Secured Transaction

Question 1

What is a secured transaction?

Answer 1

A transaction intended to create a security interest in personal property or fixtures.

Question 2

Where can a Purchase Money Security Interest arise?

Answer 2

1) The secured party sells the goods to the debtor on credit and retains a security interest in the goods sold; OR

2) The creditor loans the funds to the debtor to enable the debtor to buy specific collateral, those funds are used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral.

Question 3

What is an After-acquired property clause?

Answer 3

A security interest automatically attaches to any property the debtor subsequently acquires.

Question 4

What is a Future Advance Clause?

Answer 4

Any subsequent financing or loaning will relate back to the original security agreement. As such, the security interest of future financing automatically attaches to the collateral set for in the original security agreement.

Question 5

What is Attachment?

Answer 5

Establishes secured party’s rights in the collateral as against the debtor.

Question 6

What are the three requirements for attachment?

Answer 6

1) Parties agree to create the security interest (i.e., security agreement, possession of collateral, or control of investments);

2) Value must be given by the secured part; AND

3) Debtor must have rights (i.e., ownership) in the collateral.

Question 7

What are proceeds?

Answer 7

Whatever is received upon the disposition of collateral or proceeds of collateral.

Question 8

How does a security interest attach to identifiable proceeds of the collateral?

Answer 8

The Security interest in collateral automatically attaches to identifiable proceeds of the collateral.

Question 9

What is used in the case of commingled cash proceeds?

Answer 9

The identifiable proceeds can be traced using the lowest intermediate balance rule.

The lowest balance during that time period is the secured party’s identifiable proceeds but the amount cannot exceed the value of the cash proceeds originally deposited.

Question 10

What is Perfection?

Answer 10

Maximizes secured party’s rights in the collateral as against third parties

Question 11

To be a valid perfection, what two things must happen? Either simultaneously or later?

Answer 11

1) Attachment

2) Perfection

Question 12

What are the 5 perfection methods?

Answer 12

1) Filing (effective for all classes of collateral EXCEPT deposit accounts and money)

2) Taking possession (effective for all classes of collateral EXCEPT intangible stuff)

3) Control (effective only for nonconsumer deposit accounts)

4) Automatic possession (most commonly effective only as to PMSIs in consumer goods)

5) Temporary perfection (proceeds from collateral, may require action to extend the perfection beyond the temporary 20 days)

Question 13

What is the only type of PMSI that is automatically perfected?

Answer 13

PMSI in consumer goods

Question 14

How long is a financing statement effective for?

Answer 14

5 Years

Question 15

What is a continuation statement?

Answer 15

Extends the effective life of a financing statement. Must be filed within 6 months before the lapse of the filed financing statement.

Question 16

What is an example of temporary perfection?

Answer 16

If a secured party has a perfected SI in collateral, the secured party automatically has a perfected SI in any proceeds of the collateral for 20 DAYS after receipt of the proceeds.

Question 17

The SI in proceeds will continue to be perfected beyond the temporary 20 days if:

Answer 17

1) The proceeds are identifiable cash proceeds;

2) The SI in the original collateral was perfected by filing a financing statement and it is within the same place as the financing statement filed (same office rule); OR

3) The SI in the proceeds is perfected within the 20-day period.

Question 18

What determines the priority between perfected secured parties?

Answer 18

Priority goes to whichever party was the FIRST to either file or perfect

Remember that its the date of filing or perfection that determines priority - not the date of attachment.

Question 19

What determines the priority between unperfected secured parties?

Answer 19

The first to attach has priority

Question 20

What determines the priority between unperfected and perfected secured parties?

Answer 20

A perfected SI generally prevails over an unperfected security interest.

Question 21

What is the PMSI Superpriority?

Answer 21

PMSIs enjoy a SUPER priority - they’re superior to prior perfected security interests in the same collateral if certain conditions are met.

Question 22

What is a buyer in the ordinary course?

Answer 22

One who buys goods (1) in good faith; (2) without knowledge that the sale violates the rights of another person in the goods; AND (3) in the ordinary course of business from a seller in the business of selling goods of the kind purchased.

This buyer takes free of a nonpossessory security interest in the goods CREATED BY THE BUYER’S SELLER, even though the SI is perfected and even though the buyer knows of the security interest

Question 23

Buyers not in the ordinary course of business take the property:

Answer 23

1) Subject to perfected security interests; AND

2) take free from unperfected SIs unless they know of the SI when they give value or take delivery

Question 24

Consumer-Consumer Sales: A buyer takes free of a SI, even though it’s perfected, if the buyer buy:

Answer 24

1) Without knowledge of the SI;

2) For value;

3) For the buyer’s own personal, family, or household purposes; AND

4) Before a financing statement covering the goods has been filed.

Goods must be consumer goods in the hands of both the buyer and the seller. CREDITORS MUST FILE A FINANCING STATEMENT TO DEFEAT THIS EXCEPTION.

Question 25

After default, the secured party is entitled to take possession of the collateral without judicial process (“self-help”) so long as it can be done without:

Answer 25

Breach of peace

Question 26

What constitutes breach of the peace?

Answer 26

Any conduct by the secured party that has the potential to lead to violence is a breach of the peace.

Generally, physical presence by the debtor plus a verbal objection by the debtor over the repo is enough to create a breach of the peace.

Question 27

Every aspect of a public foreclosure sale must be:

Answer 27

Commercially reasonable.

Question 28

What is the debtor’s right to redeem?

Answer 28

Any time before the secured party has resold the collateral or has entered into a contract for its disposition, the debtor may redeem the collateral.

To do so, the debtor must tender fulfillment of all obligations secured by the collateral.