Secured Transactions

Question 1

Security Interest

Answer 1

An interest in personal property or fixtures that secures payment or performance of an obligation

Question 2

Collateral

Answer 2

The property subject to a security interest

Question 3

Attachment

Answer 3

The process by which a security interest becomes enforceable against the debtor with respect to the collateral

Question 4

Perfection of a security interest.

Answer 4

The process of making a security interest enforceable against third parties, typically by filling a financing statement with the appropriate government office.

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 of a security interest is necessary for the secured party to have a superior right in the collateral.

Question 5

Priority

Answer 5

The rules determining the order in which competing claims to the same collateral will be satisfied.

Question 6

Purpose of Secured Transactions

Answer 6

Reduce Risk for Lenders: Secured transactions provide lenders with a legal right to take possession of and sell the collateral if the borrower defaults on the loan. This reduces the lender’s risk and often results in more favorable loan terms for the borrower.
Facilitate Credit: By offering collateral, borrowers can often obtain credit that they might not otherwise qualify for. This can be particularly important for businesses needing capital to operate or expand.
Prioritize Claims: In the event of a debtor’s bankruptcy, secured creditors generally have a higher priority over unsecured creditors when it comes to payment from the debtor’s assets.

Question 7

What three conditions must be met for attachment?

Answer 7

For attachment, three conditions must be met: (i) value must be given by the secured party; (ii) the debtor has rights in the collateral; and (iii) 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).

Question 8

What is a Purchase Money Security Interest PMSI?

Answer 8

A PMSI is a special type of security interest in goods that has priority over other security interests in the same goods.

Question 9

When does a PMSI situation arise?

Answer 9

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 10

How does a secured party perfect a security interest?

Answer 10

A secured party can perfect a security interest by (i) filing a financing statement; (ii) possessing the collateral; (iii) controlling the collateral; or (iv) perfecting automatically.

Question 11

When does a PMSI in consumer goods perfect?

Answer 11

A PMSI in consumer goods perfects automatically. In other words, a security interest in a consumer good is perfected as soon as it attaches.

But while a PMSI in consumer goods automatically perfects, that perfection does not guarantee priority in a dispute over the same collateral.

Question 12

What is a consumer good?

Answer 12

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

Question 13

What is a consumer buyer?

Answer 13

A consumer buyer is a person who: (i) buys consumer goods for value; (ii) for his own personal, family, or household use; (iii) from a consumer seller; and (iv) without knowledge of the security interest. This is often referred to as the “garage sale” rule because that type of sale would qualify.

Question 14

What happens if a consumer buyer does not

Answer 14

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.

Question 15

If collateral is transferred and the transferee of the collateral is not a buyer, what happens to the security interest?

Answer 15

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.

Example: Here, the retailer did not authorize the man to dispose of the bicycles free of the security interest because the man signed an agreement that he would not sell or dispose of the collateral until he paid the balance owed on the purchase price. In addition, the friend does not fall under any Article 9 exceptions that would allow the friend to take the bicycle free of the retailer’s security interest. The friend does not qualify as either a consumer buyer or a buyer in the ordinary course of business because the friend did not give value for the bicycle. The friend received the bicycle as a birthday gift. Thus, the friend does not qualify as a buyer. Accordingly, the friend does not own the bicycle free of the retailer’s security interest.

Question 16

When is a security interest perfected?

Answer 16

A security interest is perfected when the collateral attaches and the secured party complies with one of the methods of perfection.
Those methods include filing a financing statement, having possession or control of the collateral, or it can be automatically perfected.

Question 17

How do you determine who has priority when two or more perfeced in the same collateral?

Answer 17

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.

Question 18

What happens if both security interests are perfected?

Answer 18

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

Question 19

What does Art. 9 govern?

Answer 19

Art. 9 governs a transaction that creates an SI in personal property or a fixture

Question 20

What to write when MEE asks if there’s an enforceable interest against the debtor with respect to the collateral.

Answer 20

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: (i) value has been given by the secured party; (ii) the debtor has rights in the collateral; and (iii) 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.

Here, all three criteria have been met. The loan from Bank to Acme satisfies the value requirement; Acme has rights in its inventory and accounts; and Acme has signed (authenticated) a security agreement that describes the collateral as inventory and accounts. Accordingly, Bank has an enforceable security interest in Acme’s inventory and accounts.

Question 21

What do you write when it asks whether there’s rights in items on the MEE:

Answer 21

Start with analysis on whether it’s enforceable. THEN: Whether insert name has rights in the following items as collateral depends on whether they are categorized as accounts, inventory, or equipment.

Question 22

“Accounts” include what?

Answer 22

“Accounts” include the right to payment for goods sold, property licensed, or services rendered.

Because Bank has an enforceable security interest in Acme’s accounts, the rights to payment are subject to Bank’s security interest.

Question 23

Inventory includes what?

Answer 23

“Inventory” includes goods, other than farm products, that are held for sale or lease.

“Inventory” includes not only goods, other than farm products, that are held for sale or lease, but also raw materials, works in process, or materials used or consumed in a business.

EX: Acme is holding the used violins for sale, and they are not farm products. Accordingly, the used violins held for sale are inventory subject to Bank’s interest.

Question 24

What does equipment include?

Answer 24

“Equipment,” a catchall class, consists of goods that are not consumer goods, farm products, or inventory.

Question 25

What does a BOCB take? And what is a BOCB?

Answer 25

A buyer in the ordinary course of business (BOCB) takes free of a security interest created by the seller. A BOCB is one who buys goods in the ordinary course of business from a merchant who is in the business of selling goods of that kind in good faith and without actual knowledge that the sale violates the rights of another in the same goods.

Question 26

What’s a judicial lien creditor and how does a judicial lean creditor take the property?

Answer 26

A judicial lien creditor is a creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law. A judicial lien creditor takes the property subject to a perfected security interest but generally has priority over an unperfected security interest. A security interest is perfected upon attachment of that interest and compliance with one of the methods of perfection. A secured party can perfect a security interest by: (i) filing a financing statement; (ii) taking possession of the collateral; (iii) exerting control over the collateral; or (iv) automatic perfection.