Secured Transactions

Question 1

What is the UCC section that applies to secured transactions?

Answer 1

Article 9

Question 2

What is the scope of UCC Article 9?

Answer 2

Applies to consensual security interests in personalty and fixtures

Question 3

What is attachment of a security interest?

How is it done?

Answer 3

Definition

• Making the security interest enforceable

Process

1. Value
   
   • Creditor must give value
2. Contract
   
   • Transaction must be recorded in security agreement
3. Rights
   
   • Debtor must have rights in the collateral

Question 4

What is perfection of a security interest?

How is it done?

Answer 4

Definition

• Protecting the secured party from competing creditors

Process

1. Possession of collateral
2. Automatic perfection of PMSI in consumer goods
3. Filing UCC-1 financing statement

Question 5

What do you apply when the collateral is:

• Real estate
• Personalty or fixtures

Answer 5

Real estate

• Law of mortgages

Personalty or fixtures

• UCC Article 9

Question 6

What does it mean for Article 9 to apply to consensual security interests in personalty or fixtures?

Answer 6

Article 9 does not apply to statutory or mechanic’s liens, as those are not consensual

Question 7

Under UCC Article 9, what are the different categories of collateral?

How do you determine the category?

Answer 7

Categories

• Tangible collateral
  
  • Consumer goods
  • Equipment
  • Inventory
  • Farm products
  • Fixtures
• Intangible or semi-intangible collateral
  
  • E.g., patents, stocks, proceeds from sale of collateral, accounts, promissory notes, drafts, etc.

Determination

• Look at the primary use in the hands of the debtor

Question 8

What satisfies the contract requirement for attachment?

Answer 8

• Debtor in possession of collateral:
  
  • Security agreement (i.e., record)
• Creditor in possession of collateral
  
  • Nothing more

Question 9

What needs to be included in the security agreement?

Answer 9

1. Authentication (i.e., debtor’s signature or electronic mark)
2. Reasonable identification of collateral

Question 10

What needs to be included in a UCC-1 financing statement?

Answer 10

1. Debtor’s name and address
2. Creditor’s name and address
3. Generic description of collateral
   
   • Sufficient to allow for follow-up inquiries

Question 11

In what form must a UCC-1 financing statement be filed?

Answer 11

UCC Article 9 does not require a particular medium, but encourages electronic filing

Question 12

Where must a UCC-1 financing statement be filed?

Answer 12

• If collateral is timber, minerals, or fixtures:
  
  • Secretary of state where realty is located
• Otherwise:
  
  • Secretary of state where the debtor is located

In Virginia, file with State Corporation Commission (SCC) in Richmond

Question 13

For purposes of filing a UCC-1 financing statement, where is the debtor located if:

• An individual
• An organization

Answer 13

Individual

• State of principal residence

Organization

• State of organization

Question 14

When there are competing claims to collateral, what are the different types of creditors in order of their priority?

Answer 14

1. BIOC
   
   • ​​Buyer in the ordinary course
2. PAC
   
   • ​​Perfected attached creditor
3. LC
   
   • ​​Lien creditor
4. NOC
   
   • ​​Non-ordinary course buyer
5. AUP
   
   • ​​Attached unperfected creditor
6. GUC
   
   • ​​General unsecured creditor

Question 15

Who does the attached unperfected creditor (AUP) have priority over, and who is it subordinate to?

Answer 15

Priority over

• Debtor
• Subsequent AUP
• GUC

Subordinate to

• Prior AUP
• NOC
• LC
• PAC
• BIOC

Question 16

Who does the perfected attached creditor (PAC) have priority over, and who is it subordinate to?

Answer 16

Priority over

• Everyone except:
  
  • Prior PAC
  • BIOC
  • Certain PMSI holders, provided that:
    
    • PAC is AACF, and
    • If collateral is equipment
      
      • PMSI holder files 20 days after debtor takes possession of equipment
    • If collateral is inventory
      
      • PMSI holder files before debtor takes possession of inventory
      • PMSI holder notifies AACF before debtor takes possession of inventory

Question 17

Why does BIOC always beat PAC?

Answer 17

To promose commerce and honor the buyer’s expectations

Question 18

What is default?

Where is it defined?

Answer 18

Default is when the debtor breaches the contract

It is defined in the security agreement, not in UCC Article 9

Question 19

Once a debtor has defaulted, what can a secured creditor do?

Answer 19

1. Self-help repossession
2. Repossession by judicial action
3. Strict foreclosure
4. Sale
5. Action for deficiency judgment

Question 20

When can a secured creditor use self-help repossession?

Answer 20

Whenever the secured creditor can do so without breaching the peace

Question 21

What is a breach of the peace?

Answer 21

Any action likely to cause violence, even if violence doesn’t ultimately take place

Question 22

What happens if the secured creditor tries to use self-help repossession and the debtor protests?

Answer 22

This is a breach of the peace, so creditor cannot repossess

Question 23

What happens if the secured creditor tries to use self-help repossession under color of the law?

Answer 23

This is constructive use of force, and therefore a breach of the peace, so the creditor cannot repossess

Question 24

What are the consequences if the secured creditor repossesses after breaching the peace?

Answer 24

Civil and criminal penalties attach

Question 25

For purposes of self-help repossession, what if the collateral is in the debtor's home?

Answer 25

Creditor cannot enter the home without voluntary and contemporaneous consent from debtor

Question 26

How does a secured creditor repossess by judicial action?

Answer 26

By getting a judicial writ, ordering the sheriff to obtain possession of the collateral and deliver it to the secured creditor

Question 27

What is strict foreclosure?

Answer 27

Occurs when the secured creditor lawfully retains the collateral in full satisfaction of the debt owed

Question 28

How does a secured creditor strictly foreclose?

Answer 28

1. 60% rule * If collateral is consumer goods, and debtor has paid 60%, strict foreclosure is prohibited * Collateral must be sold within 90 days or creditor is liable for conversion 2. Written proposal * If collateral is consumer goods * Send written proposal to retain the collateral in full satisfaction to: * Debtor * Secondary obligors (i.e., guarantors) * Otherwise * Send written proposal to retain the collateral in full satisfaction to: * Debtor * Other secured creditors if aware * Perfected creditors * Secondary obligors (i.e., guarantors) 3. Objection * If any notified party objects within 20 days after notice is sent, strict foreclosure is prohibited * Collateral must be sold instead

Question 29

What is the 60% rule?

Answer 29

If the collateral is consumer goods and the debtor has paid more than 60%, the creditor cannot use strict foreclosure The creditor must sell the collateral within 90 days or he is liable for conversion

Question 30

What are the requirements if the secured party chooses to sell the collateral?

Answer 30

* Secured party can use _public or private sale_ * Every aspect of sale must be _commercially reasonable_ * Prior to sale, _reasonable_ _notice_ must: * Be sent to: * If collateral is consumer goods: * Debtor * Secondary obligors * Otherwise: * Debtor * Other secured creditors if aware * Perfected creditors * Secondary obligors * Include: * If public sale: * Time of sale * Place of sale * If private sale: * Time after which sale will be made * If collateral is consumer goods: * How to calculate deficiency * How to redeem

Question 31

When does notice have to be given before a sale of collateral?

Answer 31

Within a commercially reasonable time (i.e., at least 10 days before sale)

Question 32

Can the secured party by the collateral at its sale of the collateral?

Answer 32

If public sale, yes If private sale, only if external market checks

Question 33

How do you calculate the deficiency if the secured creditor sold the collateral to an insider at a low price?

Answer 33

Use the price that an independent third party would have paid instead of the actual amount paid

Question 34

When is a debtor's right to redeem the collateral cut off?

Answer 34

Once the secured creditor has either: * Resold the collateral * Strictly foreclosed

Question 35

What does a debtor have to pay in order to redeem the collateral?

Answer 35

* Missed payments (or entire debt is acceleration clause) * Accrued interest * Creditor's reasonable expenses (e.g., attorney's fees)

Question 36

What is the garage sale rule?

Answer 36

If the buyer of consumer goods in turn resells them to another consumer (i.e., a buyer who buys for his own personal, household, or family use), the second buyer takes the consumer goods free of the security interest if he buys without knowledge of it, for value, and before a financing statement covering the goods has been filed. This is often called the "garage sale" rule.

Question 37

What is an instrument under UCC Article 9?

Answer 37

A piece of paper that represent the right to be paid money (e.g., promissory notes, drafts, certificates of deposit).

Question 38

What type of collateral can be described in a security agreement by type alone?

Answer 38

Inventory

Question 39

May a security agreement contain a clause giving the secured party rights in property the debtor will acquire in the future?

Answer 39

Yes, for all types of collateral other than commercial tort claims.

Question 40

What is a good?

Answer 40

Tangible collateral or goods includes all things movable at the time the security interest attaches (including timber to be cut, unborn animals, and growing crops, but excluding money and intangibles) as well as fixtures.

Question 41

What is the secured party’s obligation with respect to termination statements?

Answer 41

Secured parties are not generally obligated to terminate financing statements. If the initial filing was unauthorized or if there is no outstanding obligation, a termination statement must be provided or filed within 20 days of a demand. When consumer goods are involved, a secured party must file a termination statement within one month after there is no obligation or commitment, or if the debtor demands it, within 20 days of the demand.

Question 42

To be a BIOC, can you know of a security interest in the property?

Answer 42

Yes. A BIOC can know that a security agreement exists, as long as she doesn't know that the sale is in violation of the terms of the agreement.

Question 43

If a secured party has a perfected security interest in collateral, and the debtor sells the collateral, what rights does the secured party have in the proceeds?

Answer 43

The secured party has a temporarily (20 day) perfected security interest in whatever proceeds the debtor receives in exchange for the collateral. The security interest in proceeds will continue to be perfected beyond the 20 days if: * The security interest in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral (this is sometimes called the "same office" rule) * The proceeds are identifiable cash proceeds; or * The security interest in the proceeds is perfected within the 20 day period.

Question 44

What security interests can be perfected by control, rather than possession?

Answer 44

Only security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by the creditor’s control of that collateral.