Chapter 7 Section 2: Secured Transactions

Question 1

What is a secured transaction??

Answer 1

Debt secured by collateral

Question 2

What is a security interest?

Answer 2

Right of creditor to repossess upon default

Question 3

When is a security interest effective between parties?

Answer 3

Upon attachment

Question 4

What gives a creditor rights against other third parties who also have interest in the collateral?

Answer 4

Perfection

Question 5

What is the scope of Article 9?

Answer 5

Most contractual security interests in personal property or fixtures

Question 6

What does Article 9 specifically not apply to?

Answer 6

Interests in land (mortgages), wage claims, and statutory leins

Question 7

What is PMSI?

Answer 7

Purchase money security interests - has priority over all other types of security interests in the same collateral, if it is property perfected

Question 8

What makes a PMSI?

Answer 8

Creditor sells collateral to debtor on credit, retaining a security interest for purchase price or
Creditor advances funds used by the debtor to purchase collateral

Question 9

What are the three types of collateral?

Answer 9

Consumer goods (personal use)
Inventory (for sale or lease)
Equipment (business use)

Question 10

What are the three requisites for attachment?

Answer 10

1. Agreement creating interest evidenced by either authenticated record signed by debtor or creditor’s taking possession or control of collateral
2. Value must be given by the secured party in exchange for the interest
3. Debtor must have rights in the collateral

Question 11

What is an authenticated record?

Answer 11

Written agreements or computer files authenticated by a signature or electronic mark

Question 12

Is after-acquired property permissable?

Answer 12

Yes

Question 13

What is after-acquired property most commonly used for?

Answer 13

Inventory and equipment

Question 14

What is perfection?

Answer 14

Gives you maximum priority in the collateral over most third parties

Question 15

What are the five methods of perfection?

Answer 15

Filing
Taking possession of the collateral
Control
Automatic perfection
Temporary perfection

Question 16

Can you perfect before you attach?

Answer 16

No

Question 17

What is perfection by filing?

Answer 17

Filing a financial statement, authorized by the debtor, with the state, for five years (can be renewed)

Question 18

What is perfection by taking possession?

Answer 18

Tangible property, with an oral agreement for attachment is okay - you just take it and then they pay you back and you give it back

Question 19

What is perfection by control?

Answer 19

Used for investment property, when the secured party has taken necessary steps to have the property sold without further action from the owner

Question 20

What is automatic perfection?

Answer 20

By the attachment of the security interest without any added requirements - used for small scale assignment of accounts or PMSIs in consumer goods

Question 21

What is temporary perfection?

Answer 21

Interest in proceeds from original collateral, continuously perfected for 20 days

Question 22

What is the priority ranking for collateral?

Answer 22

1. Buyer in the ordinary course of business of inventory that serves as collateral
2. Holder of property perfected PMSI
3. Holder of perfected security interest (non-PMSI)
4. Holder of unperfected security interest (attached)
5. Debtor

Question 23

What is the time a PMSI loses?

Answer 23

If a buyer of consumer goods resells the goods to another consumer buyer, they take free of an automatically perfected PMSI in consumer goods as long as the secondhand consumer buyer had no notice of the interest (garage sale rule)

Question 24

What is the 20-day rule?

Answer 24

A PMSI in equipment has priority over other perfected security interests if filed anytime within 20 days of the debtor getting possession of the collateral. (relates back to date of possession)
There is none for inventory - to have priority it has to be filed before the debtor gets possession

Question 25

Who wins in non-PMSI vs. non-PMSI?

Answer 25

First to file

Question 26

What is the most important and most used of the rights on default?

Answer 26

The right to take possession of and sell collateral

Question 27

Is self-help repo okay?

Answer 27

Yes, as long as you don’t breach the peace

Question 28

Upon sale of collateral, what happens to subordinate claims?

Answer 28

They are wiped out and there is no right of redemption by subordinate security interest holders or the debtor

Question 29

What happens to the proceeds from the default sale?

Answer 29

1. Pay expenses of repo and the sale
2. Pay creditors with a security interest in the collateral in order of priority
3. Any surplus goes to the debtor

Question 30

Can you retain collateral in satisfaction of debt?

Answer 30

Yes, unless it’s consumer goods where the debtor has paid at least 60% of the loan. You have to sell it within 90 days of repo