4. UCC 9

Question 1

The primary categories of collateral under Article 9 are which of the following?

Question 1Answer

a. Consumer goods, Farm Products, Inventory, and Equipment.

b. Accounts, Deposit Accounts, General Intangibles, Tort Claims and Judgments.

c. Goods, Documentary Collateral, and Incorporeals.

d. Instruments, Chattel Paper, Documents, Investment Property.

Answer 1

c. Goods, Documentary Collateral, and Incorporeals.

Question 2

Which of the following is not one of the general requirements for “attachment” of a security interest?

Question 2Answer

a. The debtor must have rights in the collateral.

b. The debtor must authenticate a security agreement that provides a description of the collateral.

c. The debtor must agree to grant a security interest to the creditor.

d. The creditor must give value to the debtor or a third person.

Answer 2

b. The debtor must authenticate a security agreement that provides a description of the collateral.

Question 3

When a written security agreement is required by law, it must contain a description of the collateral. Which of the following is not a valid description of collateral?

Question 3Answer

a. All of my personal property.

b. My Subaru Ascent.

c. All of my vehicles.

d. All of my “goods” as the term is defined in Article 9.

e. All of the above are valid descriptions of collateral.

Answer 3

a. All of my personal property.

Question 4

Under Article 9, a security interest attaches to “after-acquired collateral,” that is, property in which the debtor acquires rights after the creation of the security interest, when the security agreement contains an “after-acquired collateral” clause. However, “after-acquired collateral” clauses are ineffective as to some forms of property. To which of the following items of collateral would an otherwise valid security interest not attach pursuant to an after-acquired collateral clause?

Question 4Answer

a. An iPhone purchased for personal use purchased by a debtor 30 days after creditor advanced funds to debtor pursuant to a security agreement.

b. An item of inventory purchased by a debtor-retailer from a wholesaler 30 days after creditor advanced funds to debtor pursuant to a security agreement.

c. An item of equipment purchased by a debtor-retailer from a supplier 30 days after creditor advanced funds to debtor pursuant to a security agreement.

d. An “account receivable” created by a debtor-retailer when the retailer sold goods to a customer on credit 30 days after the creditor advanced funds to debtor pursuant to a security agreement.

Answer 4

a. An iPhone purchased for personal use purchased by a debtor 30 days after creditor advanced funds to debtor pursuant to a security agreement.

Question 5

Diane Debtor borrowed $10,000 from First Finance to purchase inventory for her new small business - Diane’s Delights, a shoe and clothing store. She granted First Finance a security interest in the stock of inventory that she purchased by signing an authenticated security agreement describing the collateral as “that stock of inventory purchased by Diane with the funds advanced by First Federal for that purpose.” The security agreement did not contain an after-acquired property clause. To which of the following items of property does First Finance’s security interest not attach?

Question 5Answer

a. Cash received by Diane from a customer who purchased an item of inventory that Diane purchase with a loan.

b. A rare bird that Diane received from a customer in exchange for an item of inventory that Diane purchased with the loan.

c. Insurance proceeds received by Diane when some of the inventory that Diane purchase with the loan was destroyed in a fire at her place of business.

d. First Finance’s security interest attaches to all of the above items of property.

Answer 5

d. First Finance’s security interest attaches to all of the above items of property.

Question 6

The most common way to perfect a security interest is through-

Question 1Answer

a. the filing of a UCC-1 financing statement.

b. automatic perfection

c. the creditor taking control of the collateral

d. the creditor taking possession of the collateral

Answer 6

a. the filing of a UCC-1 financing statement.

Question 7

True or false: in order for perfection to be properly accomplished through the filing of a UCC-1 financing statement, the debtor must sign the financing statement.

Question 2Select one:
True
False

Answer 7

False

Question 8

As a general rule, which is the proper place for the filing of a UCC-1 financing statement?

Question 3Answer

a. The Office of the Secretary of State

b. The mortgage records of every parish in the state of Louisiana where the debtor’s collateral is located.

c. The clerk of court of any parish in the state of Louisiana.

Answer 8

c. The clerk of court of any parish in the state of Louisiana.

Question 9

The omission of which of the following from a financing statement prevents a recorded financing statement from perfecting a security interest?

Question 4Answer

a. An indication of the collateral

b. The secured party’s address

c. A statement of whether the debtor is an individual or an organization

d. All of the above

Answer 9

a. An indication of the collateral

Question 10

Which of the following is not an accurate statement of law?

Question 5Answer

a. All PMSIs are automatically perfected.

b. A security interest in proceeds is automatically perfected for at least 20 days following attachment if the security interest in the underlying collateral was properly perfected.

c. A fixture filing is not effective unless the filing occurs before the movable is affixed to the immovable.

Answer 10

a. All PMSIs are automatically perfected.

Question 11

Between a perfected and unperfected security interest, which one has priority?
Question 1Answer

a. the unperfected security interest

b. the perfected security interest

Answer 11

b. the perfected security interest

Question 12

Between two perfected security interests, which one has priority?

Question 2Answer

a. the first filed or perfected, whichever occurred first

b. the first perfected, regardless of whether or when filing occurred.

c. the first attached

Answer 12

a. the first filed or perfected, whichever occurred first

Question 13

Between two unperfected security interests, which one has priority?
Question 3Answer

a. neither; they are equally ranked

b. the first attached

c. the first for which value was advanced

Answer 13

b. the first attached

Question 14

True or false: As a general rule, a PMSI that is properly perfected within 20 days of the debtor receiving the collateral has “super-priority” over other perfected security interests, even those perfected or filed prior to the perfection or filing of the PMSI.

Question 4Select one:
True
False

Answer 14

True

Question 15

True or false: A PMSI in a fixture that is properly perfected through fixture filing before that fixture is attached to the immovable has priority over a prior-recorded mortgage of the same immovable so long as the mortgage is not a “construction mortgage.”

Question 5Select one:
True
False

Answer 15

True

Question 16

True or false: To enter into a valid pledge of a lease of an immovable and its rents, the lessor must be the owner of the thing leased.
Question 1Select one:
True
False

Answer 16

False

Question 17

Which of the following is not required for the creation of valid pledge of a lease of an immovable and its rents?

Question 2Answer

a. a written contract of pledge.

b. the signature of the pledgor or a duly authorized representative of the pledgor.

c. the signature of the pledgee or a duly authorized representative of the pledgee.

d. a property description of the leased immovable sufficient to support a mortgage.

e. an amount secured or a maximum amount that may be secured from time to time

f. all of the above are required for the creation of valid pledge of a lease of an immovable and its rents.

Answer 17

c. the signature of the pledgee or a duly authorized representative of the pledgee.

Question 18

Larry signed a document titled “Collateral Assignment of Leases and Rents” in favor of Big Bank on January 1 of last year. The agreement purports to secure “all present and future indebtedness of Larry to Big Bank, up to $500 million.” The agreement states also that Larry agrees to pledge “all rents from any lease, whether now-existing or arising in the future, on Blackacre.” The instrument contains a legal property description for Blackacre. On the same day that the agreement was signed, it was recorded in the mortgage records of the parish where Blackacre is located. On February 1 of last year (one month after the agreement was signed), Big Bank and Larry negotiated a loan in the amount of $200,000, and Big Bank advanced Larry funds in that amount. On March 1 of last year (two months after the agreement was signed), Larry leased Blackacre to Tom. On April 1 of last year (three months after the agreement was signed), Larry received his first rent payment from Tom. From what date does the agreement rank against third persons?

Question 3Answer

a. January 1

b. February 1

c. March 1

d. April 1

Answer 18

a. January 1

Question 19

True or false: Once a lessor pledges their rights to the lease of an immovable and its rents, the lessor and lessee may neither terminate nor modify the lease in any way.

Question 4Select one:
True
False

Answer 19

False

Question 20

Which of the following describes how a pledge of leases and rents is enforced by the pledgee?

Question 5Answer

a. the judicial sale of the pledge and application of the proceeds of the sale to the debt

b. the negative pledge

c. the collection of rent by the pledgee from the lessee

d. all of the above are ways that the pledge of a lease of an immovable and its rents may be enforced.

Answer 20

c. the collection of rent by the pledgee from the lessee

Question 21

This Hypo Applies to All Quiz Questions Below:

Friendly Furniture LLC (“Friendly”) is a Louisiana limited liability company engaged in the retail sale of vintage furniture. Friendly operates two furniture stores in Louisiana: one in New Orleans, Louisiana (located in Orleans Parish) and another in Covington, Louisiana (located in St. Tammany Parish). Friendly’s customers are a mix of consumers and commercial purchasers, including both businesses purchasing furniture for their office spaces and interior designers purchasing furniture for clients.

In early 2012, Friendly determined that opening a third store in Baton Rouge, Louisiana would likely be profitable. Friendly sought financing for the venture from Red River Bank (Red River). A loan officer at Red River agreed to lend Friendly $1.5 million to acquire a long-term lease at Perkins Rowe, a new and swanky retail center owed by Perkins Rowe Associates, LLC, shelving and displays for their wares, and retail stock from their various suppliers. On January 1, 2012, Friendly’s manager signed a promissory note for the loan in which it agreed to repay the debt in monthly installments of $12,500 over a period of ten years, with the final payment due on January 1, 2022. To secure the debt, Red River required Friendly to sign a security agreement granting Red River a security interest in all of its “inventory, equipment, and accounts, whether presently-owned or acquired in the future” to secure all present and future indebtedness of Friendly to Red River. Red River made a written and binding commitment to advance the full amount loaned ($1.5 million) upon Friendly securing a lease for the new location.

A few days later, on January 5, 2012, Red River filed a financing statement with the East Baton Rouge Parish Clerk of Court. The financing statement named Red River Bank as the secured party and Friendly Furniture, LLC as the debtor, respectively, and described the collateral in precisely the same manner as the security agreement. The security agreement, though signed by the manager of Friendly, was not signed by a loan officer for Red River. In contrast, the financing statement, although signed by the loan officer for Red River, was not signed by the manager of Friendly.

Over the ensuring weeks, Friendly obtained a binding and enforceable lease of a suitable space from Perkins Rowe Associates, LLC (“Perkins Rowe”) for a fifteen year term at a rent of $3,000 per month. To secure Friendly’s obligations under the lease, Perkins Rowe required Friendly to sign a security agreement granting it rights in significant collateral. A representative of Perkins Rowe contacted its law firm, Phelps Dunbar, and asked the lead partner on the file to handle the paperwork with Friendly. Since she was busy, the lead partner assigned the task to a young associate who was fresh out of law school and told him to pull up a recent security agreement and financing statement in the file and “copy and paste.” The associate, eager to please the partner, decided to make some changes to the documents in the file. Where the security agreement provided that the debtor grants a security interest in all of its “inventory and accounts, now existing or hereafter arising” the associate added the language “and all proceeds thereof.” In addition, where the financing statement described the collateral in precisely the same manner as the security agreement, the associate altered the language to describe the collateral as “all assets.” He also made sure the security agreement and financing statement contained the correct name of the debtor (Friendly Furniture, LLC) and the correct name of the secured creditor (Perkins Rowe Associates, LLC). However, he did not include the address of either party in either document. When the associate brought the documents to Friendly’s manager for signing, he was careful to make sure that Friendly’s manager signed both, and he then dutifully recorded both documents with the Parish Clerks of Court in Orleans, St. Tammany, and East Baton Rouge Parishes; The documents were all signed and recorded on February 21, 2012. Perkins Rowe has filed two continuation statements since February of 2012, also in all three parishes: one on February 21, 2017, and another on February 21, 2022.

Friendly opened its doors on April 1, 2012, and between 2011 and 2021, Friendly ran a successful business at its Baton Rouge retail store, and, until recently, always made payments to Red River and Perkins Rowe as agreed; However, in late 2021, a competitor shop began to siphon business from Friendly, and this, coupled with some poor purchasing decisions of Friendly’s manager, has slowed sales significantly. In a desperate effort to inject new life into its struggling business, Friendly approached Decorating Distributors, LLC (“Decorating Distributors”), a large regional supplier of vintage furniture, about selling a stock of on-trend merchandise to Friendly on credit. Decorating Distributors agreed and, pursuant to a verbal agreement between representatives of both companies, shipped $60,000 worth of merchandise to Friendly along with its standard invoice stating clearly: “Debtor hereby grants a security interest in all merchandise itemized on the reverse side hereof.” The agreement listed each item purchased by Friendly by description and item number. However, Friendly never saw or signed the security agreement, and Decorating Distributors never filed a financing statement evidencing a security interest in the merchandise.

Friendly also hoped to breathe new life into its business with a makeover of its display space and in January of 2022 it purchased some new high-end display shelves and countertops from Retail Suppliers, LLC (“Retail Suppliers”) on credit. Retail Suppliers asked Friendly’s representative to sign a “security agreement” making clear that the obligation to pay the price was to be secured by a security interest in the shelves and countertops. Retail suppliers filed a financing statement the day after the sale, describing the collateral as “all equipment,” and without giving any other indication of the collateral or the location of the store where it would be installed. The parties discussed no terms of this arrangement other than payment would be due “in full” on March 1, 2022. Friendly immediately had the shelves and countertops professionally installed (which required that they be permanently affixed to the floors and joists in the walls with industrial bolts and supports). Although Friendly has paid the contractors who handled the installation in full, Friendly has yet to pay Retail Suppliers.

It is now March of 2022. Despite Friendly’s best efforts, its Baton Rouge location is still failing. In fact, it sold only two items last week, both from the stock of merchandise purchased from Decorating Distributors. One item, an antique table, was sold to a customer on credit. Friendly agreed to let the customer pay for the table in monthly installments over a 12-month period. The other item was a chair that Friendly’s manager agreed to give to a customer in exchange for a rare bird. Friendly’s manager has no intention of reselling the bird, and instead named it “Little Friendly” and made it the company’s mascot. Little Friendly has taken to perching on one of the items that Friendly obtained from Decorating Distributors—an antique desk that sits in the front window of the store and is marked “for sale.” For the last two months, Friendly has failed to pay Red River or Perkins Rowe. Friendly has also not yet paid anything to Decorating Distributors or Retail Suppliers.

Question 1: The stock of merchandise purchased by Friendly from Decorating Distributors is properly classified under Article 9 as (select all that apply):
Question 1Answer

a. Goods

b. Inventory

c. Consumer Goods

d. Equipment

Answer 21

a. Goods

b. Inventory

Question 22

The high-end display shelves and countertops that Friendly purchased from Retail Suppliers, LLC are properly classified under Article 9 as (select all that apply):

Question 2Answer

a. Accounts

b. Consumer Goods

c. Fixtures

d. Equipment

Answer 22

c. Fixtures

d. Equipment

Question 23

The bird that Friendly’s manager accepted from a customer in return for merchandise (“Little Friendly”) is properly classified under Article 9 as (select all that apply):

Question 3Answer

a. Fixtures

b. Equipment

c. Proceeds

d. None of the above; Article 9 does not apply to “Little Friendly.”

Answer 23

b. Equipment

c. Proceeds

Question 24

As of January 1, 2012, had Red River’s security interest attached to the “inventory, equipment, and accounts” of Friendly’s New Orleans and Covington locations?

Question 4Answer

a. No, because Friendly did not procure the loan from Red River for the purpose of purchasing those assets.

b. No, because Red River had not yet given value as of January 1, 2012.

c. No, because a Red River representative did not sign the security agreement.

d. Yes; Red River’s security interest attached to the “inventory, equipment, and accounts” of Friendly’s New Orleans and Covington locations on January 1, 2012.

Answer 24

d. Yes; Red River’s security interest attached to the “inventory, equipment, and accounts” of Friendly’s New Orleans and Covington locations on January 1, 2012.

Question 25

Assume now that on January 1, 2012, Red River’s security interest attached to the “inventory, equipment, and accounts” of Friendly’s New Orleans and Covington locations. Was the security interest in Friendly’s existing “accounts” perfected on January 5 when Red River filed its financing statement?

Question 5Answer

a. No; Red River’s financing statement is entirely ineffective because it was not signed by a representative of Friendly.

b. No; Red River’s financing statement is entirely ineffective because it was filed in the wrong place.

c. No; Red River’s financing statement is ineffective as to Friendly’s accounts because a security interest in accounts can only be perfected through control.

d. Yes; On January 5, Red River perfected its security interest in Friendly’s existing accounts when it filed its financing statement.

Answer 25

d. Yes; On January 5, Red River perfected its security interest in Friendly’s existing accounts when it filed its financing statement.

Question 26

Assume that Red River’s security interest was properly perfected in Friendly’s equipment through filing. Which statement about the effect of the financing statement is correct?

Question 6Answer

a. The financing statement lapsed on January 5, 2017.

b. The financing statement lapsed on January 5, 2022.

c. The financing statement lapsed on January 1, 2017

d. The financing statement will never lapse.

Answer 26

a. The financing statement lapsed on January 5, 2017.

Question 27

For the remainder of this problem set, assume that Red River properly maintained perfection of its security interest in Red River’s equipment through timely filing of continuation statements and that its security interest remains perfected.

Does Red River have an enforceable security interest in Friendly’s right to be paid for the antique table that it sold last week?

Question 7Answer

a. Yes, because the right to payment is an “account” to which Red River’s security interest will attach pursuant to the security agreement.

b. Yes, because the right to payment is “proceeds,” to which Red River’s security interest automatically attaches.

c. No, because an after-acquired properly clause like the one in Red River’s security agreements is entirely ineffective with respect to “accounts.”

d. A & B are both correct.

Answer 27

d. A & B are both correct.

Question 28

Does Perkins Rowe have an enforceable security interest in the stock of merchandise Friendly purchased from Decorating Distributors?

Question 8Answer

a. Yes; Perkins Rowe has an enforceable security interest in the stock of merchandise Friendly purchased from Decorating Distributors.

b. No; the security interest is entirely unenforceable because the language in the financing statement is overly broad.

c. No, Perkins Rowe does not have an enforceable security interest in the stock of merchandise Friendly purchased from Decorating Distributors because the description of the collateral in the security agreement is overly broad.

d. No; because an after-acquired properly clause like the one in Perkins Rowe’s security agreement is entirely ineffective with respect to the stock of merchandise.

Answer 28

a. Yes; Perkins Rowe has an enforceable security interest in the stock of merchandise Friendly purchased from Decorating Distributors.

Question 29

Assume that Perkins Rowe has an enforceable security interest in the stock of merchandise Friendly purchased from Decorating Distributors. Is this security interest perfected?

Question 9Answer

a. No; the security interest is not perfected because the language in the financing statement is overboard.

b. No; the security interest is not perfected because Perkins Rowe’s financing statement has lapsed.

c. No; the security interest is not perfected because the financing statement does not contain the address of the debtor.

d. Yes, Perkins Rowe’s security interest in the stock of merchandise is perfected.

Answer 29

d. Yes, Perkins Rowe’s security interest in the stock of merchandise is perfected.

Question 30

Which of the following statements regarding Decorating Distributor’s right in the stock of merchandise it sold to Friendly is correct? (select all that apply):

Question 10Answer

a. Decorating Distributors does not have a security interest in the stock of merchandise because Friendly never authenticated a security agreement granting such a right.

b. Decorating Distributors’ security interest in the stock of merchandise outranks Red River’s security interest in the stock of merchandise.

c. Decorating Distributors’ security interest has attached to the collateral, but it is not perfected.

d. Decorating Distributor’s security interest in the collateral is an enforceable purchase money security interest in the stock of merchandise.

Answer 30

a. Decorating Distributors does not have a security interest in the stock of merchandise because Friendly never authenticated a security agreement granting such a right.

Question 31

Which of the following statements regarding Retail Suppliers’ rights in the shelves and countertops is correct? Assume for purposes of this question that the shelves and countertops have been so incorporated into the building that they have become “component parts.”

Question 11Answer

a. Although Retail Suppliers acquired PMSI in the shelves and countertops at the time of the sale, that security interest was lost entirely when the countertops were incorporated into the building.

b. Retail Suppliers acquired and perfected a PMSI in the shelves and countertops at the time of the sale and that security interest remains perfected today.

c. Retail Suppliers acquired and perfected a PMSI in the shelves and countertops at the time of the sale and, although that PMSI is still “attached” to the collateral, it is no longer perfected.

d. Retail Suppliers never acquired a security interest in the shelves and countertops because it did not meet the requirements for attachment.

Answer 31

a. Although Retail Suppliers acquired PMSI in the shelves and countertops at the time of the sale, that security interest was lost entirely when the countertops were incorporated into the building.

Question 32

Assume that Red River and Perkins Rowe both have perfected security interest in stock of merchandise sold to Friendly by Decorating Distributors. Which of the following statements regarding the ranking of their rights is accurate?

Question 12Answer

a. Perkins Rowe’s security interest and Red River’s security interest are equally ranked because they attached to the collateral at the same time (i.e., upon Friendly’s acquisition of the collateral).

b. Perkins Rowe’s security interest outranks Red River’s security interest because Perkins Rowe was the first to attach.

c. Red River’s security interest outranks Perkins Rowe’s security interest because Red River was first to file.

d. Perkins Rowe’s security interest outranks Red River’s security interest because Perkins Rowe was the first to perfect.

Answer 32

c. Red River’s security interest outranks Perkins Rowe’s security interest because Red River was first to file.