Comprehensive Volume, 18th Edition

Chapter 35: Secured Transactions in Personal Property

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DefinitionsA security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. The property that is subject to the interest is called the collateral, and the party holding the interest is called the secured party. Attachment is the creation of a security interest. To secure protection against third parties’ claims to the collateral, the secured party must perfect the security interest.

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Creation of Security Interests

Writing

Signed by Debtor

Intent to Create Security Interest

Description of Collateral

(Oral OK if Creditor is in Possession of Collateral)

ValueContemporaneous Exchange

Creditor Previously Gave Loan

Debtor’s Interest in Collateral

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Classes of Collateral

Tangible collateral is divided into classes (based on the debtor’s intended use, not on physical characteristics):

consumer goods,

equipment,

inventory,

general intangibles,

farm products, and

fixtures.

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Classes of Tangible Collateral

Used or bought primarilyfor personal, family, or household use

Consumer Goods

Used or bought primarilyfor business use

Equipment

Inventory

Held by debtor primarilyfor sale on lease to others; or raw materials, work in progress, or materials consumed in a business

Farm ProductsCrops or livestock or supplies used or produced in farming

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Perfection

Perfection of a security interest is not required for its validity, but it does provide the creditor with certain superior rights and priorities over creditors with an interest in the same collateral.

Perfection can be obtained through possession; filing; automatically, as in the case of a PMSI in consumer goods; or temporarily, when statutory protections are provided for creditors for limited periods of time.

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Consumers Farm

Local Central

Equipment Inventory

Perfection of Security InterestsPossession -- Creditor Retains Possession of CollateralPMSI in Consumer Goods -- Automatic PerfectionMotor Vehicles -- Notation in Title Registration

Writing

Signed by Debtor

Description of Collateral

Address of Debtor

Address of Creditor

File FinancingStatement

Where Depends on Type of Collateral

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Priority Among CreditorsUnperfected, unsecured creditors have the lowest priority and are paid only if sufficient assets remain after priority creditors are paid. Secured creditors have the right to take the collateral on a priority basis, based on whose interest was the first to attach. A perfected secured creditor takes priority over an unperfected secured creditor.

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Priority Among Creditors

Multiple perfected secured creditors with interests in the same collateral take priority generally on a first-to-perfect basis. Exceptions include PMSI inventory creditors who file a financing statement before delivery and notify all existing creditors, and equipment creditors who perfect within ten days of attachment of their interests.

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Priorities of Conflicting InterestsUnsecured vs. Unsecured

Priority goes to: Neither -- equal

Unsecured vs. SecuredPriority goes to: Secured

Secured vs. SecuredPriority goes to:

One whose interestattached first

Perfected Secured vs. SecuredPriority goes to:

Perfected Secured

Perfected Secured vs. Perfected Secured

Priority goes to:

One who perfected first

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Proceeds When Creditor Sells Collateral

Second, to pay the primary debtsecured by this

collateral.

Third, to pay other debts secured by

this collateral

Last, any balancegoes to debtor

PublicSale

PrivateSale

Lease to Third Party

When secured party repossesses collateral securing a debt, he may dispose

of it by:

First, to pay the expenses of thesecured party in connection

with the default

Proceedsgo to:

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Priorities When Debtor Sells Collateral

A buyer in the ordinary course of business always takes priority even over perfected secured creditors.

A buyer not in the ordinary course of business will lose out to a perfected secured creditor but will extinguish the rights of an unperfected secured creditor (unless the buyer had knowledge of the security interest).

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Creditor’s Right to Repossess

Upon default, a secured party may repossess the collateral from the buyer if this can be done without a breach of the peace.

If a breach of the peace might occur, the secured party must use court action to regain the collateral.

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Creditor’s Duty in Sale of Collateral

If the buyer has paid 60 percent or more of the cash price of the consumer goods, the seller must resell them within 90 days after repossession unless the buyer, after default, has waived this right in writing.

Notice to the debtor of the sale of the collateral is usually required.

A debtor may redeem the collateral prior to the time the secured party disposes of it or contracts to resell it.

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Priorities When Debtor Sells Collateral

Buyer not in Ordinary Course

Perfected securedcreditor

Unperfectedsecured creditor

When a debtor sells the collateral securing a debt, who has priority in the collateral: the buyer or the creditor?

Buyer in Ordinary

Course

Has priority over:Unperfected

secured creditor

(Assuming buyer had no knowledge of security interest)

Has priority over:

Perfectedsecured creditor

(except consumer PMSI –Then, buyer

has priority)

Does NOT have priority over:

What kind of buyer?