1. CHAPTER 25 SECURED TRANSACTIONS: ATTACHMENT AND PERFECTION DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

2. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 CREDIT FINANCING AND ARTICLE 9 Buyer gives owner of the goods a security interest, which is another method of commercial transaction. Buyer gives owner of the goods a security interest, which is another method of commercial transaction. Article 9 deals with secured transactions. Article 9 deals with secured transactions. Secured transactions common in business. Secured transactions common in business. Security interest ensures payment by buyer, if buyer does not pay seller can repossess good. Security interest ensures payment by buyer, if buyer does not pay seller can repossess good. Buyer gives owner of the goods a security interest, which is another method of commercial transaction. Buyer gives owner of the goods a security interest, which is another method of commercial transaction. Article 9 deals with secured transactions. Article 9 deals with secured transactions. Secured transactions common in business. Secured transactions common in business. Security interest ensures payment by buyer, if buyer does not pay seller can repossess good. Security interest ensures payment by buyer, if buyer does not pay seller can repossess good.

3. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 CREDIT FINANCING AND ARTICLE 9 Secured transaction allows buyer to receive good sooner than having to pay cash, seller has right to repossess if buyer does not pay. Secured transaction allows buyer to receive good sooner than having to pay cash, seller has right to repossess if buyer does not pay. Buyer defaults, seller must comply with rules in Article 9, relating to perfection and priorities. Buyer defaults, seller must comply with rules in Article 9, relating to perfection and priorities. Seller is called the secured party. Seller is called the secured party. Person who owes payment is the debtor. Person who owes payment is the debtor.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 CREDIT FINANCING AND ARTICLE 9 Agreement that creates security interest is a security agreement. Agreement that creates security interest is a security agreement. Property subject to a security interest is the collateral. Property subject to a security interest is the collateral. Article 9 unified approaches to secured financing. Article 9 unified approaches to secured financing.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 CREDIT FINANCING AND ARTICLE 9 Newest version of Article 9: Newest version of Article 9: – Expands scope of property available for secured transactions. – Eliminated need for multiple filings. – Creditors will file where debtor is located. – Clarifies place for filing if debtor is an international entity or individual. – Permits electronic filings.

6. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 SCOPE OF ARTICLE 9 Governs transactions intended to create security interest in personal property or fixtures. Governs transactions intended to create security interest in personal property or fixtures. Security interest: an interest in personal property/fixtures which secures payment or performance of an obligation. Security interest: an interest in personal property/fixtures which secures payment or performance of an obligation. UCC categorizes collateral according to nature or use. UCC categorizes collateral according to nature or use.

7. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 SCOPE OF ARTICLE 9 Types of collateral on basis of nature: Types of collateral on basis of nature: – Documents. Negotiable documents of title to goods bills of lading/warehouse receipts. Negotiable documents of title to goods bills of lading/warehouse receipts. – Instruments. Negotiable instruments: checks/promissory notes. Negotiable instruments: checks/promissory notes. Securities: stocks and bonds. Securities: stocks and bonds.

8. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 SCOPE OF ARTICLE 9 Types of collateral on basis of nature: Types of collateral on basis of nature: – Proceeds: Whatever is received upon the sale, exchange, collection, or other disposition. – Chattel paper. A writing or writings that represent: Promise to pay money; or Promise to pay money; or Either a security interest in, or a lease of, specific goods. Either a security interest in, or a lease of, specific goods.

9. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 SCOPE OF ARTICLE 9 Types of collateral on basis of nature: Types of collateral on basis of nature: – Accounts. Right to payment for goods sold or leased. Right to payment for goods sold or leased. Services rendered not represented by an instrument or chattel paper. Services rendered not represented by an instrument or chattel paper. – General intangibles. Other personal property, such as goodwill of a business and trademarks. Other personal property, such as goodwill of a business and trademarks.

10. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 SCOPE OF ARTICLE 9 Types of collateral on use by debtor: Types of collateral on use by debtor: – Consumer goods. Goods used/bought for personal, family, or household purposes. Goods used/bought for personal, family, or household purposes. – Equipment. Goods used/bought primarily in business. Goods used/bought primarily in business. – Farm products. Crops, livestock, or supplies used/produced in farming operations. Crops, livestock, or supplies used/produced in farming operations. Products of crops or livestock in their unmanufactured states held by farmers. Products of crops or livestock in their unmanufactured states held by farmers.

11. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 SCOPE OF ARTICLE 9 Types of collateral on use by debtor: Types of collateral on use by debtor: – Inventory. Goods held for sale or lease. Goods held for sale or lease. Raw materials, work in process, and materials consumed in a business. Raw materials, work in process, and materials consumed in a business. – Fixtures. Goods that become a part of real estate. Goods that become a part of real estate.

12. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 SCOPE OF ARTICLE 9 Classes of goods mutually exclusive. Classes of goods mutually exclusive. Article 9 applies to all consensual security interests in personal property and fixtures. Article 9 applies to all consensual security interests in personal property and fixtures. Article 9 does not apply to a security interest that arises by operation of law. Article 9 does not apply to a security interest that arises by operation of law.

13. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 ATTACHMENT: CREATION OF A SECURITY INTEREST An interest in personal property/fixtures that secures payment or performance of an obligation. An interest in personal property/fixtures that secures payment or performance of an obligation. Important to distinguish between a true lease and a lease used as a security interest. Important to distinguish between a true lease and a lease used as a security interest. Article 9 applies to a lease intended as security. Article 9 applies to a lease intended as security. Facts of each case determine if a lease is intended. Facts of each case determine if a lease is intended.

14. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 ATTACHMENT Lessee: person who is leasing. Lessee: person who is leasing. Lessor: person leasing the property to another. Lessor: person leasing the property to another. Lease intended as security is subject to Article 9’s filing requirement. Lease intended as security is subject to Article 9’s filing requirement. True lease not subject to Article 9’s filing requirement. True lease not subject to Article 9’s filing requirement.

15. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 ATTACHMENT Lease intended as security treats bankruptcy trustee as a lien creditor. Lease intended as security treats bankruptcy trustee as a lien creditor. Trustee has superior rights than original owner. Trustee has superior rights than original owner.

16. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 SECURITY AGREEMENT Security interest must be valid and enforceable. Security interest must be valid and enforceable. First step in creation and enforcement of a security interest requires attachment. First step in creation and enforcement of a security interest requires attachment. Attachment: process by secured party and debtor create security interest and confer secured party certain enforceable rights collateral vis-à-vis the debtor. Attachment: process by secured party and debtor create security interest and confer secured party certain enforceable rights collateral vis-à-vis the debtor.

17. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 Attachment does not give secured party rights superior to other creditors. Attachment does not give secured party rights superior to other creditors. Attachment occurs when secured party does all: Attachment occurs when secured party does all: – Enters into security agreement and debtor agrees security interest will attach. – Possesses security agreement signed by debtor. – Ascertains that debtor has rights in collateral. – Gives value. SECURITY AGREEMENT

18. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 Transaction involving a pledge attachment has occurred. Transaction involving a pledge attachment has occurred. A signed security agreement must: A signed security agreement must: – Be in writing. – Create or provide for a security interest. – Reasonably identify the collateral. – Be signed by the debtor. SECURITY AGREEMENT

19. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 Security agreement may contain: Security agreement may contain: – Amount of indebtedness/terms of payment. – Liability in event of risk of loss to collateral. – Requirement of insurance on maintenance and repair of collateral. – Warranty by debtor, owns collateral free from liens or security interests. – Statement of debtor’s rights. – Description events constitute default by debtor. SECURITY AGREEMENT

20. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 Security agreement may extend security interest of secured party to all collateral that is subject to agreement and debtor amy acquire after entering into agreement. Security agreement may extend security interest of secured party to all collateral that is subject to agreement and debtor amy acquire after entering into agreement. SECURITY AGREEMENT

21. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 PERFECTIONPERFECTION Process used by secured parties protect collateral from attachment by third parties. Process used by secured parties protect collateral from attachment by third parties. Date of perfection determines priorities over competing claims among other creditors. Date of perfection determines priorities over competing claims among other creditors. Perfection occurs in one of three ways: Perfection occurs in one of three ways: – Creditor’s filing a financing statement. – Creditor taking possession of collateral. – Creditor refraining from doing anything beyond attachment. (automatic attachment)

22. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 PERFECTION BY FILING If collateral consists of accounts or general intangibles. If collateral consists of accounts or general intangibles. Financing statement used by UCC to give notice of the security interest. Financing statement used by UCC to give notice of the security interest. Another method of filing involves registering the security interest according to the requirements of statutes other than the UCC. Another method of filing involves registering the security interest according to the requirements of statutes other than the UCC.

23. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 PERFECTION BY FILING Financing statement must contain: Financing statement must contain: – Names and addresses of debtor and secured party. – Debtor’s signature. – Description of the collateral. Provides public notice of a claimed interest in the collateral. Provides public notice of a claimed interest in the collateral. Financing statement effective if contains enough information to cause the party searching records to look further. Financing statement effective if contains enough information to cause the party searching records to look further.

24. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 PERFECTION BY FILING Insufficient filing when debtor uses trade or business name rather than legal name. Insufficient filing when debtor uses trade or business name rather than legal name. Filing before attachment does not constitute perfection. Filing before attachment does not constitute perfection. Financing statement effective for five years, then security interest lapses unless secured party files continuation statement before lapse. Financing statement effective for five years, then security interest lapses unless secured party files continuation statement before lapse.

25. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 25 PERFECTION BY FILING UCC imposes secured party must comply within two weeks when debtor requests a statement of account or a list of collateral from secured party. UCC imposes secured party must comply within two weeks when debtor requests a statement of account or a list of collateral from secured party. UCC limits debtor to one list every six months. UCC limits debtor to one list every six months. No outstanding obligation on financing statement, UCC, may require secured party to file termination statement. No outstanding obligation on financing statement, UCC, may require secured party to file termination statement.

26. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 26 PERFECTION BY POSSESSION Method used for perfecting security interest. Method used for perfecting security interest. Security interest in negotiable instruments perfected only by secured party taking possession of the collateral. Security interest in negotiable instruments perfected only by secured party taking possession of the collateral. Secured party may perfect security interest in tangible collateral by physical possession of collateral. Secured party may perfect security interest in tangible collateral by physical possession of collateral.

27. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 27 AUTOMATIC PERFECTION Method ordinarily used for perfecting purchase money security interests in consumer goods. Method ordinarily used for perfecting purchase money security interests in consumer goods. Perfection occurs upon attachment. Perfection occurs upon attachment. Security interest in consumer goods perfected automatically (PMSI). Security interest in consumer goods perfected automatically (PMSI). – Secured party is not required to do anything to perfect it.

28. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 28 PROCEEDSPROCEEDS Secured party has lien that floats over the collateral and includes proceeds. Secured party has lien that floats over the collateral and includes proceeds. Proceeds: whatever is received on the sale, exchange, collection, or other disposition of collateral. Proceeds: whatever is received on the sale, exchange, collection, or other disposition of collateral. – Extends to identifiable money proceeds. – Realized from the sale of the collateral.