R7 Secured Transactions

Question 1

What is a purchase money security interest?

Answer 1

A PMSI is a security interest that can have super priority. It arise when:

1. A creditor sell the collateral to the debtor on credit and retains a security interest in the collateral for the price or
2. The creditor advances funds that are used by the debtor to purchase the collateral and retains a security interest in the collateral for the price.

Question 2

What are the 3 requisites for attachment of a security interest?

Answer 2

1. An agreement to create a security interest evidence by either:

A) an authenticated record of the security agreement (e.g. a signed written security agreement or an authenticated electronic file containing the agreement) or

B) The creditor’s taking possession of the collateral

2. The secured party must give value for the security interest
3. The debtor must have rights in the collateral

Question 3

What are 5 ways to perfect a security interest?

Answer 3

1. File a financial statement
2. Possession of the collateral
3. Automatic perfection upon attachment with PMSI in consumer goods and small-scale assignment of accounts
4. Control
5. Temporary automatic perfection for 20 days for instruments, certificated securities, negotiable documents, and proceeds of sale of perfected security interest.

Question 4

Under the secured transaction article 9, what is the order of priority in collateral when the debtor defaults?

Answer 4

1. Buyers in the ordinary course of business
2. Perfected PMSI holder
3. Perfected secured creditor (Non-PMSI Holder)
4. Unperfected secured creditor
5. Debtor

Question 5

What advantages does the holder of an automatically perfected PMSI in consumer goods gain by filing?

Answer 5

If a PMSI in consumer goods is filed, it takes priority over consumer who buy the collateral from the debtor in a “garage sale” or second-hand” purchase. Absent filing, the garage sale/second-hand purchaser would not be subject to the automatically perfected PMSI.

Question 6

What is the difference in filing requirements to perfect a purchase money security interest in inventory as compared to noninventory (equipment)?

Answer 6

A PMSI in inventory must be filed before the debtor receives possession of the collateral and holders of prior perfected security interest in the inventory must be given notice before the debtor receives the collateral.

A PMSI in noninventory may be perfected by filing up to 20 days after the debtor receives possession of the collateral and there is no special notice requirement.

Question 7

What is the rule for determining which creditor has priority when 2 creditors have perfected security interest in the same collateral?

Answer 7

The first secured creditor to either file or perfect has priority.

Dates of attachment are irrelevant.

Question 8

What is the effect of the sale of collateral to good faith purchaser at a default sale?

Answer 8

The sale discharges the security interest in the collateral and all subordinate liens.

Question 9

What are a secured party’s basis rights after a debtor defaults on the secured obligation?

Answer 9

1. Take possession of the collateral through self-help if this can be done without breach of the peace and sell or keep the collateral to satisfy the secured obligation.
2. If the collateral is an account, notify the account debtor to pay the secured party.
3. Bring a judicial action to replevy the collateral
4. Bring an ordinary judicial action to enforce the obligation.

Question 10

Lien Creditor (e.g. repairman or contractor)

AKA Artisan Lien

Answer 10

1. Has priority over an unperfected security interest
   (Knowledge of security interest is immaterial)
2. Has priority over a security interest perfected after attachment of the lien unless it is a purchase money security interest perfected w/i 10 day grace period
3. A security interest perfected before the lien usually has priority.
4. Lien by statute (not by judgment or court order) has priority over a prior perfected security interest unless state statute expressly provides otherwise

EXAMPLE: A person such as a repairman, in the ordinary course of business, furnishes services or materials with respect to goods subject to a security interest. The repairman (artisan lien) has priority.