OK Bar Secured Transactions — Questions and Answers
Question 1: Under UCC Article 9, a security interest 'attaches' to collateral when which THREE elements are satisfied?
- Value has been given, the debtor has rights in the collateral, and the debtor has authenticated a security agreement describing the collateral (Correct answer)
- A financing statement has been filed, the debtor has signed a promissory note, and the secured party has taken possession of the collateral
- The debtor has paid at least one installment, the creditor has notified prior lienholders, and the security agreement is notarized
- The secured party has filed a UCC-1, obtained a court order, and delivered value to the debtor
Correct answer: Value has been given, the debtor has rights in the collateral, and the debtor has authenticated a security agreement describing the collateral
UCC § 9-203 provides that a security interest attaches when: (1) value has been given by the secured party, (2) the debtor has rights in or the power to transfer rights in the collateral, and (3) the debtor has authenticated a security agreement that describes the collateral (or the secured party has taken possession or control). All three must be satisfied.
Question 2: First Bank has a perfected security interest in Debtor's inventory. Second Bank later lends money and takes a purchase-money security interest (PMSI) in new inventory items Debtor acquires. Second Bank files a financing statement and notifies First Bank before Debtor receives the goods. Under UCC Article 9, which lender has priority in the new inventory?
- First Bank, because its security interest was perfected first
- Second Bank, because a PMSI in inventory has superpriority if properly perfected and First Bank is notified before debtor receives the goods (Correct answer)
- First Bank, because an after-acquired property clause in its agreement automatically covers new inventory
- The two banks share the collateral equally as co-equal lienholders
Correct answer: Second Bank, because a PMSI in inventory has superpriority if properly perfected and First Bank is notified before debtor receives the goods
UCC § 9-324(b) grants a PMSI in inventory superpriority over a conflicting security interest if the PMSI holder (1) perfects before the debtor receives possession and (2) sends an authenticated notification to the prior secured party before the debtor receives the goods. Second Bank satisfied both conditions, so it prevails over First Bank's earlier perfected security interest.
Question 3: A secured party perfects a security interest in a debtor's personal property by filing a financing statement. The financing statement is effective for:
- 1 year from the date of filing
- 3 years from the date of filing
- 5 years from the date of filing, unless a continuation statement is filed (Correct answer)
- 10 years from the date of filing, unless a termination statement is filed
Correct answer: 5 years from the date of filing, unless a continuation statement is filed
Under UCC § 9-515(a), a filed financing statement is effective for five years. To continue perfection beyond five years, the secured party must file a continuation statement within the six-month window before the five-year period expires (§ 9-515(d)). Without a timely continuation, the financing statement lapses and the security interest becomes unperfected.
Question 4: Debtor grants Bank a security interest in a specific piece of equipment and Bank perfects by filing. Debtor later sells the equipment to a Buyer who gives value and takes delivery without knowledge of Bank's security interest. Under UCC Article 9, does Bank's security interest survive the sale?
- No — a bona-fide purchaser for value always takes free of a prior security interest
- Yes — a perfected security interest generally continues in collateral even after an authorized or unauthorized sale, unless an exception applies (Correct answer)
- Yes — but only if Bank re-files a new financing statement within 30 days of learning of the sale
- No — once the collateral leaves the debtor's possession the security interest automatically lapses
Correct answer: Yes — a perfected security interest generally continues in collateral even after an authorized or unauthorized sale, unless an exception applies
Under UCC § 9-315(a)(1), a security interest continues in collateral notwithstanding a sale or other disposition unless the secured party authorized the disposition free of the security interest. Buyer's good faith and lack of knowledge are irrelevant when the interest is perfected and the sale was not authorized by Bank. Bank may also have a security interest in proceeds under § 9-315(a)(2).
Question 5: Under UCC Article 9, the 'first to file or perfect' priority rule means that between two conflicting security interests in the same collateral, priority goes to the party who:
- First signed a security agreement with the debtor
- First gave value to the debtor
- First filed a financing statement OR first perfected, whichever is earliest — even if the other steps had not yet occurred at that time (Correct answer)
- First notified all other creditors of the security interest
Correct answer: First filed a financing statement OR first perfected, whichever is earliest — even if the other steps had not yet occurred at that time
UCC § 9-322(a)(1) provides that conflicting perfected security interests rank according to priority in time of filing or perfection, whichever is earlier, even if the steps to completion (attachment) occurred later. A secured party who files first wins even if its interest has not yet attached, as long as it later attaches.
Question 6: After a debtor defaults, a secured party who takes possession of collateral pursuant to UCC Article 9 must dispose of it in a 'commercially reasonable manner.' This requirement means the secured party must:
- Conduct a public auction advertised in a newspaper at least 60 days before the sale
- Obtain an independent court-supervised appraisal and sell at no less than appraised value
- Conduct every aspect of the disposition — method, manner, time, place, and terms — in a commercially reasonable way, with reasonable notice to the debtor (Correct answer)
- Return the collateral to the debtor if a commercially reasonable price cannot be obtained within 90 days
Correct answer: Conduct every aspect of the disposition — method, manner, time, place, and terms — in a commercially reasonable way, with reasonable notice to the debtor
UCC §§ 9-610 and 9-611 require that every aspect of the disposition (method, manner, time, place, and other terms) be commercially reasonable. The secured party must also send reasonable authenticated notification of the sale to the debtor and certain other parties. A specific minimum price or auction format is not required — commercial reasonableness is a flexible totality standard.
OK Bar Secured Transactions
Under UCC Article 9, a security interest 'attaches' to collateral when which THREE elements are satisfied?