Chapter 30: Secured Transactions Flashcards
Secured transaction
when debtor agrees to pay back creditor by pledging property as collateral
Secured party
any creditor who has a security interest in the debtor’s collateral
security interest
interest in the collateral
security agreement
agreement that creates or provides a security interest in collateral; evidence of the security interest.
Financing statement
instrument filed to give public notice to third parties of secured party’s security interest.
attachment
When the security interest (collateral) becomes enforceable against the debtor
perfection
Legal process by which a secured party protects its security interest in the collateral against claims of third parties who want the same collateral.
Requirements for creation of a security interest
1) Unless creditor has possession of the collateral, there must be a written or authenticated security agreement that clearly describes the collateral and is signed by the debtor
2) Secured party must give debtor something of value
3) Debtor must have rights in the collateral
What must be filed to obtain perfection of a security interest?
Financing statement
Requirements of a financing statement
1) signature of debtor
2) names of debtor and secured party
3) description of the collateral
Where is a financing statement filed?
where the debtor is located (state).
Exception: if the collateral is timber or items to be extracted from land, must be filed in county where collateral is located.
How long is a financing statement effective
5 years from date of filing, can be renewed with a continuation statement within 6 months of expiration.
Perfection without filing
1) when creditor has possession of collateral
2) when security interest is applied upon attachment. PMSI; automatic at time of credit sale
PMSI
When a person buys goods for personal use and seller agrees to extend credit to the buyer for part or all of the goods.
PMSI exception
Cars, trailers, mobile homes, and farm tractors, to be perfected, the secured party must file a certificate of title with state office.
Proceeds
cash or property received when collateral is sold. A security interest in collateral simultaneously and automatically guarantees the same interest in the proceeds.
After acquired property
bank loans 50k, bank gets security interest in inventory and proceeds. If I use the 50k to buy more inventory, bank automatically gets security interest in the new inventory.
Future advances
debtor can arrange to have a continuing line of credit with bank to borrow funds when needed
Floating lien
When debtor borrows money to buy raw materials to create a product, bank gets security interest in the created product.
Resolving priority disputes basic rule
If multiple creditors have perfected interest in the same collateral, whoever perfected first has priority.
Exceptions to the basic rule regarding resolving priority disputes
1) Buyers in the ordinary course of business
2) Buyer buys consumer goods from another consumer
3) perfected PMSI in non-inventory collateral
4) Perfected PMSI in inventory
Buyers in the ordinary course of business (BIOCB)
A person who in good faith buys goods from a merchant. BIOCB will have priority to the goods it purchases, over a secured party, even if security interest is perfected and if the buyer knows of its existence. Does not apply to gifts, non-inventory, non-merchant.
Buyer buys consumer goods from another consumer
Buyer takes goods from the debtor free of PMSI if:
1)Buyer does not have knowledge of security interest
2) gives value for the collateral
3) purchases for personal use
4) secured party didn’t file a financing statement.
Perfected PMSI in non-inventory collateral
Has priority over other secured creditors if the perfected PMSI is done within 20 days after debtor takes possession of collateral.
Perfected PMSI in inventory
has priority over a conflicting security interest in the same inventory. To maintain priority, PMSI secured party must give written notice to non-PMSI party before debtor takes possession of inventory.
Termination statement
when debt is paid, secured party must send to the debtor or file a termination statement.
1) if consumer goods, termination is required
2) if non-consumer goods, not required unless debtor requests.
Obtaining collateral after default
1) Secured party can take peaceful possession of collateral without having to file a lawsuit.
2) Can file a lawsuit, obtain a judgement, have judgement enforced by execution and levy
peaceful possession
secured party cannot enter debtor’s home, garage, or place of business without permission
Execution
Implementation of court’s decree or judgement
Levy
Legal process of obtaining property through seizure and sale of non-exempt property.
Retaining collateral rules
1) can retain unless it consists of consumer goods, and debtor has paid 60% or more
2) secured party must notify debtor of its proposal to retain
3) if collateral is non-consumer goods, secured party must notify other junior lienholders who hold security interest.
4) if secured party receives written objection within 20 days of notice, must sell collateral.
Selling collateral rules
1) must be in a reasonable manner
2) secured party must notify debtor of upcoming sale
3) notification not required if collateral is perishable, rapidly depreciable, or is sold on a recognized market.
Order of where proceeds go
1) reasonable expenses incurred by secured party
2) balance of debt owed to secured party
3) junior lienholders who gave written notification
4) surplus to debtor
deficiency judgement
If after sale of collateral, debt isn’t covered, secured party can sue debtor for remainder.
