chapter 1: legal ethics 1. © 2013 cengage learning. all rights reserved. may not be copied,...

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Chapter 1: Legal EthicsCHAPTER 18: SECURITY

INTERESTSIN PERSONAL PROPERTY

2© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives

1. What is a security interest? Who is a secured party? What is a security agreement? What is a financing statement?

2. What three requirements must be met to create an enforceable security interest?


Learning Objectives

3. What is the most common method of perfecting security interest under Article 9?

4. If two secured parties have perfected security interests in the collateral of the debtor, which party has priority to the collateral on the debtor’s default?

5. What rights does a secured creditor have on the debtor’s default?


Introduction

UCC Article 9 governs transactions when personal property is put up as collateral for debt, including:–Accounts, agricultural liens, chattel

paper (writings evidencing a debt), commercial assignments over $1000, fixtures, instruments and other intangible property.


Terminology of Secured Transactions

Secured Party. Debtor. Security Interest. Security Agreement. Collateral. Financing Statement: UCC-1 form.


Exhibit 18-1 Secured Transactions


Creating a Security Interest

To become a secured party, a creditor must “attach” a security interest in collateral of debtor.

Three requirements to “attach”: –1. Either: oral agreement and

possession or a written agreement.–2. Secured creditor give debtor value.–3. Debtor has rights in the collateral.



Written or Authenticated Security Agreement. –When collateral is not in possession of

secured party, security agreement must be written or authenticated, reasonably describe collateral, and be signed by debtor.



Secured Party Must Give Value.–Creditor gives any consideration that

would support a simple contract.–Creditor already gave consideration

(antecedent debt).



Debtor Must Have Rights in the Collateral.–Debtor must have some interest (but

not necessarily ownership) in the collateral, or right to obtain possession.–Rights can either be future or current

legal interests.


Perfecting a Security Interest

Debtors often put the same property up as collateral to several different creditors.

Who gets the collateral if the debtor becomes insolvent? General rule: the first creditor to perfect the security interest gets the collateral.



Perfection by Filing a financing statement.

Perfection Without Filing Financing Statement.



Perfection by Filing.–The Debtor’s (Legal) Name and Address.• Specific Types of Debtors: corporate names

must be on the “public record” on file with government in debtor’s jurisdiction.• Trade Names: generally not sufficient for a

financing statement.



Perfection by Filing.–The Debtor’s (Legal) Name and Address.• Changes in the Debtor’s Name.• Description of the Collateral: provides

sufficient notice to public.•Where to File: central state government

office (usually secretary of state).–County Filing: only with timber, fixtures, or

items to be extracted (oil, gas, minerals).



Perfection by Filing.–The Debtor’s (Legal) Name and Address.•Where to File. Consequences of an Improper

Filing. Any improper filing renders the secured party’s interest unperfected, to an unsecured interest in bankruptcy.–CASE 18.1 IN RE CAMTECH PRECISION

MANUFACTURING, INC. (2011). What mistake did Regions Bank make in its filings?



Perfection Without Filing.–Security interests can be perfected

without filing a financing statement:•When collateral is transferred into

possession of secured party.•When security interest can be “perfected on

attachment” (PMSI in consumer goods, and assignment of beneficial interest).



Perfection Without Filing.–Perfection by Possession: common law

“pledge” in Art. 9; security instrument does not need to be in writing if collateral in creditor’s possession.–Perfection by Attachment: most

common is purchase money security interest in consumer goods.



Perfection Without Filing.–Perfection by Attachment.• Automatic Perfection: at the time of sale

of goods.• Exceptions to Automatic Perfection: (1)

certain types of security interests subject to federal or state laws, and (2) PMSI’s in non-consumer goods (business inventory or livestock).



Effective Time Duration of Perfection.–Financing statement is effective for five

(5) years.–If continuation statement is filed within

six (6)months prior to expiration, original statement is extended an additional five years.


The Scope of a Security Interest

Proceeds: cash or property received when collateral is sold or disposed of in some other way.–Gives creditor a security interest in the

proceeds from sale of that collateral. –Perfects automatically and remains

perfected for 20 days after debtor receives the proceeds.



Proceeds (cont’d). –Extension of 20 days can be provided for

in the financing agreement. –UCC also permits identifiable cash

proceeds to be perfected after 20 days.



After-Acquired Property: property debtor acquires after execution of security agreement. –When debtor buys new inventory,

security agreement has an ‘after –acquired’ clause that gives secured party a security interest in new collateral.



Future Advances.–Used in establishing a “line of credit.”• Creditor wants to lend money in the future

that will be secured by the same collateral as debtor puts up for first loan, called cross-collateralization.



Floating Lien Concept.–Concept: security interest in proceeds,

after-acquired property, or in collateral subject to future advances. –Floating Lien in Inventory: lien “floats”

over the changing inventory.–Floating Lien in Shifting Stock of Goods:

raw materials to finished goods.


Creditor Interest PrioritySecured vs. unsecured creditors Secured wins

Perfected secured vs. unperfected secured creditor

First in time wins

Secured creditor vs. secured creditor

First in time wins

Buyer not in the ordinary course of the Seller’s business

BNIOCB loses

Buyer in the ordinary course of the Seller’s business

BIOCB wins

Priorities


Priorities

General Rules of Priority. When more than one creditor claims rights in collateral:–Perfected security interest has priority

over unsecured creditors and interests.–Conflicting unperfected security interests:

generally first in filing has priority.


Priorities

General Rule: (cont’d).–Conflicting unperfected security

interests: first to attach has priority. –CASE 18.2 CITIZENS NATIONAL BANK

OF JESSAMINE COUNTY V. WASHINGTON MUTUAL BANK (2010). Which of the two security interests in the land had priority?


Priorities

Exceptions to the General Rule.–Buyers in the Ordinary Course of

Business.• Buyer in good faith and without

knowledge of defects.• Takes goods free of security interest.

–PMSI in Goods Other Than Inventory and Livestock.


Priorities

Exceptions to the General Rule.–PMSI In Inventory. • Perfected interest in inventory has priority

over conflicting interest.–Buyers of the Collateral.• Buyers in the Ordinary Course of Business.• Buyers of Farm Products, Instruments,

Documents, or Securities.


Rights and Duties of Debtors and Creditors• Information Requests.• Release, Assignment, and Amendment.• Confirmation or Accounting Request by

Debtor.– Debtor entitled to one request every six months

without charge.


Rights and Duties of Debtors and Creditors• Termination Statement.– All creditors must file.– For consumer debts, must file within one month or

when request in writing, must file within 10 days of receipt of request, whichever is earliest.

– For all other written requests - within 10 days of receipt.


Default

Basic Remedies.–Repossession of the Collateral—Self

Help Remedy. –Judicial Remedies: creditor can give up

security interest and sue to get judgment, then execute or levy.


Default

Disposition of the Collateral.–Retention of Collateral by the Secured

Party: unless consumer goods and buyer has paid 60% as PMSI. Secured party must give timely notice to buyer and any junior lienholder.


Default

Disposition of the Collateral.–Consumer Goods: if PMSI and buyer has

paid 60%, secured party must sell or dispose of property within 90 days.–Disposition Procedures: UCC allows

great flexibility.


Default

Disposition of the Collateral.–Secured party may sell, lease, license or

otherwise dispose of any collateral.–Can be disposed at public or private

sale, as long as the process is commercially reasonable. –Secured party can purchase the

collateral.


Default

Disposition Procedures.–Price is only one aspect of a

‘commercially reasonable manner’ of disposition.–CASE 18.3 HICKLIN V. ONYX

ACCEPTANCE CORP. (2009). What other factors besides price did the court look for to show commercially reasonable manner?


Default

Disposition Procedures.–Proceeds from Disposition.• Reasonable expenses incurred by secured

party.• Balance of debt owed to secured party.• Junior Lienholders.• Surplus to Debtor.


Default

Disposition Procedures.–Noncash Proceeds.–Deficiency Judgment: difference

between sale and what is actually owing by debtor.–Redemption Rights: debtor or other

secured party to retake and maintain the collateral.

chapter 1: legal ethics 1. © 2013 cengage learning. all rights reserved. may not be copied,...

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learning objectives