Secured Transactions

Question 1

Written Security Agreement

Answer 1

To be valid must: (1) Clearly describe the collateral so that it can be readily identified; (2) Contain the debtor’s promise to repay the creditor, including terms of repayment; (3) Set forth the creditor’s rights upon the debtor’s default; (4) Be signed by the debtor.

Question 2

Attachment

Answer 2

(1) Value be given for the security interest; (2) Debtor has rights in the collateral (or power to transfer the collateral to a secured party); and (3) Debtor authenticates (executes) a security agreement.

Question 3

A Creditor’s Security Interest can attach to goods
- FIFE C -

Answer 3

Fixtures
Inventory
Farm Products
Equipment
Consumer Goods

Question 4

Fixtures

Answer 4

Affixed to real estate to become part thereof.

Question 5

Inventory

Answer 5

Held for sale or lease, including work in progress and materials.

Question 6

Farm Products

Answer 6

Including crops, livestock and supplies used or produced in farming operations.

Question 7

Equipment

Answer 7

Bought or used primarily for business.

Question 8

Consumer Goods

Answer 8

Bought or used primarily for personal, family, or household purposes.

Question 9

Instruments

Answer 9

Such a checks, notes, stocks, bonds, and other investment securities.

Question 10

Chattel Paper

Answer 10

Record that evidences both a monetary obligation and a security interest in specific goods.

Question 11

Documents of Title

Answer 11

Including bills of lading and warehouse receipts – instruments evidencing ownership and control.

Question 12

Accounts

Answer 12

Such as accounts receivable – rights to payment for services rendered or to be rendered.

Question 13

General Intangibles

Answer 13

Such as patents, copyrights, money franchises, and royalties.

Question 14

Consignment Exception

Answer 14

Consignees will be treated as having the same rights as consignors where item is valued at > $1,000.00 and items are not consumer goods for resale.

Question 15

Priority
-General Rule-

Answer 15

The first to attach and perfect a security interest has priority.

Question 16

Perfection

Answer 16

Public notice given by a proper method.

Thus, it’s the first to file (UCC) OR otherwise perfect (possession or control) that takes priority.

Question 17

Financing Statement
-Perfection Method-

Answer 17

Creditor files a financing statement with the appropriate government office.

Question 18

Possession
-Perfection Method-

Answer 18

Creditor obtains physical possession of the collateral.

Question 19

Control
-Perfection Method-

Answer 19

Creditor may control collateral such as investment property, bank or investment accounts or electronic chattel paper.

Question 20

Purchase Money Security Interest (PMSI)

Answer 20

Creditor extends credit to a debtor to purchase consumer goods and obtains a security interest in the goods.

Question 21

PMSI Automatic Perfection
-Consumer Goods-

Answer 21

A creditor’s PMSI in consumer goods is automatically perfected upon attachment (no need to file) and retains top priority.

Question 22

PMSI Perfection
-Inventory-

Answer 22

A creditor’s PMSI in inventory retains top priority when: (1) it is perfected upon filing a financing statement before the time the debtor receives possession of the inventory; and (2) sends a notification to all holders of conflicting security interests prior to possession.

Question 23

PMSI Perfection
-Equipment-

Answer 23

A creditor’s PMSI in equipment retains top priority when: (1) it is either perfected upon filing a financing statement at the time the debtor receives possession of the equipment or (2) filed within 20 days after.

Question 24

PMSI v. Perfected Security Interests

Answer 24

PMSI has priority!

Question 25

Perfected v. Unperfected

Answer 25

Perfected has priority!

Question 26

Perfected v. Perfected
- First-to-File-or-Perfect Rule-

Answer 26

The general rule is that the security interest that was the earlier to be either perfected or the subject of a filed financing statement has priority.

Question 27

Secured v. Unsecured

Answer 27

A creditor who has the only secured interest in the debtor’s collateral has priority over unsecured interests.

Question 28

Unperfected v. Unperfected

Answer 28

If two or more secured parties claim an interest in the same collateral but neither has a perfected claim, the first to attach has priority.

Question 29

Perfected Secured Claims in Fungible, Commingled Goods

Answer 29

If a security interest in goods is perfected, but the goods are later commingled with other goods and the goods become part of a product or mass and lose their identity, the security interests rank equally.

Question 30

Debtor’s Name
-Individual-

Answer 30

Name must match exactly as it is listed on the person’s driver license.

Question 31

Debtor’s Name
-Businesses-

Answer 31

The financing statement is filed under its “official registered corporate name” in the state where it was first registered as a business organization.

Filing under a corporation’s trade name is fatal.

Question 32

Minor Error in Debtor’s Name

Answer 32

Will not invalidate the financing statement provided the name used is not “seriously misleading” and, by using the filing office’s standard search logic, a third party would uncover the filed financing statement.

Question 33

What if Debtor Sells or Transfers Collateral?

Answer 33

Generally, a creditor’s perfected security interest continues even though the debtor sells or transfers the secured collateral.

Question 34

Buyers in the Ordinary Course of Business
-Exception-

Answer 34

Take free from any pre-filed security interest in the merchant’s inventory even if the buyer was aware of the security interest.

A “buyer in the ordinary course of business” must buy the goods (in good faith) from a seller who is in the business of regularly selling goods of that kind.

Question 35

The Garage Sale Rule
-PMSI-

Answer 35

If subsequently another consumer: (1) pays value for consumer goods (2) for personal purposes from another consumer (3) in good faith without knowledge of the secured interest, and (4) before secured party files, the consumer prevails over the unfiled purchase money security interest in the consumer goods.

Question 36

What about the proceeds from the sale of collateral?

Answer 36

A security interest in collateral extends to identifiable proceeds of that collateral.

Question 37

Judgment Liens

Answer 37

Judgment liens take priority over unperfected security interests.

However, a perfected security interest created prior to the judgment lien holds priority over that lien.

Question 38

Default

Answer 38

Failure to make scheduled payments when due, bankruptcy of the debtor, breach of the warranty of ownership as to collateral, and other events defined by the parties to constitute default.

Question 39

Default Remedy
-Repossession-

Answer 39

The secured party may cure the default by taking possession of the collateral. Self-help without judicial process if no breach of peace.

The secured party may then: (1) Retain the collateral; or (2) Sell or dispose of the collateral and satisfy debt from proceeds.

Question 40

Default Remedy
-Retention of Collateral-

Answer 40

The secured creditor may retain possession if they notify debtor in writing, unless debtor renounced rights in writing.

Secured creditor may not retain property if: (1) there is a written objection within 20 days; or (2) the goods are consumer goods, and the debtor has paid 60 percent of the cash price or loan.

Question 41

Default Remedy
-Disposition-

Answer 41

The creditor may dispose of goods in any commercially reasonable method with written notice to debtor and other secured parties 10 days before sale.

The proceeds must first be applied to: (1) Reasonable expenses of retaking, holding, and preparing collateral for sale; (2) Satisfying balance owed; (3) Satisfaction of any subordinate claims; (4) Debtor gets surplus.

Question 42

Default Remedy
-Deficiency and Redemption-

Answer 42

The secured party may bring an action to recover any deficiency.

The debtor or another secured party may redeem the collateral before the lienholder has disposed of it, entered into a contract for sale, or discharged the debtor’s obligations.

Question 43

Default Remedy
-Relinquishing the Security Interest-

Answer 43

The creditor may relinquish his security interest and proceed to judgment to recover underlying debt.

Usually chosen when value of collateral has been reduced below value of secured interest.

Question 44

Surety v. Guaranty

Answer 44

Surety = primarily liable for paying principal’s debt.

Guaranty = is secondarily liable on debt.

Both may assert defenses of fraud or duress.