Comprehensive Volume, 18 th Edition Chapter 35: Secured Transactions in Personal Property

Definitions A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. The property that is subject to the interest is called the collateral, and the party holding the interest is called the secured party. Attachment is the creation of a security interest. To secure protection against third parties’ claims to the collateral, the secured party must perfect the security interest.

Creation of Security Interests Writing Signed by Debtor Intent to Create Security Interest Description of Collateral (Oral OK if Creditor is in Possession of Collateral) Value Contemporaneous Exchange Creditor Previously Gave Loan Debtor’s Interest in Collateral

Classes of Collateral Tangible collateral is divided into classes (based on the debtor’s intended use, not on physical characteristics): consumer goods, equipment, inventory, general intangibles, farm products, and fixtures.

Classes of Tangible Collateral Used or bought primarily for personal, family, or household use Consumer Goods Used or bought primarily for business use Equipment Inventory Held by debtor primarily for sale on lease to others; or raw materials, work in progress, or materials consumed in a business Farm Products Crops or livestock or supplies used or produced in farming

Perfection Perfection of a security interest is not required for its validity, but it does provide the creditor with certain superior rights and priorities over creditors with an interest in the same collateral. Perfection can be obtained through possession; filing; automatically, as in the case of a PMSI in consumer goods; or temporarily, when statutory protections are provided for creditors for limited periods of time.

Fixtures Consumers Farm Local Central EquipmentInventory Perfection of Security Interests Possession -- Creditor Retains Possession of Collateral PMSI in Consumer Goods -- Automatic Perfection Motor Vehicles -- Notation in Title Registration Writing Signed by Debtor Description of Collateral Address of Debtor Address of Creditor File Financing Statement WhereDepends on Type of Collateral

Priority Among Creditors Unperfected, unsecured creditors have the lowest priority and are paid only if sufficient assets remain after priority creditors are paid. Secured creditors have the right to take the collateral on a priority basis, based on whose interest was the first to attach. A perfected secured creditor takes priority over an unperfected secured creditor.

Priority Among Creditors Multiple perfected secured creditors with interests in the same collateral take priority generally on a first-to-perfect basis. Exceptions include PMSI inventory creditors who file a financing statement before delivery and notify all existing creditors, and equipment creditors who perfect within ten days of attachment of their interests.

Priorities of Conflicting Interests Unsecured vs. Unsecured Priority goes to: Neither -- equal Unsecured vs. Secured Priority goes to: Secured Secured vs. Secured Priority goes to: One whose interest attached first Perfected Secured vs. Secured Priority goes to: Perfected Secured Perfected Secured vs. Perfected Secured Priority goes to: One who perfected first

Proceeds When Creditor Sells Collateral Second, to pay the primary debt secured by this collateral. Third, to pay other debts secured by this collateral Last, any balance goes to debtor Public Sale Private Sale Lease to Third Party When secured party repossesses collateral securing a debt, he may dispose of it by: First, to pay the expenses of the secured party in connection with the default Proceeds go to:

Priorities When Debtor Sells Collateral A buyer in the ordinary course of business always takes priority even over perfected secured creditors. A buyer not in the ordinary course of business will lose out to a perfected secured creditor but will extinguish the rights of an unperfected secured creditor (unless the buyer had knowledge of the security interest).

Creditor’s Right to Repossess Upon default, a secured party may repossess the collateral from the buyer if this can be done without a breach of the peace. If a breach of the peace might occur, the secured party must use court action to regain the collateral.

Creditor’s Duty in Sale of Collateral If the buyer has paid 60 percent or more of the cash price of the consumer goods, the seller must resell them within 90 days after repossession unless the buyer, after default, has waived this right in writing. Notice to the debtor of the sale of the collateral is usually required. A debtor may redeem the collateral prior to the time the secured party disposes of it or contracts to resell it.

Priorities When Debtor Sells Collateral Buyer not in Ordinary Course Perfected secured creditor Unperfected secured creditor When a debtor sells the collateral securing a debt, who has priority in the collateral: the buyer or the creditor? Buyer in Ordinary Course Has priority over: Unperfected secured creditor (Assuming buyer had no knowledge of security interest) Has priority over: Perfected secured creditor (except consumer PMSI –Then, buyer has priority) Does NOT have priority over: What kind of buyer?