MODULE 26 SECURED TRANSACTIO

NS MULTIPLE-CHOICE A~SWE

B. Attachment of a security Interest

1. (d) Under the Revised Article 9 on Secured Trans- actions, attachment of a

security interest takes place when the secured party gives value, the debtor has rights in
the
collateral, and one of the following three is true:
a. The secured party must possess the collateral if the
debtor agrees to it
b. The secured party must have control of certain
types of collateral, or
c. The secured party must have a signed security agreement (or an authenticated
electronic transmission).
2. (a) An after-acquired property clause in a security agreement allows the
secured party's interest in such property to attach once the debtor
acquires the property, without
the need to make a new security agreement. These clauses
are typically used for inventory and accounts receivable, and
can also be used for equipment.
3. (a) The security interest did attach because there was a signed security agreement,
Gardner gave value, and Holland had rights in the collateral. Upon attachment,
Gardner's security interest is fully enforceable against Holland. Even though Gardner
never perfected the security interest, it still has priority over Boldon's interests because
Bolden was aware 'of the security interest.
4. (a) Security interests in tort claims are covered un- der the Revised UCC Secured
Transactions Article; this is
not true of after-acquired commercial tort claims,
s. (c) In order for attachment of a security interest to occur, three elements must take place.
First, the secured party must give value, second, the debtor must have rights in the
collateral, and third, there must be a security agreement. This security agreement may
be oral if the secured party has possession or control of the collateral. Otherwise, it must
be
in writing and signed by the debtor. An exception to the signature requirement is made if
it is an authenticated electronic transmission.
6. (c) In order for a security interest to attach, there must be a valid security agreement, the
secured party must have given value, and the debtor must have rights in the collateral. If
anyone of these items is missing, attachment cannot take place. Answer (a) is incorrect
because the security interest may be oral if the secured party has possession or control
of the collateral. Answer (b) is incorrect because if the security agreement is in writing,
the secured party does not need possession of the collateral to achieve attachment.
Answer (d) is incorrect because the secured party must give value, not necessarily
consideration. A pre-existing claim, although not consideration, does count as value.
7. (c) Perfection of a security interest is important in that it establishes for a secured party
priority over the claims " that may be made by most subsequent secured creditors.
Answer (a) is incorrect because there are three methods of obtaining perfection and one
of them is filing a financing statement. Answer (b) is incorrect because subsequent
creditors may still obtain security interests in the same col- lateral although they will
normally obtain a lower priority. Answer (d) is incorrect because of times the debtor
retains possession of the collateral.
8. (d) Perfection by filing a financing statement will not defeat all other parties who acquire
an "interest in the same collateral; rather, perfection by filing gives the secured party
most possible rights in the collateral. Note, purchasers from a merchant in the ordinary
course of business take the collateral free from any prior perfected security interest. The
only time a purchaser would take the collateral subject to a prior perfected security
interest would be when the purchaser knew that the merchant was selling the goods in
violation of a financing statement. A creditor need not perfect the security interest in order
to enforce it against the debtor. The filing of a financing statement does not protect the
detor's rights but rather the creditor's rights.
 9., (a) Filing a financing statement is one method of perfecting a security interest in
Personal property. Under the Revised UCC Secured Transaction Article, a financing
statement must include the following: the names of the debtor and creditor, and a listing
or description of the collateral. An after-acquired property provision, the creditor's
signature, and the collateral's location are not required to be included in the financing
statement. are easily negotiated to other holders who can become holders in due course.
Answer (a) is incorrect

 C.S. Perfection by Possession

10. (d) One way to perfect a security interest is for the secured party to take possession of
the collateral in addition to attaining attachment. A pawnbroker lending money is such a
case. There is a security agreement which may be oral since the secured party has
possession of the collateral. The secured party gives value by lending the money. The
third step in attachment is that the debtor has rights in the collateral such as ownership.
Since these steps constitute attachment, perfection is accomplished by the pawnbroker,
the secured party, taking possession of the collateral. The secured transactions laws
apply to security interests in personal property, not real property. The wholesaler (car
buyer), not the secured party, will have possession of the collateral.
11. (b) In general, the best way to perfect a security interest in a negotiable instrument is to
take possession of the instrument. This is true because n because a holder' can become
a holder in due course even if a security agreement is filed. Answer (c) is incorrect
because perfecting by attachment requires a purchase money security interest in
consumer goods. Answer (d) is incorrect because this can-not even accomplish
perfection initial is filed

C.6. Automatic Perfection

12. (b) Since West purchased the computer for personal use and the computer itself was
the collateral for the security agreement, the fact pattern involves a purchase money
security interest in consumer goods. Therefore, once attachment took place, perfection
was automatic. Answer (c) is in correct because since the computer was a consumer
good, per-fiction was automatic upon attachment Answer (d) is in- correct because filing
a financing statement is not required for perfecting a purchase money security interest in
consumer goods. Answer (a) is incorrect because retaining or obtaining possession, not
ownership, by the secured party is a way to perfect In any event, Grey Corp. did not
retain either ownership or possession since they sold and delivered the computer to
West.
13. (a) Automatic perfection (perfection by attachment) takes place in the case of a
purchase money security interest (PMSI) in consumer goods only. Answers (b), (c), and
(d) are incorrect because they include PMSI in inventory or equipment which do not
qualify for automatic perfection.
14. (c) Mars holds a purchase money security interest in the goods sold, which allowed the
buyers of these goods to secure the credit for their purchase. When a purchase money
security interest is in consumer goods, the secured party (Mars) obtains perfection when
attachment takes place without the need to file a financing statement or take possession
or control of the collateral Answers (a), (b), and (d) are incorrect because in those cases
the goods comprise inventory, not consumer goods.

E. Priorities
15. (d) Buyers in the ordinary course of business take goods free of any security interest
whether perfected or not The buyer can be, but need not be, a consumer. Answer (a) is
incorrect because a merchant who purchases consumer goods for resale may not be
buying in the ordinary course of business. Answer (b) is incorrect because the merchant
who buys the consumer goods for use in hislher business may not be buying in the
ordinary course of business. Answer (c) is incorrect because although a consumer can
take goods free of a security interest when buying from another consumer, this requires
certain facts along with a purchase money security interest in consumer goods. There
are no facts in the question to show this.
16. (c) In general, a purchase money security interest in no inventory has priority over no
purchase money security interests if it was perfected within 20 days after the debtor
received the collateral Item Ill, therefore, has the first priority because the purchase
money security interest was perfected on April 20, 2001, which was within twenty days of
the attachment Item I has priority over Item IT because the security interest in Item I was
 perfected, while the security interest in Item II was not17. (d) A purchase money security
interest in no inventory goods has a special rule. Since it was perfected within twenty
days after the debtor got possession of the collateral, it has priority over all of the others.
Answers (a) and (b) are incorrect because unperfected security interests have a lower
priority than perfected security interests. Answer (c) is in- correct because although this
security interest was perfected before the purchase money security interest, the latter
has. priority if perfected within twenty days of the debtor taking possession of the
collateral
18. (a) Since security interest I was perfected first when the financing agreement was filed
on Aprill, it has the first priority. Security interest II was perfected on April 10 when the
creditor took possession of the collateral. It has the second priority. Security interest III
has the third priority since it was perfected last on April 15.
19. (d) The party perfected by filing a security interest in inventory on April 1,2001. Slhe
would therefore have priority over a judgment lien creditor who filed later on April
15,2001. Answer (a) is incorrect because the mechanic's lien was filed on March 15
before the perfection of the security interest Therefore, the mechanic's lien has priority
over the perfected security interest Answer (b) is incorrect because the holder of the
purchase money security interest in after-acquired property filed and perfected before
Aprill. Answer (c) is incorrect because a purchaser in the ordinary course of business is
free of other security interests even if they are perfected before s/he purchases the
inventory.
20. (d) Lean, McCoy, and Norsome all purchased the furniture in the ordinary course of
business. As such, all three parties take free of the security interest even if it was
perfected. This is true whether they purchased the furniture for consumer or business
use and whether they knew of the security agreement or not
21. (d) Abby had a perfected security agreement be-cause of the purchase money security
interest in consumer goods. This, however, is not effective against a good-fait
purchaserfor value who buys from a consumer for consumer use as in the case of Gram
", Perfection by filing is, however, effective in such a case but only if the filing is done
before Gram purchases the sofa. Answer (a) is incorrect because the attachment of the
written security interest makes it enforceable against Rand, not Gram. Answer (b) is
incorrect because the filing of the financing statement took place after Gram bought the
sofa. Answer (c) is incorrect because, although Abby did accomplish automatic perfection
by way of the PMSI in consumer goods, this type of perfection was not effective against
Gram because he was a good-faith purchaser for value who bought it from a consumer
(Rand) for consumer use.
22. (c) MJC obtained a security interest in the computer purchased by Wine and perfected it
by filing. Even though when Jacobs later purchased it for consumer use he was unaware
of MJC's security interest, MJC still has priority. This is true because the filing is
constructive notice to all subsequent parties. MJC has priority and may repossess the
computer even if Jacobs was unaware of the filed security interest The filing gives MJC
priority over Jacob despite his intended use for family. Jacobs is not personally liable to
MJC because he made no contract and did not agree to take on liability with MJC.
23. (b) Because Kantar has a security interest in the inventory it sold and is also using the
same inventory as collateral for the credit, this is a purchase money security interest.
However, because the items Rally purchased are inventory, not consumer goods, in
Rally's hands, this is not a PMSI in consumer goods. Answer (a) is not chosen be- cause
this does describe a PMSI since Kantar retained a security interest in the same items
sold on credit to secure payment. Answer (c) is not chosen because a PMSI includes a
third party giving a loan who retains a security interest in the same items purchased by
the loan. Answer (d) is not . chosen because this is a PMSI in consumer goods since the
customer purchased the items for his/her home use.
24. (d) When a purchase money security interest uses no inventory as collateral, it has
priority over prior competing interests as long as it is perfected within twenty days of the
debtor obtaining possession of the collateral. Since the collateral in this fact pattern was
equipment, and Eastern filed within twenty days, Eastern has priority over the trustee in
bankruptcy. Perfection was not automatic since it was a purchase money security interest
in equipment, not in consumer goods. Furthermore, since the secured party did not have
possession of the collateral, the way to perfect this security interest is by filing a financing
statement.
F. Rights of Parties upon Default
25. (a) After Hale repossesses the computer and sells it in a commercially reasonable
fashion, Hale may obtain a deficiency judgment for the amount still owed after the
proceeds from the sale pay the expenses of repossession and sale and the debt owed to
Hale. Any remaining proceeds go to the debtor after repossession and sale expenses
and se-cured parties are paid. For consumer goods, such as the personal computer in
this fact pattern, the goods must be sold if the debtor has paid more than 60% of the debt
se- cured by the consumer goods. In this fact pattern, Drew paid two-thirds of the debt.
Hale must notify Drew in writing of the impending sale unlesDrew had agreed otherwise
in writing.
26. (c) Since Drew has paid two-thirds of the price, which is over 60% payment on the
secured debt for con- sumer goods, Hale is obligated to sell the computer rather than
keep it in satisfaction of the debt. The debtor may re- deem before, not after, the sale.
Hale may keep the proceeds needed to payoff repossession and sale expenses and the
debt owed to Hale. Any excess would go to Drew. Hale has the right to sell the
repossessed computer to payoff the se-cured debt unless Drew properly redeems the
interest s/he has in the computer.
27. (a) Upon the debtor's default, the secured party may take possession of the collateral
and sell it. A good-faith purchaser for value buys the collateral free of any liens or
security interests. Answer (b) is incorrect because the debtor has the right to redeem the
collateral before the secured party disposes of it. The debtor does this by paying the debt
in full as well as the secured party's reasonable expenses. Answer (c) is incorrect as a
good-faith purchaser of the col- lateral takes it free of the debtor's rights and any secured
interest or lien subordinate to it. Answer (d) is incorrect because although the collateral
may be disposed of by apublic sale, it also may be disposed of by a private sale if the
sale uses commercially reasonable practices.
28. (b) A good-faith purchaser for value at a private sale will take the property free from any
security interest or sub- ordinate liens in the property, but remains subject to security
interests which are senior to that being discharged at the sale. In this case, Smith
perfected his security interest later than Gray and has a subordinate interest in the
property. Thus, Walsh takes the equipment free from this subordinate security interest.
The fact that Bean is current in his payments to Smith would not affect Smith's interest I
the property. As long as Walsh is a good-faith purchaser for value, it doesn't matter if the
equipment is sold at a public or private sale. Smith is not a purchase money secured
creditor since the proceeds of Smith's loan to Bean were not used to purchase the
equipment acting as collateral.
29. (a) If the debtor defaults on the debt, the secured party may proceed against the
collateral. This extra protection is one of the main reasons for having secured
transactions. If the creditor chooses, s/he may obtain a general judgment against the
debtor.
30. (c) Under the UCC, after a secured creditor right- fully sells the debtor's collateral after
repossession, the se- cured party's reasonable sale expenses are paid first. Next, the
debt owed to the secured party is paid. Any junior security holders then get paid to the
extent of
any money nemaning