Chapter 7: Secured Transactions

Question 1

Define security interest

Answer 1

A limited right in a specific personal property (the collateral) of the debtor that allows the creditor to take the property (aka repossess) if the debtor fails to fulfill the credit obligation.

Question 2

What is a purchase money security interest? (PMSI)

Answer 2

A PMSI is a security interst that can have super priority.

It arises when:

1. a creditor sells the collateral to the debtor on credit, retaining a security interest for the purchase price, or
2. the creditor advances funds that are used by the debtor to purchase the collateral and retains a security interest in the collateral for the price.

Note: the creditor may, but need not, be the seller of the collateral

Ask yourself, did the debtor receive the collateral with teh creditor’s money or creditor’s credit?

Question 3

What are the 3 requisites for attachment of a security interest?

Answer 3

Attachment concerns the secured party’s rights against the debtor.

1. An agreement to create a security interest evidenced by either:
   
   • an authenticated record* of the security agreement (must be signed by debtor), or
   • the creditor’s taking possession of the collateral
2. the secured party must give value for the security interest, AND
3. the debtor must have rights in the collateral

*authenticated record: a signed, written security agreement or an authenticated electronic file containing the agreement

Question 4

What are 5 ways to perfect a security interest?

Answer 4

Perfection concerns the secured party’s rights againts 3rd parties.

1. File a financing statement
   
   • except to deposit accounts and money
2. possession of the collateral
3. automatic perfection upon attachment with:
   
   • a PMSI in consumer goods and
   • small-scale assignment of accounts
4. Control
   
   • only for investment property
5. Temporary

Question 5

Under the Secured Transactions Article (Article 9), what is the order of priority in collateral when the debtor defaults?

Answer 5

1. Buyer in the ordinary course of business of inventory that serves as collateral for a security agreement created by the seller; holders in due course of negotiable instruments, and holders of possessory liens
2. perfected PMSI holder
3. perfected secured creditor (non-PMSI holder), or a judicial lien that has attached to the collateral
4. unperfected secured creditor (attach only)
5. debtor

Question 6

What advantage does the holder of an automatically perfected PMSI in consumer goods gain by filing?

Answer 6

If a PMSI in consumer goods is filed, it takes priority over a consumer who buys the collateral from the debtor in a “garage sale” or “second-hand” purchase. Absent filing, the garage sale/second-hand purchaser would not be subject to the automatically perfected PMSI.

Question 7

What is the difference in filing requirements to perfect a PMSI in inventory as compared to noninventory (equipment)?

Answer 7

A PMSI in inventory must be filed before the debtor receives possession of the collateral and holders of prior perfected security interests in the inventory must be given notice before the debtor receives the collateral.

A PMSI in non-inventory (i.e. equipment) may be perfected by filing up to 20 days after the debtor receives possession of the collateral and there is no special notice requirement.

Question 8

What is the rule for determing which creditor has priority when two creditors have perfected security interests in the same collateral?

Answer 8

The first secured creditor to either file or perfect has priority.

Dates of attachment are irrelevant.

Question 9

What is the effect of the sale of collateral to a good faith purchaser at a default sale?

Answer 9

The sale discharges the security interest in the collateral and all subordinate liens.

Question 10

What are a secured party’s basic rights after a debtor defaults on the secured obligation?

Answer 10

• Take possession of the collateral through self-help if this can be done without breach of the peace, and sell or keep the collateral to satisfy the secured obligation
• if the collateral is an account, notify the account debtor to pay the secured party
• bring a judicial action to replevy the collateral
• bring an ordinary judicial action to enforce the obligation