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Secured Transactions 1

Secured Transactions General Approach

Step 1: For each party claiming an interest in the collateral (property), determine
whether the secured interest has attached to the collateral in question.
1a- Tangible? Goods (consumer goods, farm products, equipment, inventory)
1b- Intangible? Accounts, Deposit Accounts
Step 2: For each party claiming an interest, determine whether the secured interest has
been perfected.
Step 3: If there is more than one party claiming an interest in the collateral, determine
who has priority.
Step 4A: Look out for leases (special rule)
Step 4B: consignments (they have special rules)
Step 5: Default and enforcement

Goods Rights to Payment Other Types of


Collateral
Consumer Instruments=Promissory notes, Document of title= Ownership
goods=personal/family/household Checks, Drafts rights in goods held by bailee. Bills
purposes of lading or Warehouse receipts
Farm products= crops, livestock, Chattel paper= Monetary Investment property= Stocks
supplies used/produced in farming. obligation and security interest or bonds
(not equipment!) a lease
Inventory=goods held for Accounts= Right to payment of a Savings accounts= Bank account
sale/lease, under service K, raw monetary obligation for goods
materials, materials used in sold, leased, licensed or services
business rendered.
Ex- Accounts receivable, Right to
be paid under insurance, Amounts
owed on credit cards.
Equipment=machinery, delivery Payment intangible= Catch-all Commercial tort claims
vans, office equipment, farm category
equipment
Letter-of-credit rights= right to
payment or performance
General intangibles= Blueprints
copyright trademark software

STEP 1 Attachment (Violet Roses Smell Amazing) Value Rights Security Agmt
Value given by secured party
same consideration as for a K/binding commitment to extend credit
Debtor has rights in collateral
After-acquired collateral (that debtor acquires in the future)
Proceeds from collateral=automatic attachment
Accession (physically united goods)
Debtor authenticate Security Agreement
Record (tangible medium), authenticated by debtor, non-super-generic description of collateral
Secured Transactions 2

OR
IF NO SECURITY AGRMT alternatives- Possession/control of the collateral
Possession= consumer goods, equipment, farm products, chattel paper, tangible docs,
certificated securities, instruments, money
Reasonable care
Keep collateral identifiable
Relinquish collateral post-obligation
Charge debtor for reasonable expenses (storage/maintaining collateral)
Control (via oral or unauthenticated security agreement)
investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, electronic
documents
Deposit accounts control if:
Secured party=Bank where account is maintained OR
Bank, secured party & debtor written agmt to follow secured party's instructions OR
Secured party becomes bank's customer w/ respect to deposit acct.
PMSI (Purchase Money Security Interest)- goods/software
Value given allows debtor to acquire good/service
Goods/software acquired secure the loan
Lender PMSI (bank lends money to Mike to buy a new car, takes security interest in the car)
Value actually used to acquire the goods
Lender takes security interest in the goods to secure the goods
Seller PMSI (goods bought on credit) Dealer sells Mike a car for $10k on credit, takes security
interest in car

STEP 2 PERFECTION
File financing statement (**except- deposit account, money, or letter-of-credit rights, cars**)
Names (debtor/secured party), description of collateral- can be super-generic
Effective on date of filing,
Lasts 5 years, need to file continuation statement w/in 6 months before 5yrs is up.
Authorization by debtor (authenticated security agmt for example)
Seriously misleading name- Fails to accurately contain debtor's name
Unless searching filing office records would disclose financing statement
**Real property/fixtures- filed in county where real property is located
Possession of collateral (tangible stuff)
Money, goods, instruments, negotiable docs, tangible chattel paper
Control of collateral
Deposit accounts
Bank that maintains deposit acct is secured party;
The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party; or
The secured party becomes the banks customer with respect to the deposit account.
Investment property
Letter-of-credit rights
Electronic chattel paper
Electronic docs
Automatic perfection (usually in PMSI in consumer goods)
BUT NOT CARS- usually certificate of title statute
Temporary Automatic Perfection (collateral/debtor post-perfection fuck-ups)
Secured Transactions 3

If secured party fails to fix (see below), security interest no longer perfected, lose priority.
Debtor legal name change (if seriously misleading)
Sec. Party has 4-Month window to discover change, file an amendment to financing statement
Collateral acquired after 4 month window not covered by financing statement
Before name change, w/in 4 month window- stays perfected by original fin. Statement
Ex: 3/1- Bank security interest in Construction Corp's existing/after acquired equipment, perfected by
financing statement listing Construction Corp, computer & 1st bulldozer. 4/1- name change Charlie
Construction Inc. 5/1- backhoe. 10/1- 2nd bulldozer. No amended financing statement.
Perfected- before name change- Computer 1st bulldozer. W/in 4 months-backhoe.
Not perfected=2nd bulldozer (outside 4month window).
Debtor moves out of state
Perfected sec. Interest stays perfected for 4 months after debtor moves (unless fin. Stat.
Lapses earlier)
Secured party must re-file in new state w/ 4 month window to stay cont. perfected.
Collateral moves out of state
If still owned by debtor, no refiling needed.
If collateral transferred to new debtor (out of state), secured party has 1 yr to file fin.
Statement w/ new debtor's name.
***Exceptions to temporary automatic perfection (possession- instrument, negotiable doc,
certificated security, goods)- secured party can give collateral back to debtor:
Sell, exchange or enforce debtor's rights in the collateral.
Secured party perfected for 20 days.
Secured party needs to:
File financing statement OR
Repossess collateral w/in 20 day pd to stay perfected.
BEYOND 20 DAYS perfection lapses unless (special rules for proceeds):
Secured party amends statement
Cash proceeds rule (perfection continues forever as long as identifiable)
If Collateral sold/licensed/disposed
Generates cash proceeds
Same office rule (inventory into something else, like accounts, but NOT CASH)
Financing statement covers original collateral
Collateral=proceeds filed in the same office as original fin. Statement
Proceeds not acquired w/ cash proceeds

STEP 3 PRIORITIES
1. ID Status of each claimant
2. Apply appropriate rule

Security interest v. security interest


Perfected v. perfected= first to file or perfect
Perfected v. unperfected= perfected wins
Unperfected v. Unperfected= first to attach or become effective
Security interest v. lien creditor
Perfected v. Lien creditor=perfected wins
Unperfected v. lien creditor= lien creditor wins generally but
Filed but unattached security interest exception=unperfected party wins
Debtor authenticated security agreement listing collateral
Financing statement filed
Secured Transactions 4

Security interest v. statutory lien=statutory usually wins so long as:


Effectiveness of lien depends on lien-holder's possession of goods
Lien secures payment/performance of obligation for services/materials in ordinary course of business (ie
mechanic's lien)
Priority over Future advances
Secured v. secured=first to file/perfect
Secured v. lien creditor=it depends
Secured wins if advance w/in 45 days of lien arising
Lien creditor wins after 45 days unless:
advance made w/out knowledge of the lien OR
advance made pursuant to commitment entered into w/out knowledge of lien
Secured parties v. buyers (perfected security interest)
General rule- Buyer takes subject to perfected security interest, unless secured party
authorizes sale free & clear of its security interest. There are 2 exceptions:
Exceptions to general rule
***Buyer in the ordinary course of business (buyer wins if the following true):
Buyer buys goods from merchant (engaged in selling goods of this kind, not pawn broker)
In ordinary course of merchant's business
Buyer acts in good faith, without actual knowledge that sale violates rights of others in the
same goods
Consumer to consumer buyer v. secured parties (Garage-Sale) (buyer wins if
below is true):
Buyer buys consumer goods for value
For personal/family/household use
From consumer seller
W/out knowledge of the security interest UNLESS
Secured party filed financing statement covering the goods prior to purchase.
Buyer v. unperfected security interest
General rule- Buyer takes free and clear of unperfected security interest if:
Buyer gives value
Receives delivery of the collateral
Without knowledge of pre-existing interest
PMSI Priority Rules
PMSI v. Lien creditor
If purchase money secured party perfects w/in 20 days of debtor possession of collateral, then
PMSI priority over lien.
PMSI v. Security Interests
PMSI super-priority over goods that are NOT INVENTORY
If purchase money secured party perfects w/in 20 days of debtor receiving goods.
If not w/in 20 days, then first in time to file or perfect.
PMSI super-priority for Inventory
Secured party perfects before inventory delivered to debtor
Authenticated notification of PMSI sent to other secured parties.
PMSI super-priority in Proceeds
Super priority extends to inventory turned into proceeds
Super-priority extends to cash down-payments for inventory
Secured Transactions 5

PMSI v. PMSI
Seller wins over lender. Or use first to file/perfect rule.
Fixture Priority Rules
Generally- apply regular priority rules
Fixtures v. Real Property Interest= fixtures win if:
Secured party files fixture filing before real property interest is recorded
Fixture filing- financing statement filed in local real prop records.
Fixture PMSI Rule= fixture PMSI wins if
debtor has interest of record in the real property or is in possession of the real prop
AND security interest perfected by fixture filing
before the goods become fixtures OR
w/in 20 days after the goods become fixtures.
Construction Mortgage Exception to PMSI Fixtures Rule= constr. Mtg wins if:
Recorded before goods become fixtures
AND the goods become fixtures before the construction is complete

STEP 4A LEASES
Generally- Article 9 doesn't apply to a true lease, but will apply if economic reality of transaction is
actually a secured transactions

Bright-Line Test (If met, lease is a secured transaction, need to file/perfect interest in
goods) (If not met, courts look at facts of the case)
Lessee obligated to pay full obligation under the lease, whether or not they terminate
lease early AND 1 of the below outcomes is present:
Original lease term remaining economic life of goods
Lessee bound to renew lease for economic life of goods
Lessee has option to become owner of goods or option to renew lease for remaining economic
life of goods for no additional or for nominal consideration

STEP 4B CONSIGNMENTS (PMSI in Inventory Rules Apply)


Consignment= consignor owns goods, but gives ownership to consignee for the purpose of allowing
consignee to sell the goods.
Consignor=secured party, needs to perfect interest
Consignor delivers goods to merchant, who deals in goods of the kind, for the merchant to sell
Merchant isn't generally known by its creditors to be substantially engaged in business of selling goods
of others.
Value of goods $1000 per delivery
Goods are not consumer goods immediately before the delivery
Example
Specialty delivers 24 speakers, $2k each to Giant who keeps them on display, sells them on behalf of Specialty,
who hold title until they are sold. Giant isn't generally know by its creditors to be substantially engaged in
business of selling goods of others.
Specialty=consignor; secured party has PMSI in Giant's inventory.
Giant=consignee
Secured Transactions 6

STEP 5 DEFAULT & ENFORCEMENT


Default- not defined in Art. 9, refer to sec. Agmt and K law.

Enforcement
A. Repossession of Goods/Other Collateral
Replevin (judicial process)
Self-help as long as no breach of the peace
secured party brings officer to repossession without judicial authorization
repossession agent breaks into debtor's home/garage/commits criminal act
some physical confrontations
deception/trickery
B. Disposition of Collateral
Commercially reasonable standard
after secured party takes possession of collateral after default, it may sell, license, or otherwise
dispose of the collateral.
Sold in the usual manner in at market;
Sold at the price current in that market (price alone is not determinative)
OR otherwise in conformity w/ comm. Reas. Practice among dealer in that type of collateral.
Details of disposition
Sale can be either public or private
If private, the collateral price has to be fixed (by NYSE for ex.) or subject to widely-distributed
standard price quotes.
Commercially reasonable timing under the circumstances.
Authenticated notice requirement
Who?- Debtor, secondary obligors, other secured parties, other parties who gave secured party notice of a
claim or interest in the collateral.
When?
Generally commercially reasonable time to notified party to act.
**Non-consumer transactions- 10 days+ before disposition sale
What must be in the notice?
Secured party and debtor's names
Description of collateral
How/when/where collateral to disposed of
Statement that debtor is entitled to accounting for unpaid indebtedness
**Consumer goods additional requirements:
Describe any liability for deficiency
Phone # that debtor can call to get additional info, including $ to pay to redeem collateral
**Exceptions where notice NOT REQUIRED
perishable collateral/threatens to decline quickly in value
collateral sold on recognized market
notice waived after default
Cash Proceeds of a Disposition
Reasonable expenses for collection and enforcement
Pay off debt to the foreclosing secured party
Pay subordinate security interests provided the subordinated party makes a formal demand prior to
Secured Transactions 7

distribution of the proceeds


Any surplus will return to debtor
**Senior security interests survive the sale.
**If there's not enough money to satisfy the debt, secured party can seek a deficiency judgment
against the obligor for the remaining amount.
Strict Foreclosure Acceptance of Collateral
The secured party may except the collateral in full satisfaction or partial satisfaction of the debt so
long as certain conditions are met:
Full Satisfaction
Debtor must consent after default to the acceptance in an authenticated record OR
Acceptance by silent permitted if the debtor doesn't object to the secured parties proposal to
accept the collateral within 20 days after the proposal sent.
**Additional requirements for consumer goods transactions:
Secured party can only accept the collateral in full satisfaction
***60% rule: If the debtor has paid back 60% or more of the debt or the value of the
collateral vendor, goods must be sold, NO ACCEPTANCE PERMITTED!
****Debtor can waive the 60% rule after default in an authenticated record.
Partial Satisfaction
Debtors must consent after default to the acceptance in an authenticated record.
Consent by silence as not permitted.
Acceptance in partial satisfaction not allowed in consumer transactions
Redemption rights
The debtor secondary obligor or other secured party may redeem the collateral by paying the
entire secure obligations and expenses including attorneys fees incurred in repossessing and
preparing the collateral for sale.
Redemption must occur before the secured party has sold the collateral or excepted the
collateral in satisfaction of the debt.
The debtor cannot waive her right to redemption before default.
Special enforcement rules
Fixtures
If a secured party has priority, the secured party may remove the fixture from the real estate.
Liable for the cost of repairing damage to the real estate, but not diminution in value
resulting from the removal.
Accessions
Secured party with priority in the accession is allowed to remove the accession from the
other goods.
Rights to payment (Accounts, chattel paper, instruments, payment intangibles)
Secured party can step into debtor's shoes to collect amounts owing to debtor by 3 rd parties
(account debtors).
Remedies for secured party's failure to comply
Injunctive relief: if failure is ongoing, debtor or another party can ask court to halt
improper enforcement activity,
Actual damages: debtor/secured party can be compensated for loss resulting from secured
party's violations.
Statutory damages:
Claiming deficiency judgment
Commercial transactions
Consumer transactions
Secured Transactions 8

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