REG 14 - UCC Article 9 - Secured Transactions - Secured Transactions-Terminology/Perfection

Question 1

Under the UCC Secured Transactions Article, when collateral is in a secured party’s possession, which of the following conditions must also be satisfied to have attachment?
A. There must be a written security agreement.
B. The public must be notified.
C. The secured party must receive consideration.
D. The debtor must have rights to the collateral.

Answer 1

D. A security interest gives the creditor a right to the debtor’s interest in the collateral if the debtor does not repay the debt. The collateral is security for debt. If the debtor has no rights in the collateral, the creditor has no security interest.

Question 2

Under the Secured Transactions Article of the UCC, which of the following security agreements does NOT need to be in writing to be enforceable?
A. A security agreement collateralizing a debt of LESS than $500.
B. A security agreement where the collateral is highly perishable or subject to wide price fluctuations.
C. A security agreement where the collateral is in the possession of the secured party.
D. A security agreement involving a purchase money security interest.

Answer 2

C. Possession is nine tenths of the law, and under Article 9, possession is the security interest as well as perfection.

Question 3

T/F: To create a security interest by a written security agreement, the security agreement must be signed by both the debtor and the secured party.

Answer 3

False.

Must be signed or authenticated by the debtor.

Question 4

T/F: The debtor must “own” (have title) to the collateral before a secured party can have a security interest in the collateral.

Answer 4

False.
A debtor may give a security interest in goods that are to be manufactured. Once those goods are identified under the contract, the debtor has rights in them and the security interest attaches even though title will not pass until later.

Question 5

Sun, Inc., manufactures and sells household appliances on credit directly to wholesalers, retailers, and consumers.

Sun can perfect its security interest in the appliances without having to file a financing statement or take possession of the appliances if the sale is made by Sun to
A. Consumers.
B. Wholesalers that sell to buyers in the ordinary course of business.
C. Retailers.
D. Wholesalers that sell to distributors for resale.

Answer 5

A. One may perfect a security interest without filing if he or she has a purchase money security interest (PMSI) in consumer goods. This happens when the money to purchase the collateral is given as the basis of the security interest.

The collateral, however, must be in consumer goods and purchased by a consumer for personal, family, or household use for a PMSI to exist.

Question 6

Under the Secured Transactions Article of the UCC, which of the following items can usually be excluded from a filed original financing statement?
A. The name of the debtor.
B. The address of the debtor.
C. A description of the collateral.
D. The amount of the obligation secured.

Answer 6

D. There need not be the amount of the debt reflected in the publicly filed financing statement. All that needs to be included is which collateral is subject to the security interest, not the value of the collateral or the debt.

Question 7

Jones lives in Oklahoma and is the owner of a large number of valuable antiques. Treasures Delight, located in Arkansas, is a seller of antiques. Treasures Delight is owned by Sally Delight. Delight offers to purchase all of the antiques owned by Jones paying 60% of the agreed price and, by agreement, signs a security agreement for the balance putting up her entire inventory as security. The security agreement provides for monthly payments. Which of the following is correct?
A. Since this is a purchase money security interest, Jones is automatically perfected without a filing.
B. Although this is a purchase money security interest, Jones must file to have a perfected security interest.
C. There is not a purchase money security interest because being antiques for resell classifies the collateral as inventory.
D. If Jones decides to file for perfection of his security interest, Jones would file a financing statement in Oklahoma.

Answer 7

B. The antiques are classified as inventory (collateral to be held for resell). Thus, although a purchase money security interest was created, being inventory, a filing is required for perfection.

Question 8

Which of the following transactions would illustrate a secured party perfecting its security interest by taking possession of the collateral?
A. A bank receiving a mortgage on real property.
B. A wholesaler borrowing to purchase inventory.
C. A consumer borrowing to buy a car.
D. A pawnbroker lending money.

Answer 8

D. One method of perfecting an interest is by taking physical possession of it. When a pawnbroker lends money, s/he takes physical possession of the collateral for sale if the loan is not repaid according to the terms of the loan agreement.

Question 9

T/F: One of the requirements for perfection by filing is that the filing must state the names of both the debtor and secured party, but neither is required to sign the financing statement.

Answer 9

True

Question 10

T/F: A negotiable certificate of deposit can only be perfected by the secured party taking possession of it.

Answer 10

False
Article 9 requires filing for perfection, but it also allows perfection by either possession or another method of perfection.

Question 11

On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators. This comprised Ace’s entire inventory and was financed under an agreement with Rome Bank that gave Rome a security interest in all refrigerators on Ace’s premises, all future acquired refrigerators, and the proceeds of sales. On July 12, Rome filed a financing statement that adequately identified the collateral. On August 15, Ace sold one refrigerator to Cray for personal use and four refrigerators to Zone Co. for its business.

Which of the following statements is correct?
A. The refrigerators sold to Zone will be subject to Rome’s security interest.
B. The refrigerator sold to Cray will not be subject to Rome’s security interest.
C. The security interest does not include the proceeds from the sale of the refrigerators to Zone.
D. The security interest may not cover after-acquired property even if the parties agree.

Answer 11

B. Even though the interest is perfected, Cray still gets to keep the refrigerator. A buyer in the ordinary course of business takes goods free from a security interest, even if the buyer has knowledge of the security agreement.

Question 12

Wine purchased a computer using the proceeds of a loan from MJC Finance Company. Wine gave MJC a security interest in the computer. Wine executed a security agreement and financing statement, which was filed by MJC. Wine used the computer to monitor Wine’s personal investments. Later, Wine sold the computer to Jacobs for Jacobs’ family use. Jacobs was unaware of MJC’s security interest. Wine now is in default under the MJC loan.

May MJC repossess the computer from Jacobs?
A. No, because Jacobs was unaware of the MJC security interest.
B. No, because Jacobs intended to use the computer for family or household purposes.
C. Yes, because MJC’s security interest was perfected before Jacobs’ purchase.
D. Yes, because Jacob’s purchase of the computer made Jacobs personally liable to MJC.

Answer 12

C. A buyer is protected from a secured party’s security interest if the buyer buys an item in the regular course of the seller’s business. Here, Jacobs bought the machine from Wine for personal use. Nothing indicates that Wine normally sells computers, and, thus, Jacobs is a buyer not in the ordinary course of business of consumer goods.
Although Jacobs purchased (for value) the computer for personal use without knowledge of MJC’s security. MJC’s perfection by filing (not by attachment) gave MJC priority to repossess the computer.

Question 13

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, 2004.

II. Security interest attached on April 1, 2004.

III. Purchase money security interest attached April 11, 2004, and perfected by filing on April 20, 2004.

Answer 13

III, I, II. All perfected interests take priority over unperfected interests, regardless of when they arose, so II will be last. If more than one perfected interest exists, then the first to be perfected takes priority. Interests I and III are both perfected. The first is obviously perfected on April 15, 2004, and the third is not perfected by filing until April 20, 2004. An exception to the first in time is first in priority rule is when you have a PMSI in collateral other than livestock or inventory (here the collateral is store equipment) where a second in time of perfection takes place before or within twenty (20) days after the debtor takes possession of the collateral.

Question 14

Noninventory goods were purchased and delivered on June 15. 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.
B. Security interest attached June 15.
C. Security interest perfected June 20.
D. Purchase money security interest perfected June 24.

Answer 14

D. Usually, the first security interest to be perfected has top priority.
There is an exception, though, for a purchase money security interest, or a purchase money security interest. A purchase money security interest in non-inventory collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter.

Question 15

West Bank has a security interest in all the inventory of TVs held by Green Appliance Co. Green sells a TV to Norris, with Green telling Norris that its entire inventory had a lien on it held by West Bank. If Green goes into default on its loan to West Bank, can West Bank repossess (claim priority on) the TV set sold to Norris? (Yes/No)

Answer 15

No.
A buyer in the ordinary course of business takes free of a secured party’s interest, even if it is perfected, and buyer knows of the security interest at the time of sale.

Question 16

T/F: West Bank has a filed perfected security interest in Oklahoma against ABC’s equipment located in Tulsa. ABC is a partnership. On May 1, ABC moves its office and equipment across the Oklahoma-Missouri state line to St. Louis. On July 1, East Bank in St. Louis takes and perfects in Missouri a security interest in the same equipment. If on August 1, ABC goes into default, between West Bank and East Bank, West Bank has priority to the equipment moved to St. Louis.

Answer 16

True
West Bank has priority because its perfection is first in time and it has priority for four months from the date the equipment was moved into MO.

Question 17

T/F: On August 1, West Bank has a perfected security interest in the existing and any after-acquired inventory of TVs sold by debtor Able’s TV Emporium. On August 20, Able contracts to purchase from Brite Lite TV manufacturer 500 TVs, which Able wants to sell in a Labor Day promotion. Able makes a 20% cash payment to Brite Lite and signs a security agreement with Brite Lite giving Brite Lite a security interest in the 500 TVs to be delivered on August 30 for the balance owed. On August 29, Brite Lite telephones West Bank with notice of its security interest. The TVs are delivered on August 30. The Labor Day sale is a bust and Able goes into default to both West Bank and Brite Lite. West Bank has priority over the 500 TVs delivered on August 30 because its perfected after-acquired collateral clause is first in time.

Answer 17

True

Question 18

T/F: West Bank has a perfected security interest in all of ABC’s inventory. ABC has an insurance policy with ABC as beneficiary covering all of its personal property. ABC’s store burns to the ground, and with it all the inventory subject to West Bank’s security interest is destroyed. ABC goes into default to West Bank. Because the collateral is no longer in existence and the insurance policy designates ABC as the beneficiary (not West Bank), West Bank is an unsecured party and will suffer the loss for the balance ABC owes on the debt.

Answer 18

False.
West Bank has a perfected security interest which will give them priority to the insurance money ABC receives to cover the debt with West Bank.

Question 19

T/F: Smith is a retail seller of refrigerators. Smith sells a refrigerator to Green, who cannot pay the cash price. Green pays Smith 20% down in cash, and signs a security agreement giving Smith a security interest in the refrigerator sold for the balance. Since Smith is perfected by attachment, Smith does not also perfect by filing. If Green later sells the refrigerator to her next-door-neighbor Sarah, who does not know of Smith’s security interest, and then goes into default to Smith, Smith can repossess the set from Sarah because she is a buyer not in the ordinary course of business.

Answer 19

False.
As long as Sarah is able to establish the four requirements, as a buyer not in the ordinary course of business of consumer goods will prevail over a previously perfected secured party by attachment.
1. Buyer must give value to the seller-debtor.
2. Buyer must not know of secured party’s security interest.
3. Buyer must buy for personal use (as consumer goods).
4. Buyer must buy before the secured party perfects by filing.

Question 20

T/F: On February 1, West Bank has a perfected non-purchase money security interest in all of ABC’s equipment and any equipment ABC acquires thereafter. MM manufacturing later sells a new piece of equipment to ABC receiving a security interest in the new piece of equipment sold for the balance of the purchase price owed. The new piece of equipment is delivered to ABC on May 1. On May 8, MM perfects its security interest by a filing. On May 10, ABC goes into default to both West Bank and MM. Because MM filed its security interest after ABC took possession, West Bank’s prior perfection gives it priority to the new piece of equipment.

Answer 20

False.
MM has a PMSI properly perfected, and as long as West Bank was notified of the PMSI in place by MM, MM would have priority to the new piece of equipment.

Question 21

Under the UCC Secured Transactions Article, which of the following statements is correct concerning the disposition of collateral by a secured creditor after a debtor’s default?
A. A good faith purchaser for value and without knowledge of any defects in the sale takes free of any subordinate liens or security interests.
B. The debtor may not redeem the collateral after the default.
C. Secured creditors with subordinate claims retain the right to redeem the collateral after the collateral is sold to a third party.
D. The collateral may only be disposed of at a public sale.

Answer 21

A. As with most statutory-sanctioned sales (tax lien sales, judicial lien sales, etc.), a sale made by a secured party under Article 9 of the UCC, if made properly, passes good title free from any lien or security interest to the buyer. Until the sale the debtor or any other secured party has right of redemption. The sale can be public or private proceedings.

Question 22

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.

Answer 22

II, III, I. This is the order of distribution in such a case: reasonable expenses incurred by the secured party in repossession and selling the collateral, remaining debt owed to the secured party, debt owed to any other (junior) security holders who give written notice of their interest, and any surplus (except if collateral is accounts or chattel paper) is then paid back to the debtor.

Question 23

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. Obtain a deficiency judgment against Drew for the amount owed.
B. Sell the computer and retain any surplus over the amount owed.
C. Retain the computer over Drew’s objection.
D. Sell the computer without notifying Drew.

Answer 23

A. Remedies after a default are cumulative. If one method does not fully satisfy the debt, others may be sought. If the computer is repossessed and sold, and money is still owed, Hale may seek a deficiency judgment against Drew for the remainder.

Question 24

A debtor purchased an LCD television from Best Buy for $1,000. BestBuy financed the transaction. With finance charges, the total cost of the financing is $1,200. After the debtor has paid $600, he defaults on the payment and BestBuy repossesses the TV. BestBuy has decided to keep the TV as a floor display model. The debtor believes it would be best if BestBuy sold the TV.
A. Under Article 9, BestBuy must sell the TV.
B. Under Article 9, BestBuy is not required to sell the TV.
C. Under Article 9, the debtor has no control over the creditor’s actions once there has been a default.
D. Under Article 9, the decision to sell or retain is always within the discretion of the creditor.

Answer 24

A. The debtor has paid 60% of the PURCHASE PRICE, so BestBuy must sell the TV.

Question 25

A debtor is in default. The collateral consists of 100 cows described in the security agreement. Thirty cows were stolen through no fault of the debtor. Which of the following statements is correct concerning the secured party’s rights due to the debtor’s default?
A. The secured party must take the peaceful possession of the 70 remaining cows before s/he can pursue any remedies.
B. If the secured party takes possession, the secured party cannot keep the cows in full satisfaction of the debt, if the debtor has paid 60% or more of the debt.
C. If the secured party takes possession and sells the 70 cows. Proceeds will be applied to expenses incurred in the keeping of the cows. The costs of sale, and any balance, will be applied to the debt. The debt will then be discharged, even if the proceeds are insufficient to cover the costs and the debt.
D. Upon default, the secured party can proceed to recover under the Uniform Commercial Code or proceed with any judicial remedy (such as get a judgment and levy on the debtor’s non-exempt property).

Answer 25

D. Upon the debtor’s default, the secured party has the choice to proceed under the Uniform Commercial Code by taking possession of the 70 cows, either peacefully or through judicial process. The secured party can then either sell or, without objection, keep the collateral in full satisfaction of the debt. Alternately, the secured party can proceed to file suit, receive a judgment and levy on the non-exempt property of the debtor.

Question 26

T/F: A debtor is in default and the secured party has legally repossessed the collateral. The secured party wishes to retain the collateral in full satisfaction of the debt and not sell it. The secured party (who has a purchase money security interest in consumer goods) must sell the collateral if the debtor has paid 50% or more of the if purchase price.

Answer 26

False.
If the collateral is consumer goods and 60% or more of the purchase price (or debt if the collateral was not fully financed by the creditor) has been paid, the creditor must sell it.

Question 27

T/F: A debtor can waive by agreement the secured party’s compulsory requirement to sell the collateral and the debtor’s right of redemption only after the debtor’s default.

Answer 27

True