Secured Transactions Part 2 Flashcards
(98 cards)
1
Q
What does Article 9 of the UCC apply to?
A
Article 9 of the UCC applies to ANY transaction intended to create a security interest in personal property or fixtures (not mortgages on real property).
A security interest gives a creditor the right to sell a debtors property in order to satisfy a debt.
2
Q
What is the purpose of personal property or fixtures in an Article 9 transaction?
A
In an Article 9 transaction, personal property or fixtures
(1) secure the payment of a debt or
(2) insure performance of a contract obligation with the property serving as collateral.
3
Q
Who are the main parties to an Article 9 transaction?
A
There are three main parties to an Article 9 transaction: Secured Party, Debtor, and Obligor.
4
Q
Who is the Secured Party in an Article 9 transaction?
A
The secured party is the creditor who possesses the benefit of the security interest.
5
Q
Who is the Debtor in an Article 9 transaction?
A
The debtor is the party who has an ownership interest or other sufficient interest in the personal property securing the obligation.
6
Q
Who is the Obligor in an Article 9 transaction?
A
The obligor is the party held responsible for the underlying obligation (usually also the debtor, but could be a type of guarantor).
7
Q
What is collateral?
A
Collateral refers to the property in which a security interest is created, and it extends to identifiable proceeds from the property that serves as collateral.
In other words,
Collateral is the property used to secure a loan. It also includes any identifiable proceeds (like cash or goods) made from selling or using that property.
8
Q
What are the different types of collateral defined in Article 9?
A
**Article 9 defines different types of collateral as follows:
- Goods: All things that are movable when a security interest attaches.
- Consumer Goods: Goods used mainly for personal, family, or household purposes.
- Inventory: Goods kept by a person for sale or lease (not including goods held for repair).
- Accounts: A security interest in a debtor’s accounts covers any right to payment of a monetary **obligation **for property that has been or is to be sold. (It covers money the debtor is owed for selling goods, either already sold or to be sold.)
9
Q
What are consumer goods?
A
Consumer goods are goods that are used mainly for personal, family, or household purposes.
10
Q
What is included in inventory?
A
Inventory includes goods that are kept by a person for sale or lease, excluding goods that are only being held for repair.
11
Q
What does a security interest in accounts cover?
A secured party can collect …. if the debtor defaults.
A
A security interest in a debtor’s accounts covers any right to payment of a monetary obligation, whether or not earned by performance, for property that has been or is to be sold (i.e., accounts receivable).
A secured party can collect directly from the person who owes the debtor if the debtor defaults.
12
Q
What is attachment in the context of a security interest?
A
Attachment is how a security interest is created and becomes enforceable against the debtor with respect to the collateral.
In other words,
the moment the security interest becomes real and enforceable.
13
Q
What are the requirements for a valid attachment of a security interest?
A
MNEMONIC: Violet Roses Smell Amazing
A valid attachment requires:
(1) The secured party extends value to the debtor;
You don’t need to give new value — past loans or future promises are enough.
(2) The debtor has rights in the collateral;
* No rights = no interest (e.g., a thief can’t use stolen goods as collateral).
* If the debtor has voidable title (but can sell to a good faith buyer), they can give a valid security interest.’
(3) A UCC § 9-203(b)(3) condition is met.
To create a valid security interest, you need one of two things:
1. A written (or electronic) security agreement signed by the debtor that describes the collateral,
OR
2. The secured party has possession or control of the collateral under an oral agreement.
14
Q
What does UCC § 9-203(b)(3) require for attachment?
A
UCC § 9-203(b)(3) is usually satisfied by authentication of a security agreement or when the secured party takes possession or control of the collateral.
15
Q
What is required for authentication of a security agreement?
A
Authentication requires the debtor to provide a reasonable description of the collateral in writing, which can include signature, thumbprint, initials, or mechanical reproductions.
16
Q
What is consignment?
A
a) A consignment is a transaction in which a person delivers goods to a merchant for the purpose of sale in which:
(1) The merchant:
(a) Deals in goods of that kind under a name other than the name of the person making
delivery;
(b) Is NOT an auctioneer; AND
(c) Is NOT generally known by its creditors to be substantially engaged in selling the goods of
others.
(2) The aggregate value of the goods is $1,000 or more at the time of each delivery;
(3) The goods are NOT consumer goods immediately before delivery; AND
(4) The transaction does NOT create a security interest that secures an obligation.
——
A: It’s a sale-on-behalf-of arrangement that meets ALL of the following:
1. Goods are delivered to a merchant who:
* Sells that kind of goods under their own name
* Is not an auctioneer
* Is not known for selling goods for others
2. Each delivery is worth $1,000 or more
3. Goods are not consumer goods before delivery
4. The deal does not already create a security interest
17
Q
When is a consignment covered by Article 9 (i.e., when must the consignor file)?
A
All 4 conditions must be met:
1. Goods are delivered to a merchant to sell.
2. Merchant is not well known for selling others’ goods.
3. Each delivery is worth $1,000 or more.
4. The goods are not consumer goods.
18
Q
How does Article 9 treat consignments, and what must a consignor do?
A
- If there’s a risk that lenders might think the goods belong to the consignee, Article 9 treats the consignment as a secured transaction.
- The consignor is treated as a secured party and must perfect by filing a financing statement.
- This gives the consignor PMSI super-priority in inventory if:
1. They file before delivery, and
2. Notify any conflicting secured creditors.The aggregate value of the goods must be $1,000 or more at the time of each delivery.
19
Q
What type of goods cannot be involved in a consignment?
A
The goods must NOT be consumer goods immediately before delivery.
20
Q
What type of interest does a consignment transaction not create?
A
The transaction does NOT create a security interest that secures an obligation.
21
Q
What rights does a consignee (debtor) have under Article 9?
A
The consignee has rights and title to the goods identical to those of the consignor.
22
Q
What ownership interest does a consignee (debtor) possess?
A
The consignee possesses the full ownership interest of the consignor in the goods.
23
Q
What does a consignee’s creditor’s security interest attach to?
A
The security interest of the consignee’s creditor will attach to the goods.
24
Q
What is a future advances clause in a security agreement?
A
A security agreement can cover future loans or credit, even if those future loans aren’t guaranteed to happen — but only if the agreement clearly says it covers future advances.
25
What are after-acquired property clauses?
After-acquired property clauses may be included in security agreements and are generally enforceable, allowing the after-acquired property to be secured in favor of the secured party.
A **security agreement** can say it covers **property the debtor gets later** — this is called an after-acquired property clause, and it’s **usually allowed**
BUT:
If it’s **consumer goods**, the rule only applies if the **debtor** gets them **within 10 days** after the lender **gives value** (like giving the loan)
## Footnote
Does not apply to consumer goods unless the debtor acquires rights in them within 10 days after the secured party gives value.
26
Provide an example of after-acquired property.
S loans D $10,000 secured by D’s diamond ring with a security agreement that includes an after-acquired property clause. Here, S will possess a security interest in the diamond ring and the property that D acquires after the parties enter into the security agreement.
27
What is a specification clause regarding default?
The parties may **specifically define** what constitutes a **default**; if left undefined, **non-payment** generally constitutes a default.
28
What is acceleration in a security agreement?
The parties may provide for the **acceleration** of payments upon the happening of a **specified event** (e.g., full balance becomes due if payment is 7 days late).
29
What are covenants in a security agreement?
The parties **may covenant** certain things to each other regarding the **collateral** (e.g., the secured party may require the debtor to maintain insurance covering the collateral property).
30
Is a security agreement invalid if the debtor can use or dispose of collateral?
A security agreement **will NOT be invalid** because the debtor possesses a **right to use or dispose** of the property serving as collateral.
31
What is required of a secured party regarding collateral in their possession?
A secured party must use **reasonable care** in the **custody and preservation** of collateral in the secured party’s possession.
32
What is an accession in terms of collateral?
An **accession** is collateral that **does NOT** lose its **identity when physically united with other goods** (e.g., a jet engine serving as collateral does not lose its identity when it is installed into a jet).
33
What are commingled goods?
A commingled good is collateral that **loses its identity when physically united with other goods** (e.g., 100 pounds of flour serving as collateral loses its identity when physically united with other ingredients to form cake products).
34
What happens to a security interest when collateral becomes commingled?
If collateral becomes commingled with other goods, a **security interest** **attaches** to the product that **results**.
35
What is the effect of perfection on a security interest?
Perfection **enhances** the **secured party’s rights** to the property serving as collateral, such as obtaining priority in bankruptcy proceedings.
**However**, if the **security interest does not attach, it cannot be perfected**.
36
What are the three methods of perfecting a security interest?
1. Filing
2. Taking Possession
3. Automatic Perfection
Freaky Troll Auditions
37
What is the primary method of perfection?
Filing
(1) a financing statement or
(2) the security agreement
with the state.
38
Who must file the financing statement?
An **authorized party** must file the financing statement, which is presumed by the debtor’s authentication of the security agreement.
In other words,
The **secured party** (usually the creditor) files it — **but only if the debtor has agreed to it.**
Once the debtor signs (authenticates) the security agreement, it’s presumed the creditor is allowed to file.
39
What must a financing statement contain?
1. The **debtor’s** name
2. The **secured party’s** name
3. An **adequate description** of the collateral
4. The filing **fee**
40
What happens if there are minor errors in the financing statement?
Minor errors will **not invalidate** the financing statement **unless** the error makes it **seriously misleading**.
41
How can a secured party perfect a security interest through possession?
By taking **mere possession** of
1) negotiable **documents**,
2) **goods**,
3) **instruments**, or '
4) **money**.
42
What security interests are automatically perfected?
1. A **purchase-money security interest** in consumer goods
* If a lender helps someone buy personal items (like a laptop or couch), the security interest is automatically perfected — no filing needed.
* 🔑 Example: You loan someone money to buy a TV. You get a security interest in it — and it’s automatically protected.
2. An assignment of accounts that does not transfer a significant part of the assignor’s outstanding accounts.
**In other words**, If a business **sells or assigns a small number of its customer debts** (accounts) — not a big chunk — the security interest is also automatically perfected.
🔑 Example: A business transfers a few unpaid invoices — not most of them — that assignment is automatically protected, too.
43
What is the priority of a perfected security interest?
A perfected security interest has priority over a conflicting unperfected security interest in the same collateral,
even if the unperfected interest is a purchase-money security interest in inventory.
A p**erfected security interest wins over an unperfected** one, even if the unperfected one is a **PMSI in inventory**.
BIg Point: Being a PMSI doesn’t save you if you didn’t perfect it.
44
How is priority determined among multiple perfected creditors?
Between multiple perfected creditors, the first to file obtains priority, even if a party files before they perfect for priority purposes.
In other words,
When two perfected creditors are fighting over the same collateral, the one who filed first wins —
even if they hadn’t perfected yet when they filed.
🔑 Translation:
“First to file = first in line.”
Even if you perfect later, your filing date controls for priority.
45
What happens if some collateral cannot be filed?
In instances where collateral is not subject to the state filing system or cannot otherwise be filed, the first to perfect obtains priority.
🔑 Translation:
If filing isn’t an option, it’s a race to perfect — first one to perfect wins.
46
Does knowledge of a prior unperfected interest affect filing for priority?
Generally, **knowledge** of a prior unperfected interest **will not prevent** a potential secured party from filing first to obtain priority.
Just because a creditor knows someone else already has an unperfected security interest,
that doesn’t stop them from filing first and getting priority.
47
What is the status of lien creditors compared to perfected secured creditors?
Lien creditors possess virtually the same status as perfected secured creditors and will enjoy priority if they become a lien creditor before a secured party files or perfects.
A lien creditor (like someone who wins a judgment and gets a lien) is treated like a perfected creditor.
But — if the lien creditor wins their lien before the secured party files or perfects, the lien creditor wins.
48
What is the priority of lien creditors regarding future advances?
The priority of lien creditors extends to future advances secured before the lien arose, within 45 days of the lien, or without knowledge of the lien.
🔑 Translation:
Even after a **lien shows up**, the **secured party** can still win on **future loans if**:
* They loaned the money **before the lien**,
* Or within **45 days** after the lien,
* Or they **didn’t know about the lien** when they loaned.
49
Who is considered a buyer in the ordinary course of business?
A buyer in the ordinary course of business is a person who
(1) buys in the **ordinary course** from a person
(2) **in the business** of selling goods of that **kind**.
50
What rights does a buyer in the ordinary course of business have regarding security interests?
A buyer in the ordinary course **takes the item 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.
In other words,
A buyer in the ordinary course (like someone buying goods from a regular seller) gets the item free and clear,
even if:
* There’s a perfected security interest on it, and
* The buyer knows about it.
🔑 Translation:
If you buy something the normal way from a business, you don’t get stuck with the seller’s debt on it.
You take it clean, even if someone else had a claim on it.
51
What is the Shelter Principle?
The protected buyer may sell the purchased collateral to a third-party free of the secured party’s security interest.
If a buyer takes collateral free of a security interest (like a buyer in the ordinary course),
they can also resell it to someone else, and that new buyer also takes it free of the security interest.
52
What conditions allow a consumer to buy goods free of a security interest?
A buyer of consumer goods takes the goods free of a security interest if they buy without knowledge of the security interest, for value, primarily for personal, family, or household purposes, and before the filing of a financing statement covering the goods.
In other words,
If someone buys consumer goods for personal use, they get the goods free of any security interest —
if all of the following are true:
1. They **don’t know** about the security interest,
2. They **pay real value** for it,
3. They’re buying it for **personal family or household use**,
4. And they **buy it before a financing statement** is filed.
53
What is a Purchase-Money Security Interest (PMSI)?
A PMSI is a security interest that has **priority over prior perfected security interests** if **properly executed**.
54
What are the two types of PMSIs?
1. A security interest held by the **seller of collateral** to secure payment of all or part of the price.
- In other words,
When the seller lets the buyer **pay later** and **keeps a security interest** to make sure they get paid.
2. A security interest of a **person that gives value to a debtor** to **acquire rights** in or the use of collateral.
- In other words,
- When someone **gives the buyer money specifically to buy the collateral**, and takes a **security interest**.
55
What is the priority rule for a PMSI in inventory collateral?
A PMSI in inventory has priority over a conflicting security interest if perfected at the time the debtor receives possession and notice is provided to prior creditors.
A **PMSI** in inventory **only gets priority** over other conflicting security interest if:
1. It’s **perfected before** the debtor gets the inventory, and
2. The **secured party notifies** any earlier creditors.
If those things don’t happen, the **PMSI loses to any already perfected** security interest.
## Footnote
An unperfected PMSI in inventory will NOT have priority over a perfected security interest.
56
What is the priority rule for a PMSI in non-inventory collateral?
A PMSI in non-inventory collateral has priority if perfected at the time the debtor receives possession or within 20 days thereafter.
A PMSI in non-inventory collateral (like equipment or goods for long-term use) gets priority if the secured party:
- **Perfects before** the debtor gets the item, or
- **Perfects within 20 days** after the debtor receives it
57
How does a PMSI in consumer goods perfect?
A PMSI in consumer goods **perfects automatically upon attachment**, with no filing required.
58
What rights does a secured party have upon default?
A secured party has the right
(1) to **repossess** the collateral and
(2) the right to **dispose** of the collateral.
59
What is the right to repossess?
Upon default, the secured party **may take possession** of the collateral **without judicial process** as long as they **do not commit a breach of the peace**.
60
What constitutes a breach of the peace?
| When a creditor tries to reposses collateral during a default
* **Breaking into locked property** generally suffices as a breach of the peace.
* Any **opposition to the entry or seizure**, however slight, typically results in a breach.
61
What is the right to dispose of collateral?
Upon default, a secured party may *sell, lease, license,* or otherwise *dispose* of any or all of the collateral in its *present condition or in a commercially reasonable manner*.
62
What are the conditions for a sale of collateral?
- The sale must be **commercially reasonable** in terms of method, manner, time, place, and terms.
- **Reasonable notification** of the sale must be sent to the debtor and any secondary obligor.
63
What is strict foreclosure?
A secured party may purchase the collateral at a public or private sale only if the collateral is of a kind that is customarily sold on a recognized market or is subject to widely distributed standard price quotations.
In other words,
A secured party can buy the collateral at a public or private sale
it if the collateral is:
1. Something sold on a **recognized market** (like the stock market), or
2. Has a **widely known price** (like gold or corn — things with standard price listings).
64
What right does a secured party have upon default?
| Direct collection
A secured party has the right to collect **directly from the account debtor**.
To excersise this right the secured party must
(1) send an **authenticated notification** to the account debtor **informing them that the payment** is to be made to the **assignee**.
65
What must the account debtor do upon receiving proper notification?
The account debtor may discharge its **payment obligation ONLY by payment** to the assignee (the secured party).
66
What can a debtor recover if a creditor makes a non-complying disposition of collateral?
The debtor can recover actual damages, statutory damages, or be subject to judicially mandated disposition of the collateral.
## Footnote
Actual damages are those reasonably calculated to put an eligible claimant in the position that it would have occupied had no violation occurred.
67
What are the minimum statutory damages for consumer goods?
The minimum statutory damages must be at least the **credit loan interest amount + 10% of the loan’s principal amount**.
Additionally, **$500** in statutory damages is recoverable for each violation of certain Article 9 provisions.
68
What can a court do if a creditor improperly disposes of collateral?
| Judicial mandate
A court may **order**
or **restrain collection enforcement**
or **disposition of the collateral** on **appropriate** terms and conditions.
69
What is the Right of Redemption?
A debtor or any secondary obligor has the **right to redeem** collateral until the secured party has **disposed of it or entered into a contract** for its disposition.
70
What happens when a secured party sells collateral for more than the obligation?
The secured party must pay the debtor for any surplus.
71
What is the liability of the obligor when the sale of collateral brings in less than the obligation?
The obligor is liable for any deficiency.
72
Are either party liable for surplus or deficiency in certain transactions?
| neither side is liable if the transaction involves...
Neither side is liable for any surplus or deficiency if the transaction involves the
- sale of **accounts**,
- **chattel** paper,
- payment **intangibles**, or
- **promissory** notes.
73
Does Article 9 address the recovery of deficiency in consumer goods transactions?
No, Article 9 does not expressly address this issue.
74
What are the two rules adopted by jurisdictions regarding deficiency recovery after violating Article 9?
1. **Absolute Defense**: Some jurisdictions deny the secured creditor a**ny deficiency if they violate Article 9**.
2. **Rebuttable Presumption** Rule: It is presumed that the **proceeds from the disposition are equal to the debt owed** unless the cr**editor can prove otherwise**.
75
What is the burden of proof under the Rebuttable Presumption Rule?
The **secured creditor** must show that
(1) even at a **complying disposition**, the **collateral is worth less** than the amount owed by the debtor.
The creditor must prove the collateral wasn’t worth much — even in a perfect sale — or they can’t collect a deficiency.
76
Does Article 9 apply the rebuttable presumption rule to non-consumer goods transactions?
Yes, Article 9 expressly applies the rebuttable presumption rule to non-consumer goods transactions.
77
Rule Statement: Scope of Article 9
Article 9 governs consensual security interests in personal property and fixtures, as well as certain sales like accounts, promissory notes, and consignments. It applies regardless of the label used by the parties.
78
Article 9 applies to sales of certain rights to be paid money- Rule Statement
Article 9 applies to sales of certain rights to be paid money, but only when those rights fall into four categories:
1. Chattel Paper
2. Promissory Notes
3. Accounts
4. Payment Intangibles
An account is the right to get paid for selling goods, leasing or licensing property, or providing services — like a business’s accounts receivable.
Even if the debtor sells the right to payment to someone else, Article 9 still applies — it’s treated like a secured transaction.
79
Since UCC Art. 9 treats a sale of accounts as creating a security interest in the purchaser, the seller (debtor)...
When someone buys an account, Article 9 treats it like they got a security interest.
But until the buyer perfects, the seller is still treated as having rights in the account for purposes of attachment.
## Footnote
This lets the buyer attach their interest because the debtor (seller) is still considered to have rights in the collateral — even though they sold it.
80
Lease vs. Secured Transaction (Disguised Lease)
Simplified Rule for Notes:
Not all leases are true leases.
A deal that looks like a lease may really be a secured transaction if:
* The lessee must keep paying for the full lease term,
* AND can’t cancel,
* AND one of the following is true:
1. Lessee can become the owner at the end,
2. Lessee pays no extra to become owner, OR
3. Lessee pays only a tiny (nominal) amount to become owner.
→ If these apply, it’s a disguised secured transaction, and Article 9 governs.
81
Tangible Goods
* consumer goods, goods used or bought for use primarily for personal use, such as automobiles or jewelry;
equipment, meaning goods used by a business that aren’t normally sold by the business, such as chairs, desks, computers, restaurant kitchen equipment and manufacturing machines; goods or machinery used in the business.
* “Inventory” which means goods held for sale or lease, by a business, but also raw materials, works in process, or materials used or consumed in a business.
such as the hammers and drills on the shelves of a hardware store;
* farm products, which are goods unique to farming operations and include crops, livestock, feed, agriculture products and fertilizer;
* fixtures, which means property that is affixed to buildings so that they are sometimes considered real property, such as the built-in brick oven in a pizza sho
82
Intangible
* accounts, which are typically unsecured obligations owed to the person for goods supplied or services rendered; include the right to payment for goods sold, property licensed, or services rendered.
* chattel paper, which references obligations that facilitate smaller secured transactions. (1) monetary obligation (someone made a promise to repay the loan and security interest is in something else), and (2) A security interest or a lease
* deposit accounts, such as bank savings or checking accounts; and
investment property, including stocks, bonds and similar types of property traded on a securities exchange.
* Instrument – if you see a check or promissory note on exam call it an instrument Examples: promissory notes (I Owe you document, someone made a loan to someone), checks and drafts governed by Article 3 of the UCC
83
Security Agreement Requirements Rule statment
First list the first two requirement for attachment Value, Rights then move on to the following...
Usually an authenticated record (e.g., piece of paper signed by the debtor) A security agreement requires
(1) A **record** (Need not be written on paper but must be stored in a record— something that others can retrieve)
(2) The record must be **signed by the debtor**. (Need a signature or other symbol that shows the intent of the debtor to be bound.)
(3) The security agreement must **describe the collateral**.
(4) The description must **reasonably identify** the collateral.
(No magic words must be used unless it is consumer goods and commercial tort claims, then the collateral must be identified with more particularity.
A **super generic** description, such as “all of the debtor’s assets” or “all of the debtor’s personal property” does not reasonably identify the collateral for attachment.
84
After Accquired Property Rule statement
First list the first two requirement for attachment Value, Rights, Securitiy Aggreemen then move on to the following...
A security interest **only attaches to rights the debtor
has**.
However, a debtor can grant a **security interest in future** property by including an a**fter-acquired property clause** in the security agreement.
When included, the security interest **attaches automatically** when the **debtor acquires rights in the new property**.
Without such a clause, the security interest **only attaches to property the debtor owned at the time of the agreement**.
Exception: If the agreement describes inventory or accounts, courts will often presume it includes after-acquired inventory or accounts, even if not stated — this is a rebuttable presumption.
85
Perfection Rule Statement
To have priority over third parties claiming an interest in the same collateral, a secured party must perfect its security interest.
Perfection requires:
1. A valid attachment, and
2. Compliance with a proper method of perfection.
A security interest can be perfected by:
* (i) Filing a financing statement,
* (ii) Possession of the collateral,
* (iii) Control over the collateral, or
* (iv) Automatic perfection (in limited cases, such as a PMSI in consumer goods).
86
Filing Rule Statment
A security interest is usually perfected by filing a financing statement in the central filing office of the appropriate state (usually the Secretary of State).
Filing applies to most types of collateral, except deposit accounts, money, letters of credit, and anything covered by other methods like certificate of title laws.
A valid financing statement must include:
1. The debtor’s name,
2. The secured party’s name, and
3. A reasonable description of the collateral.
Normally, attachment happens first, then perfection.
But if the secured party files before attachment, the interest becomes perfected automatically upon attachment.
87
When are errors in a financing statement seriously misleading?
General rule is that minor errors in a financing statement do not affect perfection unless they make the financing statement seriously misleading.
**Errors in the debtor's name are almost always seriously misleading** unless the search for the correct name of the debtor** would uncover the financing statement with the error**, the error is not seriously misleading. If the mistake is **seriously misleading then, the security interest is not perfected**.
88
Same Office Rule Statement
| When will a security interest remain continously perfected?
Under the Same Office Rule, a security interest in proceeds remains continuously perfected without further action if three conditions are met:
1. The original financing statement covers the original collateral,
2. The proceeds are the type of collateral that can also be perfected by filing in the same office, and
3. The proceeds were not acquired with cash proceeds.
89
How long do financing statements last? - Rule Statement
Financing statements last for **5 years** unless filing a **continuation statement within 6 months** before the financing statement lapses.
90
Perfection by Posession Rule Statement
- Security interests in **tangible collateral** may perfected if the secured party takes possession of the collateral.
- Money, Goods, Instruments, Negotiable documents, Tangible Chattel Paper
- Possession is the **only way** to perfect a security interest in **$$$$ **
- As soon as the secured party has **possession**, the interest is **perfected**. The interest re**mains perfected as long as the secured party retains possession**.
91
Control of Deposit Accounts
A secured party can obtain control over a deposit account in one of three ways:
1. **Same Bank Rule** – If the secured party is the bank, it automatically has control.
2. **Control Agreement** – The secured party, debtor, and bank agree in writing that the secured party has control.
3. **Become the Customer** – The secured party becomes the bank’s customer on the account.
92
PMSI rule statement
PMSI in consumer goods
PMSI in other types of goods
PMSI (Purchase Money Security Interest) in consumer goods : PMSI gives lenders a** special security interest in goods** that have been purchased with funds borrowed from them or purchased on credit from them.
PMSI in **consumer goods is automatically perfected upon attachment**. A secured party does not need to file a financing statement or have possession to have a perfected PMSI in consumer goods.
A PMSI is a security interest in **goods has priority** over other security interests in the same goods.
A PMSI in other types of goods (e.g., inventory, equipment) or in automobiles is** not automatically perfected**.
93
Cash Proceeds
A security interest **automatically attaches to identifiable proceeds **of the original collateral.
Proceeds are **anything the debtor receives **when the collateral is sold, exchanged, or otherwise disposed of.
If the proceeds are identifiable cash proceeds (like cash or checks) and the security interest in the original collateral was perfected, the **security interest in the cash proceeds remains perfected indefinitely**.
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Buyers and Security Interests Rule Statement
In general, a **buyer of goods takes the collateral subject** to a perfected security interest
But a Buyer in the Ordinary Course of Business (BICOB) **takes the goods free of a security interest created by their seller** — even if the interest is **perfected and the buyer knows about it**.
A buyer is a BICOB if they:
1. Buy goods,
2. In the ordinary course of business,
3. From a merchant who regularly sells that type of goods,
4. In good faith, and
5. Without knowledge that the sale violates another’s rights.
The buyer must also give new value (cash or credit).
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Consumer Buyer Exception (“Garage Sale Rule”)
Generally, a buyer of goods subject to a perfected security interest takes the goods subject to the interest.
But under the “garage sale” rule, a consumer buyer takes free of a perfected security interest if the secured party **did not file a financing statement before the purchase**.
A **consumer buyer** is someone who:
1. Buys consumer goods for value,
2. For personal, family, or household use,
3. From a consumer seller, and
4. Without knowledge of the security interest.
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✅ Rule Statement – Judicial Lien Creditor Priority:
A judicial lien creditor is someone who gets a lien through court action, not automatically by law.
A judicial lien creditor takes subject to a perfected security interest, but generally has priority over an unperfected one.
A security interest is perfected when it has attached and the secured party has used a valid method of perfection (like filing, possession, or control).
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Rights Against Account Debtor Upon Default:
Upon default, a secured party may:
1. Notify the account debtor to pay the secured party directly,
2. Step into the debtor’s shoes and exercise any of the debtor’s rights related to that account, and
3. Collect or enforce payment from the account debtor, as long as it’s done in a commercially reasonable manner.
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✅ Rule Statement – Disposition of Collateral After Default:
After default, a secured party in possession of collateral may sell the collateral at a public or private sale to satisfy the debt.
The sale must be commercially reasonable, and the secured party must usually send an authenticated notice of disposition to the debtor and other relevant parties at least 10 days before the sale.
Notice is not required if:
* The collateral is perishable,
* Is likely to decline quickly in value, or
* Is customarily sold on a recognized market.
The right to notice can also be waived.
If the secured party fails to comply, the debtor may recover damages, and there is a rebuttable presumption that the secured party cannot collect a deficiency unless they prove that the deficiency would have existed even with proper notice.
