Chapter 34Chapter 34SECURED TRANSACTIONSSECURED TRANSACTIONSIN PERSONAL PROPERTYIN PERSONAL PROPERTY

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DefinitionsDefinitions

A security interest is an interest in personal A security interest is an interest in personal property or fixtures that secures payment or property or fixtures that secures payment or performance of an obligation. performance of an obligation.

The property that is subject to the interest is called The property that is subject to the interest is called the collateral, and the party holding the interest is the collateral, and the party holding the interest is called the secured party. called the secured party.

Attachment is the creation of a security interest. Attachment is the creation of a security interest. To secure protection against third parties’ claims To secure protection against third parties’ claims

to the collateral, the secured party must perfect the to the collateral, the secured party must perfect the security interest. security interest.

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Creation of a Security InterestCreation of a Security Interest

The agreement between the creditor and the The agreement between the creditor and the debtor that the creditor will have a security debtor that the creditor will have a security interest.interest.

The agreement must identify the parties, The agreement must identify the parties, describe the collateral and the debt that is describe the collateral and the debt that is secured by the agreement.secured by the agreement.

Purchase Money Security Interest: good Purchase Money Security Interest: good sold on credit by seller is collateral.sold on credit by seller is collateral.

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Writing

Signed by Debtor

Intent to Create Security Interest

Description of Collateral

(Oral OK if Creditor is in Possession of Collateral)

ValueContemporaneous Exchange

Creditor Previously Gave Loan

Debtor’s Interest in Collateral

Creation of a Security InterestCreation of a Security Interest

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Classification of CollateralClassification of Collateral

Tangible collateral is divided into classes (based on the Tangible collateral is divided into classes (based on the debtor’s intended use, not on physical characteristics): debtor’s intended use, not on physical characteristics): consumer goods, consumer goods, equipment, equipment, inventory, inventory, general intangibles,general intangibles, farm products, and farm products, and fixtures. fixtures.

After-Acquired Collateral.After-Acquired Collateral.Proceeds.Proceeds.

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Used or bought primarilyfor personal, family, or household use

Consumer Goods

Used or bought primarilyfor business use

Equipment

InventoryHeld by debtor primarilyfor sale on lease to others; or raw materials, work in progress, or materials consumed in a business

Farm ProductsCrops or livestock or supplies used or produced in farming

Tangible CollateralTangible Collateral

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Creditor who obtains a perfected security interest Creditor who obtains a perfected security interest has priority over unsecured creditors. has priority over unsecured creditors.

Perfection can be obtained :Perfection can be obtained : By Possession; By Possession; By Filing; By Filing; Automatically, as in the case of a PMSI in consumer Automatically, as in the case of a PMSI in consumer

goods; or goods; or Temporarily, when statutory protections are provided Temporarily, when statutory protections are provided

for creditors for limited periods of time.for creditors for limited periods of time.

Perfection of Secured TransactionsPerfection of Secured Transactions

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Fixtures

Consumers Farm

Local Central

Equipment Inventory

Possession -- Creditor Retains Possession of CollateralPMSI in Consumer Goods -- Automatic PerfectionMotor Vehicles -- Notation in Title Registration

Writing

Signed by Debtor

Description of Collateral

Address of Debtor

Address of Creditor

File FinancingStatement

Where Depends on Type of Collateral

Perfection of Secured TransactionsPerfection of Secured Transactions

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Priorities Priorities

Unperfected, unsecuredUnperfected, unsecured creditors have the creditors have the lowest priority and are paid only if sufficient lowest priority and are paid only if sufficient assets remain after priority creditors are paid. assets remain after priority creditors are paid.

SecuredSecured creditors have the right to take the creditors have the right to take the collateral on a priority basis, based on whose collateral on a priority basis, based on whose interest was the first to attach. interest was the first to attach.

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Perfection by FilingPerfection by Filing

Financing Statement is an authenticated record.Financing Statement is an authenticated record.Content of the financing statement:Content of the financing statement:

Name of the Debtor.Name of the Debtor. Name of the Secured Party.Name of the Secured Party. Description of Collateral.Description of Collateral.

Must be filed in a public place to give notice to Must be filed in a public place to give notice to 33rdrd parties. parties.

Defective Filings?Defective Filings?

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Loss of PerfectionLoss of Perfection

Possession of Collateral.Possession of Collateral.Consumer Goods.Consumer Goods.Lapse of Time.Lapse of Time.Removal from State.Removal from State.Motor Vehicles.Motor Vehicles.

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Rights of Parties Before DefaultRights of Parties Before Default

Status of Creditor Before Default.Status of Creditor Before Default. Determined by contract law/UCC 2.Determined by contract law/UCC 2.

Status of Debtor Before Default.Status of Debtor Before Default.Statement of Account.Statement of Account.Termination Statements.Termination Statements.Correction Statements.Correction Statements.

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PrioritiesPriorities

A A perfected secured creditorperfected secured creditor takes priority over an takes priority over an unperfected secured creditor. unperfected secured creditor.

Multiple perfected secured creditors with interests in Multiple perfected secured creditors with interests in the same collateral take priority generally on a first-to-the same collateral take priority generally on a first-to-perfect basis. perfect basis.

Exceptions include PMSI inventory creditors who file Exceptions include PMSI inventory creditors who file a financing statement before delivery and notify all a financing statement before delivery and notify all existing creditors, and equipment creditors who perfect existing creditors, and equipment creditors who perfect within ten days of attachment of their interests.within ten days of attachment of their interests.

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Unsecured vs. Unsecured Priority goes to: Neither -- equal

Unsecured vs. Secured Priority goes to: Secured

Secured vs. Secured Priority goes to:

One whose interestattached first

Perfected Secured vs. Secured Priority goes to:

Perfected Secured

Perfected Secured vs. Perfected Secured

Priority goes to:

One who perfected first

PrioritiesPriorities

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A A buyer in the ordinary course of businessbuyer in the ordinary course of business always always takes priority even over perfected secured takes priority even over perfected secured creditors. creditors.

A A buyer not in the ordinary course of businessbuyer not in the ordinary course of business will will lose out to a perfected secured creditor but will lose out to a perfected secured creditor but will extinguish the rights of an unperfected secured extinguish the rights of an unperfected secured creditor (unless the buyer had knowledge of the creditor (unless the buyer had knowledge of the security interest). security interest).

Secured Party vs. Buyer of CollateralSecured Party vs. Buyer of Collateral

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Rights of Parties After DefaultRights of Parties After Default

Self HelpSelf Help: Upon default, a secured party may: Upon default, a secured party may repossess repossess the collateral from the buyer if this the collateral from the buyer if this can be done without a breach of the peace. can be done without a breach of the peace.

If a breach of the peace might occur, the If a breach of the peace might occur, the secured party must use court action to regain secured party must use court action to regain the collateral. the collateral.

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Disposition of CollateralDisposition of Collateral

CreditorCreditor: If the buyer has paid 60 percent or : If the buyer has paid 60 percent or more of the cash price of the consumer goods, more of the cash price of the consumer goods, the seller must resell them within 90 days after the seller must resell them within 90 days after repossession unless the buyer, after default, has repossession unless the buyer, after default, has waived this right in writing. waived this right in writing. NoticeNotice to the debtor of the sale of the collateral is to the debtor of the sale of the collateral is

usually required. usually required. DebtorDebtor: A debtor may : A debtor may redeemredeem the collateral the collateral

prior to the time the secured party disposes of it prior to the time the secured party disposes of it or contracts to resell it.or contracts to resell it.

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Buyer not in Ordinary Course

Perfected securedcreditor

Unperfectedsecured 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:

Perfectedsecured creditor

(except consumer PMSI –Then, buyer

has priority)

Does NOT have priority over:

What kind of buyer?

Debtor’s RightsDebtor’s Rights