Secured Transactions materials

This file contains a short outline and some multiple choice questions. In drafting the exam, I
will look primarily to the material that we covered in the problems in the textbook.
In reviewing, a good way is to work with the problems in the book. You can see if you can do
the problem - then ask, how would I have to change the problem to get a different result. Then,
change the problem so it is a problem on a separate issue (i.e. change a problem on attachment to
a problem on perfection). That is a very effective way to work with the material.

Students have told me that Examples and Explanations and the Glannon Guide books are
helpful.

I. Short outline of Article 9

§9-109 give the scope of Article 9. 9-301 gives the rules for multi-state transactions.
Many of the following use definitions from 9-102 and other provisions - and the Article 1 duties
apply: 1-102(3), 1-201 and 203.

I. Attachment (how creditor's security interest becomes effective against debtor)

A. Under 9-203, attachment occurs when three conditions met:

1. A written security agreement, describing collateral 9-108, signed by debtor or
creditor in possession of the collateral per agreement;
2. creditor has given value ('1-201(44)); and
3. debtor has rights in the collateral.

B. The collateral may include after-acquired property (a floating lien), unless it is consumer
goods given as additional collateral or a commercial tort claim. 9-204

D. The debtor may still use collateral in its possession. 9-205

E. Creditor in possession is subject to 9-207 duties to take care of, and 9-210 duties to
account for, collateral.

II. Perfection (how creditor gives notice to make security interest effective against the rest
of the world i.e. competing creditors, the trustee if debtor files bankruptcy, etc.)

The security interest is perfected when (1) it has attached and (2) creditor has done
whatever else is necessary (filed a financing statement, gotten a notation on a vehicle's title,
taken possession or control of the collateral, or nothing if perfection is automatic). 9-308.

A. Creditor may perfect in goods, negotiable documents, instruments, money, or tangible

chattel paper by possession (n/a to accounts, general intangibles, certificate of titled

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 goods). 9-312, 313

B. The creditor must file, unless otherwise perfected 9-310

1. creditor perfected by possession, or
2. that particular security interest perfects automatically or temporarily 9-309, 312;
or
3. the collateral is a vehicle subject to a certificate of title statute (n/a inventory of a
vehicle dealer – file financing statement). 9-311.
4. collateral is proceeds covered by 9-316
5. creditor is in control of the collateral 9-314

C. Filing of financing statement

1. what constitutes filing 9-516
2. where to file 9-501
3. what to file and what if debtor's name changes
9-502, 503, 504, 506, 507
4. duration, termination, amendment, assignment of financing statement: 9-512-515

Special rules govern goods in the hands of a bailee: 9-312, 313

So to figure out if creditor has a perfected security interest in collateral, you first check if
the security interest has attached, then check whether creditor has done whatever else (if
anything) is necessary for it to be perfected.

If debtor disposes of collateral,

1. security interest still attaches and remains perfected, unless creditor
consents .
An exception: some buyers take free of the security interest
2. security interest also attaches to the proceeds and remains perfected
automatically, but may lapse. 9-315, 325

III. Priority Rules: Who Has Senior Interest in the Property

The priority rules govern contests between various categories of claimants:

9-317 Unperfected secured creditor v. various parties
9-320 Buyers of goods v. perfected secured creditors
9 110 Article 2 creditors v. perfected secured creditors
9-333 Statutory/common law secured creditors v. perfected creditors
9-322 Perfected secured creditors v. other perfected secured creditors
9-324 Special priority for perfected purchase money security interest (PMSI)
9-334 Priority in fixtures

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9-335 Priority in accessions

Also, some unpaid sellers have a right of reclamations under § 2-702, but that is subordinate to a
perfected secured creditor

Remember also the bankruptcy rules for preferential transfers and fraudulent conveyances.

IV. Default (what creditor can do to get paid)

Upon default (which parties may define by agreement):

A. Creditor may exercise any of its remedies 9-601 (note that debtor may not waive certain
rights 9-602)

B. Creditor may take possession of, or disable, collateral 9-609 or notify account debtors to
pay creditor 9-607.

C. Creditor may sell the collateral, 9-610, but

1. must give notice (with exceptions) and do everything reasonably
2. must account for proceeds and give surplus to subordinate creditors and then
debtor, and may get deficiency from debtor.

Good faith etc. buyer of sale by creditor takes free of interests of debtor, selling creditor,
and subordinate creditors.

D. Creditor may offer to keep the collateral in satisfaction of the debt. 9-620, but subject to
60% rule and no partial satisfaction rules for consumer goods

E. Debtor may redeem collateral. 9-623

F. Any violation of creditor's duties subjects creditor to possible

(1) liability for damages 9-625
(2) loss of right to sue for deficiency 9-626
(3) liability for conversion if creditor has interfered with another person's property
rights
(4) breach of the security agreement or debt instrument

***********************************************

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II. Multiple choice questions

This set of questions may include some questions on some topics we do not cover in
detail this semester.

1a
2d
3c
4c
5b
6b
7e
8b
9c
10c
11c
12d
13b
14b
15b
16b
17b
18a
19c
20c
21b
22c
23c
24c
25b
26b
27d
28d
29b
30b
31b
32c
33c
34b
35d

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 Debbie Debtor was a dealer in rare coins. On May 1, her only property consisted
of ten rare silver dollars. She sought a $10,000 loan from Octopus Bank, to enable her to
acquire some more coins and a decorative rug for her business office. Octopus agreed (without
making a binding commitment) to make the loan and Debbie signed a promissory note and
security agreement:

#############################################################
Promissory Note dated May 1

I, Debbie Debtor, hereby promise to pay Octopus Bank the sum of $10,000 in ten annual
installments of $1,000, with interest at the rate of 10% per year, first installment to be paid on
May 1 of next year, provided that Octopus does in fact make the loan.

Signed, Debbie Debtor

#############################################################

@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@
I, Debbie Debtor, hereby grant a security interest in the following property, now owned or after-
acquired, to secure all my indebtedness (if any) under the Promissory Note I signed in favor of
Octopus Bank: my equipment, inventory, and accounts.

There shall be a default if

(i) any payment is not made in timely fashion; or
(ii) Octopus deems that the prospect of payment or the value of the collateral is impaired
and declares default; or
(iii) debtor disposes of any property listed in the security agreement without the express
consent of Octopus.

dated: May 1 signed: Debbie Debtor and Octopus Bank

@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@

On May 1, Octopus also filed a financing statement in the appropriate office, signed by
Debbie and covering Debbie's equipment, inventory, and accounts, now owned or after-acquired.
On May 2, Debbie exchanged one of the ten silver dollars for an old car owned by her brother.
The exchanged items were about equivalent in value. Her brother did not know of the agreement
with Octopus and acted in good faith. Debbie got the car for personal, not business, use.

On May 10, Octopus made the $10,000 loan to Debbie. On May 15, she used $9,500 of
the loan money to buy a set of Roman coins and the decorative rug for the office. She left the
remaining $500 cash in the office. On May 20, Debbie received a gift of $31,000 from her aunt.
She used $1,000 of that money to purchase a coin- cleaning machine for the business and
deposited the other $30,000 in a new bank account.
On May 20, Octopus learned of the transfer of the silver dollar. Octopus declared
default, and took possession (peacefully but over objections of Debbie and her brother) of the
$500 cash, the coin-cleaning machine, the car, the Roman coins, and new rug from Debbie, and
the silver dollars from Debbie and her brother. One month has passed since then.

1. Was the security interest a floating lien?

a. Yes, because it applied to after-acquired property.

b. No, because a floating lien in consumer goods is invalid.
c. Yes, all security interests are floating liens.
d. No, because no further credit was advanced to Deborah.

2. Which, if any, of the property that Deborah owned were general intangibles?

a. The silver dollars.

b. The Roman coins.
c. Debbie's bank account
d. none

3. On May 1, did Octopus have a perfected security interest in the silver dollars retained by
Debbie?

a. Yes, because they were consumer goods, covered by the security agreement and
financing statement.
b. Yes, because they were inventory, covered by the security agreement and financing
statement.
c. No, because Octopus had not given value.
d. No, because Octopus did not have possession of the silver dollars.

4. When did Octopus have a perfected security interest in the silver dollars retained by
Debbie?

a. When it filed the financing statement.

b. When the security agreement was signed.
c. When Octopus made the loan.
d. When Octopus took possession of the silver dollars.

5. Is Octopus liable to Debbie's brother?

a. Yes, because the silver dollars were consumer goods, not subject to Octopus's security
interest.
b. Yes, because the silver dollar transferred to him was not subject to Octopus's security
interest.
c. No, because Octopus was entitled to take possession of the collateral upon default.
d. Yes. The brother gave fair value for the silver dollar, so he took it free of the security
interest, as a buyer in the ordinary course of business.
6. The decorative rug was

a. a consumer good
b. equipment
c. inventory
d. an instrument

7. Debbie's jurisdiction has a certificate of title statute that provides in full:

“A security interest may be perfected in a car by notation on the certificate of title, but
not by filing a financing statement (except perfection by filing does apply if the collateral is
inventory of a car merchant). “
Octopus has not had such a notation made. Does Octopus have a perfected security
interest in the car?

a. Yes, because the car is proceeds of collateral, so Octopus is perfected automatically.

b. No, because Octopus has not had a notation made on the certificate of title..
c. Yes, because Octopus is in possession of the car.
d. Yes, because Article 9 controls over the certificate of title statute.
e. No, because the car is not collateral.

8. Is there a purchase money security interest?

a. Yes, in the silver dollars.

b. Yes, in the Roman coins.
c. Yes, in the car from Debbie's brother.
d. Yes, in the coin cleaning machine.

9. When did Octopus have a perfected security interest in the coin cleaning machine?

a. Never, because it was not purchased with the loan money.

b. When the financing statement was filed.
c. When Debbie obtained the coin cleaning machine.
d. When Octopus took possession of the coin cleaning machine.

10. When did Octopus have a perfected security interest in the $500 cash?

a. When Octopus took possession of the cash.

b. When Debbie obtained the cash (from the loan from Octopus)
c. Never.
d. When Debbie signed the security agreement.

11. Suppose that Octopus takes the Roman coins and the rug (assume they are worth a total
of 10,000), and carefully stores them all in a large safe. They are destroyed when a gasoline
truck crashes into Octopus's offices and explodes. Octopus's insurance does not cover such a
freak occurrence. Can Octopus still collect on the loan?

a. No, the $10,000 worth of lost collateral must be credited to payment of the loan.
b. No, Octopus cannot collect on the loan because Octopus is now unperfected.
c. Yes, Debbie must pay even though her collateral has been destroyed.
d. Yes, Debbie must pay because there is other collateral for the loan.

****************************************************************
Suppose a Merchant sells an unusual carpet on credit to Buyer for $400 (who plans to use
the carpet in her home), and Buyer signs a sales contract that grants a security interest in the
carpet to secure payment of the price.

12. What else must occur for Merchant to have a perfected security interest?

a. The merchant must file a financing statement or take possession of the carpet
b. The parties must also sign a security agreement, in addition to the sales contract
c. Both a. and b. above
d. Nothing

13. Suppose that Buyer now sells the carpet to a Neighbor for $200. Does the security
interest attach to the carpet or the $200?

a. Both - It attaches to the $200 and remains attached to the carpet.

b. It attaches only to the $200.
c. It attaches only to the carpet.
d. It attaches to neither.

14. Assume that the security interest remains attached to the carpet and remains perfected.
Buyer goes into default under the sales contract. Merchant takes possession of the carpet and
plans to sell it for $300 to another person who had expressed interest in the carpet. To whom
must Merchant give notice?

a. Buyer
b. Neighbor
c. Both Buyer and Neighbor
d. No one.

15. Assume now that Buyer did not sell the carpet to Neighbor, and assume also that
Merchant filed a financing statement in the correct state office covering the carpet. Now Buyer
moves with the carpet to another state. Does Merchant have to file a new financing statement to
remain perfected?

a. Yes, within four months.

b. No, because the carpet was consumer goods.
c. No, it is only necessary to refile for a floating lien.
d. No, because the carpet is farm products

16. Which of the following is equipment, for Article 9 purposes?

a. a family's lawn mower, used regularly on the family lawn

b. a painting in a lawyer's office
c. a lawnmower for sale in a hardware store
d. an accountant's bank account

***********************************

Derek Debtor runs a furniture store in Boston, Massachusetts. He sells furniture to

people who use it in their homes. Bosstone Bank lends Derek all the money he uses to purchase
inventory. Bosstone has a floating lien in Derek's inventory, pursuant to a security agreement
signed by the parties and a financing statement filed in Massachusetts.

17. If Derek legally changes his name to Keereek Kebotor, does Bosstone need to file a new
financing statement to remain perfected?

a. Yes, within four months.

b. No, only as to inventory Derek acquires more than four months after the name change.
c. No, the bank must take possession of the collateral or it will become unperfected.
d. No, because the furniture is consumer goods.

18. Bosstone discovers that Derek's (no name change) inventory is also subject to a security
interest of Crosstown Bank, perfected by another financing statement that was filed six months
before Bosstone's financing statement. Bosstone had not known about Crosstown's interest.
Which Bank has priority in the inventory?

a. Crosstown, because it filed first.

b. Bosstone, because it lent the money used to buy the inventory.
c. They would share equally.
d. Whichever perfected first.

19. (Assume no name change and no Crosstown Bank) Derek moves to New York, taking
his inventory with him. A year passes, while Derek fails to make scheduled loan payments to
Bosstone. Can Bosstone take possession of the collateral?
a. No, because Bosstone became unperfected because it failed to file a new financing
statement in timely fashion in New York.
b. No, the security agreement is only valid in Massachusetts.
c. Yes, because Derek is in default.
d. Yes, because the inventory is proceeds.

***********************
20. A security interest in inventory may be perfected by

a. possession only
b. filing only
c. possession or filing
d. security interests in inventory are ineffective

21. A security interest in accounts may be perfected by

a. possession
b. filing
c. possession or filing
d. security interests in accounts are ineffective

22. A security interest in instruments may be perfected by

a. possession
b. filing
c. possession or filing
d. security interests in instruments are ineffective

23. Donnie walks into a furniture store to buy a chair. Store Owner sells Donnie a home-
style reclining chair on credit. Donnie promises in writing to pay the purchase price in six
months, with interest. Donnie takes the chair home. Which statement is true:

a. Store Owner is an unperfected secured creditor of Donnie.

b. Store Owner is a perfected secured creditor of Donnie.
c. Store Owner is an unsecured creditor of Donnie.
d. Article 9 has no application to sales of goods.

24. Deena borrows $3,000 in cash from Finance Co. Both parties sign a security agreement,
which provides that Deena promises to use the loan money to purchase a computer for her home
and that Deena grants Finance Co. a security interest in the computer. Deena intends to buy the
computer next week. Which statement is true:

a. Finance Co. is an unperfected secured creditor of Deena.

b. Finance Co. is a perfected secured creditor of Deena..
c. Finance Co. is an unsecured creditor of Deena .
d. Deena is a perfected secured creditor of Finance Co.

DD Debtor is an employment agency. DD Debtor gets a loan from Bank, and signs a
security agreement granting Bank a security interest in “the following property, now-owned or
after acquired: equipment, inventory, accounts, and general intangibles.” At that time, DD
Debtor's property includes: some promissory notes, desks, computer equipment, and accounts
receivable from clients. The desks are sufficiently attached to the floor of the office to be
fixtures. Bank files a financing statement (with the same description of collateral as the security
agreement) in the Secretary of State's office, which was the correct place to file for equipment,
inventory, accounts, and general intangibles. The correct place for fixture filings is the Recorder
of Deeds.

25. Does Bank have a security interest in the desks?

a. Bank's security interest does not attach to the desks, because the security agreement did
not list fixtures.
b. Bank's security interest attaches to the desks , but is not perfected, because Bank did not
make a fixture filing.
c. Bank's security interest in the desks is perfected by the filing of the financing statement.
d. The Bank's security interest in the desks is governed by real estate law, not Article 9.

26. DD Debtor goes into default. What can Bank do with respect to the accounts receivable?

a. Bank may perfect its security interest in the accounts receivable by taking possession
b. Bank may notify the clients to pay the Bank, rather than DD Debtor
c. Bank may notify the clients to pay the Bank, rather than DD Debtor, but may only do so
after first giving notice to DD Debtor
d. Bank must wait until the clients pay DD Debtor and then take possession of the money.

27. DD Debtor (who is in default) voluntarily hands Bank the promissory notes payable to
DD Debtor. DD Debtor and Bank orally agree that the promissory notes will be additional
collateral for the loan. Does Bank have a security interest in the promissory notes?

a. Bank's security interest does not attach, because the promissory notes are not covered by
the written security agreement.
b. Bank's security interest does not attach, because Bank did not give value for the security
interest in the promissory notes.
c. Bank's security interest is not perfected, because the promissory notes are not covered by
the financing statement.
d. Bank's security interest is perfected because Bank is in possession of the notes by
agreement.

28. Next, Bank returns the promissory notes to DD Debtor, in order for DD Debtor to
present the notes for payment to the people that made the notes. A week later, DD Debtor has
not presented them yet. Does Bank have a security interest in the promissory notes?

a. Bank's security interest does not attach, because the promissory notes are not covered by
the written security agreement.
b. Bank's security interest does not attach, because Bank did not give value for the security
interest in the promissory notes.
c. Bank's security interest is not perfected, because the promissory notes are not covered by
 the financing statement and Bank is not in possession.
d. Bank's security interest is automatically perfected.

29. DD Debtor sells the computer equipment for $5,000 cash money . DD Debtor
immediately puts the money in an envelope in its safe. At that time, does Bank have a security
interest in the money?

a. Bank has a perfected security interest because the money is a general intangible, covered
by the security agreement and financing statement.
b. Bank automatically has a perfected security interest, because the money is proceeds.
c. Bank does not have security interest in the money, because money is not listed in the
security agreement and financing statement, and the bank is not in possession.
d. A security interest cannot attach to money.

30. Two months go by and DD Debtor still has the $5,000 in cash sitting in the safe. Does
Bank have a security interest in the money?

a. Bank has a perfected security interest because the money is a general intangible, covered
by the security agreement and financing statement.
b. Bank automatically has a perfected security interest, because the money is proceeds.
c. Bank does not have security interest in the money, because money is not listed in the
security agreement and financing statement, and the bank is not in possession.
d. A security interest cannot attach to money.

Audio Store is an electronics store. Audio Store owes $10,000 to ON Bank. Audio
Store has signed a security agreement granting a floating lien in its inventory and equipment to
ON Bank. ON Bank has perfected the security interest by filing a financing statement.
Subsequently, Audio Store purchases and receives some repair equipment for $20,000 on credit
from Equipment Seller, agreeing to make four payments of $5,000 (one every three months for a
year). Audio Store will use the repair equipment to service stuff it has sold to its own customers.
In the sales contract with Equipment Seller, Audio Store agrees that (1) the repair equipment
will belong to Equipment Seller until the full price is paid; and (2) if Audio Seller fails to make
the payments on time, Equipment Seller will be entitled to take the equipment back and keep it.
Equipment Seller does not file a financing statement. After making two of the payments, Audio
Store has financial difficulties, fails to make the third or fourth payment to Equipment Seller,
and also defaults on the loan to ON Bank.

31. Does Equipment Seller have a perfected security interest in the repair equipment?

a. No, because Article Nine does not apply to sale contracts.

b. No, because it did not file a financing statement.
c. Yes, because a purchase money security interest perfects automatically.
d. Yes, because a seller is entitled to redeem goods sold on credit.

32. Suppose that Equipment Seller takes possession of the repair equipment. Which of the
following is true:

a. Equipment Seller has violated Article 9, because a creditor can only take possession on
default if the creditor has a perfected security interest.
b. Equipment Seller would be entitled to keep the repair equipment, under the terms of the
contract.
c. Equipment Seller would not be entitled to keep the repair equipment permanently,
because the contractual clause allowing it to keep the repair equipment would be invalid.
d. It would depend if the repair equipment were fixtures.

33. Does ON Bank have a perfected security interest in the repair equipment?

a. No. Its security interest did not attach, because the repair equipment belonged to
Equipment Seller until the price was paid in full.
b. No. Its security interest could not attach, because the repair equipment was not bought
with money lent by ON Bank.
c. Yes, because it was covered by the security agreement and financing statement.
d. Yes, it attaches automatically because the equipment is newly acquired property.

34. Assume that both Equipment Seller and ON Bank do have perfected security interests in
the repair equipment. Which one would have priority ?

a. ON Bank, because it was first to file or perfect.

b. Equipment Seller, because it had a purchase money security interest.
c. Equipment Seller, because it was first to take possession.
d. ON Bank, because Equipment Seller had already received two payments.

35. Does a creditor have to give notice to the debtor before taking possession of the
collateral?

a. Yes. It must give notice of the time and date of taking possession.
b. Yes. It must give notice that it will take possession after a stated date.
c. Yes. It must first give debtor a chance to pay the debt before taking possession.
d. No, the creditor can just take possession of the collateral without giving notice.

End of questions