Secured Transactions

Question 1

When does a security interest attach; or become legally enforceable?

Answer 1

Secured interest must be supported by consideration given. Debtor must actually own the rights to the collateral or have possession. Secured interest much be recorded

Question 2

What are the characteristics of perfection of interest in a secured transaction?

Answer 2

Gets higher priority over others claiming rights to collateral after the perfection takes place

Attachment must take place BEFORE perfection

Question 3

How does perfection occur in a secured transaction?

Answer 3

By filing a financing statement

By possessing the collateral

Question 4

When does automatic perfection occur in a secured transaction?

Answer 4

Store sells a consumer good on credit - Store retains security interest

A bank finances the purchase of a consumer good - Bank retains security interest

Question 5

What are the priority rules for payment in a secured transaction?

Answer 5

If two parties are perfected; then the first one to file wins

If neither party is perfected; then the first one to attach wins

Question 6

What are the advantages of a creditor holding a lien in a secured transaction?

Answer 6

Creditor holds priority over claims to collateral vs. unperfected security interests

Beats perfected security interests filed after lien attachment

Exceptions: Purchase money security interest; which has a 10 day grace period to be filed

Buyers purchasing in the ordinary course of business are immune from security interests held by merchants

Question 7

What is a security agreement? What are the requirements for a valid security agreement?

Answer 7

The agreement between the debtor and creditor that gives the creditor a security interest in the debtor’s collateral

Requirements for a valid security agreement:

1. In writing, except when creditor has physical possession of collateral
2. Signed by debtor
3. A description of collateral

Question 8

What is a purchase money security interest (PMSI)?

Answer 8

When creditor gives the debtor the purchase money or the credit to acquire the collateral. Gives priority over all other types of security interests in the same collateral.

Question 9

What is attachment on a secured transaction?

What are the 3 conditions that must be met for attachment?

Answer 9

Gives secured creditor the right to collateral upon default of debtor.
Requirements: “GRIPS”
1. Creditor “G”ives value to debtor
2. Debtor has “R”ights “I”n the property
3. Creditor takes “P”ossession of property or obtains written “S”ecurity agreement

Question 10

What is perfection on a secured transaction?

When can perfection occur?

Answer 10

Perfection gives secured creditor a claim to the property that is superior to others.
Perfection occurs when the secured interest has “A”ttached and 1 of the following:
1. A financing “S”tatement has been filed
2. A PMSI is perfected “A”utomatically when it attaches in a consumer sale
3. Creditor takes “P”ossession of the property

Question 11

When does a PMSI have the highest priority in claims of property?

Answer 11

If the creditor fulfills requirements:

• PMSI Noninventory - must be perfected in 20 days of debtor possessing collateral
• PMSI Inventory - Must be perfected prior to debtor receiving inventory; Written notice must be given to other perfected interests prior to debtor receiving inventory

Question 12

How do you determine which interest has higher priority (other than PMSI)?

Answer 12

• If all perfected by filing, in order of filing date
• If perfected by filing vs. perfection by possession, in order of perfection date

Buyers of Property:

• Buyers of goods in the ordinary course of business is not subject to security interest
• A good faith buyer of used consumer goods from another consumer takes them free of any security interest except those perfected by filing

Question 13

When a creditor repossesses collateral, what can the debtor exercise? What order are the proceeds of the sale of the repossessed property distributed?

Answer 13

1. Debtor can exercise the right of redemption by paying off loan (if prior to sale)
2. Proceeds from sale of repossessed property are distributed in the following order:
   - Reasonable expenses of sale
   - Pay secured party’s claim
   - Satisfy other secured claims in order of priority
   - Excess to debtor

Question 14

Once filed, a financing statement is effective for how long?

Answer 14

5 years, but can be extended indefinitely provided continuation statements are filed timely

Question 15

What is an example of a PMSI transaction?

Answer 15

Issuing a promissory note (extending credit to purchase the item)

Question 16

Perfection for instruments, investment securities, and money must be done how?

Answer 16

By taking possession of the collateral.

A financing statement does not perfect these.

Question 17

What must be included on a financing statement?

Answer 17

• A listing and description of the types of collateral
• Signature and address of the debtor
• Name and address of the creditor