Secured Transactions

Question 1

When does a security interest attach; or become legally enforceable?

Answer 1

• Secured interest must be supported by consideration given.
• Debtor must actually own the rights to the collateral or have possession.
• Secured interest must be recorded

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

By filing a financing statement

By possessing the collateral

Question 4

When does automatic perfection occur in a secured transaction?

Answer 4

Store sells a consumer good on credit - Store retains security interest

A bank finances the purchase of a consumer good - Bank retains security interest

Question 5

What are the priority rules for payment in a secured transaction?

Answer 5

If two parties are perfected; then the first one to file wins

If neither party is perfected; then the first one to attach wins

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

creditor wants to protect themself from:

Answer 7

• Debtor (only needs attachment)
• Other creditors claiming interest in same collateral
• Trustee in bankrupty
• Subsequent purchaser from the debtor without knowledge of perfection

** (OTS) = creditor must first attach and then perfect to protect against OTS

Question 8

purchase money security interest (PMSI)

Answer 8

• when the creditor gives the debtor the purchase money or the credit to buy the asset that became the collateral
• this gives the creditor priority over all other types of security interest in the same collateral

Question 9

attachment

Answer 9

all 3 must be met

1. property must be owned by debtor (rights to it)
2. interest is created (take possession OR signed security agreement)
   
   • agreement includes reasonable description of asset and signed by debtor
3. give value to the debtor

Question 10

statutory lien

Answer 10

• a service person who repairs personal property is given rights by legal statute in the property in the form of an artisan’s lien until the owner pays for the repairs
• when real property = mechanic’s lien
• a staturoty lien has priority over all other claims, including prior perfect claims, unless stature expressly denies it

Question 11

perfection

Answer 11

any 1 of 3
any 1 of 3
1. file a financing statement
- listing or description of types of collateral
- signature and address of debtor
- name and address of creditor
2. automatic perfection
- when you’re a PMSI in consumer goods
- loophole: if consumer to consumer sale the new purchased takes the property free of the automatic perfection
- close the loophole: creditor must file a financing stmt within 20 days of attachment
3. take possession of the collateral