chapter 1: legal ethics 1. © 2013 cengage learning. all rights reserved. may not be copied,...
TRANSCRIPT
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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?
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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?
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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.
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Terminology of Secured Transactions
Secured Party. Debtor. Security Interest. Security Agreement. Collateral. Financing Statement: UCC-1 form.
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Exhibit 18-1 Secured Transactions
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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.
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Creating a Security Interest
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.
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Creating a Security Interest
Secured Party Must Give Value.–Creditor gives any consideration that
would support a simple contract.–Creditor already gave consideration
(antecedent debt).
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Creating a Security Interest
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.
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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.
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Perfecting a Security Interest
Perfection by Filing a financing statement.
Perfection Without Filing Financing Statement.
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Perfecting a Security Interest
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.
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Perfecting a Security Interest
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).
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Perfecting a Security Interest
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?
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Perfecting a Security Interest
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).
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Perfecting a Security 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.
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Perfecting a Security Interest
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).
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Perfecting a Security Interest
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.
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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.
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The Scope of a Security Interest
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.
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The Scope of a Security Interest
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.
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The Scope of a Security Interest
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.
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The Scope of a Security Interest
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.
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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
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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?
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Default
Disposition Procedures.–Proceeds from Disposition.• Reasonable expenses incurred by secured
party.• Balance of debt owed to secured party.• Junior Lienholders.• Surplus to Debtor.
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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.