Secured Transactions

Question 1

when does a security interest attach?

Answer 1

1. Value must be given (i.e., a loan)
2. The debtor must have rights in the collateral (i.e., equipment), and
3. Either the secured party must take possession of the collateral or the debtor must authenticate a security agreement containing a description of the collateral.

Question 2

A security interest is perfected when

Answer 2

it has attached and when additional steps required for perfection have occurred. Generally speaking, the additional steps will either be possession of the collateral by the secured party or the filing of a financing statement with respect to the collateral.

It’s not a problem that the financing statement is filed before the security agreement.

Question 3

A collateral indication is sufficient

Answer 3

when it identifies the collateral by type of property.

Question 4

As between two perfected security interest, the general rule is that the

Answer 4

the security interests that was the earlier to be either perfected or the subject of a filed financing statement has priority.

Question 5

As a general rule, a security interest in collateral continues notwithstanding the fact that the debtor has sold the collateral to another person, unless there is an exception:

Answer 5

A buyer of goods will take free of an unperfected security interest in those goods. A buyer can take free even if a perfected security interest in goods if the buyer is a “buyer in ordinary course of business.” To be a BIOCB, a buyer must buy goods from a seller that is in the business of selling goods of that kind.

Question 6

Rights to services provided on credit

Answer 6

are “accounts” because they are rights to payment for services rendered or to be rendered.

Question 7

Inventory

Answer 7

goods which are held by a person for sale. A security interest covers inventory.

Inventory includes “raw materials,” work in process, or materials used or consumed in the business of the debtor.

“Equipment” is not covered. Bc it is not held for sale or lease.

Question 8

If items are being held for repair

Answer 8

are not considered “inventory” because they are not held by company for sale or lease. Second, bc the item is not owned by the company, but rather are owned by the individuals who brought them for repair, the security interest would not attach bc company has neither right sin those items nor the power to transfer rights in them to a secured party.

Question 9

Buyer in the ordinary course of business

Answer 9

is a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person in the business of selling goods of that kind.

A BIOCB takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

Question 10

A security interest is subordinate to the rights of a person who becomes a lien creditor

Answer 10

before the security interest is perfected.

A security interest is perfected when it has attached and filed (perfected).

Question 11

“economic realities” of the transaction

Answer 11

whether a transaction in the form of a lease creates a “true lease” or a security interest depends on the “economic realities” of the transaction, not on the form of the transaction or the supposed intent of the parties.

Question 12

UCC identifies certain situations in which a transaction creates a security interest, not a lease.

Answer 12

A transaction in the form of a lease creates a security interest if lease payments must be made for the full term of the lease and are not subject to termination, and the lessee has an option to “become the owner of the goods . . . for nominal additional consideration” at the conclusion of the lease agreement.

Question 13

when a secured party with priority disposes of collateral, the proceeds of that disposition are applied in the following order:

Answer 13

1. the expenses of the disposition,
2. satisfaction of the obligation owed to the disposing secured party, and
3. satisfaction of any obligation secured by a subordinate interest

Question 14

A secured party’s disposition of collateral after a debtor’s default

Answer 14

transfers the debtor’s rights in the collateral to any transferee for value, and also discharges the secured party’s interest in the collateral and “any subordinate security interest.

Question 15

Under the shelter principle

Answer 15

once the buyer in the ordinary course of business acquires the property free of any interest, any subsequent transfer of the collateral by the buyer to someone else is also free of the security interest.

Question 16

Purchase money security interest in consumer goods

Answer 16

when the interest is retained by the seller to secure payment of the remainder of the sale price.

A purchase money security interest in consumer goods perfects upon attachment without the filing of a financing statement.

Question 17

Consumer goods

Answer 17

means goods that are used or bought for use primarily for personal, family, or household purposes.

Question 18

As a general rule, a security interest continues notwithstanding the sale of collateral But this general rule is subject to several exceptions

Answer 18

Consumer to consumer exception in UCC, when the good is used for personal, family, or household purposes of the buyer before the sale to a third party

Question 19

equipment

Answer 19

means goods other than inventory, farm products, or consumer goods.

Question 20

Proceeds

Answer 20

whatever is obtained on the sale of collateral

Question 21

when collateral is disposed of, a secured party

Answer 21

automatically obtains a security interest in identifiable proceeds of the collateral

Question 22

Sale of accounts under Article 9 UCC

Answer 22

the rights of the buyer of the accounts are referred to as a “security interest,” the sold accounts are “collateral” the seller is the “debtor” and the buyer is the “secured party”

Question 23

An “account debtor” with respect to assigned accounts is

Answer 23

entitled to discharge its obligation by paying the assignor only until the account debtor receives notice of the assignment to the assignee, authenticated by either the assignor or the assignee, directing the account debtor to make payment to the assignee. Once such notice has been received, the account debtor is entitled to discharge only by paying the assignee.

Question 24

Account debtor means

Answer 24

a person obligated on an account, chattel paper, or general intangible. The term does not include persons obligated to pay a negotiable instrument, even if the instrument constitutes part of chattel paper.

Question 25

After default by the debtor, a secured party may dispose of the collateral, if it does so, the proceeds of that disposition

Answer 25

will be applied first to the expenses of that process and then to the satisfaction of the debtors obligation to the secured party.

Question 26

Before disposing of the collateral, however, the secured party must

Answer 26

send the debtor a “reasonable authenticated notification of disposition.”

The only exception to this notification requirement is if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market.

Question 27

Except as otherwise provided by the UCC, a security agreement

Answer 27

is effective against creditors.

UCC provides such an exception however, a security interest is subordinate to the rights of a person who became a lien creditor before the security interest was perfected.

Question 28

A security interest is not perfected unless it has “attached” A security interest attaches when

Answer 28

it becomes enforceable unless the time of attachment has been postponed by the agreement.

Question 29

An attached security interested can be perfected in many ways, in the case of security interest in goods

Answer 29

one method of perfection is for the secured party to take possession of the goods.

Question 30

The description of collateral in the security agreement is sufficient if

Answer 30

it reasonably identifies what is described. UCC provides that descriptions of a debtor’s property such as “all of the debtor’s personal property” or words of a similar import do not reasonably identify the collateral.

Question 31

Under the UCC, “retention or reservation of title by a seller of goods notwithstanding shipment or deliver to the buyer under section 2-401

Answer 31

is limited in effect to a reservation of a ‘security interest’”

Question 32

Following a debtor’s default, if the collateral is “equipment,” a secured party may

Answer 32

leave the equipment in place and render it unusable. The secured party may pursue this option “without judicial process, if it proceeds without breach of the peace.

Question 33

The term “goods” means

Answer 33

all things that are movable when a security interest attaches and also includes fixtures

Question 34

A security interest in fixtures, even if perfected, is ordinary subordinate to a conflicting interest of an “encumbrances of the related real property” (such as Bank) There are however, a number of exceptions to this rule. One exception relates to t

Answer 34

the priority of a “purchase money security interest” in fixtures as against an encumbrancer of the related real property.

(A purchase money security interest in the equipment when the equipment secures credit given by creditor to allow debtor to buy the equipment.

Question 35

“fixture filing”

Answer 35

the creditor must make a “fixture filing” before the equipment becomes a fixture or within 20 days thereafter, to have priority.

Question 36

A secured party that has a security interest in collateral also has a security interest in

Answer 36

any identifiable “proceeds” of the collateral. Proceeds include “whatever is acquired upon the lease of collateral.”

Question 37

chattel paper

Answer 37

when lease evidences both a monetary obligation and a lease of specific goods. A security interest in chattel paper may be perfected by filing a financing statement in the secretary of state office.