Ch 2: Attachment of Security Interest

Question 1

What does it mean for a security interest to have ‘attached’ to collateral?

Answer 1

A security interest is enforceable against the debtor regarding the collateral.

Question 2

What are the three conditions that must coexist for a security interest to be enforceable against the debtor?

Answer 2

• Value has been given by the secured party
• The debtor has rights in the collateral
• The debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral.

Question 3

Fill in the blank: For a security interest to attach, the secured party must give _______.

Answer 3

[value]

Question 4

What is meant by ‘new value’ in the context of security interests?

Answer 4

New value consists of:
* Money
* Money’s worth in property, services, or new credit
* Release by a transferee of an interest in property previously transferred.

Question 5

True or False: A debtor must possess rights in collateral for a security interest to attach.

Answer 5

True

Question 6

What is the effect of a consignor retaining title to consigned goods?

Answer 6

The consignee does not have rights in the consigned goods, and a security interest in the consignee’s inventory would not extend to the consigned goods.

Question 7

What must a security agreement include to satisfy the Article 9 Statute of Frauds?

Answer 7

• Be established by the debtor’s authentication
• The secured party must have possession or control of the collateral.

Question 8

What is required for an authenticated record to evidence a security agreement?

Answer 8

• Be in a record
• Contain a description of the collateral
• Be authenticated by the debtor.

Question 9

Fill in the blank: A security agreement must describe the collateral in sufficient detail to make it possible to _______.

Answer 9

[identify the collateral]

Question 10

What is the definition of ‘proceeds’ in the context of security interests?

Answer 10

Proceeds mean:
* Whatever is acquired upon sale, lease, license, exchange, or other disposition of collateral
* Whatever is collected on, or distributed on account of, collateral
* Rights arising out of collateral
* Claims arising out of the loss, nonconformity, or damage to the collateral
* Insurance payable due to loss or damage to the collateral.

Question 11

What is the secured party’s duty of care regarding collateral?

Answer 11

The secured party has the duty of reasonable care with respect to custody and preservation of the collateral.

Question 12

What is the secured party’s right regarding reasonable expenses?

Answer 12

The secured party has the right to charge the debtor for reasonable expenses incurred in the custody, preservation, use, or operation of the collateral.

Question 13

Fill in the blank: A security interest may apply to collateral the debtor acquires in the _______.

Answer 13

[future]

Question 14

What happens if an after-acquired clause is not effective?

Answer 14

An after-acquired clause is not effective if the collateral is a commercial tort claim or consumer goods unless the debtor acquires the goods within 10 days after the secured party gives value.

Question 15

What are the rights and risks arising from the secured party’s possession or control of collateral?

Answer 15

• Right to charge for reasonable expenses
• Risk of loss or damage is on the debtor
• Right to use or operate collateral
• Right to hold proceeds.

Question 16

What must happen for a debtor’s assignment of account rights to be valid?

Answer 16

The assignment must be authenticated by the debtor or secured party and may notify an account debtor to make payments accordingly.

Question 17

What is an account debtor?

Answer 17

A person obligated on an account, chattel paper, or general intangible, but not on a negotiable instrument.

Question 18

What happens when an account debtor receives notification of an assignment?

Answer 18

She will only discharge her obligation with payment to the assignee, not the assignor.

Question 19

True or False: An account debtor can raise claims and defenses after assignment notification.

Answer 19

True.

Question 20

What must a notification to an account debtor include?

Answer 20

It must reasonably identify the rights assigned.

Question 21

What rights does a debtor have regarding information from a secured party?

Answer 21

A debtor may obtain information about the secured obligation and the collateral.

Question 22

How long does a secured party have to respond to a debtor’s request for an accounting?

Answer 22

14 days.

Question 23

What is a Purchase-Money Security Interest (PMSI)?

Answer 23

A special type of security interest with specific rules regarding perfection and priority.

Question 24

What types of collateral can a PMSI exist in?

Answer 24

• Goods (including fixtures) * Software.

Question 25

Fill in the blank: A PMSI must meet the requirements of ______, rights, and agreement.

Answer 25

[value]

Question 26

What is an example of a PMSI in goods?

Answer 26

A secured party sells goods to the debtor and the debtor incurs an obligation to pay.

Question 27

What is the treatment of a PMSI in a consignment of goods?

Answer 27

It is a PMSI in inventory.

Question 28

What does the 'dual status' rule state in non-consumer goods transactions?

Answer 28

A PMSI does not lose its status merely because it also secures non-purchase-money obligations.

Question 29

When must payments be applied if a security interest is partially a PMSI?

Answer 29

* In accordance with the parties' reasonable agreement * According to the obligor's manifestation before or at the time of payment * First to unsecured obligations.

Question 30

What defines accessions?

Answer 30

Goods physically united with other goods in such a manner that the identity of the original goods is not lost.

Question 31

What happens to a security interest in collateral that becomes an accession?

Answer 31

It is not lost and can still be created in collateral that is an accession.

Question 32

What are commingled goods?

Answer 32

Goods physically united with other goods so that their identity is lost in a product or mass.

Question 33

True or False: A security interest can be obtained in specific commingled goods.

Answer 33

False.

Question 34

What happens to a security interest in collateral that becomes commingled goods?

Answer 34

It transfers to the resulting product or mass.

Question 35

How does perfection of a security interest affect commingled goods?

Answer 35

If perfected before commingling, the security interest in the resulting product or mass is also perfected.

Question 36

What is the priority rule for multiple security interests in a commingled product or mass?

Answer 36

A perfected security interest has priority over an unperfected one.

Question 37

What must occur for a security interest to be enforceable against a debtor?

Answer 37

Attachment must occur, which requires: * Value is given by the secured party * The debtor has rights in the collateral * The debtor has authenticated a security agreement or the secured party has possession or control of the collateral. ## Footnote Attachment involves the secured party's giving value, the debtor's rights in the collateral, and an authenticated security agreement.

Question 38

What is an after-acquired clause in a security agreement?

Answer 38

An after-acquired clause allows the security interest to cover collateral acquired by the debtor after the security interest is granted, but it is ineffective for consumer goods unless acquired within 10 days. ## Footnote It is also ineffective for commercial tort claims.

Question 39

What are the ways value can be given for a security interest?

Answer 39

Value can be given: * By providing consideration sufficient to form a contract * By extending credit * By accepting delivery under a preexisting contract * In satisfaction of a preexisting claim. ## Footnote Value need not be new; it can be exchanged for a preexisting debt.

Question 40

What rights must a debtor have for a security interest to attach?

Answer 40

A security interest attaches only to the rights that the debtor has in the collateral. ## Footnote This includes rights in after-acquired property, which do not attach until the debtor has rights in that property.

Question 41

What is required for a security agreement to satisfy the Article 9 Statute of Frauds?

Answer 41

The security agreement must: * Be in a record * Contain a description of the collateral * Be authenticated by the debtor. ## Footnote A description must allow for reasonable identification of the collateral.

Question 42

What is the difference between sufficient and super-generic descriptions of collateral?

Answer 42

A sufficient description allows for reasonable identification, such as 'all the debtor’s equipment', while a super-generic description, like 'all the debtor’s assets', is not sufficient. ## Footnote Specificity is crucial for enforceability.

Question 43

What satisfies the requirement for possession or control of collateral under the Article 9 Statute of Frauds?

Answer 43

Possession of tangible or quasi-intangible collateral satisfies the requirement if it is pursuant to a security agreement. Control of collateral without physical existence also satisfies the requirement. ## Footnote This applies to items like deposit accounts.

Question 44

What are the duties of a secured party regarding collateral?

Answer 44

Duties include: * Duty of reasonable care in custody and preservation * Duty to keep the collateral identifiable * Duty to relinquish possession upon satisfaction of the secured obligation. ## Footnote These duties protect both the collateral and the debtor's rights.

Question 45

What rights does a secured party have regarding collateral?

Answer 45

Rights include: * Right to use or operate the collateral to preserve its value * Right to hold proceeds received from the collateral * Right to charge for reasonable expenses incurred. ## Footnote These rights help the secured party manage the collateral effectively.

Question 46

True or False: The debtor bears the risk of loss or damage to the collateral.

Answer 46

True. ## Footnote The debtor is responsible for any loss or damage that occurs.

Question 47

What is a Purchase-Money Security Interest (PMSI)?

Answer 47

A PMSI may exist in goods or software and occurs when: * A secured party gives value that enables the debtor to acquire goods * A secured party sells goods to the debtor, and the debtor incurs an obligation to pay. ## Footnote PMSIs ensure that the secured party has a security interest in the goods financed.

Question 48

What are accessions in the context of security interests?

Answer 48

Accessions are goods physically united with other goods such that the identity of the original goods is not lost. A security interest can be created in an accession. ## Footnote This means the security interest is not lost when collateral becomes an accession.

Question 49

What are commingled goods?

Answer 49

Commingled goods are goods physically united with other goods such that their identity is lost in a product or mass. Once commingled, there is no security interest in the original goods, but the interest may attach to the resulting product or mass. ## Footnote This concept is important for understanding how security interests are affected by the mixing of goods.