Secured Transactions

Question 1

What is a security interest?

Answer 1

A security interest is generally an interest in personal property or fixtures that secures payment or performance of an obligation.

Question 2

Classification of goods

Answer 2

1. Consumer goods
2. Farm products
3. Inventory
4. Equipment

When the debtor uses the property for multiple purposes, the principal use to which the debtor puts the property determines the class of the goods.

Question 3

What are the other classes of collateral?

(other than goods)

Answer 3

1. Chattel paper
2. Document
3. Insruments
4. Investment Property
5. Accounts
6. Commercial tort claims
7. Deposit Account
8. Letter-of-credit right
9. General intangibles

Question 4

When is a lease treated as creating a security interest?

Answer 4

A transaction in the form of a lease is treated as creating a security interest if the lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease, the payment obligation cannot be terminated by the lessee, and one of the following four conditions is also met:

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

ii) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become owner of the goods;

iii) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or

iv) The lessee has an option to become the owner of the goods, for no additional consideration or nominal additional consideration, upon completion of the lease agreement.

Question 5

When do consignments fall within the scope of Article 9?

Answer 5

i) A person (i.e., the consignor) must deliver goods to a merchant for the merchant to sell;

ii) The merchant (i.e., the consignee) must:

     a)    Deal in goods of that kind,

     b)    Not operate under the name of the          consignor,

      c)    Not be generally known by its creditors to be substantially engaged in selling the goods of others, and

      d)    Not be an auctioneer;

iii) Regarding each delivery, the value of the goods delivered must be at least $1,000 at the time of the delivery; and

iv) The goods must not be consumer goods immediately before the delivery.

the consignor’s security interest in the consigned goods is treated as a purchase-money security interest (PMSI) in inventory.

Question 6

What is considered value given?

Answer 6

i) By providing consideration sufficient to support a simple contract;

ii) By extending credit, either immediately or under a binding commitment to do so (the debtor need not draw upon the credit);

iii) As a buyer, by accepting delivery under a preexisting contract, thereby converting a contingent obligation into a fixed obligation; or

iv) In satisfaction of, or as security for, part or all of a preexisting claim.

Question 7

When is a security interest considered attached (enforceable against the debtor)?

Answer 7

For the security interest to be enforceable against the debtor, three conditions must coexist:

• Value has been given by the secured party;
• The debtor has rights in the collateral; and
• The debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral under a security agreement.

When these conditions coexist, the security interest attaches, unless there is an agreement to postpone the time of attachment.

Question 8

Requirements for a security agreement

Answer 8

Must satisfy statute of frauds:
- Established by the debtor’s authentication (1. be in a record, 2. contain a description of the collateral, and 3. be authenticated by the debtor) of the agreement, or the secured party’s possession or control of the collateral

Question 9

Duties arising from the secured party’s possession or control of collateral

Answer 9

1. Duty of care
2. Duty to keep collateral identifiable
3. Duty to relinquish possession of collateral upon satisfaction of the secured obligation
4. Duty to relinquish control of collateral upon satisfaction of the secured obligation (10 days)

Question 10

Rights and risks arising from the secured party’s possession or control of the collateral

Answer 10

1. Right to charge for reasonable expenses
2. Risk of loss or damage is on the debtor
3. Right to use or operate collateral (for the purpose of preserving the collateral or its value)
4. Right to hold proceeds (except for funds which would be applied to reduce secured obligation or remitted to debtor)

Question 11

PMSI in Goods

Answer 11

A PMSI in goods exists when:

1. a secured party sold goods to the debtor, and
2. the debtor incurs an obligation to pay the secured party all or part of the purchase price.

A PMSI in consumer goods is automatically perfected upon attachment.

Question 12

PMSI in Software

Answer 12

A PMSI in software exists only when the debtor acquired his interest in software in an integrated transaction in which the debtor also acquired an interest in goods (e.g., a computer), and the debtor acquired that interest in the software for the principal purpose of using the software in the goods.

The security interest in the software must also secure an obligation concerning the goods, and the secured party must hold a PMSI in the goods.

Question 13

Security interest in commingled goods

Answer 13

Once goods have been commingled, a security interest in the specific goods that have been commingled cannot be obtained. However, a security interest may attach to the product or mass that results when the goods are commingled.

such as a security interest in inventory of a manufacturer who makes brass by combining copper and zinc.

Question 14

Methods of perfection

Answer 14

Under Article 9, there are four ways a secured party can perfect a security interest:

i) Filing of a financing statement;

ii) Possession of the collateral;

iii) Control over the collateral; and

iv) Automatic perfection (either temporary or permanent).

Question 15

Requirements for filing a financing statement

Answer 15

A financing statement must contain the following information:

i) The debtor’s name;

ii) The name of the secured party or a representative of the secured party; and

iii) The collateral covered by the financing statement.

Question 16

Rules for names of individual debtors in filing financing statement

Answer 16

1. Only-if Rule (Alternative A) (Majority Rule): The financing statement must reflect the name on the debtor’s current driver’s license or identification card (issued by the state where the financing agreement will be filed). If the debtor does not have a driver’s license, the filer must use either the individual name of the debtor (i.e., the debtor’s current legal name) or the debtor’s surname and first personal name.
2. Safe-harbor Rule (Alternative B): the financing statement may include the debtor’s “individual name” (which the UCC does not define), the name on the debtor’s driver’s license, or the debtor’s surname and first personal name.

If the debtor changes its name and the filed financing statement consequently becomes seriously misleading (i.e., the name on the financing statement does not meet the requirements), then the secured party has four months in which to file an amendment to the financing statement reflecting the new name. Should the secured party fail to act within this four-month window, collateral acquired by the debtor after the four-month period is not covered by the financing statement.

Question 17

For a valid security agreement, what is the proper description of the collateral?

Answer 17

The security agreement must provide a sufficient description of the collateral that reasonably identifies the collateral. A description that identifies the collateral by category or by type of collateral reasonably identifies the collateral.

“all debtor’s assets” or “all debtor’s possessions” is insufficient to reasonably identify collateral

Question 18

Perfected security interest vs. unperfected security interest

Answer 18

A perfected security interest has priority over an unperfected security interest in the same item of collateral.

A secured party’s knowledge of another security interest in the same collateral does not affect the secured party’s priority.

Question 19

Judicial lien creditor

Answer 19

A judicial lien creditor is a creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law.

Question 20

unperfected security interest vs. judicial lien

Answer 20

A judicial lien creditor generally has priority over an unperfected security interest.

Question 21

Perfected security interest vs Judicial lien creditor

Answer 21

A judicial lien creditor takes the collateral subject to an existing perfected security interest (perfected security interest has priority)

Question 22

A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that interest. What are the exceptions?

Answer 22

1. A buyer in the ordinary course of business (BOCB) takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. A BOCB is a person who: (i) buys goods; (ii) in the ordinary course of business; (iii) from a merchant who is in the business of selling goods of that kind; (iv) in good faith; and (v) without knowledge that the sale violates the rights of another in the same goods.
2. A consumer buyer of consumer goods takes free of a security interest, even if perfected, unless prior to the purchase the secured party filed a financing statement covering the goods. A consumer buyer is a person who: (i) buys consumer goods for value; (ii) for his own personal, family, or household use; (iii) from a consumer seller; and (iv) without knowledge of the security interest. (garage sale rule)

Question 23

perfected security interest vs. perfected security interest

Answer 23

If both security interests are perfected, then priority dates from the time of filing or perfection, whichever occurs first.