Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 34 Secured Transactions In Personal Property Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Definitions 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 Creation of a Security Interest The agreement between the creditor and the debtor that the creditor will have a security interest. The agreement must identify the parties, describe the collateral and the debt that is secured by the agreement. Purchase Money Security Interest: good sold on credit by seller is collateral.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 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 Creation of a Security Interest

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Classification 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. After-Acquired Collateral. Proceeds.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 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 Tangible Collateral

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 Creditor who obtains a perfected security interest has priority over unsecured creditors. Perfection can be obtained : –By Possession; –By 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. Perfection of Secured Transactions

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Perfection by Filing Financing Statement is an authenticated record. Content of the financing statement: –Name of the Debtor. –Name of the Secured Party. –Description of Collateral. Must be filed in a public place to give notice to 3 rd parties. Defective Filings?

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Fixtures Consumers Farm Local Central EquipmentInventory 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 Perfection of Secured Transactions

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 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). Secured Party vs. Buyer of Collateral

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Loss of Perfection Possession of Collateral. Consumer Goods. Lapse of Time. Removal from State. Motor Vehicles.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 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 debtor 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? Debtor’s Rights

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 Rights of Parties Before Default Status of Creditor Before Default. –Determined by contract law/UCC 2. Status of Debtor Before Default. Statement of Account. Termination Statements. Correction Statements.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 15 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 Priorities

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 16 Priorities 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 17 Priorities PMSI in inventory collateral. –To prevail, the secured creditor must perfect before before the debtor receives possession, and give notice to other secured parties. PMSI in non-inventory collateral. –Secured creditor prevails if she files a financing statement within 20 days of possession.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 18 Priorities A perfected secured creditor takes priority over an unperfected secured creditor. 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 19 Rights of Parties After Default Self Help: 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 20 Disposition of Collateral Creditor: 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. Debtor: A debtor may redeem the collateral prior to the time the secured party disposes of it or contracts to resell it.