Drills 1-30 Flashcards
What are the four classes of tangible collateral (goods)?
(1) Consumer goods;
(2) _______ _____________;
(3) Inventory; and
(4) ____________
(2) Farm products;
(4) Equipment.
Please classify the following collateral:
A check or a promissory note
Instrument
When distinguishing between types of collateral, what is the difference between “accounts” and “deposit accounts”?
Accounts include the right to payment for property sold, leased, licensed, or for services rendered. Think accounts receivable, amounts owed on a credit card, etc.
Deposit accounts include savings, passbook, time, or demand accounts maintained with a bank.
What happens when parties leave out after-acquired language in situations that suggest they intended to include it (e.g., when the collateral is inventory or accounts)?
General rule: If there is no reference to after-acquired property, the security interest attaches only to the collateral that exists at the time that the security agreement is executed.
**Exception: **In most states, if the security agreement describes inventory or accounts, there is a rebuttable presumption that the description includes after-acquired inventory and accounts.
Which of the following descriptions of collateral in a security agreement are inadequate for purposes of attachment? Why?
(1) “All of debtor’s equipment”
(2) “All of debtor’s inventory”
(3) “All of debtor’s assets”
(4) “All of debtor’s personal property”
Hint: more than 1
(3) and (4) are inadequate descriptions because they are super-generic and do not reasonably identify the collateral.
(Note that super-generic descriptions in a financing statement are adequate for perfecting a security interest. The security agreement for attachment purposes must be more specific.)
Consignments may fall within Article 9 in order to facilitate public notice.
If a consignment is subject to Article 9, how are the consignor and the security interest in the consigned goods treated?
The consignor is treated as the secured party and must perfect its security interest in the consigned inventory, and the security interest in the consigned goods is treated as a PMSI in inventory.
(In other words, a consignor will have PMSI super-priority in consigned goods if the consignor perfects by filing before the consignee receives possession of the items, and the consignor properly notifies any secured parties with conflicting security interests in consignee’s inventory.)
In order for a consignment to be subject to Article 9, the following 4 requirements must be met:
(1) A consignor must deliver goods to a merchant (consignee) to sell;
(2) The merchant (consignee) must deal in goods of that kind, not operate under the name of the consignor, not be generally known by its creditors to be substantially engaged in the business of selling goods of others, and not be an auctioneer;
(3) The value of the goods must be at least _________ in each delivery; and
(4) The goods must not be ______________ _________ immediately before delivery.
(3) $1,000
(4) Consumer goods
A PMSI may exist only with respect to two types of collateral. What are they?
A security interest qualifies as a PMSI only if the collateral is goods (including fixtures) or software.
A new security agreement is not necessary when a debtor buys additional collateral if the original security agreement includes what?
An after-acquired property clause should be included in the original
Typical language includes, “all of the debtor’s existing and after-acquired [collateral]” or “all of the [collateral] now owned or hereafter acquired.”
Under what circumstances does a buyer of goods take free of an unperfected security interest?
If the buyer:
i) Gives value; and
ii) Receives delivery of the collateral;
iii) Without knowledge of the existing security interest.
What is the most common method of perfection, and what is this method’s objective?
Filing is the most common method of perfection.
By filing a financing statement, the secured party is giving notice that he/she has an interest in the debtor’s personal property.
(The actual security agreement between the parties does not have to be filed. Perfection by filing assumes that a third party will investigate any details of a security agreement.)
An after-acquired clause is not effective if the collateral is consumer goods, unless ______?
Unless the debtor acquires them within 10 days after the secured party gives value.
Even if parties label their transaction as a lease in the hopes of avoiding Article 9 rules, their transaction will be governed by Article 9 if one of the following four conditions is present:
(1) The original lease term is equal to (or greater than) the good’s remaining economic life;
(2) The lessee is bound to renew the lease for the good’s remaining economic life (or is bound to become the owner of the goods);
(3) The lessee has the option to renew the lease for the good’s remaining economic life for nominal or no additional consideration; or
(4) The lessee has the option to become the owner of the goods upon completion of the lease for nominal or no additional consideration.
What happens to perfection when a debtor moves to another state?
If a debtor moves to another state, a perfected security interest will remain perfected for 4 months after the move (unless the financing statement lapses earlier).
This 4 month grace period also covers collateral the debtor acquires after the debtor moves.
To remain continuously perfected, the secured party must re-file in the new state within the four-month window.
How and when does tangible collateral (goods) get classified, and does this method apply to other types of collateral?
To properly classify tangible collateral (goods), look to the debtor’s principal use when the security interest attaches.
Unlike tangible goods, classification of other types of collateral does not turn on the manner in which the debtor uses the property.
Proceeds are whatever results when collateral is sold, leased, licensed, exchanged or otherwise disposed of. If a security interest was attached to collateral, how does the security interest then attach to the proceeds of that original collateral upon its sale or disposition?
A security interest in collateral attaches automatically to identifiable proceeds.
“Goods” encompasses anything that is moveable at the time that a security interest attaches. Also included in “goods” that are technically not moveable. Give 5 examples of these non-moveable goods.
(1) Fixtures
(2) Standing timber
(3) Unborn animals
(4) Growing or unharvested crops (including crops grown on trees, vines, or bushes)
(5) Manufactured homes
When can a PMSI exist in goods?
(1) The value given (e.g., a loan) allows the debtor to acquire the goods or software; or
(2) The goods or software acquired is the collateral that secures the loan (e.g., goods bought on credit)
Upon default, what happens when a secured party has priority in a fixture?
The secured party may remove the fixture from the real estate but will be liable for the cost of repairing any physical damage to the real estate, but not for any reduction in the value of the real property due to the removal.
How must the collateral be described in a financing statement?
The financing statement must contain a description of the collateral that sufficiently indicates the collateral (such as one that meets the requirements for creation of an enforceable security agreement).
When the security interest covers all of the debtor’s assets or personal property, the description can contain a broad statement to that effect.
Chattel paper is a record (paper or electronic) with what two components?
It is a record that evidences both
(1) a monetary obligation
and
(2) a security interest in specific goods (security agreement) or a lease of specific goods.
For a security interest to be enforceable against a debtor (i.e., attachment), what three conditions must be met?
(1) Value has been given by the secured party;
(2) The debtor has rights in the collateral; and
(3) The debtor has authenticated a security agreement describing the collateral, or the secured party has possession or control of the collateral.
When these conditions coexist, the security interest has attached, unless there is an agreement to postpone the time of attachment.
The general rule is that unless the secured party authorizes the sale free and clear of its security interest, a buyer takes subject to a perfected security interest. This is not the case for a buyer in the ordinary course of business who can take free of the security interest, even if the buyer knows of its existence. Explain what it means to be a buyer in the ordinary course of business.
A buyer in the ordinary course of business (BOCB) is a person who:
(1) buys goods (not farm products) in the ordinary course of business;
(2) from a merchant who is in the business of selling goods of that kind;
(3) in good faith; and
(4) without actual notice that the sale violates the rights of another in the same goods.
Note: A buyer cannot receive BOCB status if the merchant is a pawnbroker.
What is the difference between accessions and commingled goods? What happens to security interests that are attached to those types of goods?
Accessions are goods that are physically united with other goods so that the identity of the original goods is not lost (e.g., a framed piece of art). The security interest in the accession continues in the accession.
Commingled goods are goods that are physically united with other goods to the point that their identity is lost (e.g., eggs being used to make a cake). The security interest in the good does not continue, but it will attach to the larger product.
