cheeseman blaw8e ch27

25-1

Chapter 27

Secured Transactions and

E-Filing

Secured Transactions

Secured transaction: A transaction in which a creditor makes a loan to a debtor in exchange for the debtor’s pledge of personal property as security

Collateral: The property in which a security interest is taken

Personal property Tangible property – equipment, vehicles, furniture Intangible property – securities, patents,

trademarks

27-2Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.


Unsecured credit Creditor takes no interest in the collateral If debtor defaults, creditor must sue the debtor

Secured credit Purchaser pledges the collateral Creditor may recover the collateral in case of

default



Debtor: A person who has an ownership or other interest in the collateral and owes payment of a secured obligation

Secured Party: A person in whose favor a security interest is created or provided under a security agreement

Security Interest: An interest in the collateral, such as personal property or fixtures, which secures payment or performance of an obligation



Security Agreement: An agreement that creates or provides for a security interest

Collateral: Property subject to security interest, including accounts and chattel paper that have been sold

Financing Statement: Record relating to initial financing statement


Exhibit 27.2: Two-Party Secured Transaction


Exhibit 27.3: Three-PartySecured Transaction


Creating a Security Interest

Security agreement: A written document signed by a debtor that creates a security interest in personal property

To be valid, a security agreement must Clearly describe the collateral Contain the debtor’s promise to repay the creditor Set forth the creditor’s rights upon the debtor’s

default Be signed by the debtor



Attachment: A situation in which a creditor has an enforceable security interest against a debtor and can satisfy the debt out of the designated collateral Debtor must have current or future legal right in or

right to possession of collateral Once rights of secured party attach to the

collateral, the creditor has enforceable security interest in the property

Debt can be satisfied out of collateral, subject to priority rules



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

Floating lien can attach to: After-acquired property Sales proceeds Future advances



After-acquired property: Property that a debtor acquires after a security agreement is executed

Sale proceeds: The resulting assets from the sale, exchange, or disposal of collateral subject to a security agreement

Future advances: Funds advanced to a debtor from a line of credit secured by collateral


Perfecting a Security Interest

Perfection of a security interest: A process that establishes the right of a secured creditor against other creditors who claim an interest in the collateral

Methods Perfection by filing a financing statement Perfection by possession of collateral Perfection by a purchase money security interest in

consumer goods



Perfection by filing a financing statement Document filed by secured creditor with the

appropriate government office State law specifies where to file May be done electronically

Gives constructive notice of security interest in personal property

Effective for five years from the filing date Continuation Statement may be filed


Case 27.1: Filing a Financing Statement under an Individual’s Name

Case Pankratz Implement Company v. Citizens National

Bank 130 P.3d 57, Web 2006 Kan. Lexis 141 (2006) Supreme Court of Kansas

Issue Is Pankratz’s filing of the financing statement

under the wrong first name of the debtor seriously misleading?



Perfection by possession of the collateral: If a secured creditor has physical possession of the collateral, no financing statement has to be filed Other potential creditors are put on notice of the

creditor’s secured interest in the property Perfection by a purchase money security interest

in consumer goods: Creditor automatically obtains purchase money security interest when extending credit to consumer to purchase consumer 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 20 days after receipt of the debtor’s written

demand


Priority of Claims

Priority of claims: The order in which conflicting claims of creditors in the same collateral are solved Secured claims have priority over unsecured

claims Competing unperfected security interests: first to

attach has priority Perfected claims have priority over unperfected

claims Competing perfected security interests: first to

perfect has priority


Priority of Claims

Buyer in the ordinary course of business: A person who in good faith and without knowledge of another’s ownership or security interest in goods buys the goods in the ordinary course of business from a person in the business of selling goods of that kind


Default and Remedies

Default is constituted by

Failure to make scheduled payments when due

Bankruptcy of the debtor

Breach of the warranty of ownership as to the collateral

Other events defined by the parties in a security agreement



Remedies for default:

Take possession of the collateral

Retention of collateral

Disposal of the goods

Written objection Consumer goods

Disposition of collateral

Deficiency judgment



Redemption rights Relinquishing the security interest and proceeding to

judgment on the underlying debt Artisan’s lien: A statutory lien given to workers on

personal property to which they furnish services or materials in the ordinary course of business


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