R7-2 Flashcards
Under the Secured Transactions Article of the UCC, which of the following requirements is necessary to have a security interest attach?
~~Debtor has rights in the collateral
~~Proper filing of a security agreement
~~Value given by the creditor
a.
Yes
Yes
No
b.
No
Yes
Yes
c.
Yes
Yes
Yes
d.
Yes
No
Yes
Choice “d” is correct. Attachment requires that: (i) 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, (ii) the debtor must have rights in the collateral, and (iii) the creditor must give value. There is no requirement that the security agreement be filed. (Filing is related to perfection.)
Under the Secured Transactions Article of the UCC, which of the following purchasers will own consumer goods free of a perfected security interest in the goods?
a.
A merchant who purchases the goods for resale.
b.
A consumer who purchases the goods in the ordinary course of business.
c.
A merchant who purchases the goods for use in its business.
d.
A consumer who purchases the goods from a consumer purchaser who gave the security interest.
Choice “b” is correct. The general rule is that a buyer takes subject to security interests in the goods 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.
Choice “a” is incorrect. A merchant buyer who purchases goods 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.
Choice “c” is incorrect. A merchant buyer who purchases goods for use in its business owns equipmentrather than consumer goods. Note that if a buyer purchases the equipment in the ordinary course of the seller’s business, the buyer generally will hold the equipment free of a perfected security interest previously given by the seller.
Choice “d” is incorrect. The general rule is that a buyer takes goods subject to security interests existing in the goods. There is an exception to this rule for consumers who, in good faith and without notice of any security interest, purchase the goods from consumers, but the exception applies only when the security interest is perfected automatically, and here we are not told how the security interest was perfected.
Under the Secured Transactions Article of the UCC, what would be the order of priority for the following security interests in consumer goods?
I.
Financing agreement filed on April 1.
II.
Possession of the collateral by a creditor on April 10.
III.
Financing agreement perfected on April 15.
a.
I, II, III.
b.
II, I, III.
c.
III, II, I.
d.
II, III, I.
Choice “a” is correct. When there are conflicting perfected security interests in the same collateral, the first creditor to file or to perfect has priority. Here, “I” was filed first. “II” was next perfected by possession. “III” was last to be filed or perfected.
Under the Secured Transactions Article of the UCC, which of the following remedies is available to a secured creditor when a debtor fails to make a payment when due?
~~Proceed against the collateral
~~Obtain a general judgment against the debtor
a.
Yes
Yes
b.
No
Yes
c.
No
No
d.
Yes
No
Choice “a” is correct. 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.
Under the UCC Secured Transactions Article, which of the following events will always prevent a security interest from attaching?
a.
Failure of the debtor to have rights in the collateral.
b.
Failure of the creditor to have possession of the collateral.
c.
Failure to have an authenticated record of a security agreement.
d.
Failure of the creditor to give present consideration for the security interest.
Choice “a” is correct. For a security interest to attach (i) there must be an agreement to create the security interest evidenced by either an authenticated security agreement or the creditor’s taking possession or control of the collateral, (ii) the creditor must give value, and (iii) the debtor must have rights in the collateral. Thus, a debtor must always have rights in the collateral in order for a security interest to attach.
Choice “c” is incorrect. If there is no authenticated security agreement, a security interest can attach if the secured party takes possession of the collateral or has control of it.
Choice “b” is incorrect. The creditor need not take possession for a security interest to attach if there is a written security agreement.
Choice “d” is incorrect. The creditor must give value, which includes antecedent debts. Thus, value is not limited to present consideration.
Under the UCC Secured Transactions Article, which of the following after-acquired property may be attached to a security agreement given to a secured lender?
~~Inventory
~~Equipment
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
Choice “a” is correct. 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 clauses involve consumer goods and commercial tort claims.
Under the UCC Secured Transactions Article, which of the following actions will best perfect a security interest in a negotiable instrument against any other party?
a.
Perfecting by attachment.
b.
Taking possession of the instrument.
c.
Obtaining a duly executed financing statement.
d.
Filing a security agreement.
Choice “b” is correct. 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.
Choice “d” is incorrect. A security interest perfected by filing may be defeated by a subsequent holder in due course, so filing is not the best method of perfecting here.
Choice “a” is incorrect. A security interest in a negotiable instrument is not automatically perfected upon attachment, as this choice suggests, so relying on attachment would be wholly ineffective.
Choice “c” is incorrect. Merely obtaining an executed financing statement is not a method of perfection; the statement must be filed to constitute perfection. Moreover, as discussed with respect to choice “b”, filing is not the best method of perfecting when a negotiable instrument is involved because a subsequent holder in due course would have higher priority.
Under the UCC Secured Transactions Article, perfection of a security interest by a creditor provides added protection against other parties in the event the debtor does not pay its debts. Which of the following parties is not affected by perfection of a security interest?
a.
Other prospective creditors of the debtor.
b.
A subsequent personal injury judgment creditor.
c.
The trustee in a bankruptcy case.
d.
A buyer in the ordinary course of business.
Choice “d” is correct. Perfection has little effect on a buyer in the ordinary course of business (such a buyer takes subject to a perfected security interest only if the buyer knows that the sale violates the security agreement).
Choice “a” is incorrect. Perfection gives the secured party superior rights in the collateral as against most later creditors.
Choice “c” is incorrect. If the bankruptcy is filed after perfection, the secured party will have priority in the collateral as against the trustee in bankruptcy because the trustee is treated as a lien creditor as of the day the bankruptcy petition is filed, and a prior perfected security interest has priority over a subsequent lien creditor.
Choice “b” is incorrect. Subsequent judgment creditors have lower priority in collateral than a secured creditor who has perfected a security interest in the collateral.
Under the UCC Secured Transactions Article, what is the order of priority for the following security interests in store equipment?
I.
Security interest perfected by filing on April 15, 1994.
II.
Security interest attached on April 1, 1994.
III.
Purchase money security interest attached April 11, 1994 and perfected by filing on April 20, 1994.
a.
I, III, II.
b.
II, I, III.
c.
III, II, I.
d.
III, I, II.
Choice “d” is correct. A PMSI in equipment has priority over a perfected security interest in the same equipment as long as the PMSI is perfected within 20 days of delivery of the collateral to the debtor. A perfected security interest has priority over an unperfected security interest. Thus, III has highest priority, I has next priority, and II has last priority.
Larkin is a wholesaler of computers. Larkin sold 40 computers to Elk Appliance for $80,000. Elk paid $20,000 down and signed a promissory note for the balance. Elk also executed a security agreement giving Larkin a security interest in Elk’s inventory, including the computers. Larkin perfected its security interest by properly filing a financing statement in the state of Whiteacre. Six months later, Elk moved its business to the state of Blackacre, taking the computers. On arriving in Blackacre, Elk secured a loan from Quarry Bank and signed a security agreement putting up all inventory (including the computers) as collateral. Quarry perfected its security interest by properly filing a financing statement in the state of Blackacre. Two months after arriving in Blackacre, Elk went into default on both debts. Which of the following statements is correct?
a.
Quarry’s security interest is superior because Larkin’s time to file a financing statement in Blackacre had expired prior to Quarry’s filing.
b.
Larkin’s security interest is superior even though at the time of Elk’s default Larkin had not perfected its security.
c.
Larkin’s security interest is superior provided it repossesses the computers before Quarry does.
d.
Quarry’s security interest is superior because Quarry had no actual notice of Larkin’s security interest.
Choice “b” is correct. When a security interest in collateral is perfected and the collateral is subsequently moved to another state, the collateral is temporarily perfected for four months in the state into which the collateral is moved. Thus, because Larkin’s security interest in Elk’s computers was perfected in Whiteacre, the interest was temporarily perfected in Blackacre. Since the default occurred within the four month temporary perfection period, Larkin has priority over the bank’s subsequently perfected security interest.
Choice “a” is incorrect. A secured creditor has four months in which to perfect in the new state when collateral in which the creditor has a perfected security interest is moved to the second state.
Choice “d” is incorrect. Quarry’s lack of notice is irrelevant. There is a four month temporary period of perfection when collateral subject to a perfected security interest is moved to another state.
Choice “c” is incorrect. Larkin’s security interest is superior on account of the “four month temporary period of perfection in the second state” rule that applies when collateral subject to a perfected security interest is moved to another state.
Drew bought a computer for personal use from Hale Corp. for $3,000. Drew paid $2,000 in cash and signed a security agreement for the balance. Hale properly filed the security agreement. Drew defaulted in paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused, Hale peacefully repossessed the computer.
Under the UCC Secured Transactions Article, which of the following remedies will Hale have?
a.
Sell the computer and retain any surplus over the amount owed.
b.
Obtain a deficiency judgment against Drew for the amount owed.
c.
Sell the computer without notifying Drew.
d.
Retain the computer over Drew’s objection.
Choice “b” is correct. After consumer goods collateral is repossessed and more than 60% of the price has been paid, unless the debtor agrees otherwise, the collateral must be sold, and the creditor can hold the debtor liable for any deficiency.
Choice “a” is incorrect. After the sale any surplus must be given to the debtor.
Choice “d” is incorrect. After consumer goods collateral is repossessed and more than 60% of the price has been paid, unless the debtor agrees otherwise, the collateral must be sold.
Choice “c” is incorrect. A secured party generally must notify the debtor of the sale.
Drew bought a computer for personal use from Hale Corp. for $3,000. Drew paid $2,000 in cash and signed a security agreement for the balance. Hale properly filed the security agreement. Drew defaulted in paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused, Hale peacefully repossessed the computer.
Under the UCC Secured Transactions Article, which of the following rights will Drew have?
a.
Prevent Hale from selling the computer.
b.
Redeem the computer after Hale sells it.
c.
Recover the sale price from Hale after Hale sells the computer.
d.
Force Hale to sell the computer.
Choice “d” is correct. Where a debtor has paid more than 60% of the price of consumer goods collateral and the creditor repossesses the collateral after default, the creditor must sell the collateral within 90 days unless the debtor agrees otherwise.
Choice “b” is incorrect. A debtor has a right to redeem before collateral is sold, but not after it is sold.
Choice “c” is incorrect. After collateral is sold, the proceeds go first to the costs of the sale, next to satisfy the secured party, then to any other party with an interest in the collateral. Only if there is a surplus can the debtor recover any of the sale price.
Choice “a” is incorrect. The debtor may allow the creditor to keep the collateral in satisfaction of the debt, but has no power to prevent a sale if the creditor does not want to retain the collateral in satisfaction.
In what order are the following obligations paid after a secured creditor rightfully sells the debtor’s collateral after repossession?
I.
Debt owed to any junior security holder.
II.
Secured party’s reasonable sale expenses.
III.
Debt owed to the secured party.
a.
I, II, III.
b.
II, I, III.
c.
II, III, I.
d.
III, II, I.
Explanation
Choice “c” is correct. Upon disposition of the goods, the costs of the sale are satisfied first, the secured party is paid next, and any junior security holders are paid next. If any proceeds remain, they are remitted to the debtor.
Winslow Co., which is in the business of selling furniture, borrowed $60,000 from Pine Bank. Winslow executed a promissory note for that amount and used all of its accounts receivable as collateral for the loan. Winslow executed a security agreement that described the collateral. Winslow did not file a financing statement. Which of the following statements best describes this transaction?
a.
Perfection of the security interest occurred by Pine having an interest in accounts receivable.
b.
Attachment of the security interest occurred when the loan was made and Winslow executed the security agreement.
c.
Attachment of the security interest did not occur because Winslow failed to file a financing statement.
d.
Perfection of the security interest occurred even though Winslow did not file a financing statement.
Choice “b” is correct. A security interest attaches when there is a security agreement (either an authenticated record of the agreement or the creditor’s having either possession or control of the collateral), the creditor gives value, and the debtor has rights in the collateral. All three requirements were present when the loan here was made and the security agreement was executed.
Choices “d” and “a” are incorrect. A security interest in accounts receivable can be automatically perfected upon attachment, but only if the accounts receivable assigned do not make up a significant part of the assignor’s accounts receivable. Here, Winslow Co. assigned all of its accounts receivable, so automatic pefection does not apply.
Choice “c” is incorrect. A security interest attaches when there is a security agreement, the creditor gives value, and the debtor has rights in the collateral. A financing statement is not required, although it is relevant to perfection.
Grey Corp. sells computers to the public. Grey sold and delivered a computer to West on credit. West executed and delivered to Grey a promissory note for the purchase price and a security agreement covering the computer. West purchased the computer for personal use. Grey did not file a financing statement. Is Grey’s security interest perfected?
a.
No, because the computer was a consumer good.
b.
Yes, because it was perfected at the time of attachment.
c.
No, because Grey failed to file a financing statement.
d.
Yes, because Grey retained ownership of the computer.
Choice “b” is correct. 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.
Choice “d” is incorrect. Retention of ownership when the debtor has possession of the collateral is not an effective substitute for obtaining and perfecting a security interest.
Choice “a” is incorrect. The security interest is automatically perfected because the computer is a consumer good here (i.e., used for personal purposes as opposed to business purposes).
Choice “c” is incorrect. The security interest will be automatically perfected, as explained above.
Noninventory goods were purchased and delivered on June 15, 1993. Several security interests exist in these goods. Which of the following security interests has priority over the others?
a.
Security interest in future goods attached June 10, 1993.
b.
Security interest perfected June 20, 1993.
c.
Purchase money security interest perfected June 24, 1993.
d.
Security interest attached June 15, 1993.
Choice “c” is correct. A purchase money security interest (PMSI) in noninventory goods has priority over all other security interests in the same collateral if the PMSI is perfected within 20 days of the debtor’s getting possession. Here, the PMSI was filed 9 days after the debtor got possession of the noninventory goods.
Choices “a” and “d” are incorrect because an unperfected security interest is subordinate to a perfected security interest.
Choice “b” is incorrect. Although the general rule among competing security interests is that the creditor who is the first to file or to perfect has priority, a purchase money security interest (PMSI) in noninventory goods has priority over all other security interests in the same collateral if the PMSI is perfected within 20 days of the debtor’s getting possession of the noninventory goods.
On March 1, Green went to Easy Car Sales to buy a car. Green spoke to a salesperson and agreed to buy a car that Easy had in its showroom. On March 5, Green made a $500 downpayment and signed a security agreement to secure the payment of the balance of the purchase price. On March 10, Green picked up the car. On March 15, Easy filed the security agreement. On what date did Easy’s security interest attach?
a.
March 1.
b.
March 15.
c.
March 10.
d.
March 5
Choice “c” is correct. For a security interest to attach, three elements must coexist. There must be an agreement to create a security interest (either an authenticated record of the agreement or the creditor’s having either possession or control of the collateral), the secured party must give value for the interest, and the debtor must have rights in the collateral. Here, all elements existed on March 10: the parties agreed to create a security interest on March 5, the secured party gave value on March 10, and the debtor obtained an interest in the collateral on March 10 when the debtor picked up (took title to) the car.
Choices “a” and “d” are incorrect as per the above.
Choice “b” is incorrect. A security agreement need not be filed for a security interest to attach to collateral. Filing (typically of a financing statement) is a method of perfection of a security interest. Here, filing would not even be sufficient for perfection because a security interest in certificate of title property, such as a car, can be perfected only by notation on the certificate of title.
Mars, Inc. manufactures and sells VCRs on credit directly to wholesalers, retailers, and consumers. Mars can perfect its security interest in the VCRs it sells without having to file a financing statement or take possession of the VCRs if the sale is made to:
a.
Wholesalers that sell to distributors for resale.
b.
Consumers.
c.
Wholesalers that sell to buyers in the ordinary course of business.
d.
Retailers.
Choice “b” is correct. 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.
Choices “d”, “a”, and “c” are incorrect. If Mars 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 Mars’ security interest and does not affect Mars’ need to file.
