Secured Transactions

Question 1

The creation of a security interest requires

Answer 1

A valid security agreement that reasonably identifies the collateral and is signed or electronically marked by the debtor.

Question 2

The security interest is enforceable if there is

Answer 2

attachment.

Attachment requires a security agreement or possession of collateral by secured party; Value must be given by the creditor; and The debtor must have rights in the collateral.

Question 3

Can a security interest be created in property the debtor does not currently own but that the debtor may or will acquire in the future?

Answer 3

Generally yes. Exception: household goods, consumer goods after 10 days, and commercial tort claims.

Question 4

Perfection requires

Answer 4

Attachment plus a perfection step:

• File a financing statement
• Secured party takes possession of or control over collateral
• Purchase money security interest in consumer goods

Question 5

Priority among conflicting security interest. Each claimant is entitled to payment in full before a subordinated claimant is entitled to take. The order of priority is as follows:

Answer 5

1. Buyer in the ordinary course.
2. Perfected attached creditor (if more than one, first in time to either file or perfect).
3. Lien creditor
4. Non-ordinary course buyer
5. Attached unperfected creditor
6. General unsecured creditors

Question 6

Can a debtors rights be transferred to a third-party

Answer 6

Yes.

Question 7

A buyer who purchases goods in the ordinary course of business from a merchants inventory will take

Answer 7

Free of perfected security interest held by the merchant’s secured creditors in the inventory.
Exception: farm products
True even if buyer had knowledge of the perfected security interest at the time of the purchase as long as the buyer did not know that the sale was in violation of the terms of the security agreement. This is a good faith requirement.

Question 8

Secured party’s remedies

Answer 8

• Notify debtor To make payment or otherwise render performance to or for the benefit of a secured party.
• Take possession, self-help OK but no breach of peace
• Repossession by judicial action, a.k.a. writ of replevin
• Keep collateral in full satisfaction of outstanding debt, written proposal required
• Sell the collateral and apply the proceeds to the debt, must be commercially reasonable, notification
• Action for a deficiency judgment

Question 9

Shelter principal

Answer 9

Under the shelter principle, once a buyer acquires free of security interest created by its seller, any subsequent transfer by the buyer to someone else will also be free a of the security interest.

Question 10

As a general rule does a security interest continue notwithstanding the sale of collateral?

Answer 10

Yes. Exceptions include consumer to consumer and buyer in ordinary course of business.

Question 11

When collateral is disposed of, secured party automatically obtains

Answer 11

A security interest and identifiable proceeds of the collateral.