Chapter 38: Secured Transactions and Suretyship

Secured Transactions in Personal Property

ESSENTIALS OF SECURED TRANSACTIONSDefinition of Secured Transaction an agreement by which one party obtains a security interest in the personal property of another to secure the payment of a debt• Debtor person who has an interest in the collateral other than a security interest; typically the person

obligated on the debt secured by the security interest• Secured Party person in whose favor a security interest in the collateral is created or provided for under the

security agreement• Collateral property subject to a security interest• Security Agreement agreement that creates or provides for a security interest• Security Interest right in personal property that secures payment or performance of an obligation• Purchase Money Security Interest security interest in goods purchased; interest is retained either by the

seller of the goods or by a lender who advances the purchase priceFundamental Rights of Debtor• to redeem collateral by payment of the debt• to possess general rights of ownershipFundamental Rights of Secured Party• to recover amount of debt• to have collateral applied to payment of debt upon default

CLASSIFICATION OF COLLATERALGoods things that are movable when a security interest attaches• Consumer Goods goods bought or used primarily for personal, family, or household purposes• Farm Products goods that are part of a farming operation, including crops, livestock, or supplies used or

produced in farming• Inventory includes nonfarm product goods (1) held for sale, lease, or to be furnished under a service

contract, or (2) that consist of raw materials, work in process, or materials used or consumed in a business• Equipment goods not included in the definition of consumer goods, inventory, or farm products• Fixtures goods that are so related to real property that they are considered part of the real estate• Accession goods installed in or firmly affixed to personal propertyIndispensable Paper• Chattel Paper tangible or electronic record that evidences both a debt and a security interest in specific

goods• Instruments negotiable instruments or any other writing that evidences a right to payment of money that is

transferable by delivery with any necessary indorsement• Documents documents of title• Investment Property investment security (stocks and bonds), security accounts, commodity contracts, and

commodity accountsIntangibles• Account right to payment for (1) goods sold, leased, licensed, or otherwise disposed of or (2) services

rendered• General Intangibles catchall category of collateral not otherwise covered; includes software, goodwill,

literary rights, and interests in patents, trademarks, and copyrightsOther Kinds of Collateral• Proceeds whatever is received upon sale, lease, license, exchange, or other disposition of collateral; the

secured party, unless the security agreement states otherwise, has rights to the proceeds• Deposit Accounts a demand, savings, time, or similar account maintained with a bank

ATTACHMENTDefinition security interest that is enforceable against the debtor

Value consideration under contract law, a binding commitment to extend credit, or an antecedent debtDebtor’s Rights in Collateral a debtor is deemed to have rights in personal property the debtor owns, possesses, is in the process of acquiring, or has the power to transfer rights to a secured partySecurity Agreement agreement between debtor and creditor creating a security interest: must be in a record authenticated by the debtor, unless, as in the case of most types of collateral, the secured party has possession of the collateral, and must contain a reasonable description of the collateral• Authenticity Record• Consumer Goods federal regulation prohibits a credit seller or lender from obtaining a consumer’s grant of

a nonpossessory security interest in household goods• After-Acquired Property a security agreement may cover property the debtor may acquire in the future• Future Advances a security agreement may include future advances

PERFECTIONDefinition attachment plus any steps required for perfectionEffect enforceable against most third parties

METHODS OF PERFECTINGFiling a Financing Statement may be used for all collateral except deposit accounts, letter-of-credit rights, and money• Financing Statement document filed to provide notice of a security interest• Duration of Filing filing is effective for five years but may be continued by filing a continuation statement• Place of Filing statements, except for real-estate-related collateral, must be filed in a central location

designated by the state• Subsequent Change of Debtor’s LocationPossession by the secured party (a pledge); may be used for goods, instruments, money, negotiable documents, tangible chattel paper, or certificated securitiesAutomatic Perfection perfection upon attachment; applies to a purchase money security interest in consumer goods and isolated assignments of accountsTemporary Perfection a security interest in certificated securities, instruments, and negotiable documents is automatically perfected for twenty daysControl may be used to perfect a security interest in electronic chattel paper, investment property, nonconsumer deposit accounts, and letter-of-credit rights

PRIORITIES AMONG COMPETING INTERESTSSee Concept Review 38-3 for a summary of the priority rules

DEFAULTRepossession of Collateral the secured party may take possession of the collateral on default without judicial process if it can be done without a breach of the peaceSale of Collateral the secured party may sell, lease, license, or otherwise dispose of any collateralAcceptance of Collateral the secured party, unless the debtor objects, may retain the collateral in full or partial satisfaction of the obligation (with the exception of the compulsory disposition of some consumer goods)

Suretyship

NATURE AND FORMATIONDefinition of Surety a person who promises to answer for the payment of a debt or the performance of a duty owed to the creditor by the principal debtor upon the principal debtor’s failure to perform• Principal Debtor the party primarily liable on the obligation• Cosurety each of two or more sureties who are liable for the same debt of the principal debtor• Absolute Surety surety liable to a creditor immediately upon the default of a principal debtor• Conditional Guarantor of Collection surety liable to a creditor only after the creditor has exhausted the

legal remedies against the principal debtorTypes of Sureties• Party Assuming a Mortgage

• Fidelity Bonds• Performance Bonds• Official Bonds• Judicial BondsFormation the promise of the surety must satisfy all the elements of a contract and must also be in writing

RIGHTS OF SURETYExoneration the right of a surety to be relieved of his obligation to the creditor by having the principal debtor perform the obligationReimbursement the right of a surety who has paid the creditor to be repaid by the principal debtorSubrogation the right of a surety who has paid the creditor to assume all the rights the creditor has against the principal debtorContribution the right to payment from each cosurety of his proportionate share of the amount paid to the creditor

DEFENSES OF SURETY AND PRINCIPAL DEBTORPersonal Defenses of Principal Debtor defenses available only to the principal debtor, including her incapacity, discharge in bankruptcy, and setoffPersonal Defenses of Surety defenses available only to the surety, including her own incapacity, the statute of frauds, contract defenses to her suretyship undertaking, setoff, modification of the contract between the creditor and the principal debtor, and the creditor’s release of security or a cosuretyDefenses of Both Surety and Principal Debtor include contract defenses to the contract between the creditor and the principal debtor