Secured Transactions

Question 1

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

Answer 1

Secured interest must be supported by consideration given or have value. 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(given notice, good for 5 yrs then continuous filing=indefinitely)

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

In what order are banks to charge checks to your account?

Answer 7

There is no required order for charging checks to an account, so the accounts may be charged in whatever order is convenient to the bank.

Most banks employ:

1. in any order provided no charges creates an overdraft
2. from lowest to highest amount to minimize the number of dishonored checks.

Question 8

What is a warehouse receipt?

Answer 8

It is a document of title to goods being stored, these can be either negotiable or non-negotiable.

To be negotiable it must: the warehouse receipt, bill of landing or other document of title must provide that the goods are to be delivered to bearer or to the order of a named person.

Question 9

Purchase Money Security Interest (PMSI):

Answer 9

has priority over all other types of security interests in the same collateral if the PMSI is properly perfected

Question 10

When does a Purchase Money Security Interest (PMSI) arise?

Answer 10

a) creditor sells collateral on credit, retaining a security interest OR
b) the creditor advances funds used by the debtor to purchase the collateral.

Question 11

What are Types of Collateral

Answer 11

Collateral for personal use. not real estate. Is it not the nature but how it it used.

1) Goods Include:
a) Consumer Goods
b) Inventory
c) Equipment
2) Intangible Collateral Accounts: Accounts Receivable
3) Investment Property
4) Proceeds: whatever is received upon sale of collateral(using proceeds from wool to buy a tractor)

Question 12

What are the Duties of Secured Party?

Answer 12

1) send debtor termination stmt when debt is paid
2) confirm for the debtor any unpaid amount on the secured debt
3) use reasonable care to preserve any collateral in the secured party’s possession

Question 13

What are the Attachment requirements?

Answer 13

Attachment will be effective when all 3 are satisfied in any order:

i) parties must have an agreement by either:
a) writing and signed by debtor OR
b) creditor takes possession of collateral
ii) creditor must give value
iii) debtor must have rights in the collateral

Question 14

What is an Authenticated Report?

Answer 14

a. A “record” includes not only old fashioned written security agreements, but also intangible records such as emails.
b. a record can be authenticated by a written signature or by any electronic mark made with the intent to identify the authenticating person and adopt the agreement.

Question 15

Perfection of security interest

Answer 15

To acquire the max priority over most 3rd parties, the secured party needs perfection. Can’t acquire perfection unless you have attached.

Question 16

5 methods of perfection

Answer 16

1) Filing paperwork with the state: file a financing stmt that must have debtor’s name, address and signature and what item is collateral. The financing stmt is only good for 5 years unless it is extended
2) Taking possession of the collateral: must be a tangible asset and an oral agreement is OK
3) Control: take steps to gain possession of investment property
4) Automatic perfection: can gain by-
1) PSMI in a consumer good 2)small scale assignment of A.R.
5) Temporary perfection: proceeds from original collateral is continuously perfected for 20 days from debtor’s receipt of proceeds. Also, if collateral is taken into a different state, perfection in the first state is only valid for 4 months after it leaves. The creditor must perfect in new state within the 4 month period.

Question 17

Attachment Priorities **

Answer 17

1) The collateral is from a merchant’s inventory
2) Holder of a properly perfected PMSI in the collateral
EXCEPTION: if a buyer of consumer goods resells the goods to another consumer, the 2nd hand consumer will take free of an automatically perfected PMSI unless the original secured party filed perfect with the state.
3) Perfect security interest in, or judicial lien is attached to collateral Judicial lien has priority if attached before security interest was perfected.
4) Holder of an unperfected security interest in collateral
5) The debtor

Question 18

Rights on Default

Answer 18

Right to take possession and sell collateral without judicial process if can do so without disturbing the peace bc we agreed in advance, attached and perfected (beats 3rd party). Therefore, no need to go to court.

Question 19

Replevin Action

Answer 19

Can also take possession by Replevin Action: judicial action seeking the transfer of personal property.