Secured Transactions

Question 1

What are the three elements of attachment?

Answer 1

(1) An agreement between the parties to create a security interest

(2) The creditor gives value to the debtor

(3) The debtor has an interest in the collateral

Question 1

How may an agreement to create a security interest be shown?

Answer 1

By an authenticated security agreement, by the creditor obtaining possession of the collateral, or by a creditor taking control of deposit account/investment property/electronic chattel paper

Question 2

When may a buyer take free of a security interest in a sale of consumer goods?

Answer 2

If the buyer buys without knowledge of the security interest, for value, for the buyer’s own personal/household/family purposes, before a financing statement covering the goods has been filed

Question 3

What is the buyer in the ordinary course exception allowing a buyer of goods to take free of security interests?

Answer 3

A buyer in the ordinary course takes free of non possessory security interests created by the seller.

Question 4

How is an interest in proceeds perfected?

Answer 4

Automatically for 20 days after receipt of proceeds, and beyond 20 days if …

1) Proceeds are identifiable cash proceeds

2) “Same office rule”: Proceeds were NOT purchased by cash proceeds, the security interest in the original collateral was perfected by filing, and a security interest in proceeds would be perfected by filing in the same office

3) Interest in proceeds is independently perfected within 20 days

Question 5

What is the general rule regarding the attachment of a security interest to proceeds?

Answer 5

A security interest in collateral automatically attaches to identifiable proceeds

Question 6

What are proceeds?

Answer 6

Whatever is received upon disposition of the collateral (or other proceeds)

Question 7

What is the lowest intermediate balance rule?

Answer 7

If cash proceeds are placed in a bank account, the lowest balance of the account from the date the proceeds were deposited to the date of application of the rule are identifiable.

Question 8

What is the priority rule governing priority in collateral between a secured party and a judicial lien creditor?

Answer 8

A prior perfected security interest (or a security interest where a security agreement was reached/financing statement was filed before a lien arose) prevails over a judicial lien creditor.

Question 9

What is the special priority rule between PMSI and judicial lien creditors?

Answer 9

If a financing statement was filed on a PMSI within 20 days of the debtor receiving collateral, the PMSI prevails over a judicial lien which arose prior to perfection

Question 10

When does a perfected future advance have priority over a subsequent judicial lien creditor?

Answer 10

When the advance was made without knowledge of the judicial lien, within 45 days of the lien arising, or pursuant to a commitment made without knowledge of the lien

Question 11

What type of error in a filing statement invalidates the statement?

Answer 11

A “seriously misleading error,” or an error the effect of which is that the financing statement would not appear in a filing office search under the debtor’s correct name

Question 12

What is the rule regarding the priority of security interests perfected by control?

Answer 12

Interests perfected by control prevail over interests in the collateral perfected by other methods

Question 13

Between perfected interests in non consumer deposit accounts, what is the order of priority?

Answer 13

1) A secured party whose name was placed on the deposit account

2) The bank which maintains the deposit account

3) A secured party who achieved control via a control agreement

Question 14

What is the effect of a seriously misleading error in a financing statement as a result of a debtor’s name change?

Answer 14

The secured party must file a financing statement under the correct name after 4 months.

Question 15

Who is a buyer in the ordinary course?

Answer 15

A buyer who purchases goods from a seller in the ordinary business of selling such goods, for value, in good faith, without knowledge that the purchase violates a security agreement.

Question 16

What must be contained within a financing statement for it to be valid?

Answer 16

1) The name and mailing address of the debtor

2) The name and address of the secured party

3) An indication of the collateral covered by the financing statement

Question 17

What is the correct name of a registered organization which must be included in a financing statement?

Answer 17

The name on its most recent public organic record

Question 18

What are the two types of purchase money security interests?

Answer 18

Seller-Financed: A seller sells goods on credit and retains a security interest in the goods.

Lender-Financed: A creditor loans a debtor funds to purchase goods, the debtor uses those funds to purchase the goods, and the creditor retains a security interest in the goods

Question 19

What is equipment?

Answer 19

Goods used/purchased for use in a business

Question 20

What is inventory?

Answer 20

Goods held for sale or lease, goods to be furnished under service contracts, goods used by a business within a short period of time

Question 21

What is an account?

Answer 21

A right to be paid for property sold or services rendered

Question 22

What is chattel paper?

Answer 22

A record showing a monetary obligation and a security interest

Question 23

What is a deposit account?

Answer 23

An account maintained with a bank

Question 24

How is a security agreement authenticated?

Answer 24

The parties execute a writing evidencing intent to create a security interest, signed by the debtor, containing a description of the collateral sufficient to reasonably identify the collateral

Question 25

When does a security interest attach automatically to after-acquired property?

Answer 25

When the property is rapidly depleted/replenished (i.e. accounts and inventory)

Question 26

To what types of property does an explicit after-acquired property clause NOT apply?

Answer 26

To consumer tort claims, to consumer goods obtained more than 10 days after creditor gives value

Question 27

When the law of perfection is governed by the debtor’s location, what is the effect of the relocation of the debtor/the collateral?

Answer 27

When the debtor relocates, interest becomes unperfected after four months.

When the collateral is moved, interest becomes unperfected after a year.

Question 28

When is a security interest in an account/payment intangible automatically perfected?

Answer 28

When there is a small-scale assignment of the account/payment intangible that does not transfer a large portion of the debtor’s outstanding accounts/payment intangibles

Question 29

What are the ways the perfect a security interest in a consumer deposit account by control?

Answer 29

The bank which maintains the account automatically has control; control can also be obtained by placing the account in the secured party’s name or executing a control agreement stating bank will comply with the secured party’s orders regarding the account.

Question 30

What special rules apply to filings to perfect security interests in timber to be cut/minerals to be extracted/fixtures?

Answer 30

The financing statement must be filed locally in the office where the collateral is located, and must include a description of the real property/name of the owner of record.

Question 31

When may a security interest in fixtures prevail over a prior in time real estate interest?

Answer 31

If it is perfected by a fixture filing within 20 days of the good becoming a fixture

Question 32

What is the special super priority rule applicable to a PMSI?

Answer 32

A PMSI in goods other than inventory or livestock prevails over any other security interest in the goods if it is perfected within 20 days of the debtor taking possession of the goods

Question 33

When may a secured party buy collateral in a private sale upon default?

Answer 33

When the goods are of a type commonly sold on a recognized market OR which is subject to widely distributed price quotations

Question 34

What factors does a court consider in determining whether the sale of collateral is “commercially reasonable”?

Answer 34

The extent of advertising, whether people in limited market were contacted, whether collateral needed cleaning/repair, convenience of time and place of public auction

Question 35

What damages may a debtor recover for the improper disposition of consumer goods?

Answer 35

Actual damages (proper sale price - price obtained), or

Statutory damages (10% cash price of goods plus an amount equal to interest charges to be paid over the life of the loan)

Question 36

What three approaches may a court apply to determine if a seller who improperly disposes of consumer goods loses their right to collect a deficiency?

Answer 36

Rebuttable presumption: Value of goods presumed to be equal to amount of debt

Absolute bar: secured party cannot recover deficiency regardless of whether they prove collateral is worth less than debt

Setoff: Secured party may recover the deficiency less actual damages

Question 37

What are the notice requirements for a secured party who wants to sell the collateral upon default?

Answer 37

They must provide written notice to the debtor/sureties within a reasonable time before the sale

Question 38

What is a debtor’s right to redeem?

Answer 38

After default and repossession, a debtor may redeem the collateral before sale by fulfilling the secured obligation and paying reasonable expenses related to repossession