Secured Transactions

Question 1

Options of the Potential Creditor

Answer 1

• Outright Refusal
• Obtain promise to repay: This type of creditor is called an unsecured or general. IF the debtor fails to pay the creditor must bring suit, get a judgment, and have the sheriff seize enough of the debtors non-exempt property to satisfy the judgment. This is expensive and time consuming
• Obtain Surety: have someone promise to pay the debt if debtor does not
• Obtain Collateral (secured creditor: The creditor might require the debtor to place some of the debtors property at risk so that if the debtor does not pay, the creditor may take the property
• Real Property: the creditor may obtain a mortgage or deed of trust over the land
• Personal Property: The creditor may obtain a security interest in debtors personal property under Article 9 of the UCC

Question 2

Article 9 Approach

Answer 2

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

Question 3

Scope of Article 9 C

Answer 3

1. Collateralized Transaction
2. Sales of Receivables
3. Consignments
4. Agricultural Liens Created by Statute
5. Lease-Purchase Agreements

Question 4

Colatteralized Transaction / Scope of Article 9

Answer 4

Subject matter of Article 9
1. Collateralized Transaction
Any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures
Property used as collateral may be:
A. Already owned by the debtor
B. To be acquired with loan (purchase money security interest)
- Item your buying with the loan. Lender and Seller can either be the same person or they can be different. IF they are different the lender must be able to trace the exact money it lent to the debtor into the collateral
- PMSI often have special, better rules than other types of security interest
C. After-Acquired: property you buy in the future

Question 5

Sales of Receivables/ Scope of Article 9

Answer 5

The outright sale of accounts, chattel paper, payment intangibles and promissory notes
Ex: sell the bank your outstanding accounts, as the accounts come due have to collect them and give them to bank. Even though this is a sale and not a secured loan, Article 9 applies and the bank must comply with article 9 just as if it were a collateralized loan

Question 6

3. Consignments / Scope of Article 9

Answer 6

A Consignment is a bailment by the owner/bailor/cosignor under which the bailee/consignee has authority to sell
- To the world the consignee appears to own goods and thus the true owner (consignor) may be required to comply with article 9 to gain protection over consigness other creditors
Consignments which must comply with Article 9:
A. Consigned goods are worth a total of $1,000 or more and
B. The consignor did not use the goods for personal, family, or household purpose
C. Potentially Deceptive Consignee
- Consignee deals with goods of that kind under a name other than the consigner name (not name of true owner)
- Consignee is not an auctioneer and
- Consignee is not generally known by consignees creditors to be substantially engaged in selling consigned goods ex: shop named Fred’s consignment won’t count

Question 7

4. Agricultural Liens Created by Statute/ Scope of Article 9

Answer 7

Article 9 covers agricultural liens, that is, nonpossesory liens on farm products such as crops and livestock created by state law in favor of a person who provides goods or services to a farmer

Question 8

Lease-Purchase Agreements/ Scope of Article 9

Answer 8

Article 9 does not govern true leases of personal property in any manner. When lease term is over, lessor can recover the leased property without complying with Article 9 free of lesees creditors
BUT a lead which is actually an installment sale is covered
Ex: 5 year car loan (vs. 3 day)
Lessee cannot terminate lease early without being in breach and
- Lease term is equal to or greater than remaining economic life of goods or
- Lessee owns property at end of lease term or
- Lessee has option to buy for nominal consideration at end of lease term

Question 9

Exclusions from Article 9

Answer 9

1. Rights governed by federal law
2. Real property (except fixtures)- Mortgages, leases, rent
3. Tort claims (except commercial tort claims)
4. Deposit Accounts in Consumer Transactions
5. Statutory Liens- Landlords lien, mechanics lien

Question 10

Classifaction of Collateral

Answer 10

• Rules regarding perfection, priority, repossession ,resale etc depend on type of collateral involve
  Mutually exclusive: any particular item can be only one type of collateral
  Debtors use determinative: classify collateral from the debtors prospective (how the debtor is using the collateral)

Question 11

Goods

Answer 11

Goods
Moveable Items & Fixtures
Inclusions: Standing Timber (trees), Growing Crops, Unborn young of animals
Exclusions: Money, Minerals before extraction (considered real property still), Collateral that fits other categories

Classification of Goods
1. Consumer Goods: Personal, Family, Household Purposes
Ex: car, couch, tv
2. Equipment: Business purposes
- Goods used or bought for use primarily in business (including farming or profession)
- Includes goods brought by a nonprofit organization or a governmental subdivision or agency
- Equipment is the default category if a good does not fit within the other three categories, then it is deemed to be equipment
3. Inventory:
-Goods held for sale or lease in the ordinary course of business
- Raw Material & Work in progress
- Consumed Materials (Ex: pens, paper,)
4. Farm Products
Ex: Crop or Livestock
- To be a farm product must be in possession of the farmer engaged in farming operations and in an unmanufactured condition
- Distinction between manufactured and unmanufactured is a fact question (ex: pasteurizing milk probably not but making ice cream probably)
5. Multiple Uses: If item used for multiple things categorized by its principal use

Question 12

Semi- Tangible and Intangible Collateral

Answer 12

Semi-Tangible and Intangible Collateral
1. Instruments: Represent money
Ex: Promissory Note, Check, Drafts etc
2. Documents: Written of electronic representation of goods, that is, documents of title
- Warehouse Receipt: goods in storage
- Bill of Landing: Goods in transit
3. Chattel Paper: Single writing or group of writings evidencing monetary obligation (ex: promissory note) plus security interest in or lease of goods
- If chattel paper stored on paper called tangible chattel paper
- If chattel paper stored electronically called electronic chattel paper
4. Account: Any right to the payment of money for goods sole or leased or for services rendered not evidenced by an instrument or chattel paper
- Typical accounts receivables of a business: what your clients owe you
- Includes contract rights which have not yet been earned by performance
- Includes computer software license fees and credit card receivables
5. Deposit Accounts: accounts with a financial institution
Ex: checking account, savings account. NOT Cd’s
6. Investment Property
Ex: Stocks, Bonds, Mutual funds
7. Commercial Tort Claims: business tort claims that do not involve personal property
Ex: Unfair competition
8. General Intangibles: any other type of personal property except money
Ex: good will of business, liquor license, intellectual property

Question 13

Proceeds Classification Generally

Answer 13

Proceed are whatever is received upon the sale, exchange, collection or other disposition o collateral or proceeds
Ex: used truck and computer as collateral for loans. Traded truck for motorcycle and sold computer for cash. The motorcycle and cash are proceeds of the original collateral
- Proceeds may include collateral a creditor could not have a security interest in if originally used as collateral such as the money in example above

Question 14

Attachment

Answer 14

Attachment is the process by which a security interest is created and becomes enforceable against the debtor so the creditor can repossess the collateral if the debtor does not pay
3 Elements (VCR): Creditor gave value, Contract (the security agreement), Debtor has rights in the collateral
- The Elements can occur in any order
- No attachment until all elements satisfied

Question 15

Attachment/ Creditor Gave Value

Answer 15

1. Creditor gave value
   Ex: Lending money, giving goods on credit

Question 16

Attachment/ Contract (security agreement)

Answer 16

2. Contract- The Security Agreement
   The contract between the debtor and creditor in which the debtor gives the creditor a security interest in the collateral
   - Methods of Proving Security Agreement
   A. Oral
   The security agreement may be oral only if the collateral is in the creditors possession (often referred to as a pledge)
   Creditors has a duty to rake reasonable care of collateral in the creditors possession

B. Authenticated Record
Requirements
- Evidence of Records: Record may be written or electronic as long as it is signed or marked electronically with present intent to identify the debtor and adopt the agreement
- Description of Collateral: Description of collateral must reasonably identify the property, that is, make it clear what property the creditor may repossess if the debtor defaults
EX: “my computer” is sufficient if debtor owns 1 computer, but inadequate if debtor owns many computers
EX: If there is a slight error on serial numbers description is sufficient if it still reasonably identities the computer even though there is an error
EX: “all my equipment” ok because description may be by category or type quantity, computational formula or any other method with is objectively determinable.
Exception: Consumer goods and commercial tort claims may not be described by type alone, description must be more specific (“all my consumer goods” not sufficient)
EX: Super generic descriptions are not allowed (ex: all my personal property)

C. Control
The security agreement may be demonstrated by 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

Question 17

Attachment/ Debtor has rightsin teh collateral

Answer 17

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 persons property as collateral without that persons permission

Question 18

After-Acquired Property and Attachment

Answer 18

1. Using new property as Collateral for Old Loan
   The debtor can agree that new acquisitions of property will serve as additional collateral for an old loan
   - Situation is often referred to as a floating lien and is very common with inventory and equipment
   - Security interest does not attach in the after acquired property until debtor actually buys it because until then debtor has no rights in collateral
2. Consumer Goods Exception: 10 day limitation from creditor giving value
   An after acquired property clause will work only for consumer goods acquired within 10 days of the creditor giving value
3. Commercial Tort Claim Exception: After-Acquired property clauses will not work with commercial tort claims

Question 19

Future Advances/ Attachment

Answer 19

Debtor can agree that the collateral will serve as collateral for new loans as well as the current loan. A line of Credit arrangement

Question 20

Perfection

Answer 20

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

Question 21

Elements of Perfection

Answer 21

Attachment and Act of Perfection

1. Attachment
   - Creditor gives value, contract (security agreement), Debtor has rights in the collateral
2. Act of Perfection
   Appropriate act of perfection depends on type of collateral. May be just one method or several
   - 6 methods
   A. Possession of Collateral by Creditor
   B. Filing of financing statement by creditor
   C. Automatic permanent- attachment alone is sufficient
   D. Automatic temporary- attachment alone sufficient for short period of time
   E. Control
   F. Notation of Security Interest on Certificate of Title.

Question 22

Perfection by Possession

Answer 22

Almost all collateral can be perfect by possession except: accounts, deposit accounts, nonnegotiable documents, electronic documents, electronic chattel paper, general intangibles
Lost of Possession: If the creditor has possession of the collateral, perfection is lost
- 20 Day exception for instruments, negotiable documents and certificated securities

Question 23

Perfection by Filing a Financing Statement

Answer 23

Almost all collateral can be perfect by filing except: deposit accounts and money
Requirements of financing statement:
1. Names of debtor and creditors
2. Addresses of debtor and creditors
-Exception: waived if financing statement is accepted by filing office
3. Debtors authorization in an authenticated record
- Cannot be oral
Authorization of the financing statement is automatic if the debtor authenticated the underlying security agreement
Ex: debtor signed a valid security agreement, can then file financing statement without debtors signature.
4. Description of the collateral
- Can be in broader terms then security agreement such as “all assets”
- After acquired property covered by the security agreement that fits within the description is automatically included
5. Description of the land if the collateral is Timber, Minerals, Fixtures or Crops

Almost all collateral can be perfect by filing except: deposit accounts and money
Requirements of financing statement:
1. Names of debtor and creditors
2. Addresses of debtor and creditors
-Exception: waived if financing statement is accepted by filing office
3. Debtors authorization in an authenticated record
- Cannot be oral
Authorization of the financing statement is automatic if the debtor authenticated the underlying security agreement
Ex: debtor signed a valid security agreement, can then file financing statement without debtors signature.
4. Description of the collateral
- Can be in broader terms then security agreement such as “all assets”
- After acquired property covered by the security agreement that fits within the description is automatically included5. Description of the land if the collateral is Timber, Minerals, Fixtures or Crops

5. Description of the land if the collateral is Timber, Minerals, Fixtures or Crops

Errors in Financing Statement: ok if errors are minor and not seriously misleading

Question 24

Desingation of Debtor in Financing Statement

Answer 24

Very Important as the financing statement is filed under the debtors name

• Individual Name= name of drivers license
• Registered Organization (corporation, partnership) = name under which entity is organized
• Trade Name (doing business as)= not sufficient unless extremely similar to the debtors name
• A trade name will work only if the name is so similar to the debtors name that the financing statement would be discovered in a search of the secretary of states records in response to a request using the debtors name

Question 25

Change in Debtors Name for Financing Statement

Answer 25

Change in Debtors Name - Collateral debtor has at the time of the name change: Perfection Continues - Collateral debtor obtains within four months of name change: Perfection continues - Collateral debtor obtains after four months of name change: Perfection ends unless refilled under new name within the four month period

Question 26

Place of Filing Financing Statemetn

Answer 26

Place of Filing: Secretary of State’s office in Austin Exception: Fixtures, Minerals and Timer to be cut= county where mortgage on real estate would be filed

Question 27

Duration of Financing Statement

Answer 27

Duration A financing statement is effective for 5 years from the date of filing Exception: A recorded real property mortgage covering fixtures continues until the mortgage is released or satisfied

Question 28

Continuation Statement for Financing Statement

Answer 28

Continuation Statement To extend the effectiveness of filing, the creditor should file a continuation statement within 6 months prior to the expiration date and before the 5 yeas expires - Can’t be earlier then the 6 months

Question 29

Termination Statement for Financing Statment

Answer 29

Termination Statement (when debtors pays it off) Consumer Goods= required Creditor must file a termination statement in a timely manner, that is earlier of: - Within 20 days after the debtors written demand or - Within 1 month after there is no outstanding secured obligation or commitment to make advances, even without demand from the debtor Non-Consumer Goods: Only upon the debtors 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 30

Automatic Permanent Perfection

Answer 30

1. Purchase money security interest in consumer goods - If its for consumer goods and debtor signs security agreement perfected without having to file a financing statement assuming the money is actually used to buy the collateral Warning: This special purchased-money security interest rule is only for consumer goods that are not either certificate of title items or fixtures 2. Assignment of insignificant amount of debtor’s accounts 3. Sale of Promissory Notes

Question 31

Automatic Temporary Perfection

Answer 31

1. Proceeds: Automatically perfected for 20 days from the debtors receipt of the proceeds 2. New Value for instruments, Negotiable Documents and Certified Securities: Creditor is automatically perfected for 20 days (a grace period to perfect using normal methods0 from time of attachment if the creditor gave new value - Must file or take possession within 20 days or security interest will become unperfected Ex: security interest in not is given and bank gives $1,00. Must get note of file within 20 days 3. Delivery of Instrument, Negotiable Document or Certified Security to Debtor for 20 days for certain purposes Ex: sale, exchange or presentation of the collateral Ex: Bank has interest in Promissory notes but gives them back to debtor when they come due so he can collect on them. Bank does not regain possession of the notes before the expiration of the 20 days perfection is lost

Question 32

Control / Perfection

Answer 32

Investment Property, Nonconsumer deposit accounts, Electronic documents and electronic Chattel paper - Control basically means the creditor has the right to sell or cash in the collateral without further action from the debtor - If a deposit account, secured party has control if the secured party is the bank in which deposit account is maintained

Question 33

Notation on Certificate of Title / Perfection

Answer 33

Notation on Certificate of Title Items covered: Motor Vehiles, Boats, Manufactured Housing Perfection if collateral is consumer goods or equiptment: Required that there be a notation of security itnerst on certificate of title - Even if you try and perfect another way (ex: filing) not perfected unless noted on certificate of title

Question 34

Perfection if Collateral Inventory

Answer 34

Perfection if collateral Inventory= file or take possession Ex: if the debtor is a car dealer the creditor should perfect by filing or taking possession of the cars

Question 35

Special Rules for Perfection of Proceeds

Answer 35

Generally perfection continues for 20 days When perfection continues beyond 20 days: - 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 Ex: security interest in inventory. Traded in inventory for equipment. Perfected in equipment because both inventory and equipment are perfected by filing in the secretary of states office - Identifiable cash proceeds (as long as the cash remains identifiable) - Proceeds perfected within the 20 day period: The perfection could occur without further action on the creditors part or the creditor might need to take action to perfect. Ex: security agreement in equipment. Sell equipment to buy more equipment

Question 36

Mult-State Transactions

Answer 36

Issue= What states version of the UCC is used to determine whether a creditor is perfected Law of the state where the debtor is located Registered Organization= Law of state where organized (doesn’t matter where they do business) Unregistered Organization= Place of business, but if more than one place of business, chief executive office Exceptions where creditor must follow law of the collaterals location - Security interests perfected by possession - Fixtures - Timber - Agricultural liens= law of state where farm product covered by the lien is located Other Exceptions: - Certificate of Title items= Law of state which issued most recent certificate of title - Deposit Accounts= Law of state in which bank has its chief executive office Debtor or Collateral Changes States IF debtor moves perfection continues for 4 months (have to fix before then) - Perfection by possession= perfection continues as long as perfected under new states law - Certificate of Title Items= Perfection continues for as long as it would have under the original certificate of title

Question 37

Subordination

Answer 37

Subordination: By contract, the competing parties may agree to a priority order different form the normal rules

Question 38

Secured Creditor vs. Unsecured/General Creditor

Answer 38

Secured creditor prevails - Perfected status of secured creditor is irrelevant

Question 39

Secured Party vs. Secured Party

Answer 39

If both secured parties are unperfected= first to attach prevails If one secured party is perfected= perfected creditor prevails - Doesn’t matter who came first as a creditor

Question 40

Both Creditors Perfected

Answer 40

First creditor to either file or perfect - First creditor to do the first filing or perfecting prevails (not both) - Doesn’t matter which creditor first had a security agreement with the debtor - Doesn’t matter which 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 Exception: IF one creditor has purchase money security interest in goods (other than inventory and livestock) - The purchase money security interest creditor prevails (even though second) if it is perfected - The purchase-money security interest creditor prevails (even though second) if it is perfected: 1. At the time of the debtor receives possession of the collateral or 2. Within 20 days of when the debtor received possession of the collateral Exception: If one creditor has purchase-money security interest in inventory - Purchase money security interest creditoy prevails if: 1. Purchase-Money security interest creditor perfected at time debtor receives possession of the inventory and 2. Proper Notice to Holder of Conflicting security interest Authenticated notification to all creditors who have already filed with respect to the collateral. This notice must: - Explain that the creditor is obtaining a purchase-money security interest in inventory - Describe the collateral and - Be given before the debtor receives possession of inventory The notice is effective for deliveries of the same type of collateral for 5 years Exception: if one creditor has a purchase money security interest in Livestock - Apply same rules as purchase-money security interest in inventory Exception: For Deposit Accounts - Secured party with control prevails Exception: For Investment Property Secured Party who has control over investment property has priority over a secured party who does not have control (ie a secured party who perfected by filing)

Question 41

Secured party v. Donee

Answer 41

If the debtor makes a gift of the collateral to a donee, the collateral remains subject to the security interest in the donee’s hands

Question 42

Secured Party v. Purchaser

Answer 42

- Burden on Purchaser to prove your in exception General Rule: Secured Party Prevails Exceptions: - Debtor has Permission to Sell= Purchaser Prevails - Secured party unperfected at time of purchase Purchaser wins if: - Buyer gives value and - Buyer receives delivery of the item and - Buyer has no knowledge of security interest at time of delivery - Purchase- Money Security Interest Exception If Purchase-Money Security Interest creditor perfects within 20 days after debtor receives the collateral but after debtor sells collateral to purchaser, creditor will prevail over the “gap” purchaser

Question 43

Buyers in Ordinary Course of Business

Answer 43

A buyer in the ordinary course of business can prevail even over a perfected creditor if the following requirements are satisfied - Good Faith: Honesty in Fact and observances of reasonable commercial standards - Without Knowledge of a Security Interest Violation - Purchaser of Goods that are not Farm Products - Ordinary Purchase: Purchase must be from a person the business of selling goods of the kind (ex: Sellers inventory) - Security Interest created by the seller - Creditor not perfected by possession

Question 44

Consumer Purchasers of Consumer Goods (ex: garage sale, ebay) / Priorty

Answer 44

Purchaser prevails if: - Consumer goods in sellers hands - Consumer goods in buyers hands - Buyer has no knowledge of security interest - Buyer pays value - Creditors not perfect by possession - Creditors interest is unfiled prior to purchase

Question 45

Buyers Not in The Ordinary Course of Business vis-à-vis future advances / Priorites

Answer 45

The creditor gives more money to the debtor based on collateral that the debtor has already sold to purchaser who does not qualify as a buyer in the ordinary course of business A non-buyer in the ordinary course of business can prevail over a secured creditor for future advance amounts (not the prior advances) made after the first of these events occur: - Secured creditor obtains knowledge of the purchase or - 45 days have elapsed from the date of the purchaser

Question 46

Holder in Due Course of Negotiable Instrument / Priorities

Answer 46

Holder in Due Course of Negotiable Instrument A holder in due course will prevail over earlier perfected interests in the negotiable instrument

Question 47

Secured Creditor v. Lien Creditor

Answer 47

Secured Creditor v. Lien Creditor Lien Creditor: General (unsecured) creditors who have acquired a judicial lien by a levy on the debtors property - Term also includes bankruptcy trustee If secured creditor unperfected at time lien attached=lien creditor prevails If secured creditor perfected at time lien attached= secured creditor prevails

Question 48

Purchase Money Security Interest Exception/ Priorities

Answer 48

Purchase Money Security Interest Exception If a purchase money 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

Question 49

Future Advaces/ Priorities

Answer 49

The secured creditor will lose priority to a lien creditor for future advances after both of the following: the secured creditor obtains knowledge of the lien and 45 days elapses from date of the lien

Question 50

Secured Creditor vs. Statutory Mechanics Lien

Answer 50

Statutory Lien prevails if following conditions satisfied: Unless lien states otherwise 1. Person furnished services or materials with respect to the goods covered by the security interest 2. Furnishing was in ordinary course of business and 3. Collateral is in the possession of the statutory lien holder

Question 51

Proceeds / Priority

Answer 51

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

Question 52

Fixtures Priority

Answer 52

Fixtures Secured party vs. holder of real property mortgage Fixture: ordinary building materials (brick. Lumber, nail, siding, shingles, wiring, pipes etc) cease to be goods when incorporated into a structure and are real property Thus a creditor with a security interest in these ordinary building materials loses its security interest once construction occurs A fixture is a good which is not completely integrated into the building although it is so related to the real estate that an interest in it arises under the real estate law A fixture can be removed but some damage will occur to the realty Ex: furnace, hot water heater, toilet, sink, chandelier Secured party may win if: Perfected before real estate interest recorded and Perfected with a fixture filing A fixture filing is a financing statement which meets the following additional requirements: - Describes the real property - Filed in office where a mortgage on the real property would be recorded Purchase Money Security Interest Exception Purchase-money secured creditor, even though perfected after real property interest is of record, can prevail if: - Purchase money secured creditor perfected by fixture filing - Perfected within 20 days of Good becoming a fixture and - Competing Real Estate interest is not a construction mortgage Construction mortgage is the loan which enabled the whole building process to begin and thus it is not defeated by a later purchase- money security interest

Question 53

Readily Removable Collateral

Answer 53

Sometimes there is a debate whether an item is a fixture or merely a good Generally if the good is readily removable it will be treated as a regular good rather than as a fixture and thus may be perfected without a fixture filing Ex: Refrigerator

Question 54

Judicial Liens and Fixtures

Answer 54

Judicial Liens A security interest in fixtures that is perfected in any matter prevails over a later-acquired judicial lien even if the perfection was not done via a fixture filing - If bank as a security interest in specified fixtures and they filed a financing statement instead of a fixture filing and someone later gets a judicial lien Bank still has priorty over that person even though bank did not perfect with a fixture filing

Question 55

Crops/ Fixture / Priority

Answer 55

Crops 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 56

Where to look out for Bankruptcy Cross-Over

Answer 56

Priority

Question 57

Remedies of Secured Party Upon Default

Answer 57

Remedies of Secured Party Upon Debtors Default - Default not defined but means not paying. May also mean other things specified in the security agreement such as taking the collateral out of state without permission or not keeping the collateral insured - Repossession - Sale of Collateral by Creditor \_resell or strict foreclosure

Question 58

Repossession

Answer 58

Upon Default, Creditor may repossess - No judicial process needed, self help remedy Creditor need not give debtor notice Limitation on repossession: No breach of peace - Fact question to determine whether the peace was breached Ex: Trespass in driveway ok, breaking and entering is not Ex: Includes debtor coming out and yelling, debtors breach of the peace counts Ex: cannot be a threat of violence or even constructive force (dress up as police man) Ex: Dealership can trick you into coming in and then repossess (lying ok) Creditor cannot delegate duty not to breach peace Creditor cannot delegate the duty not to breach the peace to the rep person/company 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 for conversion of the repossessed item, actual damages, and even punitive damages Creditor now has choice after a proper repossession: 1. Resell Collateral: sue for deficiency, give surplus to debtor 2. Strict Foreclosure: keep collateral and call things square

Question 59

Sale of Collateral by Creditor

Answer 59

Notice required Exceptions: perishable collateral, collateral threatening to decline speedily in value, collateral is customarily sold on a recognized market Contents of Notice: - Description of debtor and secured party - Description of the collateral - Method of sale - Statement that debtor is entitle to an accounting and the charge if any - Time and place of public sale; time after which a private sale will be made (earliest date of sale) - If the collateral is consumer goods, the notice must also: - Explain that debtor is liable for deficiency - Telephone number of person from whom debtor can obtain amount needed to redeem the collateral - Telephone number or address from which debtor can get additional information about the sale Timeliness of Notice Notice must be sent a reasonable amount of time before the sale - It is a fact question as to what is a reasonable time but in a nonconsumer transaction, 10 days or more before the sale is considered reasonable Who Receives Notice 1. Debtor- unless debtor has waived notice in an authenticated agreement after default (not valid if waived noticed in security agreement) 2. Sureties 3. If collateral not consumer goods- notice to creditors who have perfected by filing, notation on certificate of title, or who have give notice to reselling creditor

Question 60

Debtors RIght to Redeem

Answer 60

Debtor has the ability to cure the default and regain the collateral if certain requirements satisfied - Creditor ahs not yet sole or entered into a contract to sell collateral - Strict foreclosure has not yet occurred - Debtor has not waived the right to redeem after default - Debtor must tender fulfillment of all obligation secured by the collateral - Not enough just to tender the late payments, watch out for acceleration clauses - Debtor must tender creditor’s reasonable expenses (ex: repoman, storage, sale cost)

Question 61

Standard of Care for Creditor Sale

Answer 61

Standard of Care All aspects of the sale, that is, the method, manner, time, place and terms must be commercially reasonable It is a fact question whether the sale was commercially reasonable Merely because a better price could have been obtained does not make sale unreasonable but if the difference in price is substantial the sale will be closely analyzed Burden of Proof is on the creditor to show commercial reasonableness of the sale in a deficiency suit

Question 62

Ability of creditor to purchase at resale

Answer 62

``` Public Sale (auction)= Yes Private Sale= Only if Collateral is customarily sold in a recognized market or Collateral is subject to widely distributed standard price quotations ```

Question 63

Title of Purchaser at Resale

Answer 63

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 64

Application of Resell proceeds

Answer 64

1. Reasonable Expenses of Reselling Creditor 2. Satisfaction of debt 3. Satisfaction of Subordinate creditors 4. Surplus if any to debtor

Question 65

What if Deficiency happens at resell?

Answer 65

The creditor is unsecured for the deficiency amount

Question 66

Penalty for not complying with resale requirements

Answer 66

Creditor liable for actual damages: this liability could be to the debtor or to another creditor Consumer Goods: The creditor is automatically liable for amount equal to the finance charge plus 10% of the principal Effect on creditors ability to recover deficiency - Consumer transactions= absolute bar to recovery of deficiency - Nonconsumer transactions= rebuttable presumption that value of collateral was equal to amount of debt - Secured creditor may prove otherwise and still recover a deficiency

Question 67

If collateral Accounts or Instruments for Resell

Answer 67

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

Question 68

Strict Foreclosure

Answer 68

Strict Foreclosure Creditor Retains Collateral Creditor can retain collateral in total satisfaction of debt (consumer, only option) In non-consumer situations the creditor may retain the collateral in total or partial satisfaction of the debt Requirements to use strict foreclosure - Debtor consents -Express or the debtor agrees in authenticated record made after default - Implies: debtor fails to object to the creditors proposal to strictly foreclose within 20 days of when the creditor sent notice - Creditor Sends authenticated notice to retain collateral to: Debtor- unless the debtor has waived notice in an authenticated agreement made after default If collateral not consumer goods- notice to creditors who have perfected by filing, notation on certificate of title, or who have given notice to creditor No timely objection: if the debtor or another creditor objects in writing within 20 days the creditor may not keep the collateral nad must conduct a resale Exception for high equity (debtor has paid 60% of price) Consumer Goods: Resale necessary within 90 days of repossession