slides developed by les wiletzky wiletzky and associates copyright © 2006 by pearson prentice-hall....

Slides developed byLes WiletzkyWiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved.

PowerPoint Slides to AccompanyCONTEMPORARY BUSINESS

ANDONLINE COMMERCE LAW

5th Editionby Henry R. Cheeseman

Chapter 22Credit, Secured Transactions, and Surety Agreements

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 22 - 2

Introduction

The American economy is a credit economy

Businesses and individuals use credit to purchase many goods and services

DebtorDebtor – The borrowerborrower in a credit transaction

CreditorCreditor – The lenderlender in a credit transaction


Unsecured Credit

Credit that does not require any security (collateral) to protect the payment of the debt

The creditor relies on the debtor’s promise to repay the principal (plus an interest) when it is due

The creditor may bring legal action if the debtor fails to make the payments


Secured Credit

Credit that requires security (collateral) that secures payment of the loan

Security interests may be taken in real, personal, intangible, and other property

The collateral may be repossessed to recover the outstanding amount if the debtor fails to make payment


Mortgage

A collateral arrangement where a property owner borrows money from a creditor who uses a deed as collateral for repayment of the loan

MortgagorMortgagor – The owner-debtor in a mortgage transaction

MortgageeMortgagee – The creditor in a mortgage transaction


Parties to a Mortgage

Loan of FundsLoan of Funds

Security Interest in Security Interest in Real PropertyReal Property

Owner-Debtor Owner-Debtor Mortgagor Mortgagor (Borrower)(Borrower)

Creditor Mortgagee Creditor Mortgagee (Lender)(Lender)MORTGAGEMORTGAGE


Notes and Deeds of Trust

NoteNote – An instrument that evidences the borrower’s debt to the lender

Deed of TrustDeed of Trust – An instrument that gives the creditor a security interest in the debtor’s property that is pledged as collateral


Parties to a Note and Deed of Trust

Loan of FundsLoan of Funds

Security Interest in Security Interest in Real PropertyReal Property

Owner-Debtor Owner-Debtor Trustor Trustor

(Borrower)(Borrower)

Creditor Creditor Beneficiary Beneficiary

(Lender)(Lender)

TrusteeTrustee

Legal Legal TitleTitle

If default, can If default, can perfect rightsperfect rights


Recording Statute

A statute that requires the mortgage or deed of trust to be recorded in the county recorder’s office of the county in which the real property is located

This record gives potential lenders or purchasers of real property the ability to determine whether there are any existing liens (mortgages) on the property


Foreclosure

Legal procedure by which a secured creditor causes the judicial sale of the secured real estate to pay a defaulted loan

All states permit foreclosure salesforeclosure sales

Most states permit foreclosure by power power of saleof sale


Deficiency Judgment

Some states permit the mortgagee to bring a separate legal action to recover a deficiency from the mortgagor

If the mortgagee is successful, the court will award a deficiency judgmentdeficiency judgment entitles the mortgagee to recover the amount

of the judgment from the mortgagor’s property


Right of Redemption

A right that says the mortgagor has the right to redeem real property after default and before foreclosure

Requires the mortgagor to pay the full amount of the debt incurred by the mortgagee because of the mortgagor’s default


Material Person’s Lien

A contractor’s and laborer’s lien that

makes the real property to which

improvements are being made become

security for the payment of the services

and materials for those improvements


Secured TransactionSecured Transaction

A transaction that is created when A transaction that is created when a creditor makes a loan to a a creditor makes a loan to a debtor in exchange for the debtor in exchange for the debtor’s pledge of personal debtor’s pledge of personal property as security.property as security.


Article 9 of the UCC – Security Interests in Personal Property An article of the Uniform Commercial

Code (UCC) that governs secured transactions in personal property

Article 9Article 9 has been adopted by all states except Louisiana

Although there may be some variance among states, most of the basics of Article 9Article 9 are the same


Two-Party Secured Transaction

Sale of Goods on Sale of Goods on CreditCredit

Secured Interest in Secured Interest in the Goodsthe Goods

Buyer-DebtorBuyer-DebtorSeller-Lender Seller-Lender

Secured CreditorSecured Creditor


Three-Party Secured Transaction

Sale of GoodsSale of GoodsBuyer-DebtorBuyer-Debtor SellerSeller

Lender-Secured Lender-Secured CreditorCreditor

Security Security Interest in the Interest in the GoodsGoods

Loan of Loan of FundsFunds


Personal Property Subject to a Security Agreement A security interest may be given in various

types of personal property, including:1. goods

2. instruments

3. chattel paper

4. documents of title

5. accounts

6. general intangibles


Creating a Security Interest in Personal Property

Security Agreement:Security Agreement: the agreement between the debtor and the secured party that creates or provides a security interest

Unless the creditor has possession of the collateral, the security agreement must be in writing

Attachment:Attachment: the creditor has an enforceable security interest against the debtor and can satisfy the debt out of the designated collateral

Security Agreement:Security Agreement: the agreement between the debtor and the secured party that creates or provides a security interest

Unless the creditor has possession of the collateral, the security agreement must be in writing

Attachment:Attachment: the creditor has an enforceable security interest against the debtor and can satisfy the debt out of the designated collateral


The Floating-Lien Concept

A security interest in property that was not in possession of the debtor when the security agreement was executed

A floating lien can attach to: After-acquired property Sale proceeds Future advances


Perfection of a Security Interest Establishes the right of a secured

creditor against other creditors who claim an interest in the collateral

Perfection is a legal process The three main methods of perfecting a

security interest under the UCC are:1. Perfection by filing a financing statement2. Perfection by possession of collateral3. Perfection by a purchase monetary security interest in

consumer goods


Summary: Methods for Perfecting a Security InterestPerfection Method How Created

Financing statement Creditor files a financing statement with the appropriate government office.

Possession of collateral

Creditor obtains physical possession of the collateral.

Purchase money security interest

Creditor extends credit to a debtor to purchase consumer goods and obtains a security interest in the goods.


Termination Statement

A document filed by a secured party that ends a secured interest because the debt has been paid

Must be filed within one month after the debt is paid or 10 days after receipt of the debtor’s written demand (whichever occurs first)


Priority of Claims

PriorityPriority – The order in which conflicting claims of creditors in the same collateral are solved

The priority of claims is determined according to:

1. Whether the claim is unsecured or secured

2. The time at which secured claims were attached or perfected


Exceptions to the Perfection-Priority Rule Purchase money security interest:

inventory as collateral

Purchase money security interest: non-inventory as collateral

Buyers in the ordinary course of business

Secondhand consumer goods


Artisan’s and Mechanic’s Liens If a worker in the ordinary course of

business furnishes services or materials to someone with respect to goods and receives a lien on the goods by statute or rule of law, this artisan’sartisan’s or mechanic’s mechanic’s lienlien prevails over all other security interests in the goods unless a statutory statutory lienlien provides otherwise [UCC 9-310]


DefaultDefault

Failure to make scheduled Failure to make scheduled payments when due, bankruptcy of payments when due, bankruptcy of the debtor, breach of the warranty the debtor, breach of the warranty of ownership as to collateral, and of ownership as to collateral, and other events defined by the parties other events defined by the parties to constitute default [UCC 9-501(1)].to constitute default [UCC 9-501(1)].


UCC Remedies for Default

Upon default by the debtor, the secured party may reduce his or her claim to judgment, foreclosure, or otherwise enforce his or her security interest by any available judicial procedure: Repossession Retention of collateral Disposition of collateral Proceeds from disposition Deficiency judgment Redemption rights

Upon default by the debtor, the secured party may reduce his or her claim to judgment, foreclosure, or otherwise enforce his or her security interest by any available judicial procedure: Repossession Retention of collateral Disposition of collateral Proceeds from disposition Deficiency judgment Redemption rights


Surety Arrangement

An arrangement where a third party promises to be primarilyprimarily liable with the borrower for the payment of the borrower’s debt

SuretySurety – The third person who agrees to be liable in a surety arrangement


Guaranty Arrangement

An arrangement where a third party promises to be secondarily liablesecondarily liable for the payment of another’s debt

GuarantorGuarantor – The third person who agrees to be liable in a guaranty arrangement


Summary: Liability of Sureties and Guarantors ComparedType of Arrangement

Party Liability

Surety Contract Surety Primarily liable.The surety is a co-debtor who is liable to pay the debt when it is due.

Guaranty Contract Guarantor Secondarily liable.The guarantor is liable to pay the debt if the debtor defaults and does not pay the debt when it is due.


Collection Remedies (1 of 2)

When a debt is past due, the creditor may bring a legal action against the debtor

If the creditor is successful, the court will award a judgment against the debtor

The judgment will state that the debtor owes the creditor a specific sum of money: Principal and interest past due on the debt, Other costs resulting from the debtor’s default, and Court costs


Collection Remedies (2 of 2)

The most common collection remedies are:

1. Attachment

2. Execution

3. Garnishment

slides developed by les wiletzky wiletzky and associates copyright © 2006 by pearson prentice-hall....

Documents

property slide

collateral slide

credit transaction slide

perfect rights slide

mortgage transaction

secured creditor

payment slide

unsecured credit credit