Drills 1-30 Flashcards
What are the four classes of tangible collateral (goods)?
(1) Consumer goods;
(2) _______ _____________;
(3) Inventory; and
(4) ____________
(2) Farm products;
(4) Equipment.
Please classify the following collateral:
A check or a promissory note
Instrument
When distinguishing between types of collateral, what is the difference between “accounts” and “deposit accounts”?
Accounts include the right to payment for property sold, leased, licensed, or for services rendered. Think accounts receivable, amounts owed on a credit card, etc.
Deposit accounts include savings, passbook, time, or demand accounts maintained with a bank.
What happens when parties leave out after-acquired language in situations that suggest they intended to include it (e.g., when the collateral is inventory or accounts)?
General rule: If there is no reference to after-acquired property, the security interest attaches only to the collateral that exists at the time that the security agreement is executed.
**Exception: **In most states, if the security agreement describes inventory or accounts, there is a rebuttable presumption that the description includes after-acquired inventory and accounts.
Which of the following descriptions of collateral in a security agreement are inadequate for purposes of attachment? Why?
(1) “All of debtor’s equipment”
(2) “All of debtor’s inventory”
(3) “All of debtor’s assets”
(4) “All of debtor’s personal property”
Hint: more than 1
(3) and (4) are inadequate descriptions because they are super-generic and do not reasonably identify the collateral.
(Note that super-generic descriptions in a financing statement are adequate for perfecting a security interest. The security agreement for attachment purposes must be more specific.)
Consignments may fall within Article 9 in order to facilitate public notice.
If a consignment is subject to Article 9, how are the consignor and the security interest in the consigned goods treated?
The consignor is treated as the secured party and must perfect its security interest in the consigned inventory, and the security interest in the consigned goods is treated as a PMSI in inventory.
(In other words, a consignor will have PMSI super-priority in consigned goods if the consignor perfects by filing before the consignee receives possession of the items, and the consignor properly notifies any secured parties with conflicting security interests in consignee’s inventory.)
In order for a consignment to be subject to Article 9, the following 4 requirements must be met:
(1) A consignor must deliver goods to a merchant (consignee) to sell;
(2) The merchant (consignee) must deal in goods of that kind, not operate under the name of the consignor, not be generally known by its creditors to be substantially engaged in the business of selling goods of others, and not be an auctioneer;
(3) The value of the goods must be at least _________ in each delivery; and
(4) The goods must not be ______________ _________ immediately before delivery.
(3) $1,000
(4) Consumer goods
A PMSI may exist only with respect to two types of collateral. What are they?
A security interest qualifies as a PMSI only if the collateral is goods (including fixtures) or software.
A new security agreement is not necessary when a debtor buys additional collateral if the original security agreement includes what?
An after-acquired property clause should be included in the original
Typical language includes, “all of the debtor’s existing and after-acquired [collateral]” or “all of the [collateral] now owned or hereafter acquired.”
Under what circumstances does a buyer of goods take free of an unperfected security interest?
If the buyer:
i) Gives value; and
ii) Receives delivery of the collateral;
iii) Without knowledge of the existing security interest.
What is the most common method of perfection, and what is this method’s objective?
Filing is the most common method of perfection.
By filing a financing statement, the secured party is giving notice that he/she has an interest in the debtor’s personal property.
(The actual security agreement between the parties does not have to be filed. Perfection by filing assumes that a third party will investigate any details of a security agreement.)
An after-acquired clause is not effective if the collateral is consumer goods, unless ______?
Unless the debtor acquires them within 10 days after the secured party gives value.
Even if parties label their transaction as a lease in the hopes of avoiding Article 9 rules, their transaction will be governed by Article 9 if one of the following four conditions is present:
(1) The original lease term is equal to (or greater than) the good’s remaining economic life;
(2) The lessee is bound to renew the lease for the good’s remaining economic life (or is bound to become the owner of the goods);
(3) The lessee has the option to renew the lease for the good’s remaining economic life for nominal or no additional consideration; or
(4) The lessee has the option to become the owner of the goods upon completion of the lease for nominal or no additional consideration.
What happens to perfection when a debtor moves to another state?
If a debtor moves to another state, a perfected security interest will remain perfected for 4 months after the move (unless the financing statement lapses earlier).
This 4 month grace period also covers collateral the debtor acquires after the debtor moves.
To remain continuously perfected, the secured party must re-file in the new state within the four-month window.
How and when does tangible collateral (goods) get classified, and does this method apply to other types of collateral?
To properly classify tangible collateral (goods), look to the debtor’s principal use when the security interest attaches.
Unlike tangible goods, classification of other types of collateral does not turn on the manner in which the debtor uses the property.
