MEE - secured transactions

In order for a consignment to be subject to Article 9, what 4 requirements must be met?

(1) A consignor must DELIVER the goods to a merchant (consignee) to sell; (2) The merchant (consignee) must DEAL in goods of that kind, not operate under the name of the consignor, not be generally known by its creditors to be substantially engaged in the business of selling goods of others, and not be an auctioneer; (3) The VALUE of the goods must be AT LEAST $1,000 in each delivery; AND (4) The goods must NOT be consumer goods immediately before delivery

Once there has been a default, the secured party can repossess the collateral in what two ways?

(1) By use of judicial process (e.g.: replevin action) (2) Self-help repossession WITHOUT breaching the peace

What are the four classes of tangible collateral (goods)?

(1) Consumer goods (2) Farm products (3) Equipment (4) Inventory

A security interest in proceeds enjoys temporary perfection (20 days) and may continue to be perfected indefinitely under what three circumstances?

(1) If the original financing statement is broad enough to encompass the proceeds OR the secured party amends the financing statement within 20 days (2) If the proceeds are identifiable cash proceeds AND the security interest in the original collateral was perfected (note that cash proceeds includes checks and deposit accounts) (3) If the same office rule applies

The characterization of collateral can affect the validity of a security interest, the way in which a security interest can be perfected, and the rights of a third party in the collateral. Classify the following collateral: (1) A check or a promissory note; (2) A check along with a security agreement; (3) The right to be paid for a service rendered; (4) A savings account at a bank

(1) Instrument (2) Chattel papers (3) Accounts (4) Deposit account

If a secured party sells collateral, cash proceeds of a disposition are distributed in what order?

(1) Pay reasonable expenses for collection and enforcement (e.g., reasonable attorney's fees); THEN (2) Pay off the debt to the foreclosing secured party; THEN (3) Pay subordinate security interests, PROVIDED the subordinated party makes a formal demand prior to distribution of the proceeds; THEN (4) Any surplus or remainder will be returned to the debtor.

Once a default has occurred, what are the secured party's options?

(1) Seek possession of tangible collateral (repossess) and either sell OR retain it in satisfaction of the obligation owed; (2) Initiate a judicial action to obtain a judgment against the debtor or obligor; or (3) Pursue other courses of action to which the debtor and secured party have agreed

A secured party is not required to send a notice of disposition when:

(1) The collateral is perishable or threatens to decline speedily in value; (2) The collateral is customarily sold on a recognized market; OR (3) Notice is waived by an authenticated agreement after default.

A PMSI in fixtures has priority over a prior interest in the real property with which they are associated when what two things occur?

(1) The debtor has an interest in the real property (owner) OR is in possession (lessee); AND (2) The security interest is perfected by a fixture filing before the goods become fixtures OR within *20 days* thereafter

At a minimum, what information must a financing statement contain?

(1) The debtor's name (2) The name of the secured party or a representative of the secured party (3) The collateral covered by the financing statement

A transaction in the form of a lease is treated as creating a security interest IF:

(1) The lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease, (2) The payment obligation CANNOT be terminated by the lessee, AND (3) One of the following four conditions is ALSO met: - The original term of the lease is equal to OR greater than the remaining economic life of the goods - The lessee is bound to renew the lease for the remaining economic life of the goods OR is bound to become the owner of the goods - The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement, OR - The lessee has an option to become the owner of the goods, for no additional consideration or nominal additional consideration, upon completion of the lease agreement

When can a PMSI exist in goods?

(1) The value given (e.g., a loan) allows the debtor to acquire the goods or software; OR (2) The goods or software acquired is the collateral that secures the loan (e.g., goods bought on credit)

For a security interest to be enforceable against a debtor (i.e., attachment), what three conditions must be met?

(1) Value has been given by the secured party; (2) The debtor has rights in the collateral; and (3) The debtor has authenticated a security agreement describing the collateral, or the secured party has possession or control of the collateral

Which of the following statements regarding accessions and commingled goods is FALSE? (A) Accessions are goods that are physically united with other goods so that the identity of the original goods is lost. (B) A security interest that is created in collateral that becomes an accession is not lost due to the collateral becoming an accession. (C) An existing security interest in collateral that subsequently becomes commingled goods is transferred to the resulting product or mass. (D) A security interest in collateral that becomes commingled goods is lost in the original goods.

(A) Accessions are goods that are physically united with other goods so that the identity of the original goods is lost.

Which of the following statements regarding the priority rules for PMSIs is FALSE? (A) A PMSI in goods other than inventory or livestock will prevail over all other security interests in the collateral if the secured party perfects within 20 days of the debtor receiving possession of the collateral. (B) A PMSI in inventory will take priority over all other security interests if the secured party perfects within 20 days of delivery to the debtor and the secured party sends an authenticated notification to other secured parties. (C) If there are two or more competing PMSIs, the first to file or perfect rule generally governs priority. (D) A PMSI in consumer goods takes priority over all other security interests, no matter when they are perfected.

(B) A PMSI in inventory will take priority over all other security interests if the secured party perfects within 20 days of delivery to the debtor and the secured party sends an authenticated notification to other secured parties.

Which of the following statements regarding a financing statement is TRUE? (A) security interest in any collateral may perfected by filing a financing statement. (B) A financing statement must generally be filed in the central filing office of the appropriate state. (C) A financing statement must generally be filed in the state where the collateral is located. (D) A financing statement for a fixture must be filed in the state where the debtor is located.

(B) A financing statement must generally be filed in the central filing office of the appropriate state.

Which of the following types of collateral cannot be perfected by possession? (A) Instruments (B) Deposit account (C) Money (D) Tangible chattel paper

(B) Deposit account

Which of the following is the correct majority rule regarding an individual debtor's name? (A) Any legal name is sufficient to perfect. (B) If the debtor has a non-expired driver's license or state-issued I.D., the only correct name is the name on that card. (C) The only correct name is the name on the debtor's birth certificate. (D) If the debtor has multiple legal names, all must be listed on the financing statement.

(B) If the debtor has a non-expired driver's license or state-issued I.D., the only correct name is the name on that card.

Which of the following serves to provide notice of a security interest to establish a claim superior to others? (A) Attachment (B) Perfection (C) Priority (D) Enforcement

(B) Perfection

When the debtor moves to another state, the secured party has a __________ window in which to re-file; when the collateral is transferred to a new debtor in a new state, the secured party has __________ in which to re-file. (A) three months, six months (B) four months, one year (C) six months, 18 months (D) one year, two years

(B) four months, one year

Identify the term that describes the rules for resolving who wins and who loses in disputes between two claimants who fight over the same piece of property. (A) Attachment (B) Perfection (C) Priority (D) Enforcement

(C) Priority

Which of the following is the correct order for application of cash proceeds of a disposition? (A) Reasonable expenses for collection and enforcement; subordinate security interests; debt of the foreclosing party; surplus to the debtor. (B) Debt of the foreclosing party; reasonable expenses for collection and enforcement; subordinate security interests; surplus to the debtor. (C) Reasonable expenses for collection and enforcement; debt of the foreclosing party; subordinate security interests; surplus to the debtor. (D) Subordinate security interests; debt of the foreclosing party; reasonable expenses for collection and enforcement; surplus to the debtor.

(C) Reasonable expenses for collection and enforcement; debt of the foreclosing party; subordinate security interests; surplus to the debtor.

The "filed but unattached" security interest exception applies with regard to a contest between __________. (A) the holder of a perfected security interest and the holder of an unperfected security interest (B) the holder of a perfected security interest and another holder of a perfected security interest (C) a judicial lien creditor and the holder of an unperfected security interest (D) a judicial lien creditor and the holder of a perfected security interest

(C) a judicial lien creditor and the holder of an unperfected security interest

Which of the following statements regarding purchase money security interests (PMSI) is FALSE? (A) A PMSI can only occur if the collateral is goods or software. (B) The secured party must provide value that enables the debtor to acquire the goods. (C) The goods that the debtor acquires are used as collateral to secure the loan. (D) A PMSI can occur even if the debtor does not use the value given to acquire the goods.

(D) A PMSI can occur even if the debtor does not use the value given to acquire the goods.

Which of the following types of collateral CANNOT be perfected by control? (A) Letter of credit rights (B) Electronic chattel paper (C) Investment property (D) Negotiable instruments

(D) Negotiable instruments

Which of the following is NOT essential information that a financing statement must contain? (A) The name of the secured party (B) The name of the debtor (C) A description of the collateral covered by the financing statement (D) The address of the debtor

(D) The address of the debtor

In order for a UCC Article 9 security interest to be created, there must be __________. (A) tangible collateral (B) possession of the collateral by the secured party (C) a loan by the secured party to the debtor (D) a consensual security agreement

(D) a consensual security agreement

Even if parties label their transaction as a lease in the hopes of avoiding Article 9 rules, their transaction will be governed by Article 9 if one of the following four conditions is present:

*economic reality test* (1) the original lease term is equal to or greater than the good's remaining economic life; (2) the lessee is bound to renew the lease for the good's remaining economic life (or is bound to become the owner of the goods) (3) the lessee has the option to renew the lease for the good's remaining economic life for nominal or no additional consideration; OR (4) the lessee has the option to become the owner of the goods upon completion of the lease for nominal or no additional consideration.

Rule re: after acquired property NOT mentioned in the security agreement

- *General rule:* If there is no reference to after-acquired property, the security interest attaches ONLY to the collateral that exists at the time that the security agreement is executed. - *Exception:* In MOST states, if the security agreement describes inventory or accounts, there is a rebuttable presumption that the description includes after-acquired inventory and accounts.

Who is a "buyer in the ordinary course of business" and what are the benefits?

- A buyer in the ordinary course of business (BOCB) is a person who: (1) buys goods (not farm products) in the ordinary course of business; (2) from a merchant who is in the business of selling goods of that kind; (3) in good faith; AND (4) without actual notice that the sale violates the rights of another in the same goods. - A BOCB takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence. *Note:* A buyer CANNOT receive BOCB status if the merchant is a pawnbroker.

"Garage sale" exception (a/k/a "consumer buyer" exception)

- A buyer of consumer goods will take free of a security interest EVEN IF it is perfected, if: (1) the buyer buys consumer goods for value, (2) from a consumer seller, (3) it's for his own personal, family, or household use, AND (4) it's without knowledge of the security interest. - *Exception to the exception:* IF the party holding a PMSI in consumer goods filed a financing statement covering those goods before the consumer to consumer purchase occurred, THEN the secured party's security interest will be good against the consumer buyer . . . (Recall that a PMSI in consumer goods is automatically perfected and filing is not required. By filing regardless of automatic perfection, the secured party protects his priority in the event of a consumer to consumer purchase of the covered goods.)

What happens to perfection when a debtor moves to another state?

- A perfected security interest will remain perfected for *four months* after the move UNLESS the financing statement lapses earlier - This four month grace period also covers collateral the debtor acquires after the debtor moves. - To remain continuously perfected, the secured party MUST re-file in the new state within the four-month window

Who has priority in a car radio that had been installed in a vehicle that was perfected under a certificate-of-title statute?

- A security interest in an accession is usually subject to general priority rules. HOWEVER, a security interest in an accession is subordinate to a security interest in the whole collateral if that collateral was perfected under a certificate-of-title statute. - Here, the radio was installed in a vehicle that was perfected under a certificate-of-title statute. Therefore, the security interest in the car radio is subordinate to the holder of the lien noted on the title certificate of the vehicle.

Rule re: attachment

- A security interest in collateral is enforceable only upon "attachment" - Attachment occurs when the following three conditions are met: (1) value is given by the secured party (2) the debtor has rights in the collateral, AND (3) the debtor has authenticated a security agreement that describes the collateral, or the secured party has possession of or control over the collateral pursuant to a security agreement

Accessions vs. commingled goods

- Accessions are goods that are physically united with other goods so that the identity of the original goods is NOT lost (e.g., a framed piece of art) . . . The security interest in the accession CONTINUES in the accession. - Commingled goods are goods that are physically united with other goods to the point that their identity IS lost (e.g., eggs being used to make a cake) . . . The security interest in the good does NOT continue, BUT it will attach to the larger product.

What is the difference between "accounts" and a "deposit account"?

- Accounts include the right to payment for property sold, leased, licensed, or for services rendered. Also included are rights to payment under insurance policies, amounts owing on credit cards, as well as a company's accounts receivable. - Deposit accounts include savings, passbook, time, or demand accounts maintained with a bank.

A new security agreement is not necessary when a debtor buys additional collateral if the original security agreement includes what?

- Because a security interest only attaches to the collateral described in the security agreement, an *after-acquired property clause* should be included in the original security agreement if a creditor wants to have a security interest in property acquired by the debtor after the agreement is authenticated. - Typical language includes, "all of the debtor's existing and after-acquired [collateral]" or "all of the [collateral] now owned or hereafter acquired."

Categories of intangible collateral

- Chattel paper - Document - Instrument - Accounts - Deposit Account - Investment property - Commercial tort claims - Letter of credit rights - General intangibles

Categories of tangible collateral (i.e., goods)

- Consumer goods - Farm Products - Inventory - Equipment

Consignments may fall within Article 9 in order to facilitate public notice. These consignments carry the risk that a consignee's lenders may be misled into thinking that consigned inventory is actually owned by the consignee rather than the consignor. If a consignment is subject to Article 9, how are the consignor and the security interest in the consigned goods treated?

- The consignor is treated as the secured party and must perfect its security interest in the consigned inventory, and the security interest in the consigned goods is treated as a PMSI in inventory. - In other words, a consignor will have PMSI super-priority in consigned goods IF the consignor perfects by filing before the consignee receives possession of the items, and the consignor properly notifies any secured parties with conflicting security interests in consignee's inventory.

How must the collateral be described in a financing statement?

- The financing statement must contain a description of the collateral that sufficiently indicates the collateral (such as one that meets the requirements for creation of an enforceable security agreement). - When the security interest covers all of the debtor's assets or personal property, the description CAN contain a broad statement to that effect.

After collateral is sold or otherwise disposed of, the secured party has an automatically perfected security interest in the proceeds for __________ days.

20

When do financing statements lapse?

5 years after the date of filing, unless continued

Under what circumstances does a buyer of goods take free of an unperfected security interest?

A buyer, other than a secured party, of collateral that is goods, takes free of an unperfected security interest in the same collateral if the buyer: (1) Gives value; and (2) Receives delivery of the collateral; (3) Without knowledge of the existing security interest.

What is the rule regarding construction mortgages and subsequent security interests in fixtures?

A construction mortgage has priority over any subsequent security interest in fixtures, including PMSIs in fixtures IF it is recored before the goods become fixtures AND it covers ONLY those goods that become fixtures before completion of construction

When is a disposition considered commercially reasonable?

A disposition is commercially reasonable when the collateral is: (1) Sold in the usual manner in a recognized market that has standardized prices for fungible goods; (2) Sold at the price current in a recognized market; OR (3) Disposed of in conformity with reasonable commercial practices among dealers in that type of collateral.

As between a secured party and a judicial lien creditor, who has priority?

A judicial lien creditor takes the collateral subject to an existing perfected security interest BUT generally has priority over an unperfected security interest.

What is a "letter-of-credit right"?

A 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

If a security interest was attached to collateral, how does the security interest then attach to the proceeds of that original collateral upon its sale or disposition?

A security interest in collateral attached automatically to identifiable proceeds

As between a perfected secured creditor and a statutory lien claimant, who has priority in a dispute over the same collateral?

A statutory lien claimant has priority over a perfected secured creditor provided: (1) the lienholder has possession of the goods; AND (2) the lien secures payment or performance of an obligation for services or materials furnished in the ordinary course of the person's business (e.g., a mechanic's lien)

Secured transactions are governed by:

Article 9 of the U.C.C.

If a secured party holding a subordinate security interest in a piece of collateral reposseses and sells that collateral, what happens to the senior, or superior, security interests in that collateral?

Senior, or superior, security interests survive the sale.

Where must a financing statement be filed?

Generally must be filed with the Secretary of State ("central filing") of the state of the DEBTOR's location

A PMSI may exist only with respect to these two types of collateral . . .

Goods (including fixtures) OR software

Chattel paper is a record (paper or electronic) with what two components?

It is a record that evidences both (1) a monetary obligation and (2) a security interest in specific goods (security agreement) or a lease of specific goods

Rule re: leases covered under Article 9

Leases are covered under Article 9 of the U.C.C. ONLY when the transaction, although in the form of a lease, is in economic reality or substance, a security transaction

A security interest in ________ can be perfected only by possession.

Money

If there are two competing PMSIs between a lender and a seller, the PMSI taken by the __________ has priority; all other PMSIs are governed by the __________ rule.

seller; first to file or perfect

When there are two unperfected security interests in the same collateral, the first security interest __________ has priority.

to attach or become effective

An after-acquired clause is not effective if the collateral is consumer goods, unless ______?

The debtor acquires them within *10 days* after the secured party gives value

How do you determine priority when there is an unperfected security interest versus another unperfected security interest in the same collateral?

The first to attach takes priority

What happens to perfection when the collateral is transferred to a person in another state who takes the collateral subject to the security interest?

The secured party has *one year* to file a new financing statement listing the new debtor

Upon default, what happens when a secured party has priority in a fixture?

The secured party may remove the fixture from the real estate BUT will be liable for the cost of repairing any physical damage to the real estate BUT NOT for any reduction in the value of the real property due to the removal.

What is the priority rule for a lender with a PMSI versus a seller with a PMSI?

The seller PMSI beats the lender PMSI

What is the priority rule for a PMSI in inventory or livestock?

This PMSI will have priority over all other security interest in the same inventory or livestock IF the secured party: (1) Perfects before the inventory or livestock is delivered to the debtor; AND (2) Sends an authenticated notification of the PMSI to other secured parties.

What is the priority rule for a PMSI in goods (other than inventory or livestock)?

This PMSI will prevail over all other security interests in the same collateral, even if those other security interests were previously perfected (e.g., an existing after-acquired equipment clause by a lender), SO LONG AS the security interest is perfected before or *within 20 days* after the debtor receives possession of the collateral.

"Same office" rule

Under the same office rule, temporary perfection in proceeds may continue indefinitely if: (1) A filed financing statement covers the original collateral; (2) The proceeds are collateral in which a security interest may be perfected by filing in the same office as the original financing statement; AND (3) The proceeds are not acquired with cash proceeds. *E.g.:* Lender filed a financing statement covering candle inventory. The candles are sold on credit to Boutique generating an account (which is the proceeds of the inventory). Those proceeds and the original inventory would be perfected by filing in the same office, and the account was not acquired with cash proceeds. Lender is perfected in the account without having to file a new financing statement.

Define "chattel paper"

Writing(s) that evidence both a security interest in a good (or software) AND a monetary obligation to pay

As a general rule, a security interest in fixtures has priority over an interest in the real property with which the fixtures are associated if the security interest in fixtures is perfected by a fixture filing __________.

before the real property interest is recorded

A PMSI in what type of goods automatically perfects upon attachment?

consumer goods

As soon as a security interest in a PMSI in __________ attaches it is automatically perfected.

consumer goods

A security interest in a ________ can be perfected only by control.

deposit account

When there are two perfected security interests in the same collateral and neither interest is a purchase money security interest, the first security interest to __________ has priority.

file or perfect

It is ____________, and NOT ____________ that determines whether Article 9 applies

form and NOT substance

If the proceeds are identifiable cash proceeds and the security interest in the original collateral is perfected, the perfected security interest in the proceeds continues __________.

indefinitely