Secured Transactions Professor McKinsey OBE 118, Section 3, Fall 2004 In the real world, few goods are paid for in cash. Most are financed. How does a seller ensure that the buyer will pay? What can the seller do to protect herself if the buyer does not pay?

2 Notes and Instruments We skipped pages 311 to 320 which explained how we allow debts and obligations to be easily transferred to parties Obligations to pay someone money or perform services can be a promise in a contract. Sometimes the when an obligation is solely about paying money, it is unconditioned, and it meets certain other requirements, we call it a note.

3 Negotiable Instruments A Note and other instruments such as checks, Certificates of Deposit can often be negotiable meaning they are easily transferred or sold for value. This week we study the world of notes, loans, collateralized loans, purchase agreements, security interests and the like. This is the real world of most personal property acquisition.

4 Security Interest A right another party has in property that allows them take the property and sell it to recover the amount of a debt or obligation Can be in Personal Property or in Fixtures: (We use a different system for Land) A security interest is acquired through a document called a “security agreement”

5 Security Agreements Buyer Seller This exchange of a security agreement for goods creates a valid security interest in the goods. The goods are “secured property” The Seller is a “secured party” The buyer has less than full rights in the goods

6 Security Interest To have a security interest, the seller must –Obtain a security agreement –Give up value

7 Security Agreement Identification of the property Written Signed by debtor (authenticated if electronic) Explanation of what the security interest is (description of the financial obligations) Usually the security agreement is a contract that will have a lot more information, promises, terms etc.

8 Oral Security Agreement? Security Agreements should be in writing A secured party can satisfy that requirement if they gain control or possession of the secured property –Control: for such as accounts. –Possession: for

9 Security Agreement for Future Property? Sure Can be for after-acquired property (Secured party loans money to debtor). Security interests automatically attach to the proceeds of a sale or disposition of the property.

10 Chattel Paper A special form of a security interest for personal property (chattel) Chattel Paper is the equivalent of a security agreement for a specific piece (or set) of property. Chattel Paper is fairly negotiable: it is often used for other transactions

11 Security Agreements Buyer Seller This is a security interest in the goods because the seller gave up value Thursday, we examine how this security interest works with third parties