Attachment/Perfection/Rights of Parties/Buyer Protections Flashcards
Why is Attachment & Perfection of a security interest important?
Enforcing a security interest depends on two factors:
Attachment and Perfection
Only attachment is required to enforce. Perfection provides priority.
What is Attachment?
Secures the creditor’s rights in the collateral, making it enforceable
What is Perfection?
Gives notice of the creditor’s rights in the collateral (determines priority of interests)
Can a security interest be perfected without being attached?
No. The security interest must first be attached to be perfected.
What does Attachment require?
- creditor to extend value to debtor;
- debtor must have rights in the collateral; and
-
One of the following:
(a) an authenticated record or security agreement (authenticated by debtor and reasonable identifies the collateral - NO super GENERIC description);
(b) the secured party has possession of the collateral;
(c) certificated security in registered form + security certificate delivered to secured party; OR
(d) Control for deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights
How is Perfection usually obtained?
- by filing a financing statement with the Secretary of State (which must identify the collateral and security interest); OR
- taking possession or control of the collateral
What makes a financing statement effective?
It must:
1. provide the name of the debtor and secured party;
2. indicate the collateral covered; AND
3. be filed by a person authorized by the debtor
Is subtantial compliance with a financing statement enough?
Yes. Minor errors/omissions are okay UNLESS it makes the statement seriously misleading.
An insufficient name of debtor is seriously misleading unless the statement is discoverable in a search of the records of the filing office under debtor’s correct name.
How is a Purchase Money Security Interest (PMSI) created?
When a creditor extends value to the debtor for the purpose of enabling the debtor to acquire rights in the collateral
PMSI for Consumer Goods
automatic perfection occurs (without the need to file a financing statement)
PMSI for Non-Consumer Goods
takes priority if the creditor files a financing statement before/within 20 days after the debtor receives delivery of the collateral
If a debtor sells an account, chattel paper, payment intangible, or promisory note, does the debtor retain an interest in the collateral sold?
No. But, when determining the rights of creditors/purchasers of an account/chattel paper sold by debtor, the debtor is deemed to have rights in such collateral while the buyer’s security interest is unperfected.
When is a security interest automatically perfected upon attachment of an assignment of accounts?
If it does not transfer a significant part of the outstanding accounts of the assignor
If collateral is sold, when will a security interest continue?
A security interest will continue despite the sale, lease, or other disposition of the collateral unless the secured party authorizes a transfer free of the security interest.*
*or unless an exception applies. See buyer protections.
How is consignment treated for purposes of perfection?
A consignment is treated like a PMSI in inventory.
What is a consignment?
Transaction in which:
1. a person delivers goods to a merchant for the purpose of sale;
2. merchant deals in goods of the kind, is not an auctioneer, and is generally not known by his creditors to be substantially engaged in selling goods of others;
3. value of goods is $1000 or more at time of delivery;
4. goods are not consumer goods immediately before delivery; and
5. transaction does not create a security interest
Since a deposit account can only be perfected by “control,” when does a secured party have control?
- secured party is the bank where the account is maintained;
- the debtor, secured party, and bank have agreed as such in an authenticated record; OR
- the secured party becomes the bank’s customer with respect to the deposit account
Future Advances
A security agreement may provide that the collateral secures future advances (whether or not the advances are mandatory).
When collateral is transferred to a buyer, what rights does the buyer receive?
A buyer receives ALL of the rights the seller had upon transfer of the goods.
When can a seller who does not have title to goods transfer title to a buyer?
Cannot transfer title unless an exception applies:
1. Shelter Principle
2. Buyer in the Ordinary Course of Business; or
3. Consumer-to-Consumer Rule
What is the Shelter Principle?
if a buyer acquires property free of a security interest, then any subsequent transfer is also free of the security interest.
Buyer in the Ordinary Course of Business
- buys in good faith;
- without knowledge that the sale violates the rights of another person; and
- is in the ordinary course from a merchant
This kind of buyer takes free of a security interest.
Consumer-to-Consumer Rule
Buyers of consumer goods take free of a security interest if the goods are bought:
1. without knowledge of the security interest;
2. for value;
3. from a consumer who primarily bought the goods for personal, family, or household purposes; AND
4. before the filing of a financing statement covering the goods
A perfected security interest will attach to any identifiable proceeds (but will become unperfected on the 21st day after attachment) UNLESS:
- proceeds are identifiable cash proceeds;
- security interest is perfected when it attaches to the proceeds or within 20 days; OR
- if ALL of the following are satisfied:
(a) original collateral was perfected under the general filing rule;
(b) proceeds are collateral that may be perfected by filing; and
(c) proceeds are not acquired with cash proceeds
