Secured Transactions

Question 1

How to Obtain a Security Interest

Answer 1

Debtor must sign a security agreement

Question 2

Security Agreement

Answer 2

SA must be in writing

Signed by debtor

Identify collateral specifically

State that it is creating a security interest in favor of the secured party

Question 3

Security Interest Attachment

Answer 3

Attached when ALL 3 things occur:

1. Secured Party (lender) gives value (makes loan)
2. Debtor has right in collateral or power to transfer rights in collateral (must be explicit if collateral is in after-acquired goods OTHER than inventory or accounts receivable)
3. Debtor authenticated security agreement

Question 4

Perfection (definition)

Answer 4

The process of giving notice to the world that you have a security interest in the collateral (like recording for mortgages/real property).

Question 5

Various ways to perfect

Answer 5

1. File a financing statement with Sec. of State in STATE where collateral located (most common)
2. Taking possession of property (when collateral is tangible); can take possession of goods, instruments, money, or negotiable documents.

CANNOT perfect by possession with: accounts (unless bank is secured party and account is at the bank), letters of credit, etc.

3. Must note security interest on a certificate of title for consumer goods/equipment.

Question 6

Financing Statement

Answer 6

Public document that tells the world that a security interest is created

Must have:

Debtor’s name

Secured party’s name

Basic description of collateral “can say all assets of debtor”

If security agreement and financing statement include after-acquired property, date of perfection = date financing statement filed

Question 7

Priority Exceptions

Answer 7

PMSI in goods (not livestock or inventory): PMSI wins if perfected at time debtor receives collateral or within 20 days of when debtor receives collateral.

PMSI in inventory/livestock: wins if perfected when debtor has possession and gives proper notice to conflicting security holders (notice must explain PMSI in inventory, describe collateral, and be given before debtor receives possession.

Deposit accounts: secured party with control prevails.

Investment property: secured party with control over investment property has priority over secured party w/out control.

Question 8

Priority Rules for Inventory

Answer 8

4 part test:

1. PMSI perfected when debtor gets possession of inventory
2. PM-secured party sends notice to holder of conflicting security interests
3. Holder of conflicting interest receives notification w/in 5 years before debtors gets possession of the inventory
4. Notification says person has or expects to get PMSI in inventory.

Question 9

Priority for Equipment

Answer 9

If the collateral is equipment, PMSI prevails over conflicting security interests if PMSI perfected w/in 20 days of debtor getting possession of the property.

Question 10

Repossessing the Collateral

Answer 10

Upon default, secured party pay repossess collateral (but can’t breach peace, use force or threat, deceptive practices, etc.)

No judicial remedy needed, self-help; don’t have to give notice of repossession.

Can sell collateral in satisfaction of debt but must sell in commercially reasonable matter - notice to debtor, sufficient advertising, normal location/format, reasonable timeframe.

Debtor can redeem after repossession but before sale by paying off debt.

Question 11

Goods

Answer 11

Items for personal, family, or household use

Question 12

Equipment

Answer 12

Business purposes; goods bought for primary use in business

Includes gifts bought by non-profit or government agency

DEFAULT CATEGORY IF DOESN’T FIT ANYWHERE ELSE

Question 13

Inventory

Answer 13

Goods held for sale or lease in ordinary course of business

Raw material and work in progress

Consumed materials

Question 14

Farm Products

Answer 14

Chickens, cows, corn

2 requirements:

Must be in possession of the farmer engaged in farming operations, and

In an unmanufactured condition

Question 15

Termination Statement

Question 16

AUTOMATIC PERMANENT PERFECTION

Answer 16

PMSI in Consumer Goods (except certificates of title or fixtures)

Assignment of an insignificant amount of debtor’s accounts

Sale of promissory notes

Question 17

AUTOMATIC TEMPORARY PERFECTION

Answer 17

Proceeds - perfected for 20 days from debtor’s receipts of the proceeds

New Value for instruments, negotiable documents, certified securities - perfected for 20 days

Delivery of instrument, negotiable document, certified security to debtor for 20 days for certain purposes

Question 18

Master Priority List

Answer 18

Secured creditor beats unsecured creditor (even if unperfected)

Two secured but unperfected creditors: winner is first to attach

Two secured creditors, only one perfected: perfected one wins

Both perfected, secured creditors: winner is first one to file OR perfect

Secured and perfected creditor wins over judicial lien; lien creditor wins over unperfected creditors

Question 19

Secured Party v. Purchaser

Answer 19

Secured party prevails unless debtor has permission to sell

If secured party unperfected at time of purchase, purchaser wins if:

1. Buyer gives value
2. Buyer receives delivery of item
3. Buyer has no knowledge of security interest time of delivery

If secured party perfects PMSI within 20 days after debtor gets collateral but after debtor sells collateral, secured party wins over “gap purchaser”.

Question 20

Buyer in Ordinary Course of Business

Answer 20

1. GF
2. No knowledge of security interest
3. Purchase of non-farm products
4. Ordinary purchase from seller in goods of king
5. Security interest created by seller
6. Creditor not perfected by possession