SU 19.6-19.9 Test Prep with Explanations
Shemwell Co. purchased a printing press from Jones Equipment, Inc. Shemwell signed a promissory note for the purchase price and signed a security agreement stating, "The buyer waives as against any assignee of the security interest any claim or defense that the buyer may have against the seller." Jones assigned the promissory note and security agreement to 1st Bank. The waiver-of-defenses clause is not enforceable against Shemwell if
1st Bank did not give value for the assignment from Jones. A waiver-of-defenses clause in a security agreement is not always binding. For personal defenses effective against an assignee of a security interest, the debtor is bound by the waiver only if the assignee has taken (1) for value, (2) in good faith, and (3) without notice of a claim or defense. However, the clause is not binding with respect to real defenses, i.e., effective against a holder in due course of a negotiable instrument.
Under the UCC Secured Transactions Article, perfection of a security interest in goods by a creditor provides added protection against other parties in the event the debtor does not pay its debts. Which of the following parties is not affected by perfection of a security interest?
A buyer in the ordinary course of business. A buyer of goods in the ordinary course of business is a person who, in good faith and without knowledge that the sale is in violation of the ownership rights or security interest of a third party in the goods, buys in the ordinary course of business from a person in the business of selling goods of that kind. Such a buyer, except one purchasing farm products from a person engaged in farming, takes free of a perfected security interest granted by the seller even if the buyer knows of its existence.
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?
A buyer of goods in the ordinary course of business. A buyer in the ordinary course of business, other than a buyer of farm products from a farmer, takes the goods free of any security interest created by the seller. This right is extended to the buyer regardless of whether (1) the security interest is perfected or (2) the buyer knows of its existence. A buyer of goods in the ordinary course of business buys (1) in the ordinary course, (2) from a person in the business of selling goods of that kind, (3) in good faith, and (4) without knowledge that the sale violates a third party's rights.
Under the Secured Transactions Article of the UCC, which of the following purchasers will own consumer goods free of a perfected security interest in the goods?
A consumer who purchases the goods in the ordinary course of business. A buyer in the ordinary course of business, except one purchasing farm products from a person engaged in farming, takes the goods free of any security interest conveyed by the seller to another party. The right is extended to the buyer regardless of whether the security interest is perfected or the buyer has knowledge of its existence.
Under the UCC Secured Transactions Article, which of the following statements is most likely true concerning the disposition of collateral by a secured creditor after a debtor's default?
A good-faith transferee for value and without knowledge of any defects in the sale takes free of any subordinate liens or security interests. When a secured party disposes of collateral after default, (1) the transferee for value receives all of the debtor's rights in the collateral, (2) the security interest under which the disposition occurs is discharged, and (3) subordinate security interests or liens are discharged unless a specific statute provides for a lien that is not dischargeable in this manner. As long as the transferee acts in good faith, (s)he will receive the property free of the foregoing interests even if the secured party does not comply with the requirements for the sale under Article 9 or any judicial proceeding.
A party who filed a financing statement covering inventory on April 1 would have a superior interest to which of the following parties?
A judgment lien creditor who filed its judgment on April 15. When two perfected security interests conflict, the first secured party to file or perfect ordinarily has priority. A secured party who filed on April 1 would have priority over a judgment lien creditor who filed on April 15. The judgment lien creditor's interest would be superior to an unperfected security interest or one perfected after attachment of the lien.
Which of the following is a false statement about priority under UCC Article 9?
A lien arising by operation of law subsequent to the perfection of any security interest will be subordinate to the earlier perfected security interest because of the first-in-time, first-in-priority rule. A person who in the ordinary course of business furnishes services or materials with respect to goods may receive a common law or statutory lien to secure payment if the goods are in the person's possession. The UCC describes this lien as a possessory lien. Such a person has priority over a security interest in the goods (whether or not perfected) unless the lien is statutory and the statute expressly provides otherwise.
Which of the following transactions illustrates a secured party's perfection of its security interest by taking possession of the collateral?
A pawnbroker's lending money. A secured party may perfect a security interest by taking possession of the collateral. Thus, pawnbrokers, to secure loans, usually take possession of the collateral. A security interest in goods, instruments, money, negotiable documents, or tangible chattel paper (but not a security interest in electronic chattel paper, which is perfected by control) may be perfected by the secured party's taking possession of the collateral.
Under the Secured Transactions Article of the UCC, which of the following security agreements does not need to be in writing to be enforceable?
A security agreement if the collateral is in the possession of the secured party. A security agreement is generally enforceable when the debtor has authenticated a security agreement that describes the collateral. Authentication means signing to indicate that the identified person intends to accept the record of the agreement. However, the secured party's possession of the collateral may substitute for authentication of a security agreement if it is in accordance with the security agreement.
Which of the following is most likely covered by Article 9 (Secured Transactions) of the UCC?
A transaction intended to create a security interest in personal property. Article 9 of the UCC covers any transaction, regardless of its form or name, that is intended to establish a security interest in personal property or fixtures. Thus, a secured transaction may be in the form of a lease, pledge, chattel mortgage, etc. However, a lease that is essentially a sale to the lessee does not establish a security interest.
A secured creditor wants to file a financing statement to perfect its security interest. Under the UCC Secured Transactions Article, which of the following must be included in the financing statement?
An indication of the collateral. To be effective, the financing statement must (1) include the name of the debtor on the public organic record, (2) include the name of the secured party or representative, and (3) indicate the collateral covered.
For purposes of the Secured Transactions Article of the Uniform Commercial Code, a security interest includes
An interest in personal property or fixtures that secures payment or performance of an obligation. A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. This broad definition encompasses currently existing security devices and new ones that may evolve.
Forward Motors, Inc., is a franchised automobile dealer for National Motors. National provides the financing of the purchase of its automobiles by Forward. It sells Forward 25 to 50 automobiles at a time and takes back promissory notes, a security agreement, and a financing statement on each sale. The agreement between Forward and National includes an after-acquired property clause. The financing statement covering this revolving inventory has been duly filed.
As against the creditors of Forward, National has a valid "floating lien" against the automobiles and the proceeds from their sale. A floating lien is retained by the secured party against the inventory of a debtor even though the items in the inventory change over time. Such a lien arises under an after-acquired property clause in the security agreement. National Motors, as a purchase money secured creditor with a perfected floating lien, has priority in the inventory against other creditors of Forward.
Retailer Corp. was in need of financing. To secure a loan, it made an oral assignment of its accounts receivable to J. Roe, a local investor, under which Roe lent Retailer, on a continuing basis, 90% of the face value of the assigned accounts receivable. Retailer collected from the account debtors and remitted to Roe at intervals. Before the debt was paid, Retailer filed a petition in bankruptcy. Which of the following is true?
As between the account debtors and Roe, the assignment is not an enforceable security interest. Retailer's assignment is not an enforceable security interest against either Retailer or third parties, such as the account debtors. When the collateral consists of accounts, a security interest does not attach (become enforceable against the debtor and third parties) until the debtor has authenticated a security agreement describing the collateral. Furthermore, the debtor must have (1) received value and (2) have rights (or the ability to transfer rights) in the collateral. Attachment of a security interest in accounts requires that the debtor authenticate a security agreement because the secured party cannot take possession, control, or delivery of accounts. However, an assignment that does not transfer a significant part of the assignor's receivables creates a security interest that is automatically perfected.
Under the Secured Transactions Article of the UCC, a secured party generally must comply with each of the following duties except
Assigning the security interest to another party at the debtor's request. Under Article 9 of the UCC, a security interest is assignable as a matter of right by the secured party. However, the secured party has no such duty to a debtor.
Winslow Co., which is in the business of selling furniture, borrowed $60,000 from Pine Bank. Winslow executed a promissory note for that amount and used all of its accounts receivable as collateral for the loan. Winslow executed a security agreement that described the collateral. Pine Bank did not file a financing statement. Which of the following statements best describes this transaction?
Attachment of the security interest occurred when the loan was made and Winslow executed the security agreement. Attachment occurs when the security interest is enforceable against the debtor with regard to the collateral, barring an express agreement postponing attachment. The security interest is enforceable against the debtor when (1) the secured party has value; (2) the debtor has rights in the collateral or can transfer them to the secured party; and (3) the debtor has authenticated a security agreement describing the collateral or the secured party has possession or control. Because the secured party (Pine) gave value of $60,000 and the debtor (Winslow) had rights in the collateral (accounts) receivable, attachment occurred when Winslow authenticated the security agreement.
Edie owned and operated a bowling alley. She obtained a loan from Bank secured by "the equipment and all other chattels and personal property used in the business." Bank properly filed a financing statement. Edie then borrowed funds from S & L, giving a first mortgage on "all real property used in the business." Edie became insolvent and filed a petition in bankruptcy. Which of the following is true?
Bank is entitled to resort to the personal property even against a trustee in bankruptcy. Even in bankruptcy proceedings, a secured creditor with a perfected security interest may obtain a remedy against the particular property. The secured party has a property right in the property and the proceeds from disposition of the collateral. However, the trustee in bankruptcy has the status of a hypothetical lien creditor and can defeat a nonperfected security interest in personal property.
If a secured party does not comply with the UCC rules with respect to collateral after a debtor's default, the secured party will
Be liable to another known secured party for losses resulting from not sending notification of sale. In general, a secured party is liable for damages to the debtor or certain other parties as a result of losses they sustain when the secured party does not comply with UCC Article 9. For example, if another secured party ought to have been notified of a sale but was not, any losses resulting are recoverable.
Burn Manufacturing borrowed $500,000 from Howard Finance Co., secured by Burn's current and future inventory, accounts receivable, and its proceeds. Burn's representative authenticated a sufficient security agreement that described the collateral. The security agreement was filed in the appropriate state office. Burn subsequently defaulted on the repayment of the loan, and Howard attempted to enforce its security interest. Burn contended that Howard's security interest was unenforceable. In addition, Green, who subsequently gave credit to Burn without knowledge of Howard's security interest and filed a financing statement but did not have a purchase money security interest (PMSI) in inventory, is also attempting to defeat Howard's alleged security interest. The security interest in question is valid with respect to
Both Burn and Green. Before attachment of the security interest, the creditor gave value, the debtor had rights in the collateral, and the debtor authenticated a sufficient security agreement. Thus, attachment has occurred, and the security interest is enforceable between the debtor (Burn) and the secured party (Howard). Because Howard's security interest was perfected by filing a financing statement, Green is assumed to have notice of Howard's security interest. Howard's claim has priority over Green's because Howard filed and perfected before Green. However, if Green had perfected a PMSI in inventory and met the notice requirements, Green would have priority.
Which is the true classification of goods under UCC Article 9?
Consumer goods, equipment, farm products, inventory. UCC Article 9 effectively classifies goods other than fixtures into four categories. Consumer goods are those used or bought for use primarily for personal, family, or household purposes. Equipment means goods other than inventory, farm products, and consumer goods. Farm products are crops, livestock, supplies used or produced in farming operations, or products of crops or livestock in their unmanufactured states. They must be in the hands of one engaged in farming operations. If goods are farm products, they are not equipment or inventory. Inventory consists of goods (1) leased by a person as lessor; (2) held for sale or lease; (3) furnished under contracts of service; or (4) consisting of raw materials, work-in-process, or materials used or consumed in a business.
Wurke, Inc., manufactures and sells household appliances on credit directly to wholesalers, retailers, and consumers. Wurke can perfect its security interest in the appliances without having to file a financing statement or take possession of the appliances if the sale is made by Wurke to
Consumers A purchase money security interest (PMSI) is created when the security interest secures payment of the purchase price of the collateral. The appliances are consumer goods when they are purchased by consumers (for personal, family, or household purposes). A PMSI in consumer goods, other than those subject to certain statutes or treaties (e.g., a certificate-of-title statute), is perfected upon attachment.
Under the Secured Transactions Article of the UCC, which of the following requirements is necessary to have a security interest attach?
Debtor Has Rights in the Collateral and Value Given By the Creditor but not Proper Filing of a Security Agreement Attachment occurs when the security interest is enforceable against the debtor with regard to the collateral, barring an express agreement postponing attachment. The security interest is enforceable against the debtor and third parties when (1) value has been given by the secured party, (2) the debtor has rights in the collateral or can transfer them to the secured party, and (3) the debtor has authenticated a security agreement describing the collateral or other evidence of authentication exists (e.g., the secured party has possession of the collateral). Filing is relevant to perfection, not attachment.
Under the UCC Secured Transactions Article, for a security interest to attach, the
Debtor must agree to the creation of the security interest. Attachment occurs when the security interest is enforceable against the debtor with regard to the collateral. It is enforceable against the debtor and third parties when (1) the secured party has given value, (2) the debtor has rights in the collateral, and (3) the debtor has authenticated a security agreement describing the collateral or other evidence of authentication exists (e.g., the secured party has possession or control). Accordingly, a security agreement (a contract) must exist. It grants the secured party a security interest in described collateral, and the debtor must agree to the creation of a security interest.
Lombard, Inc., manufactures exclusive designer apparel. It sells through franchised clothing stores on consignment, retaining a security interest in the goods. Gifford is one of Lombard's franchisees pursuant to a detailed contract signed by both Lombard and Gifford. For the security interest to be valid against Gifford with respect to the designer apparel in Gifford's possession, Lombard
Does not have to do anything further. Attachment of a security interest is the process by which a security interest becomes enforceable against a debtor by a secured party. Attachment of a security interest in inventory collateral results as soon as the following three events occur (barring an explicit agreement otherwise): (1) The collateral is in the possession of the secured party pursuant to the debtor's security agreement, or the debtor has authenticated a security agreement describing the collateral; (2) value has been given; and (3) the debtor has rights (or the ability to transfer rights) in the collateral. All these conditions have been satisfied. The detailed contract was a security agreement because it created or provided for a security interest, and the debtor has signed (authenticated) it. Value has been given because Lombard has effectively sold the goods on credit to Gifford. The debtor has rights in the goods because it has the power to sell the goods at a profit. Consequently, the security interest has attached, and Lombard need not do anything further to protect itself against Gifford.
On June 15, Harper purchased equipment for $100,000 from Imperial Corp. for use in its manufacturing process. Harper paid for the equipment with funds borrowed from Eastern Bank. Harper gave Eastern an authenticated security agreement covering Harper's existing and after-acquired equipment. On June 21, Harper was petitioned involuntarily into bankruptcy under Chapter 7 of the Federal Bankruptcy Code. A bankruptcy trustee was appointed. On June 23, Eastern duly filed a sufficient financing statement. Which of the parties will have a superior security interest in the equipment?
Eastern, because it perfected its security interest within the permissible time limits. The equipment is purchase money collateral that secures the purchase money obligation arising from the lender's giving value to permit the debtor to obtain rights in the collateral. Thus, Eastern Bank has a PMSI. A PMSI in goods other than inventory or livestock has priority over a perfected conflicting security interest in the same collateral if it is perfected at the time the debtor receives possession of the collateral or within 20 days thereafter. Even in bankruptcy proceedings, a secured creditor with a perfected security interest may pursue its remedy against the particular property. Thus, Eastern Bank's perfected PMSI in the equipment is superior (it is not inventory). However, the trustee in bankruptcy has the status of a hypothetical lien creditor and can defeat a nonperfected security interest in the equipment.
Perfection of a security interest permits the secured party to protect its rights by
Establishing priority over the claims of most subsequent secured creditors. Unless perfection is by attachment, to establish priority over a previous unperfected creditor or a subsequent secured creditor, a secured party must give notice by perfecting its security interest. The methods of perfection include (1) filing a financing statement, (2) taking possession of the collateral, or (3) obtaining control of the collateral. The steps taken will depend upon the nature of the collateral.
Under the UCC Secured Transactions Article, which of the following events will always prevent a security interest from attaching?
Failure of the debtor to have rights in the collateral. Attachment occurs when the security interest is enforceable against the debtor with regard to the collateral, barring an express agreement postponing attachment. The security interest is enforceable against the debtor and third parties when (1) the secured party has given value, (2) the debtor has rights in the collateral or can transfer them to the secured party, and (3) the debtor has authenticated a security agreement describing the collateral or other evidence of authentication exists (e.g., the secured party has possession or control).
Motor Sales, Inc., sells motor vehicles at retail. It borrowed money from Finance Company and gave a properly executed security agreement in its present and future inventory and in the proceeds therefrom to secure the loan. The security interest was duly perfected under the laws of the state where Motor does business and maintains its entire inventory. Thereafter, Motor sold a new pickup truck from its inventory to a consumer and received a certified check in payment of the full price. Which of the following is true?
Finance's security interest in the certified check Motor received is perfected against Motor's other creditors. The certified check received by the debtor constitutes identifiable cash proceeds from the sale of the inventory. In general, a security interest attaches to identifiable proceeds of collateral. Moreover, this security interest is perfected if the security interest in the original collateral also was perfected. A perfected security interest in proceeds becomes unperfected on the 21st day after attachment unless (1) the proceeds are identifiable cash proceeds; (2) some other method is used to perfect the security interest at the time of attachment or within 20 days thereafter; or (3) (a) a filed financing statement covers the original collateral, (b) the proceeds are collateral in which a security interest could be perfected by filing in the same office as the original collateral, and (c) the proceeds are not obtained using the cash proceeds. Because a certified check constitutes identifiable cash proceeds, Finance has a perfected security interest in it that will not lapse on the 21st day after attachment.
Fact Pattern: 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 on paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused, Hale peaceably repossessed the computer. Under the UCC Secured Transactions Article, which of the following rights will Drew have?
Force Hale to sell the computer. Because the debtor (Drew) has paid at least 60% of the cash price in the case of a PMSI in consumer goods, the secured party (Hale) must dispose of the goods. However, a waiver or renunciation of rights may be made in writing by the debtor after default. Similarly, if the debtor objects to the creditor's acceptance (retention) of the goods (strict foreclosure), the creditor is required to sell the goods in a commercially reasonable manner.
Tawney Manufacturing approached Worldwide Lenders for a loan of $50,000 to purchase vital components it used in its manufacturing process. Worldwide decided to grant the loan but only if Tawney would agree to a field warehousing arrangement. Pursuant to their understanding, Worldwide paid for the purchase of the components, took a negotiable bill of lading for them, and surrendered the bill of lading in exchange for negotiable warehouse receipts issued by the bonded warehouse company that had established a field warehouse in Tawney's storage facility. Worldwide did not file a financing statement. Under the circumstances, Worldwide
Has a security interest in the goods that has attached and is perfected. The requirements of attachment have been satisfied. (1) Value was given, (2) the debtor had rights in the collateral, and (3) the secured party had possession of the collateral. Whether the debtor authenticated a security agreement describing the collateral is irrelevant because the collateral is in the possession of the secured party in accordance with the debtor's security agreement. The warehouser issued negotiable documents of title representing the goods. These negotiable documents are in the possession of the secured party. Also, value was given when Worldwide paid for the parts, and the debtor has rights in the collateral (use of the components in manufacturing). Perfection of a security interest in the goods also has occurred. Possession of the negotiable documents of title is a means of perfecting a security interest in them. Furthermore, perfecting a security interest in the negotiable documents is a means of perfecting a security interest in the goods they represent while the goods are held by the issuer of the documents.
Under the Secured Transactions Article of the UCC, what would be the order of priority for the following nonpurchase money security interests in consumer goods? I. Financing statement filed on April 1 II. Possession of the collateral by a creditor on April 10 III. Security interest perfected on April 15
I. Financing statement filed on April 1 II. Possession of the collateral by a creditor on April 10 III. Security interest perfected on April 15 Under the general priority rules of the UCC, a creditor perfects a security interest in consumer goods either by possession of the collateral or by filing a financing statement. A perfected security interest has priority according to the date of filing or perfection (April 1, April 10, and April 15) unless a special priority rule applies. For example, if a security interest also is a PMSI in collateral other than inventory, it has priority if it is perfected when the debtor receives possession or within 20 days thereafter.
Under the Secured Transactions Article of the UCC, which of the following statements is(are) correct regarding the filing of a financing statement? I. A financing statement must be filed before attachment of the security interest can occur. II. Once filed, a financing statement is effective for an indefinite period of time provided continuation statements are timely filed.
II only. Attachment of a security interest in collateral occurs when it is enforceable against the debtor. Attachment is not dependent on the filing of a financing statement. A duly filed financing statement is effective for 5 years from the filing date. A continuation statement extending perfection for 5 years may be filed during the last 6 months before expiration of this period. Accordingly, the filing of the financing statement is effective for an indefinite period until a continuation statement is not filed or a termination statement is filed.
In what order are the following obligations paid after a secured party rightfully sells the debtor's collateral after repossession? I. Debt owed to any junior security holder II. Secured party's reasonable sales expenses III. Debt owed to the secured party
II. Secured party's reasonable sales expenses III. Debt owed to the secured party I. Debt owed to any junior security holder Proceeds of disposition are applied in the following order: (1) reasonable expenses of repossession, holding, preparation for disposition, processing and disposing, and, pursuant to agreement, reasonable attorneys' fees and legal expenses (if not barred by law); and repossession expenses; (2) the secured debt; (3) subordinate security interests or other subordinate liens after receipt of authenticated demands for proceeds from the holders of such interests and liens; and (4) payment of any surplus to the debtor.
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. II. Security interest attached on April 1. III. Purchase money security interest attached April 11 and perfected by filing on April 20.
III. Purchase money security interest attached April 11 and perfected by filing on April 20. I. Security interest perfected by filing on April 15. II. Security interest attached on April 1. The basic rule is that conflicting security interests in the same collateral will rank in priority according to the time of filing or perfection. If a purchase money security interest (PMSI) in goods (e.g., equipment) other than inventory or livestock is perfected when the debtor receives possession of the collateral, or within 20 days afterward, the PMSI has priority over a conflicting security interest even if it was perfected first. The reasonable assumption is that the debtor took possession between April 11 (when the security interest attached) and April 20 (when perfection occurred). Furthermore, a perfected security interest generally has priority over a security interest that has attached but is not perfected.
Clear Lake Finance, a secured party under UCC Article 9, has perfected a security interest in certain personal property of the debtor, Clara, by taking possession. Which of the following statements is false?
If Clear Lake's employee makes an unauthorized use of Clara's collateral, Clear Lake can avoid liability by showing that it exercised reasonable care to prevent such occurrences. A bailment is the legal relationship resulting from the transfer of possession of personal property from one person (the bailor) to another person (the bailee) under such circumstances that title does not pass and that the bailee is under a duty to return the item to the bailor or dispose of it as directed. The usual standard of care imposed on a bailee is reasonable care. However, a bailee must use the property for bailment purposes only and is strictly liable if it makes unauthorized use of the property. A debtor in possession of collateral for security reasons is a bailee and is not entitled to any use of the property.
Vega Manufacturing, Inc., manufactures and sells stereo systems and components to the trade and at retail. Repossession is frequently made from customers who are in default. Which of the following statements is true concerning the rights of the defaulting debtors who have had property repossessed by Vega?
If a debtor has paid 60% or more of the cash price of consumer goods in satisfaction of a purchase money security interest, the debtor has the right to have the creditor dispose of the goods. To protect the equity interest of debtors who have had property repossessed by secured parties, the UCC provides for compulsory disposition of the collateral in certain cases. In other cases, a secured party may retain the collateral if appropriate authenticated notice is given to the debtor and other parties to whom notice must be given, and no authenticated objection is received within 20 days of sending the notice. If the debtor has paid at least 60% of the cash price in the case of a PMSI in consumer goods, the secured party must dispose of the goods unless the debtor waives the right to require disposal by an agreement entered into and authenticated after default.
The UCC provides for the filing of termination statements. Which of the following is true?
If collateral in the form of consumer goods secures no obligation and no commitment to give value exists, a termination statement must be filed. If (1) the collateral consists of consumer goods, (2) no obligation is secured by the collateral, and (3) no commitment to give value exists, the secured party must cause the secured party of record to file a termination statement within 1 month. The filing must be within 20 days after receipt of an authenticated demand from the debtor, if earlier. If the property is not consumer goods, a termination statement must be filed or sent to the debtor within 20 days after the debtor makes an authenticated demand given that no obligation is secured and no commitment to give value exists.
Which is the true statement about the rights of the debtor and the secured party after default?
If the security interest secured an indebtedness, the debtor has an absolute responsibility to pay any deficiency remaining following disposition. The secured party may dispose of collateral at a public or private proceeding if the disposition is commercially reasonable. Proceeds are applied to reasonable sale expenses, the secured debt, and subordinate secured debt. If proceeds are insufficient, the creditor may seek a deficiency judgment against a debtor for the balance owed.
Under the UCC Secured Transactions Article, which of the following after-acquired property may be covered by a debtor's security agreement with a secured lender?
Inventory & Equipment A security agreement may provide for a security interest in after-acquired property. The security interest does not attach to consumer goods, unless the debtor acquires rights in them within 10 days after the secured party gives value. An after-acquired property clause can apply to both inventory and equipment.
Cross has an unperfected security interest in the inventory of Safe, Inc. The unperfected security interest
Is subordinate to lien creditors of Safe who become such prior to any subsequent perfection by Cross. Certain interests have priority over unperfected security interests. Included are the rights of a lien creditor, that is, a creditor who has acquired a lien on the property by judicial process, an assignee for the benefit of creditors, a receiver in equity, or a trustee in bankruptcy. The lien creditor takes the property subject to any security interest perfected before the lien attached, but its rights are superior to any security interest perfected after the lien attached.
Maxim Corporation, a wholesaler, was indebted to the Wilson Manufacturing Corporation in the amount of $50,000 arising out of the sale of goods delivered to Maxim on credit. Maxim authenticated a security agreement creating a security interest in certain collateral of Maxim. The collateral was described in the security agreement as "the inventory of Maxim Corporation, presently existing and thereafter acquired." In general, this description of the collateral A. Applies only to inventory sold by Wilson to Maxim.
Is sufficient to cover all inventory. Unless the secured party takes possession of the inventory collateral, the security interest does not attach unless the debtor has authenticated a security agreement that describes the collateral. Such a description suffices if it reasonably identifies what is described even though the language is not specific. For example, collateral may be reasonably identified by a type of collateral defined in the UCC, such as inventory.
Under the Secured Transactions Article of the UCC, which of the following statements is correct regarding a security interest that has not attached?
It is not effective against either the debtor or third parties. A security interest is not effective against anyone before it attaches.
Larkin is a wholesaler of computers in the state of Whiteacre. Larkin sold 40 computers to Elk Appliance, which also does business in the state of Whiteacre, for $80,000. Elk paid $20,000 down and signed a promissory note for the balance. Elk also executed a security agreement giving Larkin a security interest in Elk's inventory, including the computers. Larkin perfected its security interest by properly filing a financing statement in the state of Whiteacre. Six months later, Elk moved its business to the state of Blackacre, taking the computers. On arriving in Blackacre, Elk secured a loan from Quarry Bank and signed a security agreement, putting up all inventory (including the computers) as collateral. Quarry perfected its security interest by properly filing a financing statement in the state of Blackacre. Two months after arriving in Blackacre, Elk went into default on both debts. Which of the following statements is true?
Larkin's security interest is superior even though at the time of Elk's default Larkin had not perfected its security interest in the state of Blackacre. Larkin perfected its security interest in the jurisdiction where the debtor and the collateral were located. The perfection of the security interest continues until the earlier of (1) lapse of perfection in the original jurisdiction, (2) 4 months after a change of the debtor's location to another jurisdiction, or (3) 1 year after a transfer of the collateral to a new debtor located in another jurisdiction. Larkin's security interest in the collateral was perfected until the day of removal. It would have continued perfected until 4 months later without any action by Larkin. Thus, 2 months after the debtor and the collateral arrived in Blackacre, Larkin's perfected security interest had priority over the subsequent security interest of Quarry Bank. The general rule is that conflicting perfected security interests rank according to time of filing or perfection.
Mansfield Financial lends money on the strength of negotiable warehouse receipts. Its policy is always to obtain a perfected security interest in the receipts against the creditors of the borrowers and to maintain it until the loan has been satisfied. Insofar as this policy is concerned, which of the following is true?
Mansfield has a perfected security interest in goods represented by the receipts. A warehouse receipt is a form of document of title issued by a person engaged in the business of storing goods. A warehouse receipt is negotiable if by its terms the goods that it represents are to be delivered (1) to the bearer or (2) to the order of a named person. During the period that goods represented by a document of title are in the possession of the issuer (bailee), a security interest in the goods may be perfected by perfecting a security interest in the document. Possession of the negotiable document is a means of perfecting a security interest in it.
On March 1, Green went to Easy Car Sales to buy a car. Green spoke to a salesperson and agreed to buy a car that Easy had in its showroom. On March 5, Green made a $500 down payment and signed a security agreement to secure the payment of the balance of the purchase price. On March 10, Green picked up the car. On March 15, Easy filed the security agreement. On what date did Easy's security interest attach?
March 5. Attachment occurs when a security interest is enforceable against the debtor with regard to the collateral, barring an express agreement postponing attachment. The security interest is enforceable against the debtor and third parties when (1) the secured party has given value, (2) the debtor has rights in the collateral or can transfer them to the secured party, and (3) the debtor has authenticated a security agreement describing the collateral or other evidence of authentication exists (e.g., the secured party has possession or control). These conditions were satisfied on March 5. First, the seller gave value in the form of the consideration provided by the contractual promise to sell a specific car on credit on March 1. The security agreement is a writing evidencing the contract. If the contract was not signed by the seller, the statute of frauds applying to a sale of goods for $500 or more prevents its enforcement against the seller. Nevertheless, partial performance (the $500 down payment) renders the contract enforceable to the extent of payment made and accepted. Acceptance of a partial payment is the seller's admission (at least to the extent of payment) that a contract exists. Second, the buyer (debtor) had rights in the collateral (the car). (1) A specific car was identified in the contract, giving the buyer a special property and an insurable interest in it, (2) the car presumably was adequately described in the security agreement, and (3) a down payment was made on March 5. "A debtor's limited rights in collateral, short of full payment, are sufficient for a security interest to attach" (Official Comment, UCC 9-203). But this interest attaches only to the rights held by the debtor. Third, the debtor authenticated a security agreement on March 5.
Milo Manufacturing Corp. sells baseball equipment to distributors, who in turn sell it to various retailers throughout the United States. The retailers then sell the equipment to consumers who use it for their own personal use. In all cases, the equipment is sold on credit with a security interest taken in the equipment by each of the respective sellers. Which of the following is true?
Milo and the distributors must file a financing statement or take possession of the baseball equipment to perfect their security interests. The equipment is inventory in the hands of Milo, the distributors, and the retailers. Milo and the distributors must therefore either take possession of the goods or file a financing statement to perfect their security interests. The only purchase money security interest that is automatically perfected is one in consumer goods.
The Uniform Commercial Code contains numerous provisions relating to the rights and remedies of the parties upon default. With respect to a buyer, these provisions may
Not be varied insofar as they require the secured party to account for any surplus realized on the disposition of collateral securing the obligation. If the security interest secures an indebtedness, the secured party must account to the debtor for any surplus on disposition of the collateral after default. This right of the buyer-debtor is absolute when the collateral is sold after default because the risk remains with the debtor. But it would not apply if the secured party is allowed to retain (accept) the collateral and later sells it at a profit.
Jay Thrush, a wholesaler of television sets, contracted to sell 100 sets to Kara 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 Myra 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 her note. Assuming Haynes bought the goods (1) in good faith, (2) without knowledge that the sale was in violation of Thrush's security interest, (3) in the ordinary course of business, and (4) from a person in the business of selling television sets (not a pawnbroker), she qualifies as a buyer in the ordinary course of business. She therefore takes free of the purchase money security interest in inventory given by Kelly even though it was perfected and she knew of its existence. However, the security interest continues in the proceeds, so Thrush may recover payments made by Haynes to Kelly. A perfected PMSI in inventory extends to identifiable cash proceeds received no later than the time of delivery to a buyer and to proceeds in the form of instruments, chattel paper (e.g., the note and security agreement), and the proceeds of chattel paper.
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 Mary Wilks for use in her 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
Not subject to the GAC security interest because Wilks is regarded as a buyer in the ordinary course of Acorn's business. A buyer in the ordinary course of business takes the goods free of any security interest created by the seller. This right is extended to the buyer regardless of whether the security interest is perfected or the buyer has knowledge of its existence. A buyer of goods in the ordinary course of business buys goods (1) in the ordinary course, (2) from a person in the business of selling goods of that kind, (3) in good faith, and (4) without knowledge that the sale violates a third party's rights. Because boat motors are the regular inventory of Acorn Marina, Inc., Wilks is a buyer in the ordinary course of business and takes the motor free of GAC's security interest.
Which of the following statements about a debtor's notice for foreclosure sales is false?
Notice required for a public disposition is the same as notice required for a private disposition. After repossession, the secured party may dispose of the collateral by means of a sale, lease, license, or other means. Dispositions may be either public or private. A notice of public disposition must include the time and place. The notice of a private disposition must include only the time after which the disposition may occur.
Fact Pattern: 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 on paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused, Hale peaceably 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. The secured party may dispose of collateral publicly or privately in a commercially reasonable manner. Proceeds are applied to reasonable disposition and other expenses, the secured debt, and subordinate security interests and other subordinate liens. If proceeds are insufficient, the creditor may seek a deficiency judgment against a debtor for the balance owed.
On January 1, Shemwell Co. signed a security agreement giving Jones a security interest in a crane Shemwell was planning to buy for its business. In exchange for the security agreement, Jones signed a contract to lend Shemwell $10,000 on request. On January 9, Shemwell purchased the crane. On January 15, Jones delivered $10,000 to Shemwell. On January 20, Jones filed the security agreement with the appropriate public officials. Under the UCC, when did Jones's security interest in the crane attach?
On January 9, when Shemwell purchased the crane for its business. Attachment of a security interest in collateral occurs when the security interest is enforceable against the debtor. It is enforceable against the debtor and third parties when all of the following events have occurred unless the time is postponed by an explicit agreement: (1) value has been given, (2) the debtor has rights in the collateral, and (3) the collateral (other than a certificated security) is in the possession of the secured party pursuant to the debtor's security agreement or the debtor has authenticated a security agreement containing a description of the collateral. (1) The secured party gave value on January 1 when it entered into a contract to lend money to the debtor, (2) the debtor had rights in the collateral on January 9, and (3) the debtor authenticated a security agreement on January 1. Thus, the attachment requirements were met on January 9.
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
On October 5. A security interest is perfected when it has attached and when all of the necessary steps required for perfection have been taken. The security interest did not attach until October 5 when the security agreement was authenticated by the debtor. The debtor had rights in its assets (the collateral) and value had been given by the secured party (the loan commitment on October 1 met the value requirement). Because a financing statement had already been filed, October 5 was also the date when perfection occurred. NOTE: Priority among perfected security interests is determined by date of filing or perfection, whichever comes first. Thus, Liberty Bank has priority over a conflicting perfected security interest from the date of filing on October 2.
ABC Co. loaned XYZ Co. $5,000. Under the Secured Transactions Article of the UCC, which of the following items would give ABC the best position in the event of default on the loan by XYZ?
Possession of XYZ's service truck as collateral. UCC Article 9 covers any transaction (regardless of form or name) intended to create a security interest in personal property. A security interest secures payment or performance of an obligation. A security interest in collateral is not effective against the debtor or third parties until it attaches. Attachment must occur to be enforceable against the debtor, barring an explicit agreement stating otherwise. The security interest attaches and becomes enforceable against the debtor when the following three events have occurred: (1) the debtor has authenticated (signed manually or electronically) a security agreement that describes the collateral, or the secured party possesses or controls the collateral; (2) the secured party has given value; and (3) the debtor has rights in the collateral or can transfer such rights. Possession is the best form of an attached security interest because it perfects the interest.
Under the Secured Transactions Article of the UCC, which of the following remedies is available to a secured creditor when a debtor fails to make a payment when due?
Proceeds Against the Collateral and Obtain a General Judgement Against the Debtor Although default by a debtor does not require a secured creditor to take action, a secured party essentially has three remedies. The secured party may sue the debtor for the amount owed and proceed to judgment on the underlying debt. A second remedy is peaceably to take possession of (foreclose on) the collateral with or without judicial process. The creditor then may sell, lease, license, or otherwise dispose of the collateral in a commercially reasonable way and apply the sales proceeds to the costs of disposal and to the obligations secured. A third remedy available under certain conditions is to accept (retain) the collateral in full or partial satisfaction of the obligations secured.
Mozart Pianos has a perfected security interest in pianos owned by the Virtuoso Piano School. Virtuoso sends one of the pianos to Rachmaninoff Repair Service, which makes extensive repairs to the instrument. Virtuoso is unable to make payment for the repairs, and the piano remains in Rachmaninoff's possession. A state statute establishes an artisan's lien but is silent with regard to priority as against a perfected security interest.
Rachmaninoff will prevail in a priority contest because the statute did not expressly provide that the security interest took priority. Certain liens have priority over even a perfected security interest. If (1) a state statute grants a lien in favor of a person who, in the ordinary course of business, furnishes services or materials with respect to goods subject to a security interest, and (2) such person retains possession of the goods, the lien has priority over a perfected security interest unless the statute expressly provides otherwise.
Under the UCC Secured Transactions Article, if a debtor is in default under a payment obligation secured by goods, the secured party has the right to
Reduce the Claim to a Judgement, Sell the Goods & Apply the Proceeds Toward the Obligations Secured, and Peacefully Repossess the Goods Without Judicial Process After default by a debtor, a secured party essentially may choose among three remedies. The secured party may (1) sue the debtor for the amount owed (reduce the claim to judgment); (2) peaceably take possession of (foreclose on) the collateral, with or without judicial process, and dispose of it in a commercially reasonable manner that includes applying the proceeds to the costs of disposition and to the obligations secured; and (3) accept (retain) the collateral in full or partial satisfaction of the obligations secured if certain conditions, for example, consent of the debtor, are met. These remedies are cumulative and allow the creditor, if unsuccessful by one method, to pursue another remedy. They also may be exercised simultaneously.
Roth and Dixon both claim a security interest in the same collateral. Roth's security interest attached on January 1, and it was perfected by filing on March 1. Dixon's security interest attached on February 1, and it was perfected on April 1 by taking possession of the collateral. Which of the following statements is true?
Roth's security interest has priority because Roth perfected before Dixon perfected. The basic rule is that conflicting security interests in the same collateral rank in priority according to the time of filing or perfection. Perfection of a security interest can occur only if the attachment requirements have been met. Attachment has occurred for both parties, and the party whose security interest was perfected first will have priority. Roth's security interest was perfected 1 month prior to the perfection of Dixon's security interest, so Roth has priority, assuming no special rules apply.
The scope of secured transactions under Article 9 of the Uniform Commercial Code does not include
Sale of corporate debentures. Article 9 applies to security interests created under Articles 2, 2A, 4, and 5. It also applies to (1) security interests in personal property and fixtures created by contract; (2) agricultural liens; (3) consignments; and (4) sales of accounts, promissory notes, and certain other items. It does not apply to sales of corporate debentures, which are bonds not secured by specific collateral. These transactions are governed by Article 8 of the UCC, other state statutes, and possibly the federal securities laws. However, corporate debentures and other investment property may be collateral under Article 9.
Under the UCC Secured Transactions Article, which of the following actions will best perfect a security interest in a negotiable instrument against any other party?
Taking possession of the instrument. A security interest in instruments may be perfected by the secured party's taking possession of the collateral. A security interest in instruments also may be perfected by filing. However, a security interest in instruments is perfected without filing or perfection for 20 days after attachment to the extent of new value given under an authenticated security agreement. Temporary perfection of a security interest in an instrument also is permitted for a 20-day period when such collateral is delivered to the debtor for ultimate sale or exchange or for presentation, collection, enforcement, renewal, or registration of transfer. Possession is the optimal method of perfection because (1) it is not limited to 20 days, and (2) a prior perfected security interest is defeated by a holder in due course.
Under the Secured Transactions Article of the UCC, which of the following items most likely can be excluded from a filed original financing statement?
The amount of the obligation secured. Because a financing statement may be filed before a security agreement is reached or a security interest attaches, the amount of the obligation secured can usually be excluded from a filed original financing statement.
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 true?
The collateral may be sold by Pine at a private proceeding and, if it is consumer goods, without notice to other secured parties. The secured party may dispose of the collateral at a public or private proceeding provided that every aspect of the disposition is commercially reasonable. Unless the collateral (1) is perishable, (2) threatens to decline rapidly in value, or (3) is of a type customarily sold on a recognized market, reasonable authenticated notice must be given to the debtor and any secondary obligor unless that right has been waived. In the case of consumer goods, no other notice need be sent to other secured parties because many PMSIs in consumer goods are perfected by attachment alone.
Case Corporation manufactures electric drills and sells them to retail hardware stores. Under the Uniform Commercial Code, it is likely that
The drills are inventory in Case's hands. The classification of goods depends on who holds the property and the use to which it is put. Inventory consists of goods, other than farm products, that (1) are held for sale or lease or to be provided under a contract for service; (2) are leased or provided under a contract for service; or (3) consist of materials used or consumed by a business, work-in-process, or finished goods. Electric drills are inventory in the hands of their manufacturer (or a retailer) because they are held for sale. The drills are consumer goods, however, in the hands of someone using them primarily for personal, family, or household purposes. They are equipment if they do not qualify as inventory, farm products, or consumer goods.
A filing requirement for perfection applies to which of the following transactions under Article 9 (Secured Transactions) of the Uniform Commercial Code?
The factoring of a significant amount of the assignor's accounts receivable. The factoring of accounts receivable is an outright sale that Article 9 of the UCC treats as a secured transaction. Perfection of a security interest in accounts ordinarily may be achieved only by filing because nothing exists to possess. A purchaser of accounts therefore must file a financing statement to perfect an ownership interest. But if an insignificant amount of the assignor's accounts is transferred, perfection is by attachment only.
Under the Secured Transactions Article of the UCC, a financing statement generally must contain
The name of the debtor. The financing statement must contain (1) the name of the debtor, (2) the name of the secured party (or representative), and (3) an indication of the covered collateral.
Under the Secured Transactions Article of the UCC, if a secured creditor rightfully repossesses and sells a debtor's collateral, which of the following obligations is the first to be paid from the proceeds of the sale?
The reasonable expenses incurred by the sale. After repossession, the secured party may dispose of the collateral by public or private proceedings. The proceeds of collection or enforcement are applied in the following order: (1) payment of reasonable expenses of collection or enforcement, (2) satisfaction of the debt owed to the secured party under whose security interest the collection or enforcement is made, (3) satisfaction of the debts owed to subordinate secured parties, and (4) payment of any surplus to the debtor.
On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators that constituted Ace's entire inventory. They were 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 sufficiently indicating the collateral covered. 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 true?
The refrigerator sold to Cray will not be subject to Rome's security interest. The refrigerators held by Ace constitute inventory of the debtor. Accordingly, Rome must file a financing statement to perfect its purchase money security interest in the collateral. Filing would not have been necessary if the collateral had consisted of consumer goods. Thus, Rome Bank's PMSI was perfected on July 12. Under UCC rules, a buyer in the ordinary course of business (Cray), except one purchasing farm products from a farmer, takes the goods free of any security interest created by the seller. This right is extended to the buyer regardless of whether the security interest is perfected or the buyer has knowledge of its existence.
When collateral covered under the Secured Transactions Article of the UCC is in the secured party's possession,
The risk of accidental loss is on the debtor to the extent of any deficiency in any effective insurance coverage. In most cases, a secured party in possession of the collateral must use reasonable care in its custody and preservation. However, Article 9 states that "the risk of accidental loss or damage is on the debtor to the extent of a deficiency in any effective insurance coverage."
Under the UCC Secured Transactions Article, what is the effect of perfecting a security interest by filing a financing statement?
The secured party has priority in the collateral over most creditors who acquire a security interest in the same collateral after the filing. Perfection of a security interest maximizes a secured party's rights with respect to the collateral. Although perfection by filing a financing statement does not give the secured party priority over all subsequent secured parties, it does give priority over all unperfected interests and over most subsequent perfected interests.
Under the Secured Transactions article of the UCC, a security interest becomes enforceable when
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. For most forms of collateral, a security interest is enforceable against the debtor when (1) the debtor has authenticated a security agreement that describes the collateral or the secured party has possession of the collateral, (2) the secured party has given value, and (3) the debtor has rights in the collateral or the power to transfer such rights.
The Town Bank makes collateralized loans to its customers at 1% above prime on securities owned by the customer, subject to existing margin requirements. In doing so, which of the following is true?
Town Bank can obtain a perfected security interest in the securities by control. Investment property includes securities, whether certificated or not. A security interest in investment property may be perfected by control or by filing. Control of a certificated security in bearer form arises from delivery to the secured party. If the security is in registered form, control requires delivery and endorsement or delivery and registration. Control of an uncertificated security requires delivery or the issuer's agreement to comply with instructions without the further consent of the debtor-registered owner. Control of a security entitlement requires that (1) the secured party become the holder, or (2) the securities intermediary agree to comply with entitlement orders originated by the secured party without further consent by the debtor-entitlement holder. A secured party has control over a securities account if the secured party controls all security entitlements in the account.
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, who used it for family purposes. Jacobs was unaware of MJC's security interest. Wine now is in default under the MJC loan. May MJC repossess the computer from Jacobs?
Yes, because MJC's security interest was perfected before the purchase by Jacobs. The purchase by Jacobs was not made in the ordinary course of business. A buyer from the original purchaser of consumer goods (a buyer outside the ordinary course of business) has priority over a secured party whose security interest is perfected by attachment if the buyer (1) has no knowledge of the security interest; (2) gives value; (3) buys for his or her personal, family, or household purposes; and (4) buys before the secured party files. Given that a financing statement was filed before the resale, constructive knowledge of the security interest is imputed to the buyer, and the secured party prevails. Thus, MJC may repossess the computer after Wine's default.
Taso Corp. sells laptop computers to the public. Taso sold and delivered a laptop to Cara on credit. Cara gave Taso a purchase money security interest in the laptop by executing and delivering to Taso a promissory note for the purchase price and a security agreement covering the laptop. Cara purchased the laptop for personal use. Taso did not file a financing statement. Under the Secured Transactions Article of the UCC, is Taso's security interest perfected?
Yes, because it was perfected at the time of attachment. A PMSI in consumer goods ordinarily is automatically perfected without filing or possession. Thus, it becomes effective at the time of attachment.