How to Approach an MEE Secured Transactions Question

Welcome to Uniform Commercial Code Article 9, also called secured transactions. This is one of five subjects that appears on the Multistate Essay Exam, but not the Multistate Bar Exam. In these lessons, I'm going to teach you how to identify and attack secured transactions questions. Pay attention because there usually is a secured transactions question on every MEE.

So, what exactly is a secured transaction? This class is about loans and credit transactions in which a lender acquires an interest in personal property owned by the borrower. The borrower is called the debtor. The lender is called the creditor. A security interest is an interest in certain assets which secures payment or performance of an obligation. In a secured transaction, the debtor grants a security interest over some of its assets to the creditor to secure repayment of a loan or debt.

Article 9, the subject of this class, governs security interests given in personal property. Personal property is property that is not real property, meaning anything that is not land or buildings attached to land. Personal property includes money, bank accounts, which are called deposit accounts, accounts receivable, which are called accounts, equipment, goods, inventory, and intangibles, like trademarks, copyrights, and patents.

The property in which a creditor takes a security interest is called collateral. The creditor with the security interest is called a secured creditor. Before diving into the material, it is useful to set out the relevant parties and key types of credit transactions involved in secured transactions as tested on the bar.

Main Parties

The debtor can be an individual or a business. The lender, called a creditor, can be a bank or a business that sells goods or inventory. The person or business borrowing and the lender extending credit are the key parties. However, there are two other parties that you may see on a secured transactions question.

First is someone who buys collateral from the debtor. For instance, the debtor is a business that sells clothing. Someone may buy clothing from the debtor. The other party you may encounter is a creditor who was owed money on an unsecured basis. For example, a credit card lender is typically an unsecured creditor.

If the debtor is not paying the unsecured creditor, that creditor can go to court and get a ruling that gives the creditor the right to take possession of the debtor's property. This ruling is called a judgment. That judgment allows the creditor to levy on the debtor's personal property. Once the creditor does so, it is called a judgment lien creditor and has a right to the debtor's property it levied on.

To recap, the main parties you will encounter in a secured transactions question are the debtor, secured creditors, judgment lien creditors, and buyers.

Types of Transactions

Half the battle of answering a secured transactions question is recognizing that the question is about Article 9. Oftentimes the question will include the word "secured" and deal with a lender. If you see the words "secured," "personal property," and "a lender" such as a bank, think about secured transactions.

Occasionally the testers will try to trick you into thinking that a question is not about secured transactions when it really is. They will do this through a question about a lease of personal property. If a debtor is leasing personal property from a business, is paying a particular amount of money per period to lease the property, and will own the property at the end of the lease, this is a secured transaction. It does not matter what the parties call it. If you encounter a lease of personal property, think about whether the lease might actually be a secured interest.

There also are two subtypes of secured transactions that often appear on exam questions. The first is what is called a " purchase-money security interest." This refers to a security interest taken in property for which the creditor loans the debtor money needed to buy the property. The definition and the term should make sense. Loan the money to purchase the property, get a purchase-money security interest.

The other type of secured transaction that appears on exam questions is a security interest taken in consumer goods. Consumer goods are goods that are used primarily for personal, family, or household purposes. Consumer goods secured transactions often are subject to different rules, as detailed in the following lessons. Once you find a secured transactions question, consider whether it involves a purchase-money security interest or consumer goods.

Checklist

If you catch a secured transactions question, there are three main legal issues that testers will likely ask about: attachment, perfection, and priority. Knowing the basic rules for these three issues will get you pretty far on a question.

Attachment

First, attachment. For a security interest to be enforceable, it must attach. Attachment of a security interest is what gets the creditor rights in the collateral. If the debtor defaults on the underlying loan, the creditor can take and sell the property to satisfy the loan amount it is due.

For a security interest to attach, three requirements must be met. First, value must have been given by the creditor. That value is the loan. Second, the debtor must have rights in the collateral that can be transferred. The debtor typically has those rights. Third, the debtor must have authenticated a security agreement that provides a description of the collateral, or the secured party must have taken possession of the collateral pursuant to the security agreement.

In brief, if you encounter a question about attachment or enforceability of a security interest, make sure there actually is a written security agreement that describes the collateral or gives the creditor the right to possess the collateral. Attachment is about the deal between the debtor and the creditor.

Perfection

The second main issue is perfection. Perfection is the act that the secured creditor takes to publicly tell other parties of its rights to the collateral. Perfection is about the secured creditor in relation to other creditors and buyers of the collateral.

To perfect, a secured creditor must meet two requirements. First, it must have an enforceable security interest. The security interest must have attached. Second, it must file a financing statement or take steps to possess or control the collateral. If you encounter a question asking about the rights of a secured creditor in relation to other creditors, consider whether the secured creditor correctly perfected. For this, look through the facts to find the filing of a financing statement.

Priority

The third and final main issue tested in a secured transactions question is priority. Priority is about the order in which creditors can take value from a piece of property. Creditors have priority against a specific competing claim held by another creditor or other party. A secured creditor, of course, will want to take first. It may be competing against another secured creditor, a judgment lien creditor, or a buyer.

Buyers typically take free of security interests. The secured creditor cannot take the property from them. As between secured creditors and judgment lien creditors, whichever perfects first typically takes first in the collateral. Judgment lien creditors perfect when they gain right in the collateral.

If you encounter a question about priority, remember that buyers of collateral typically take free of security interests. As between a secured creditor and other creditors, assess which party got rights to the collateral first.

A secured transactions question is best assessed as a timeline. Dates are especially important for secured transactions questions. Read the question carefully and use the facts to sketch a timeline of the problem, even if no specific date is given. A creditor, typically, will first attach a security interest. It then will perfect.

In the meantime, other creditors will attach security interests, and possibly perfect. An unsecured creditor may levy on property to become a judgment lien creditor. Then the debtor may sell property. Later, the debtor will default on its loans.

A secured transactions question typically asks about priority in a piece of property as of the moment of default. To answer it, you must assess whether each creditor attached and perfected correctly. The timeline allows you to compare the timing of perfection as among creditors with rights in a particular item of collateral.

With that, let's dive into secured transactions.