SECURED TRANSACTION: BAR CHECKLIST GENERAL DEBTOR-CREDITOR RELATIONSHIPS

1) Creditor must get a lien by process of execution (judgment)2) Exceptions

a) Statutory liens (construction liens and artisan’s liens)b) Consensual Agreements (mortgages and Art. 9 Security Interests in Personal Property)

UCC ARTICLE 9

1) Attachment (Secured party’s rights in collateral as against the debtor)

a) Three Requirementsi) Value given (any debt)ii) Debtor has rights in the collateraliii) Security agreement created

b) Evidence of Security Agreement (Statute of Frauds)i) Agreement and creditor has possession of the collateral (IF value has been given and

debtor has rights, once creditor possesses the collateral, he has attached and perfected)

ii) Agreement in an Authenticated Record (signed writing)

c) Authenticated Recordi) Description of Collateral : Reasonably identifies the collateral (NO SUPERGENERIC

DESCRIPTIONS such as “all debtor’s assets/property)ii) Language indicating that the collateral described is security for a debt (no magic

words needed)iii) Security interest attaches to after-acquired collateral by agreement (“all debtor’s

existing and after-acquired equipment) iv) Security interest attaches to identifiable proceeds v) Agreement can provide for future advances

d) General Rulesi) Debtor can transfer rights to the collateral (i.e., sell, grant another security interests, etc.)ii) Typically, the security interest follows the collateral even if the debtor disposes of it

unless Creditor authorized the debtor to transfer free of the security interest iii) Generally, the original secured party wins except as provided by the priority rule (see

below)

2) Perfection (Secured party’s rights against 3d parties) (Attachment must be established before you can perfect)

a) Perfection by filing a financing statement in the office of the secretary of state

i) What?(1) Debtor’s name (minor errors OK; if debtor changes his name, it’s seriously misleading

and you need to file new FS) (2) Secured party’s name(3) Indication of the collateral (supergeneric OK)

ii) Where?(1) Individuals : state of debtor’s principal residence(2) Organizations

(a) Principal place of business(b) If more than one, in the chief executive office

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iii) Authorized by debtor in an authenticated record (if there’s a security agreement, it’s authorized)

b) Perfection by Possession of Collateral i) Tangible goodsii) Chattel paperiii) Negotiable instruments

c) Perfection by Control (investment property, deposit accounts, electronic chattel paper, letters of credit)

d) Automatic Perfectioni) PMSI in consumer goodsii) PMSI is (1) money lent to the debtor to buy the actual collateral or (2) seller financingiii) Consumer goods: personal, family, or household use

e) Temporaryi) 20 days for proceedsii) Beyond 20 days

(1) “Same office” Rule (proceeds could be filed in the same office as original collateral)(2) Identifiable cash proceeds(3) Creditor perfects within the 20-day temporary period (filing, possession, etc.)

iii) Four months after debtor relocates if debtor’s location governs perfection

3) Priorities (More than one creditor has rights in the debtor’s collateral after debtor defaults)

a) General Rulesi) Between unperfected secured parties: first to attachii) Between perfected and unperfected: perfected secured party winsiii) Between two perfected secured creditors: first to file or perfectiv) Purchase Money Security Interests have superpriority

b) PMSI in Inventory wins IF:i) Perfected when debtor gets possession of inventory andii) Notice to prior creditors

c) PMSI in Equipment wins IF:i) Perfected before or within 20 days after debtor gets possession of the equipment

d) Conflicting PMSIi) If the PMSI is seller financing, seller winsii) Otherwise, first to file or perfect wins

e) Purchaser of Chattel Paperi) Good faith purchaser of chattel paper takes priority over proceed interests in the chattel

paper and any other security interest in the chattel paper if purchased without knowledge of any violation of the secured party’s rights

f) Buyers

i) Regular buyer takes free of a security interest if he gives value and receives delivery without knowledge of the security interest and before perfection

ii) Buyer in the ordinary course of business take free even if perfected if(1) Buyer buys in the ordinary course of his business(2) Seller (debtor) is engaged in the business of selling goods of that kind(3) Buyer has no knowledge that the sale violates the secured party’s rights (buyer can

know about the security agreement)

iii) Consumer to Consumer Sales (E.g., yard sales): Buyer takes free eve if perfected if:

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(1) Buyer has no knowledge of the security interests(2) Gives value(3) Goods are consumer goods(4) Before secured party filed

g) Lien Creditors i) General rule : lien creditors beat unsecured creditorsii) Exceptions : Security interest beats lien creditor if

(1) Secured party is perfected before the lien attaches or(2) Secured party files first and meets one of the attachment requirements (value given;

agreement or debtor has rights)

h) Bankruptcyi) Perfected secured creditors beat the trustee in bankruptcy ii) Unperfected secured creditors lose to the trustee in bankruptcy

4) Rights on Default

a) Repossessioni) After defaultii) Cannot “breach the peace”

b) Sale of Collaterali) Commercially reasonableii) Private or publiciii) Notice of the sale to debtor or surety (if applicable)iv) Order of Distribution

(1) Expenses(2) Secured debt is paid(3) Junior liens and interests are paid(4) If there is a surplus, debtor gets the balance(5) If there is a deficiency, creditor can sue for deficiency

c) Retaining the Collateral (Strict Foreclosure)i) Proposed to the debtorii) Acceptance by the debtor or acquiescenceiii) Complete satisfaction:

(1) Fully satisfies the debt(2) Not allowed for consumer goods where debtor has paid 60% of the secured debt

iv) Partial Satisfaction for Non-consumer goods(1) Partial satisfaction of the debt(2) Debtor is liable for the balance(3) Not allowed for consumer goods

d) Debtor’s Right of Redemptioni) Any time before dispositionii) Pay all obligations plus reasonable expenses

e) Failure to Comply with the Codei) Creditor is liable for actual damagesii) Court presumes that the value of the collateral is presumed equal to the amount of the

debt

5) Surety/Accommodation Partya) Surety (answers for the debt of another) is liable to the extent of the obligation he commits to

payb) Special Rules

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i) Surety can always recover from the primary debtorii) Surety is subrogated to any lien that the principal gave to the payee or secured partyiii) If the creditor has impaired the collateral, surety’s obligation is reducediv) Surety has the same rights under Art. 9 as the principal debtor

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