Perfection

Question 1

What does perfection do, generally?

Answer 1

It establishes a creditor’s rights in the collateral against third parties.

Question 2

State the Issue statement for Perfection

Answer 2

Whether a “creditor” is a perfected creditor in the “collateral” when it filed a financing statement on “DATE”.

Question 3

State the rule for perfection in Equipment and Inventory

Answer 3

A creditor can perfect their interest in EQUIPMENT and INVENTORY by filing a financing statement. The financing statement must identify the collateral and super generic language is acceptable.

Question 4

State the Rule for perfection in Goods

Answer 4

A creditor can perfect their interest in goods by taking possession of the collateral. If perfection of a security interest depends upon the possession of the collateral by a secured party, perfection occurs NO EARLIER than the time the secured party TAKES POSSESSION and continues ONLY WHILE the SECURED PARTY RETAINS POSSESSION. The creditor is only perfected in goods they have possession of and must file a financing statement to be perfected in ALL other goods.

Question 5

What is the effect if a security interest is perfected?

Answer 5

It prevails over a later creditor’s interest

Question 6

What is the effect if a financing statement is not effective?

Answer 6

The the creditor is not perfected.

Question 7

What is a financing statement?

Answer 7

1/5 of the methods for perfection of the security interest.

Serves as notice to the rest of the world.

Question 8

What is required for a financing statement to be effective?

Answer 8

Collateral is identified (super generic language is ok)
Debtor’s name is sufficient (No trade names)
Name of the secured party

Question 9

What is the issue with a debtor name change?

Answer 9

The issue is whether the financing statement is effective to perfect a security interest in collateral acquired by the debtor when the debtor’s name change is seriously misleading.

Question 10

What is the rule is a debtor changes their name?

Answer 10

Rule: If the debtor changes their name and it is seriously misleading based on the search engine logic, then the financing statement is effective to perfect a security interest in collateral acquired by the debtor before, or within 4 months after, the filed financing statement becomes seriously misleading.

The financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the financing statement becomes seriously misleading, unless an amendment is filed within four months after the financing statement became seriously misleading.

Question 11

What are the methods of perfection?

Answer 11

Possession or pledge
Temporary perfection
Automatic perfection
Filing a financing statement
Control (deposit accounts)

Question 12

What type of collateral does perfection by possession or pledge apply to?

Answer 12

Negotiable docs, goods, instruments, etc.

(does NOT apply to the following)
General Intangibles
Accounts
Nonconsumer deposit accounts
Nonnegotiable documents
Electronic Chattel Paper

Question 13

State the Rule for Temporary Perfection

Answer 13

A security agreement in certificated securities, negotiable documents, and instruments is perfected without filing or taking possession for 20 days after attachment requirements are met.

Certificated Securities = stock certificates or bond
Negotiable Docs = air bills, warehouse receipt, or bill of lading
Instruments = promissory notes, certificate of deposit

Question 14

State the Rule for Automatic Perfection. What is is generally applied to?

Answer 14

A security interest is perfected simply by attachment of the security interest.

This generally covers:
Purchase money security interest in consumer goods only

A PMSI in Consumer Goods is Perfected automatically as soon as it attaches

Question 15

State the issue for Purchase Money Security Interest.

Answer 15

Whether (Creditor) has super priority in the (Specific Collateral) over (Creditor 2) as a PMSI in (Collateral).

Question 16

State the Rule for PMSI Creditor

Answer 16

Rule: A PMSI creditor is one who extends credit to a buyer who advances the money to enable the buyer to purchase the collateral. The PMSI Creditor is given SUPER-priority over ALREADY EXISTING secured, perfected creditors.

Question 17

State the PMSI rule for Equipment

Answer 17

Rule for Equipment: A PMSI creditor is perfected by filing a financing statement. A creditor will have super priority as a PMSI in equipment over earlier perfected creditors if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.

Question 18

State the PMSI rule for Consumer Goods.

Answer 18

Rule for Consumer Goods: A PMSI creditor is automatically perfected upon attachment and will have super priority as a PMSI in consumer goods over earlier perfected creditors if their interest is perfected when the debtor receives possession or within 20 days.

Question 19

State the PMSI rule for Inventory

Answer 19

Rule for Inventory: A PMSI creditor is perfected by filing a financing statement. A creditor will have super priority as a PMSI in inventory over earlier perfected creditors if:

(1) the purchase-money security interest is perfected at the time the debtor gets possession of the inventory
(2) The purchase money secured party sends written notification to the holder of the conflicting security interest (most commonly tested)
(3) Notification received within 5 years before the debtor receives possession of the inventory
(4) The notification states that the purchase money secured party has or expects to obtain a PMSI in the debtor’s inventory and describes the inventory by item or type.

Question 20

What are the two ways that a PMSI is created? VERY IMPORTANT TO ISSUE SPOT!

Answer 20

(1) Creditor sells goods to the debtor retaining a security interest in the goods for the purchase price.

(2) Creditor/lender advances debtor the funds used to buy the goods and creditor takes security interest in the goods.
Loan is made for the PURPOSE of ENABLING the debtor to acquire/Buy the collateral!

Example: John wants to buy a $500 stove from Ed’s appliance emporium, (seller), but does not have $500 in cash. John signs a security agreement granting a security interest in the stove to secure the repayments to Ed’s Appliance Emporium. This will be a PMSI.
Look for Language: “on Credit”

Example: John borrows $500 from the Credit Union (lender) to buy a new stove. John signs a security agreement granting a security interest in the stove to the Credit Union. John uses the money to buy the stove. This will be a PMSI.

Question 21

State the issue statement for a Bonafide Purchaser v. PMSI problem

Answer 21

Issue: Whether (Creditor 1) takes free of (Creditor 2)’s PMSI in (Collateral).

Question 22

State the Rule for a Bonafide Purchaser v. PMSI problem

Answer 22

Rule: A PMSI in equipment has priority over a bona fide purchaser if the interest is perfected before or within 20 days after debtor receives delivery.

Note: THIS IS NOT BUYER VS REGULAR CREDITOR. THIS IS BUYER VS PMSI CREDITOR.

Question 23

Define Proceeds

Answer 23

Proceeds is whatever acquired upon the sale, lease, license, exchange, or other disposition of collateral.

Question 24

What happens to the Creditor’s security interest in Debtor’s collateral if it is sold?

Answer 24

The secured party will want to argue that they are SECURED and PERFECTED in the “proceeds” just as they are in the original collateral.

Question 25

State the rule for proceeds.

Answer 25

A security interest in proceeds is a perfected security interest if the interest in the original collateral was perfected.

Question 26

State the Same Office Rule

Answer 26

Rule: A perfected security interest in proceeds becomes unperfected on the 21st day after attachment unless…
The “same office rule” is satisfied (filed financing statement in new office)

If debtor disposes of collateral and now debtor is holding proceeds, but proceeds are NOT perfected in the same office, then that means the creditor needs to take additional steps to make sure they are perfected in the proceeds.