Secured Transaction Set

Question 1

Which statement correctly categorizes the collateral described?

A Televisions in the debtor’s office lobby are consumer goods.

B Eggs at the debtor’s poultry farm are inventory.

C Computer terminals in the debtor’s internet café are equipment.

D Bags of manure sold by the debtor’s agricultural supply depot are farm products.

Answer 1

C

Computer terminals in the debtor’s internet cafe are categorized as equipment. Equipment means goods that are not consumer goods, farm products, or inventory (e.g., durable goods used in a business, paintings on an office wall). Farm products are crops, livestock, unmanufactured products of livestock (e.g., eggs), and supplies used or produced in farming operations and either in the possession of or used by a farmer. Inventory includes goods held for sale or lease, goods furnished under a contract of service, supplies used in manufacturing, materials consumed in a business (e.g., fuel used to run a factory), and work in progress. Consumer goods are goods used or bought for personal, family, or household purposes.

Question 2

Instruments are pieces of paper that represent:

A The right to receive goods.

B The right to be paid money.

C A security interest in specific goods.

D A lease of specific goods.

Answer 2

B

As defined by Article 9, instruments are pieces of paper that represent the right to be paid money (e.g., promissory notes, drafts, certificates of deposit). Under Article 9, pieces of paper that represent the right to receive goods are called documents (e.g., bills of lading, warehouse receipts). Records evidencing both a monetary obligation and a security interest in, or a lease of, specific goods are referred to as chattel paper.

Question 3

Which of the following is NOT necessary for a security interest to attach to collateral?

A The parties must agree to create a security interest.

B The secured party must give value.

C The debtor must authorize the filing of a financing statement.

D The debtor must have rights in the collateral.

Answer 3

C

Filing an authorized financing statement is not necessary for a security interest to attach, but rather is one way to perfect a security interest. Attachment establishes the secured party’s rights against the debtor. Perfection gives a secured party greater priority as against others with competing interests in the collateral. A security interest cannot be perfected until it has attached.

Question 4

To perfect a security interest in goods, where must a creditor file a financing statement?

A With the clerk of the circuit court of the county where the debtor is located.

B With the clerk of the circuit court of any county in the state where the debtor is located.

C With the clerk of the circuit court of the county where the creditor is located.

D With the office of the secretary of state of the state where the debtor is located.

Answer 4

D

In most states, and for most types of collateral (including goods), a financing statement must be filed with the secretary of state of the state where the debtor is located.

Question 5

Where must a creditor usually file a fixture filing?

A With the clerk of the circuit court of the location of the creditor.

B With the secretary of state of the state where the land is.

C Wherever a mortgage on real property would be filed in the jurisdiction where the land is.

D With the secretary of state of the state where the debtor’s principal place of business is located.

Answer 5

C

Fixture filings must be made in the same office where a mortgage on real property would be filed (often a county clerk’s office). Fixture filings do not follow the general rule in most states that financing statements must be filed with the secretary of state of the state where the debtor is located.

Question 6

Perfection occurs automatically on attachment of a purchase money security interest (“PMSI”) in which of the following?

A Inventory.

B Consumer goods.

C Equipment.

D Motor vehicles.

Answer 6

B

A PMSI in consumer goods is perfected as soon as it attaches. A PMSI arises where the creditor (i) sells goods to the debtor on credit and reserves a security interest in those goods, or (ii) advances the funds used to purchase goods and reserves a security interest in those goods. Consumer goods are goods used or bought for personal, family, or household purposes. Automatic perfection does not apply to PMSIs in other types of goods, and security interests in noninventory motor vehicles generally can be perfected only by notation on the vehicle’s certificate of title, even if that motor vehicle would be categorized as a consumer good.

Question 7

The original filing of a financing statement generally is effective for:

A 180 days.

B 1 year.

C 5 years.

D 10 years.

Answer 7

C

The original filing of a financing statement (other than filings for transmitting utilities or manufactured home transactions) is effective for 5 years from the date of filing. Note, however, that recorded real property mortgages that cover fixtures continue until the mortgage is released or satisfied.

Question 8

To continue the effectiveness of a financing statement, a continuation statement must be authorized by:

A The debtor only.

B The secured party only.

C Either the debtor or the secured party.

D Both the debtor and the secured party.

Answer 8

B

Only the secured party must authorize the continuation statement; the debtor need not do so. Continuation statements may be filed during the last six months of the effective period of a prior filing, and will continue the effectiveness of the filing for five more years.

Question 9

If a secured party in a nonconsumer transaction fails to comply with default rules of the Uniform Commercial Code (“UCC”), which of the following is true?

A The secured party will automatically be barred from recovering a deficiency judgment.

B The security interest is extinguished.

C The value of the collateral is presumed to equal the amount of the debt.

D The right of redemption is automatically extended 90 days.

Answer 9

C

In nonconsumer transactions, the rebuttable presumption rule applies, which holds that the value of the collateral is presumed to equal the amount of the debt unless the secured party proves otherwise.

Question 10

A purchase money security interest (“PMSI”) in most goods has priority over conflicting security interests in the same goods only if the PMSI is perfected before or within 20 days after:

A Attachment.

B The debtor receives possession of the goods.

C Another security interest attaches to the goods.

D The secured party sends competing secured parties notice of the PMSI.

Answer 10

B

A PMSI in goods other than inventory or livestock has priority over conflicting security interests in the same goods and their identifiable proceeds only if the interest is perfected before or within 20 days after the debtor receives possession of the goods. The requirement that the secured party notify others with competing security interests in the collateral applies only to PMSIs in inventory.

Question 11

May a security agreement contain a clause giving the secured party rights in property the debtor will acquire in the future?

A Yes, for all types of collateral other than inventory.

B Yes, for all types of collateral other than commercial tort claims.

C No, because after-acquired property clauses are against public policy.

D No, because the debtor cannot grant a security interest in what he does not yet own.

Answer 11

B

A valid security agreement may create a security interest in property to be acquired in the future for all collateral other than commercial tort claims. The security interest attaches to the property as soon as the debtor acquires an interest in it. Note, however, that such after acquired property clauses are effective for consumer goods only if the debtor acquires rights in the goods within 10 days after the creditor gives value.

Question 12

Which of the following transactions is covered by Article 9?

A A mechanic’s lien on a commercial building.

B A security interest in a car when the car serves as collateral to secure a loan for the purchase of the car itself.

C A sale of a single family home.

D A mortgage on a single family home.

Answer 12

B

In general, Article 9 applies to contractual security interests in personal property and fixtures, but not other forms of real property. Thus, it does not apply to a sale or mortgage of a single family home or a mechanic’s lien on a commercial building. But it does apply to a security interest in a car.

Question 13

Which of the following statements reflect correct classifications of collateral?

A An attorney’s set of Southwest Reporters is equipment.

B A check is a document.

C A bill of lading is investment property.

D A stock certificate is an instrument.

Answer 13

A

The attorney’s set of Southwest Reporters is equipment. Equipment is defined as goods that are not consumer goods, farm products or inventory. Documents are pieces of paper that represent the right to receive goods, e.g., a bill of lading. Instruments are pieces of paper that represent the right to be paid money, such as a check. Investment property includes items such as stocks, bonds, and mutual funds.

Question 14

Which of the following is NOT a breach of the peace?

A Creditor hotwires Debtor’s car, which is sitting in Debtor’s driveway, in the middle of the night.

B Creditor enters Debtor’s unlocked garage in the middle of the day, finds Debtor’s keys in her car’s ignition, opens the garage door, and drives the car away.

C Creditor finds Debtor’s car parked on the street in front of Debtor’s house. While hooking it up to a tow truck, Creditor hears Debtor yell “Don’t take my car!” from the house. Creditor tows the car away before Debtor is able to run from the house to the street.

D Creditor, dressed as a police officer, goes to Debtor’s house and informs her that her car is being repossessed. Debtor hands over the keys.

Answer 14

A

A repossession made over any protest by the debtor constitutes a breach of the peace, even though no violence or significant disturbance occurs. Thus, taking a car when a debtor yells “don’t take my car” is a breach of the peace. Constructive force or actions that contain implied threats are not peaceful. Carrying a weapon or dressing as a law enforcement officer are implied threats that constitute breaches of the peace. Breaking and entering is also generally a breach of the peace. So, entering an unlocked garage is a breach of the peace, but merely trespassing on a debtor’s driveway is not.

Question 15

Which of the following secured parties has priority in a debtor’s equipment?

A W, who filed a financing statement on March 1, the same day her security interest attached.

B X, who filed a financing statement on February 20, and whose security interest attached on April 1.

C Y, who obtained a judicial lien on the equipment on May 1.

D Z, whose security interest attached to the equipment on January 1, but who did not perfect his security interest.

Answer 15

B

X has top priority in the collateral because X filed on February 20, before any other party filed or perfected. As between conflicting perfected security interests in the same collateral, priority goes to whichever party was first to either file or perfect, provided that there is no period thereafter when there is neither filing nor perfection. A prior perfected security interest in the collateral has priority over a judicial lien creditor’s interest in the same collateral. Generally, judicial lien creditors and perfected security interests have priority over unperfected security interests. Thus, W’s interest in the collateral takes priority over the interests of Y and Z and Y’s interest has priority over that of Z.

Question 16

Which of the following is NOT necessary for a purchase money security interest (“PMSI”) in inventory to gain priority over a conflicting security interest in the inventory?

A The PMSI attaches before the debtor receives possession of the inventory.

B A financing statement is filed before the debtor gets possession of the inventory.

C The creditor seeking the PMSI takes control of the collateral within 20 days after the debtor receives possession of the inventory.

D Any secured party who has filed her security interest in the same inventory receives an authenticated notification of the PMSI before the debtor receives possession of the inventory.

Answer 16

C

A PMSI in inventory has priority over a conflicting security interest in the inventory if: (i) The PMSI in inventory is perfected at the time the debtor gets possession of the inventory (the filing must take place before the inventory is delivered to the debtor); and (ii) Any secured party who has filed her security interest in the same inventory receives an authenticated notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type. Attachment is a necessary requirement of perfection of a security interest. So, the only answer choice that is not required is that the creditor take control of the collateral within 20 days. Note that a PMSI in goods other than inventory or livestock has priority over conflicting security interests in the same goods if the interest is perfected before or within 20 days after the debtor receives possession of the goods.

Question 17

A description that describes collateral simply as all of the debtor’s assets is sufficient for which of the following purposes?

A To identify the collateral in a security agreement, but not in a financing statement.

B To identify the collateral in a financing statement, but not in a security agreement.

C To identify the collateral in either a security agreement or in a financing statement.

D To identify the collateral in neither a security agreement nor in a financing statement.

Answer 17

B

A general description, such as “all assets,” is satisfactory to identify the collateral in a financing statement, but such supergeneric terms are not sufficient to describe collateral for purposes of a security agreement. The description of the collateral in an authenticated security agreement is sufficient if it reasonably identifies the collateral. The description may be specific, or it may be by category, type, quantity, computational formula, or any other method in which the identify of the collateral is objectively determinable.

Question 18

Which of the following debtors’ names may be seriously misleading under Article 9?

A A name that would be discovered in a filing office search under the debtor’s correct name using standard search logic.

B The debtor’s trade name.

C A registered organization’s name as filed in the most recent public organic record in the jurisdiction of the organization.

D An individual debtor’s name as indicated on her unexpired driver’s license.

Answer 18

B

Use of a debtor’s trade name may be seriously misleading under Article 9 as financing statements are indexed under the debtor’s name. Although minor errors in the debtor’s name will not invalidate the financing statement, the statement must not contain any seriously misleading errors. An individual debtor’s name is proper if it matches her name on her unexpired driver’s license. A registered organization’s name (e.g., a corporation, limited partnership, or limited liability company) is sufficient if it matches the name on the public organic record (i.e., the publicly available record that forms or organizes the organization) most recently filed in the jurisdiction of organization. A financing statement is not seriously misleading if it would be discovered in a filing office search under the debtor’s correct name, using the filing office’s standard search logic.

Question 19

A security interest in equipment may be perfected:

A By filing only.

B By filing or by possession.

C By filing or by control.

D By filing or automatically upon attachment.

Answer 19

B

A security interest in equipment may be perfected either by filing a financing statement or by the creditor’s possession of the collateral. Security interests in every kind of collateral except deposit accounts and money (unless either is claimed as proceeds of other collateral) may be perfected by filing. Security interests in tangible collateral, such as equipment, also may be perfected by the secured party taking possession (i.e., by pledge). However, only security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by the creditor’s control of that collateral. The only tangible collateral that is automatically perfected are PMSIs in consumer goods.

Question 20

Which of the following has lesser priority to collateral than the holder of an unperfected security interest?

A A buyer in the ordinary course of business who does not know that the sale violates a security interest.

B A party who perfected its security interest after the unperfected security interest arose.

C The holder of a possessory lien.

D The debtor.

Answer 20

D

When a debtor defaults and a number of persons have an interest in the same item of collateral, the person with the highest priority has first rights in the collateral; if any part of the collateral or its proceeds is left, the next person can recover. With the exception of the debtor, the holder of an unperfected security interest has the lowest priority of any claimant. If two competing security interests are unperfected, the first to attach has priority.

Question 21

Which of the following remedies is NOT generally available to a secured party when a debtor defaults on a security agreement?

A Repossessing the collateral over the protests of the debtor.

B Selling the collateral to recover the amount owed at a private sale.

C Retaining the collateral to fully satisfy the debt.

D Levying on the collateral after bringing a judicial action for the amounts due.

Answer 21

A

Article 9 provides remedies for the secured party on the debtor’s default. The secured party may take possession by self-help without judicial process if she can do so without a breach of the peace. She may sell, lease, or license the collateral by a public sale (i.e., auction), private sale, or contract. Alternatively, she may keep the collateral to satisfy the debt. Or, instead of taking possession and selling the collateral under Article 9, she may bring an ordinary judicial action for the amounts due and levy on the collateral.

Question 22

Which of the following are not considered “proceeds” under Article 9?

A Funds the creditor has agreed to loan the debtor in the future, secured by the same collateral.

B Cash received when the collateral was leased to a third party.

C An item traded in exchange for the collateral.

D Money received from an insurance company for damage to the collateral.

Answer 22

A

“Proceeds” include whatever is received upon the sale, lease, exchange, license, collection, or other disposition of collateral or proceeds. This can include cash received from a lease of the collateral, an item traded for the collateral, and money received from an insurance company for damage to the collateral. Funds the secured party has agreed to loan the debtor in the future are future advances, not proceeds.

Question 23

Which of the following, if true, would prevent the application of the garage sale rule?

A The collateral consists of consumer goods.

B The first buyer and the second buyer are both consumers.

C The second buyer has no knowledge of the security interest.

D The creditor files a financing statement.

Answer 23

D

A purchase money security interest (“PMSI”) in consumer goods is perfected automatically without filing. If the buyer of consumer goods in turn resells them to another consumer (i.e., a buyer who buys for his own personal, household, or family use), the second buyer takes the consumer goods free of the security interest if he buys without knowledge of it, for value, and before a financing statement covering the goods has been filed. This is often called the “garage sale” rule.