Secured Transactions Flashcards
The issue is whether the finance company has an interest in the home entertainment system.
A security interest arises when one party uses certain collateral in order to secure repayment of an obligation from another party. Attachment is the process by which a security agreement is created. Attachment occurs when the secured party gives value, the debtor has rights in the collateral, and a valid security agreement exists. A valid security agreement is (1) in writing, (2) authenticated, or signed, by the debtor, (3) contains a granting clause indicating that a security agreement exists, and (4) contains a description of the collateral. A description of collateral in a security agreement is sufficient if it reasonably identifies what is being described. Perfection is the process by which a secured party gives notice to the entire world of its interest. Perfection is necessary for establishing priority. The most common method of perfection is filing a financing statement with an appropriate public office.
Inventory is collateral that may be subject to a security interest. Inventory includes all goods that a company holds for sale to customers in its business. A buyer in the ordinary course of business takes the goods purchased free and clear of any interest the seller may have created. A buyer in the ordinary course of business is one that purchases consumer goods in good faith, without notice of any prior interest in the goods, and in the ordinary course of business from a seller that normally sells those types of goods.
The issue is whether the retailer has an interest in the home entertainment system.
A purchase-money security interest (PMSI) is created when an interest in goods is incurred by the debtor in order to purchase the goods. In order to qualify as a PMSI, the debtor must actually use the funds to purchase the goods. A PMSI in consumer goods is perfected automatically upon the debtor taking possession of the goods, without the need for filing a financing statement. The “garage sale” exception applies when a person buys a consumer good face-to-face from another individual (such as when one buys from another person at a garage sale). Similarly to the buyer in the ordinary course of business, a “garage sale” buyer purchases free and clear from any previous interests in the item, so long as they buy in good faith and without knowledge of the interest.
The issue is whether the retailer has an interest in the $4,000 check [proceeds].
A secured creditor has a right to all proceeds from the sale of the secured goods for which it has a security interest. When the proceeds are cash and are traceable, the security interest persists in the proceeds from the sale of the collateral.
The issue is whether the bank observed the proper sale procedures in enforcing the security interest [foreclosure sale reqs].
Generally, a secured party is entitled to enforce its security interest over personal property if the debtor is in default under the relevant security agreement. Enforcement may take place by a variety of means, including repossession (self-help without breaching the peace), strict foreclosure, and by exercising the power of sale. In order to correctly exercise a power of sale, the secured party must: (1) conduct the sale process in a commercially reasonable manner; and (2) give reasonable prior notice of the sale to the debtor, any guarantors of the debtor, and (in the case on non-consumer transactions) any other secured parties or claimants against the property of whom the prospective enforcing secured party has notice. Notice must be provided within a reasonable time prior to the sale of the collateral; generally, 10 days or more prior to sale has been found reasonable. Failure to properly notify may result in adverse consequences for the secured party: they may be estopped from seeking a deficiency against the debtor, the deficiency may be reduced, or they may be liable to suit on behalf of the debtor or other creditors with interest in the collateral for damages or even to enjoin the sale if it has not already occurred.
[Themis: 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. 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. This notice must be given sufficiently far enough in advance of the disposition (e.g., at least 10 days) to allow the notified party to act on the notification. 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. If a secured party fails to comply with these requirements, then the debtor or other secured party may seek damages for any loss caused by the secured party’s failure to notify. There is also a rebuttable presumption that the secured party is not entitled to collect a deficiency. The secured party can rebut this presumption in whole or in part by showing that the deficiency would have existed even had the secured party complied with Article 9.]
The issue is whether the bank’s perfected security interest has priority over a judicial lien creditor.
Rules of perfection determine priority among secured parties, general creditors, and lien creditors. A secured party perfects its interest when, after the interest attaches, the secured party files a financing statement, obtains control or possession over the collateral, or through automatic perfection by operation of law.
Attachment occurs when (1) the secured party gives value, (2) the debtor has rights in the collateral, and (3) the debtor signs a security agreement.
A financing statement must contain a description of the property, the parties to the security agreement, and be authorized by the debtor. The debtor’s authorization on a security agreement will constitute authorization of the financing statement. Supergeneric terms like “all personal property” are acceptable in financing statements. A secured party with a perfected security interest has priority in the collateral over a judicial lien creditor, but a judicial lien creditor has priority over an unperfected security interest.
The issue is whether the description of the bank’s security interest (set out in the written security agreement) was stated with sufficient particularity to cause the security interest to validly attach to the other property.
Under Article 9 of the UCC, attachment occurs when: (1) the secured party gives value in exchange for the collateral, (2) the debtor has a right to convey the collateral, and (3) the debtor signs a valid security agreement which describes the collateral and evidences the intent to grant a security interest in the collateral. In the security agreement (unlike in financing statements), the collateral to be secured must be described with sufficient particularity to adequately identify the collateral. While a supergeneric description like “all the debtor’s assets” may suffice for purposes of a financing statement, something more detailed is required for the security agreement itself.
The issue is whether the retailer has a perfected security interest in the bicycles.
Under Article 9 of the Uniform Commercial Code, for a security interest to be enforceable against a debtor, the interest must attach to the collateral. For attachment, three conditions must be met: (1) value must be given by the secured party; (2) the debtor has rights in the collateral; and (3) the debtor authenticated a security agreement that describes the collateral (or the secured party has possession or control of the collateral pursuant to a security agreement). A PMSI is a special type of 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.
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. A secured party can perfect a security interest by (1) filing a financing statement; (2) possessing the collateral; (3) controlling the collateral; or (4) perfecting automatically. A PMSI in consumer goods perfects automatically. In other words, a security interest in a consumer good is perfected as soon as it attaches. A consumer good is a good that is acquired primarily for personal, family, or household purposes.
The issue is whether the buyer is a consumer buyer that takes free of the retailer’s perfected security interest in the bicycle.
While a PMSI in consumer goods automatically perfects, that perfection does not guarantee priority in a dispute over the same collateral. A consumer buyer of consumer goods takes free of a security interest, even if perfected, unless prior to purchase, the secured party filed a financing statement covering the goods. In other words, the holder of a PMSI in consumer goods could lose to a consumer buyer if he/she does not file a financing statement. A consumer buyer is a person who: (1) buys consumer goods for value; (2) for his own, personal, family, or household use; (3) from a consumer seller; and (4) without knowledge of the security interest. This is often referred to as the “garage sale” rule because that type of sale would qualify.
The issue is whether the retailer’s perfected security interest in the bicycle is enforceable against the friend who received the bicycle as a gift.
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.
The issue is whether Bank has a security interest in Construction Company’s right to be paid $450,000 by the developer for the road-building project.
Under Article 9 of the Uniform Commercial Code (UCC), a security agreement is enforceable against a debtor when the security interest attaches to the collateral. Attachment occurs upon the happening of three elements: (1) the secured party gives value; (2) the debtor acquires rights in the collateral; and (3) the debtor authenticates (signs) a security agreement that reasonably describes the collateral. In addition, after-acquired property clauses are valid in a security agreement, and a valid security interest will attach to the after-acquired property as soon as the second element (debtor acquires rights in the collateral) is met. An account is a right to be paid money for goods sold or services rendered, and a secured party may properly take a security interest in accounts.
The issue is whether the developer was discharged from its payment obligation under the road-building contract by virtue of having paid Construction Company.
Upon default, which is a defined term within a given security agreement and not by Article 9 of the UCC, the secured party is entitled to foreclose on its security interest. The method of foreclosure depends on the nature of the collateral. Here, Bank acquired rights in Construction Company’s account. Upon default, Bank was entitled to foreclose on Construction Company’s accounts by following the rules of Article 9.
Under Article 9 and upon default, a secured party holding a security interest in accounts can direct the debtor’s debtors to make payments directly to the secured party. The secured party must give written notice to the third party owing the obligation to the debtor, and the written notice must be signed by the secured party. Upon receipt of the secured party’s notice instructing the third party to make payments to the secured party, the secured party is entitled to demand assurances that the secured party has rights in the account. Before and until the secured party provides reasonable assurance, the third party is allowed to continue making payments on the obligation to the debtor, and the third party’s obligation will be credited by the amount paid to the debtor. This is because the third party’s payments to the debtor are considered proceeds, and the secured party is at least temporarily perfected in the payments even though the money is in the hands of the debtor. However, once the secured party provides notice and reasonable assurances (if requested), then the third party must pay the secured party as instructed. Any payments made to the debtor will not be credited towards the third party’s account.
The issue is the order of priority as between the three banks (one perfected/attached; one unperfected/attached; one unperfected/unattached) and Supplier (judicial lien creditor).
Priority is the method of ranking who has a superior interest in the collateral in case of a default. Between two perfected security interests, the first to file or perfect prevails. A perfected security interest will take priority over an unperfected security interest. A judicial lien will take priority over a security interest if the lien attaches prior to the time that the interest is perfected. Priority among unperfected security interests rank in order of attachment.
[Also: If a security interest is perfected after the lien is levied, it can still have priority in special cases, e.g., with purchase-money security interests and when future advances are made without knowledge of the lien, or pursuant to an obligation that existed before the lien, or within 45 days after the lien was created]
The issue is which of the banks’ security interests have been properly perfected.
Under UCC Article 9, a security interest that has attached to the collateral is valid against the debtor. A security interest that is perfected is valid against third parties. There are five methods of perfection: (1) automatic upon attachment (with a purchase-money security interest in consumer goods); (2) by possession, (3) by control, (4) by notation on the certificate of title (where appropriate, usually with motor vehicles), and (5) by filing a financing statement.
The issue is whether Bank has an enforceable security interest in the property described in the loan and security agreements–the inventory and accounts.
A security interest that is enforceable against the debtor with respect to the collateral is said to have attached to the collateral. To be enforceable against the debtor, three conditions must coexist: (1) value has been given by the secured party, (2) the debtor has rights in the collateral, and (3) the debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement.
The issue is whether Bank has a SI in Acme’s rights to payments from customers.
“Accounts” include the right to payment for goods sold, property licensed, or services rendered.
