Secured Transactions

Question 1

What governs security interests?

Priority: High

Answer 1

Article 9 of the Uniform Commercial Code (UCC) governs ANY TRANSACTION REGARDLESS OF ITS FORM THAT CREATES A SECURITY INTEREST, including security interests in personal property, consignments, a sale of accounts, chattel paper, and promissory notes.

Question 2

What goods are considered to be “inventory?”

Priority: High

Answer 2

Inventory includes goods, other than farm products, that are held for sale, leased by a person, or raw materials used in a business.

Items owned by another person held for repair services are not included.

Question 3

What is necessary to enforce a security interst?

Priority: High

Answer 3

Enforcing a security interest depends on whether that interest has ATTACHED and been PERFECTED.

Question 4

What does attachment do to a security interest?

Priority: Medium

Answer 4

Attachment secures the creditor’s rights in the debtor’s collateral, making the security interest valid and enforceable against the debtor.

Question 5

What does perfection do to a security interest?

Priority: Medium

Answer 5

Perfection of a security interest is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties.

Perfection gives notice of the creditor’s rights in the collateral to other parties who may have claims to the same, and usually determines which party has priority to the collateral.

Question 6

What is necessary for an interest to attach?

Priority: High

Answer 6

An interest has attached to collateral when: (1) the creditor extends VALUE TO THE DEBTOR; (2) the debtor has RIGHTS IN THE COLLATERAL; and (3) the debtor has authenticated a security agreement decribing the collateral or the secured party retains possession or control of the collateral.

Question 7

When is a security interest perfected?

Priority: High

Answer 7

A security interest is perfected upon attachment and compliance with one of the methods of perfection.

Question 8

What are the available methods for perfection?

Priority: High

Answer 8

Perfection may be obtained by filing a financing statement, having possession or control of the collateral, or an interest can be automatically perfected in certain circumstances.

Question 9

Does a security interest continue after the sale of the collateral?

Priority: High

Answer 9

Generally, a security interest will continue despite any sale, lease, or other disposition of the collateral, unless the secured party has authorized its sale free of the security interest.

A buyer of collateral subject to a perfected interest generally takes the collateral subject to that interest, unless the secured party has authorized its sale free of the security interest

Question 10

Is a buyer in the ordinary course of business subject to a security interest?

Priority: High

Answer 10

A buyer in the ordinary course of business (BOCB) takes free of a security interest created by the buyer’s seller, even if the security interest is perfected.

Question 11

Who is a buyer in the ordinary course of business?

Priority: High

Answer 11

A BOCB is a buyer who (1) buys goods in good faith; (2) without knowledge that the sale violates the rights of another person; and (3) in the ordinary course of business from a merchant in the business of selling goods of that kind.

A buyer who has knowledge of a creditors security interest in a sellers inventory, but does not know the terms of the agreement, will still be a BOCB.

Question 12

What is a purchase money security interest, and what are the requirements?

Priority: High

Answer 12

A purchase-money security interest (PMSI) is a special type of security interest that exists when a secured party sold goods to the debtor, and the debtor incurs an obligation to pay the secured party all or party of the purchase price (a sale on credit).

A purchase money security interest (PMSI) is a security interest in goods that has priority over other security interests in the same goods.

It arises when a creditor sells goods to a debtor on credit and retains a security interest in those goods, or the creditor advances funds, which are then used to purchase the goods and the creditor reserves a security interest in those goods.

Question 13

How is a purchase money security interest in consumer goods perfected?

Priority: Medium

Answer 13

A PMSI in consumer goods is automatically perfected.

Consumer purchase money security interests (PMSI) are automatically perfected.

Question 14

What is a consumer good?

Priority: High

Answer 14

A consumer good is a good acquired primarily for personal, family, or household purchases.

Question 15

What is the consumer-to-consumer (garage sale) rule?

Priority: Medium

Answer 15

A consumer buyer of consumer goods takes free of a security interest unless, prior to the purchase, the secured party has filed a financing statement covering the goods.

Question 16

Who is a consumer buyer under the garage sale rule?

Priority: Medium

Answer 16

A consumer buyer is a person who: (1) buys goods for value from a consumer seller, (2) for his own personal, family, or household use, (3) without knowledge of a security interest, and (4) before the filing of a financing statement covering the goods.

Question 17

What is the shelter principle for buyers who take free of security interests?

Priority: Medium

Answer 17

If a buyer acquires property free of a security interest, then ANY SUBSEQUENT TRANSFER by the buyer to someone else is also free of the security interest.

Question 18

What are included as proceeds?

Priority: High

Answer 18

Proceeds include whatever is acquired upon the sale or disposition of collateral.

A check given in exchange for secured goods is deemed to be cash proceeds.

Question 19

When does a security interest attach to identifiable proceeds?

Priority: Medium

Answer 19

A security interest in collateral automatically attaches to identifiable proceeds.

Question 20

What is equipment?

Priority: High

Answer 20

Equipment consists of goods that are not consumer goods, inventory, or farm products.

Question 21

What are goods?

Priority: Medium

Answer 21

Goods are anything that can be moved when the security interest attaches.

Question 22

Who has priority between two or more perfected secured parties?

Priority: High

Answer 22

When there are two or more perfected secured parties with rights in the same collateral, the first to file or perfect its security interest has priority.

If both security interests are perfected, then priority dates from the time of filing or perfection, whichever occurs first.

If a party files first but perfects second, that party will still take priority.

Question 23

Who has priority between a PMSI in non-consumer goods and any other security interest?

Priority: High

Answer 23

A PMSI in non-consumer goods prevails over all other security interests in the collateral, even if they were previously perfected, if a financing statement is filed within 20 days of the debtor receiving the collateral.

Question 24

Does a lease of goods create a security interest?

Priority: High

Answer 24

A true lease of goods does not create a security interest. However, a transaction that appears to be in the form of a lease may actually be a secured transaction, creating a security interest.

Question 25

When will a “lease” be considered a security interest.

Priority: High

Answer 25

The transaction may be categorized as a secured transaction if the lessee must make payments for a term that cannot be terminated, and either (1) the term of the lease is equal to or greater than the remaining economic life of the goods, (2) the lessee must renew, or has the option to renew for nominal consideration, the lease for the remaining economic life of the goods, or (3) the lessee has an option to purchase the goods for nominal consideration.

Question 26

What effect does a seller retaining or reserving title after a shipment to the buyer have?

Priority: Medium

Answer 26

Any attempt by a seller to retain or reserve title after a shipment/delivery to the buyer, is limited in effect to a reservation of a security interest.

Question 27

Who has priority between a perfected interest and an unperfected interest?

Priority: High

Answer 27

If only one security interest is perfected and the other is not, then the perfected interest has priority over the unperfected one.

Question 28

Who has priority between two unperfected security interests?

Priority: High

Answer 28

When there are two competing unperfected security interests, the first to attach will prevail.

Question 29

Who has priority between a PMSI in consumer goods and any other security interest?

Priority: High

Answer 29

A PMSI in consumer goods enjoys automatic perfection. As such, it generally takes priority over another perfected or unperfected interest.

(The holder of a PMSI in consumer goods could lose to a consumer buyer if they do not file a financing statement)

Question 30

When does a judgment lien creditor have priority over a conflicting security interest?

Priority: High

Answer 30

Judgment lien creditors have priority over conflicting security interests if the person became a lien creditor before the conflicting security interest was perfected.

In a contest between a perfected security interest and a judicial lien, a judicial lien creditor takes the collateral subject to an existing perfected security interest but generally has priority over an unperfected security interest.

Question 31

What happens to a security interest when collateral is transferred as a gift?

Priority: Medium

Answer 31

If collateral is transferred and the transferee of the collateral is not a buyer, the security interest generally continues in the collateral, unless the secured party has authorized its sale free of the security interest.

Question 32

When does a perfected security interest attach to proceeds?

Priority: High

Answer 32

A perceted security interest will attach to any identifiable proceeds from the disposition of collateral.

The interest will become unperfected on the 21st day after attachment unless: (1) the proceeds are identifiable cash proceeds; (2) the security interest in the proceeds is perfected within 20 days; or (3) the original collateral was perfected under the general filing rule, the proceeds are collateral that may be perfected under that rule, and the proceeds are not acquired with cash proceeds.

^This (number 3 specifically) will include equipment obtained for trade in inventory

Question 33

What is an account, and what qualifies?

Priority: High

Answer 33

An account is a RIGHT OF PAYMENT FOR A MONETARY OBLIGATION.

Accounts include (1) property that has been or is to be sold; (2) services rendered; (3) an insurance policy; (4) an incurred secondary obligation; (5) energy provided; (6) the use or hire of a vessel; (7) credit card debt; or (8) lottery winnings.

Question 34

What is a deposit account?

Priority: Low

Answer 34

A deposit account is a demand, time, savings, or similar account maintained with a bank.

Question 35

How can a deposit account be perfected?

Priority: Low

Answer 35

A deposit account can only be perfected by control.

Question 36

What is necessary for an effective financing statement?

Priority: High

Answer 36

A financing statement must include the name of the debtor and secured party, indicate the collateral, and be filed by someone the debtor authorized.

Substantial compliance will be effective unless the errors make the statement seriously misleading.

Question 37

What collateral can be perfected by filing a financing statement?

Priority: High

Answer 37

A security interest in any collateral, except a deposit account, money, or letter-of-credit rights that are not a supporting obligation, may be perfected by filing a financing statement.

Question 38

Can a security agreement create an agreement in future collateral, and are there any exceptions?

Priority: Medium

Answer 38

A security agreement may create a security interest in after-acquired collateral.

An after-acquired property clause is not effective for a commercial tort claim, or consumer goods unless the debtor acquires rights in them within 10 days after the secured party gives value.

Question 39

What is the same office rule for perfecting proceeds?

Priority: High

Answer 39

Under the same office rule, a perfected security interest in proceeds may continue indefinitely when:

(1) the filed financing statement covers the original collateral,

(2) the proceeds are collateral in which a security interest may be perfected by filing in the same office as the financing statement (does not require possession for perfection), and

(3) the proceeds are not acquired with cash proceeds.

Question 40

What collateral cannot be perfected with a financing statement?

Priority: High

Answer 40

All collateral except deposit accounts, money, or letter-of-credit rights may be perfected by filing a financing statement.

Money can only be perfected by possession, whereas letter-of-credit rights can only be perfected by control, and deposit accounts can be perfected by either.

Question 41

When does a security interest become enforceable?

Priority: High

Answer 41

Under Article 9, for a security interest to be enforceable against a debtor, the interest must attach to the collateral.

Question 42

When does the security interest for after acquired property attach?

Priority: High

Answer 42

The security interest for after-acquired property attaches as soon as the debtor obtains an interest in the property.

Question 43

When does a PMSI in inventory have priority:

Priority: Medium

Answer 43

While, generally, a PMSI has priority over other security interest in the same goods, a PMSI in inventory has priority only if: (1) the PMSI is perfected by the time the debtor receives possession of the collateral; and (2) the purchase money secured party sends an authenticated notification of the PMSI to the holder of any conflicting security interest before the debtor receives possession of the collateral.

Question 44

Who takes priority between a perfected and unperfected interest?

Priority: Low

Answer 44

Under the priority rules of Article 9, a perfected security interest has priority over an unperfected security interest.

Question 45

When does UCC Article 9 apply?

Priority: Literally every single essay

Answer 45

UCC Article 9 applies if the substance of a transaction creates a security interest.

Question 46

When is a lease treated as a security interest?

Priority: Medium

Answer 46

A transaction in the form of a lease is treated as a security interest if

(1) the lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease,

(2) the payment obligation cannot be terminated by the lessee, and

(3) the lessee has an option to become the owner of the goods upon completion of the lease agreement

Question 47

When can an interest attach without a security agreement?

Priority: High

Answer 47

If the secured party has possession or control of the collateral pursuant to an agreement, then a security agreement in the form of a record is not required; an oral argument suffices.

Question 48

What can a secured party in possession of collateral do upon default?

Priority: High

Answer 48

Upon default, one of the alternatives generally available to a secured party once in possession of collateral is to dispose of the collateral at a sale, which may be public or private, in order to satisfy the obligor’s outstanding obligation.

After default; a secured party may take possession of the collateral and without removal, render equipment unusable and dispose of collateral on a debtor’s premises.

The secured party may proceed either pursuant to judicial process or without judicial process if it does not breach the peace.

Question 49

What are the requirements for a secured party to sell collateral?

Priority: High

Answer 49

In addition to conducting the sale in a commercially reasonable manner, the secured party is generally required to send an authenticated notification of disposition to, among others, the debtor.

Question 50

What is considered when determining whether a repossession was a breach of the peace?

Priority: High

Answer 50

Courts examine (1) where the repossession took place; (2) who was present; and (3) whether any protests were made.

In general, breaking into locked property is a breach of the peace.

Question 51

When does notice need to be given to dispose of collateral?

Priority: High

Answer 51

This notice must be given sufficiently far enough in advance of the disposition (typically at least 10 days) to allow the notified party to act on the notification.

Question 52

When does a secured party not need to provide notice?

Priority: High

Answer 52

A secured party is not required to send a notice of disposition when the collateral is perishable, threatens to decline speedily in value, or is of a type customarily sold on a recognized market.

A person entitled to notification may waive the right to notification.

Question 53

What happens when a secured party does not provide notice of a sale?

Priority: High

Answer 53

If a secured party fails to comply with the notice requirements, then the debtor or other secured party may seek damages for any loss caused by the secure party’s failure to notify.

There is also a rebuttable presumption that the secured party is not entitled to collect a deficiency. This presumption can be rebutted in whole or part by showing that the deficiency would have existed even had the secured party complied with Article 9.

Question 54

What is the specificity requirement for a security agreement in attachment?

Priority: Medium

Answer 54

The security agreement must be authenticated by the debtor and reasonably identify the collateral. A generic description of the collateral such as “all the debtor’s personal property” is not sufficient.

But a description stating “all debtor’s equipment” is sufficient because “equipment is defined under UCC Art. 9