Attachment/Perfection/Rights of Parties/Buyer Protections

Question 1

Why is Attachment & Perfection of a security interest important?

Answer 1

Enforcing a security interest depends on two factors:
Attachment and Perfection

Only attachment is required to enforce. Perfection provides priority.

Question 2

What is Attachment?

Answer 2

Secures the creditor’s rights in the collateral, making it enforceable

Question 3

What is Perfection?

Answer 3

Gives notice of the creditor’s rights in the collateral (determines priority of interests)

Question 4

Can a security interest be perfected without being attached?

Answer 4

No. The security interest must first be attached to be perfected.

Question 5

What does Attachment require?

Answer 5

1. creditor to extend value to debtor;
2. debtor must have rights in the collateral; and
3. One of the following:
   (a) an authenticated record or security agreement (authenticated by debtor and reasonable identifies the collateral - NO super GENERIC description);
   (b) the secured party has possession of the collateral;
   (c) certificated security in registered form + security certificate delivered to secured party; OR
   (d) Control for deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights

Question 6

How is Perfection usually obtained?

Answer 6

1. by filing a financing statement with the Secretary of State (which must identify the collateral and security interest); OR
2. taking possession or control of the collateral

Question 7

What makes a financing statement effective?

Answer 7

It must:
1. provide the name of the debtor and secured party;
2. indicate the collateral covered; AND
3. be filed by a person authorized by the debtor

Question 8

Is subtantial compliance with a financing statement enough?

Answer 8

Yes. Minor errors/omissions are okay UNLESS it makes the statement seriously misleading.

An insufficient name of debtor is seriously misleading unless the statement is discoverable in a search of the records of the filing office under debtor’s correct name.

Question 9

How is a Purchase Money Security Interest (PMSI) created?

Answer 9

When a creditor extends value to the debtor for the purpose of enabling the debtor to acquire rights in the collateral

Question 10

PMSI for Consumer Goods

Answer 10

automatic perfection occurs (without the need to file a financing statement)

Question 11

PMSI for Non-Consumer Goods

Answer 11

takes priority if the creditor files a financing statement before/within 20 days after the debtor receives delivery of the collateral

Question 12

If a debtor sells an account, chattel paper, payment intangible, or promisory note, does the debtor retain an interest in the collateral sold?

Answer 12

No. But, when determining the rights of creditors/purchasers of an account/chattel paper sold by debtor, the debtor is deemed to have rights in such collateral while the buyer’s security interest is unperfected.

Question 13

When is a security interest automatically perfected upon attachment of an assignment of accounts?

Answer 13

If it does not transfer a significant part of the outstanding accounts of the assignor

Question 14

If collateral is sold, when will a security interest continue?

Answer 14

A security interest will continue despite the sale, lease, or other disposition of the collateral unless the secured party authorizes a transfer free of the security interest.*

*or unless an exception applies. See buyer protections.

Question 15

How is consignment treated for purposes of perfection?

Answer 15

A consignment is treated like a PMSI in inventory.

Question 16

What is a consignment?

Answer 16

Transaction in which:
1. a person delivers goods to a merchant for the purpose of sale;
2. merchant deals in goods of the kind, is not an auctioneer, and is generally not known by his creditors to be substantially engaged in selling goods of others;
3. value of goods is $1000 or more at time of delivery;
4. goods are not consumer goods immediately before delivery; and
5. transaction does not create a security interest

Question 17

Since a deposit account can only be perfected by “control,” when does a secured party have control?

Answer 17

1. secured party is the bank where the account is maintained;
2. the debtor, secured party, and bank have agreed as such in an authenticated record; OR
3. the secured party becomes the bank’s customer with respect to the deposit account

Question 18

Future Advances

Answer 18

A security agreement may provide that the collateral secures future advances (whether or not the advances are mandatory).

Question 19

When collateral is transferred to a buyer, what rights does the buyer receive?

Answer 19

A buyer receives ALL of the rights the seller had upon transfer of the goods.

Question 20

When can a seller who does not have title to goods transfer title to a buyer?

Answer 20

Cannot transfer title unless an exception applies:
1. Shelter Principle
2. Buyer in the Ordinary Course of Business; or
3. Consumer-to-Consumer Rule

Question 21

What is the Shelter Principle?

Answer 21

if a buyer acquires property free of a security interest, then any subsequent transfer is also free of the security interest.

Question 22

Buyer in the Ordinary Course of Business

Answer 22

1. buys in good faith;
2. without knowledge that the sale violates the rights of another person; and
3. is in the ordinary course from a merchant

This kind of buyer takes free of a security interest.

Question 23

Consumer-to-Consumer Rule

Answer 23

Buyers of consumer goods take free of a security interest if the goods are bought:
1. without knowledge of the security interest;
2. for value;
3. from a consumer who primarily bought the goods for personal, family, or household purposes; AND
4. before the filing of a financing statement covering the goods

Question 24

A perfected security interest will attach to any identifiable proceeds (but will become unperfected on the 21st day after attachment) UNLESS:

Answer 24

1. proceeds are identifiable cash proceeds;
2. security interest is perfected when it attaches to the proceeds or within 20 days; OR
3. if ALL of the following are satisfied:
   (a) original collateral was perfected under the general filing rule;
   (b) proceeds are collateral that may be perfected by filing; and
   (c) proceeds are not acquired with cash proceeds