable

Question 84

rules on the creditor repossessing and keeping the collateral

Answer 84

• The term for this is strict foreclosure.
• Generally, in the case of consumer goods for which the consumer has paid at least 60% of the price, the secured party must dispose of the collateral within 90 90 days. UCC 9-620(e). [Prof Note: This does not seem to be mentioned in the Casebook.] Thus, in these cases there is no strict foreclosure.
• In all cases involving consumer goods, the creditor can only retain the repossessed goods in full satisfaction (no partial satisfaction is allowed).
• For non-consumer goods, the creditor can only retain the collateral in partial satisfaction with the debtor’s consent. The creditor could retain the non-consumer goods in full satisfaction if the debtor failed to respond to a notice within 20 days.
• In these situations, a debtor can always protest and require a sale.

Question 85

Item #4: HYPO: The Parties to a Security Agreement—New Debtors: Crypt’s Credit loaned Drac’s Vampire Den the money to begin operation of a chain of haunted houses. The loan was secured by all current or after-acquired equipment (and proceeds from dispositions thereof). Within a year, Frank’s Fright House, a much larger corporation, purchased all the assets of Drac’s Vampire Den and agreed, by contract, to become obligated for all of Drac’s Vampire Den’s obligations.
* Question a: Presume Drac’s Vampire Den ceases to exit—Is Crypt’s Credit’s loan still secured? (Yes/No) Who is the debtor?
* Question b: Is it necessary for Crypt’s Credit to have Frank’s Fright House sign a new security agreement? (Yes/No)

Answer 85

Yes, Frank’s Fright House, No

Question 86

At common law, what event appears to always qualify as an event of default?

Answer 86

failing to make a payment on time

Question 87

written security agreements usually provide that the debtor will be in default if the creditor has reasonable grounds for insecurity

Answer 87

“This should only arise if the creditor has a good faith belief that the prospect performance is impaired; it cannot be a mere whim or caprice.”

Question 88

A creditor generally has the option of declaring a debtor in default upon the occurrence of the specified event; it is not automatic. (T/F)

Answer 88

True

Question 89

It is customary to provide in a security agreement that if a debtor is in default, the creditor may accelerate all remaining payments. (T/F)

Answer 89

True

Question 90

Taking possession (in other words, repossessing) without judicial process is allowed, but only if

Answer 90

if there is no breach of the peace. The UCC provides no definition of a breach of the peace; instead, it is left to the courts to decide.

Question 91

If a creditor uses an independent contractor to repossess the collateral, could the creditor be liable for damages in the event of a breach of the peace?

Answer 91

Yes

Question 92

damages for a breach of the peace

Answer 92

actual damages and principles of tort law

Question 93

is breach of the peace interpreted broadly?

Answer 93

YEs

Question 94

when is there a breach of the peace

Answer 94

there is a breach of the peace even if the debtor “mildly protests and the repo person takes possession

Question 95

If a debtor defaults, is the creditor required to provide the debtor with advance notice that it plans to repossess the collateral?

Answer 95

No

Question 96

A sale will be in a “commercially reasonable manner” if

Answer 96

First: The manner of the sale is approved in advance by a court or creditors’ committee.
Second: The collateral is sold in the usual manner in a recognized market at the current price.
Third: The collateral is sold in conformity with reasonable commercial practices used among dealers in that type of property. The courts have summarized this safe harbor as the reputable dealer standard.

Question 97

Generally, is the creditor required to give the debtor notice before selling the collateral?

Answer 97

yes, unless goods are perishable or likely to decline in value rapidly.

Question 98

In the case of non-consumer goods, at least ____days notice before the sale

Answer 98

10

Question 99

In the case of consumer goods, __________ is required and the notice must include a phone number the debtor can use to find out the amount the consumer would need to pay to redeem the collateral.

Answer 99

reasonable noteice

Question 100

merely requires that the creditor properly send the notice; the statute does not require that the debtor receive the notice. Nevertheless, the UCC always requires good faith in contract performance and enforcement. (T/F)

Answer 100

True

Question 101

The creditor must always sell repossessed consumer goods within ___ days if the debtor had paid at least 60% of the cash price. UCC § 9-620
In contrast, if the creditor keeps the repossessed property, this is called a “strict foreclosure.”

Answer 101

90

Question 102

As a matter of policy, should “strict foreclosure should be encouraged as it often will produce better results than a disposition for all concerned.” UCC § 9-620 Comment #2.

Answer 102

yes

Question 103

In a consumer goods transaction, the creditor can only retain the collateral in full satisfaction of the debt if the creditor sends a notice proposing the creditor’s acceptance of the collateral in full satisfaction of the debt, and the debtor consents, or the consumer fails to respond within 20 days of the notice.

Answer 103

Treu

Question 104

Partial Satisfaction Rules: For non-consumer collateral, the creditor needs the signed consent of the debtor to make a partial satisfaction; for consumer collateral, the creditor is not permitted to make a partial satisfaction. UCC § 9-620 Comment 12

Answer 104

T