Creating SI; timing of attachment & perfection

Question 1

When is a transaction in the form of a lease treated as creating a SI?

Answer 1

(1) If the lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease;
(2) the payment obligation cannot be terminated by the lessee; and
(3) one of the following four conditions is also met:

i) The original term of the lease is equal to or greater than the remaining economic life of the goods;

ii) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become owner of the goods;

iii) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or

iv) The lessee has an option to become the owner of the goods, for no additional consideration or nominal additional consideration, upon completion of the lease agreement.

Question 2

When do consignments fall within Article 9?

Answer 2

i) A person (i.e., the consignor) must deliver goods to a merchant for the merchant to sell;

ii) The merchant (i.e., the consignee) must:
a) Deal in goods of that kind,
b) Not operate under the name of the consignor,
c) Not be generally known by its creditors to be substantially engaged in selling the goods of others, and
d) Not be an auctioneer;

iii) With respect to each delivery, the value of the goods delivered must be **at least $1,000 **at the time of the delivery; and

iv) The goods must not be consumer goods immediately before the delivery.

Question 3

Are liens subject to Article 9?

Answer 3

A statutory or common-law lien for services or materials (e.g., a mechanics lien) is not subject to Article 9, except for the rule regarding the priority of such a lien

Question 4

How does Article 9 relate to real property transactions?

Answer 4

Although Article 9 is generally limited to personal-property transactions, it does apply to a security interest in a secured obligation (e.g., a promissory note), even though the obligation is itself secured by a transaction or interest to which Article 9 does not apply (e.g., a real property mortgage)

Question 5

When must value be given, and how may it be given?

Answer 5

For attachment, and :
i) By providing consideration sufficient to support a simple contract;
ii) By extending credit, either immediately or under a binding commitment to do so (the debtor need not draw upon the credit);
iii) By, as a buyer, accepting delivery under a preexisting contract, thereby converting a contingent obligation into a fixed obligation; or
iv) In satisfaction of, or as security for, part or all of a preexisting claim

Question 6

When is a SI enforceable?

Answer 6

When it has “attached,” whereby:
i) Value has been given by the secured party;
ii) The debtor has rights in the collateral; and
iii) The debtor has authenticated a **security agreement **that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement.

Question 7

Can a preexing debt constitute “new value”?

Answer 7

Yes. For creating a security interest that is enforceable against the debtor, a creditor may receive a security interest in exchange for a preexisting debt.

Question 8

For future advances, which documents must specify that the SI covers future advances?

Answer 8

Only the security agreement (may or must?). The financing statement need not refer to the future value.

Question 9

What collateral must be specifically be identified in a SA?

E.g., can’t say “all the debtor’s…”

Answer 9

1. Consumer goods
2. Commercial tort claims

Question 10

For which collateral may a SI exist in after-acquired property?

Answer 10

SI in after-acquired property is valid, except as to:
1. Consumer goods, unless the debtor acquires them within 10 days after the secured party gives value
2. Commercial tort claims

Question 11

Which documents need mention after-acquired property

Answer 11

1. Generally, must mention it in the SA. For collateral that turns over rapidly (like inventory or accounts) majority rule is to have a rebuttable presumption that AAP is included.
2. Need not mention AAP in a FS.

Question 12

For what collateral can you have a PMSI?

Answer 12

Only goods and software.

Question 13

When does a PMSI in goods exist?

Answer 13

A PMSI in goods exists when:

i) A secured party gave value (e.g., made a loan) to the debtor and the debtor incurred an obligation to enable the debtor to acquire rights in or use of the goods, and the value given was so used; or

ii) A secured party sold goods to the debtor, and the debtor incurs an obligation to pay the secured party all or part of the purchase price (i.e., a sale of goods on credit).

Question 14

How to perfect PMSI in consumer goods?

Answer 14

Perfects automatically

Question 15

How do you perfect SI in a deposit account?

Answer 15

Only through control:
i) The secured party **is the bank **with which the deposit account is maintained;
ii) The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party; or
iii) The secured party becomes the bank’s customer with respect to the deposit account

Question 16

What is the period for temporary perfection for proceeds?

Answer 16

If the security interest in the original collateral is perfected, then a security interest in proceeds is temporarily perfected for 20 days from the time it attaches

Question 16

How to stay perfected in proceeds?

Answer 16

1. Cash proceeds (money, checks, deposit accounts)
2. Original FS is broad enough to cover the proceeds (“All the debtor’s assets”) or SP amends FS to cover proceeds
3. Same Office: (i) FS covers original collateral, (ii) proceeds are collateral in which SI may be perfected by filing in the same office, and (iii) proceeds are NOT acquired w/ cash proceeds

For Same Office: (1) when the original filing ceases to be effective during the 20-day period after the security interest in the proceeds attaches, the security interest in the proceeds continues to be automatically perfected until the expiration of that period, and (2) if the original filing ceases to be effective after the 20-day period, then the security interest in proceeds also ceases to be automatically perfected

Question 17

Perfecting PSMI in Goods other than Inventory

Answer 17

PMSI takes priority if it is perfected when the debtor receives possession of the collateral or within 20 days thereafter

Question 18

Perfecting PSMI in Inventory

Answer 18

1. Must be perfected when the debtor receives possession of the inventory
2. Must notify prior in time secured creditors

Question 19

Does PMSI extend to proceeds of the purchase-money collateral?

Answer 19

1. Perfected PMSI in goods other than inventory also means perfected PMSI in proceeds
2. Perfected PMSI in inventory: perfected PMSI in cash proceeds only if the cash proceeds are received on or before the delivery of the inventory to a buyer (must get paid before delivery; can’t sell on account); perfected PMSI in chattel paper or an instrument constituting proceeds of the inventory and in proceeds of the chattel paper

Question 20

What can be perfected only through control?

Answer 20

1. Deposit accounts
2. Letter of credit rights

Question 21

What collateral can be perfected only through possession?

Answer 21

Money

Question 22

How do you perfect a SI in motor vehicles?

Answer 22

Unless car is inventory, follow the certificate-of-title statute (which requires that the security interest in a vehicle be noted on the certificate of title or a registry maintained by a state agency)