Secured Transactions Flashcards
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
- Most security interests either can or must be perfected by filing financing statement(s) in the appropriate office
- Secured party takes possession of collateral, or in certain cases takes control
- In a few cases, security interest is perfected automatically upon attachment
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Under the UCC, which of the following is correct regarding the disposition of collateral by a secured creditor after the debtor’s default?
- The collateral must be disposed of at a public sale.
- It is improper for the secured creditor to purchase the collateral at a public sale.
- Secured creditors with subordinate claims retain the right to redeem the collateral after the disposition of the collateral to a third party.
- 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.
Under the UCC Secured Transactions Article, for a security interest to attach, the
- Debtor must agree to the creation of the security interest.
- Creditor must properly file a financing statement.
- Debtor must be denied all rights in the collateral.
- 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.
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
- Not repossess the set from Haynes, but is entitled to any payments Haynes makes to Kelly on his note.
- Repossess the set from Haynes as he has a purchase money security interest.
- Repossess the set as his perfection is first, and first in time is first in right.
- 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.