Secured Transactions

Question 1

What is a security interest?

Answer 1

A security interest is when a party (the debtor) uses certain property as collateral to secure repayment of funds to another party (the secured party/creditor).

Question 2

What is collateral?

Answer 2

Property that is subject to a security interest that a creditor can look to satisfy the debt.

Question 3

What are the four main types of collateral?

Answer 3

1. Consumer goods: Goods used primarily for personal, family, or household purposes (cars, jewelry)
2. farming equipment
3. Inventory: goods held for sale or lease by a business.
4. (Workplace) Equipment: Used by a business but not sold (chairs, computers, desks)

Question 4

What are tangibles vs intangibles/semi-intangibles?

Answer 4

Tangibles = things you can see/touch

Intangibles = things you cannot touch: Includes intellectual property, stocks, bonds, cash proceeds, accounts (right to payment) promissory notes

Question 5

What is attachment?

Answer 5

Attachment is when the security interest is enforceable against a debtor.

Question 6

What are the three requirements for attachment?

Answer 6

Attachment requires:
1. A security agreement: The debtor must authenticate a security agreement granting the creditor security interest in the collateral & reasonably identify the collateral (including after-acquired property)

2. The debtor has rights to the collateral.
3. The Creditor must give value to the debtor

Question 7

What is perfection?

Answer 7

Perfection is the process by which the secured party (the creditor) gives notice to the entire world of its security interest. It is necessary for priority. A security interest is perfect if it has been attached and all of the requirements for perfection have been made.

Question 8

What are the four ways that a security interest can be perfected?

Answer 8

1. Automatic Perfection
2. Creditor files Notice with a public office that includes the correct information from the filing statement (security interest covered, debtor’s info.)
3. Creditor takes possession/physical control over the property
4. Creditor has control over the collateral

Question 9

When is PMSI in consumer goods perfected?

Answer 9

Consumer goods are automatically perfected upon attachment

Question 10

When is re-perfection needed?

Answer 10

Re-perfection is needed when:

1. Lapse - a perfected security interest only lasts five years. A perfected party must file a continuation statement within six months before the expiration.
2. Debtor or collateral moves out of state

Question 11

What is the general rule of priority under Article 9?

Answer 11

Under Article 9, the general rule of priority is “first in time, first in right.”

Question 12

What happens if a debtor defaults?

Answer 12

If a debtor defaults, a creditor may take possession of the collateral via self-help, if doing so can be done without a “breach of the peace”.

“Breach of the peace” is characterized by the likelihood of violence, disturbance, the threat of disturbance, constructive force, impersonation of police, or repossession over any protest. Trickery is okay.

Question 13

What is a buyer in the ordinary course of business and its impact?

Answer 13

1) someone who buys goods in good faith; 2) without knowledge that it violates the security interest of someone else (but you can know the security interest exists); and 3) from a seller that is in the business of selling goods of that kind

Buyers in the ordinary course of business receive priority over others and protection. If a BIOC transfers or sells their interest, the new party is protected under the shelter rule.