© 2007 West Legal Studies in Business, A Division of Thomson Learning Chapter 20 Secured Transactions

© 2007 West Legal Studies in Business, A Division of Thomson Learning 2 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? Learning Objectives

© 2007 West Legal Studies in Business, A Division of Thomson Learning 3 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 4 Creating and Perfecting 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. Once these requirements are met, the creditor’s rights “ATTACH” to the collateral, giving the creditor an enforceable security interest.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 5 Collateral Collateral is generally divided into two categories: tangible and intangible. –Tangible: Consumer goods, equipment, farm products, inventory, accessions. –Intangible:Chattel Paper, Instruments, Accounts, Deposit Accounts, General Intangibles.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 6 Perfecting a Security Interest Perfection is the legal process by which the secured party protects herself from third party claims against the same collateral. Perfection by Filing a Financing Statement. –CASE 20.1 Cabool State Bank v. Radio Shack, Inc. (2002). Perfection Without Filing. –Collateral is in the possession of the Secured Party. –Purchase Money Security Interest (PMSI--financing). Changes in Debtor’s Name.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 7 Scope of 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 8 Scope of Security Interest Floating Liens –Security interest in proceeds in after-acquired property, or –Collateral subject to future advances.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 9 Priorities General Rule is that a secured party’s interest has priority over the following: –Unsecured creditor. –Unperfected secured party. –Subsequent lien creditor. –Trustee in bankruptcy. –Buyers who do not purchase collateral in the course of Seller’s business.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 10 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. Generally, Buyers in the ordinary course of business take goods free from security interest.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 11 Priorities Creditors or Secured Parties. –Conflicting Perfected Security Interests: First to Perfect has Priority. –Conflicting Unperfected Security Interests: First to Attach has Priority. –Conflicting Perfected Security Interests in Commingled or Processed Goods. First-in-Time Rule. –Exceptions. CASE 20.2 In re Rebel Rents, Inc. (2004).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 12 Rights and Duties of Debtors and Creditors 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. –When Debtor has fully paid the debt, secured party must release security interest and file a termination statement.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 13 Basic Remedies Not defined by Article 9. Defined in the security agreement. If Debtor in default, Secured Party can: –Relinquish a security interest and use any judicial proceeding on the underlying debt (execution and levy). –Take peaceful or judicial possession of the collateral.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 14 Basic Remedies 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. –CASE 20.3 Banks Brothers Corp. v. Donovan Floors, Inc. (2000).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 15 Basic Remedies Disposition Procedures: –Commercially reasonable manner. –Public sale with notice. Distribution of Proceeds –Expenses  balance of debt  junior liens  then balance to secured party.