chapter 34 secured transactions in personal property twomey, business law and the regulatory...

Chapter 34Chapter 34

Secured Transactions in Personal Secured Transactions in Personal PropertyProperty

Chapter 34Chapter 34

Secured Transactions in Personal Secured Transactions in Personal PropertyProperty

Twomey, Business Law and the Regulatory Environment (14th Ed.)

(c) 2000 West Legal Studies Chapter 34 2

Creation of Security InterestsCreation of Security Interests [34-1][34-1]Creation of Security InterestsCreation of Security Interests [34-1][34-1]

Writing

Signed by Debtor

Intent to Create Security Interest

Description of Collateral

(Oral OK if Creditor in Possession)

ValueContemporaneous Exchange

Creditor Previously Gave Loan

Debtor’s Interest in Collateral


Four Classes of Tangible Four Classes of Tangible CollateralCollateral [34-2][34-2]

Used or bought primarilyfor personal, family, or household use

Used or bought primarilyfor business use

Inventory

Consumer Goods Equipment

Farm Products

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

Crops or livestock, or supplies used or produced in farming


Perfection of Security Interests Perfection of Security Interests [34-3][34-3]Perfection of Security Interests Perfection of Security Interests [34-3][34-3]

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

WhereDepends on Type of Collateral

Local vs. Central

Fixtures

ConsumersFarm

Equipment

Inventory


Priorities of Conflicting InterestsPriorities of Conflicting Interests [34-4][34-4]Priorities of Conflicting InterestsPriorities of Conflicting Interests [34-4][34-4]Conflict Priority

Secured Party vs.Unsecured Party

Secured Party

Secured Party vs.Secured Party

First to Attach (Pro Rata in BankruptcyFollowing Sale of Collateral)

Perfected Secured Party vs.Secured Party

Perfected Secured Party

Perfected Secured Party vs.Perfected Secured Party

First to Perfect*

*Exceptions

PMSI in Inventory Notification before deliveryLater perfected party takes priority

PMSI Equipment Notification within 10 daysLater perfected party takes priority

Fixtures Perfection within 10 days of affixation giveslater creditor priority

Purchases See 34-4


Buyer in the Ordinary Course of Business

PerfectedSecured

Party

UnperfectedSecured

Party

Buyer Buyer

Buyer Not in the Ordinary Course

PMSI Consumer Unperfected

Buyer(Unless Creditor

Filed)

Buyer

Perfected

Creditor

Priority Between Buyers and Priority Between Buyers and Secured PartiesSecured Parties [34-5][34-5]

Priority Between Buyers and Priority Between Buyers and Secured PartiesSecured Parties [34-5][34-5]


Proceeds from Sale of Collateral Proceeds from Sale of Collateral [34-6][34-6]

PublicSale

PrivateSale

Lease to Third Party

First, to pay the expenses of thesecured party in connection

with the default

Second, to pay the debtowed the secured party

Third, to paydebts owed

other securedparties

Fourth, to payany balance

to debtor

Upon debtor’s default, creditor may sell collateral.


Priority of Secured Interest under Article 9Priority of Secured Interest under Article 9Conflict Priority

Secured Party vs. Secured Party

Unsecured Party vs. Secured Party

Perfected Secured Party vs. Secured Party

Perfected Secured Party vs. Perfected Secured Party

Perfected Secured Party vs. Lienor

Exceptions

PMSI in Fixtures vs. Perfected Secured Party

PMSI in Equipment vs. Perfected Secured Party

PMSI in Inventory vs. Perfected Secured Party

PMSI in Consumer Goods vs. Buyer

Perfected Security Party vs. Buyer

First to attach

Secured party

Perfected secured party

Party who is first to perfect

Party who filed (financing statement or lien first) [9-307(2)]

PMSI creditor if perfected before annexation or within ten days after annexation (PMSI will have priority even over prior perfected secured party

PMSI is perfected within ten days after delivery[9-301(1)(d)]

PMSSI is perfected before delivery and if perfected secured party given notice before delivery [9-302(1)(d)]Buyer unless perfection is by filing beforepurchase [9-302(1)(d)]

Buyer in ordinary course wins even with knowledge [9-306(1)(d)]


Priorities in Transfer of Priorities in Transfer of Collateral by StateCollateral by State

Priorities in Transfer of Priorities in Transfer of Collateral by StateCollateral by State

Buyer vs. Secured Creditor

Buyer in Ordinary

Course

Buyer Not in Ordinary

Course

Perfected SecuredCreditor

UnperfectedSecured Creditor

PerfectedSecured Creditor

Buyer(Assuming no knowledge of

security interest)

Buyer HasPriority

CreditorHas Priority

(except consumer PMSI

creditor,buyer has priority)

UnperfectedSecured Creditor


Chapter 34 SummaryChapter 34 SummaryChapter 34 SummaryChapter 34 Summary

A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. The property that is subject to the interest is called the collateral, and the party holding the interest is called the secured party. Attachment is the creation of a security interest. To secure protection against third parties’ claims to the collateral, the secured party must perfect the security interest.


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

Chapter 34 Summary Chapter 34 Summary [2][2]Chapter 34 Summary Chapter 34 Summary [2][2]


Perfection of a security interest is not required for its validity, but it does provide the creditor with certain superior rights and priorities over other types of creditors and creditors with an interest in the same collateral. Perfection can be obtained through possession; filing; automatically, as in the case of a PMSI in consumer goods; or temporarily, when statutory protections are provided for creditors for limited periods of time.



Priority among creditors is determined according to their status. Unperfected, unsecured creditors simply wait to see if there will be sufficient assets remaining after priority creditors are paid. Secured creditors have the right to take the collateral on a priority basis. As between secured creditors, the first creditor’s interest to attach takes priority in the event the creditors hold security interests in the same collateral.



A perfected secured creditor takes priority over an unperfected secured creditor. Perfected secured creditors with interests in the same collateral take priority generally on a first-to-perfect basis. Exceptions include PMSI inventory creditors who file a financing statement before delivery and notify all existing creditors, and equipment creditors who perfect within ten days of attachment of their interests.



A buyer in the ordinary course of business always takes priority even over perfected secured creditors who have knowledge of the creditor’s interest. A buyer not in the ordinary course of business will lose out to a perfected secured creditor but will extinguish the rights of a secured creditor unless the buyer had knowledge of the security interest.



A buyer from a consumer–debtor takes free and clear of the debtor’s creditor’s perfected security interest unless the creditor has filed a financing statement and perfected beyond just the automatic PMSI consumer goods perfection.



Upon default, a secured party may repossess the collateral from the buyer if this can be done without a breach of the peace. If a breach of the peace might occur, the secured party must use court action to regain the collateral.



If the buyer has paid 60 percent or more of the cash price of the consumer goods, the seller must resell them within 90 days after repossession unless the buyer, after default, has waived this right in writing. Notice to the debtor of the sale of the collateral is usually required. A debtor may redeem the collateral prior to the time the secured party disposes of it or contracts to resell it.


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