Secured Transactions – Attachment, Perfection, Priority & Default

A comprehensive set of question-and-answer flashcards covering key concepts from the Secured Transactions Essay Writing Workshop, including definitions, attachment, perfection, priority rules, PMSIs, buyers’ rights, and default remedies.

What are the four major analytical steps for any secured-transactions exam question?

(1) Determine whether each party’s security interest has attached; (2) determine whether each interest is perfected; (3) if multiple parties claim the collateral, determine priority; (4) if the collateral is disposed of, allocate the proceeds.

Define a “secured transaction” under UCC Article 9.

A loan or purchase secured by collateral in which the debtor grants the creditor a security interest in specific personal property or fixtures to secure payment or performance.

What is a “security interest”?

An interest in personal property or fixtures that secures payment or performance of an obligation.

Who is a “secured party”?

The person in whose favor a security interest is created—usually the lender or seller who extended credit.

Who is an “obligor”?

A person who must pay or otherwise perform the secured obligation.

Who is a “debtor”?

A person with an ownership or other non-security interest in the collateral (often, but not necessarily, the obligor).

What is “collateral”?

Property subject to a security interest.

List the four classes of tangible goods collateral.

Consumer goods, farm products, inventory, and equipment.

When are goods categorized as “consumer goods”?

When acquired primarily for personal, family, or household purposes.

Define “inventory” under Article 9.

Goods, other than farm products, that are held for sale or lease, furnished under service contracts, or consumed in a business (e.g., raw materials).

Define “equipment.”

A catch-all class of goods that are not consumer goods, farm products, or inventory—typically used or bought for use in a business.

Name two frequently tested types of intangible collateral.

Accounts and deposit accounts.

What is the general rule of Article 9 applicability?

It governs any consensual transaction creating a security interest in personal property or fixtures, and may also cover certain leases, consignments, agricultural liens, or sales of accounts.

When does a lease create a security interest?

When payments must be made for the full lease term without termination and the lessee can become owner for nominal consideration at the end.

What three conditions are required for attachment?

(1) Secured party gives value; (2) debtor has rights in the collateral; (3) debtor authenticates a security agreement describing the collateral OR secured party takes possession or control.

Give four ways a secured party can “give value.”

Provide consideration; extend credit; accept delivery under a pre-existing contract; take collateral as security for a pre-existing claim.

What is an “after-acquired property” clause and its consumer-goods exception?

A clause extending the security interest to future collateral; ineffective for consumer goods unless the debtor acquires them within 10 days after value is given.

How does a security interest attach to proceeds?

Automatically, to identifiable proceeds from disposition of the collateral.

Define “accession.”

Goods physically united with other goods so the identity of the original goods is not lost; the security interest continues in the accession.

What are the three formal requirements of a written security agreement?

It must be in a record, contain a reasonable description of the collateral, and be authenticated (signed) by the debtor.

Explain a Purchase-Money Security Interest (PMSI) in goods.

A security interest in goods that secures (i) a loan used to acquire the goods or (ii) a credit sale of the goods themselves by the secured party.

Why is perfection important?

It gives the secured party rights in the collateral superior to the rights of most third parties.

Name five methods of perfection.

Filing a financing statement, possession, control, automatic perfection, or perfection under another statute (e.g., notation on a vehicle title).

What collateral cannot be perfected by filing?

Deposit accounts (non-supporting), money, and non-supporting letter-of-credit rights.

What information must a financing statement contain?

Debtor’s name, secured party’s name, and a description or indication of the collateral.

How long is a financing statement effective and how is it extended?

Five years; it can be continued for another five by filing a continuation statement within six months before expiration.

When is an error in the debtor’s name fatal to a financing statement?

If the error is “seriously misleading”; not seriously misleading if a standard search under the correct name would still find the filing.

How is a security interest in a deposit account perfected?

Only by control—secured party is the bank, enters a control agreement, or becomes the bank’s customer on the account.

Which PMSI is automatically perfected upon attachment?

A PMSI in consumer goods.

If perfected collateral is sold for cash, what is the status of the security interest in proceeds?

It remains perfected in identifiable cash proceeds.

What happens when perfection is first by filing then later by possession with no lapse?

Perfection is continuous; priority dates back to the original perfection date.

Who prevails between a secured party and a general unsecured creditor?

The secured party always prevails.

What priority rule applies between a perfected security interest and a judicial lien?

A perfected security interest defeats a judicial lien; a judicial lien defeats an unperfected security interest (unless the only missing element is value not yet given).

What is the rule for a buyer versus an unperfected security interest in goods?

A buyer who gives value, receives delivery, and lacks knowledge of the interest takes free of the unperfected security interest.

State the Buyer in the Ordinary Course of Business (BOCB) rule.

A BOCB takes goods free of a security interest created by the seller, even if perfected and even with knowledge of the interest—provided the buyer lacked knowledge the sale violated another’s rights.

List the five elements of BOCB status.

(1) Buys goods (not farm products) (2) in ordinary course (3) from a merchant selling goods of that kind (4) in good faith (5) without knowledge of violation of another’s rights.

Define a “consumer buyer” (a.k.a. consumer-to-consumer or “garage-sale” buyer).

Person who buys consumer goods for value, for personal/family/household use, from a consumer seller, without knowledge of the security interest.

What is the consumer-buyer rule regarding perfected interests?

Consumer buyer takes free of even a perfected interest unless the secured party filed a financing statement before purchase.

How can a PMSI holder in consumer goods protect against consumer buyers?

File a financing statement even though perfection is automatic; filing defeats the consumer-buyer exception.

Between two perfected security interests, who has priority?

First to file OR perfect, whichever occurs first.

Between a perfected and an unperfected security interest, who wins?

The perfected security interest.

Between two unperfected interests, what controls?

First to attach (i.e., earlier security agreement).

State the 20-day PMSI super-priority rule for non-inventory goods.

A PMSI in goods other than inventory or livestock prevails over earlier interests if perfected before or within 20 days after the debtor receives possession.

What additional requirements apply for a PMSI in inventory or livestock to gain priority?

(i) PMSI perfected before the debtor receives possession, and (ii) authenticated notice to earlier secured parties before possession, describing the inventory/livestock.

Who wins between two competing PMSIs?

First to file or perfect.

How does a construction mortgage rank against a PMSI in fixtures?

A recorded construction mortgage filed before the goods become fixtures has priority over a subsequent security interest (including PMSI) in the fixture goods.

What is “default” generally?

Failure of the obligor to make timely payment or otherwise perform as required.

After default, what main remedies does a secured party have?

Take possession and sell or retain collateral, sue on the debt, or pursue agreed-upon remedies.

When may a secured party remove fixtures from real property?

When its security interest in the fixture has priority over the real-property interest; the SP must repair any physical damage from removal.

What standard governs every aspect of collateral disposition?

Commercial reasonableness (method, manner, time, place, and terms).

May a secured party buy the collateral at its own private sale?

Only if it is sold on a recognized market or has widely distributed standard price quotations; otherwise SP may bid only at a public sale.

Who must receive notice of disposition and when is 10-day notice deemed reasonable?

Debtor, any secondary obligor, and (for non-consumer goods) other filed/perfected secured parties or lien holders; 10 days before earliest sale date is a safe harbor for non-consumer transactions.

In what order must cash proceeds of disposition be applied?

(1) Reasonable costs of collection/sale (including attorney fees); (2) debt owed to foreclosing secured party; (3) subordinate security interests that made demand; (4) surplus to debtor.

Who is liable for a deficiency after disposition of collateral?

The obligor (debtor) is liable for any remaining deficiency.

What rights does a good-faith transferee obtain from a foreclosure sale?

All the debtor’s rights in the collateral, free of the foreclosed security interest and any subordinate interests, but subject to any senior interests.