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 much 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

Under the U.C.C. Secured Transactions Article, which of the following must be included in the financing statement?

Answer 7

• Names of the debtor and the secured party
• signed by debtor
• secured party’s address
• debtor’s mailing address
• a statement indicating the types, or describing the items of collateral

Question 8

What is a security agreement?

Answer 8

Is a contract between a borrower and a secured lender that specified which assets is promised as security. The security agreement must be handwritten or electronically written, and it must reasonably identify the collateral involved in the transaction. An assignment, release of collateral, or termination dies not have to be signed by the debtor.

Note: When the secured party can take possession of the collateral as part of the security agreement, the agreement is enforceable without writing.

Question 9

True or False: For consumer goods, a security agreement is automatically perfected upon attachment if the purchaser buys on credit or the secured party lends to the consumer the funds to make the purchase.

Answer 9

True

Question 10

When can a security interest can attach?

Answer 10

A security interest can attach only when:
•there is a security agreement between the debtor and the secured party. (This may also be created by obtaining the asset and does not have to be in writing.)
•the secured party has given value.
•the debtor has rights in the collateral.

Question 11

True or False: Lien creditors have priority over unperfected security interest. Later perfection does not improve their priority.

Answer 11

True

Question 12

True or False: Automatic perfection applies to purchase money security interests in consumer goods

Answer 12

True

Question 13

True or False: The creditor has the option, normally to retain or sell the collateral but the debtor has the right to redeem the collateral.

Answer 13

True