© 2004 West Legal Studies in Business A Division of Thomson Learning 1 Chapter 28 Secured Transactions Chapter 28 Secured Transactions

© 2004 West Legal Studies in Business A Division of Thomson Learning 2 Overview Liens. Consensual Liens. Art.9 secured transactions = personal property. Mortgages = real property. Statutory Liens. Mechanic’s Lien. Artisan’s Lien. Innkeeper’s Lien. Judicial Liens. Attachment. Writ of Execution. Garnishment. Other Creditor Remedies: Composition. agreements, ABC’s. Suretyship.

© 2004 West Legal Studies in Business A Division of Thomson Learning 3 §1: Terminology UCC Article 9 governs transactions when personal property is put up as collateral for debt. Terminology:  Security interest.  Secured party.  Debtor.  Security agreement.  Collateral. UCC Article 9 governs transactions when personal property is put up as collateral for debt. Terminology:  Security interest.  Secured party.  Debtor.  Security agreement.  Collateral.

© 2004 West Legal Studies in Business A Division of Thomson Learning 4 Tangible Collateral Real Property. Tangible Personal Property.  Consumer goods.  Equipment.  Farm Products.  Inventory.  Fixtures. Real Property. Tangible Personal Property.  Consumer goods.  Equipment.  Farm Products.  Inventory.  Fixtures.

© 2004 West Legal Studies in Business A Division of Thomson Learning 5 Intangible Collateral Chattel Paper:  A note with security agreement in it. Documents of Title:  Bills of lading, warehouse receipts. Instruments:  Notes, drafts, CDs. Pure Intangibles:  Accounts Receivable.  General Intangibles: patents, trademarks, copyright, trade name, good will. Chattel Paper:  A note with security agreement in it. Documents of Title:  Bills of lading, warehouse receipts. Instruments:  Notes, drafts, CDs. Pure Intangibles:  Accounts Receivable.  General Intangibles: patents, trademarks, copyright, trade name, good will.

© 2004 West Legal Studies in Business A Division of Thomson Learning 6 §2: Creating Security Interests A valid security interest makes a creditor “secured” and her rights “attach” to the collateral. Attachment gives creditor enforceable security interest. Three requirements:  1. Either: oral agreement and possession or a written agreement.  2. Secured creditor give debtor value.  3. Debtor has rights in the collateral. A valid security interest makes a creditor “secured” and her rights “attach” to the collateral. Attachment gives creditor enforceable security interest. Three requirements:  1. Either: oral agreement and possession or a written agreement.  2. Secured creditor give debtor value.  3. Debtor has rights in the collateral.

© 2004 West Legal Studies in Business A Division of Thomson Learning 7 Security Interest: Agreement An oral agreement wherein the debtor puts the personal property up as collateral and gives possession of the collateral to the secured party; or A written agreement wherein the debtor puts the personal property up as collateral, describes the collateral reasonably identifying it, and signs the agreement. An oral agreement wherein the debtor puts the personal property up as collateral and gives possession of the collateral to the secured party; or A written agreement wherein the debtor puts the personal property up as collateral, describes the collateral reasonably identifying it, and signs the agreement.

© 2004 West Legal Studies in Business A Division of Thomson Learning 8 Security Interest: Value Creditor gives any consideration that would support a simple contract. Creditor already gave consideration (antecedent debt). Creditor gives any consideration that would support a simple contract. Creditor already gave consideration (antecedent debt).

© 2004 West Legal Studies in Business A Division of Thomson Learning 9 Security Interest: Debtor’s Rights in Collateral Debtor must have some interest (but not necessarily ownership) in the collateral, or right to obtain possession. Rights can either be future or current legal interests. Debtor must have some interest (but not necessarily ownership) in the collateral, or right to obtain possession. Rights can either be future or current legal interests.

© 2004 West Legal Studies in Business A Division of Thomson Learning 10 Purchase Money Security Interest (PMSI) Sellers that finance the sale of durable goods take PMSI. Occurs in two situations:  Credit sale of the personal property, which will be collateral for the credit given.  A loan is made to buy the personal property, which will be collateral for the loan. Sellers that finance the sale of durable goods take PMSI. Occurs in two situations:  Credit sale of the personal property, which will be collateral for the credit given.  A loan is made to buy the personal property, which will be collateral for the loan.

© 2004 West Legal Studies in Business A Division of Thomson Learning 11 §3: Perfecting a Security Interest Debtors often put the same property up as collateral to several different creditors. Who gets the collateral if the debtor becomes insolvent? General rule: the first creditor to perfect the security interest gets the collateral. Debtors often put the same property up as collateral to several different creditors. Who gets the collateral if the debtor becomes insolvent? General rule: the first creditor to perfect the security interest gets the collateral.

© 2004 West Legal Studies in Business A Division of Thomson Learning 12 Two Ways to Perfect Filing a financing statement (in Texas--Secretary of State).Texas--Secretary of State Without Filing Financing Statement:  By “Pledge”: Debtor transfers collateral to Creditor.  Automatically by attachment of PMSI in consumer goods (for personal or household). Filing a financing statement (in Texas--Secretary of State).Texas--Secretary of State Without Filing Financing Statement:  By “Pledge”: Debtor transfers collateral to Creditor.  Automatically by attachment of PMSI in consumer goods (for personal or household).

© 2004 West Legal Studies in Business A Division of Thomson Learning 13 Perfection By Filing Debtor’s and Creditor’s Name and Address.  Changes in the Debtor’s Name.  Case 28.1: Cabool State Bank v. Radio Shack (2002). Description of the Collateral. Where to File?  Consumer goods - where debtor lives.  Farm equipment - where farm is.  Commercial transactions - central state office.  Fixtures - where real property is located. Debtor’s and Creditor’s Name and Address.  Changes in the Debtor’s Name.  Case 28.1: Cabool State Bank v. Radio Shack (2002). Description of the Collateral. Where to File?  Consumer goods - where debtor lives.  Farm equipment - where farm is.  Commercial transactions - central state office.  Fixtures - where real property is located.

© 2004 West Legal Studies in Business A Division of Thomson Learning 14 Perfection Without Filing Perfection by Possession of Collateral:  Money.  Non-negotiable document of title.  Instruments. Investment securities. Automatic Perfection by Law:  PMSI in consumer goods.  Exceptions:  Perfection by Possession of Collateral:  Money.  Non-negotiable document of title.  Instruments. Investment securities. Automatic Perfection by Law:  PMSI in consumer goods.  Exceptions: 

© 2004 West Legal Studies in Business A Division of Thomson Learning 15 Exceptions to Automatic Perfection Following collateral must be perfected by special federal or state laws:  FAA: aircraft.  UCC Art 8: investment securities.  UCC Art 7: documents of title.  State statutes: motor vehicle, boat trailers, motorcycles, and motor home security agreements must appear on certificate of registration filed with state. Following collateral must be perfected by special federal or state laws:  FAA: aircraft.  UCC Art 8: investment securities.  UCC Art 7: documents of title.  State statutes: motor vehicle, boat trailers, motorcycles, and motor home security agreements must appear on certificate of registration filed with state.

© 2004 West Legal Studies in Business A Division of Thomson Learning 16 §4: The Scope of a Security Interest Proceeds: whatever Creditor received when collateral sold or disposed of. Automatically perfected in proceeds of collateral for 10 days after receipt of the proceeds by the Debtor. Proceeds: whatever Creditor received when collateral sold or disposed of. Automatically perfected in proceeds of collateral for 10 days after receipt of the proceeds by the Debtor.

© 2004 West Legal Studies in Business A Division of Thomson Learning 17 To Perfect Proceeds Beyond 10 days Filed financing statement provides for extended coverage. Financing statement would be filed in same place. When financing statement would be filed in same place for property bought by the debtor with cash proceeds. Filed financing statement provides for extended coverage. Financing statement would be filed in same place. When financing statement would be filed in same place for property bought by the debtor with cash proceeds.

© 2004 West Legal Studies in Business A Division of Thomson Learning 18 Financing statement covers original collateral and proceeds are identifiable cash proceeds. Perfected before the 10 days in a different place as called for by the kind of property proceeds. Financing statement covers original collateral and proceeds are identifiable cash proceeds. Perfected before the 10 days in a different place as called for by the kind of property proceeds. To Perfect Proceeds Beyond 10 days

© 2004 West Legal Studies in Business A Division of Thomson Learning 19 After-Acquired Property Creditor wants to have a security interest in property acquired after the security interest is signed.  Inventory as collateral: will be sold, and more inventory brought in - Creditor wants a security interest in the new inventory. Creditor wants to have a security interest in property acquired after the security interest is signed.  Inventory as collateral: will be sold, and more inventory brought in - Creditor wants a security interest in the new inventory.

© 2004 West Legal Studies in Business A Division of Thomson Learning 20 Future Advances Used in establishing a “line of credit.” Creditor wants to lend money in the future that will be secured by the same collateral as debtor puts up for first loan. Creditor and Debtor do not want to execute a new security agreement every time the debtor needs to borrow money - the first security agreement covers future advances. Used in establishing a “line of credit.” Creditor wants to lend money in the future that will be secured by the same collateral as debtor puts up for first loan. Creditor and Debtor do not want to execute a new security agreement every time the debtor needs to borrow money - the first security agreement covers future advances.

© 2004 West Legal Studies in Business A Division of Thomson Learning 21 The Floating-Lien Concept Commonly used in the financing of inventory - the lien “floats” over the changing inventory.  After-acquired property clause will cover new inventory as it comes in.  Future advances clause will enable debtor to borrow money again and again without putting up new collateral or entering into a new agreement. Commonly used in the financing of inventory - the lien “floats” over the changing inventory.  After-acquired property clause will cover new inventory as it comes in.  Future advances clause will enable debtor to borrow money again and again without putting up new collateral or entering into a new agreement.

© 2004 West Legal Studies in Business A Division of Thomson Learning 22 §5: Priorities Creditor InterestPriority Secured vs. unsecured creditorsSecured wins Perfected secured vs. unperfected secured creditor First in time wins Secured creditor vs. secured creditorFirst in time wins Buyer not in the ordinary course of the Seller’s business BNIOCB loses Buyer in the ordinary course of the Seller’s business BIOCB wins

© 2004 West Legal Studies in Business A Division of Thomson Learning 23 Priorities [2] General Rule: Secured Party vs. Lien Creditor: first in time has priority. Exceptions:  PMSI creditor has an extra 10 days to file which is then retroactive. General Rule: Secured Party vs. Lien Creditor: first in time has priority. Exceptions:  PMSI creditor has an extra 10 days to file which is then retroactive.

© 2004 West Legal Studies in Business A Division of Thomson Learning 24 Priorities [3] When More Than One Party has security in same Collateral: first in time wins. Exceptions:  PMSI creditor in inventory.  PMSI creditor in equipment. When More Than One Party has security in same Collateral: first in time wins. Exceptions:  PMSI creditor in inventory.  PMSI creditor in equipment.

© 2004 West Legal Studies in Business A Division of Thomson Learning 25 §6: Rights and Duties of Debtors and Creditors Information Requests. Release, Assignment and Amendment. Confirmation or Accounting Request by Debtor.  Debtor entitled to one request every six months without charge. Termination Statement.  All creditors must file.  For consumer debts, must file within one month or when request in writing, must file within 10 days of receipt of request, whichever is earliest.  For all other written requests - within 10 days of receipt. Information Requests. Release, Assignment and Amendment. Confirmation or Accounting Request by Debtor.  Debtor entitled to one request every six months without charge. Termination Statement.  All creditors must file.  For consumer debts, must file within one month or when request in writing, must file within 10 days of receipt of request, whichever is earliest.  For all other written requests - within 10 days of receipt.

© 2004 West Legal Studies in Business A Division of Thomson Learning 26 §7: Debtor’s Default Basic Remedies:  Creditor can give up security interest and sue to get judgment, then execute.  Take possession and keep or sell. Secured Party’s Right to Take Possession, but no breach of peace. Case 28.2: Bank Brothers Corp. v. Donovan Floors Inc. (1996). Basic Remedies:  Creditor can give up security interest and sue to get judgment, then execute.  Take possession and keep or sell. Secured Party’s Right to Take Possession, but no breach of peace. Case 28.2: Bank Brothers Corp. v. Donovan Floors Inc. (1996).

© 2004 West Legal Studies in Business A Division of Thomson Learning 27 Disposition of Collateral After taking possession, Creditor must give notice of plans for the collateral:  Notice.  With 21 days for objection.  Consumer Goods exception. Sale of Collateral By Secured Party.  Notice.  Commercially reasonable manner. Case 28.3: Fielder v. Credit Acceptance (1996). After taking possession, Creditor must give notice of plans for the collateral:  Notice.  With 21 days for objection.  Consumer Goods exception. Sale of Collateral By Secured Party.  Notice.  Commercially reasonable manner. Case 28.3: Fielder v. Credit Acceptance (1996).

© 2004 West Legal Studies in Business A Division of Thomson Learning 28 Disposition Procedures Proceeds from disposition. Deficiency Judgment.  not for accounts or chattel paper unless court order or security agreement. Redemption Rights. Proceeds from disposition. Deficiency Judgment.  not for accounts or chattel paper unless court order or security agreement. Redemption Rights.

© 2004 West Legal Studies in Business A Division of Thomson Learning 29 Law on the Web Revised Article 9 at U of Penn. Revised Article 9 Secured transactions at Cornell U. Secured transactions Legal Research Exercises on the Web. Revised Article 9 at U of Penn. Revised Article 9 Secured transactions at Cornell U. Secured transactions Legal Research Exercises on the Web.