Secured Transactions in Personal Property

Question 1

What is a secured transaction?

Answer 1

An agreement by which one party obtains a security interest in the personal property of another to secure the payment of debt.
- Basically, how to use assets to borrow $$

Question 2

What is a consensual lien?

Answer 2

You tell them it’s okay to have a lien so you can borrow money

Question 3

What is a lien?

Answer 3

An involuntary security interest in property, created if you don’t do something you’re supposed to do

Question 4

What is a Secured Interest?

Answer 4

• An interest in personal property or fixtures which secures payment or performance of an obligation

Question 5

What is a Security Agreement?

Answer 5

• An agreement that creates or provides for a security interest

Question 6

What is a secured party?

Answer 6

• The person who you owe money
• The person in whose favor a security interest is created or provided for under a security agreement. It includes lenders, vendors, or consigners

Question 7

What is collateral?

Answer 7

The property you pledge to secure loan

Question 8

Who is a debtor?

Answer 8

• They can pledge the collateral.
• A person having an interest in the collateral other than the secured party; a seller of accounts, chattle paper, payment intangibles, or promissory notes; or a consignee (Can be same person as obligor)

Question 9

Who is an obligor?

Answer 9

• A person who owes payment which is secured by a security interest. (Can be same person as debtor)

Question 10

What is the difference between consumer goods and goods?

Answer 10

• Consumer goods are goods bought or used primarily for personal, family, or household purposes
• Goods now include computer software which is embedded in the goods themselves
• Asset cannot be in multiple categories (computer could be consumer good, equipment, and inventory, but you must pick one category)

Question 11

What is the difference between equipment and farm products?

Answer 11

• Equipment are goods used primarily for business

- Farm products are crops, livestock, or supplies used or produced in farming

Question 12

What is the difference between inventory and fixtures?

Answer 12

• Inventory - goods held for sale or lease and raw materials used in business
• Fixtures - goods that are so firmly attached to real property that they are part of the estate (Ex: lights, permanent part of real estate, when removed, damages ceiling)

Question 13

What is indispensable paper (Chattel paper, instruments, documents)

Answer 13

• Chattel paper: writing evidencing both a debt and a security interest
• Instruments: negotiable instruments and investment securities (stocks and bonds)
• Documents: title documents (documents are assets)

Question 14

What is the difference between accounts and general intangibles?

Answer 14

Accounts: right to payment for goods sold or leased or for services rendered
General Intangibles: catch all collateral category (e.g. software, goodwill, literary rights, interests in intellectual property)

Question 15

What is a Secured Transaction - Purchase Money Security Interest?

Answer 15

• Purchasing asset
• Borrowing funds to do so
• Securing loan with asset purchased
• Automatic Attachment (legal relationship between debtor and secured party)

Question 16

What is attachment?

Answer 16

• a security interest enforceable against the debtor (between secured party and debtor)
• value given by secured party and debtor has rights in collateral

Question 17

What is an attachment agreement? (4 Things to create attachment)

Answer 17

1) agreement in writing (where SP has possession)
2) providing a security interest
3) in described collateral
4) signed by debtor

Question 18

What is a Security Agreement?

Answer 18

• An agreement between the debtor and creditor creating a security interest
• With the Revised Article 9 Security agreements can now be signed electronically

Question 19

What is the value of attachment?

Answer 19

It is a contract law consideration, binding commitment to extend credit, or an antecedent debt (NOT future debt)

Question 20

What are the debtor’s rights in collateral?

Answer 20

Personal property that the debtor owns, possesses, or is in the process of acquiring

Question 21

What is perfection?

Answer 21

Attachment plus any steps required for perfection.

• 3rd parties learn what assets have been pledged
• Other people need to know so you can avoid fraud (you can’t use the same asset as collateral twice)

Question 22

What are the methods of perfection?

Answer 22

• filing a financing statement
• secured party takes possession (they can’t take your car, but can take stocks, bonds, jewelry)
• automatic (perfection upon attachment, for consumer goods that are not expensive, not resold often, and pretty frequent purchases)
• temporary (lend $ now and file paperwork later - immediate loan)

Question 23

Is electronic filing of perfection permitted?

Answer 23

YES!

Question 24

What is a non-static transaction?

Answer 24

The collateral changes constantly and debt changes constantly

Question 25

What is a floating lien?

Answer 25

It’s going up and down (debt, value of assets, etc)

Question 26

What are Boucher’s 4 Rules of Priorities for Secured Transactions?

Answer 26

1) BIOC always wins (buyer in ordinary course)
2) PMSI always first (purchase money security interest)
3) If same priority, then first to file wins
4) Unsecured creditor always last (charge high interest rates because they have higher risk of not being paid

Question 27

In Default, what are the 3 options?

Answer 27

1) Retain Collateral
2) Repossess
3) Sell Collateral

Question 28

What does it mean to Retain Collateral?

Answer 28

If debtor forecloses, secured party can keep collateral in satisfaction of the obligation, if it is in possession of it

Question 29

What does it mean to Repossess?

Answer 29

The secured party may take possession of the collateral on default without judicial process if it can be done without a breach of the peace (Bank cannot trespass, need court order if you don’t let them in)

Question 30

What does it mean to Sell Collateral?

Answer 30

• The secured party may sell, lease, or otherwise dispose of any collateral (Craigslist, auctions)
• Must be commercially reasonable
• Note rules for consumer goods (overridden by laws protecting consumers - more stringent to protect us)