Secured Transactions

Question 1

Overview/Terminology

Answer 1

• Definition - Tx inteded to create a securit interest in personal property or fixtures. Look for: (1) a credit transaction, and (2) agreement creating lien in favor of creditor in debtor’s personal property to secure the debt
• Purchase money security interest:
  (a) Seller-financed PMSI - Secured party sells debtor collateral on credit and retains a security interest in item sold
  (b) Financier-financed PMSI - Loan to a debtor to enable debtor to buy specific collateral, and creditor takes a security interest in that specific collateral
• After-acquired property clause - Secured party obtains security interest not only in debtor’s present property, but also in future-obtained property
• Future advance clause - Secures potential future loans in the present security agreement so don’t need a new one
• Attachment - Steps legally required to give secured party a security interest in collateral that is effective as against the debtor; not a secured creditor until attachment
• Perfection - Steps legally required to give secured party an interest in collateral that is effective as against the world; typically involves public notice
• Financing statement - Doc used to provide public notice of security interest for perfection

Question 2

Types of Collateral - Goods

Answer 2

Tangible, moveable personal property (including unborn young of animals, crops, fixtures)

• Consumer goods - Used OR bought for use primarily for personal, family, or household purposes
• Equipment - Used or bought for use in business
  (a) Catch-all, default category
• Farm products - Crops/livestock/supplies used or produced in farming operations OR products of crops/livestock in their unmanufactured states ~IF~ they are in the possession of a debtor engaged in farming operations
• Inventory - Goods held for sale or lease or to be furnished under service contracts; ~materials used or consumed in a business in a short period of time~

Question 3

Types of Collateral - Semi-Intangible and Intangible Property

Answer 3

• Instruments - Writings evidencing right to payment of a monetary obligation, and which are in ordinary course of bus transferred by delivery
• Documents - Documents which in the reg course of bus are treated as evidencing entitlement to receive, hold, and dispose of document and goods it covers (e.g. bill of loading, warehouse receipt)
• Chattel paper - Record which evidences BOTH a monetary obligation AND a security interest in/lease of specific goods; can be physical or electronic
• Investment property - Stocks, bonds, mutual funds, brokerage accounts
• Accounts - Right to payment NOT evidenced by instrument/chattel paper (1) for property, (2) for services, (3) for insurance, (4) for secondary obligation, (5) for energy provided, (6) for use/hire of vessel, (7) arising out of credit card use, or (8) as lottery winnings
• Deposit accounts - NONCONSUMER bank accounts (Art. 9 doesn’t apply to consumer)
• Commercial tort claims - Tort claim where (1) claimant is an ORG, OR (2) claimant is an individual AND claim arose in claimant’s bus AND doesn’t include personal injury/death damages
• General intangibles - Any personal property not within scope of other definitions (e.g. software, IP)
  (a) Catch-all, default category

Question 4

Scope of Art 9

Answer 4

• Applies to:
  (1) Any tx, regardless of its form, that creates a security interest in personal property or fixtures by contract - OFTEN TESTED
  (2) Agricultural lien
  (3) ~Sale~ of accounts, chattel paper, payment intangibles, or promissory notes (UNLESS sale is for purposes of collection only or part of sale of a business)
  (4) Certain consignments
  (5) Secured sales disguised as a lease - OFTEN TESTED
  (a) At the time the parties entered into the tx, was it reasonably likely that the “lessor” would get the item back when it still had meaningful economic value? - If Yes => Lease; If No => Secured sale
  (b) Also a secured sell if at end of “lease”:
• • Lessee becomes the owner for little or no consideration
• • Lessee is bound to purchase or to renew the lease for the remaining economic life of goods, or
• • Lease is for entire economic life of goods

Question 5

Attachment - Creation an Art 9

Security Interest

Answer 5

• 3 reqs:
  (1) Security agreement
  (2) Value must be given
  (3) Debtor has rights in the collateral
• Security agreement - Written security agreement reqd
  (a) Writing NOT reqd:
  (1) Possession - Called “pledge” - Secured party keeps collateral until paid back
  (2) Control - If collateral is nonconsumer deposit account, electronic chattel paper, or investment property, agreement by control works

(b) Form of writing reqs:
(1) Show intent to create a security interest (no magic language)
(2) Authenticated (signed w any symbol)
(3) Contain a description of the collateral sufficient to “reasonably identify”; can use normal vocab OR Art. 9 categories

• Secured party must have given value
  (a) Very broad - Any consideration, EVEN past consideration
• Debtor has rights in collateral - Can’t grant contingent property interest in property debtor doesn’t own

Question 6

Scope of Security Interest

Answer 6

• Debt secured may include future advances - “future advance clause”
• Property secured may include after-acquired property - “after-acquired property clause”
  (a) WITHOUT explicit clause, security interest reaches only collateral debtor had rights to at time of signing
  (b) EXCEPTIONS:
  (1) Clause may be implied by court if collateral is of type that is rapidly depleted and replenished (e.g. inventory/accounts)
  (2) Doesn’t apply to ~consumer goods~ UNLESS debtor acquires rights in them within 10 days of secured party giving value
  (3) Doesn’t apply to commercial tort claims
• Property secured generally includes proceeds - WHATEVER is received upon sale, exchange, collection, or other disposition of collateral OR proceeds
  (a) Unless otherwise agreed, security interest automatically gives right to identifiable proceeds
  (1) Identifiability issue w cash - Apply “lowest intermediate balance” test - Lowest balance is identifiable proceeds
• Attachment of a security interest in collateral is also an attachment of a security interest in a supporting obligation (guarantee/surety) for that collateral

Question 7

Perfection - Methods - Automatic

Answer 7

Automatic perfection upon attachment for ~PMSI in consumer goods~

Question 8

Special PMSI Rules

Answer 8

(1) Automatic perfection for PMSI in consumer goods
(2) Priority - PMSI in goods other than inventory or livestock - PMSI in such goods has priority over conflicting security interest in same goods or proceeds IF PMSI is perfected (a) at the time debtor received possession of collateral, OR (b) within 20 days after possession
(3) Priority - PMSI vs Lien Creditor - If sec party to a PMSI files within 20 days of debtor receiving possession of collateral, priority over rights of lien creditor arising bw attachment and filing
(4) Fixture Priority - PMSI vs Earlier Real Estate Interest - PMSI > earlier realty interest IF perfected by fixture filing before goods become fixtures OR within 20 days

Question 9

Perfection - Methods - Possession of Collateral by Secured Party

Answer 9

• Perfect by taking possession of collateral
• Perfection lasts only as long as possession is retained
• Impossible for property you can’t take possession of

Question 10

Perfection - Methods - Control

Answer 10

• Can be perfected by control:
  (a) Investment property
• • Control when secured party takes whatever steps necessary to be able to ~sell~ the property without action from owner
    (b) Electronic chattel paper
• • Control when system showing transfer of interests in chattel paper ~reliably establishes~ secured party as the assignee (e.g. secured party having ~authoritative copy~ of records)
• Can ONLY be perfected by control:
  (a) Nonconsumer deposit accounts
• • Bank in which account’s maintained automatically has control
• • If not bank, secured party gets control by: (1) putting account in its name, OR (2) agreeing in authenticated record w debtor and bank that bank will follow secured party’s order w/o debtor consent

Question 11

Perfection - Methods - Notation of Lien on Certificate of Title

Answer 11

• ONLY way to perfect for items covered by certificate of title statutes (e.g. cars and trucks)
• EXCEPTION - If debtor is a car/truck dealer, perfection by filing a finance statement against inventory

Question 12

Perfection - Methods - Filing a Financing Statement

Answer 12

• Form UCC-1
• Notice filing - Must indicate merely that a person ~MAY~ have a security interest
• Contents:
  (1) Debtor’s name - Individual, corporate, or partnership
• • If debtor is individual DBA - If has driver’s license, that name; if not, individual name as known in community
• • Name errors OK if not ~seriously misleading~ - Check if shows up in search for correct name
• • Name change - Existing statement effective for interests acquired before or within 4 months after the change

(2) Description of collateral - Must “reasonably identify”; can use normal vocab or Art. 9 categories or “all assets”/”all personal property”
(3) Secured party’s name - Errors OK bc searches not conducted under this name

(4) Real-property-related statements - If about RP-related collateral (minerals, timber, fixtures), must:
* * Indicate will be filed in real property records
* * Provide description of real property
* * Name the record owner, if not the debtor

(5) No signature, but debtor MUST authorize filing in signed writing
* * Can authorize automatically if authenticates a security agreement on the same collateral - Ipso facto authorization

(6) Authenticated security agreement itself may be filed

• Where to file:
  (1) In general - Sec of State
  (2) If real-estate-related - Real estate records of county where real property is located
  (3) Multiple-state tx:
• • In general - Where debtor is located
• • If debtor is registered org - Where organized
• • If debtor is unregistered org - Place of business, or, if >1, chief executive office
• • If debtor moves - Unperfection after 4 months
• • If collateral is transferred to new debtor in diff state - Unperfection after 1 year
• Financing statements affective for 5 years from date of filing
  (1) Can be extended by continuation statement filed in last 6 months of 5-year life
  (2) When no more obligation, upon receiving authenticated debtor demand, secured party must provide debtor with a ~termination statement~ in 20 days
  (3) If consumer goods, termination statement must be filed within 1 month of no obligation
• Financing statement can be filed before security agreement is entered into (impt for priorities)

Question 13

Perfection - Proceeds

Answer 13

• If there’s a perfected security interest, automatically one in proceeds debtor receives in exchange for 20 days after receipt of proceeds
• To perfect beyond 20 days, must take new action UNLESS:
  (1) Proceeds are identifiable cash, OR
  (2) (a) original sec interest was perfected via statement, (b) new sec interest would be perfected by filing statement in same place, AND (3) proceeds weren’t purchased with cash proceeds of collateral - “Same Office” rule
• Best e.g. of Same Office rule - Debtor selling inventory on credit, which creates account

Question 14

Perfection - Change in Use of Collateral

Answer 14

• If debtor changes use of collateral, filed financing statement REMAINS effective
• Sec party has no duty to monitor/amend EVEN IF it knows that the description is seriously misleading

Question 15

Priority - Secured vs Secured - General Rules

Answer 15

• General - Between 2 perfected secured creditors, first to file or perfect, whichever first, has priority.
• Bw 2 UNperfected secured creditors, first to attach has priority
• Bw perfected and unperfected, perfected has priority

Question 16

Priority - Secured vs Secured - Special Rules

Answer 16

• PMSI in goods other than inventory or livestock - PMSI in such goods has priority over conflicting security interest in same goods or proceeds IF PMSI is perfected (a) at the time debtor received possession of collateral, OR (b) within 20 days after possession
• PMSI in inventory or livestock (HARD TO TEST ON) - Priority over conflicting security interest (and proceeds) if, before debtor receives possession, secured party (1) perfects, AND (2) sends authenticated notification to holders of previously filed conflicting security interests
• Conflicting PMSIs - Seller-financed PMSI has priority over financer-financed PMSI
• Special rules for investment property:
  (a) Sec int perfected by control > sec int perfected by filing/automatic
  (b) If both perfected by control, control earlier in time wins
  (c) Sec int granted to debtor’s intermediary > sec int granted to another secured party
  (d) Except as 3 above, first to file or perfect governs
• Special rules for deposit accounts:
  (a) Sec int perfected by control > sec int perfected via proceeds
  (b) If both perfected by control, control earlier in time wins
  (c) Control by putting account in name > Other parties w control
  (d) Bank that has control bc maintains account > all other parties EXCEPT party who has control by putting account in name
• Purchaser of chattel paper - Priority over: (1) sec int in paper arising merely as proceeds of inventory, AND (2) any other sec int in paper
• Purchaser of instruments - Priority over perfected sec int in instrument IF purchaser gives value and takes possession in good faith+w/o knowledge that it violates other’s rights

Question 17

Priority - Secured Party vs Buyer of Collateral - General

Answer 17

If you buy something with a sec int on it, sec int stays on.

Question 18

Priority - Secured Party vs Buyer of Collateral - Authorized Sales

Answer 18

• If sale is authorized by sec party free of sec interest, buy takes free of sec interest.
  (a) Authorization can be express or implied from type of sale or seller’s conduct.
• • Implied authorization when inventory is sold to an ordinary consumer.
• • Implied authorization by acquiescence - E.g. Acquiescing to sales of collateral even tho said no sales w/o consent.

Question 19

Priority - Secured Party vs Buyer of Collateral - Unauthorized Sales

Answer 19

• General - Buyer in the ordinary course of bus (other than buying farm products from farmer) takes free of sec interest ~created by his seller~ even though the sec interest is perfected and even though buyer knows it it.
• Buyer in ordinary course - Person who buys goods in good faith, w/o knowledge that sale violates sec party’s rights, and in the ordinary course from a person in the business of selling goods of that kind
• Buyers not in ordinary course:
  (a) Take subject to perfect sec interests
  (b) Take free from unperfected sec interests UNLESS know of them
• Consumer-to-consumer sales - Buyer takes free of sec interest even tho perfect IF he buys w/o knowledge of the sec interest, for value, AND for his own personal, family, or household purposes UNLESS prior to the purchase the sec party filed a financing statement

Question 20

Priority - Secured Party vs Judgment Lien Holders

Answer 20

• Unperfected sec int < rights of person who becomes lien creditor before perfection.
• Perfect sec int > rights of person who becomes lien creditor after perfection
• “Lien creditor” - Unsecured creditor who has obtained a judgment and has levied on that judgment
  (a) So look at time of perfection and time of levy by sheriff
• Special Rule - PMSI vs Lien Creditor - If sec party to a PMSI files within 20 days of debtor receiving possession of collateral, priority over rights of lien creditor arising bw attachment and filing
• Priority for Future Advances - Future advance > lien creditor IF future advance is made (1) w/o knowledge of lien, OR (2) within 45 days of lien arising, OR (3) pursuant to a commitment entered into w/o knowledge of lien

Question 21

Priority - Secured Party vs Statutory Lien Claimants

Answer 21

• Statutory lien beats even a perfect sec int

* E.g. car mechanic

Question 22

Default - Definition

Answer 22

• Grounds typically specified in the security agreement
• Look for:
  (a) Late or missed payments
  (b) Possible waiver by sec party of late/missed payments

Question 23

Default - Self-Help Repo

Answer 23

• After default, sec party can take possession of collateral w/o judicial process IF done without “breach of the peace”
• Breach of the peace - Any conduct by the sec party that has the ~potential~ to lead to ~violence~
  (a) Physical presence of debtor/rep + verbal objection generally enough
  (b) Unauthorized entry into home likely enough
  (c) If you pick locks to get into a bus and DON’T relock, likely a breach
• Self-help alternatives to repo:
  (a) Make equipment unusable and dispose of it on debtor’s property (e.g. bulky machinery)
  (b) For accounts - Notify in signed writing persons owing money to the debtor to pay sec party instead; does NOT discharge debtor’s obligation

Question 24

Default - Retention of Collateral/Strict Foreclosure

Answer 24

• After default and repo, sec party may propose retaining the collateral in full or partial satisfaction of debt
• Must send proposal to (1) other secured party who has given notice of a claim to collateral, and (2) perfect sec interest holders
  (a) If any objection, collateral must be disposed of by sale
• Must also obtain debtor’s consent by either (1) agreeing in authenticated record after default, OR (2) if in case of a full strict foreclosure, failing to make an objection within 20 days

Question 25

Default - Resale of Collateral

Answer 25

• After default, sec party may sell, lease, license, or otherwise dispose of collateral; sale may be public or private.
• Sale discharges of the sec interest and all subordinate sec interests, but NOT superior sec interests
• Reasonable notification - Notice authenticated by sec party must be given to debtor and any sureties and any other sec parties who have notified, and any perfect sec parties.
  (a) Not required if collateral is perishable/threatens to decline rapidly in value.
  (b) Debtor/surety can, AFTER default, waive notice right
  (c) Timeliness - Reasonable time before sale
• • Nonconsumer tx - >= 10 days before sale
    (d) Content:
• • Statutes might have “safe harbor” notice forms
• • Public sale - Notice of time and place of sale
• • Private sale - Notice of time AFTER which sale will occur
• Commercially reasonable sale - Every aspect of sale must be commercially reasonable
• Sec party buying collateral - May buy at any public sale, but at private sale ONLY if collateral is of type customarily sold in a recognized market
• Sec party has right to any deficiency after sale - Gets a judgment for that amount
• If surplus after everyone’s paid off, debtor gets it
• If debtor’s a consumer, secured creditor selling must sent an explanation of calculation of deficiency/surplus
• Failure to comply w resale reqs:
  (a) Sec party liable for actual damages
  (b) Minimum recovery for consumer goods - Debtor entitled to a minimum of 10% of cash price of goods + interest charges
  (c) Rebuttable presumption that sale proceeds equals amount of debt (no deficiency available)

Question 26

Default - Debtor’s Right to Redeem

Answer 26

• Any time before resale/K for disposition/discharge of obligation by retention, debtor can REDEEM
• Must fulfill ALL obligations secured by collateral
• If sec agreement has an acceleration clause, debtor must tender entire balance

Question 27

Fixtures

Answer 27

• Like fixtures from property law
• Perfection - Must make “fixture filing” in office where a mortgage on the real estate would be filed
  (a) Filing must reasonably identify real estate and name owner (if debtor doesn’t have an interest of record)
• Rights on default - No? IDK
• Priority - Sec Party vs Subsequent Real Estate Interest
  (a) Sec interest in fixtures > real estate interest subsequent to perfection
• Priority - Sec Party vs Prior Real Estate Interest
  (a) General - Prior real estate interest properly recored > subsequent sec int
  (b) Exception - PMSI > earlier realty interest IF perfected by fixture filing before goods become fixtures OR within 20 days
  (c) Exception to exception - Construction mortgage > subsequent PMSI
• When DON’T need fixture filing to perfect (any other perfection method before become fixtures is OK for priority) - Readily removable:
  (a) Factory/office machines
  (b) Equipment not primarily used/leased for use in operation of the real estate
  (c) Replacements of domestic appliances which are consumer goods

Question 28

Accessions

Answer 28

• Def - Goods that are physically united w other goods in such a manner that the identity of the original goods is not lost (e.g. tires on a car)
• Perfection - If sec int is perfect when collateral becomes an accession, stays perfect
• Priority - Previously discussed rules apply here
  (a) Special - Sec interest in accession < sec interest in whole which is perfected by compliance w reqs of a certificate-of-title statute
• Removal and Reimbursement for Physical Injury to Whole
  (a) Sec party CAN remove accession IF sec interest > claims of every person having an interest in whole
  (b) Sec party responsible for cost of repair and any physical injury to the whole or other goods
  (c) Person entitled to reimbursement may refuse permission to remove until sec party gives adequate assurance