Drills

Question 1

What are the four classes of tangible collateral (goods)?

Answer 1

(1) Consumer goods;
(2) Farm products;
(3) Inventory; and
(4) Equipment.

Question 2

The characterization of collateral can affect the validity of a security interest, the way in which a security interest can be perfected, and the rights of a third party in the collateral. Please classify the following collateral:

(1) A check or a promissory note;
(2) A check along with a security agreement;
(3) The right to be paid for a service rendered;
(4) A savings account at a bank

Answer 2

(1) Instrument;
(2) Chattel paper;
(3) Accounts;
(4) Deposit Account

Question 3

When distinguishing between types of collateral, what is the difference between “accounts” and “deposit accounts”?

Answer 3

Accounts are rights to payment for goods sold, leased, licensed, or services rendered, including insurance proceeds, credit card amounts, and accounts receivable.

Deposit accounts are bank accounts like savings, passbook, time, or demand accounts.

Question 4

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)?

Answer 4

General rule: Without an after-acquired property clause, the security interest attaches only to the collateral existing when the agreement is signed.

Exception: For inventory or accounts, most states have a rebuttable presumption the description includes an after-acquired inventory and acconts

Question 5

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”

Answer 5

Points (3) and (4) are super generic to reasonably identify collateral for attachment.
Note: Super-generic descriptions work for perfection (financing statements) but the security agreement needs more specificity to attach.

Question 6

Consignments may fall within Article 9 in order to facilitate public notice. These consignments carry the risk that a consignee’s lenders may be misled into thinking that consigned inventory is actually owned by the consignee rather than the consignor. If a consignment is subject to Article 9, how are the consignor and the security interest in the consigned goods treated?

Answer 6

The consignor is treated as a secured party with a PMSI in consigned goods. To get super-priority, the consignor must:

Perfect by filing before the consignee gets possession, and

Notify secured parties with conflicting interests in the consignee’s inventory.

Question 7

In order for a consignment to be subject to Article 9, what 4 requirements must be met?

Answer 7

For a consignor-consignee relationship:

Goods must be delivered to a merchant (consignee) to sell;

The consignee must deal in that kind of goods, not use the consignor’s name, not be known as mainly selling others’ goods, and not be an auctioneer;

Each delivery’s value must be at least $1,000;

Goods must not be consumer goods right before delivery.

Question 8

A PMSI may exist only with respect to two types of collateral. What are they?

Answer 8

A security interest qualifies as a PMSI only if the collateral is goods (including fixtures) or software.

Question 9

A new security agreement is not necessary when a debtor buys additional collateral if the original security agreement includes what?

Answer 9

A security interest attaches only to collateral described in the agreement. To cover property acquired later, include an after-acquired property clause like:
“all existing and after-acquired [collateral]” or “all [collateral] now owned or hereafter acquired.”

Question 10

Under what circumstances does a buyer of goods take free of an unperfected security interest?

Answer 10

A buyer (not a secured party) of goods takes free of an unperfected security interest in the same collateral if the B:

Give value;

Receive delivery; and

Have no knowledge of the security interest.

Question 11

What is the most common method of perfection, and what is this method’s objective?

Answer 11

Filing is the most common way to perfect. Filing a financing statement gives public notice of the secured party’s interest in the debtor’s personal property.

The security agreement itself doesn’t need to be filed—third parties rely on the filing to learn about the interest.

Question 12

An after-acquired clause is not effective if the collateral is consumer goods, unless ______?

Answer 12

unless the debtor acquires them within 10 days after the secured party gives value.

Question 13

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:

Answer 13

A lease is treated like a sale with a security interest if:

The lease term equals or exceeds the good’s economic life;

The lessee must renew for the good’s remaining life or become owner;

The lessee can renew for the remaining life at little/no cost; or

The lessee can buy the goods at lease end for little/no cost.

In these cases, the lessor is a secured party and must perfect their interest despite calling it a lease.

Question 14

What happens to perfection when (1) a debtor moves to another state, or (2) the collateral is transferred to a person in another state who takes the collateral subject to the security interest?

Answer 14

When a debtor moves states, perfection continues for 4 months (unless earlier lapse), covering old and new collateral. The secured party must refile in the new state within this period.

If collateral transfers to a new out-of-state debtor, the secured party has 1 year to file a financing statement naming the new debtor.

Question 15

How and when does tangible collateral (goods) get classified, and does this method apply to other types of collateral?

Answer 15

Tangible goods are classified based on the debtor’s principal use when the security interest attaches.

Unlike tangible goods, classification of other types of collateral aren’t classified by the debtor’s use.

Question 16

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?

Answer 16

A security interest in collateral attaches automatically to identifiable proceeds

Question 17

“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.

Answer 17

(1) Fixtures
(2) Standing timber
(3) Unborn animals
(4) Growing or unharvested crops (including crops grown on trees, vines, or bushes)
(5) Manufactured homes

Question 18

When can a PMSI exist in goods?

Answer 18

(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)

Question 19

Upon default, what happens when a secured party has priority in a fixture?

Answer 19

The secured party can remove the fixture but must pay for repair of physical damage, not for any loss in the property’s value caused by removal.

Question 20

How must the collateral be described in a financing statement?

Answer 20

The financing statement must describe the collateral clearly—enough to identify it like in a security agreement.

If covering all assets or personal property, a broad description is allowed.

Question 21

Chattel paper is a record (paper or electronic) with what two components?

Answer 21

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.

Question 22

For a security interest to be enforceable against a debtor (i.e., attachment), what three conditions must be met?

Answer 22

(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.

Question 23

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.

Answer 23

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.

Question 24

What is the difference between accessions and commingled goods? What happens to security interests that are attached to those types of goods?

Answer 24

Accessions are goods joined to others without losing their identity (e.g., a framed painting). A security interest in accessions continues despite the union.

Commingled goods are mixed so their identity is lost (e.g., eggs in a cake). The original security interest ends but attaches to the new product. to the larger product.

Question 25

At a minimum, what information must a financing statement contain?

Answer 25

A financing statement must contain the following information: i) The debtor’s name; ii) The name of the secured party or a representative of the secured party; and iii) The collateral covered by the financing statement.

Question 26

A security interest in ________ can be perfected only by possession unless it is received as __________ of a perfected security interest.

Answer 26

money; proceeds

Question 27

Does the buyer of collateral subject to a perfected security interest take the collateral free and clear, or subject to the security interest?

Answer 27

A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that interest, unless the secured party has authorized its sale free of the security interest.

Question 28

A security interest in proceeds enjoys temporary perfection (20 days) and may continue to be perfected indefinitely under what three circumstances?

Answer 28

A security interest in proceeds is perfected if: The original financing statement covers proceeds or is amended within 20 days; The proceeds are identifiable cash (including checks and deposit accounts) and the original interest was perfected; or The “same office” filing rule applies.

Question 29

What is the buyer in the ordinary course of business (BOCB) exception and who qualifies as a BOCB?

Answer 29

A BOCB takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. A BOCB is a person who: i) Buys goods (other than farm products); ii) In the ordinary course; iii) From a seller who is in the business of selling goods of that kind; iv) In good faith; and v) Without knowledge that the sale violates the rights of another in the same goods.

Question 30

If attachment is the process by which a security interest in a piece of collateral becomes enforceable against a debtor, then why is it important to perfect?

Answer 30

Perfection gives a secured party priority over third parties—like buyers and lien creditors—by publicly staking a claim in the collateral. It doesn’t affect rights against the debtor, only against others who may later claim an interest.

Question 31

As between a perfected secured creditor and a statutory lien claimant, who has priority in a dispute over the same collateral?

Answer 31

A statutory lien claimant has priority over a perfected secured creditor provided: (1) The lienholder has possession the goods; and (2) The lien secures payment or performance of an obligation for services or materials furnished in the ordinary course of the person’s business (e.g., a mechanic’s lien).

Question 32

Typically, a secured party must give authenticated notice of disposition to a variety of parties. When is notice not required?

Answer 32

A secured party is not required to send a notice of disposition when: (1) The collateral is perishable or threatens to decline speedily in value; (2) The collateral is customarily sold on a recognized market; or (3) A debtor or secondary obligor waives the right to notification

Question 33

Where must a financing statement be filed?

Answer 33

Generally, the financing statement must be filed with the Secretary of State (“central filing”) of the state of the debtor’s location.

Question 34

A security interest in a ________ can be perfected only by control

Answer 34

deposit account

Question 35

Under what circumstances does the same office rule extend temporary perfection?

Answer 35

Under the same office rule, temporary perfection in proceeds may continue indefinitely if: (1) A filed financing statement covers the original collateral; (2) The proceeds are collateral in which a security interest may be perfected by filing in the same office as the original financing statement; and (3) The proceeds are not acquired with cash proceeds.

Question 36

When can perfection occur as it relates to attachment?

Answer 36

Perfection can happen after attachment or at the same time - but not before.

Question 37

Who has priority in a car radio that had been installed in a vehicle that was perfected under a certificate-of-title statute?

Answer 37

A security interest in an accession (like a car radio) is generally governed by normal priority rules, but it's subordinate to a security interest in the whole (like the vehicle) if the whole is perfected under a certificate-of-title statute. Since the car was perfected by title, the radio’s security interest is subordinate to the lien on the title.

Question 38

As between a secured party and a judicial lien creditor, who has priority?

Answer 38

A judicial lien creditor takes the collateral subject to an existing perfected security interest but generally has priority over an unperfected security interest.

Question 39

A PMSI in what type of goods automatically perfects upon attachment?

Answer 39

consumer goods (A PMSI in other types of goods (e.g., inventory, equipment) does not automatically perfect. Automobiles are subject to special perfection rules)

Question 40

Does a perfected security interest have priority over an earlier created but unperfected security interest in the same collateral?

Answer 40

Yes, the perfected security interest has priority of over an earlier created but unperfected security interest in the same collateral.

Question 41

A PMSI in fixtures has priority over a prior interest in the real property with which they are associated when what two things occur?

Answer 41

1) The debtor has an interest in the real property (owner) or is in possession (lessee); and (2) The security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter.

Question 42

Explain the "garage sale" exception to the general rule that unless the secured party authorizes the sale free and clear of its security interest, a buyer takes subject to a perfected security interest. Is there an exception to this exception?

Answer 42

A buyer of consumer goods takes free of a perfected security interest if the goods are bought for value, from another consumer, for personal use, and without knowledge of the interest. Exception: If a PMSI holder filed a financing statement before the sale (even though perfection is automatic), the security interest survives the consumer-to-consumer sale. Filing protects against losing priority in these situations.

Question 43

The general rule for a perfected security interest versus another perfected security interest in the same collateral is that the first to file or perfect has priority. In essence, this rule rewards the earlier _________.

Answer 43

Filer. The first to file has priority—even over a party who was first to attach or perfect. If both parties perfected at the same time, the one who filed wins over one who perfected by control or possession.

Question 44

Once there has been a default, the secured party can repossess the collateral in what two ways?

Answer 44

(1) By use of judicial process (e.g., replevin action); or (2) Self-help repossession

Question 45

(1) What is the general rule for a security interest in fixtures versus a real property interest to which it is associated? (2) In order for a security interest in a fixture to have priority over an interest in the real property, what must happen?

Answer 45

General rule: A security interest in fixtures is subordinate to the real property owner's interest (other than the debtor's). Exception: To get priority, the secured party must make a fixture filing (a financing statement for fixtures) before the real property interest is recorded, and file it in the local real property records.

Question 46

If a secured party holding a subordinate security interest in a piece of collateral reposseses and sells that collateral, what happens to the senior, or superior, security interests in that collateral?

Answer 46

Senior security interests survive the sale—they remain attached to the collateral even after it’s sold, leased, or licensed in foreclosure

Question 47

How do you determine priority when there is an unperfected security interest versus another unperfected security interest in the same collateral?

Answer 47

The first to attach takes priority

Question 48

Self-help repossession cannot "breach the peace," which is not defined by Article 9 and is left up to the courts. What self-help measures are typically deemed acceptable by courts?

Answer 48

A trespass with respect to the collateral itself (e.g., entering a car or other vehicle), or the debtor's land (e.g., seizing a car from the debtor's driveway [but not the garage or residence]) are generally deemed acceptable means of self-help repossession that do not breach the peace.

Question 49

What is the priority rule for a PMSI in goods (other than inventory or livestock)?

Answer 49

A PMSI beats all other security interests in the same collateral—even earlier perfected ones—if it’s perfected before or within 20 days after the debtor gets possession.

Question 50

What is the priority rule for a lender with a PMSI versus a seller with a PMSI?

Answer 50

The seller PMSI beats the lender PMSI.

Question 51

What is the rule regarding construction mortgages and subsequent security interests in fixtures?

Answer 51

A construction mortgage has priority over later security interests in fixtures (including PMSIs) if it’s recorded before the goods become fixtures and covers only those fixtures installed before construction is complete.

Question 52

"Default" is not defined by Article 9. Typically, parties to a security agreement agree to what circumstances give rise to a default. In the absence of such an agreement, what event gives rise to a default?

Answer 52

Without an agreement, default occurs only if the obligor fails to make timely payments to the secured party.

Question 53

Upon default, what happens when a secured party has priority in an accession?

Answer 53

A secured party with priority in an accession can remove it from the whole but must reimburse for any physical damage caused. Note: A security interest in a car radio is subordinate to a perfected security interest in the car noted on the title.

Question 54

What remedy is available to a secured party of large equipment that makes repossession difficult?

Answer 54

Hard-to-repossess equipment can be made unusable instead of repossessed, then usually sold on the debtor’s premises.

Question 55

What is the priority rule for a PMSI in inventory or livestock?

Answer 55

A PMSI in inventory or livestock has priority over others if the secured party: Perfects before delivery to the debtor; and Sends an authenticated notice to other secured parties.

Question 56

What is the consumer buyer exception and who qualifies as a consumer buyer?

Answer 56

garage sale rule: A consumer buyer of a consumer good takes free of a security interest, even if perfected, unless the secured party filed a financing statement before the sale. A consumer buyer: Buys consumer goods for value; For personal, family, or household use; From a consumer seller; Without knowledge of the security interest.

Question 57

Once a default has occurred, what are the secured party's options?

Answer 57

The secured party may: Repossess tangible collateral and sell or keep it to satisfy the debt; Sue to get a judgment against the debtor/obligor; or Use other agreed-upon remedies with the debtor.

Question 58

All aspects of the disposition of collateral must be conducted in a commercially reasonable manner. When is a disposition considered commercially reasonable?

Answer 58

A disposition is commercially reasonable if the collateral is: Sold in the usual way in a recognized market with standard prices; Sold at the current price in that market; or Disposed of following reasonable commercial practices for that type of collateral.

Question 59

If a secured party sells collateral, cash proceeds of a disposition are distributed in what order?

Answer 59

Cash proceeds are paid in this order: Reasonable collection and enforcement costs (e.g., attorney’s fees); Debt owed to the foreclosing secured party; Subordinate security interests, if they demand payment before distribution; Any leftover goes to the debtor.