Secured Transactions

Question 1

When does a security interest attach?

Answer 1

1. The parties must have an agreement creating the security interest (authenticated record signed by the debtor or creditor’s possession of collateral)
2. Value must be given by the secured party in exchange for the security interest
3. The debtor must have rights in the collateral

Question 2

What are the characteristics of perfection of interest in a secured transaction?

Answer 2

Gets higher priority over others claiming rights to collateral after the perfection takes place

Attachment must take place BEFORE perfection

Question 3

How does perfection occur in a secured transaction?

Answer 3

1. Filing a financing statement
2. Taking possession of the tangible collateral (i.e. pawn shop)
3. Control
4. Automatic perfection
   4a. PMSI in consumer goods (inventory or equipment must be filed and is not automatic)
   4b. Small scale assignment of accounts (like A/R)
5. Temporary perfection
   5a. 20 days for proceeds
   5b. 4 months for interstate

Question 4

When does automatic perfection occur in a secured transaction?

Answer 4

PMSI in consumer goods (i.e. creditor sells debtor collateral or gives the debtor money to buy the collateral)

Small scale assignment of accounts like accounts receivable

Question 5

What are the priority rules for payment in a perfected security interest? (Priority 3)

Answer 5

First to file or perfect wins

If both security parties perfected by filing, the one who filed first has priority

If one party perfected by filing and the other perfected by another method (e.g. taking possession), the party who filed will have priority if he filed before the other party perfected.

Question 6

What are the advantages of a creditor holding a lien in a secured transaction?

Answer 6

Creditor holds priority over claims to collateral vs. unperfected security interests

Beats perfected security interests filed after lien attachment

Exceptions: Purchase money security interest; which has a 10 day grace period to be filed

Buyers purchasing in the ordinary course of business are immune from security interests held by merchants

Question 7

According to UCC Article 9, what is the order of priority for interests in collateral?

Answer 7

1. A buyer in the ordinary course of business of inventory that serves as collateral for a security agreement created by the seller; HDCs of negotiable instruments; and holders of possessory liens
2. Holder of a properly perfected PMSI
3. Holder of a perfected security interest or judicial lien
4. Holder of an unperfected security interest
5. The debtor

Question 8

When is security interest effective between parties?

Answer 8

Upon attachment; gives the creditor the protection they are looking for.

Question 9

What is the difference between attachment and perfection?

Answer 9

Attachment creates a security interest between parties. Perfection provides the creditor rights over other third parties who might also have an interest in that collateral.

Question 10

What is within the scope of Article 9 (secured transactions)?

Answer 10

Security interests in personal property or fixtures (personal property so attached to real property as to become part of the real property) and outright sales of accounts receivable.

Question 11

What is a Purchase Money Security Interests (PMSI) and how does it arise?

Answer 11

PMSI has priority over all over types of security interests in the same collateral when properly perfected.

1. Creditor sells the collateral to the debtor on credit, retaining a security interest for the purchase price
2. Creditor advances funds used by the debtor to purchase the collateral

Ask yourself: was the creditor involve in the purchase of the collateral?

Question 12

What are the four types of collateral?

Answer 12

1. Goods (consumer goods, inventory, equipment)
2. Intangible collateral accounts (any right to payment not evidenced by an instrument or chattel paper - i.e. money you owe a doctor after a checkup)
3. Investment property (stocks, bonds, mutual funds)
4. Proceeds (what’s received after the disposition of collateral)

Question 13

What are the ways for properly perfected PMSI to occur?

Answer 13

1. PMSI in CONSUMER goods automatically perfected
2. Exception: Second-hand consumer purchaser without notice
3. PMSI in Inventory - Prior perfection and notice required for priority
4. Noninventory PMSI - priority if filing within a 20-day grace period

Question 14

What are the rights on default?

Answer 14

1. Right to take possession of and sell collateral
2. Retention of collateral in satisfaction of debt
   * *Remember 60% rule: in consumer goods cases where the debtor has paid 60% of the loan, the secured party must sell the collateral within 90 days after repossession, unless the debtor waives this right