Most Frequent Secured Transaction Rules Flashcards
How is a security interest established?
A security interest is established when it attaches to collateral - i.e. once (i) the parties agree to create a security interest, which may be evidenced by the debtor signing a security agreement describing the collateral; (ii) the creditor gives value; and (iii) the debtor has rights in the collateral. If collateral, such as inventory, is exchanged for a physical object (i.e. a computer) the physical object is considered inventory.
How is a security interest in goods perfected?
A security interest in goods may be perfected by properly filing a financial statement or by the secured party’s possession of the goods. Buyers generally take goods subject to any perfected security interests but an exception exists for a buyer in the ordinary course of business (“BIOC”). A BIOC buys goods in the ordinary course of business from a seller engaged in the business of selling goods of that kind.
What is a purchase money security interest (PMSI)?
A purchase money security interest (“PMSI”) arises when a creditor sells goods to a debtor on credit, retaining a security interest in the goods for the purchase price. A consumer who buys goods from another consumer, before a financing statement has been filed and without knowledge of the interest, takes the goods free of even a perfected PMSI.
Lease v. Security
If a transaction is characterized as a lease but is intended to have effect as a security, it will be governed by Article 9 as a security interest. Whether a lease of a good is intended for security rather than a “true” lease, depends on the economic realities of the transaction. A transaction will be deemed to create a security interest rather than a lease if the rental obligation is not terminable by the lessee and, at the end of the lease, the lessee has an option to purchase the goods for no or nominal consideration.
When does a security interest attach?
A security interest attaches when the parties have an agreement that: (i) the security interest will attach; (ii) the secured party gives value; AND (iii) the debtor has rights in the collateral.
A security interest is not enforceable unless it has attached. Upon default of the debtor, a party with an enforceable security interest may repossess and sell any collateral that secures the debt. If a secured party sells the collateral after default by the debtor, its security interest and all subordinate security interests in the collateral that was sold are discharged - absent bad faith on the part of the purchaser.
Perfected v. Unperfected creditor
If two creditors are competing for priority in collateral, a perfected creditor will have priority over an unperfected creditor. Security interests in most goods may be perfected by filing an authorized financing statement indicating the collateral. If a security interest becomes perfected before a competing creditor becomes a lien creditor, the perfected creditor has a prior claim that is superior.
