Secured Transactions

Question 1

What are the four classes of tangible collateral (goods)?

Answer 1

1) Consumer goods
2) Farm Products
3) Inventory
4) Equipment

Question 2

Accounts

Answer 2

Right to payment for property sold, leased, licensed or otherwise disposed of OR for services rendered

Also includes right to payment from insurance policy, use of a credit or change card, or winning a lottery

DOES NOT include - loan transactions or rights of payment with other collateral

Question 3

Payment Intangible

Answer 3

Catch-all of rights to payment; right to repaid a loan of money most common example

Question 4

Instrument

Answer 4

promissory notes, checks, and drafts governed by Article 3

Question 5

Chattel Paper

Answer 5

A record, paper or electronic, with two components
1) a monetary obligation
2) a security interest or a lease

Question 6

What are the four types right to payments?

Answer 6

1) Instrument
2) Chattel Paper
3) Accounts
4) Payment Intangible

Question 7

Deposit Accounts

Answer 7

Physical bank accounts - NOT Accounts (unlike accounts which are rights to payment for goods sold or rendered)

Question 8

After-Acquired Language (inventory and accounts)

Answer 8

If there is no reference to after-acquired property, the security interest attaches only to the collateral that exists at the time that the security agreement is executed

EXCEPTION: most states, if security agreement describes inventory or accounts, there is rebuttable presumption that the description includes after-acquired inventory and accounts

Question 9

Super-Generic Descriptions

Answer 9

Inadequate descriptions that do not reasonably identify collateral
for a security agreement

They are adequate for a financing statement

Question 10

Consignment

Answer 10

To qualify under Article 9:

1) a consignor must deliver goods to a merchant to sell
2) merchant must deal in goods of that kind, not operate under the name of the consignor, not be generally known by its creditors to be substantially engaged in the business of selling goods of others, and not be an auctioneer
3) Value of the goods must be at least $1,000 in each delivery AND
4) good must not be consumer goods immediately before delivery

Question 11

What types of collateral can create a PMSI?

Answer 11

Security interest qualifies as a PMSI only if the collateral is goods (including fixtures) or software

Question 12

Take free of an unperfected security interest

Answer 12

A buyer, other than a secured party, of collateral that is goods, takes free in the same collateral if the buyers:
1) gives value AND
2) receives delivery of the collateral AND
3) without knowledge of the existing security interest

Question 13

Perfection

Answer 13

Perfection creates superior rights to any rights claimed by third parties

1) Most common type filing - which requires a finance statement, secured party is given notice that they have an interests in the debtor’s personal property
2) Possession of the collateral
3) Control over the collateral AND
4) Automatic perfection

Question 14

Four conditions to subject a lease to Article 9

Answer 14

1) Original lease term is equal to or greater than the good’s remaining economic life
2) lessee is bound to renew the lease for the good’s remaining economic life
3) lessee has the option to renew the lease for the good’s remaining economic life for nominal or no additional consideration
4) lessee has the option ot become the owner of the goods upon the completion of the lease for nominal or no additional consideration

Question 15

Classification of Tangible Collateral

Answer 15

Look to debtor’s principal use when the security attaches

1) Consumer Goods
2) Farm Products
3) Inventory
4) Equipment

Question 16

Proceeds

Answer 16

Security interest in collateral attaches automatically to identifiable proceeds

Includes:
1) whatever is acquired upon the sale, lease license, exchange, or disposition of collateral
2) whatever is collected on, or distributed on account of the collateral
3) rights arising out of the collateral
4) to extent of the value of collateral, claims arising out of the loss, nonconformity or interreference with the use of, defects, or infringement or rights in, or damage to the collateral
5) extent of the value of collateral and to the extent payable to the debt or the secured party, insurance payable by reason of loss or nonconformity of, defects or infringement of rights in, or damage to the collateral.

Question 17

Non-Movable Consumer Goods

Answer 17

1) Fixtures
2) Standing Timber
3) Unborn Animals
4) growing or unharvested crops
5) Manufactured homes

Question 18

Purchase-Money Security Interest

Answer 18

Special rules for perfection and priority and applies to goods and software

Elements:
1) the value allows the debtor to acquire the goods or software OR
2) the goods or software acquires is the collateral that secures the loan

Question 19

Default

Answer 19

Security agreement is a contract law - contract law determines the enforceability of terms and defines the default

1) Secured party with priority may remove the fixture from the real estate but will be liable for the cost of repairing physical damage to the real estate, reduced in value of real property due to removal
2) Initiate a judicial action to obtain judgement based on the obligation
3)Subject to statutory limitations, pursue any course of action to which the debtor and obligor have agreed

Question 20

Enforceable Security Interest against debtor needs:

Answer 20

1) Value given by the secured party
2) debtor has rights in the collateral AND
3) debtor has authenticated a security agreement describing the collateral or the secured party has possession or control of the collateral

Question 21

Bright-Line Test

Answer 21

Determines if a elase is is a secured transaction
1) lessee of the property is obligated to full obligation under the lease AND
2) one of the four outcomes

Question 22

Buyer in the Ordinary Course of Business

Answer 22

Takes free of a secutiry interest created by the buyer’s seller, even if the security interest is perfected and buyer knows of its existence.

Person who:
1) buys goods (not farm products) in the ordinary course of business
2) from a merchant who is in the business of selling goods of that kind
3) in good faith AND
4) without actual notice that the sale violates the rights of another in the same goods

Question 23

Same Office Rule

Answer 23

A security interest in process will be perfected as long as the original finance statement remains effective when:
1) financing statement cover the original collateral
2) Proceeds are collateral in which the security interest may be perfected by filing the same office as the original financing statement AND
3) Proceeds are not acquired with cash proceeds

Question 24

Cash Proceeds Rule

Answer 24

If collateral is sold, licensed, leased, or otherwise disposed of and generates cash proceeds, perfection continues indefinitely in cash proceeds so long as they are identifiable

Question 25

Garage Sale Rule

Answer 25

Consumer takes free of a secutiry interset, even if perfected, unless prior to the purchase, the secured party filed a financing statement covering the goods

Consumer buyers:
1) buys consumer goods for value
2) for own personal, family, or household use
3) from a consumer seller
4) without knowledge of the security interest

Question 26

Difference between accession and commingled goods

Answer 26

Accessions: goods that are physically united with other goods so that the identity of the original goods is not lost (security interest continues after accession)

Commingled goods - goods physically united with other goods to point that their identity is lost (security interest does not continue, but it will attach to the larger products

Question 27

Financing Statment

Answer 27

Requires at minimum:
1) debtor’s name
2) name of the secured party or a representative of the secured party AND
3) collateral covered by the financing statement

Question 28

Buyer of Collateral

Answer 28

Takes the collateral generally subject to the security interest

Question 29

Automatic Perfection for 20 days when:

Answer 29

1) original financing statment is broad enough to encompass the proceeds or the secured party amend the financing statement within 20 days
2) if proceeds are identifiable cash proceeds and the security interest in the original collateral was perfected OR
3) same office rule applies

Question 30

Three types of claimants’ for collateral

Answer 30

1) Perfected Secured Parties
2) Unperfected Secured Parties
3) Lien Creditors
4) Transferors
5) PMSI Secured Party

Question 31

Priority for Perfected v. Perfected Security Interests

Answer 31

First in time to file or perfect takes priority

Question 32

Perfected v. Unperfected Priority

Answer 32

Perfect security beats an unperfected security interest

Question 33

Unperfected v. Unperfected security interest

Answer 33

First security interest to attach or become effective takes priority

Question 34

Perfected security interest v. lien creditor

Answer 34

Perfected security interest takes priority over lien creditor

Question 35

Unperfected interest v. Lien Creditor

Answer 35

lien creditor will take priority over an unperfected security interest

EXCEPTION: the filed but unattached security interest - secured party has not given value but debtor authenticated a security agreement listing collateral and financing statement on file

Question 36

Security Interest v. Statutory lien

Answer 36

Statutory lien, created by a statute, has priority as long as:
1) effectiveness of the lien depends on the lienholder’s possession of the goods
2) Lien secures payment or performance of an obligation for services or material furnished in the ordinary course of the person’s business (mechanic’s lien) AND
3) statute does provide otherwise

Question 37

Secured Party v. Secured Party over Future Advances

Answer 37

Art. 9 gives priority to first party to file or prefect with respect to future advances, even if secured party has knowledge of the competing security interest when future advance is made

Question 38

Secured Party v. Lien Creditor over Future Advances

Answer 38

Secured party’s advance is made within 45 days of the lien creditores lien arising, the securing party has priority

BUT if more, lien creditor has priority unless
1) advance is made without knowledge of the lien OR
2) advance is made pursuant to commitment entered without knowledge of the lien

Question 39

PMSI v. Lien Creditor

Answer 39

Secured lien has priority over lien except PMSIs have 20-day grace period starting when the debtor receives possession of the collateral

Question 40

PMSIs v. Security Interest

Answer 40

In goods other than inventory and livestock takes priority over all other security interests, no matter when performed, if secured party perfects within 30 days of the debtor receiving the goods

Question 41

PSMI Super-Priority for Inventory

Answer 41

PSMI perfects before inventory is delivered and sends authenticated notification of the PMSI to other secured parties

Question 42

PMSI v. PMSI

Answer 42

a secured PMSI beats a unsecured PMSI, otherwise apply first to file or perfect rule

Question 43

Notice not required by secured party

Answer 43

Not required to send a notice of disposition when:
1) collateral is perishable or threatens to decline speedily in value
2) collateral is customarily sold on a recognized market OR
3) notice is waived by an authenticated agreement after default

Question 44

Location to file a financing statement

Answer 44

Generally, must be filled with the Secretary of State of the state of the debtor’s location

Question 45

Can only be perfected by control

Answer 45

Deposit Account

Question 46

PMSI in Fixture v. Prior Interest in real property

Answer 46

Ficxure has priority when
1) debtor has an interest i the real property or is in possession AND
2) security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter

Question 47

Repossession After Default

Answer 47

Two ways:
1) by use of judicial process OR
2) Self-help repossession (cannot breach the peace)

Trespass with repect to the collateral or debtor’s land are generally deemed acceptable self-help repossession

Question 48

Reasonable Disposition

Answer 48

Commercially reasonable when the collateral is:
1) sold in the usual manner in a recognized market that has standardized prices for fungible goods
2) sold at the price current in a recognized market OR
3) disposed of in conformity with reasonable commercial practices among dealers in that type of collateral

Question 49

Sale of Collateral Priority

Answer 49

1) pay reasonable expenses for collection and enforcement
2) pay off the debt to the foreclosing secured party
3) pay subordinate security interests, provided the subordinate party makes a formal demand prior to distribution of the proceeds
4) any surplus or remained will be returned to the debtor