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Flashcards in Secured Transactions Deck (42):
1

Perfecting a Security Interest (in addition to attachment)

Perfection focuses on rights between various other parties that may claim an interest in same collateral. There are three primary ways that an attached security interest may be perfected— these are important

  1. Most security interests either can or must be perfected by filing financing statement(s) in the appropriate office
  2. Secured party takes possession of collateral, or in certain cases takes control
  3. In a few cases, security interest is perfected automatically upon attachment

2

Under the Secured Transactions Article of the UCC, for which of the following types of collateral must a financing statement be filed in order to perfect a purchase money security interest?

  • Stock certificates.
  • Promissory notes.
  • Personal jewelry.
  • Inventory.

Inventory. A financing statement must be filed to perfect an interest in inventory.

3

Which of the following requires a filing for perfection?

  • A purchase money security interest in consumer goods.
  • A purchase money security interest in equipment.
  • A security interest in negotiable promissory notes.
  • None of the above.

A purchase money security interest in equipment. Here, possession as a method of perfection is not practical, and, although it is a purchase money security interest, the collateral equipment is not covered by the automatic perfection rule. Thus, a filing is required.

Automatic happens when the PMSI is in Consumer Goods

  • does not cover inventory or equipment

4

On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators. This comprised Ace's entire inventory and was financed under an agreement with Rome Bank that gave Rome a security interest in all refrigerators on Ace's premises, all future acquired refrigerators, and the proceeds of sales. On July 12, Rome filed a financing statement that adequately identified the collateral. On August 15, Ace sold one refrigerator to Cray for personal use and four refrigerators to Zone Co. for its business.

Which of the following statements is correct?

  • The refrigerators sold to Zone will be subject to Rome's security interest.
  • The refrigerator sold to Cray will not be subject to Rome's security interest.
  • The security interest does not include the proceeds from the sale of the refrigerators to Zone.
  • The security interest may not cover after-acquired property even if the parties agree.

The refrigerator sold to Cray will not be subject to Rome's security interest. Even though the interest is perfected, Cray still gets to keep the refrigerator. A buyer in the ordinary course of business takes goods free from a security interest, even if the buyer has knowledge of the security agreement.

5

Under the UCC Secured Transaction Article, what is the effect of perfecting a security interest by filing a financing statement?

  • The secured party can enforce its security interest against the debtor.
  • The secured party has permanent priority in the collateral even if the collateral is removed to another state.
  • The debtor is protected against all other parties who acquire an interest in the collateral after the filing.
  • The secured party has priority in the collateral over most creditors who acquire a security interest in the same collateral after the filing.

The secured party has priority in the collateral over most creditors who acquire a security interest in the same collateral after the filing. The secured party, in perfecting the security interest, gives notice to others of its superior claim to most others. There are exceptions. For example, those secured parties who acquire a purchase-money security interest in the collateral may take priority over a previously perfected nonpurchased money security if certain conditions are met.

6

Under the UCC Secured Transactions Article, what is the order of priority for the following security interests in store equipment?

  • I. Security interest perfected by filing on April 15, 2004.
  • II. Security interest attached on April 1, 2004.
  • III. Purchase money security interest attached April 11, 2004, and perfected by filing on April 20, 2004.

  • III
  • I
  • II

​​​All perfected interests take priority over unperfected interests, regardless of when they arose, so II will be last. If more than one perfected interest exists, then the first to be perfected takes priority. Interests I and III are both perfected. The first is obviously perfected on April 15, 2004, and the third is not perfected by filing until April 20, 2004. An exception to the first in time is first in priority rule is when you have a PMSI in collateral other than livestock or inventory (here the collateral is store equipment) where a second in time of perfection takes place before or within twenty (20) days after the debtor takes possession of the collateral.

7

Wine purchased a computer using the proceeds of a loan from MJC Finance Company. Wine gave MJC a security interest in the computer. Wine executed a security agreement and financing statement, which was filed by MJC. Wine used the computer to monitor Wine's personal investments. Later, Wine sold the computer to Jacobs for Jacobs' family use. Jacobs was unaware of MJC's security interest. Wine now is in default under the MJC loan.

May MJC repossess the computer from Jacobs?

  • No, because Jacobs was unaware of the MJC security interest.
  • No, because Jacobs intended to use the computer for family or household purposes.
  • Yes, because MJC's security interest was perfected before Jacobs' purchase.
  • Yes, because Jacob's purchase of the computer made Jacobs personally liable to MJC.

Yes, because MJC's security interest was perfected before Jacobs' purchase.

A buyer is protected from a secured party's security interest if the buyer buys an item in the regular course of the seller's business. Here, Jacobs bought the machine from Wine for personal use. Nothing indicates that Wine normally sells computers, and, thus, Jacobs is a buyer not in the ordinary course of business of consumer goods. Although Jacobs purchased (for value) the computer for personal use without knowledge of MJC's security. MJC's perfection by filing (not by attachment) gave MJC priority to repossess the computer.

8

Vista is a wholesale seller of microwave ovens. Vista sold 50 microwave ovens to Davis Appliance for $20,000. Davis paid $5,000 down and signed a promissory note for the balance. Davis also executed a security agreement giving Vista a security interest in Davis' inventory, including the ovens. 
Vista perfected its security interest by properly filing a financing statement in the state of Whiteacre. Six months later, Davis moved its business to the state of Blackacre, taking the ovens. On arriving in Blackacre, Davis secured a loan from Grange Bank and signed a security agreement putting up all inventory (including the ovens) as collateral. 
Grange perfected its security interest by properly filing a financing statement in the state of Blackacre. 
Two months after arriving in Blackacre, Davis went into default on both debts.

Assuming Vista is a partnership, which of the following statements is correct?

  • Grange's security interest is superior because Grange had no actual notice of Vista's security interest.
  • Vista's security interest is superior even though at the time of Davis' default Vista had not perfected its security interest in the state of Blackacre.
  • Grange's security interest is superior because Vista's time to file a financing statement in Blackacre had expired prior to Grange's filing.
  • Vista's security interest is superior provided it repossesses the ovens before Grange does.

Vista's security interest is superior even though at the time of Davis' default Vista had not perfected its security interest in the state of Blackacre.

When the debtor moves to another jurisdiction, a perfected secured party in the old jurisdiction has to perfect in the new jurisdiction within a time limit to preserve its priority to its security interest. The perfected security party must properly file in the new jurisdiction within four months of the date the debtor crossed into the new jurisdiction. Until the four months expires, the perfected secured party in the old jurisdiction retains superior claim, even if the secured party has not yet filed in the new jurisdiction. Only if the four months pass, and there is no new filing does the old secured party lose superior claim.

9

Noninventory goods were purchased and delivered on June 15. Several security interests exist in these goods.
Which of the following security interests has priority over the others?

  • Security interest in future goods attached June 10.
  • Security interest attached June 15.
  • Security interest perfected June 20.
  • Purchase money security interest perfected June 24.

Purchase money security interest perfected June 24. Usually, the first security interest to be perfected has top priority. There is an exception, though, for a purchase money security interest, or a purchase money security interest. A purchase money security interest in noninventory collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter.

10

A debtor is in default. The collateral consists of 100 cows described in the security agreement. Thirty cows were stolen through no fault of the debtor. Which of the following statements is correct concerning the secured party's rights due to the debtor's default?

  • The secured party must take the peaceful possession of the 70 remaining cows before s/he can pursue any remedies.
  • If the secured party takes possession, the secured party cannot keep the cows in full satisfaction of the debt, if the debtor has paid 60% or more of the debt.
  • If the secured party takes possession and sells the 70 cows. Proceeds will be applied to expenses incurred in the keeping of the cows. The costs of sale, and any balance, will be applied to the debt. The debt will then be discharged, even if the proceeds are insufficient to cover the costs and the debt.
  • Upon default, the secured party can proceed to recover under the Uniform Commercial Code or proceed with any judicial remedy (such as get a judgment and levy on the debtor's non-exempt property).

Upon default, the secured party can proceed to recover under the Uniform Commercial Code or proceed with any judicial remedy (such as get a judgment and levy on the debtor's non-exempt property). - remember the cows are not consumer goods

Upon the debtor's default, the secured party has the choice to proceed under the Uniform Commercial Code by taking possession of the 70 cows, either peacefully or through judicial process. The secured party can then either sell or, without objection, keep the collateral in full satisfaction of the debt. Alternately, the secured party can proceed to file suit, receive a judgment and levy on the non-exempt property of the debtor.

11

A debtor purchased an LCD television from Best Buy for $1,000. BestBuy financed the transaction. With finance charges, the total cost of the financing is $1,200. After the debtor has paid $600, he defaults on the payment and BestBuy repossesses the TV. BestBuy has decided to keep the TV as a floor display model. The debtor believes it would be best if BestBuy sold the TV.

  • Under Article 9, BestBuy must sell the TV.
  • Under Article 9, BestBuy is not required to sell the TV.
  • Under Article 9, the debtor has no control over the creditor's actions once there has been a default.
  • Under Article 9, the decision to sell or retain is always within the discretion of the creditor.

Tricky question...Under Article 9, BestBuy must sell the TV.

The debtor has paid 60% of the PURCHASE PRICE, so BestBuy must sell the TV.

12

Drew bought a computer for personal use from Hale Corp. for $3,000. Drew paid $2,000 in cash and signed a security agreement for the balance. Hale properly filed the security agreement. Drew defaulted in paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused, Hale peacefully repossessed the computer.

Under the UCC Secured Transactions Article, which of the following remedies will Hale have?

  • Obtain a deficiency judgment against Drew for the amount owed.
  • Sell the computer and retain any surplus over the amount owed.
  • Retain the computer over Drew's objection.
  • Sell the computer without notifying Drew.

Obtain a deficiency judgment against Drew for the amount owed. Remedies after a default are cumulative. If one method does not fully satisfy the debt, others may be sought. If the computer is repossessed and sold, and money is still owed, Hale may seek a deficiency judgment against Drew for the remainder.

The security interest exists only to ensure that Hale will receive the money it is owed, in this case $1000. If it is able to resell the computer for over that amount, it may not keep all of the windfall. After deducting its reasonable expenses incurred in the repossession and resale, any surplus must be returned to Drew.

13

Kwik Bank loaned Crocker $30,000 to finance the purchase of appliances shipped to it from Cue Company.  Crocker used the money from the loan to fully pay for the appliances.  Kwik had Crocker sign a security agreement that listed as collateral the entire present and future inventory of Crocker.  Kwik meant to file a financing statement but failed to do so.  Duncan Company, aware of Kwik's security interest, extended credit to Crocker to purchase office supplies, which Crocker planned to sell at his store.  Crocker failed to pay either Kwik or Duncan.  Which of the following is correct?

  • Kwik’s security interest is not enforceable against Crocker.
  • Kwik’s security interest is enforceable against Crocker but does not have priority over Duncan.
  • Kwik’s security interest is enforceable against Crocker and does have priority over Duncan.
  • Kwik’s security interest has priority over Duncan as well as any other potential third parties.

Kwik’s security interest is enforceable against Crocker and does have priority over Duncan. Kwik’s security interest against Crocker was enforceable because attachment took place due to the fact that there was a signed security agreement, Kwik gave value, and Crocker had rights in the collateral. Since Kwik did not perfect the security interest, it is not effective against third parties unless they were aware of it, such as Duncan was in this case.

14

Under the UCC, which of the following is correct regarding the disposition of collateral by a secured creditor after the debtor’s default?

  1. The collateral must be disposed of at a public sale.
  2. It is improper for the secured creditor to purchase the collateral at a public sale.
  3. Secured creditors with subordinate claims retain the right to redeem the collateral after the disposition of the collateral to a third party.
  4. A good-faith purchaser for value and without knowledge of any defects in the sale takes free of any subordinate liens or security interests.

A good-faith purchaser for value and without knowledge of any defects in the sale takes free of any subordinate liens or security interests. a purchaser for value at a public sale who is without knowledge of any defects in that sale and who is not in collusion with the secured creditor will take the property free of the debtor’s rights and any security interests. A purchaser for value at a private sale will take free of the debtor’s rights and any security interests if he acts in good faith. The debtor’s remedy for an improperly conducted sale is a cause of action for money damages against the secured party. The debtor and any secondarily secured party have an absolute right to redeem the collateral at any time prior to the sale of the collateral by tendering all amounts due the secured party.

15

Under the UCC Secured Transactions Article, for a security interest to attach, the

  1. Debtor must agree to the creation of the security interest.
  2. Creditor must properly file a financing statement.
  3. Debtor must be denied all rights in the collateral.
  4. Creditor must take and hold the collateral.

Debtor must agree to the creation of the security interest. In order for a security interest to attach, there must be a security agreement. It may be oral if the secured party obtains possession or control of the collateral. In either case, the debtor must have agreed to the security interest. The secured party must also give value and the debtor must have rights in the collateral.

16

Thrush, a wholesaler of television sets, contracted to sell 100 sets to Kelly, a retailer.  Kelly signed a security agreement with the 100 sets as collateral.  The security agreement provided that Thrush’s security interest extended to the inventory, to any proceeds therefrom, and to the after-acquired inventory of Kelly.  Thrush filed his security interest.  Later, Kelly sold one of the sets to Haynes who purchased with knowledge of Thrush’s perfected security interest.  Haynes gave a note for the purchase price and signed a security agreement using the set as collateral. Kelly is now in default.  Thrush can

  1. Not repossess the set from Haynes, but is entitled to any payments Haynes makes to Kelly on his note.
  2. Repossess the set from Haynes as he has a purchase money security interest.
  3. Repossess the set as his perfection is first, and first in time is first in right.
  4. Repossess the set in Haynes’ possession because Haynes knew of Thrush's perfected security interest at the time of purchase.

Not repossess the set from Haynes, but is entitled to any payments Haynes makes to Kelly on his note.

Proceeds include whatever is received upon the sale of the collateral. The secured party, Thrush, has the ability to assert rights against the proceeds received by the debtor, Kelly, upon sale of the collateral. Thrush has a perfected security interest in the proceeds from the sale of the television sets because the security agreement states proceeds are covered. Therefore, Thrush is entitled to any payments Haynes makes to Kelly on the note. Normally, access to the proceeds upon default by the debtor is an integral part of an inventory financing agreement. Haynes, as a purchaser in the ordinary course of business, takes free of Thrush’s perfected security interest in inventory.

17

On October 1, Winslow Corporation obtained a loan commitment of $250,000 from Liberty National Bank.  Liberty filed a financing statement on October 2. On October 5, the $250,000 loan was consummated and Winslow signed a security agreement granting the bank a security interest in inventory, accounts receivable, and proceeds from the sale of the inventory and collection of the accounts receivable.  Liberty’s security interest was perfected

  1. On October 1.
  2. On October 2.
  3. On October 5.
  4. By attachment.

October 5.

Perfection of a security interest may be accomplished by the filing of a financing statement. Filing may be done anytime, even before the security agreement is made. But perfection does not occur until all the requirements for attachment of a security interest are met. The requisite acts of perfection are not a substitute for the attachment of a security interest, but are additional steps. Therefore, because a financing statement has already been filed, Liberty’s security interest was perfected on October 5, when all three elements for attachment existed.

18

A typewriter, which was subject to a prior UCC security interest, was delivered to Ed Fogel for repair. Fogel is engaged in the business of repairing typewriters.  Fogel repaired the typewriter. However, the owner of the typewriter now refuses to pay for the services performed by Fogel.  The state in which Fogel operates his business has a statute which gives Fogel an artisan’s lien on the typewriter.  Fogel’s artisan’s lien

  1. Takes priority over a prior perfected security interest under all circumstances.
  2. Is subject to a prior perfected purchase money security interest under all circumstances.
  3. Is subject to a prior unperfected security interest where the statute is silent as to priority.
  4. Takes priority over a prior perfected security interest unless the statute expressly provides otherwise.

Takes priority over a prior perfected security interest unless the statute expressly provides otherwise.

The UCC states that when a person in the ordinary course of business furnishes services or materials for goods subject to a security interest, an artisan’s lien on such goods, which arises under state law, takes priority over prior perfected security interests unless the statute expressly provides otherwise.

19

Under the Secured Transactions Article of the UCC, all of the following are needed to create an enforceable security interest, except

  1. A security agreement must exist.
  2. The secured party must give value.
  3. The debtor must have rights in the collateral.
  4. A financing statement must be filed.

A financing statement must be filed.

A financing statement need not be filed to create an enforceable security interest. Filing a financing statement perfects the interest, but it is not necessary to create the interest.

Attachment is a term used to describe the moment when security interest is enforceable against a debtor by the secured party

Security interest is said to attach when all of the following occur in any order (these are important):

  1. Preexisting claim (although not consideration) is value
  2. Debtor has rights in collateral

And either:

  • (1)Collateral must be in possession of secured party by debtor’s agreement (third party may possess if debtor agrees); or
  • (2)Secured party must have “control” of collateral if it is investment property, deposit account, electronic chattel paper, or a letter-of-credit right; or
  • (3)A record of security agreement must exist
    • (a)Record may be in traditional writing or in electronic or other form that is retrievable in perceptible form
    • (b)Security agreement must be signed or in case of electronic form, it must be authenticated
      • [1]Exception to need to sign or authenticate in case of pledge when secured party has possession or control of collateral

20

Batch Department store sold a refrigerator to Conrad for his home.  Conrad agreed to installment payments and Batch had him sign a security agreement.  Batch did not file a financing statement.  After having the refrigerator in his home for a time, Conrad quit making payments and sold it to Backus for use in her home.  Backus was unaware that Conrad still owed Batch for the refrigerator.  Batch is now seeking to get paid for the balance owed or to repossess the refrigerator. Which of the following statements is correct?

  1. Batch can repossess the refrigerator from Backus, and Backus has the right to recover her money from Conrad.
  2. Batch can repossess the refrigerator from Backus, but Backus has no right to recover her money from Conrad.
  3. Batch has no right to repossess the refrigerator from Backus.
  4. Batch has the legal right to collect from Backus the unpaid balance.

Batch has no right to repossess the refrigerator from Backus.

Batch obtained automatic perfection when it had a purchase money security interest in consumer goods since the steps for attachment took place and Conrad bought the refrigerator for his household use. However, automatic perfection is not effective against a good-faith purchaser for value who buys from a consumer for consumer use. Backus’s purchase from Conrad qualifies.

21

Under the UCC Secured Transactions Article, for a security interest to attach, the

  1. Debtor must agree to the creation of the security interest.
  2. Creditor must properly file a financing statement.
  3. Debtor must be denied all rights in the collateral.
  4. Creditor must take and hold the collateral.

Debtor must agree to the creation of the security interest. In order for a security interest to attach, there must be a security agreement. It may be oral if the secured party obtains possession or control of the collateral. In either case, the debtor must have agreed to the security interest. The secured party must also give value and the debtor must have rights in the collateral.

22

On June 3, Muni Finance loaned Page Corp. $20,000 to purchase four computers for use in Page’s trucking business. Page contemporaneously executed a promissory note and security agreement. On June 7, Page purchased the computers with the $20,000, obtaining possession that same day.  On June 10, Mort, a judgment creditor of Page, levied on the computers.
Which of the following statements is correct?

  1. Muni failed to qualify as a purchase money secured lender.
  2. Muni’s security interest attached on June 3.
  3. Muni’s security interest attached on June 7.
  4. Muni’s security interest did not attach.

Muni’s security interest attached on June 7.

Attachment of a security interest in personal property occurs when the following three requirements have been fulfilled;

  1. the secured party gives value,
  2. the debtor has rights in the collateral, and
  3. a record of the security agreement must exist.

The secured party gave value and the security agreement existed on June 3, but the debtor did not acquire any rights in the collateral until June 7, the day of the purchase.

23

Fogel purchased a TV set for $900 from Hamilton Appliance Store.  Hamilton took a promissory note signed by Fogel and a security interest for the $800 balance due on the set. It was Hamilton’s policy not to file a financing statement until the purchaser defaulted.  Fogel obtained a loan of $500 from Reliable Finance which took and recorded a security interest in the set.  A month later, Fogel defaulted on several loans outstanding and one of his creditors, Harp, obtained a judgment against Fogel which was properly recorded. After making several payments, Fogel defaulted on a payment due to Hamilton, who then recorded a financing statement subsequent to Reliable’s filing and the entry of the Harp judgment.  Subsequently, at a garage sale, Fogel sold the set for $300 to Mobray.  Which of the parties has the priority claim to the set?

  1. Reliable.
  2. Hamilton.
  3. Harp.
  4. Mobray.

Hamilton.

Hamilton took a purchase money security interest in the TV set which would be considered consumer goods in Fogel’s possession. Consequently, Hamilton’s security interest was perfected automatically upon attachment. Therefore, Hamilton can defeat Reliable because Hamilton’s security interest was perfected prior to the time Reliable perfected its security interest by filing. Hamilton can also defeat Harp because Harp’s judgment was subsequent to Hamilton’s perfection. Normally Mobray, as a good-faith purchaser for personal use, would defeat a prior perfected secured party who gained his/her perfection through automatic perfection by attachment. However, Hamilton engaged in a second method of perfection (filing a financing statement) prior to the sale of the TV set to Mobray, allowing Hamilton to defeat the good-faith purchaser for personal use.

24

Under the Secured Transactions Article of the UCC, which of the following statements is (are) correct regarding the filing of a financing statement?

  • A financing statement must be filed before attachment of the security interest can occur.
  • Once filed, a financing statement is effective for an indefinite period of time provided continuation statements are timely filed.
  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

II only

Filing a financing statement lasts for five years and can be continued with a continuation statement if filed within six months of expiration. Financing statements can be refiled for each new five-year period.

25

Rich Electronics sells various brand name televisions and stereos at discount prices.  Rich maintains a large inventory which it obtains from various manufacturers on credit.  These manufacturer-creditors have all filed and taken security interests in the goods and proceeds which they sold to Rich on credit. Rich in turn sells to hundreds of ultimate consumers; some pay cash but most buy on credit.  Rich takes a security interest but does not file a financing statement for credit sales.  Which of the following is correct?

  1. Since Rich takes a purchase money security interest in the consumer goods sold, its security interest is perfected upon attachment.
  2. The appliance manufacturers can enforce their security interests against the goods in the hands of the purchasers who paid cash for them.
  3. A subsequent sale by one of Rich’s customers to a bona fide purchaser will be subject to Rich’s security interest.
  4. The goods in Rich’s hands are consumer goods.

Since Rich takes a purchase money security interest in the consumer goods sold, its security interest is perfected upon attachment.

Purchase money security interest (PMSI) occurs in two important cases

  1. Seller retains security interest in same item sold on credit to secure payment
  2. Another party such as bank provides loan for and retains security interest in same item purchased by debtor

Note - goods are not consumer goods because Rich holds these goods in the ordinary course of his business; thus, the goods are inventory in Rich’s hands.

26

The perfection of a security interest by filing a financing statement

  1. Serves to protect the secured party’s interest in the collateral against most creditors who acquire a security interest in the same collateral after the filing.
  2. Is necessary to enable the secured party to enforce its security interest against the debtor.
  3. Serves to give the public actual notice.
  4. Gives the secured party priority over all other parties who acquire an interest in the collateral after the filing.

Serves to protect the secured party’s interest in the collateral against most creditors who acquire a security interest in the same collateral after the filing.

Perfection by filing a financing statement will not defeat all other parties who acquire an interest in the same collateral; rather, perfection by filing gives the secured party his best possible rights in the collateral. For example, purchasers from a merchant in the ordinary course of business take the collateral free from any prior perfected security interest. The only time a purchaser would take the collateral subject to a prior perfected security interest would be when the purchaser knew that the merchant was selling the goods in violation of a financing statement.

27

Acorn Marina, Inc. sells and services boat motors.  On April 1, Acorn financed the purchase of its entire inventory with GAC Finance Company.  GAC required Acorn to execute a security agreement and financing statement covering the inventory and proceeds of sale.  On April 14, GAC properly filed the financing statement pursuant to the UCC Secured Transactions Article. On April 27, Acorn sold one of the motors to Wilks for use in his charter business. Wilks, who had once worked for Acorn, knew that Acorn regularly financed its inventory with GAC. Acorn has defaulted on its obligations to GAC.  The motor purchased by Wilks is

  1. Subject to the GAC security interest because Wilks should have known that GAC financed the inventory purchase by Acorn.
  2. Subject to the GAC security interest because Wilks purchased the motor for a commercial use.
  3. Not subject to the GAC security interest because Wilks is regarded as a buyer in the ordinary course of Acorn’s business.
  4. Not subject to the GAC security interest because GAC failed to file the financing statement until more than 10 days after April 1.

Not subject to the GAC security interest because Wilks is regarded as a buyer in the ordinary course of Acorn’s business.

Buyers in the ordinary course of business take free of any security interest whether perfected or not. In general, buying in the ordinary course of business means buying goods from the inventory of one that normally sells those goods. Wilks bought in the ordinary course of business from Acorn who normally sells and services boat motors. The fact that Wilks knew that Acorn normally financed its inventory does not change this rule.

28

Under certain conditions, perfection of a security interest is accomplished by completing attachment with no further steps required.  Which of the following qualify?

  • I.Purchase money security interest in tables that are purchased to be used in the buyer’s restaurant.
  • II.Purchase money security interest in tables that are purchased by a retailer to sell in the buyer’s furniture store primarily to consumers.
  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

Neither!

Automatic perfection applies to purchase money security interests in consumer goods.

29

Roth and Dixon both claim a security interest in the same collateral.  Roth’s security interest attached on January 1, and was perfected by filing on March 1.  Dixon’s security interest attached on February 1, and was perfected on April 1, by taking possession of the collateral. Which of the following statements is correct?

  1. Roth’s security interest has priority because Roth perfected before Dixon perfected.
  2. Dixon’s security interest has priority because Dixon’s interest attached before Roth’s interest was perfected.
  3. Roth’s security interest has priority because Roth’s security interest attached before Dixon’s security interest attached.
  4. Dixon’s security interest has priority because Dixon is in possession of the collateral.

Roth’s security interest has priority because Roth perfected before Dixon perfected.

Perfection of a security interest takes place when all of the elements for attachment have occurred as well as one of the alternate methods of perfection. Roth’s security interest was perfected on March 1. Dixon’s security interest was perfected on April 1. Therefore, Roth’s security interest has priority over that of Dixon because Roth’s was perfected first.

30

Under the Secured Transactions Article of the UCC, which of the following security agreements does not need to be in writing to be enforceable?

  1. A security agreement collateralizing a debt of less than $500.
  2. A security agreement where the collateral is highly perishable or subject to wide price fluctuations.
  3. A security agreement where the collateral is in the possession of the secured party.
  4. A security agreement involving a purchase money security interest.

A security agreement where the collateral is in the possession of the secured party. This is also known as a pledge.  

Generally, security agreements must be in writing to be enforceable. The primary exception to the writing requirement is if the secured party takes physical possession of the collateral, known as a pledge.

31

Which of the following is(are) a purchase money security interest(s) in consumer goods?

  • I.A department store purchases light fixtures on credit from Rampart Corporation who has a security interest in these light fixtures.  The department store plans on selling this inventory primarily to consumers.
  • II.A person purchases a dining room table for consumer use from a retail outlet on credit.  The outlet has the consumer sign a security agreement and the set is delivered.
  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

2 ONLY.

This is a purchase money security interest in consumer goods because in the security agreement the item purchased would also be the collateral for the credit given and the table is for consumer use.

I is incorrect because the security interest that Rampart has is in the department store’s inventory, which is not for consumer use in the hands of the department store.

32

Pine has a security interest in certain goods purchased by Byron on an installment contract.  Byron has defaulted on the payments, resulting in Pine’s taking possession of the collateral. Which of the following is correct?

  1. Byron may waive his right of redemption at the time he executes the security agreement.
  2. Pine must sell the collateral if Byron has paid more than 60% of the cash price on a purchase money security interest in business equipment.
  3. The collateral may be sold by Pine at a private sale and, if the collateral is consumer goods, without notice to other secured parties.
  4. Unless otherwise agreed, Pine must pay Byron for any increase in value of the collateral while the collateral is in Pine’s possession.

The collateral may be sold by Pine at a private sale and, if the collateral is consumer goods, without notice to other secured parties.

If the collateral is consumer goods, Pine may sell the collateral at a private sale without notice to other secured parties. However, Pine must notify the debtor before the sale unless the collateral is perishable or threatens to decline in value.

Pine only has the option of selling the collateral if the debtor has paid 60% of the cash price on a purchase money security interest in consumer goods, not business equipment. Since the collateral is equipment, Pine would still have the option of keeping the collateral as full payment of the obligation if, after giving written notice to Byron of this desire, Byron did not object within 21 days.

33

In order for a security interest in goods to attach, the

  1. Debtor must sign a security agreement which adequately describes the goods.
  2. Debtor must retain possession of the goods until the underlying debt has been satisfied.
  3. Creditor must properly file a financing statement.
  4. Creditor must have given value.

Creditor must have given value.

A security interest attaches when all of the following have been met, in any order:

  1. The debtor has rights in the collateral,
  2. the creditor extends value, and
  3. a record of the security agreement exists.

Thus, the creditor must give value for attachment to occur.

34

ABC Company purchased some musical instruments from a wholesaler to sell in its store. ABC borrowed the money for this inventory from Redletter Bank who perfected a security interest by filing. Adams purchased a piano for his home since he wished to take piano lessons.  This is strictly for personal, not business, use.  Banner, a professional pianist, purchased a piano for his music studio.  ABC defaults on its loans with Redletter Bank and the bank wishes to repossess the pianos from Adams and Banner.  From which parties can Redletter Bank repossess?

  1. Adams only.
  2. Banner only.
  3. Both Adams and Banner.
  4. Neither Adams nor Banner.

Neither Adams nor Banner.

Buyers in the ordinary course of business take free of any security interest, even those perfected.

35

The Town Bank makes collateralized loans to its customers at 1% above prime on certified securities owned by the customer, subject to existing margin requirements.  In doing so, which of the following is correct?

  1. Notification of the issuer is necessary in order to perfect a security interest.
  2. Filing is a permissible method of perfecting a security interest in the securities if the circumstances dictate.
  3. Any dividend or interest distributions during the term of the loan belong to the bank.
  4. A perfected security interest in the securities can only be obtained by possession.

Filing is a permissible method of perfecting a security interest in the securities if the circumstances dictate.

Perfection by secured party’s possession of collateral.  

  • Perfection is accomplished by control, which is the term used for collateral that cannot be physically possessed,  rather than actual possession for investment property, deposit accounts, letter-of-credit rights

36

Under the Secured Transactions article of the UCC, when does a security interest become enforceable?

  1. A contract is executed between a debtor and a secured party under which the debtor gives the secured party rights in collateral if the debtor violates any of the terms contained in the contract.
  2. The debtor and the secured party execute a security agreement describing the transfer of the collateral and, after doing so, the secured party files it with the requisite agency.
  3. The debtor and the secured party execute a security agreement describing the transfer of collateral from seller to buyer and the secured party retains possession of the agreement.
  4. The value has been given, the secured party receives a security agreement describing the collateral authenticated by the debtor, and the debtor has rights in the collateral.

The value has been given, the secured party receives a security agreement describing the collateral authenticated by the debtor, and the debtor has rights in the collateral.

There are three requirements for a security interest to become enforceable:

  1. The secured party must give value,
  2. the debtor has legal rights in the collateral, and
  3. the secured party and the debtor have entered into a valid security agreement.

All are present here.

37

Mern Corp. is in the business of selling computers and computer software to the public. Mern sold and delivered a personal computer to Whyte on credit.  Whyte executed and delivered to Mern a promissory note for the purchase price and a security agreement covering the computer.  If Whyte purchased the computer for personal use and Mern fails to file a financing statement, which of the following statements is correct?

  1. The computer was a consumer good while in Mern’s possession.
  2. Perfection of Mern’s security interest occurred at the time of attachment.
  3. Mern’s security interest is not enforceable against Whyte because Mern failed to file a financing statement.
  4. Mern does not have a perfected security interest because it failed to file a financing statement.

Perfection of Mern’s security interest occurred at the time of attachment.

Perfection occurs at the time of attachment whenever a creditor obtains a purchase money security interest in consumer goods. Since Whyte purchased the computer for personal use and all the essential elements necessary for attachment have occurred, Mern’s security interest has been perfected.

38

In the course of an examination of the financial statements of Control Finance Company the auditors learned that the company has just taken possession of certain heavy industrial equipment from Arrow Manufacturing Company, a debtor in default.  Arrow had previously borrowed $60,000 from Control secured by a security interest in the heavy industrial equipment. The amount of the loan outstanding is $30,000.  Which of the following is correct regarding the rights of Control and Arrow?

  1. Control is not permitted to sell the repossessed equipment at a private sale.
  2. Arrow has no right to redeem the collateral at any time once possession has been taken.
  3. Control is not entitled to retain the collateral it has repossessed in satisfaction of the debt even though it has given written notice to the debtor and he consents.
  4. Arrow is not entitled to a compulsory disposition of the collateral.

Control is not permitted to sell the repossessed equipment at a private sale.

Upon default, the secured party normally has the right to retain (or sell) the collateral to satisfy the obligation. However, the secured party cannot retain the collateral if it is consumer goods and the debtor has paid 60% or more of the obligation. In such a case, the debtor is entitled to a compulsory disposition of the goods. Control’s security interest is in equipment, not consumer goods, and Arrow has paid only 50% of the obligation. Thus, Arrow is not entitled to a compulsory disposition.

39

With regard to a prior perfected security interest in goods for which a financing statement has been filed, which of the following parties is most likely to have a superior interest in the same collateral?

  1. A buyer in the ordinary course of business who purchased the goods from a merchant.
  2. A subsequent buyer of consumer goods who purchased the goods from another consumer.
  3. The trustee in bankruptcy of the debtor.
  4. Lien creditors of the debtor.

A buyer in the ordinary course of business who purchased the goods from a merchant.

Buyers in the ordinary course of business take free of any security interest whether perfected or not.

40

Gilbert borrowed $10,000 from Merchant National Bank and signed a negotiable promissory note which contained an acceleration clause. In addition, securities valued at $11,000 at the time of the loan were pledged as collateral.  Gilbert has defaulted on the loan repayments. At the time of default, $9,250, plus interest of $450, was due, and the securities had a value of $8,000. Merchant

  1. Must first proceed against the collateral before proceeding against Gilbert personally on the note.
  2. Cannot invoke the acceleration clause in the note until 10 days after the notice of default is given to Gilbert.
  3. Must give Gilbert 30 days after default in which to refinance the loan.
  4. Is entitled to proceed against Gilbert on either the note or the collateral or both.

Is entitled to proceed against Gilbert on either the note or the collateral or both.

Merchant is entitled to proceed against Gilbert on either the note or the collateral or both. The reason a creditor desires collateral for an obligation is to provide another source of payment besides the debtor’s personal promise. Merchant, the creditor, need not first proceed against the collateral before proceeding against Gilbert personally.

41

Pix Co., which is engaged in the business of selling appliances, borrowed $18,000 from Lux Bank.  Pix executed a promissory note for that amount and pledged all of its customer installment receivables as collateral for the loan.  Pix executed a security agreement that described the collateral, but Lux did not file a financing statement.  With respect to this transaction

  1. Attachment of the security interest did not occur because Pix failed to file a financing statement.
  2. Perfection of the security interest occurred despite Lux’s failure to file a financing statement.
  3. Attachment of the security interest took place when the loan was made and Pix executed the security agreement.
  4. Perfection of the security interest did not occur because accounts receivable are intangibles.

Attachment of the security interest took place when the loan was made and Pix executed the security agreement.

Attachment of a security interest under the Revised Article 9 takes place when the secured party gives value, the debtor has rights in the collateral, and one of the following is true:

  1. The secured party possesses the collateral
  2. The secured party has control of certain types of collateral
  3. There exists a security agreement in writing or in electronic form

Attachment took place in this case when Pix executed the security agreement and was given a loan by Lux using Pix’s customer installment receivables as collateral for the loan.

42

Under the UCC, which of the following is correct regarding the disposition of collateral by a secured creditor after the debtor’s default?

  1. The collateral must be disposed of at a public sale.
  2. It is improper for the secured creditor to purchase the collateral at a public sale.
  3. Secured creditors with subordinate claims retain the right to redeem the collateral after the disposition of the collateral to a third party.
  4. A good-faith purchaser for value and without knowledge of any defects in the sale takes free of any subordinate liens or security interests.

A good-faith purchaser for value and without knowledge of any defects in the sale takes free of any subordinate liens or security interests.

A purchaser for value at a public sale who is without knowledge of any defects in that sale and who is not in collusion with the secured creditor will take the property free of the debtor’s rights and any security interests. A purchaser for value at a private sale will take free of the debtor’s rights and any security interests if he acts in good faith. The debtor’s remedy for an improperly conducted sale is a cause of action for money damages against the secured party. The debtor and any secondarily secured party have an absolute right to redeem the collateral at any time prior to the sale of the collateral by tendering all amounts due the secured party.