P A R T P A R T Credit Introduction to Credit and Secured Transactions Security Interests in Personal Property Bankruptcy 6 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Security Interests in Personal Property PA E TR HC 29 “One must have some sort of occupation now- a-days. If I hadn’t my debts I shouldn’t have anything to think about.” Oscar Wilde, A Woman of No Importance, Act I (1893)

Learning Objectives  Security interests under Article 9 of the Uniform Commercial Code  Attachment of the security interest  Perfecting the security interest  Creditors and priority rules  Default and foreclosure

 Uniform Commercial Code Article 9 covers security interests in personal property and applies to common transactions  A security interest in personal property or fixtures obtained by a creditor secures payment of a debt or performance of a duty [1–201(37)]  Strict compliance with procedure is required or creditor loses preferred claim Overview

 A security interest is not legally enforceable against debtor until attached to particular item(s) of debtor’s property ( collateral )  Attachment requires [9–203]:  Agreement in which debtor grants creditor a security interest in collateral  Debtor must have right s in the collateral  Creditor must give value to the debtor Attaching the Security Interest

 Collateral -- the property securing the promise to repay – may include [9-102(a)]: Collateral Under Article Negotiable instruments 2. Documents of title 3. Accounts 4. Chattel paper 5. General intangibles 6. Goods 7. Investment property 8. Deposit accounts

 A security agreement must be clear that a security interest will exist  In re Shirel: information in credit application did not meet requirements for agreement  Future advances are extensions of credit specified in a security agreement [9–204(3)] Special Issues

 A security agreement may be drafted to grant a creditor a security interest in debtor’s after-acquired property [9–203(b)(2)]  Purchase money security interest (PMSI) : when seller retains security interest until goods are paid for or when money is loaned to acquire goods and lender takes interest in goods Special Issues

 Creditor protected against other creditors or purchasers of collateral by perfecting the security interest (filing, possession)  Basic rule: If more than one security interest on the same collateral was filed (perfected), the first security interest filed (perfected) has priority over any later-filed (perfected) interest [9–322(a)(1)] Basic Priority Rules

 Perfected purchase money security interest (PMSI) in inventory may have priority over another security interest in same inventory  PMSI in collateral other than inventory has priority over another interest in same collateral if perfected at time debtor receives collateral  Buyer in ordinary course of business takes free of security interest even if security interest perfected and buyer knows Exceptions to Basic Priority Rules

 If debtor defaults, secured creditor may: 1. Forget collateral and sue debtor on the note or promise to pay 2. Repossess collateral and foreclose to keep the collateral in satisfaction of the remaining debt 3. Repossess and sell collateral, then either sue for deficiency or return surplus to debtor, depending on the circumstances Default & Foreclosure

Test Your Knowledge  True=A, False = B  UCC Art. 7 applies to secured transactions  Only a security agreement is required to create attachment to the collateral  A security agreement may be drafted to grant a creditor a security interest in debtor’s after- acquired property.  Automatic protection occurs in a purchase money security interest

Test Your Knowledge  True=A, False = B  When several creditors claim a security interest in the same collateral, priority rules apply to determine who is paid first.  Perfecting the security interest only means filing a notice about the security in a public newspaper.  Future advances are extensions of credit specified in a security agreement

Test Your Knowledge  Multiple Choice  Don, a furniture maker, needed a loan for $5000. Which of the following would be satisfactory collateral?  (a) A painting valued at $7,000  (b) A bill of lading on Swiss woodworking equipment in transit to Don  (c) A certificate of deposit for $8,000  (d) Both A and C, but not B  (e) All of the above

Test Your Knowledge  Multiple Choice  Katy bought a motorcycle from Kyle’s Bikes, Inc. Kyle finances his motorcycle inventory through GMAC. Could GMAC repossess the bike from Katy if Kyle fails to repay his loan to GMAC?  (a) No  (b) Yes  (c) Yes, but only if Kyle consents

Thought Questions  What security interests in personal property affect you? Your family?