Introduction

Question 1

Security Agreement

Answer 1

The agreement between the debtor and the creditor that creates the security interest. This is a contract.

Question 2

Security Interest

Answer 2

An contingent property interest in a debtor’s personal property (collateral) that springs to life if the debtor defaults, giving the secured creditor rights in the property.

Question 3

Purchase Money Secured Interest

Answer 3

A PMSI is created when a creditor advances credit or funds that the debtor needs to purchase the collateral, the debtor uses the credit or funds to purchase the collateral, and the creditor retains a security interest in the collateral.

There are two types:

1. Seller-Financed PMSI. A creditor sells the collateral to the debtor on credit and retains a security interest in the collateral.
2. Financer-Financed PMSI. A creditor loans money to the debtor, the debtor uses that specific money to acquire the collateral, and the creditor takes a security interest in that collateral.

Question 4

After-Acquired Property Clause

Answer 4

A clause in a security agreement that gives the secured creditor a security interest in property that the debtor will obtain in the future.

⇒ Note that without a valid after-acquired property clause, the secured creditor’s interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement. There is an exception for collateral of a type that is rapidly depleted and replenished, such as inventory and accounts.

Question 5

Future Advance Clause

Answer 5

A clause in a security agreement that contemplates future loans by the secured creditor to the debtor and that provides that those loans will be secured by an interest in the same collateral.

Question 6

Attachment

Answer 6

Attachment is the process by which a security interest is created. It deals with the relationship between the creditor and the debtor.

Question 7

Perfection

Answer 7

Perfection deals with the steps required for a secured creditor to make their secured interest effective against other creditors.

Question 8

UCC Article 9 applies to:

Answer 8

1. Any transaction that creates a security interest in personal property or fixtures;
2. A secured sale disguised as a lease.

Question 9

When is a sale disguised as a lease?

Answer 9

A sale is disguised as a lease if, at the time the parties entered into the transaction, it was not reasonably likely that the “lessee” would return the item to the “lessor” at a time with the item had meaningful economic value.

For example:

1. At the end of the “lease,” the “lessee” may obtain the property for little or no consideration.
2. At the end of the “lease,” the “lessee” is obligated to renew the “lease” or to purchase the property.
3. The “lease” is for the entire economic life of the good.

⇒ Contrast this with an ordinary car rental.

Question 10

Proceeds

(How does this relate to security interests?)

Answer 10

Anything that is recieved upon the sale or exchange of collateral or proceeds.

⇒ IMPORTANT: Unless otherwise agreed, a security interest in collateral automatically gives the secured party a right to identifiable proceeds. Proceeds are identifiable if the secured creditor can trace the proceeds back to the creditor’s original collateral.

Question 11

Lowest Intermediate Balance Test

Answer 11

The lowest intermediate balance test is used to identify cash proceeds that are comingled with other cash. Under the test, the secured creditor’s identifiable proceeds are equal to the lowest balance between the time the proceeds are deposited and the time that the test is applied. (Note that the timeframe includes the pre-deposit balance.)

Question 12

Accessions

Answer 12

Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost.

Question 13

Fixtures

Answer 13

A fixture is a good that is atteched to real property with the intent that it become a permmanent part of the real property.