Secured Transactions Flashcards
(107 cards)
1
Q
A secured transaction arises when
A
a debtor makes a purchase on credit and agrees to give the
creditor a security interest in specific property as collateral for the loan. Secured transactions are
governed by Article 9 of the Uniform Commercial Code (UCC).
2
Q
A security interest is
A
an interest in personal property or fixtures that secures payment or performance of an obligation
3
Q
Secured party
A
The person in whose favor the secured interest is created under the security agreement
4
Q
Obligor (secured transactions)
A
The person who must pay (or otherwise perform) with respect to the obligation that is secured by the security interest.
5
Q
Debtor (ST)
A
The person who has an interest—other than the security interest or other lien—in the
collateral, such as its sole owner (the debtor is usually also the obligor)
6
Q
Collateral
A
Collateral is the property subject to the security interest. The characterization of collateral can affect (1)
the validity of a security interest, (2) the way in which a security interest can be perfected, and (3) the
rights of a third party (e.g., buyer) in the collateral.
7
Q
Goods (ST)
A
Goods encompass anything that is movable at the time the security interest attaches as well as fixtures,
standing timber, unborn animals, unharvested crops, and manufactured homes.
8
Q
What determines the classificaiton of goods (ST)
A
The debtor’s principal use of the good at the time the security interest attaches determines the
classification of the good. As collateral passes from debtor to debtor, or the principal use changes, the
classification of the collateral can change.
9
Q
Types of goods (ST)
A
Consumer goods: Goods acquired primarily for personal, family, or household purposes.
Farm products: Crops (grown/growing/to be grown) or livestock (born/unborn), unmanufactured
products of crops or livestock, and supplies used or produced in farming.
Inventory: Goods (other than farm products) that are held for sale or lease, are furnished
under a service contract, or consist of raw materials, work in process, or materials
used or consumed in a business in a short period of time.
Equipment: Goods that are not consumer goods, farm products, or inventory (a catchall)
Note that software embedded in goods is treated as part of those goods, while unembedded softwar is treated as a general intangible.
10
Q
Non-good collateral
A
There are nine other classes of personal property, the first four of which are sometimes referred to as
quasi-intangible property because a writing usually defines the property right. Unlike the classification of
goods, classification of these nine types of collateral is determined without reference to the debtor’s use.
11
Q
Chattel paper
A
One or more records that evidence both a monetary obligation and a security
interest in specific goods or a lease of specific goods
12
Q
Documents (ST)
A
Refers to a document of title, which confers on the holder ownership rights in
goods held by a bailee
13
Q
Instrument (ST)
A
Encompasses negotiable instruments (e.g., promissory notes, checks) and
nonnegotiable instruments (e.g., certificates of deposit)
14
Q
Investment property (ST)
A
Includes certificated and uncertificated securities, as well as securities accounts
15
Q
Accounts (ST)
A
The right to payment for (1) property sold, leased, or licensed or (2)
services rendered
16
Q
Commercial tort claims (ST)
A
Includes tort claims held by an organization or an individual that arose during
the course of business, but excludes tort claims by an individual for personal
injury or death
17
Q
Deposit accounts (ST)
A
Includes a savings, passbook, time, or demand account maintained with a
bank (e.g., checking or savings account), but excludes investment property and
accounts evidenced by instruments (e.g., certificates of deposit)
18
Q
Letter-of-credit rights (ST)
A
The right to payment or performance under a letter of credit, even though the
beneficiary has not demanded—nor is the time ripe for—payment or performance
19
Q
General intangibiles (ST)
A
A residual category (e.g., copyrights)
20
Q
When classifying rights to payment, first determine
A
whether the collateral is an instrument or
chattel paper. If neither, it is likely an account (if payment is owed for goods or services) or a
payment intangible (if payment is owed for a loan).
21
Q
Leases (article 9)
A
– covered under Article 9 when the transaction, although in the form of a lease, is in substance
a secured transaction
22
Q
Consignments (Article 9)
A
– if subject to Article 9, the consignor’s security interest in the consigned goods is
treated as a purchase-money security interest (PMSI) in inventory
23
Q
Article 9 and real property
A
Article 9 generally does not govern the sale of personal property or real property. However, Article 9 can
apply to a security interest in a secured obligation (e.g., a promissory note) for a real property transaction
even though the obligation is itself secured by a transaction or interest to which Article 9 does not apply
(e.g., a real property mortgage).
24
Q
For a security interest to be enforceable against a debtor, the interest must have
A
attached to the collateral.
25
Attachment occurs if:
Value is given by the secured party
y The debtor has rights in the collateral and
y The debtor has authenticated a security agreement that describes the collateral, or the secured
party has possession or control of the collateral.
A security interest attaches only to the collateral described in the security agreement. The agreement
may cover collateral owned when the security is granted as well as collateral that the debtor acquires
after the security interest is given. However, an after-acquired clause is not effective if the collateral is a
consumer good (unless the debtor acquires the good within 10 days after the secured party gives value)
or a commercial tort claim.
If the above requirements for attachment are met, then the security interest will also attach automatically
to identifiable proceeds of the collateral (i.e., whatever is acquired upon disposition of the collateral).
26
Value given (ST)
The secured party, or a person acting on behalf of the secured party, must give value for the security
interest at the time the security agreement is entered. The security agreement may also provide that the
collateral secures future value given by the secured party (e.g., future advances). Value can be given:
y By providing consideration sufficient to form a contract
y By extending credit
y By accepting delivery under a preexisting contract or
y In satisfaction of a preexisting claim.
Because a security interest can be exchanged for a preexisting debt, the value given need not be new.
27
The basic rule is that a security interest attaches only to
the rights that the debtor has in the collateral.
Regarding consignments, if the consignor retains title to the consigned goods, then the consignee
generally does not have rights in those goods (unless the consignment is covered by Article 9).
28
Security agreement
Attachment also requires a security agreement, and the secured party must satisfy the Article 9 Statute of
Frauds. This means that the security agreement must be established by the debtor’s authentication of
the agreement (most common) or the secured party’s possession or control of the collateral
29
Authentication of a security agreement
To satisfy this requirement, the security agreement must:
y Be in a record
y Contain a description of the collateral and
y Be authenticated by the debtor.
A description is sufficient if it makes it possible to reasonably identify the collateral. A description of the
type of collateral (e.g., “all the debtor’s equipment” or “the debtor’s entire inventory”) is usually sufficient,
but a super-generic description (e.g., “all the debtor’s assets” or “all the debtor’s personal property”) is not.
Authentication requires that the debtor execute or adopt the signature or symbol that is attached to
or associated with the record with the present intention to do so. An original authenticated security
agreement between a debtor and a secured party can serve as a new debtor’s authenticated security
agreement (i.e., the new debtor need not execute another agreement) by operation of law or by contract.
30
Possession or control of collateral to satisfy SOF (ST)
A secured party’s possession of tangible or quasi-intangible collateral satisfies the Article 9 Statute of
Frauds if the secured party’s possession is pursuant to an oral or written security agreement.
A secured party’s control of collateral that typically has no physical existence (e.g., deposit account)
satisfies the requirement that the debtor assent to the security agreement, provided the control is
pursuant to the security agreement.
31
Duties of a secured party (when possessing collatoral)
y Duty of reasonable care in the custody and preservation of the collateral
y Duty to keep the collateral identifiable
y Duty to relinquish possession or control of the collateral upon satisfaction of the
secured obligation
32
Rights of a secured party (when posessing collateral)
Right to use or operate the collateral to preserve the collateral or its value
y Right to hold proceeds received from the collateral
y Right to charge for reasonable expenses incurred in the custody, preservation, use,
or operation of the collateral
33
Who bears risks to collateral in securaty agreement (when secured party possesses collatteral)
The debtor bears the risk of loss of, or damage to, the collateral
34
A debtor with a right to receive payment on an account, chattel paper, or a payment intangible from a
third party (an account debtor) may assign that right to the secured party. The secured party may then notify the account debtor to pay the secured party. Upon receipt of the notification, the account debtor
must make payments to the secured party.
35
Purchase-Money Security Interest
A PMSI may exist only with respect to two types of collateral: goods (including fixtures) and software. A PMSI
in goods exists when a secured party:
y Gave value to the debtor, and the debtor used the value to incur an obligation that enabled the debtor
to acquire goods or
y Sold goods to the debtor, and the debtor incurred an obligation to pay the secured party all or part of
the purchase price.
A PMSI in software exists when the debtor:
y Acquired an interest in software in an integrated transaction in which the debtor also acquired an
interest in goods (e.g., a computer) and
y Acquired that interest in the software for the principal purpose of using the software in the goods.
36
Accessions
goods that are physically united with other goods such that the identity of the original
goods is not lost. A security interest can be created in an accession, and a security interest created in
collateral that becomes an accession is not lost.
37
Commingled goods
goods that are physically united with other goods such that their identity is lost
in a product or mass. Once the goods are commingled, there is no security interest in the original goods—
but the security interest may attach to the resulting product or mass.
38
Perfection of a security interest gives the secured party
greater rights than third parties in the collateral. It
has no relevance to the secured party’s rights against the debtor.
39
Methods of perfection
A security interest is perfected upon attachment of that interest and compliance with one of the following
four methods of perfection:
y Filing a financing statement (most common)
y Possessing the collateral (e.g., tangible collateral)
y Controlling the collateral (e.g., letter-of-credit rights and deposit accounts)
y Automatic perfection (e.g., PMSIs in consumer goods)
40
Security interest is enforceable against a debtor when you have
attachment: 1) value given by secured party, 2) debtor has rights in the collateral, and 3) debtor authenticated a security agreement or secured party has possession/control
41
Secured party obtains superior rights in collateral over third parties when:
(a) attachment: 1) value given by secured party, 2) debtor has rights in the collateral, and 3) debtor authenticated a security agreement or secured party has possession/control; and
(b) perfection: 1) Filing financial statement, 2) possession of collateral, 3) control of collateral, or 4) automatic perfection.
42
Filing (ST)
Filing a financing statement is a method of perfection for any security interest except a deposit account,
money, or letter-of-credit rights. The primary objective of filing is to give interested parties notice of the
existence of the security interest.
The financing statement must contain:
y The debtor’s name
y The secured party’s name and
y A description of the collateral.
Any person may file the financing statement, and the signature of the filer is not required. Additionally,
because a security agreement requires more information than a financing statement, a security
agreement may be filed as a financing statement. Similarly, a mortgage may be used as a financing
statement if it contains all the necessary information.
43
Debtors name for filing of a financial statement
An individual debtor must be identified by the name on the debtor’s current driver’s license or stateissued identification card (most states).
y A debtor’s trade name is insufficient by itself and is not needed if the debtor’s name is correctly provided.
y A registered organization must be identified by the name shown on public organic records
(e.g., articles of incorporation).
y If there is an error in the debtor’s name that makes the financing statement seriously misleading, the
statement is not effective unless a standard search under the debtor’s correct name would disclose
the statement.
y When a debtor’s name changes, the secured party has four months to amend the financing statement.
Otherwise, collateral acquired by the debtor after the four-month period is not covered by the
financing statement.
44
Description of collateral for filing of a financial statement
Unlike a security agreement, a financing statement can include a super-generic description of the
collateral (e.g., “all debtor’s assets”) if the description sufficiently indicates the collateral. And it need not
mention or indicate that it covers after-acquired property or future advances to be perfected.
45
Debtor's authorizing of filing financial statement
The debtor must authorize the financing statement in an authenticated record, but the debtor need not
sign the financing statement. The debtor’s consent to the filing is presumed when the secured party
seeks to perfect a security interest in any identifiable proceeds of the collateral by filing. And “ipso facto
authorization” occurs when the debtor’s authentication of the security agreement serves as authorization
to file the financing statement.
46
Filing location (financial statement)
Collateral related to real property requires filing in the office for recording a mortgage on the related
real property (i.e., local filing). All other collateral requires filing with the secretary of state of the state of
the debtor’s location (i.e., central filing).
y An individual debtor is located in the state in which the debtor maintains his principal residence.
y A nonregistered organization debtor (e.g., partnership) is located in the state in which it maintains its
place of business and, if it has more than one place of business, the state in which it maintains its chief
executive office.
y A registered organization (e.g., corporation) is located in the state in which it is organized.
47
Effective date of filing a financial statement
A financing statement is generally effective upon its delivery to the filing office and tender of the filing fee.
The filing office’s incorrect indexing of a financing statement does not affect perfection. However, the effect of
the filing office’s refusal to accept a financing statement depends on whether the refusal was:
y Justified (e.g., failure to pay fee): The financing statement is treated as having not been filed or
y Unjustified: The financing statement is treated as having been filed, and the statement is effective
except as to a purchaser of the collateral who gives value in reasonable reliance upon the absence of
the record from the files.
48
How long is a financing statement effective
A financing statement is generally effective for five years even though there is no obligation secured by
the collateral and no commitment to make an advance, unless a termination statement has been filed.
A continuation statement filed within six months before the financing statement lapses will extend perfection
for an additional five years. The debtor’s signature is not required. If a continuation statement is not filed, then
the security interest is treated as never having been perfected against a purchaser of the collateral for value.
49
Amendment of a financing statement
An amendment to a financing statement can be filed to add or delete collateral covered by the statement.
The amendment is effective from the date of filing but does not extend the financing statement’s period
of effectiveness.
50
Termination of a financial statement
A financing statement is terminated by filing a termination statement after the obligation is satisfied.
51
perfection by possession (ST)
Security interests in tangible collateral (e.g., goods, instruments, negotiable documents, money,
tangible chattel paper, certificated security) may be perfected if the secured party takes possession of the
collateral. Perfection exists only during the period of possession
52
Perfection by control (ST)
A secured party may perfect a security interest in specific intangible collateral (i.e., investment property,
deposit accounts, letter-of-credit rights, electronic chattel paper, electronic documents) by taking control of
the collateral, and perfection exists only while the secured party retains control.
This is the only method of perfection for letter-of-credit rights and deposit accounts. A secured party
has control over a deposit account if:
y The secured party is the bank that maintains the deposit account
y The bank, secured party, and debtor agree in writing that the secured party has control or
y The secured party becomes the bank’s customer with regard to the deposit account.
53
Perfection of PMSI in consumer goods
A PMSI in consumer goods is automatically perfected upon attachment. A secured party does not need
to file a financing statement to perfect.
Automatic perfection applies only to a PMSI in consumer goods. A PMSI in inventory, equipment,
or farm products is not automatically perfected upon attachment.
54
Temporary perfection
Temporary perfection may be available if a security interest was perfected but the debtor or the collateral
has changed since perfection occurred.
y If new value is given under an authenticated security agreement, a security interest in certificated
securities, negotiable documents, or instruments is automatically perfected for 20 days from attachment.
y If the collateral is delivered to the debtor for the purpose of selling or exchanging it, the security
interest in the collateral remains temporarily perfected for 20 days.
y If the debtor moves to another state, there is a four-month grace period for a perfected security
interest to be refiled in a new state.
y If the collateral is transferred to a debtor in another state, there is a one-year grace period for a
perfected security interest. A perfected possessory security interest remains perfected when the
security interest is perfected under the new state’s laws.
y A security interest generally ceases to be perfected upon the expiration of the temporary
perfection period.
55
Proceeds and perfection
If a security interest in original collateral is perfected, then a security interest in proceeds is temporarily
perfected for 20 days from attachment. However, perfection may continue indefinitely in some situations.
y Financing statement: When the secured party amends the financing statement to cover proceeds
within 20 days or the original financing statement is broad enough to cover proceeds, then the security
interest in proceeds is perfected indefinitely.
y Cash proceeds: If the security interest in the original collateral is perfected, then the security interest
in the identifiable cash proceeds is perfected indefinitely.
y Same-office rule: If (1) a filed financing statement covers the original collateral and (2) the proceeds
are collateral in which a security interest may be perfected by filing in the same office as the financing
statement, then a perfected security interest in the proceeds may continue indefinitely. However, this
does not apply to proceeds acquired with cash proceeds. And if the original filing ceases to be effective
after the 20-day period, then the security interest in proceeds also ceases to be automatically perfected.
56
Statutes and perfection (ST)
When property is subject to a special statute in lieu of Article 9, the statute dictates the manner of
perfection. For example, a certificate-of-title statute requires that vehicles note a security interest on the
certificate of title. If not, the filing is insufficient.
57
Priorities (ST)
Article 9 prioritizes conflicting claims to the same collateral and pays them accordingly (however, the
holder of a priority can agree to subordinate her interest to another’s interest). Priority is determined by
(1) identifying the status of each claimant and then (2) applying the appropriate priority rule.
58
Claimants (ST)
Claimants are other persons with interests that may conflict with a secured party’s interest, such
as creditors, transferees/buyers, and other secured parties.
59
Priority of a general creditor (unsecured)
Has a claim (including a judgment) against the debtor, but no lien on or security interest in the collateral.
1) Any security interest, 2) general creditor
60
Order of priority for a judicial-lien creditor
Acquires a lien on the collateral by a judicial process
1) Perfected security interest, 2) judicial lien, 3) unperfected security interest
Exceptions: 1) An unperfected security interest has priority if the only reason it is unperfected is that the secured party has yet to give value.
2) If a PMSI is perfected 20 days after the debtor receives possession of the collateral, then the PMSI has priority over a creditor's rights that arose between attachment and filing.
3) A security interest securing an advance is subordinate to a lien creditor's rights when the advance is made more than 45 days after the person becomes a lien creditor, unless the advance or commitment is made without knowledge of the lien.
61
Statutory or common-law lien creditor
Has a possessory lien on the collateral by statute or common-law rule (i.e., a nonconsensual lien)
1) Possessory lien that secures payment for goods or services furnished in the ordinary course of business (e.g. mechanic's lien), 2) any security interest
62
General creditor, judicial-lien creditor, statutory or common-law lien creditor, perfected security, interest, and unperfected security interest order
1) Statutory or common-law lien creditor, 2) Perfected security interest, 3) judicial lien, 4) unperfected security interest, 5) general creditor
63
Transferees and priority (ST)
A transferee obtains full title to the collateral as the result of a transfer from the debtor. Therefore, the
typical inquiry regarding priority is whether the transferee takes the collateral free from or subject to the
security interest.
64
Transferee (nonbuyer) vs secured party with a security interest
The security interest in the
collateral continues (i.e., the transferee takes subject to the security interest) unless the secured party
authorized the transfer free from the security interest.
65
Buyer vs unperfected security interest
The buyer takes the collateral free from the security
interest if the buyer (1) gives value, (2) receives delivery, and (3) has no knowledge of the security interest.
66
Buyer vs perfected security interest
The buyer generally takes the collateral subject to the
security interest.
67
Buyer in the course of ordinary business (special priority rule for transferees)
Buys goods (not farm products) in good faith, without
knowledge that the sale violates another’s rights in
the same goods, and in the ordinary course from a
seller in the business of selling goods of that kind
Takes free of any security interest in goods given by the seller.
68
Consumer buyer and special priority rules for transferees
Buys consumer goods for value for his own
personal, family, or household use from a consumer
seller without knowledge of the security interest
Takes free of any security interest unless a secured party has filed a financing statement covering the goods ("garage sale" rule).
69
Purchaser of chattel paper, special rules for transferees and priority
Gives new value and has possession/control of
collateral, purchases it in good faith and in the
ordinary course of business, and does not indicate
an assignment to an identified assignee in the
chattel paper
Has priority over a security interest in the chattel paper
70
Future advances and special priority rules for transferees
A buyer of goods who secures an advance made
(1) after the secured party acquires knowledge of
the purchase or (2) 45 days after the purchase—
whichever is earlier
Takes free of the security interest
71
Transferee of money or funds, special priority rules for transferees
A transferee of money or of funds from a bank deposit
account (Note: a debtor is not treated as a transferee)
Takes free of a security
interest in the money
or funds
72
Article 2 security interest and special rules for priority of transferees
A buyer or seller with possession of the goods
Has priority over an Article
9 security interest
73
"Clean" certificate of title, special priority rules for transferees
A buyer without knowledge of a prior security interest
not noted on the title
Takes free of the security interest
74
Priority, perfected vs perfected
First to file or protect has priority.
75
Perfected vs unperfected, priority
1) Perfected, 2) unperfected
76
Unperfected vs unperfected priority
The first to attach has priority (i.e., first in time first in right)
77
PMSI vs non-PMSI (priority)
A PMSI has priority over a prior non-PMSI security interest.
78
PMSI in goods other than inventory or livestock vs any security interest, priority
A PMSI has priority
if perfected before or within 20 days after the debtor takes possession of the collateral.
79
PMSI in inventory or livestock versus any security interest
: A PMSI has priority if it is perfected by
the time the debtor takes possession of the collateral. If the security interest was perfected by filing,
then the purchase-money secured party must send an authenticated notice of the PMSI to the holder
of any conflicting security interest before the debtor takes possession.
80
Perfected PMSI vs perfected PMSI, priority
The first to file or perfect has priority. A seller with a PMSI
has priority over a lender with a PMSI.
81
Proceeds from PMSI in goods, priority
The priority of a PMSI in goods generally extends to the proceeds
of the original collateral, if the security interest is perfected when the debtor takes possession of the
collateral or within 20 days thereafter.
82
Security interest in fixtures vs real property interest, priority
A security interest in fixtures has priority
over an interest in the real property with which the fixtures are associated if the security interest is
perfected by a fixture filing before the real property interest is recorded.
83
Perfected security interest in fixtures vs subsequent judicial lien, priority
A perfected security
interest in fixtures has priority
84
PMSI in fixtures vs prior real property interest, priority
: A PMSI in fixtures has priority if it is perfected
by a fixture filing before the goods become fixtures or within 20 days thereafter.
85
Prior construction mortgage vs security interest in fixtures, priority
A prior construction mortgage has
priority if recorded before the goods become fixtures.
86
Proceeds and priority
The “first to file or perfect” rule generally applies. The filing or perfection date for the original
collateral is the filing or perfection date for the proceeds.
87
Future advances and priority
The “first to file or perfect” rule generally applies. Perfection generally dates from
the time the advance is made.
88
Accessions and priority
General priority rules apply. After a default, a secured party may have the right to remove
the accession
89
Investment property and deposit accounts and priority
: A security interest held by a secured party with control
over the collateral has priority over a secured party without control over the collateral.
90
Default
A default is not defined by Article 9, so the parties can decide what constitutes a default in the security
agreement. Default typically occurs when the debtor fails to make a payment to the secured party, but default
can also occur when the debtor fails to keep the collateral insured or transfers the collateral without authority.
91
Consequences of default
If a default occurs, then the secured party may:
y Seek possession of the collateral and then sell or retain it
y Sue for a judgment based on the obligation
y Pursue any course of action to which the parties have agreed
y Notify an account debtor to pay the secured party
The secured party may simultaneously pursue any or all of these remedies, provided that the secured party
acts in good faith. But if the secured party ignores the default, then that may be treated as a waiver of the
secured party’s rights
92
default and fixtures
When a security agreement covers fixtures, the secured party may remove the fixture from the real
property after default if the security interest has priority but is liable for repair costs. Similarly, a secured
party with a security interest in an accession that has priority over anyone having an interest in the whole
may remove the accession from the other goods.
93
possession of collateral and default
After default, the secured party is entitled to take possession of or otherwise dispose of the collateral.
The secured party need not give notice of a default or an intent to take possession of the collateral.
But the secured party is required to use judicial process (e.g., replevin) to obtain possession of the
collateral unless possession can be obtained without breach of the peace. As an alternative to securing
possession of the collateral, a secured party may render equipment unusable.
94
Disposition of collateral after default
Alternatively, after default, a secured party may sell, lease, license, or otherwise dispose of all or any of
the collateral. All aspects of the disposition—including the method, manner, time, and place—must be
commercially reasonable. A disposition is commercially reasonable when it is conducted:
y In the usual manner on a recognized market
y At the price current in that market or
y Otherwise in conformity with reasonable commercial practices among dealers in the type of property.
Disposition may be by public or private sale, but the secured party cannot purchase the collateral
at a private sale. No specific price must be obtained, and the mere fact that a higher price could have
been obtained does not establish unreasonableness. Likewise, there is no time limit for dispositions, so
immediate disposition is not always required.
95
Notice of disposition following default
At least 10 days before disposition, the secured party must typically send an authenticated notification
of disposition to:
y The debtor
y Any secondary obligor
y Any other secured party or lienholder who has a security interest perfected by filing and
y Any party who has notified the secured party of a claim or interest in the collateral.
However, notification is not required if:
y The collateral is perishable or threatens to decline speedily in value
y The collateral is of a type customarily sold on a recognized market or
y The person has waived his right to notification in an authenticated writing.
96
Application of proceeds from disposition
1) reasonable disposition expenses, 2) secured obligation, 3) subordinate security interests, 4) debtor.
97
notice of deficiency or surplus following disposition
The debtor is entitled to any surplus and is liable for any deficiency except with regard to the sale of
accounts, chattel paper, payment intangibles, or promissory notes. Accordingly, the secured party must
send written notice of any deficiency or surplus to the debtor upon demand. If the chattel is sold to the
secured party at a low price, then the amount of the deficiency may be adjusted to reflect the higher
price that would have been realized from another person.
98
transferee's rights after disposition
A sale of collateral gives the buyer all of the debtor’s rights in the collateral, but the collateral remains
subject to any senior security interest. The disposition of collateral also includes the warranties of title,
possession, and quiet enjoyment, but these warranties may be disclaimed or modified.
99
acceptance of collateral as satisfaction
In lieu of disposing of the collateral, the secured party may accept the collateral in full or partial
satisfaction of the corresponding obligation when:
y The debtor consents, after default, to acceptance in an authenticated record or
y The debtor does not object to the secured party’s proposal to accept the collateral within 20 days
after the proposal is sent.
A secured party wishing to accept the collateral must notify the debtor and other interested parties.
100
Acceptance of collateral as satisfaction, special rules for consumer goods transactions
In a consumer transaction, a secured party can accept the collateral only in full satisfaction of the
obligation; an acceptance in partial satisfaction of the obligation is not allowed.
No strict foreclosure is permitted if (1) the consumer goods are in the secured party’s possession
and (2) the debtor has paid at least 60% of the cash price (in the case of a PMSI) or at least 60% of
the obligation (in the case of a non-PMSI). The secured party cannot keep the goods in satisfaction of
the debt—they must be sold. However, the debtor may waive this right to force a sale of the collateral,
provided it is done after default in an authenticated agreement.
101
Redemption of collateral following a default
A debtor has the right to redeem the collateral after default—but before disposition or foreclosure—by
paying the entire obligation and expenses incurred by the secured party in repossessing the collateral
or preparing for its disposition. An acceleration clause can require the redeemer to tender the entire
balance of the secured obligation. However, the right to redemption can be waived after default and by an
authenticated agreement (except in a consumer goods transaction).
102
Remedies for a secured party's failure to comply
Injunctive relief (can be sought to compel or restrain the secured party)
Actual damages (any lossess suffered by the debtor due to the secured party's failure to comply
103
Minimum statutory damages for consumer goods, ST
Permit the debtor or a secondary obligor to recover (1) the credit service charge
+ 10% of the principal amount of the obligation or (2) the time-price differential
+ 10% of the cash price—even if actual damages are less
104
Limitation on deficiency damages (ST)
Commercial transactions: There is a presumption that the secured party is not entitled to
collect a deficiency, which can be rebutted by showing that the
deficiency would have existed regardless of the failure to comply
No damages are permitted if the deficiency is merely reduced or
eliminated by the secured party’s failure to comply
Consumer transaction: Same rules as commercial transactions, but some courts bar deficiency
105
Conversion actions (ST)
Can be pursued against a secured party for improper possession of the collateral
106
Approaching secured transaction issues
1) Attachment; Steps necessary to make a security interest enforceable against the debtor.
2) Perfection: Notice of a security interest needed to establish a claim superior to other parties who may claim an interest in the same collateral.
3) Priority: Rules for resolving priority disputes between multiple claimants to the same collateral.
4) Enforcement: Rights and duties of secured party that enforces its interests in the collateral after default.
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