Twomey & Jennings BUSINESS LAW

1. Twomey & JenningsBUSINESS LAW Chapter 33 Secured Transactions in Personal Property

2. Definitions • A 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.

3. McLeod v Sears Roebuck & Co. (2000) Was the description of the collateral sufficient? The Security Agreement • The agreement between the creditor and the debtor that the creditor will have a security interest. • The agreement must identify the parties, describe the collateral and the debt that is secured by the agreement.

4. Signed by Debtor Intent to Create Security Interest Writing Description of Collateral (Oral OK if Creditor is in Possession of Collateral) Contemporaneous Exchange Value Creditor Previously Gave Loan Debtor’s Interest in Collateral Creation of Security Interests

5. Classification 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.

6. Equipment Consumer Goods Used or bought primarily for personal, family, or household use Used or bought primarily for business use Inventory Farm Products Held by debtor primarily for sale on lease to others; or raw materials, work in progress, or materials consumed in a business Crops or livestock or supplies used or produced in farming Tangible Collateral

7. Perfection of Secured Interests • Creditor who obtains a perfected security interest has priority over unsecured creditors. • Perfection can be obtained : • By Possession; • By 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.

8. Allstate Financial Corp. v United States (1997) Is there an Article 9 Security Interest? Perfection by Filing • The financing statement is an authenticated record that gives sufficient information to alert third persons that a security interest in the collateral exists. • Rules under Article 9 of the UCC.

9. Writing Signed by Debtor File Financing Statement Description of Collateral Address of Debtor Address of Creditor Where Depends on Type of Collateral Local Central Fixtures Equipment Inventory Farm Consumers Perfection of Security Interests Possession -- Creditor Retains Possession of Collateral PMSI in Consumer Goods -- Automatic Perfection Motor Vehicles -- Notation in Title Registration

10. GMAC v Lincoln National Bank (2000) Does the Bank Win? Priorities • Unperfected, 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.

11. Priorities • A perfected secured creditor takes priority over an unperfected secured creditor. • 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.

12. Priority goes to: Unsecured vs. Unsecured Priority goes to: Unsecured vs. Secured Priority goes to: Secured vs. Secured Priority goes to: Perfected Secured vs. Secured Priority goes to: Perfected Secured vs. Perfected Secured Priorities Neither -- equal Secured One whose interestattached first Perfected Secured One who perfected first

13. Public Sale Private Sale Lease to Third Party First, to pay the expenses of the secured party in connectionwith the default Proceedsgo to: Second, to pay the primary debtsecured by this collateral. Third, to pay other debts secured by this collateral Last, any balance goes to debtor Distribution of Proceeds When secured party repossesses collateral securing a debt, he may dispose of it by:

14. Schultz v Bank of the West (1997) Do the Plaintiffs own the Motor Home? 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).

15. Creditor’s Self-Help • 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.

16. 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.

17. Buyer not in Ordinary Course Buyer in Ordinary Course Does NOT have priority over: Has priority over: Has priority over: Perfected secured creditor (except consumer PMSI –Then, buyer has priority) Unperfected secured creditor (Assuming buyer had no knowledge of security interest) Perfected secured creditor Unperfected secured creditor Priorities When Debtor Sells When a debtor sells the collateral securing a debt, who has priority in the collateral: the buyer or the creditor? What kind of buyer?