Attachment & Perfection

Question 1

What are the requirements for attachment?

Answer 1

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

Question 2

How does a creditor obtain a valid security interest in collateral?

Answer 2

1. Attach the collateral, and
2. Perfect the interest

A security interest cannot be perfected until it’s attached!

Question 3

How can the parties agree to create a security interest?

Answer 3

1. The creditor takes possession of the collateral
2. The creditor takes control (non-consumer deposit accounts, electronic chattel paper, and investment property), or
3. An authenticated security agreement.

Question 4

What are the requirements for an authenticated security agreement?

Answer 4

1. Record showing intent to create security interest
2. Authenticated by debtor (signed)
3. Must describe the collateral

Question 5

What is a sufficient description of collateral for a security agreement?

Answer 5

Must reasonably identify the collateral.

Description can’t be supergeneric (e.g., “all debtor’s assets”), but it can be broad (e.g., “all debtor’s equipment).

Question 6

Is past consideration valid consideration under Article 9?

Answer 6

Yes.

Question 7

What value does a debtor provide in exchange to a creditor?

Answer 7

Every debtor gives value by promising implicitly, if not explicitly, to repay the loan.

Question 8

When does attachment occur?

Answer 8

When the last of the three requirements is satisfied.

Question 9

What are the exceptions to the requirement that after-acquired property clauses by explicit?

Answer 9

A security interest automatically attaches to collateral that is rapidly depleted and replenished (e.g., accounts and inventory).

A security interest also automatically attaches to identifiable proceeds.

Question 10

How does a security interest attach to identifiable proceeds?

Answer 10

Automatically.

Question 11

What does “identifiable” mean for identifiable proceeds?

Answer 11

The proceeds can be traced back to the original collateral.

Question 12

What is the lowest intermediate balance rule?

Answer 12

In the case of commingled cash proceeds, look at the bank account starting at the time the proceeds are deposited and ending at the time applying the rule. The lowest balance is the identifiable proceeds (but can’t exceed value of proceeds originally deposited).

Question 13

What is a supporting obligation?

Answer 13

A surety/guarantee to pay the debt for another.

Attachment of security interest in some types automatically extends to the supporting obligation for that collateral.

Question 14

What are the five methods of perfection?

Answer 14

1. Filing
2. Taking possession of the collateral
3. Control
4. Automatic perfection
5. Temporary

Question 15

How do you perfect a PMSI in consumer goods?

Answer 15

It automatically perfects upon attachment.

Question 16

How is a security interest in a motor vehicle perfected?

Answer 16

Can only be perfected by a notation on the vehicle’s certificate of title.

UNLESS the debtor is a car dealer and holds the vehicles in inventory (then file a financing statement).

Question 17

How can you perfect a security interest in money?

Answer 17

Only by taking possession.

Question 18

What can’t be perfected by possession?

Answer 18

Stuff that can’t be possessed (e.g., general intangibles, deposit accounts, electronic chattel paper, accounts).

Question 19

How can a security interest in a business deposit account be perfected?

Answer 19

Only by control!

Question 20

How is control obtained over a non-consumer deposit account?

Answer 20

The bank where the account is maintained automatically has control over it.

If the creditor is not that bank, it can get control by:

1. Putting the account in their name, or
2. Executing a control agreement with the debtor and other bank that the other bank will follow the creditor’s orders.

Question 21

What must be contained in a financing statement?

Answer 21

1. Name of the debtor and secured party & their addresses
2. Description of the collateral covered; and
3. Be filed by a person authorized by the debtor.

Question 22

What is the effect of an error in a financing statement?

Answer 22

Minor errors/omissions are okay, but seriously misleading errors are not.

• Incorrect debtor’s name will not be seriously misleading if the financing statement would be discovered in a filing office search under the debtor’s correct name.
  
  • If debtor is a registered organization, will be considered seriously misleading if name does not match official registered name.
• Error by the filing office does not impact a financing statement’s effectiveness.

Question 23

What law governs perfection?

Answer 23

Generally, the law of the state where the debtor is located.

• Individual: principal residence
• Registered organization: state where organized
• Unregistered organization: place of business or chief executive office if 2+ offices

Question 24

How long is a financing statement good for?

Answer 24

5 years.

File a continuation statement within six months of the lapse to get another 5 years.

Question 25

How does perfection work for proceeds?

Answer 25

If a secured party has a perfected security interest, the secured party automatically has a perfected security interest in any proceeds of the collateral for 20 days after receipt of the proceeds.

It will continue beyond 20 days if:

• The proceeds are identifiable case proceeds
• The original SI was perfect by filing and the SI in the proceeds would be filed in the same office, and the proceeds were not purchased with cash proceeds of the collateral, or
• SI in the proceeds is perfected within the 20-day period

Question 26

How is perfection affected if the debtor changes its use of the collateral?

Answer 26

It isn’t. The filed financing statement remains effective.