-Secured Transactions

Question 1

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

Answer 1

Secured interest must be supported by consideration given.

The debtor must actually own the rights to the collateral or have possession.

Secured interest must be recorded.

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Question 2

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

Answer 2

It 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

Perfection occurs in a secured transaction by:

• filing a financing statement
• possessing the collateral

Question 4

When does automatic perfection occur in a secured transaction?

Answer 4

Automatic perfection occurs in a secured transaction when:

• A 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

A creditor holding a lien in a secured transaction:

• 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 20 day grace period to be filed.

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