Secured Transactions

Question 1

Under Article 9 of the UCC (adopted by Virginia), a creditor must take two steps to gain the full protection of secured transactions law:

Answer 1

1. Attach a security interest to the collateral AND

2. Perfect the security interest

Question 2

Attaching a security interest simply means

Answer 2

creating a valid security interest in collateral.

Question 3

The most common way to attach a security interest is

Answer 3

with a signed security agreement.

Question 4

The security agreement is

Answer 4

a written agreement that certain personal property will serve as collateral, usually for a loan.

Question 5

For a security agreement to be valid,

Answer 5

(1) the security agreement must describe the collateral, (2) the party offering the collateral must have rights in it (that i, they must own it or have some other legal rights in it), AND (3) the party gaining the security interest (usually a bank or merchant) must give value in exchange for the security interest.

Question 6

Generally, after-acquired collateral clauses are

Answer 6

valid in Virginia.

Question 7

In Virginia, after-acquired collateral clauses are ineffective as to

Answer 7

consumer goods acquired more than 10 days after the creditor has given value

Question 8

There are also two ways for a security interest to attach to collateral without a security agreement:

Answer 8

1. Possession, and

2. Control

Question 9

What does the holder of a security interest do by perfecting a security interest?

Answer 9

Puts the world on notice that the security interest exists

Question 10

When done properly, a perfected security interest will

Answer 10

be superior to most (but not all) interests others might have in the collateral.

In other words, if the business defaults on the loan, the bank will be first in line to auction off the business’s collateral and recover the balance of the loan

Question 11

Most security interests are perfected when

Answer 11

the holder of the security interest files a financing statement at a central filing location in the state where the debtor is located

Question 12

In Virginia, financial statements are filed

Answer 12

with the State Corporation Commission

Question 13

The financing statement is

Answer 13

a simple document that identifies the debtor and the creditor and describes the collateral.

Question 14

Once a financing statement is properly filed, the security interest is

Answer 14

perfected and the world is considered to have notice of the security interest.

Question 15

Security interests in motor vehicles can be perfected only

Answer 15

by a notation on the security interest of the vehicle’s title.

Question 16

Security interests in things attached to land (e.g., timber or fixtures) usually must be perfected

Answer 16

with filing statements that describe the land and are filed in the county where the land is located.

Question 17

Security interests in most types of collateral can be perfected by possession

Answer 17

by the party holding the security interest.

Question 18

Security interests in a few types of collateral (e.g., business deposit accounts) can be perfected by

Answer 18

control.

Question 19

Purchase money security interests in consumer goods are

Answer 19

automatically perfected.

Question 20

The main issue in most secured transactions questions is

Answer 20

the order of priority of the security interests.

Question 21

Perfected security interests have priority over

Answer 21

unperfected security interests.

Question 22

Between two perfected security interests, ___ _____ __ ____ ____ __ _________ has priority.

Answer 22

the first to have been filed OR the first to file a valid financing statement

Question 23

PMSI =

Answer 23

Purchase money security interests

Question 24

PMSIs have priority over

Answer 24

non-PMSIs

Question 25

Where the collateral in inventory, a PMSI will have super priority only if:

Answer 25

the creditor, before handing over possession of the inventory to the debtor: (1) sends a special written notice to other security interest holders, AND (2) takes steps to assure that its PMSI will be perfected at the time the debtor receives possession.

Question 26

Perfected security interests have priority over creditors

Answer 26

in bankruptcy.

Question 27

A buyer in the ordinary course of business usually takes goods

Answer 27

free of any security interest.

(e.g., if a store gets a loan from a bank and gives the bank a security
interest in its inventory of refrigerators, and then you buy a refrigerator from the
store, the bank loses its security interest because you are a buyer in the ordinary
course of business).

*knowledge of a financial statement filed by the holder of the security interest does not defeat this rule unless there is knowledge that the sale violated the terms of the agreement between the debtor and the security interest holder

Question 28

Consumer goods are

Answer 28

goods used or bought for personal or household purposes.

Question 29

Inventory are

Answer 29

goods held for sale or lease and supplies/materials quickly used up in business.

Question 30

Equipment is

Answer 30

any physical goods other than consumer goods, inventory, or farm products

Question 31

Accounts is

Answer 31

a right to payment (accounts receivable).

Question 32

Deposit accounts is

Answer 32

a bank account.

Question 33

A purchase money security interest (PMSI) is

Answer 33

a special type of security interest that gets higher than usual priority.

Question 34

A PMSI arises when

Answer 34

the lender loans money to the borrower specifically for the buyer to purchase certain goods, and the lender takes a security interest in those goods.

For example, Lumber Mill owns a bunch of machines that saw wood. Bank 1 has a perfected security interest on all of Lumber Mill’s equipment (including these machines and any acquired in the future) due to an existing loan. Lumber Mill needs a new machine. Bank 2 gives Lumber Mill a loan to buy the new machine and takes a security interest in the new machine. Bank 2’s
security interest is a PMSI and, therefore, Bank 2’s security interest has priority over Bank 1’s (even though Bank 1’s interest was perfected first).

Question 35

Generally, if a borrower defaults on a loan that is covered by a security interest, the secured party has a right to

Answer 35

sell the collateral and use the funds from the sale to pay itself the amount remaining on the loan.

Question 36

When a borrower defaults on a loan and the secured party wants to sell the collateral, how does the secured party get the collateral?

Answer 36

Secured parties can simply take the collateral

if they can do so peacefully. OR they can file an action in court to force a public sale of the collateral.