chapter 26 secured transactions: priorities and default davidson, knowles & forsythe business...

CHAPTER 26CHAPTER 26SECURED TRANSACTIONS:SECURED TRANSACTIONS: PRIORITIES AND DEFAULT PRIORITIES AND DEFAULT

CHAPTER 26CHAPTER 26SECURED TRANSACTIONS:SECURED TRANSACTIONS: PRIORITIES AND DEFAULT PRIORITIES AND DEFAULT

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

PRIORITIESPRIORITIESPRIORITIESPRIORITIESCreditor who has status of perfected secured Creditor who has status of perfected secured

party can maximize chances of money owed.party can maximize chances of money owed.Status gives creditor first claim to the Status gives creditor first claim to the

collateral.collateral.Perfected secured party will have priority over Perfected secured party will have priority over

general and lien creditor including trustee in general and lien creditor including trustee in bankruptcy.bankruptcy.

Secured party disposed of collateral, excess Secured party disposed of collateral, excess money owed to secured party may be applied money owed to secured party may be applied to claims of other creditors.to claims of other creditors.



CONFLICTING SECURITY CONFLICTING SECURITY INTERESTSINTERESTS


Code validates a first-in-time and first-in-Code validates a first-in-time and first-in-right approach.right approach.

Those who have a perfected claim first have Those who have a perfected claim first have priority.priority.

Creditor/lender file financing statement Creditor/lender file financing statement covering transaction before all requirements covering transaction before all requirements for attachment have been met.for attachment have been met.

Date of filing controls priority in collateral.Date of filing controls priority in collateral.



Code justifies “race to the recording office” Code justifies “race to the recording office” as necessary protection of the public filing as necessary protection of the public filing system.system.





Order of Perfection.Order of Perfection.– Filing represents one method of perfection.Filing represents one method of perfection.– Purchase of money security interests in Purchase of money security interests in

consumer goods, one may rely of automatic consumer goods, one may rely of automatic perfection.perfection.

– Perfect by taking possession of the collateral.Perfect by taking possession of the collateral.– First to perfect has priority.First to perfect has priority.





Order of Attachment.Order of Attachment.– When no creditor has perfected its security When no creditor has perfected its security

interest in the collateral.interest in the collateral.– First interest to attach has priority to the First interest to attach has priority to the

collateral.collateral.– An unperfected secured creditor will not enjoy An unperfected secured creditor will not enjoy

preferred status in bankruptcy proceedings. preferred status in bankruptcy proceedings.





EXCEPTIONSEXCEPTIONSEXCEPTIONSEXCEPTIONS

Important exceptions to the general rules of Important exceptions to the general rules of priority, which include:priority, which include:– Purchase Money Security Interests.Purchase Money Security Interests.– Bona Fide Purchaser of Consumer Goods.Bona Fide Purchaser of Consumer Goods.– Buyer in the Ordinary Course of Business.Buyer in the Ordinary Course of Business.– Common Law and Statutory Liens.Common Law and Statutory Liens.– Fixtures.Fixtures.



EXCEPTIONSEXCEPTIONSEXCEPTIONSEXCEPTIONSPurchase Money Security Interests.Purchase Money Security Interests.

– Held by a purchase money secured party.Held by a purchase money secured party.– Purchase money security interest contradicts Purchase money security interest contradicts

first-to-file-or-to-perfect. first-to-file-or-to-perfect. – Security interest is purchase money security to Security interest is purchase money security to

extent that it is:extent that it is: Taken by seller of collateral to secure all/part of Taken by seller of collateral to secure all/part of

price.price. Taken by person who by making advances gives Taken by person who by making advances gives

value to enable the debtor acquire rights.value to enable the debtor acquire rights.




Purchase Money Security Interests.Purchase Money Security Interests.– Gives lenders priority if they are first to file or Gives lenders priority if they are first to file or

perfect.perfect.– UCC, attempts to balance both parties interests.UCC, attempts to balance both parties interests.– Perfected floating lien loses to later property Perfected floating lien loses to later property

perfected.perfected.



EXCEPTIONSEXCEPTIONSEXCEPTIONSEXCEPTIONSPurchase Money Security Interests. Purchase Money Security Interests.

– This exception applies only if:This exception applies only if: PMSI is perfected before the debtor gets the inventory.PMSI is perfected before the debtor gets the inventory. PMSI secured creditor gives written notice describing PMSI secured creditor gives written notice describing

inventory to those previously filed financing statements inventory to those previously filed financing statements covering the collateral.covering the collateral.

– PMSI creditor in collateral (other than inventory).PMSI creditor in collateral (other than inventory).– Has priority over a previously perfected floating Has priority over a previously perfected floating

lien in same collateral.lien in same collateral.



EXCEPTIONSEXCEPTIONS

Purchase Money Security Interests.Purchase Money Security Interests.– Code in determining priority applies first-to-or-Code in determining priority applies first-to-or-

to-perfect rules.to-perfect rules.– So long as PMSI is perfected at time debtor So long as PMSI is perfected at time debtor

gets collateral or within 10 days afterwards.gets collateral or within 10 days afterwards.



EXCEPTIONSEXCEPTIONSEXCEPTIONSEXCEPTIONSBuyers in the Ordinary Course of Business.Buyers in the Ordinary Course of Business.

– Purchasers who are buying from a seller who Purchasers who are buying from a seller who routinely sells from inventory.routinely sells from inventory.

– Code allows buyer who purchases goods in the Code allows buyer who purchases goods in the ordinary course of the seller’s business. ordinary course of the seller’s business.

– Buyer takes priority over a previously perfected Buyer takes priority over a previously perfected security interest provided that the buyer:security interest provided that the buyer:

Acts in good faith andActs in good faith and Does not know that the sale violates the rights of a Does not know that the sale violates the rights of a

third party. third party.




Bona Fide Purchasers of Consumer Goods.Bona Fide Purchasers of Consumer Goods.– Another class of persons who may have priority Another class of persons who may have priority

over previously perfected security interest.over previously perfected security interest.– Consumer goods: used or bought for personal, Consumer goods: used or bought for personal,

family, or household purposes.family, or household purposes.– Code limits priority to purchase of this type of Code limits priority to purchase of this type of

collateral.collateral.



EXCEPTIONSEXCEPTIONS

Bona Fide Purchasers of Consumer Goods.Bona Fide Purchasers of Consumer Goods.– Limitations over previously perfected security Limitations over previously perfected security

interests: interests: Buyer ignorant of security interest.Buyer ignorant of security interest. Must pay value for the goods.Must pay value for the goods. Uses goods for personal, family or household use.Uses goods for personal, family or household use.

– By filing a financing statement covering By filing a financing statement covering consumer good before buyer purchases it, not consumer good before buyer purchases it, not bona fide purchaser, will have priority claim.bona fide purchaser, will have priority claim.



CONFLICTS BETWEEN CONFLICTS BETWEEN SECURITY INTERESTS AND SECURITY INTERESTS AND

LIENSLIENSJudicial Liens.Judicial Liens.

– Acquired by creditor in a judicial proceeding.Acquired by creditor in a judicial proceeding.– Equal to Security Interests.Equal to Security Interests.– Courts apply “first in time, first in right.”Courts apply “first in time, first in right.”

Statutory Liens. Statutory Liens. – Possessory or Non-Possessory.Possessory or Non-Possessory.– Tax liens.Tax liens.

Consensual Liens.Consensual Liens.



CONFLICTS BETWEEN SECURITY CONFLICTS BETWEEN SECURITY INTERESTS AND TRUSTEE IN INTERESTS AND TRUSTEE IN

BANKRUPTCYBANKRUPTCYSeveral things happen when debtor files for Several things happen when debtor files for

bankruptcy:bankruptcy:– Bankruptcy court enters order for relief and Bankruptcy court enters order for relief and

issues automatic stay.issues automatic stay.– Trustee manages the debtor’s estate (Chapter 7).Trustee manages the debtor’s estate (Chapter 7).– Trustee is treated as a judicial lien holder.Trustee is treated as a judicial lien holder.



ENFORCEMENT OF THE ENFORCEMENT OF THE SECURITY INTERESTSECURITY INTEREST

ENFORCEMENT OF THE ENFORCEMENT OF THE SECURITY INTERESTSECURITY INTEREST

Debtor Default: fails to meet obligations set Debtor Default: fails to meet obligations set out in security agreement.out in security agreement.

UCC allows secured party, upon debtor’s UCC allows secured party, upon debtor’s default, to take possession of collateral and default, to take possession of collateral and dispose of it in satisfaction of secured dispose of it in satisfaction of secured party’s claim.party’s claim.

UCC provides debtor with certain UCC provides debtor with certain protections.protections.



DEFAULTDEFAULTDEFAULTDEFAULT

UCC does not define default, parties UCC does not define default, parties provide definition in each security provide definition in each security agreement.agreement.

Common examples of default include:Common examples of default include:– Nonpayment of financial obligations.Nonpayment of financial obligations.

Acceleration clause: when default occurs, Acceleration clause: when default occurs, secured party may be allowed to declare secured party may be allowed to declare entire debt due and payable immediately.entire debt due and payable immediately.



NON-CODE REMEDIESNON-CODE REMEDIES

Non-UCC remedies, the secured party may: Non-UCC remedies, the secured party may: – Become a judgement creditor.Become a judgement creditor.– Garnish debtor’s wages.Garnish debtor’s wages.– Replevy the goods.Replevy the goods.

Code remedies include:Code remedies include:– Strict foreclosure; and/orStrict foreclosure; and/or– Resale of the collateral.Resale of the collateral.

Remedies are cumulative.Remedies are cumulative.



NON-CODE REMEDIESNON-CODE REMEDIESNON-CODE REMEDIESNON-CODE REMEDIES

Permit secured parties to file lawsuit to Permit secured parties to file lawsuit to foreclose on security interest in collateral.foreclose on security interest in collateral.

Secured party may obtain writ of execution Secured party may obtain writ of execution directing sheriff to recover and sell directing sheriff to recover and sell collateral.collateral.

Secured party can use judgment as basis for Secured party can use judgment as basis for garnishing debtor’s wages to satisfy debt.garnishing debtor’s wages to satisfy debt.



CODE REMEDIES: CODE REMEDIES: REPOSSESSIONREPOSSESSION

CODE REMEDIES: CODE REMEDIES: REPOSSESSIONREPOSSESSION

Secured party may repossess the collateral Secured party may repossess the collateral without obtaining a judicial procedure. without obtaining a judicial procedure.

Repossession by self-help must be done Repossession by self-help must be done without breach of the peace.without breach of the peace.

Repossession carries dangers if involves Repossession carries dangers if involves breach of peace:breach of peace:– Tort liability.Tort liability.– UCC liability.UCC liability.– Loss of right to a deficiency judgement.Loss of right to a deficiency judgement.



““REALIZING ON THE REALIZING ON THE COLLATERAL: COLLATERAL:

STRICT FORECLOSURESTRICT FORECLOSURE

““REALIZING ON THE REALIZING ON THE COLLATERAL: COLLATERAL:

STRICT FORECLOSURESTRICT FORECLOSUREFollowing default and repossession, secured Following default and repossession, secured

party generally has two options:party generally has two options:– Collateral sold with proceeds applied to the Collateral sold with proceeds applied to the

debt.debt.– Retain collateral in complete satisfaction of Retain collateral in complete satisfaction of

debt.debt.

Keeping collateral in satisfaction of secured Keeping collateral in satisfaction of secured debt called strict foreclosure.debt called strict foreclosure.



STRICT FORECLOSURESTRICT FORECLOSURESTRICT FORECLOSURESTRICT FORECLOSURE

Strict foreclosure beneficial because:Strict foreclosure beneficial because:– Value of collateral may be equal to amount of Value of collateral may be equal to amount of

debt.debt.– Court actions and expenses are avoided.Court actions and expenses are avoided.– No subsequent controversies about resale price No subsequent controversies about resale price

being fair.being fair.– UCC sets requirements for effecting strict UCC sets requirements for effecting strict

foreclosure.foreclosure.



STRICT FORECLOSURESTRICT FORECLOSURESTRICT FORECLOSURESTRICT FORECLOSURE

Keeping collateral in satisfaction of the debt Keeping collateral in satisfaction of the debt requires secured party to:requires secured party to:– Send written notice to debtor, unless debtor Send written notice to debtor, unless debtor

waived right to require sale of collateral.waived right to require sale of collateral.– Send written notice to other secured party who Send written notice to other secured party who

claimed an interest in the collateral.claimed an interest in the collateral.– Wait twenty one days for parties to respond Wait twenty one days for parties to respond

with objections.with objections.



STRICT FORECLOSURESTRICT FORECLOSURESTRICT FORECLOSURESTRICT FORECLOSUREStrict foreclosure not permitted in certain Strict foreclosure not permitted in certain

situations:situations:– When any party entitled to notice objects.When any party entitled to notice objects.– Debtor has paid at least 60% of cash price of Debtor has paid at least 60% of cash price of

purchase money security interest (PMSI) in purchase money security interest (PMSI) in consumer goods or at least 60% of the loan for consumer goods or at least 60% of the loan for all other security interests. all other security interests.

Sale of collateral required and seller fails to Sale of collateral required and seller fails to sell within 90 days, secured party liable for sell within 90 days, secured party liable for conversion or damages.conversion or damages.



DISPOSITION BY SALEDISPOSITION BY SALEDISPOSITION BY SALEDISPOSITION BY SALESecured creditor may choose to satisfy Secured creditor may choose to satisfy

debtor’s obligation by reselling, leasing, or debtor’s obligation by reselling, leasing, or disposing of the collateral.disposing of the collateral.

Secured parties use foreclosure by saleSecured parties use foreclosure by sale remedy more often than strict foreclosure.remedy more often than strict foreclosure.

Code’s provision for resale allows secured Code’s provision for resale allows secured party to realize highest resale price possible. party to realize highest resale price possible.

Reduces possibility of deficiency judgment.Reduces possibility of deficiency judgment.



DISPOSITION BY SALEDISPOSITION BY SALEDISPOSITION BY SALEDISPOSITION BY SALE

Sale may be private or public.Sale may be private or public.Sale must be conducted in commercially Sale must be conducted in commercially

reasonable manner.reasonable manner.Public sale or auction more ordinary Public sale or auction more ordinary

method.method.Code encourages private sale through Code encourages private sale through

commercial channels, which increase commercial channels, which increase chances for higher resale price.chances for higher resale price.




Notice.Notice.– Secured parties notify debtors of time and place Secured parties notify debtors of time and place

of public or private sale.of public or private sale.– The secured party must notify:The secured party must notify:

Debtor, unless debtor has waived notification or Debtor, unless debtor has waived notification or there is threat of immediate loss of collateral.there is threat of immediate loss of collateral.

Junior secured parties claiming an interest in non-Junior secured parties claiming an interest in non-consumer goods, provided they gave written notice consumer goods, provided they gave written notice of interest.of interest.




Commercially Reasonable Sale.Commercially Reasonable Sale.– Code states sale must be commercially Code states sale must be commercially

reasonable.reasonable.– Held in accordance with practices consistent for Held in accordance with practices consistent for

that type of collateral.that type of collateral.– Conducted in usual manner for a recognized Conducted in usual manner for a recognized

market.market.– Conducted pursuant to court order or approved Conducted pursuant to court order or approved

by a creditor’s committee.by a creditor’s committee.




Commercially Reasonable Sale.Commercially Reasonable Sale.– Failure to obtain better prices does not make a Failure to obtain better prices does not make a

sale commercially unreasonable.sale commercially unreasonable.– Following sale of collateral, creditor is entitled Following sale of collateral, creditor is entitled

to receive a deficiency judgment for the unpaid to receive a deficiency judgment for the unpaid balance of secured debt.balance of secured debt.



DISPOSITION BY SALEDISPOSITION BY SALE

Commercially Reasonable Sale.Commercially Reasonable Sale.– If sale is improperly carried out:If sale is improperly carried out:

Seller may be barred from recovering any Seller may be barred from recovering any deficiency or subject to other penalties under deficiency or subject to other penalties under the Code.the Code.

Permits secured party to recover the Permits secured party to recover the deficiency, but reduces from this amount the deficiency, but reduces from this amount the debtor’s damages.debtor’s damages.

Opts for a compromise between two views.Opts for a compromise between two views.




Proceeds.Proceeds.– According to UCC, secured party must apply According to UCC, secured party must apply

proceeds in this order:proceeds in this order: Payment of reasonable expenses of retaking and Payment of reasonable expenses of retaking and

disposing of collateral, including attorney’s fees. disposing of collateral, including attorney’s fees. Satisfaction of the debt owed to secured party.Satisfaction of the debt owed to secured party. Payment to eligible junior secured creditors.Payment to eligible junior secured creditors. Payment of any surplus is paid to the debtor.Payment of any surplus is paid to the debtor.



DEBTOR’S RIGHTSDEBTOR’S RIGHTSDEBTOR’S RIGHTSDEBTOR’S RIGHTS Debtor may redeem collateral at any time before Debtor may redeem collateral at any time before

the secured party has disposed of it. the secured party has disposed of it. Redemption consist of debtor’s tendering payment Redemption consist of debtor’s tendering payment

of all obligations, including:of all obligations, including:– Expenses incurred by secured party in retaking and Expenses incurred by secured party in retaking and

preparing the collateral for disposition.preparing the collateral for disposition.– Arranging for resale.Arranging for resale.– Extinguishing secured party’s security interest in the Extinguishing secured party’s security interest in the

collateral. collateral.



DEBTOR’S RIGHTSDEBTOR’S RIGHTS

Expenses may include attorneys’ fees and Expenses may include attorneys’ fees and legal expenses.legal expenses.

Waiver of redemption cannot occur in the Waiver of redemption cannot occur in the security agreement.security agreement.



SECURED PARTIES’ DUTIESSECURED PARTIES’ DUTIESSECURED PARTIES’ DUTIESSECURED PARTIES’ DUTIES

Take reasonable care of the collateral while Take reasonable care of the collateral while in their possession, before or after default.in their possession, before or after default.

Liable for any losses by failure to meet this Liable for any losses by failure to meet this obligation.obligation.

Do not lose security interest of loss occurs.Do not lose security interest of loss occurs.Secured party can charge debtor payment of Secured party can charge debtor payment of

reasonable expenses.reasonable expenses.



SECURED PARTIES’ DUTIESSECURED PARTIES’ DUTIES

Turn any surplus proceeds over to the Turn any surplus proceeds over to the debtor or apply to reduce secured debtor or apply to reduce secured obligation.obligation.

Keep collateral identifiable.Keep collateral identifiable.UCC Section 9-507 identifies the liability UCC Section 9-507 identifies the liability

that secured parties incur when their that secured parties incur when their noncompliance results in a loss to the noncompliance results in a loss to the debtor or junior secured creditors.debtor or junior secured creditors.

chapter 26 secured transactions: priorities and default davidson, knowles & forsythe business...

Documents

knowles forsythe business

west legal studies

purchase money secured

common law

default davidson

legal environment

chances of money

excess money