answer each QUESTION but also REVIEW the explanations for each possible answer
A1. Is the purchase of a musical instrument the purchase of a consumer good or the purchase of a piece of equipment? [Consider the definition of a consumer good in UCC Article 2. Might a person in a certain profession purchase a musical instrument for business use?]
The purchase of a musical instrument is the purchase of a consumer good because it may be used for personal, family or household use.
The purchase of a musical instrument is the purchase of a consumer good if it will be used exclusively for personal or household use.
The purchase of a musical instrument is NOT the purchase of a consumer good if the instument is a professional grade instrument regardless of whether it will be used for personal or household use.
Whether a particular musical instrument is, or is not, a consumer good depends on the primary use (or intended primary use at the time of purchase).
B2. Do the rules for perfecting a security interest in a consumer good as original collateral differ from the rules for perfecting a security interest in a piece of ordinary equipment acquired for business use (i.e. a non-consumer use) as original collateral?
YES, because a purchase money security interest in a consumer good is perfected when the security interest attaches.
YES, because a security interest in a consumer good is perfected when the security interest attaches (regardless of whether the security interest is a general security interest or a purchase money security interest.
NO, because a security interest in a consumer good may only be perfected by the filing of a UCC-1 financing statement.
NO, because a security interest in a consumer good may only be perfected by the filing of a UCC-1 financing statement or by taking possession of the consumer good.
C3. If the seller of a good loans all or a portion of the purchase price to a buyer of a good and takes back a security interest in the good sold, is that extension of secured credit always a PMSI? Explain why this is or is not the case.
YES, because all extensions of credit by a person in the business of selling goods are, if secured, PMSIs (or purchase money security interests).
YES, because it is an obligation incurred as all or part of the price of the collateral.
NO, because such a transaction might amount to the mere retention of title to the goods.
NO, because such a transaction might be structured as a conventional conditional sale agreement.
D4. If a third-party lender (i.e. not the seller of the good) loans money to a buyer who needs financing to purchase equipment or to purchase a consumer good, and takes a security interest in the good, does such a security interest automatically qualify for PMSI status? [Consider how the loan proceeds must be applied. What happens if the buyer uses the actual loan proceeds to pay rent and uses the funds set aside for rent payment to actually fund the purchase of the equipment or the consumer good? Is there a method the third-party lender might use to make sure that its loan qualifies for PMSI status?]
YES because it is a purpose credit.
YES, because it is an "enabling" loan.
NO, not necessarily. The proceeds of the loan must actually be used to enable the buyer to acquire rights in the collateral.
NO. The PMSI or purchase money security interest is only available to a seller of goods and not to a third-party lender (in order to stimulate sales by actual dealers in goods rather than banks).
E5. Must a PMSI always be perfected by filing a financing statement, or are there alternate methods of perfecting a PMSI? [For this answer, exclude consideration of security interests perfected by a specific method such as vehicles subject to a certificate of title statute.]
Only by filing a financing statement because others must be able to send a notice to competing secured parties in order to obtain a PMSI for themselves. This can not be done if there are unfiled or "secret" PMSI in existence.
Only by filing a financing statement with the single exception of perfection by possession because possession by a PMSI lender provides effective notice because goods in the possession of third party will not mistakenly be included in an inventory audit.
There are alernate methods. Depending on the circumstances, a PMSI might be perfected by filing a financing statement, taking possession of the good or automatically upon attachment, in the case of a consumer good.
Only by filing a financing statement with the single exception of automatic perfection for a consumer good because the transaction costs to file a UCC-1 in a consumer case are too high to be cost effective yet sellers of goods to consumers must be protected by secured credit.
F6. Must a PMSI always be created by use of a written and signed security agreement or might a PMSI be created in another manner?
A PMSI is created only by a signed security agreement.
A PMSI is created only by an authenticated record, which may be a signed writing or an authenticated electronic record--as in electronic chattel paper.
A PMSI may be created by any method appropriate to create an enforceable security interest in a good which simply requires compliance with the requirements for attachment in UCC Article 9, s. 9-203, including the possibility of perfection by the secured party taking possession of the good.
Answer C is correct but incomplete in one detail as the secured party may perfect a security interest in a PMSI represented by chattel paper if it takes possession or otherwise obtains control over the chattel paper.
SELLER entered into a "shipment" contract with BUYER for the sale of 100 widgets at $10 per widget. Both parties signed the contract. SELLER loaned BUYER $800 of the purchase price, and the contract granted SELLER a security interest in the widgets. Buyer purchased these widgets to enhance the productivity of its assemply line (as each worker could use a widget to help the worker produce gadgets. On April 1, SELLER delivered the widgets to a common carrier. The common carrier delivered the widgets to BUYER's factory on April 28. SELLER filed a financing statement in the proper form and office on April 25. PROPOSITION: SELLER successfully created a PMSI in the widgets. Evaluate this proposition !
This proposition is TRUE because the filing of the UCC-1 financing statement took place in a timely fashion.
This proposition is FALSE because the UCC-1 financing statement filing did not occur within 20 days after the BUYER taking delivery of the widgets.
PROPOSITION: A PMSI or "purchase money security interest" must be indicated as such in the security agreement which creates the security interest. Evaluate this proposition !
The proposition is TRUE. For a security interest to benefit from the special PMSI status, the security agreement should indicate, in the granting clause or elsewhere, that the secured party claims PMSI status.
The proposition is FALSE . For a security interest to benefit from the special PMSI status, the security agreement need not indicate, in the granting clause or anywhere else, that the secured party claims PMSI status.
PROPOSITION: A PMSI or "purchase money security interest" must be indicated as such on a UCC-1 financing statement which is filed to perfect the security interest. Evaluate this proposition !
The proposition is TRUE. For a security interest to benefit from the special PMSI status, the UCC-1 financing statement should indicate, in the indication of collateral or elsewhere, that the secured party claims PMSI status.
The proposition is FALSE . For a security interest to benefit from the special PMSI status, the UCC-1 financing statement need not indicate, in the indication of collateral or anywhere else, that the secured party claims PMSI status.
PROPOSITION: A PMSI or purchase money security interest in inventory may be perfected either by pre-filing a UCC-1 financing statement, fiing the UCC-1 financing statement simultaneously with the receipt of the inventory by the debtor, or within 20 days after the debtor receives possession of the inventory in order to maintain PMSI status. Evaluate this proposition !