Secured Transactions

Question 1

How is a PMSI formed?

Answer 1

(1) a seller sells goods to a debtor on credit and retains a security interest in the goods
(2) a creditor loans funds to the debtor to enable the debtor to buy specific collateral, those funds are used by the debtor to acquire the collateral, and the creditor takes a security interest in that collateral.

Question 2

What are the four types of goods?

Answer 2

(1) consumer goods
(2) farm products
(3) inventory
(4) equipment

Question 3

What are consumer goods?

Answer 3

Goods used or bought primarily for personal, family, or household purposes

Question 4

What are farm products?

Answer 4

Crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states if they are in the possession of a debtor engaged in farming operations.

Question 5

What is inventory?

Answer 5

Goods held for sale or lease, goods that are to be furnished under service contracts, and materials used or consumed in a business in a short period of time.

Question 6

What is equipment?

Answer 6

(1) goods that are used or bought for use in a business
(2) any other good that is not a consumer good, farm product, or inventory.

Question 7

What are the eight types of intangible collateral?

Answer 7

(1) instruments
(2) documents
(3) chattel paper
(4) investment property
(5) accounts
(6) deposit accounts
(7) commercial tort claims
(8) general intangibles

Question 8

What is an instrument?

Answer 8

A piece of paper representing the right to be paid money, such as a promissory note, check, or certificate of deposit.

Question 9

What is a document (intangible collateral)?

Answer 9

A piece of paper that represents the right to receive goods, such as a bill of lading or warehouse receipt.

Question 10

What is chattel paper?

Answer 10

A record which evidences (1) a monetary obligation and (2) a security interest in or a lease of specific goods.

Question 11

What is investment property?

Answer 11

Stocks, bonds, mutual funds, and brokerage accounts containing such items.

Question 12

What is a commercial tort claim?

Answer 12

A tort claim where (1) the claimant is a business organization or (2) the claimant is an individual, the claim arose out of the claimant’s business or profession, and the claim does not include damages for personal injury or the death of an individual.

Question 13

What is a general intangible?

Answer 13

Any intangible collateral that does not fall into one of the other categories, including intellectual property (patent, trademark, copyright, goodwill).

Question 14

When does a lease fall under Article 9?

Answer 14

When it is a security interest disguised as a lease -
(1) the lease term is equal to or greater than the remaining economic life of the goods
(2) the lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life of the goods
(3) at the end of the lease, the lessee has an option to purchase the goods or renew the lease for the remaining economic life of the goods for no or nominal consideration

Question 15

What are the requirements to attach a security interest?

Answer 15

(1) an agreement, evidenced by a security agreement, possession, or control
(2) value given by the secured party
(3) debtor has rights in the collateral

Question 16

What are the requirements for a valid security agreement?

Answer 16

(1) a writing showing an intent to create a security interest
(2) authenticated by the debtor
(3) reasonably identify the collateral

Question 17

What are proceeds?

Answer 17

Whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. It includes second generation proceeds.

Question 18

When does a security agreement attach to proceeds?

Answer 18

When the proceeds are “identifiable proceeds.”

Question 19

What part of commingled cash proceeds are identifiable?

Answer 19

This is determined using the lowest intermediate balance rule. The lowest balance during the time period starting when the proceeds were deposited and ending when the rule is applied are the identifiable proceeds.

Question 20

What are the six methods of perfection?

Answer 20

(1) filing a financing statement
(2) taking possession
(3) taking control
(4) automatic perfection
(5) temporary perfection
(6) noting on certificate of title

Question 21

What type of security interest is automatically perfect?

Answer 21

A PMSI in consumer goods.

Question 22

What type of security interest may be perfected by control?

Answer 22

Investment property, nonconsumer deposit accounts, electronic chattel paper

Question 23

What type of security interest must be perfected by control?

Answer 23

Nonconsumer deposit accounts (unless the funds in the account are proceeds)

Question 24

How does a secured party obtain control of a nonconsumer deposit account?

Answer 24

(1) automatically if the secured party is the bank in which the nonconsumer deposit account is maintained
(2) putting the deposit account in the secured party’s name
(3) control agreement

Question 25

How do you perfect an interest in a motor vehicle?

Answer 25

Notation on the vehicle’s certificate of title (unless the vehicles are held as inventory for sale or lease)

Question 26

What are the requirements for a financing statement?

Answer 26

(1) debtor’s name and mailing address
(2) secured party’s name and mailing address
(3) description of the collateral

Question 27

What are the requirements for the debtor’s name in a financing agreement?

Answer 27

If the debtor is an individual with an unexpired driver’s license issued by the state where the financing statement is to be filed, the name must match the license.

If the debtor is a registered organization, the name must match its most recent public organic record.

Question 28

When does an error in the debtor’s name invalidate a financing statement?

Answer 28

When the name is seriously misleading. A name is not seriously misleading if it would be discovered in a filing office search under the debtor’s correct name.

Question 29

What happens to a secured party’s perfected interest in after-acquired property if the debtor changes his name?

Answer 29

The secured party is perfected as to collateral acquired within four months of the name change, after which the secured party must refile.

Question 30

When does a financing statement perfect as to after-acquired property?

Answer 30

When the description is broad enough to cover the after-acquired property.

Question 31

What are the additional requirements for a financing statement that covers real-estate-related collateral?

Answer 31

(1) a description of the related real property
(2) the name of the record owner
(3) an indication that it is to be filed in the real property records

Question 32

How may a debtor authorize the filing of a financing statement?

Answer 32

(1) any signed writing
(2) authenticating the financing statement
(3) authenticating the security agreement

Question 33

What happens to a security interest perfected by a financing statement if the debtor moves to a new state?

Answer 33

The interest is perfected for four months after the move; to continue perfection the secured party must file a new financing statement in the new state before the expiration of the four-month period.

Question 34

What happens to a security interest perfected by a financing statement if the collateral is transferred to a new owner in a different state?

Answer 34

The interest is perfected for one year after the move; to continue perfection the secured party must file a new financing statement in the new state before the expiration of the one-year period.

Question 35

What is the special priority rule for an accession in a vehicle?

Answer 35

A security interest in an accession is subordinate to a security in the whole of a vehicle (even if the security interest in the accession is a PMSI).

Question 36

What is the garage sale rule?

Answer 36

In a consumer-to-consumer sale, a buyer takes free of a perfected security interest if the buyer buys (1) without knowledge of the security interest, (2) for value, (3) for the buyer’s own personal, family, or household purposes, and (4) before a financing statement covering the goods has been filed.

Question 37

When is authorization of the sale of collateral implied?

Answer 37

When the collateral is inventory.

Question 38

What is the buyer in the ordinary course exception?

Answer 38

A buyer in the ordinary course takes free of a nonpossessory security interest in goods created by the buyer’s seller.

Question 39

What is a buyer in the ordinary course?

Answer 39

A person who buys goods (1) in good faith, (2) without knowledge that the sale violates a securty agreement, and (3) in the ordinary course of business from a seller in the business of selling goods of the kind purchased.

Question 40

What is PMSI superpriority in goods other than inventory and livestock?

Answer 40

A PMSI in goods other than inventory and livestock has priority over conflicting security interests in the same goods or their proceeds if the interest is perfected before or within 20 days after the debtor receives possession of the goods.

Question 41

What is PMSI superpriority in inventory?

Answer 41

A PMSI in inventory has priority over a conflicting security interest in the same inventory if:

(1) it is perfected at the time the debtor gets perfection (filing must take place before delivery), and
(2) any secured party who has filed a financing statement covering the inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory.