Perfection of Security Interest in Inventory

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Questions and Answers

Which of the following types of collateral may be perfected by possession?

Goods, instruments, negotiable documents, money, and tangible chattel paper

What is required for a security interest in money to be perfected?

Possession, unless the money is received as proceeds of a perfected security interest

How can a certified security be perfected?

By taking delivery of the security

Which of the following methods can a secured party use to perfect a security interest in a deposit account?

Obtaining control of the account Signup and view all the answers

What is required for perfection by control of the collateral?

Control of the collateral, and the security interest remains perfected only while the secured party retains control Signup and view all the answers

A security interest in a motor vehicle held as inventory for sale by a car dealership can be perfected by

Filing a financing statement Signup and view all the answers

Which of the following types of collateral can be perfected by control?

Investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents Signup and view all the answers

Under what circumstances can a security interest in a deposit account be automatically perfected?

Upon attachment Signup and view all the answers

A security interest in a civil aircraft is subject to

Federal statutory rules for perfection Signup and view all the answers

How is a security interest in letter-of-credit rights perfected if such rights are a supporting obligation for other collateral?

By the perfection of the security interest in the other collateral Signup and view all the answers

What type of security interest is automatically perfected in consumer goods?

PMSI in consumer goods Signup and view all the answers

In what situations can a security interest in letter-of-credit rights be perfected only by control?

When the letter-of-credit rights are not a supporting obligation for other collateral Signup and view all the answers

A security interest is perfected upon

Both attachment and compliance with one of the methods of perfection Signup and view all the answers

What is required for a secured party to have control of a deposit account?

The secured party must be the bank with which the deposit account is maintained Signup and view all the answers

What is the relationship between gaining control for purposes of attachment and perfection?

Gaining control for purposes of attachment is sufficient for perfection Signup and view all the answers

If a security interest is perfected by one method and later perfected by another method without a lapse in perfection, it is

Continuously perfected Signup and view all the answers

What is an example of a situation where automatic permanent perfection occurs?

The casual or isolated assignment of accounts or payment intangibles Signup and view all the answers

The date of perfection is the date on which the security interest

First becomes perfected Signup and view all the answers

Which of the following is an example of temporary perfection?

None of the above Signup and view all the answers

What is required for a secured party to perfect a security interest in a deposit account through an agreement?

The bank, secured party, and debtor must agree in writing to follow the instructions of the secured party Signup and view all the answers

Article 9 prioritizes the claims of conflicting interests in collateral and

Pays them in order of priority Signup and view all the answers

A holder of a priority can

Agree to subordinate their interest to another's interest Signup and view all the answers

What happens to a security interest that is entitled to automatic perfection?

It can be perfected through another method, such as filing or possession Signup and view all the answers

The determination of priority involves

Two steps: identifying the status of each claimant and applying the appropriate priority rule Signup and view all the answers

What is the primary purpose of perfecting a security interest?

To have superior rights over third parties Signup and view all the answers

What happens to a security interest in collateral that becomes commingled goods if it is perfected before the collateral becomes commingled?

The security interest in the resulting product or mass is also perfected Signup and view all the answers

How does a security interest rank in priority if more than one security interest is perfected in a commingled product or mass?

The security interests rank equally in proportion to the value of the collateral at the time it became commingled goods Signup and view all the answers

What are the four ways by which a secured party can perfect a security interest under Article 9?

Filing of a financing statement, possession of the collateral, control over the collateral, and automatic perfection Signup and view all the answers

What is the status of a security interest that is perfected upon attachment of that interest and compliance with one of the methods of perfection?

Perfected Signup and view all the answers

What is the result if more than one security interest attaches to a product or mass and none of them are perfected?

The general rules regarding priority apply Signup and view all the answers

What is the effect of perfecting a security interest in collateral that becomes commingled goods?

The security interest is also in the resulting product or mass Signup and view all the answers

What is the relevance of automatic perfection in relation to security interests?

It is a method of perfection Signup and view all the answers

What is the duration of temporary perfection for a security interest in proceeds if the security interest in the original collateral is perfected?

20 days Signup and view all the answers

What is required to continue the perfection of a security interest in proceeds beyond the 20-day period?

Amending the original financing statement to cover the proceeds within the 20-day period Signup and view all the answers

What type of proceeds are considered identifiable and can continue to be perfected indefinitely?

Cash proceeds Signup and view all the answers

What is not a requirement for a security interest in proceeds to be temporarily perfected?

The debtor must be notified Signup and view all the answers

What happens to the perfection of a security interest in proceeds if the security interest in the original collateral ceases to be perfected?

The perfection of the security interest in proceeds also ceases Signup and view all the answers

What is the purpose of a financing statement?

To perfect the security interest in the original collateral Signup and view all the answers

What is the definition of cash proceeds according to the UCC?

Money, checks, and deposit accounts Signup and view all the answers

What is the significance of the 20-day period in relation to temporary perfection?

It is the time period for temporarily perfecting a security interest in proceeds Signup and view all the answers

Which of the following types of collateral can be perfected by control?

Investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents Signup and view all the answers

A security interest in letter-of-credit rights can be perfected by possession.

False Signup and view all the answers

What is the status of a security interest that is perfected upon attachment of that interest and compliance with one of the methods of perfection?

The security interest is considered perfected. Signup and view all the answers

A security interest in proceeds is temporarily perfected for a period of ______________ days.

20 Signup and view all the answers

Match the following types of collateral with their corresponding method of perfection:

Goods = Possession Certified security = Taking delivery of the security Deposit account = Control Letter-of-credit rights = Control, unless supporting obligation for other collateral Signup and view all the answers

A financing statement is required for perfecting a security interest in collateral.

False Signup and view all the answers

What is the purpose of perfecting a security interest?

To prioritize the claims of conflicting interests in collateral Signup and view all the answers

What happens to a security interest in collateral that becomes commingled goods if it is perfected before the collateral becomes commingled?

The security interest remains perfected Signup and view all the answers

When a security interest is perfected by one method and later perfected by another method without a lapse in perfection, it is

continuously perfected Signup and view all the answers

A security interest that is entitled to automatic perfection will remain perfected even if the security interest in the original collateral ceases to be perfected.

False Signup and view all the answers

What is the purpose of a financing statement?

To perfect a security interest in collateral. Signup and view all the answers

The date of perfection is the date on which the security interest ______________________ became perfected.

first Signup and view all the answers

Match the following types of collateral with the method of perfection:

Motor vehicles held as inventory for sale = Perfection by ordinary Article 9 rules Civil aircraft = Federal statutory rules Deposit account = Control of the collateral Signup and view all the answers

A security interest in proceeds is temporarily perfected for 20 days after the proceeds are received.

True Signup and view all the answers

What happens to a security interest in collateral that becomes commingled goods if it is perfected before the collateral becomes commingled?

The security interest remains perfected. Signup and view all the answers

A holder of a priority can agree to ______________________ his interest to another's interest.

subordinate Signup and view all the answers

What is the primary purpose of perfecting a security interest?

To have rights in the collateral that are superior to any rights claimed by third parties Signup and view all the answers

A security interest in collateral that becomes commingled goods is automatically perfected.

False Signup and view all the answers

What is the status of a security interest that is perfected upon attachment of that interest and compliance with one of the methods of perfection?

The security interest is perfected and has priority over unperfected security interests. Signup and view all the answers

Under Article 9, there are ____________________ ways by which a secured party can perfect a security interest.

four Signup and view all the answers

Match the following methods of perfection with their descriptions:

Filing of a financing statement = Method of perfection that involves filing a financing statement with the appropriate filing office. Possession of the collateral = Method of perfection that involves the secured party taking possession of the collateral. Control over the collateral = Method of perfection that involves the secured party having control over the collateral. Automatic perfection = Method of perfection that occurs automatically, either temporarily or permanently, without the need for further action by the secured party. Signup and view all the answers

What happens to a security interest that is entitled to automatic perfection?

It is automatically perfected, either temporarily or permanently Signup and view all the answers

A security interest in proceeds is temporarily perfected for a period of ____________________ days.

20 Signup and view all the answers

A financing statement is only required for perfection by control of the collateral.

False Signup and view all the answers

What is the duration of temporary perfection for a security interest in proceeds if the security interest in the original collateral is perfected?

20 days Signup and view all the answers

A security interest in proceeds can continue to be perfected beyond the 20-day period if the original financing statement is broad enough to encompass the proceeds.

True Signup and view all the answers

What are cash proceeds according to the UCC?

Cash proceeds include more than just money. They also include checks and deposit accounts. Signup and view all the answers

A security interest in proceeds can be ______________________ if the security interest in the original collateral is perfected and the proceeds are identifiable cash proceeds.

perfected indefinitely Signup and view all the answers

Match the following circumstances with the type of perfection that applies:

Security interest in original collateral is perfected = Temporary perfection Proceeds are identifiable cash proceeds = Indefinite automatic perfection Original financing statement is broad enough to encompass the proceeds = Financing statement perfection Signup and view all the answers

What is required to continue the perfection of a security interest in proceeds beyond the 20-day period?

Amending the financing statement Signup and view all the answers

A security interest in proceeds ceases to be perfected if the security interest in the original collateral ceases to be perfected.

False Signup and view all the answers

The purpose of a financing statement is to ______________________ a security interest in collateral.

perfect Signup and view all the answers

What is a requirement for a security interest in a deposit account to be perfected?

Control by the secured party Signup and view all the answers

A security interest in a payment intangible or promissory note is automatically perfected upon attachment.

True Signup and view all the answers

What type of security interest is automatically perfected in consumer goods?

PMSI (Purchase Money Security Interest) Signup and view all the answers

A security interest in proceeds is temporarily perfected for a period of ______________ days after the security interest attaches to the original collateral.

20 Signup and view all the answers

What is the primary purpose of perfecting a security interest?

To provide notice to third parties Signup and view all the answers

A security interest in collateral that becomes commingled goods will lose its perfection.

False Signup and view all the answers

Match the type of collateral with the method of automatic perfection:

Consumer goods = PMSI Payment intangible or promissory note = Sale Letter-of-credit rights = Supporting obligation Deposit account = Control Signup and view all the answers

What is the purpose of a financing statement?

To provide notice to third parties Signup and view all the answers

Study Notes

Perfection of Security Interests

Perfection of a security interest is necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties.
Perfection has no relevance to the secured party's rights against the debtor.
A security interest is perfected upon attachment of that interest and compliance with one of the methods of perfection.

Methods of Perfection

Filing of a financing statement
Possession of the collateral
Control over the collateral
Automatic perfection (either temporary or permanent)

Perfection by Filing

Does not require the secured party to be in possession of the collateral
Goods, instruments, negotiable documents, money, and tangible chattel paper are the only types of collateral that may be perfected by possession

Perfection by Possession

A security interest in money may be perfected only by possession, unless the money is received as proceeds of a perfected security interest
A certified security may be perfected by the secured party taking delivery of the security

Perfection by Control

May only be achieved with respect to a security interest in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents
Gaining control for purposes of attachment also suffices for purposes of perfection

Letter-of-Credit Rights

A security interest in letter-of-credit rights, if such rights are a supporting obligation for other collateral, is perfected by the perfection of the security interest in the other collateral
Otherwise, perfection of a security interest in letter-of-credit rights may be perfected only by control

Deposit Account

A security interest in a deposit account can be perfected only by control
A secured party has control of a deposit account if:
- The secured party is the bank with which the deposit account is maintained
- The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party
- The secured party becomes the bank's customer with respect to the deposit account

Automatic Perfection

Under some circumstances, a security interest is automatically perfected upon attachment
Such perfection may extend indefinitely or may be subject to a time limitation, in which case it is referred to as "temporary perfection"

Indefinite Period of Perfection

A PMSI in consumer goods is automatically perfected upon attachment
Automatic permanent perfection also occurs in other situations, including:
- The casual or isolated assignment of accounts or payment intangibles that does not transfer a significant part of the assignor's outstanding accounts or payment intangibles
- Sale of a payment intangible or promissory note

Temporary Perfection

If the security interest in the original collateral is perfected, then a security interest in proceeds is temporarily perfected for 20 days from the time it attaches
If the original financing statement is broad enough to encompass the proceeds or the secured party takes the necessary steps to amend the financing statement to cover the proceeds within the 20-day period, the security interest in the proceeds continues to be perfected
If the proceeds are identifiable cash proceeds and the security interest in the original collateral is perfected, the perfected security interest in the proceeds continues indefinitely, even though the security interest in the original collateral subsequently ceases to be perfected

Priorities

Article 9 sets out rules governing the priorities of conflicting interests in collateral
Unlike in bankruptcy, which provides a pro rata share to all creditors, Article 9 prioritizes the claims and pays them in order
The holder of a priority can agree to subordinate his interest to another's interest
The determination of priority involves two steps:
- Identify the status of each claimant
- Apply the appropriate priority rule

Perfection of Security Interests

Perfection of a security interest is necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties.
Perfection has no relevance to the secured party's rights against the debtor.
A security interest is perfected upon attachment of that interest and compliance with one of the methods of perfection.

Methods of Perfection

Filing of a financing statement
Possession of the collateral
Control over the collateral
Automatic perfection (either temporary or permanent)

Perfection by Filing

Does not require the secured party to be in possession of the collateral
Goods, instruments, negotiable documents, money, and tangible chattel paper are the only types of collateral that may be perfected by possession

Perfection by Possession

A security interest in money may be perfected only by possession, unless the money is received as proceeds of a perfected security interest
A certified security may be perfected by the secured party taking delivery of the security

Perfection by Control

May only be achieved with respect to a security interest in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents
Gaining control for purposes of attachment also suffices for purposes of perfection

Letter-of-Credit Rights

A security interest in letter-of-credit rights, if such rights are a supporting obligation for other collateral, is perfected by the perfection of the security interest in the other collateral
Otherwise, perfection of a security interest in letter-of-credit rights may be perfected only by control

Deposit Account

A security interest in a deposit account can be perfected only by control
A secured party has control of a deposit account if:
- The secured party is the bank with which the deposit account is maintained
- The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party
- The secured party becomes the bank's customer with respect to the deposit account

Automatic Perfection

Under some circumstances, a security interest is automatically perfected upon attachment
Such perfection may extend indefinitely or may be subject to a time limitation, in which case it is referred to as "temporary perfection"

Indefinite Period of Perfection

A PMSI in consumer goods is automatically perfected upon attachment
Automatic permanent perfection also occurs in other situations, including:
- The casual or isolated assignment of accounts or payment intangibles that does not transfer a significant part of the assignor's outstanding accounts or payment intangibles
- Sale of a payment intangible or promissory note

Temporary Perfection

If the security interest in the original collateral is perfected, then a security interest in proceeds is temporarily perfected for 20 days from the time it attaches
If the original financing statement is broad enough to encompass the proceeds or the secured party takes the necessary steps to amend the financing statement to cover the proceeds within the 20-day period, the security interest in the proceeds continues to be perfected
If the proceeds are identifiable cash proceeds and the security interest in the original collateral is perfected, the perfected security interest in the proceeds continues indefinitely, even though the security interest in the original collateral subsequently ceases to be perfected

Priorities

Article 9 sets out rules governing the priorities of conflicting interests in collateral
Unlike in bankruptcy, which provides a pro rata share to all creditors, Article 9 prioritizes the claims and pays them in order
The holder of a priority can agree to subordinate his interest to another's interest
The determination of priority involves two steps:
- Identify the status of each claimant
- Apply the appropriate priority rule

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