1. McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 6 Credit Introduction to Credit and Secured TransactionsP A R T
Credit
Introduction to Credit and
Secured Transactions
Security Interests in Personal Property
Bankruptcy

3. Security Interests in Personal Property29 C H A P T E R
Security Interests in Personal Property
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)

4. Learning Objectives
Describe types of collateral for a security interest under UCC Article 9
Explain how to create and perfect a security interest in debtor’s property
Recall priority rules for security interests
List steps creditor can take if debtor defaults

5. Article 9 Requirements Article 9 applies to common transactions:
Financing a car, buying equipment with a payment plan, or financing business inventory
Strict compliance with procedure is required or creditor will lose the preferred claim to debtor’s personal property
A creditor who loses a secured interest is merely a general creditor

6. Collateral Under Article 9
Typically, for loans, tangible goods are the collateral (property securing the promise to repay), but Art. 9 classifies collateral as:
Instruments, such as checks, notes, drafts, and certificates of deposit [9–102(a)(47)]
Documents of title, such as bills of lading, dock warrants, dock receipts, and warehouse receipts [9–102(a)(30)]

7. Collateral Under Article 9
Accounts, such as rights to payment of a monetary obligation for goods or services not evidenced by instruments
Chattel paper, such as documents that reflect an obligation to pay money and a security in specific goods [9–102(a)(11)]
General intangibles, a catchall, including intellectual property [9–102(a)(42)]

8. Collateral Under Article 9
Goods, such as consumer goods, equipment, farm products, inventory, and fixtures [9–102(a)(44)]
Investment property, such as stocks, bonds, and commodity contracts [9–102(a)(49)]
Deposit accounts, such as demand, time, savings, passbook, and similar accounts maintained with a bank [9–102(a)(29)]

9. Attaching the Security Interest
A security interest is not legally enforceable against a debtor until attached to one or more particular items of debtor’s property (collateral)
Attachment requires [9–203]:
agreement in which debtor grants creditor a security interest in collateral
debtor must have rights in the collateral
creditor must give value to the debtor

10. Special Issues
A security agreement must be clear that a security interest will exist
Purchase money security interest (PMSI): created when seller retains security interest until goods paid for or lender takes security interest for money loaned to acquire goods
Future advances: extensions of credit specified in security agreement [9–204(3)]
Contractual security interest in debtor’s after-acquired property [9–203(b)(2)]
The court in In re Shirel found the information contained in a credit application did not meet the requirements for a security agreement: “[N]o reasonable party would understand that a security interest was created by merely looking to the description [‘all merchandise’]…”
Kevin Shirel applied for a credit card from Sight’N Sound Appliance Centers, Inc. The credit application, which constituted the agreement between the parties, was a barely legible, seven-page, single-spaced, small-print document. Shirel signed it on the first page. The form contained a statement that Sight’N Sound would have a “security interest” in all “merchandise” purchased with the credit card. The statement was located approximately four pages into the application. Shirel’s credit was approved, and he purchased a new refrigerator using the credit card. Several months later, Shirel filed a bankruptcy petition listing the remaining credit card debt as unsecured and the refrigerator as exempt from the claims of creditors. Subsequently, Sight’N Sound objected to the claim of exemption. It contended that Shirel had improperly listed the debt as unsecured and asserted that it held a secured interest in the refrigerator.

11. Perfecting the Security Interest
A creditor gets protection against other creditors or purchasers of the collateral by perfecting the security interest:
By filing public notice (financing statement)
By the creditor taking possession or control of the collateral
Automatic perfection in certain transactions, such as a purchase money security interest
The financing statement (see pages of the text) filed in county offices works as public notice.
The typical example of method 2 (taking possession of collateral) is the pawnbroker transaction or a field warehousing arrangement (primarily for agricultural products).
For method 3, In re Lance is a good example (purchase of a snowmobile). The court found that the snowmobile was a consumer good. Since the UCC provides for the automatic perfection of purchase money security interests taken in consumer goods, the Credit Union’s purchase money security interest was perfected when it attached and the Credit Union was not required to file a financing statement.
See In re Lance

12. Basic Priority Rules
Several creditors may claim a security interest in the same collateral, thus the Code establishes a set of rules for priority
Basic rule: when more than 1 security interest in the same collateral filed (or otherwise perfected), the first security interest filed (or perfected) has priority over any filed (or perfected) later [9–322(a)(1)]
If none perfected, the first to be attached to collateral has priority [9–322(a)(3)]
Priority really means who gets paid first.

13. Exceptions to Basic Priority Rules
A perfected purchase money security interest in inventory has priority over a conflicting security interest in the same inventory if requirements are met
PMSI in collateral other than inventory has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time debtor receives the collateral or within 20 days [9–324(a)]
A perfected purchase money security interest in inventory has priority over a conflicting security interest in the same inventory if requirements are met
Interest perfected when debtor received possession
Secured party gave notice to prior secured creditor before debtor received inventory
Competing secured creditor received notice within five years before debtor received inventory
Notice stated expectation to acquire PMSI in debtor’s inventory and description [9–324(b)]
A second exception to the general priority rule is that a PMSI in collateral other than inventory has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time debtor receives the collateral or within 20 days [9–324(a)]
See In Re McAllister concerning farm equipment and machinery as collateral for a PMSI
The court in In re McAllister applied the rule concerning the priority of purchase money security interests in collateral other than inventory over a prior perfected conflicting security interest.

14. Exceptions to Basic Priority Rules
A third exception is that a buyer in the ordinary course of business takes free of a security interest created by his seller even though the security interest is perfected and buyer knows about it [9–320(a)]
Without this exception, the average consumer couldn’t take title to anything!
Goods taken in ordinary course of business become fixtures by attachment to real estate, creating real estate interest. Generally, security interest in real estate takes priority over interest in fixtures. Exceptions exist, but in Yeadon Fabric Domes, Inc. v. Maine Sports Complex, LLC: Yeadon failed to perfect security interest in fixtures that would have taken priority over the real estate interest.

15. Security Interests & Fixtures
Goods become fixtures by attachment to real estate, creating real estate interest
Generally, security interest in real estate takes priority over interest in fixtures
Exceptions exist, but in Yeadon Fabric Domes, Inc. v. Maine Sports Complex, LLC, Yeadon failed to perfect a security interest in fixtures that would have taken priority over the real estate interest
The hyperlink is to the court’s opinion.
A perfected security interest in fixtures has priority over the conflicting interest of an encumbrancer or owner of the real property if (1) the debtor has an interest of record in the real property or is in possession of it, (2) the security interest is a purchase money security interest, (3) the interest of the encumbrancer arose before the goods became fixtures, and (4) the fixtures’ security interest is perfected by a “fixtures filing” either before the goods became fixtures or within 20 days after the goods became fixtures [9–334(d)].
In Yeadon Fabric Domes, Inc. v. Maine Sports Complex, LLC, the Maine Sports Complex entered into a contract to purchase an inflatable fabric dome from Yeadon Fabric Domes. Yeadon filed a financing statement covering the dome and equipment. The court determined that the dome with its equipment is a fixture. Claims of others in the real property were Kiser and Harriman, pursuant to the mechanic’s lien statute. Under state law, a fixture filing was necessary for a security interest in fixtures to obtain priority over mechanic’s liens.
Court: “To obtain priority over Harriman and Kiser pursuant to section 9–334(5)(a), Yeadon’s security interest had to be perfected by a fixture filing before the Harriman or Kiser interests became of record. Because Yeadon’s fixture filing was not made until 2004 and both Harriman’s and Kiser’s title 10 liens were of record in 2002, Yeadon does not have priority over Harriman and Kiser pursuant to section 9–334(5)(a).”

16. Default & Foreclosure If debtor defaults, secured creditor may:
Forget the collateral and sue debtor on the note or promise to pay
Repossess the collateral and foreclose to keep the collateral in satisfaction of the remaining debt
Repossess and sell collateral, then either sue for deficiency or return surplus to debtor (depending on situation)
Caution: Giles v. First Virginia Credit Services, Inc. demonstrates that a creditor can be liable to debtor if the creditor acts improperly in repossessing or selling collateral

17. Thought Question
What security interests in personal property affect you and your family?
Opportunity to discuss the impact of credit on our lives. Is the Wilde’s quote on the first slide applicable in today’s society?
Quote: “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)