Security Interests

Question 1

What is the “typical” security interest?

Answer 1

One party (the creditor) gives another party (the debtor) something of value in exchange for the debtor’s giving the creditor an interest in the debtor’s collateral.

• The creditor’s interest in the collateral is not a FULL ownership interest, but rather is the right to keep or sell the collateral if the debtor defaults on his obligation to the creditor

Question 2

What is a PMSI?

Answer 2

A special type of security interest in goods that has priority over ALL OTHER security interests in the same goods if certain requirements are met.

Question 3

How does a PMSI arise?

Answer 3

1. A creditor sells the goods to the debtor on credit, retaining a security interest in the goods for all or part of the purchase price (creditor and seller are the SAME person); or
2. a creditor advances funds that are used by the debtor to purchase the goods (creditor and seller are DIFFERENT persons).

Question 4

PMSI in Software

Answer 4

If a creditor acquires a security interest that qualifies as PMSI in a computer, the PMSI extends to any software that is also covered by the creditor’s security interest IF the software was purchased in a related transaction for use on the purchased computer.

Question 5

What is the Dual Status Rule?

Answer 5

Under the “dual status” rule, a security interest does NOT lose its status as a PMSI even if:

1. The purchase money collateral also secures an obligation that is NOT a purchase money obligation;
2. Nonpurchase money collateral ALSO secures the purchase money obligation; or
3. The purchase money obligation has been renewed, refinances, consolidated or restructured.

Question 6

What are “proceeds”?

Answer 6

Proceeds include whatever is received upon the sale, lease, exchange, license, collection, or other disposition of collateral or proceeds.

Question 7

Do proceeds include second generation proceeds (i.e. proceeds of proceeds)?

Answer 7

Yes, proceeds can go through several transformations and still retain their character as proceeds

Question 8

Are insurance payments and claims for damage “proceeds”?

Answer 8

Yes. If the collateral is insured and money is received from the insurance company due to loss or damage to the collateral, the money is a proceed of the collateral (up to the value of the collateral) unless it is payable to someone other than the debtor or the secured party claiming it.

• Any claims arising out of the loss of, defects in, or damage to collateral are proceeds of the collateral up to the value of the collateral