M6-Secured Transactions

Question 1

Attachment requires that:

Answer 1

1) The parties agree to create a security interest-evidenced by either an authenticated security agreement or the creditor’s taking possession or control of the collateral,
2) The debtor must have rights in the collateral, and
3) The creditor must give value

There is no requirement that the security agreement be filed. (Filing is related to perfection)

Question 2

When there are conflicting perfected security interests in the same collateral, the first creditor to file or to perfect has priority. (true or false)

Answer 2

true

Question 3

The general rule is that a buyer takes subject to security interests in the good bought, but one large exception to this rule is that any buyer from a merchant in the ordinary course of business usually takes free of a security interest previously given by the merchant. (true or false)

Answer 3

true

A merchant buyer who purchases good for resale owns inventory rather than consumer goods. Note that if a merchant buyer purchases inventory in the ordinary course of the seller’s business, the merchant buyer generally will hold the inventory free of a perfected security interest previously given by the seller.

A merchant buyer who purchases good for use in its business owns equipment rather than consumer goods.

Question 4

When a debtor defaults, the secured creditor can proceed against the collateral, but is not required to. Instead, the creditor can obtain a general judgment. (true or false)

Answer 4

true

Question 5

A secured party may take a security interest in both after-acquired inventory and after-acquired equipment. The only limits on the effect of after-acquired property clause involve ________and ________.

Answer 5

Consumer goods & Commercial Tort Claims

Question 6

Because a holder in due course of a negotiable instrument has priority over a prior perfected security interest, the best way to perfect a security interest in a negotiable instrument is to take possession of it, because taking possession of the instrument prevents a later person from becoming a holder in due course. (true or false)

Answer 6

true

Question 7

Perfection has little effect on a buyer in the ordinary course of business (true or false)

Answer 7

true

Such a buyer takes subject to a perfected security interest only if the buyer knows that the sale violates the security agreement.

Question 8

When a security interest in collateral is perfected and the collateral is subsequently moved to another state, the collateral is temporarily perfected for ______ months in the state into which the collateral is moved.

Answer 8

four

Question 9

If a seller retains a security interest for the sale price of consumer goods, the security interest is automatically perfected; neither filing nor possession by the secured party is necessary. (true or false)

Answer 9

true

Question 10

A purchase money security interest (PMSI) in non-inventory goods has priority over all other security interests in the same collateral if the PMSI is perfected within ____ days of the debtor’s getting possession.

Answer 10

20 days

Question 11

A seller who sells goods on credit and retains a security interest in the goods to secure the purchase price has a purchase money security interest (PMSI). A PMSI in consumer goods is automatically perfected; there is no need to file. (true or false)

Answer 11

true

If the seller sells to retailers or wholesalers, the collateral is inventory, since it is held by the debtor for sale to others. A security interest in inventory is not automatically perfected, even if the secured party has a purchase money security interest. The fact that a wholesaler sells to buyers in the ordinary course addresses the question of whether the buyers will be subject to the sellers security interest and does not affect the sellers’ need to file.

Question 12

Perfection by taking possession requires the secured party to take possession of the collateral, and that is what happens when a pawnbroker lends money - the pawnbroker gives a person money in exchange for an item of personal property, which the person may redeem by paying back the pawnbroker. (true or false)

Answer 12

true

Question 13

A prior perfected security interest has priority over a subsequent judicial lien creditor. (true or false)

Answer 13

true

Question 14

Article 9 of the Uniform Commercial Code specifically includes any sale of accounts receivable. (true or false)

Answer 14

true

The code specifically excludes a landlord’s lien, the assignment of a claim for wages, and the sale of chattel paper as part of the sale of business out of which it arose.

Question 15

A financing statement is effective for five years, but can be extended for another five years by filing a continuation statement within six months before the end of the five year period. Successive continuation statements must be filed by the end of each subsequent five year period. (true or false)

Answer 15

true

Question 16

By definition a purchase money security interest in inventory can only occur in one of two ways:

Answer 16

1) The creditor sells inventory to the debtor on credit and retains a security interest for the purchase price or
2) the creditor lends money to the debtor so that the debtor can purchase the inventory.

In either case filing is the only way to perfect when the debtor has possession of the inventory. If the debtor has possession of the inventory (which is almost always the case) the creditor cannot perfect by possession or control.

In addition, the creditor cannot be automatically perfected with a purchase money security interest in inventory. Only a purchase money security interest in consumer goods is automatically perfected without the creditor’s either possessing/controlling the consumer goods or filing a financing statement with respect to consumer goods.

Thus the only way to perfect a purchase money security interest in inventory is to file a financing statement.

With stocks, bonds, and negotiable instruments (like promissory notes), the creditor can only perfect by possession or control.

Question 17

The security agreement must be signed or authenticated by the debtor. (true or false)

Answer 17

true

Question 18

A security interest is not effective against anyone before it attaches to the collateral. (true or false)

Answer 18

true

Question 19

The act of “perfection” of a security interest establishes a priority over claims of most subsequent secured creditors. (true or false)

Answer 19

true

Question 20

When there is a conflict between perfected security interests, generally the secured party who was first to file or to perfect has priority. (true or false)

Answer 20

true

Question 21

Under the UCC Secured Transactions Article (Article 9) a financing statement must contain a general description of the collateral in which a security interest is being sought. (true or false)

Answer 21

true

A security agreement need not include the amount of the obligation secured. The security agreement must include the name and address of the debtor, a description of the collateral (by type is sufficient), and the debtor’s authentication (e.g., a signature or electronic substitute).