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Chapter 20 Secured Transactions

Chapter 20 Secured Transactions. Learning Objectives. What is a security interest? Who is a secured party? What is a security agreement? What is a financing statement? What three requirements must be met to create an enforceable security interest?

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Chapter 20 Secured Transactions

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  1. Chapter 20Secured Transactions

  2. Learning Objectives • What is a security interest? Who is a secured party? What is a security agreement? What is a financing statement? • What three requirements must be met to create an enforceable security interest? • What is the most common method of perfecting security interest under Article 9? • 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? • What rights does secured creditor have on the debtor’s default?

  3. Terminology • Secured Party: creditor who has a security interest in debtor’s collateral. • Debtor: person who owes payment of a secured obligation. • Security Interest: interest in the collateral that secures the performance. • Security Agreement: agreement that creates or provides for a security interest. • Collateral: subject of the security interest. • Financing Statement: normally filed with public notice to third parties.

  4. Creating and Perfecting A Security Interest • Creating a Security Interest. • Collateral in possession of Creditor or there must be a written agreement describing the collateral signed by Debtor. • Creditor must give something of value to Debtor. • Debtor must have “rights” in collateral. • Once these requirements are met, the creditor’s rights “ATTACH” to the collateral, giving the creditor an enforceable security interest.

  5. Collateral • Collateral is generally divided into two categories: tangible and intangible. • Tangible: Consumer goods, equipment, farm products, inventory, accessions. • Intangible:Chattel Paper, Instruments, Accounts, Deposit Accounts, General Intangibles.

  6. Perfecting a Security Interest • Perfection is the legal process by which the secured party protects herself from third party claims against the same collateral. • Perfection by Filing a Financing Statement. • CASE 20.1Cabool State Bank v. Radio Shack, Inc. (2002). • Perfection Without Filing. • Collateral is in the possession of the Secured Party. • Purchase Money Security Interest (PMSI--financing). • Changes in Debtor’s Name.

  7. Scope of Security Interest • Proceeds: whatever received when collateral sold or disposed of. • After-Acquired Property. • Security Agreement may provide for a security interest in property acquired after execution of security agreement. • Future Advances. • Continuing line of credit. • Subject to security interest.

  8. Scope of Security Interest • Floating Liens • Security interest in proceeds in after-acquired property, or • Collateral subject to future advances.

  9. Priorities • General Rule is that a secured party’s interest has priority over the following: • Unsecured creditor. • Unperfected secured party. • Subsequent lien creditor. • Trustee in bankruptcy. • Buyers who do not purchase collateral in the course of Seller’s business.

  10. Priorities • Buyers of the Collateral. • Conflicts with Perfected Secured Party. • Buyers in the Ordinary Course of Business. • Buyers not in the Ordinary Course of Business of Consumer Goods. • Buyers of Chattel Paper. • Buyers of Instruments, documents or securities. • Buyers of Farm Products. • Generally, Buyers in the ordinary course of business take goods free from security interest.

  11. Priorities • Creditors or Secured Parties. • Conflicting Perfected Security Interests: First to Perfect has Priority. • Conflicting Unperfected Security Interests: First to Attach has Priority. • Conflicting Perfected Security Interests in Commingled or Processed Goods. • First-in-Time Rule. • Exceptions. CASE 20.2In re Rebel Rents, Inc. (2004).

  12. Rights and Duties of Debtors and Creditors • Information Requests. • Release, Assignment and Amendment. • Secured party can release all or part of the interest. • Secured party can assign all or part of the interest. • Parties can agree to amend the financing statement. • Termination. • When Debtor has fully paid the debt, secured party must release security interest and file a termination statement.

  13. Basic Remedies • Not defined by Article 9. Defined in the security agreement. • If Debtor in default, Secured Party can: • Relinquish a security interest and use any judicial proceeding on the underlying debt (execution and levy). • Take peaceful or judicial possession of the collateral.

  14. Basic Remedies • Disposition of Collateral: Retention of Collateral by Secured Party (unless PMSI and debtor paid 60% or more). • Notice Required. If objection, then Secured Party must sell property. • CASE 20.3Banks Brothers Corp. v. Donovan Floors, Inc. (2000).

  15. Basic Remedies • Disposition Procedures: • Commercially reasonable manner. • Public sale with notice. • Distribution of Proceeds • Expenses balance of debt junior liens then balance to secured party.

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