Secured Transactions

Question 1

What is a security interest?

Answer 1

a limited right in specific personal property (the collateral) of the debtor that allows the creditor to take the property (repossession) if the debtor fails to fulfill the credit obligation

Question 2

T/F: a security interest is effective between the parties as soon as certain steps are taken to attach the interest

Answer 2

True; however, attachment does not provide the creditor with rights against their parties who might also have an interest in the collateral; to gain rights over third parties, a creditor must perfect their security interest which essentially serves as a form of notice that gives the creditor rights in the collateral superior to certain third parties

Question 3

What is the special type of security interest that has priority over all other types of security interests in the same collateral if it is properly perfected?

Answer 3

purchase money security interest (PMSI); it arises when a creditor sells the collateral to the debtor on credit, retaining a security interest for the purchase price or the creditor advances funds used by the debtor to purchase the collateral

Question 4

What are the 4 broad categories of collateral?

Answer 4

goods (consumer goods, inventory, and equipment; it depends on how the debtor uses the item, not by the nature of the item)

intangible and semi-intangible collateral (an account that has any right to payment for goods, services, real property, or use of a credit card not evidenced by an instrument or chattel paper [money you owe your doctor after a checkup])

investment property (stocks, bonds, mutual funds, etc.)

proceeds (includes whatever is received upon the sale, exchange, collection, or other disposition of collateral)

Question 5

What are the 5 methods of perfection?

Answer 5

filing a financing statement - includes all kinds of collateral except deposit accounts and money; the financing statement must include the names and addresses of the debtor and creditor and an indication of the type of collateral covered by the financing statement

taking possession of the collateral - similar to a pawn shop; the property owner can redeem the pledged item by paying back the amount borrowed

control - a secured party has control of an item of investment property when the secured party has taken whatever steps are necessary to be able to have the investment property sold without further action from the owner

automatic perfection - there are two types: PMSI in consumer goods and small-scale assignment of accounts (assignment of a few accounts receivable)

temporary perfection - if a creditor has a perfected security interest in collateral and that collateral is sold, the creditor has a temporary, perfected security interest in the proceeds of the collateral that was sold (lasts 20 days); if the debtor moves to a different state, perfection in the first state is valid for 4 months; to maintain its priority, the creditor must perfect in the new state within this 4 month period

Question 6

T/F: the right to take possession of and sell the collateral on default is the most important and most used of the rights on default

Answer 6

True; the secured party may take possession as long as there is no breach of the peace (they can also take possession by replevy action which is a judicial action seeking the transfer of personal property)