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1. Rule: Article 9 applies to consensual security interests in personalty and fixtures
II. How does a creditor create an enforceable security interest in debtor’s collateral, meaning, how does the creditor ATTACH?
1. VCR: Value, Contract, Right in the Collateral
2.Attachment: The collateralization is enforceable
III.Once attached, how does the creditor attain PERFECTION?
1. Rule: By putting the world on record notice of its existence
2. Perfection: Art. 9 is concerned about perfecting when concerned with the world of potential competition
IV. When more than one creditor has a stake in the same collateral, what are the rules of PRIORITY?
1. General Rule: First in time, first in right
V. What if the debtor DEFAULTS on the debt or obligation?
1. Rule: The article 9 lender has statutory & judicial remedies
1. Article 9 applies to consensual security interests in personalty or fixtures.
a. Note: When the collateral is real estate, apply the law of mortgages.
b. When the collateral is personalty or fixtures, apply Article 9.
c. Personalty: Goods
d. Voluntary or consensual collaterizations ONLY Article 9 does NOT apply to statutory or mechanic’s liens
i. Debtor: The entity who owes the money
ii. Secured Party or Secured Creditor: The entity who lends the money
iii. Security Agreement: The contract or the record (interchangeable terms)
iv. Security Interest: The right creditor has in debtor’s personalty or fixtures
v. Collateral: The personalty or fixtures creditor can look to for satisfaction
a. Consumer goods: Those items used for personal or familial purposes
b.Equipment: Items used in business
c.Inventory: goods held for sale or lease (stuff on shelves)
d.Farm Products: Crops, livestock, and supplies used in farming operations
e.Fixtures: Items annexed to realty
* The key for purposes of classifying tangible collateral: Primary use in the hands of the debtor.
i. Subjective Test: It depends on the facts and how the debtor is using the property
ii. Significance: On the exam, how you classify the collateral MATTERS for purposes of determining priority
a. Patents, trademarks, copyrights
b. Stocks, bonds, mutual funds
c. Proceeds from the sale of collateral
d. Accounts (A right to payment for goods or services)
e. Promissory notes and drafts (commercial paper)
i. VALUE must be given by creditor (i.e. bank lends $50K to debtor)
ii. CONTRACT called the security agreement, must evidence the secured transaction unless the secured party has taken possession of the collateral.
a. Note: If the secured party is in possession of the collateral, there is no need for a record. By contrast, if the debtor is in possession of the collateral, we need a record.b. The record must:
2. How to attain perfection
A. By the secured party’s taking possession of the collateral.
B. Automatic perfection for purchase money security interests (PMSIs) in consumer goods only
a. Perfected automatically, upon attachment
b. PMSI: A security interest that enables debtor to purchase the goods. UCC favorites.
C. Most Common Route to Perfection: Secured Party Files Notice of the Security Interest in the public records (see separate flashcard)
1.What is filed?
i. The security agreement could be filed, but rarely is. Financing statement usually filed instead.
ii. Financing statement: Simple document whose only purpose is to provide interested parties with sufficient information to make follow-up inquiries.
a. Article 9 aims to encourage electronic filing, but is "medium neutral"
b. Requisite contents: "Simple and sparse"
1) Debtor's name & address
2) Creditor's name & address; and
3) A description of the collateral (super generic descriptions are ok)
i. Individual: If debtor is an individual, he or she is located in the state of principal residence
ii. Registered organization: If debtor is a registered organization (i.e. a corporation, a LLC, or a LP), it is located in the state under whose laws it is organized.
iii. Exception to central filing: If the collateral is timber, minerals, or fixtures, then file locally, in the county where Blackacre is located.
1. Basic Context: More than one party stakes a claim to the same collateral. Who gets to take first, second, third, etc.?
2.Basic Concept: Priority is the purpose of collateralization, and the secured party seeks to subordinate the other creditors, not to share pro rateably.
a. Piggish norm: Each claimant is entitled to satisfaction in full before a subordinated claimant is entitled to take.
2. AUPie will defeat any subsequent AUPie, as well as any GUC
3. AUPie will lose to PAC, LC, and to any buyer without knowledge of the security interest
1. The PAC who filed first;
2. certain PMSI-holders;
3. the BIOC
1. Rule: First in time, first in right
2. Priority and Early Filing: For purposes of determining priority, Article 9 gives special effect to filing. It allows for early filing, even at the onset of loan negotiations. **If an early filer subsequently attaches, she is allowed the benefit of her early filing. Priority will relate back to the early filing date.
2. Collateral is inventory: PMSI holder must satisfy two requirements in order to take priority:
(1) File properly BEFORE debtor takes possession AND
(2) Notify AACF BEFORE debtor takes possession.
a. General Rule: PAC loses to BIOC. A buyer in the ordinary course of business takes free of a perfected security interest in seller’s inventory.
b.Reason: To promote commerce and honor buyer’s expectations.
1. Defined: Debtor has breached. Not defined in Art. 9. Breach is whatever the contract says it is.
2.Article 9 Creditor’s Remedies on Debtor’s Default
A. Self-Help Repossession (REPO!)
B. Repossession by Judicial Action
1.Rule: Self-help repossession is permissible, so long as creditor does not breach the peace. A breach of the peace occurs when the secured party’s actions are likely to cause violence.
2. Thus, the relevant question is NOT whether an actual fight broke out, but whether the secured party did something provocative or likely to cause violence.
3. "please stop": A repossession made over any protest by the debtor, however mild the protest, constitutes a breach of the peace. For that matter, if the repossessor misuses the color of law, by, for example, impersonating a law enforcement officer, he or she has used constructive force and therefore has breached the peace. Criminal and civil penalties attach to creditor's misconduct.
4. Repossession when the collateral is in the debtor's home: The home enjoys a zone of privacy. Secured party may not enter debtor's home without voluntary & contemporaneous consent.
5. Repossession when the collateral is outside the home: More latitude. Secured party may take the collateral so long as there is no debtor objection.
i. Defined: Strict foreclosure occurs when the secured party retains the collateral in full satisfaction of the debt. The creditor lawfully retains the collateral and the debt in turn is cancelled.
ii. Works best when the value of the collateral is roughly approximate to the debt owed.
iii.How to strictly foreclose: The secured party must send a written proposal to retain the collateral in satisfaction of the debt. To whom is this proposal sent?
1. Consumer Goods: Notice is sent to the debtor and secondary obligors (guarantors of the debt)
2. Not consumer goods: Notice is sent to debtor, and other secured parties who have told the foreclosing creditor of their security interest in the collateral, as well as perfected creditors & secondary obligors
c. Objection: If any of the notified parties objects within 20 days after notice is sent, strict foreclosure will not be allowed. Instead, the collateral must be disposed of by sale.
b. Instead, the secured party must sell collateral within 90 days or be liable in conversion.
c. Reason: To avoid giving creditors windfalls.
1. The secured party may sell the collateral and apply the sale proceeds to the debt. The secured party chooses whether the sale will be public (i.e. a public auction) or private.
2. Two governing guideposts
i. Every aspect of the sale must be commercially reasonable
ii. Prior to the sale reasonable notice must be sent.
a. Standard notice forms: Art. 9 provides standard notice forms which, if used, are presumptively commercially reasonable.
b.Consumer goods: Notice must be sent to debtor & secondary obligors.
c. All other types of collateral: Notice must be sent to debtor, and those secured parties who have advised the foreclosing creditor of their security interest, as well as perfected creditors and secondary obligors.
d. Contents of the Notice: Depends on the type of sale
1. Public Sale: Must state the time and place of sale
2. Private Sale: Must state the time after which the sale will be made.
e. Consumer Goods: Additional consumer-protective provisions are mandatory, such as how to calculate any deficiency and how the debtor can redeem.
f. Advance Notice Requirements: No bright line
1. Standard: Commercial reasonableness
2. Nonconsumer Transactions: Notice is deemed sent within a reasonable time if it is sent 10 days or more before the time of sale.
g. May the secured party buy at sale?
1. Public sale: Yes
2. Private sale: Absent external market checks, NO
1. If the outstanding debt exceeds the amount of the sale of the collateral, the secured party can proceed against the debtor for a deficiency judgment.
2. Note: If a secured party sells collateral at a low price to an insider buyer, the price that an independent third party would have paid rather than the actual amount paid, is the price that will be used in calculating the deficiency. (Aims to close the door to bad faith).
a. The debtor’s right to redeem the collateral is cut off once the secured party has resold or completed a strict foreclosure.
b. Redemption: To redeem, the debtor must may the amount owed (missed payments) plus any interest and creditor’s reasonable expenses including attorney’s fees.
c. Acceleration Clause: If the security agreement contains an acceleration clause (which permits the creditor to declare the full balance due in the event of a default), to redeem, the debtor must pay off the entire debt plus interest & expenses.
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