Deck 43: Security Interests in Personal Property

Question 1

According to Article 9 of the Uniform Commercial Code (UCC), documents of title include the rights to payment for goods sold or leased or for services rendered that are not evidenced by instruments or chattel paper but are carried on open accounts.

Answer 1

False

Question 2

In terms of the classifications of collateral recognized by Article 9 of the Uniform Commercial Code (UCC), instruments include checks, notes, drafts, and certificates of deposit.

Answer 2

True

Question 3

The preference given to a purchase money security interest prevents a single creditor from closing off all other sources of credit to a particular debtor and thus possibly preventing the debtor from obtaining additional inventory or equipment needed to maintain its business.

Answer 3

True

Question 4

Documents of title include:

A) stock and bonds.
B) dock warrants and dock receipts.
C) certificates of deposit.
D) conditional sales contracts.

Question 5

An interest in fixtures that a creditor obtains to secure performance of an obligation is called a(n):

A) ownership equity.
B) financial leverage.
C) security interest.
D) income trust.

Question 6

Under the Uniform Commercial Code, a fixture is defined as goods:

A) bought primarily for business, personal, or household use.
B) held for sale or lease to be used under contracts of service.
C) that are considered to be a part of the real property.
D) other than inventory, farm products, or consumer goods.

Question 7

The attachment of a security interest takes place in a physical sense, rather than a legal sense.

Question 8

A financing statement is effective for a period of seven (7) years from the date of filing.

Question 9

As a general rule, an oral security agreement is legally enforceable.

Question 10

Change of possession is a common and convenient way for perfecting most security interests in consumer goods.

Question 11

A purchase money security interest in noninventory collateral prevails over a prior perfected security interest if the purchase money security interest is perfected at the time the debtor takes possession or within twenty (20) days afterward.

Question 12

The least common way of perfecting a security interest is by filing a financing statement in the appropriate public office.

Question 13

When a consumer debtor completely fulfills all debts and obligations secured by a financing statement, she is entitled to a termination statement signed by the secured party or an assignee of record.

Question 14

The law covering security interests in personal property is contained in Article _____ of the Uniform Commercial Code.

A) 6
B) 4
C) 3
D) 9

Question 15

A creditor protects her security interest in collateral against other creditors of the debtor and other third persons, including some buyers of the collateral, by perfecting the security interest.

Question 16

If the collateral is in the possession of the debtor and cannot be obtained without disturbing the peace, then the creditor must take court action to repossess the collateral.

Question 17

According to Article 9 of the Uniform Commercial Code (UCC), chattel paper includes, among other things, patents, copyrights, software, and franchises.

Question 18

The basic rule established by the Uniform Commercial Code is that when more than one security interest in the same collateral has been filed, the last security interest to be filed has priority over any that is filed earlier.

Question 19

Usually the creditor and debtor state in their agreement what events constitute default by the buyer, without being subject to the Uniform Commercial Code (UCC) requirement that the parties act in "good faith" in doing so.

Question 20

A conditional sales contract is an example of a(n):

A) chattel paper.
B) document of title.
C) negotiable instrument.
D) investment property.

Question 21

The most common way of perfecting a security interest is by:

A) automatic perfection.
B) filing a financing statement.
C) taking possession of the collateral.
D) mere attachment of the security interest.

Question 22

Obtaining a security interest enforceable against third parties is a:

A) two-step process consisting of attachment and priority.
B) two-step process consisting of priority and perfection.
C) three-step process consisting of priority, attachment, and perfection.
D) two-step process consisting of attachment and perfection.

Question 23

A continuation statement can be filed:

A) a month after the expiration date.
B) within ten months before the expiration date.
C) within three months after the expiration date.
D) within six months before the expiration date.

Question 24

If the creditor has possession of the collateral, the security agreement:

A) should specify the collateral.
B) need not be in writing.
C) need not specify the collateral.
D) should be in writing.

Question 25

A purchase money security interest may be automatically perfected if it covers:

A) future advances.
B) inventory.
C) consumer goods.
D) proceeds.

Question 26

When the security interest is perfected and the buyer knows of its existence, a buyer in the ordinary course of business:

A) is subject to the security interest created by his seller.
B) takes the purchase free from a security interest created by his seller.
C) takes the purchase free from a security interest only if the person is buying farm products from a person engaged in a farming operation.
D) is not protected if the dealership is in default of its loan agreement.

Question 27

Identify the statement that is true of perfection by attachment of consumer goods.

A) If the secured party filed a financing statement for the collateral, the new buyer takes the collateral free of any security interest.
B) If the goods are to become fixtures, the creditor can get full protection through perfection by attachment.
C) If the new buyer buys from the debtor without knowledge of the interest, for value, and for personal use, the new buyer takes free of the security interest.
D) If the consumer goods are motor vehicles for which the state issues certificates of title, perfection by attachment to the vehicle is effective.

Question 28

To be sufficient, a financial statement must:

A) indicate that the creditor is in possession of the collateral.
B) be effective for a period of two years from the date of filing.
C) be filed only in the state of the debtor's residence.
D) indicate the collateral covered by the financing statement.

Question 29

Maya borrowed money from Solvent National Bank and gave the bank a security interest in her business equipment, both present and after-acquired. She later borrowed money from Resilient Savings and Loans to purchase additional business equipment. Three and a half weeks after Maya purchased the new equipment and took possession of it, an employee of Resilient discovered the bank has filed financing statement concerning the bank's loan to Maya. Resilient immediately recorded a financing statement, so as to perfect its purchase money security interest in the equipment. Maya then defaulted on the obligation owed to the bank and on the obligation owed to Resilient. Who has the first priority security interest in the equipment purchased by Maya with the funds borrowed from Resilient Savings and Loans?

A) Solvent National Bank
B) Resilient Savings and Loans
C) Both Resilient and Solvent have equal priority
D) Both Maya and Resilient have equal priority

Question 30

A financing statement is valid:

A) for a period of five years from the date of filing.
B) until a continuation statement is filed after its expiry.
C) until the creditor is in possession of the collateral.
D) for a period of ten years from the date of filing.

Question 31

Possession of collateral by _____ is often the best way to perfect a security interest in chattel paper and negotiable documents of title.

A) the creditor
B) the debtor
C) the court
D) a third secure party

Question 32

Which of the following statements is true of change of possession?

A) It is the most common way of perfecting a security interest.
B) It is the only way to perfect a security interest in money.
C) It is the most convenient way of perfecting a security interest in consumer goods.
D) It is not a practical method of perfecting security interests in commercial collateral.

Question 33

A purchase money security interest in noninventory collateral prevails over a prior perfected security interest if the:

A) purchase money security interest is perfected at the time the debtor takes possession or within 20 days afterward.
B) notification states that the person expects to acquire a purchase money security interest in inventory of the debtor and describes the inventory.
C) holder of the competing security interest received notification within five years before the debtor receives the inventory.
D) purchase money secured party gives notification in writing to the prior secured creditor before the debtor receives the inventory.

Question 34

Milt borrowed $200 from Femi. He agreed verbally that Femi could take possession of his books and keep them until he had repaid the loan in full. The next day, after Femi had the books in her possession, Orin offered to purchase the books from Milt for $150. Milt accepted the offer and took Orin's money to retrieve the books from Femi. Femi, however, refused to give up possession of the books until she was paid in full. Both Milt and Orin now claim that Femi has no rights to the books because she does not have a signed security agreement and has not filed a financing statement. In this case, which of the following statements is true according to the Uniform Commercial Code?

A) Femi's security interest in the collection will be protected only if she files a financing statement.
B) Femi's security interest is not attached in the absence of a written security agreement even though she maintained possession of the books.
C) Femi's possession of the collection satisfies the perfection requirement because it puts a third party like Orin on notice of Femi's interest in the property.
D) Femi's failure to file a public notice rejects the perfection of the agreement even though she is in possession of the collateral.

Question 35

Which of the following statements is true of an artisan's lien?

A) It is ineffective against other creditors unless a proper financing statement has been filed.
B) It may be given priority even over perfected security interests in collateral if the artisan has possession of the goods.
C) It is invalid if the artisan did not inform the debtor that he intended to claim a lien before beginning the work.
D) It gives the retailer prevalence over someone who buys the collateral from the debtor if the buyer gives value for goods.

Question 36

Under the revised Article 9 of the Uniform Commercial Code, _____.

A) a creditor cannot protect her security interest in collateral against other creditors of a debtor and other third persons
B) a security interest in an after-acquired property cannot attach to that property until the debtor obtains some property rights in the new property
C) a creditor cannot use the collateral to protect his interest in repayment of the money advanced to a debtor by covering future advances
D) the attachment of a security interest to the collateral does not automatically give a secured party a security interest in the proceeds on the disposal of the collateral by the debtor

Question 37

Which of the following is true of perfecting security interests?

A) A continuation statement may be filed within a year before the five-year expiration date.
B) A financing statement is effective for a period of one year from the date of filing.
C) Filing a financing statement in the appropriate public office is one of the least used ways of perfecting a security interest.
D) Possession, a possible way of perfecting a security interest in inventory, is sometimes achieved through a field warehousing arrangement.

Question 38

When a consumer debtor completely fulfills all debts and obligations secured by a financing statement, he or she is entitled to a:

A) continuation statement.
B) termination statement.
C) statement of benefits.
D) statement of claims and defenses.

Question 39

A perfected purchase money security interest in inventory is likely to have priority over a conflicting security interest in the same inventory if the:

A) purchase money security interest is perfected three months after the debtor receives possession of the inventory.
B) purchase money secured party gives an oral notification to the prior secured creditor before the debtor receives the inventory.
C) holder of the competing security interest received notification within eight years before the debtor receives the inventory.
D) notification states that the person expects to acquire a purchase money security interest in inventory of the debtor and describes the inventory.

Question 40

A perfected security interest:

A) protects a creditor's security interest in collateral against other creditors of a debtor.
B) becomes effective even when a creditor does not give anything of value to a debtor.
C) gives a creditor protection against other creditors of the collateral but not against other purchasers of the collateral.
D) does not provide a creditor rights vis-à-vis a debtor.

Question 41

Explain what it means to perfect a security interest, and list the three (3) main ways to perfect a security interest.

Question 42

Define future advances and explain how covering future advances in the security agreement benefits the creditor.

Question 43

Denis bought a diamond ring on credit from Pavel as an engagement present for his fiancée. He signed a purchase money security agreement giving Pavel a security interest in the ring until it was paid for. Pavel did not file a financing statement covering its security interest. Denis filed for bankruptcy. The bankruptcy trustee claimed that the diamond ring was part of the bankruptcy estate because Pavel did not perfect his security interest. Pavel claimed that it had a perfected security interest in the ring. Did Pavel have to file a financing statement to perfect its security interest in the diamond ring?

Question 44

An appliance store sells a television set to Adam for $750 on a conditional sales contract, reserving a security interest in the set until Adam has paid for it. The store does not file a financing statement but relies on attachment for perfection. Adam later borrows money from a credit union and gives it a security interest in the television set. The credit union does not perfect the security interest. Adam defaults on his loans and the credit union tries to claim the set. Under these circumstances, _____.

A) the credit union has a better claim to the set than does the appliance store
B) the appliance store cannot claim the set as they relied on attachment for perfection
C) the appliance store has a better claim to the set than the credit union
D) neither the appliance store nor the credit union can claim the set

Question 45

Explain a creditor's three potential courses of action upon default.

Question 46

Which of the following statements is true of sale of collateral?

A) In disposing of the collateral, the creditor must use a commercially reasonable method to produce the greatest benefit to himself and not to the debtor.
B) The creditor must sell the collateral unless the consumer orally objects to the sale, otherwise, the creditor may keep the collateral in satisfaction of the debt.
C) If less than 80 percent of the purchase price has been paid, the creditor may propose to the debtor that the creditor keep the collateral in satisfaction of the debt.
D) If the creditor has a security interest in consumer goods and the debtor has paid 60 percent or more of the purchase price, the creditor must sell the repossessed collateral.

Question 47

Under Article 9 of the Uniform Commercial Code, in what order are proceeds from the sale of collateral by the creditor to be distributed?

A) First, any expenses of repossessing the collateral are paid. Second, the proceeds are used to satisfy the debt. Third, any other junior liens are paid. Finally, if any proceeds remain, the debtor is entitled to them.
B) First, the proceeds are used to satisfy the debt. Second, junior liens are paid. Third, any expenses of repossessing the collateral are paid. Finally, if any proceeds remain, the debtor is entitled to them.
C) First, the proceeds are used to satisfy the debt. Second, any expenses of repossessing the collateral. Lastly, the debtor is entitled to remaining proceeds. Finally, if any proceeds remain, the debtor is entitled to them.
D) First, the junior liens are paid. Second, any expenses of repossessing the collateral are paid. Third, the proceeds are used to satisfy the debt. Finally, if any proceeds remain, the debtor is entitled to them.

Question 48

If the proceeds of sale of collateral are not sufficient to satisfy the debt, then the creditor is usually entitled to a:

A) future advance.
B) deficiency judgment.
C) fixture filing.
D) warehousing arrangement.

Question 49

A perfected security interest in fixtures has priority over the conflicting interest of an encumbrancer or owner of the real property:

A) only if the debtor is in possession of the real property.
B) if the security interest is a purchase money security interest.
C) if the interest of the encumbrancer arose after the goods became fixtures.
D) if the fixtures' security interest is perfected by a "fixtures filing" anytime after the goods became fixtures.

Question 50

Explain what a purchase money security interest in consumer goods is, and provide an example.