© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Chapter 20: Security Interests in Personal Property

2 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives What is a security interest? Who is a secured party? What is a security agreement? What is a financing statement? What three requirements must be met to create an enforceable security interest? What is the most common method of perfecting security interest under Article 9? If two secured parties have perfected security interests in the collateral of the debtor, which party has priority to the collateral on the debtor’s default? What rights does secured creditor have on the debtor’s default?

3 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Terminology Secured Party: creditor who has a security interest in debtor’s collateral. Debtor: person who owes payment of a secured obligation. Security Interest: interest in the collateral that secures the performance. Security Agreement: agreement that creates or provides for a security interest. Collateral: subject of the security interest. Financing Statement: normally filed with public notice to third parties.

4 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Creating a Security Interest Creating a Security Interest. –Collateral in Possession of Creditor, or there must be a written agreement describing the collateral signed by Debtor. –Creditor must give something of value to Debtor. –Debtor must have “rights” in collateral.

5 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Creating a Security Interest Once these requirements are met, the creditor’s rights “ATTACH” to the collateral, giving the creditor an enforceable security interest. Written or Authenticated Security Agreement. –When collateral is NOT in possession of secured party. Document must contain description of property.

6 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Perfecting a Security Interest Perfection is the legal process by which the secured party protects herself from third party claims against the same collateral, which is divided into two categories: –Tangible: Consumer goods, equipment, farm products, inventory, accessions. –Intangible: Chattel Paper, Instruments, Accounts, Deposit Accounts, General Intangibles.

7 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Perfecting a Security Interest Perfection by Filing. –File financing statement with proper state authority. Gives 3 rd parties notice. Lasts 5 years. Financing statement must provide: Proper Legal Name of Debtor, Secured Party, and description of Collateral. Improper filing reduces secured party’s claim in bankruptcy to an unsecured creditor. Case 20.1 Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc. Creditor failed to perfect the security interest by incorrectly stating the debtor’s name.

8 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Perfecting a Security Interest Perfection Without Filing. –Collateral is in the possession of the Secured Party. –Purchase Money Security Interest (PMSI) in consumer goods and seller/manufacturer provides financing. Automatic Perfection: at the time of credit sale, unless certificate of title is required (automobile, mobile homes, tractors, etc).

9 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Scope of a Security Interest Proceeds: whatever received when collateral sold or disposed of. After-Acquired Property. –Security Agreement may provide for a security interest in property acquired after execution of security agreement. Future Advances. –Continuing line of credit. –Subject to security interest. Floating Liens –Security interest in proceeds in after-acquired property, or –Collateral subject to future advances.

10 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Priorities General Rule is that a first-in-time perfected security interest has priority over: –Unsecured creditors and unperfected security interests. –Conflicting perfected security interests. –Conflicting unperfected security interests.

11 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Priorities Buyers in the Ordinary Course of Business: take goods free from any security interest, even if perfected and the buyer knows of its existence. –Good faith, without notice. Exception to the First-in-Time Rule: PMSI in equipment that is not inventory. Exception to First-in-Time Rule: security interests in inventory. Buyers of the Collateral: may conflict with perfected interests on debtor’s default.

12 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Rights and Duties Information Requests. Release, Assignment and Amendment. –Secured party can release all or part of the interest. –Secured party can assign all or part of the interest. –Parties can agree to amend the financing statement. Termination Statement. –When Debtor has fully paid the debt, secured party must release security interest and file a termination statement.

13 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Default Not expressly defined by Article 9 but rather in the security agreement. Any breach can constitute default. Basic Remedies are cumulative: –Repossession of the Collateral (Self-Help). –Judicial Remedies: execution and levy. Case 20.2 First National Bank of Litchfield v. Miller. Debtors were required to pay for boat, after signing purchase agreement and taking delivery.

14 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Disposition of Collateral Disposition of Collateral: Retention of Collateral by Secured Party (unless PMSI and debtor paid 60% or more). –Notice Required. If objection, then Secured Party must sell property.

15 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Disposition of Collateral Disposition Procedures: –Flexible but commercially reasonable manner. –Public or private sale with notice (unless perishable). –Secured party may purchase collateral at a public (but not private) sale. –“Satisfactory” price is only one factor: Case 20.3 Hicklin v. Onyx Acceptance Co. Seller did not sell car in commercially reasonable manner.

16 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Disposition of the Collateral Distribution of Proceeds –Expenses  balance of debt  junior liens  then balance to secured party. Noncash Proceeds. Deficiency Judgment. –Debtor is liable for deficiency owing to the creditor. Redemption Rights. –Debtor can ‘redeem’ property by tendering performance of all obligations prior to sale or discharge.

17 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Priorities Buyers of the Collateral. –Conflicts with Perfected Secured Party. –Buyers in the Ordinary Course of Business. –Buyers not in the Ordinary Course of Business of Consumer Goods. –Buyers of Chattel Paper. –Buyers of Instruments, documents or securities. –Buyers of Farm Products.