Chapter 27 Secured Transactions and E-Filing

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Secured Transactions Secured transaction: A transaction in which a creditor makes a loan to a debtor in exchange for the debtor’s pledge of personal property as security Collateral: The property in which a security interest is taken Personal property Tangible property – equipment, vehicles, furniture Intangible property – securities, patents, trademarks 27-2 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Secured Transactions Unsecured credit Creditor takes no interest in the collateral If debtor defaults, creditor must sue the debtor Secured credit Purchaser pledges the collateral Creditor may recover the collateral in case of default 27-3 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Secured Transactions Debtor: A person who has an ownership or other interest in the collateral and owes payment of a secured obligation Secured Party: A person in whose favor a security interest is created or provided under a security agreement Security Interest: An interest in the collateral, such as personal property or fixtures, which secures payment or performance of an obligation 27-4 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Secured Transactions Security Agreement: An agreement that creates or provides for a security interest Collateral: Property subject to security interest, including accounts and chattel paper that have been sold Financing Statement: Record relating to initial financing statement 27-5 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 27.2: Two-Party Secured Transaction 27-6 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 27.3: Three-Party Secured Transaction 27-7 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Creating a Security Interest Security agreement: A written document signed by a debtor that creates a security interest in personal property To be valid, a security agreement must Clearly describe the collateral Contain the debtor’s promise to repay the creditor Set forth the creditor’s rights upon the debtor’s default Be signed by the debtor 27-8 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Creating a Security Interest Attachment: A situation in which a creditor has an enforceable security interest against a debtor and can satisfy the debt out of the designated collateral Debtor must have current or future legal right in or right to possession of collateral Once rights of secured party attach to the collateral, the creditor has enforceable security interest in the property Debt can be satisfied out of collateral, subject to priority rules 27-9 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Creating a Security Interest Floating lien: A security interest in property that was not in the possession of the debtor when the security agreement was executed Floating lien can attach to: After-acquired property Sales proceeds Future advances 27-10 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Creating a Security Interest After-acquired property: Property that a debtor acquires after a security agreement is executed Sale proceeds: The resulting assets from the sale, exchange, or disposal of collateral subject to a security agreement Future advances: Funds advanced to a debtor from a line of credit secured by collateral 27-11 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Perfecting a Security Interest Perfection of a security interest: A process that establishes the right of a secured creditor against other creditors who claim an interest in the collateral Methods Perfection by filing a financing statement Perfection by possession of collateral Perfection by a purchase money security interest in consumer goods 27-12 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Perfecting a Security Interest Perfection by filing a financing statement Document filed by secured creditor with the appropriate government office State law specifies where to file May be done electronically Gives constructive notice of security interest in personal property Effective for five years from the filing date Continuation Statement may be filed 27-13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Case 27.1: Filing a Financing Statement under an Individual’s Name Pankratz Implement Company v. Citizens National Bank 130 P.3d 57, Web 2006 Kan. Lexis 141 (2006) Supreme Court of Kansas Issue Is Pankratz’s filing of the financing statement under the wrong first name of the debtor seriously misleading? 27-14 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Perfecting a Security Interest Perfection by possession of the collateral: If a secured creditor has physical possession of the collateral, no financing statement has to be filed Other potential creditors are put on notice of the creditor’s secured interest in the property Perfection by a purchase money security interest in consumer goods: Creditor automatically obtains purchase money security interest when extending credit to consumer to purchase consumer goods 27-15 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Perfecting a Security Interest Termination statement: A document filed by a secured party that ends a secured interest because the debt has been paid Must be filed within One month after the debt is paid, or 20 days after receipt of the debtor’s written demand 27-16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Priority of Claims Priority of claims: The order in which conflicting claims of creditors in the same collateral are solved Secured claims have priority over unsecured claims Competing unperfected security interests: first to attach has priority Perfected claims have priority over unperfected claims Competing perfected security interests: first to perfect has priority 27-17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Priority of Claims Buyer in the ordinary course of business: A person who in good faith and without knowledge of another’s ownership or security interest in goods buys the goods in the ordinary course of business from a person in the business of selling goods of that kind 27-18 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Default and Remedies Default is constituted by Failure to make scheduled payments when due Bankruptcy of the debtor Breach of the warranty of ownership as to the collateral Other events defined by the parties in a security agreement 27-19 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Default and Remedies Remedies for default: Take possession of the collateral Retention of collateral Disposal of the goods Written objection Consumer goods Disposition of collateral Deficiency judgment 27-20 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Default and Remedies Redemption rights Relinquishing the security interest and proceeding to judgment on the underlying debt Artisan’s lien: A statutory lien given to workers on personal property to which they furnish services or materials in the ordinary course of business 27-21 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 27-22 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.