1-4 Terminology, Creation of Security Interest, Scope, Perfection

Question 1

What is a secured transaction?

Answer 1

A transaction intended to create a security interest in personal property or fixtures.

Question 2

to spot a secured transaction, look for

Answer 2

(1) a credit transaction and
(2) an agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt.

Question 3

What is a security interest?

Answer 3

An interest in personal property or fixtures that secures payment or performance of an obligation.

Question 4

What is collateral?

Answer 4

The property subject to a security interest.

Question 5

A PSMI can arise in two ways:

Answer 5

1. secured party sells the goods to the debtor on credit and retains a security interest in the goods sold, or
2. the creditor loans the funds to the debtor to enable the debtor to buy specific collateral, those funds are used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral. PSMI secures whatever portion of the purchase price still has to be paid.

Question 6

What is attachment?

Answer 6

attachment is the process that creates a valid security interest in a secured transaction, establishing the rights and obligations between the debtor and the secured party.

Question 7

What is perfection?

Answer 7

Deals with those steps legally required to give the secured party an interest in the collateral that is effective as against the world.

In general, perfection is the process of giving public notice of the security interest to the world.

Question 8

What is a financing statement?

Answer 8

The document generally used to provide public notice of the security interest, and so to perfect the security interest.

Question 9

What are goods (tangible collateral)?

Answer 9

Includes all things which are movable at the time the security interest attaches.

Question 10

What are the four types of goods?

Answer 10

• consumer goods
• equipment
• farm products
• inventory

Question 11

There are three requirements for attachment, which must coexist:

Answer 11

1. parties must agree to create the security interest AND
2. value must be given by the secured party, AND
3. the debtor must have rights in the collateral.

Question 12

form of the authenticated security agreement:

Answer 12

a. evidenced by a record –> must show an intent to create a security interest
b. agreement must be authenticated –> usually means signed by the debtor
c. description of collateral –> must reasonably identify collateral

(no supergeneric descriptions)

Question 13

proceeds must be “identifiable”

Answer 13

“identifiable” means that the proceeds can be traced back to the original collateral.

Question 14

First Bank has a security interest in Hilda’s inventory. Hilda sells some inventory on credit. Does First Bank’s security interest reach the accounts resulting from such sales?

Answer 14

Yes, if identifiable and likely identifiable here.

Question 15

What about identifiable in the case of commingled cash proceeds?

Answer 15

Identifiable proceeds can be traced using the lowest intermediate balance rule.

Question 16

lowest intermediate balance rule

Answer 16

Under that rule, you will look at the bank account starting at the time the proceeds are deposited and ending at the time you are applying the rule. The lowest balance during that time period is the secured party’s identifiable proceeds (but the amount cannot exceed the value of the cash proceeds originally deposited)

Question 17

there are 5 methods of perfection:

Answer 17

1. filing;
2. taking possession of the collateral;
   3 control
3. automatic perfection; and
4. temporary perfection.

Question 18

perfection by filing

Answer 18

effective for all classes of collateral except deposit accounts and money

Question 19

perfection by possession

Answer 19

effective for all classes of collateral except general intangibles, accounts, nonconsumer despoit accounts, nonnegotiable documents, and electronic chattel paper, although it is impractical for some classes of collateral (e.g. if secured party takes debtor’s equipment or inventory, it will be difficult for debtor to run his business.)

Question 20

perfection by automatic

Answer 20

most commonly effective only as to PMSIs in consumer goods

Question 21

perfection by temporary

Answer 21

effective for 20 days (and possibly longer) for proceeds; 20 days when a secured party gives new value under a security agreement where collateral is a negotiable document, instrument, or certified security; 20 days where a secured party makes available a negotiatble document, instrument, certificated security, or goods in possession of a bailee on a temporary basis (e.g. for debtor to present for payment or to sell); four months where debtor moves from one state to another if debtor’s location governs perfection

Question 22

perfection by control

Answer 22

effective ONLY for nonconsumer deposit accounts, electronic chattel paper, and investment property.

Question 22

Eight types of intangible or semi-intangible collateral

Answer 22

• instruments
• documents
• chattel paper
• investment property
• accounts
• deposit accounts
• commercial tort claims
• general intangibles

Question 23

Generally, how can a security interest in goods be perfected?

Answer 23

May be perfected by filing a financing statement indicating the collateral.

Question 24

Is filing a financing statement effective to perfect a security interest in vehicles subject to a state statute that provides for perfection by notation on the certificate of title?

Answer 24

No, under article 9.

Question 25

A security agreement that includes an after-acquired property clause attaches when…

Answer 25

the debtor obtains an interest in the property.

Question 26

To attach a security interest:

Answer 26

(i) either the debtor must authenticate a security agreement granting the creditor a security interest in collateral that describes the collateral or the creditor must take possession or control of the collateral,
(ii) the creditor must give value, and
(iii) the debtor must have rights in the collateral.

Question 27

A creditor can perfect its security interest in goods by:

Answer 27

(i) filing in a public office, a financing statement that is authorized by the debtor in an authenticated record, or

(ii) taking possession.

Question 28

Is a PMSI in consumer goods automatically perfected upon attachment?

Answer 28

Yes.

Question 29

What is a consumer goods?

Answer 29

Consumer goods are goods used or bought primarily for personal, family, or household purposes.

Question 30

What is the original use test?

Answer 30

The debtor’s original intended use for the collateral governs the collateral’s classification. So, even if they later change the purpose of the item their original use takes priority.

Question 31

When does a security interest attach to collateral?

Answer 31

When the parties agree to create a security interest, the creditor gives value, and the debtor has rights in the collateral.

Question 32

a financing statement must contain:

Answer 32

(1) the name and mailing address of debtor
(2) name and mailing address of secured party
(3) collateral indication (description)

Question 33

Will minor errors in the debtor’s name render the financing statement ineffective?

Answer 33

No, only seriously misleading errors.

Question 34

If the debtor is a registered organization, the debtor’s name must match the name on the debtor’s public organic record?

Answer 34

Yes, but a name is still not seriously misleading if the financing statment would be discovered under the debtor’s correct name using the filing office’s standard search logic.