Secured Transactions (DONE)

Question 1

What is the basic approach to secured transactions?

Answer 1

1) Is the transaction within the scope of Article 9?
2) Classify the collateral
3) Determine if a security interest has been created (has attachment occurred?)
4) Determine if the security interest has been properly perfected
5) Determine the persons who are making claims to the collateral
6) Apply proper priority rules and rules regarding repossession

Question 2

What transactions fall under Article 9?

Answer 2

1) Collateralized transaction: Any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures.
2) Sales of Receivables: The outright sale of accounts, chattel paper, payment intangibles, and promissory notes
3) Consignments: A bailment by the owner under which the bailee has authority to sell.
4) Agricultural Liens Created by Statute
5) Lease-purchase agreements

Question 3

What property may be used as collateral?

Answer 3

1) Property already owned by the debtor
2) Property to be acquired with loan (purchase money security interest)
3) After-acquired property

Question 4

What is a consignment?

Answer 4

A consignment is a bailment by the owner/bailor/consignor under which the bailee/consignee has authority to sell.

Consignee appears to own the goods, and thus the true owner may be required to comply with Article 9 to gain protection over the consignee’s other creditors.

Question 5

What consignments must comply with Article 9?

Answer 5

1) Consigned good are worth a total of $1000 or more, and
2) The consignor did not use the goods for personal, family, or household purposes, and
3) Potentially deceptive consignee - the consignee must be in a position to deceive potential creditors with the consigned goods.

Question 6

What constitutes a potentially deceptive consignee?

Answer 6

1) Consignee deals with goods of that kind under a name other than the consignor’s name
2) Consignee is not an auctioneer, and
3) Consignee is not generally know by consignee’s creditors to be substantially engaged in selling consigned goods.

Question 7

What four types of goods are considered tangible collateral?

Answer 7

1) Consumer goods - personal, family, household purposes
2) Inventory - goods held for sale or lease and goods consumed by a business
3) Farm products - Goods used or produced in farming that are in possession of or used by a farmer

Question 8

What eight types of goods are considered intangible collateral?

Answer 8

1) Instruments - notes, drafts, and negotiable certificates of deposit
2) Documents - bills of lading and warehouse receipts
3) Chattel paper - records evidencing both a monetary obligation and a security interest in or lease of goods
4) Accounts - rights to payment for goods, services, etc.
5) Deposit accounts - savings accounts, passbook accounts, nonnegotiable certificates of deposit, etc.
6) Investment property - Stocks, bonds, mutual funds, commodity accounts, brokerage accounts, etc.
7) Commercial tort claims - tort claims filed by organizations and tort claims filed by individuals that arouse out of their business and do not involve personal injury
8) General intangibles - others, such as goodwill and copyrights

Question 9

What is a lease-purchase agreement?

Answer 9

Normally, true leases are not subject to secured transactions. But a lease that is actually an installment sale does fall under Article 9.

Evidence of these:
Lessee cannot terminate the lease, and
1) Lease term is equal to or greater than remaining economic life of goods, or
2) Lessee owns property at end of lease term, or
3) Lessee has option to buy for nominal consideration at the end of lease term.

Question 10

What are the exclusions from Article 9?

Answer 10

1) Rights governed by Federal Law
2) Real property (except fixtures)
3) Tort claims (except commercial tort claims)
4) Deposit accounts in consumer transactions (except business deposit accounts useable as collateral)
5) Statutory liens (e.g., Landlord liens and MMLs)
6) Wage assignments

Question 11

What is a purchase money security interest? (PMSI)

What is the benefit of a PMSI?

Answer 11

PMSI’s are security interests that arise when:

1) The creditor sells the goods to the debtor on credit, retaining a security interest in the goods for the purchase price, and
2) The creditor advances the debtor the funds used to buy the goods, and the creditor takes a security interest in the goods

A holder of PMSI has priority over other security interests in the same goods.

Question 12

What are the classifications of collateral?

Answer 12

1) Goods (movable items and fixtures, and specific inclusions)
2) Semi-tangible and intangible collateral
3) Proceeds

Question 13

What are the specific inclusions classified as goods?

Answer 13

1) Standing timber
2) Growing crops
3) Unborn young of animals

Question 14

What are the specific exclusions not classified as goods?

Answer 14

1) Money
2) Minerals before extraction
3) Collateral that fits other categories

Question 15

What is classified as a good?

Answer 15

1) Consumer goods (personal, family, and household items)
2) Equipment (business purposes)
3) Inventory (goods held for sale or lease, raw materials, consumed materials)
4) Farm products (any type of crop or livestock)

Question 16

What is considered an instrument? (semi-tangible/intangible collateral)

Answer 16

Instruments represent money, like promissory notes, checks, drafts, etc.

Question 17

What is considered a document? (semi-tangible/intangible collateral)

Answer 17

Written or electronic representations of goods.

1) Warehouse receipt - goods in storage
2) Bill of Lading - goods in transit

Question 18

What is considered chattel paper? (semi-tangible/intangible collateral)

Answer 18

Single writing or group of writings evidencing two things:

1) Monetary obligations, plus
2) Security interest in or lease of goods

Question 19

What is considered an account? (semi-tangible/intangible collateral)

Answer 19

Any right tot he payment of money for goods sold or leased or for services rendered not evidenced by an instrument or chattel paper.

The typical accounts receivable of a business - what your clients owe you

Includes contracts which have not yet been earned by performance

Includes computer software license fees and credit card receivables

Question 20

What is considered a deposit account? (semi-tangible/intangible collateral)

Answer 20

Accounts with a financial institution.

Question 21

What is classified as proceeds collateral?

Answer 21

Proceeds are whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.

Proceeds may include collateral a creditor could not have a security interest in if originally used as collateral, such as the cash from the same of the original collateral.

Question 22

What is attachment?

Answer 22

Attachment is relevant if the fight is between the debtor and the creditor. The creditor will usually prevail if the creditor has attached.

The process by which security interest is created and becomes enforceable against the debtor so the creditor can repossess the collateral if the debtor does not pay.

Question 23

What is required for a security interest to attach?

Answer 23

1) Creditor gave value
2) Contract (the security agreement)
3) Debtor has rights in collateral

The elements of attachment may occur in any order.

No attachment until all elements satisfied.

Question 24

What is considered “creditor giving value”?

Answer 24

Value must be given by the secured party

a preexisting debt is deemed value if the security interest is intended’s security for the preexisting debt

Question 25

What is required of the contract proving the security agreement necessary for attachment?

Answer 25

Methods proving the security agreement:

1) Oral agreement
2) Authenticated record
3) Control

Question 26

What is required for an oral security agreement to be sufficient?

Answer 26

Security agreements may be oral only if the collateral is in the creditor’s possession.

Often referred to as a “pledge”.

The creditor has a duty to take reasonable care of collateral in the creditor’s possession.

Question 27

What is required for an authenticated record to be sufficient?

Answer 27

1) Evidence of record

2) Description of collateral (must reasonably identify the property - minor errors can still be reasonable)

Question 28

What is required to establish control for attachment to be made?

Answer 28

The security agreement may be demonstrated why control if the collateral is nonconsumer deposit accounts, electronic chattel paper, or investment property.

Control basically means the creditor has the right to sell or cash in the collateral without further action from the debtor.

Control applies to INTANGIBLE items.

Question 29

What is the requirement that debtor has rights in the collateral?

Answer 29

A debtor cannot give a security interest in property without having rights in the property such as ownership or identification to a contract.

Debtor cannot use another’s person’s property as collateral without that person’s permission.

Question 30

How can a security interest be created in property to be acquired in the future? (After-acquired property)

Answer 30

1) Using new property as collateral for an old loan: The debtor can agree that new acquisitions of property will serve as additional collateral for an OLD loan. (“Floating Lien”)
2) Consumer good exception: An after-acquired property clause will only work for consumer goods acquired 10 days of the creditor giving value.
3) Commercial Tort Claim exception: After-acquired property clauses will NEVER work with commercial tort claims.

Question 31

How does attachment work with future advances?

Answer 31

Debtor can agree that the collateral will serve as collateral for NEW loans, as well as the current loan.

This creates a line of credit arrangement.

Question 32

What is perfection?

Answer 32

Perfection is relevant if the fight is between the creditor and a third party claiming the same collateral.

Perfection is the process by which the creditor protects the security interest from most other claimants to the same collateral.

Question 33

What are the elements of perfection?

Answer 33

1) Attachment: Creditor gives value, Contract proving security agreement, Debtor has rights in collateral
2) Act of perfection: depends on the type of collateral involved.

Question 34

What are the different methods constituting an “act of perfection”?

Answer 34

1) Possession of collateral by creditor
2) Filing of financing statement by creditor
3) Automatic permanent - attachment alone is sufficient
4) Automatic temporary - attachment alone sufficient for short period of time
5) Control
6) Notation of security interest on certificate of title
7) Special rules for proceeds
8) Multi-state transactions

Question 35

What is perfection by possession?

Answer 35

Almost all collateral may be perfected by possession.

This places the WORLD on notice that creditor has possession of collateral.

Question 36

What are the exceptions to perfection by possession?

Answer 36

The following types of collateral may NOT be perfect by possession:

1) accounts
2) deposit accounts
3) nonnegotiable documents
4) electronic documents
5) electronic chattel paper
6) general intangibles

(mostly intangible things)

Question 37

What happens when possession of collateral is lost? (perfection)

Answer 37

If the creditor no longer has possession of the collateral, perfection is lost.

Question 38

What is required for perfecting by filing of a financing statement?

Answer 38

Almost all collateral may be perfect by filing.

Requirements:

1) Names of debtor and creditor
2) Addresses of both
3) Debtor’s authorization in an authenticated record (authorization automatic debtor authenticated the underlying security agreement)
4) Description of the collateral
5) Description of the land if the collateral is timber, minerals, fixtures, or crops

Question 39

What is the effect of errors in financing statements?

perfection

Answer 39

Minor errors that are not seriously misleading are excused.

Question 40

What are the requirements for designating a debtor in a financing statement?

(perfection)

Answer 40

Very important as the financing statement is filed under the debtor’s name.

1) Individual = individual’s name
2) Registered organization = name under which entity is organized
3) Trade Name = not sufficient, unless extremely similar to the debtor’s name

Question 41

What is the effect in a financing statement if there is a change in the debtor’s name?

(perfection)

Answer 41

If the changed name renders the name on the financing statement seriously misleading, the financing statement is effective only against collateral acquired by the debtor BEFORE the name became insufficient and within FOUR MONTHS after.

For collateral acquired after the four-month period, the secured party must refile using the debtor’s correct name.

Question 42

Where is the place of filing for financing statements?

perfection

Answer 42

General Rule = Secretary of State’s office in Austin

For fixtures, minerals, and timber to be cut = County where mortgage on real estate would be filed.

Question 43

What is the effective duration for financing statements?

perfection

Answer 43

Effective for five years from the date of filing.

Exception: Recorded real property mortgage covering FIXTURES continues until the mortgage is released or satisfied.

Question 44

How is the effectiveness of a financing statement extended?

perfection

Answer 44

By filing a continuation statement within 6 months prior to the expiration date and before the 5 years expires.

Question 45

When is a termination statement required for consumer goods?

perfection

Answer 45

The creditor must file a termination statement in a timely manner, the earlier of:

1) within 20 days after the debtor’s written demand; or
2) within 1 month after there is no outstanding secured obligation or commitment to make advances, even without a demand from the debtor.

Question 46

When is a termination statement required for non-consumer goods?

(perfection)

Answer 46

Only upon the debtor’s request.

Creditor must provide the debtor with a termination statement within 20 days of written demand. The debtor has the responsibility of filing the termination statement and must incur the cost.

Question 47

What is the standard for a fraudulent filing?

perfection

Answer 47

A person may not file a financing statement the person knows is forged, contains a material false statement, or is groundless.

Minimum penalty = $5000 plus court costs and reasonable attorney’s fees.

Question 48

What causes automatic permanent perfection?

Answer 48

1) PMSI in Consumer Goods
2) Assignment of Insignificant Amount of Debtor’s Accounts
3) Sale of Promissory Notes

Question 49

What is the effect of a PMSI on consumer goods in terms of automatic permanent perfection?

Answer 49

When there’s a PMSI in collateral, the security is automatically perfected without having to file a financing statement, assuming the money is actually used to buy the collateral.

WARNING: This special purchase-money security interest is only for CONSUMER GOODS that are NOT either certificate of title items or fixtures.

Question 50

What causes automatic temporary perfection?

Answer 50

1) Proceeds
2) New value for instruments, negotiable documents, and certified securities
3) Delivery of those three to debtor for 20 days for certain purposes.

Question 51

How do proceeds cause automatic temporary perfection?

Answer 51

Proceeds are automatically perfect for 20 days from the debtor’s receipt of the proceeds.

Question 52

How does new value for instruments, negotiable docs, and certified secures cause automatic temporary perfection?

Answer 52

Creditor is automatically perfected for 20 days (a grace period to perfect using normal methods) from time of attachment if the creditor gave new value.

Must file or take possession within 20 days or its security interest will become unperfected.

Question 53

How does delivery of interments, negotiable documents, or certified security for certain purposes cause automatic temporary perfection?

Answer 53

If a creditor gives the debtor these documents for certain purposes (such as for proof of security to other parties), then the creditor has “temporary perfection” for 20 days following its surrender.

If the creditor does not regain possession of the notes before the expiration of the 20 days, perfection is lost.

Question 54

What is the definition of “control” as an act of perfection?

Answer 54

Basically means the creditor has the right to sell or cash in the collateral without further action from the debtor.

Question 55

What items are covered by perfection through notation on certificate of title?

Answer 55

1) Motor vehicles
2) Boats
3) Manufactured Housing

Physical notice is required of security interest on certificate of title

e.g., Perfection is not automatic when using a consumer good as collateral. The creditor must note its security interest directly on the title of the collateral.

Question 56

What are the special rules for perfection through proceeds?

Answer 56

Perfection continues for 20 days.

Question 57

What can be done if perfection through proceeds continues beyond 20 days?

(only one needed to regain perfection)

Answer 57

1) “Same Office” - Original security interest perfected by filing and a financing statement covering the proceeds would be filed in the same place as the original collateral.
2) “Identifiable Cash Proceeds” - As long as the case remains identifiable from the sale of the proceeds, the security remains perfected.
3) “Proceeds Perfected Within the 20-day Period” - The perfection could occur without further action on the creditor’s part or the creditor might need to take action to perfect.

Question 58

What are the rules of perfection for multi-state transactions?

Answer 58

General Rule: Law of the state where the DEBTOR is located.

1) For an individual: principal residence
2) Registered organization: Law of state where organized
3) Unregistered organization: Place of business, but if more than one, chief executive office.

Question 59

What are the exceptions for the multi-state transactions rule where the law of the collateral’s location controls?

Answer 59

Creditor must follow the law of the collaterals location when:

1) Security interests perfected by possession
2) Fixtures
3) Timber
4) Agricultural liens = law of state where farm product covered by the lien is located

Question 60

What is the multi-state transaction exception for certificate of title liens?

Answer 60

Law of the state which issued most recent certificate of title.

Question 61

What is the multi-state transaction exception for deposit accounts?

Answer 61

Law of state in which bank has its chief executive office.

Question 62

For multi-state transactions rules, what is the effect of a debtor or collateral changing states?

Answer 62

General rule: If debtor moves, perfection continues for FOUR months.

For perfection by possession cases, perfection continues as long as perfected under new state’s laws.

For certificate of titler items, perfection continues for as long as it would under the original certificate of title.

Question 63

Who has priority between:

Secured Creditor vs. Unsecured/General Creditor

Answer 63

SECURED CREDITOR prevails.

Perfected status of secured creditor is irrelevant.

(general creditor has no interest in the property / no collateral)

Example: Debtor granted Bank a security interest in Debtor’s computer. Debtor has financial difficulties and quits paying both Bank and Debtor’s American Express account. Bank has priority in the computer regardless of Bank’s perfected status because American Express is UNSECURED.

Question 64

Who has priority between:

Secured Party vs. Secured Party

Answer 64

1) Both perfected = First to ATTACH prevails
2) One creditor perfected = PERFECTED creditor prevails
3) Both creditors perfected = special rule (see other slide)

Example: In 2013, Debtor granted Octopus National Bank a security interest in its equipment. ONB did not file a financing statement or otherwise perfect its interest. In 2014, Debtor granted Shark National Bank a security interest in the same equipment. Debtor told SNB that it had already granted ONB a security interest in the equipment. SNB properly perfected. Debtor stops paying both ONB and SNB. SHARK prevails because it is perfected.

Question 65

Who has priority between:

Secured Party vs. Secured Party

(and both parties PERFECTED)

Answer 65

General rule = First creditor either to 1) FILE or 2) PERFECT.

First creditor to do the first of filing or perfecting prevails (not both)

Doesn’t matter which creditor first had a security agreement with the debtor.

Doesn’t matter with creditor attached first.

Doesn’t matter which creditor perfected first if one creditor filed before that perfection.

Knowledge of Creditor A who filed first that Creditor B has subsequently filed and perfected, but before Creditor A perfects, is irrelevant.

Example: Bank A had Debtor sign a security agreement and a financing statement on May 10. Bank A properly filed the financing statement on May 10, but neither lent the money nor made a commitment to do so. Bank B lent Debtor money and took a security interest in the same collateral by taking possession on May 11. On May 12, Bank A lent Debtor the money with full knowledge of the transaction with Bank B. Bank B was perfected on May 11, but Bank A did not perfect until May 12 because perfection cannot occur until all the elements of attachment are satisfied (the final element here was Bank A giving value on May 12). However, Bank A has priority because it was the first creditor who either filed or perfected. The policy behind this rule is to promote reliance on the filing system so that creditors in the position of Bank A can check to see that the debtor’s assets are unencumbered, file a financing statement, and then loan the money with confidence that it has priority without having to continuously recheck the records.

Question 66

What is the priority exception if both parties are secured and perfected, but one has a PMSI in GOODS (other than inventory and livestock)?

Answer 66

The PMSI creditor prevails (even though second) if it is perfected:

1) At the time the debtor receives possession of the collateral, or
2) Within 20 days of when the debtor received possession of the collateral.

Example: On June 1, Debtor gave a security interest in all of his office equipment now owned and after-acquired to Bank A. Bank A filed a financing statement and lent Debtor the money on the same day. Later, Debtor bought a new copying machine from B.I.G. Machines, Inc. which took a security interest therein to secure the payment of the purchase price. B.I.G. Machines gave Debtor possession of the machine on October 10. Although second to file or perfect, B.I.G. Machines will have priority over Bank A if it perfects by OCTOBER 30.

Question 67

What is the priority exception if both parties are secured and perfected, but one has a PMSI in INVENTORY?

Answer 67

PMSI creditor prevails if:

1) PMSI creditor perfected at time debtor receives possession of the inventory, and
2) Proper notice to holders of conflicting security interests

Example: Owl Bookstore granted Last National Bank (LNB) a security interest in its inventory now owned and after-acquired, which LNB perfected by filing a financing statement in the proper place. Thereafter, Owl decided to buy more books on credit for its inventory from Book Wholesalers. Book Wholesalers wants to claim a purchase money security interest in the books. To have priority in them over LNB, it must give LNB a written notice of its intentions BEFORE delivering the books to Owl. In addition, Book Wholesalers must perfect (e.g., file a financing statement) BEFORE delivery (there is no 20-day grace period). When the books are delivered, LNB’s floating lien will attach to the books. But, if Book Wholesalers has followed this procedure, it will have a priority claim to these books.

Question 68

What is the priority exception if both parties are secured and perfected, but one has a PMSI in LIVESTOCK?

Answer 68

Same rules as a PMSI in inventory.

Question 69

What is the priority exception if both parties are secured and perfected, but the interest involves DEPOSIT ACCOUNTS?

Answer 69

Secured party with CONTROL prevails

Question 70

What is the priority exception if both parties are secured and perfected, but the interest involves INVESTMENT PROPERTY?

Answer 70

Secured party who has CONTROL over investment priority over a secured party who does not have control (e.g., a secured party who perfected by filing.)

Example — Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor’s investment property. At that time, Debtor owns 1,000 shares of XYZ Co. stock for which Debtor has a certificate. Alpha perfects by filing. Later, Debtor borrows from Beta and grants Beta a security interest in the 1,000 shares of XYZ Co. stock. Debtor delivers the certificate, indorsed in bearer form, to Beta. Alpha and Beta both have a perfected security interest in the XYZ Co. stock. Beta has CONTROL because of the delivery of the properly indorsed certificate and hence Beta has priority over Alpha.

Question 71

Who has priority between:

Secured Party vs. Donee

Answer 71

if the debtor makes a gift of the collateral to a donee, the collateral remains subject tot he security interest in the donee’s hands.

Example: Larry Lawyer grants Bank a security interest in his office computer. He uses the loan proceeds to pay his office bills. Several months later, Larry gives the computer to Sarah as a birthday present. Larry then stops making payments on the loan. The computer IS subject to the security interest and Bank may repossess the computer from Sarah.

Question 72

Who has priority between:

Secured Party v. Purchaser

Answer 72

General Rule = Secured party prevails

see special rules

Question 73

Who has priority between:

Secured Party v. Purchaser

(Special rule - And debtor has permission to sell)

Answer 73

If debtor has permission to sell, PURCHASER prevails

Question 74

Who has priority between:

Secured Party v. Purchaser

(Special rule - And secured party is unperfected at time of purchase)

Answer 74

General rule = Purchaser wins if:

1) Buyer gives value
2) Buyer receives delivery of the item, and
3) Buyer has no knowledge of security interest at time of delivery.

PSMI Exception: If PMSI creditor perfects within 20 days after debtor receives the collateral but after debtor sells collateral to purchase, creditor will prevail over the gap purchaser.

Example: On May 1, Debtor grants Bank a security interest in Machine A and Machine B. Debtor already owned Machine A and uses a portion of the loan proceeds to purchase Machine B. On May 10, Debtor sells both machines to Paula. Paula immediately takes delivery of the machines and has no knowledge about Bank’s security interests. On May 15, Bank properly perfects its interests in both machines. Later, Debtor stops making loan payments. Paula may keep Machine A because Bank was UNPERFECTED when she took delivery. However, Bank may repossess Machine B because Bank had a 20 DAY grace period to perfect its purchase-money security interest in Machine B.

Question 75

Who has priority between:

Secured Party v. Purchaser

(Special rule - Buyers in the ordinary course of business)

Answer 75

A buyer in the ordinary course of business can prevail over a perfected creditor if the following requirements are satisfied.

1) Good faith: Honesty in fact and observance of reasonable commercial standards
2) Without knowledge of a security interest violation
3) Purchaser of goods that are not farm products
4) Ordinary purchase (must be from a person selling goods of the kind)
5) Security interest created by the seller
6) Creditor not perfected by possession

Example: Big Department Store granted a security interest in all its inventory to Octopus National Bank which ONB properly perfected. Nonetheless, buyers of the inventory items (the customers coming into the store) will purchase FREE of ONB’s security interest, as long as they meet the requirements of a buyer in the ordinary course of business.

Question 76

Who has priority between:

Secured Party v. Purchaser

(Special rule - Consumer purchasers of consumer goods)

Answer 76

Purchaser prevails if:

1) Consumer goods in seller’s hands
2) Consumer goods in buyer’s hands
3) Buyer has no knowledge of security interest
4) Buyer pays value
5) Creditor not perfected by possession
6) Creditor’s interest is unfixed prior to purchase

e.g., Debtor selling the good he bought on credit to another before paying it off - the second purchaser takes free of the security interest if she didn’t have notice

Example: Carl Consumer bought a television set on credit from Big Department Store, which took a purchase money security interest therein. Before the television was paid for, Carl sold it to his sister. If the sister buys without notice of the store’s interest (and the store has not filed a financing statement), the sister takes FREE of the store’s security interest.

Question 77

Who has priority between:

Secured Party v. Purchaser

(Special rule - Buyers not in the ordinary course of business vis-a-vis Future Advances)

Answer 77

The creditor gives more money to the debtor based on collateral that the debtor has already sold to a purchaser show does not qualify as a buyer in the ordinary course of business.

A non-buyer in the OCOB can prevail over a secured creditor for future advance amounts made after the first of these events occurs:

1) Secured creditor obtains knowledge of the purchase, OR
2) 45 days have elapsed from the date of purchase.

Example: Adam Attorney sells his office computer to Paula on May 1. Unbeknownst to Paula, Adam had granted Bank a security interest in the computer and had received a $500 loan. On September 1, Bank loans Adam $250 under a future advance provision in the original security agreement. Adam stops making payments to Bank. Paula CANNOT qualify as a buyer in the ordinary course of business because she did not buy the computer from a person in the business of selling computers. Likewise, the consumer purchaser of consumer goods exception does not apply because Paula purchased equipment, not consumer goods. Thus, the computer is still subject to the original $500 loan. However, Paula takes FREE of the $250 future advance because it was made more than 45 days after she purchased the computer.

Question 78

Who has priority between:

Secured Party v. Purchaser

(Special rule - Holder in due course of negotiable instrument)

Answer 78

A holder in due course will PREVAIL over earlier perfected interests in the negotiable instrument.

Question 79

What is a lien creditor?

Answer 79

General (unsecured) creditors who have acquired a judicial lien by a levy by the debtor’s property.

The term also includes the bankruptcy trustee.

Question 80

Who has priority between:

Secured Creditor vs. Lien Creditor

Answer 80

General rules:

1) If secured creditor is unperfected at time lien attached = LIEN CREDITOR prevails
2) If secured creditor is perfected at time lien attached = SECURED CREDITOR prevails.

Example: Antitrust National Bank loaned Debtor $10,000, and made the debtor sign a security agreement giving the bank a security interest in Debtor’s business equipment. Antitrust National never filed a financing statement. A few weeks later, one of Debtor’s other creditors recovered a judgment against Debtor and had the sheriff seize the business equipment. This seizure created a judicial lien on the property and the judicial lien creditor is entitled to be paid first when the equipment is sold because Antitrust’s interest was unperfected. Antitrust National would have been superior to the judicial lien creditor only if it had filed a financing statement in the proper place before the sheriff’s levy.

Question 81

Who has priority between:

Secured Creditor vs. Lien Creditor

(Exception - PMSI’s)

Answer 81

If a PMSI secured creditor perfects by FILING within 20 days after the debtor receives possession, the creditor will defeat lien creditors who obtained their liens in the gap period.

Example: Barbara bought a typewriter for her law office on credit on July 10, giving Seller (creditor) a security interest in the machine. On July 12, another creditor obtained and levied on a judgment against her. On July 14, Seller properly filed a financing statement. Although the judicial lien came prior to Seller’s perfection, Seller prevails because of the 20 day grace period for purchase money security interests which allows the perfection to occur within 20 days of the debtor receiving possession of the collateral.

Question 82

Who has priority between:

Secured Creditor vs. Lien Creditor

(Exception - Future Advances)

Answer 82

The secured creditor will lose priority to a lien creditor for future advances after BOTH of the following two things occur:

1) The secured creditor obtains KNOWLEDGE of the lien, and
2) 45 days elapse from the date of the lien.

Question 83

Who has priority between:

Secured Creditor vs. Statutory Mechanic’s Lien

Answer 83

Statutory Lien prevails if the following conditions are satisfied:

1) Person furnished services or materials with respect to the goods covered by the security interest.
2) Furnishing was in ordinary course of business
3) Collateral is in the possession of the statutory lien holder

Example: Antitrust National Bank (ANB) had a perfected security interest in Karla Consumer’s car. When the car broke down, she took it to George’s Garage and had it repaired. George’s statutory mechanic’s lien has priority over ANB’s security interest as long as George retains POSSESSION of the car, unless the statute creating the mechanic’s lien expressly states otherwise.

Question 84

Who has priority over proceeds from the sale of collateral?

Answer 84

Priority for the proceeds is the same as the priority in the original collateral as long as the security interest in the proceeds is perfected.

Question 85

Who has priority regarding FIXTURES:

Secured Party vs. Holder of Real Property Mortgage

Answer 85

A creditor with security interest in these ordinary building materials LOSE its security interest once construction really occurs.

General Rule: Secured party may win if:

1) Perfected BEFORE real estate interest is recorded, and
2) Perfected with a FIXTURE FILING.

Fixture filing requires:

a) description of the real property
b) filed in office where a mortgage on the real property would be recorded

Question 86

Who has priority regarding FIXTURES:

Secured Party vs. Holder of Real Property Mortgage

(Exception - PMSI’s)

Answer 86

PMSI creditor, even though perfect after real property interest is of record, can prevail if:

1) PMSI perfected before fixture filing
2) Perfected within 20 days of good becoming a fixture, and
3) Competing real estate interest is not a construction mortgage

Example: In 2010, Happy Homeowner purchased a used house and granted Bank a mortgage covering the house and its fixtures. Bank immediately filed the mortgage. A few years later, Happy’s air conditioner needed replacement and he did not have the funds. But, his credit was good so he granted We R Cool a security interest in the new air conditioner they installed on May 1. We R Cool properly filed a fixture filing on May 15. Although We R Cool’s security interest was not perfected before Bank’s mortgage was recorded, We R Cool prevails because it perfected within the 20 days of the INSTALLATION of the air conditioner.

Question 87

Who has priority regarding FIXTURES:

Secured Party vs. Holder of Real Property Mortgage

(Exception - Readily Removable Collateral)

Answer 87

If the good is READILY REMOVABLE, it will be treated as a regular good, rather than a fixture, and thus may be perfected without a fixture filing. (e.g., refrigerator)

Question 88

Who has priority regarding FIXTURES:

Secured Party vs. Holder of Real Property Mortgage

(Exception - Judicial Liens)

Answer 88

A security interest that is perfected in any manner PREVAILS over a later-acquired judicial lien, even if the perfection was not done via a fixture filing.

Example: Big Business granted Bank a security interest in specified fixtures of its main manufacturing plant. Bank filed a traditional financing statement rather than a fixture filing. Later, Palsgraf, who was injured on Big’s property, recovered a judgment against Big and obtained a judicial lien. Bank has priority over Palsgraf even though Bank did not perfect with a fixture filing.

Question 89

Who has priority regarding CROP collateral?

Answer 89

A perfected security interest in crops has priority over a conflicting interest in the land on which the crops are growing. It does not matter who filed or perfected first.

Question 90

What is the effect of BANKRUPTCY on priority rules?

Answer 90

Bankruptcy of the debtor may change the normal priority rules. Check preferences in bankruptcy law.

Question 91

What is considered “default”?

Answer 91

Not paying on the security interest, but the terms may include other things specified in the agreement such as taking the collateral out of the state without permission or not keeping the collateral insured.

Question 92

What are the rules of repossession?

Answer 92

1) Upon default, creditor may repossess
2) No judicial process needed (self-help remedy)
3) Creditor need not give debtor notice
4) Limitations on repossession (no breach of peace)

Question 93

What are the rules regarding the limitation not to breach the peace?

Answer 93

Creditor CANNOT delegate duty not to breach the peace.

Thus, if the repo person breaches the peace, the creditor is STRICTLY LIABLE even if the repo person is an independent contractor.

This liability could be conversion of the repossessed item, actual damages, and even punitive damages.

Question 94

What are the creditor’s choices after they repossess collateral?

Answer 94

1) Resell collateral - sue for deficiency, and give surplus to debtor
2) Strict foreclosure - keep collateral and call things square

Question 95

What is required for the sale of collateral by creditor?

Answer 95

1) Notice of sale (required)
2) Debtor’s right to redeem
3) Standard of care
4) Ability of creditor to purchase at resale
5) Title of purchaser at resale (warranties)
6) Application of resale proceeds
7) Deficiency liability for creditor
8) Penalty for not complying with resale requirements
9) Special rules for if collateral is accounts or instruments

Question 96

When is notice for the sale of collateral not required of the creditor?

Answer 96

1) Perishable collateral
2) Collateral threatening to decline speedily in value
3) Collateral is customarily sold on a recognized market

Question 97

What is required of a notice for the sale of collateral?

Answer 97

1) Description of debtor and secured party
2) Description of the collateral
3) Method of sale
4) Statement that debtor is entitled to an accounting and the charge, if any.
5) Time and place of public sale time after which a private sale will be made (earliest date of sale)
6) If the collateral is consumer goods, the notice must also
- — explain that debtor is liable for deficiency
- — telephone # of person from whom debtor can obtain amount needed to redeem the collateral
- — telephone # or address from which debtor can get additional information about the sale

Question 98

What is the timeline for sending notice of a sale of collateral?

Answer 98

Notice must be sent a reasonable amount of time before the sale.

It is a fact question as to what is a reasonable amount of time, but in a nonconsumer transaction, 10 days or more before the sale is considered unreasonable.

Question 99

Who must receive notice of a sale of collateral?

Answer 99

1) Debtor - unless debtor has waived notice in an authenticated agreement made after default
2) Sureties
3) If collateral is not consumer goods - notice to creditors who have perfected by filing, notation on certificate of title, or who have given notice to reselling creditor

Question 100

What is the debtor’s right to redeem before a sale of collateral?

Answer 100

Debtor has the ability to cure the default and regain the collateral if certain requirements are satisfied:

1) Creditor has not yet sold or entered into a contract to sell collateral
2) Strict foreclosure has not yet occurred
3) Debtor has not waived the right to redeem after default
4) Debtor must tender fulfillment of all obligations secured by the collateral
- — not enough to just tender the late payments/watch out for acceleration clauses.
5) Debtor must tender creditor’s reasonable expenses (e.g., expenses of repossession)

Question 101

What is the creditor’s standard of care in a sale of collateral?

Answer 101

Method, manner, time, place, and terms of the sale must be commercially reasonable. (fact question)

Merely because a better price could not be obtained is not enough to make a sale unreasonable, but if the difference in price is substantial, the sale will be scrutinized.

Burden of proof is on the CREDITOR to show commercial reasonableness of the sale in a deficiency suit.

Question 102

When does the creditor have the ability to purchase the collateral at resale?

Answer 102

a) Public sale (auction) = YES

b) Private sale = only if:
- — collateral is customarily sold in a recognized market, or
- — collateral is subject to widely distributed standard price quotations.

Question 103

What is the warranty required of the title of a purchaser at resale?

Answer 103

The reselling creditor warrants TITLE, POSSESSION, and QUIET ENJOYMENT of the collateral by the purchaser unless the creditor takes steps to disclaim the warranties.

Question 104

How are the proceeds from the sale of collateral applies?

Answer 104

Payment goes to:

1) Reasonable exposes of reselling creditor
2) Satisfaction of debt
3) Satisfaction of subordinate creditors
4) Surplus, if any, to debtor

Question 105

Who is liable for the deficiency from the sale of collateral?

Answer 105

The creditor is liable for the deficiency amount.

Question 106

What are the penalties for not complying with resale requirements?

Answer 106

1) Creditor liable for actual damages
2) For consumer goods: The creditor is automatically liable for amount equal to finance charge plus 10% of the principal
3) Effects creditor’s ability to recover deficiency

Question 107

What is the effect on creditor’s ability to recover deficiency when they don’t comply with resale requirements?

Answer 107

1) In consumer transactions, creditor cannot sue to recover deficiency
2) In nonconsumer transactions, there is a rebuttable presumption that the value of the collateral was equal to the amount of debt

(Secured creditor may prove otherwise and still recover a deficiency)

Question 108

What is the effect if a resale of collateral regards accounts or instruments?

Answer 108

The creditor directs the obligor to make payments directly to the creditor, rather than to the debtor.

Question 109

What is strict foreclosure?

Answer 109

The creditor retains the collateral in total satisfaction of the debt.

In nonconsumer situations, the creditor may retain the collateral in total or partial satisfaction of the debt.

Question 110

What are the requirements to use strict foreclosure?

Answer 110

1) The debtor consents
2) Creditor send authenticated notice to retain collateral
3) There is no timely objection

Question 111

What is the requirement for a debtor’s consent to use strict foreclosure?

Answer 111

1) Express: The debtor agrees in an authenticated record made after defaults, or
2) Implied: The debtor fails to object to the creditor proposal to strictly foreclose within 20 days of when the creditor sent notice.

Question 112

Who must the creditor send authenticated notice to retain collateral to in order to strictly foreclose?

Answer 112

1) Debtor: Unless the debtor has waived notice in an authenticated agreement made after default
2) If collateral is not fore consumer goods, notice to creditors who have perfected by filing, have a notation on certificate of title, or who have given notice to creditor.

Question 113

What is the requirement to make a timely objection to a strict foreclosure?

Answer 113

If the debtor or another creditor objects in writing within 20 days, the creditor may not keep the collateral and must conduct a resale.