Secured Transactions

Question 1

Types of Collateral

Answer 1

Accounts - A right to payment of a monetary obligation

Deposit Accounts - An account maintained with a bank (can only be perfected by control)

Inventory - Goods which are (a) leased, (b) held for sale/lease or to be given under contract of service, (c) given under a contract of service, OR (d) materials used or consumed in a business in a short period of time

Equipment - Goods that are used or bought for use of a business. (Goods other than inventory, farm products, or consumer goods)

Consumer Goods - Goods purchased primarily for personal, family, or household purposes

(SEE PAGE 6)

Question 2

To obtain a valid security interest in collateral, a creditor MUST:

Answer 2

(1) Attach the collateral

AND

(2) perfect its interest

Question 3

Attachment

Answer 3

Secures the creditor’s rights in collateral

Question 4

Attachment requires:

Answer 4

1. Parties must agree to create the security interest (must enter into a security agreement), as evidenced by the creditor taking possession.
2. Creditor extends value to the debtor
3. Authenticated record or security agreement (authenticated by debtor + reasonably identify collateral)
4. Debtor has rights in the collateral

Question 5

Perfection

Answer 5

Gives notice of the creditor’s rights in the collateral.

Question 6

Perfection is obtained by:

Answer 6

(a) Filing a financing statement with the Secretary of State (must identify collateral and security interest); OR

(b) Taking possession or control of the collateral

Question 7

An effective financing statement MUST:

Answer 7

1. Provide the name of the debtor and secured party (if debtor is an org. must provide official registered name);
2. indicate collateral covered; AND
3. Be filed by a person authorized by the debtor

• Minor errors are ok UNLESS seriously misleading
• Insufficient name of debtor = seriously misleading UNLESS statement is discoverable in a search of the records of the filing office under debtor’s correct name

Question 8

Purchased Money Security Interest (PMSI)

Answer 8

A PMSI is created when a creditor extends value to the debtor for the purpose of enabling the debtor to acquire rights in collateral

• PMSI in consumer goods = automatic perfection
• PMSI in non-consumer goods transaction = takes priority if creditor files a financing statement before/within 20 days after debtor receives delivery of collateral

Question 9

Automatic Perfection for Certain Assignment of Accounts

Answer 9

A security interest is automatically perfected upon attachment of an assignment of accounts if it does not transfer a significant part of the outstanding account of the assignor

Question 10

Security Interest in the Sale of Collateral & Identifiable Proceeds

Answer 10

• A security interest will continue despite any sale, lease, or other disposition of the collateral
• A perfected security interest will attach any identifiable proceeds from the disposition of collateral

Question 11

An interest in proceeds will become unperfected on the 21st day UNLESS

Answer 11

a) Proceeds are identifiable cash proceeds;

b) Security interest is perfected when it attaches to the proceeds or within 20 days

OR

c) If ALL of the following are satisfied: (1) original collateral was perfected by filing; (2) proceeds are collateral that be perfected by filing; and (3) proceeds are not acquired with cash proceeds.

Question 12

Consignment

Answer 12

Treated like a PMSI in inventory

Question 13

A consignment is a transaction in which:

Answer 13

1) A person delivers goods to a merchant for the purpose of sale;

2) Merchant deals in goods of the kind, is not an auctioneer, and is generally not known to be substantially engaged in selling goods of others;

3) Value of goods is $1,000 or more at the time of delivery;

4) Goods are not consumer goods immediately before delivery; AND

5) Transaction does not create security interest.

Question 14

Control of a Deposit Account

Answer 14

can only be perfected by control.

Question 15

A secured party has “control” of a deposit account if:

Answer 15

a) The secured party is the bank where the account is maintained;

b) The debtor, secured party, and bank have agreed in an authenticated record; OR

c) The secured party becomes the bank’s customer with respect to the deposit account

Question 16

Future Advances

Answer 16

A security agreement may provide that the collateral secures future advances whether or not the advances are mandatory

Question 17

Transfers of Collateral

Answer 17

• A buyer acquires ALL title that the seller had or had power to transfer.
• Thus, a seller who did not have title to goods CANNOT
  transfer title to a buyer (unless an exception applies).

Question 18

The Shelter Principle

Answer 18

Under the shelter principal, if a buyer acquires property free of a security interest, then any subsequent transfer is also free of the security interest.

Question 19

Buyers in the Ordinary Course of Business (Protection)

Answer 19

take free of a security interest

Question 20

A buyer in the ordinary course of business is a person:

Answer 20

1. That buys goods in good faith
2. W/o knowledge that the sale violates the rights of another person; AND
3. Purchases in the ordinary course from a merchant (a person in the business of selling goods of that kind)

Question 21

Consumer-to-Consumer Rule

Buyers of consumer goods take free of a security interest if the goods are bought:

Answer 21

1. Without knowledge of the security interest;
2. For value
3. From a consumer who primarily bought goods for personal/family/household purposes; AND
4. Before filing a financing statement

Question 22

Perfected Interest vs. Unperfected Interest:

Answer 22

Perfect interest has priority over conflicting unperfected interests.

Question 23

Unperfected Interest vs. Unperfected Interest:

Answer 23

The first creditor to attach will prevail

Question 24

Perfect Interest vs. Perfected Interest

Answer 24

Rule of “first in time, first in right” controls - First creditor to perfect has priority

Question 25

Priority of Liens Arising by Law

Answer 25

Possessory liens by law have priority over a security in goods (unless the lien is created by a statute that states otherwise)

Question 26

A possessory lien is an interest that:

Answer 26

1) secures payment of an obligation for services or materials furnished by a person in ordinary course of the person’s business;

2) is created by statute or rule of law in favor of the person;

AND

3) whose effectiveness depends on the person’s
possession.

Question 27

Judgment Liens

Answer 27

• Judgment lien creditors have priority over conflicting security interests ONLY IF the person became a judgment lien creditor before the security was perfected.
• Priority also extends to future advances secured more than 45 days after become lien creditor UNLESS the advance is made without knowledge of the lien.
• BUT, this rule does not apply to a buyer of
  accounts or a consignor.

Question 28

Fixtures

Answer 28

• An ownership interest in real property has priority over conflicting security interest in fixtures

BUT Two Exceptions
1. Perfected PMSI in Fixtures:
2. Fixture Filing

Question 29

Accessions

Answer 29

Goods that are physically united with other goods, but retain its separate identity.

• Security interest continues.
• If perfected when the collateral became an accession, its remains perfected.

Question 30

Commingling

Answer 30

Two goods that are each subject to a different security interest.

• General priority rules govern (except that an interest perfected by compliance with the requirements of a certificated-of- title statute take priority over all other interests).

Question 31

Secured Party’s Right to take Possession of Collateral

After default, a secured party may:

Answer 31

1) take possession; and

2) without removal, render equipment unusable and dispose of collateral on a debtor’s premises.

• The secured party may proceed pursuant to:
  (a) Judicial process; OR
  (b) without judicial process (if without breach of the peace)

Question 32

Secured Party’s Right to Dispose of Collateral

Answer 32

• After default, a secured party may sell, lease, or otherwise dispose of the collateral in any reasonably commercial manner.

Notice: Must send an authenticated notification of the disposition to the debtor and secondary obligor.

– Secured party will be liable for damages for failing to provide notice even if the debtor had actual knowledge of the disposition.