Chapter 30

scope of a security interest: future advances

-a debtor can arrange with a bank to have a continuing line of credit under which the debtor can borrow funds intermittently -advances against lines of credit can be subject to a properly perfected security interest in certain collateral -security agreement may provide that any future advances made against that line of credit are also subject to the security interest in the same collateral -future advances don't need to be of the same type -cross collateralization=occurs when an asset that is not the subject of a loan is used to collateralize the loan

disposition of collateral: disposition of collateral by the secured party

-a secured party who doesn't choose to retail the collateral or who is required to sell it must dispose of it in a commercially reasonable manner -the secured party must notify the debtor and other specified parties in writing ahead of the time about the sale or disposition of the collateral -notification isn't required if the collateral is perishable or will decline in value -sale can be public or private -must be commercially reasonable

scope of a security interest: floating-lien concept

-a security agreement that provides for a security interest in proceeds, in after acquired property, or in collateral subject to future advances by the secured party -security agreement continues in the collateral or proceeds even if the collateral is sold, exchanged. or disposed of

disposition of collateral: deficiency judgement

-after proper disposition of the collateral, the secured party still has not collected all that the debtor owes -unless otherwise agreed, the debtor is normally liable for any deficiency and the creditor can obtain a deficiency judgement from a court to collect the deficiency -If the underlying transaction is a sale of accounts, chattel paper, promissory notes, the debtor isn't liable for any deficiency;debtor is also not entitled to any surplus from the disposition of these types of collateral, unless that right is granted by the security agreement

perfection by filing: consequences of an improper filing

-any improper filing renders the secured party's interest unperfected and reduces the secured party's claim to that of an unsecured creditor

default: what constitutes default

-article 9 doesn't define default so the UCC encourages parties to include it in their security agreement requirements imposed by the UCC: -parties can't agree to waive or alter certain UCC provisions, such as those involving the debtor's right to accounting or disposition of collateral -terms may not oppose UCC's provisions of good faith and unconscionability -any breach of the terms of the security agreement can constitute default

basic remedies to Default

-cumulative -If a creditor is unsuccessful in enforcing rights by one method, they can pursue another -2 categories: repossession and litigation Repossession of the collateral-self help remedy: -on the debtor's default, a secured party can take peaceful possession of the collateral covered by the security agreement w/o the use of the judicial process -cannot breach the peace/be violent judicial remedies: -secured party can relinquish the security interest and use any judicial remedy available followed by execution and levy execution=implementation of a court's decree or judgement -levy=legal process of obtaining of funds through seizure and sale of non exempt property

creation of a security interest: debtor must have rights in the collateral

-debtor must have rights in the collateral -debtor's right's can represent either a current or future legal interest in the collateral

scope of a security interest: after acquired property

-debtor will purchase new inventory to replace the inventory sold; secured party wants this newly acquired inventory to be subject to the original security interest -the after acquired property clause continues the secured party's claim to any inventory acquired thereafter

effective time duration of perfection

-financing statement is effective for 5 years from the date of filing -If a continuation statement is filed within 6 months prior to the expiration date, the effectiveness of the original statement is continued for another 5 years -continuation period starts with the expiration date of the first 5 year period -any attempt to file a continuation statement outside the 6 month window will render the continuation ineffective and the perfection will lapse at the end of the 5 year period -If a financing statement lapses, the security interest that had been perfected by the filing now becomes unperfected

perfection by filing: where to file

-financing statement must be filed in the state office where the debtor is located; not based on location of the collateral 1. individual debtor-state of their principal residence 2. organization registered with the state-state where the organization is registered 3. all other entities-state in which the business is located or if the debtor has more than one office, the place from which the debtor manages its business operations and affairs

perfection by filing: debtor's name

-financing statement needs to be filed under the name of the debtor rules: 1. corporations -debtor's name on the financing statement must be the name of the debtor indicated on the public record of the debtor's jurisdiction of organization 2. trusts -If the debtor is a trust or trustee for property held in trust, the financing statement must disclose this info and provide the trust's name as specified in its official documents 3. individuals and organizations -statement must disclose the individual or organizational name of the debtor 4. trade names -need to include owner's debtors actual name; fictitious names are not valid

perfection by filing: changes in the debtor's name

-financing statement remains effective only for collateral the debtor acquired before or within 4 months after the name change -unless an amendment to the financing statement is filed, the secured party's interest in goods that the debtor acquired after the 4 month period is unperfected

exceptions to the general priorities rule

-in some situations the perfection of a security interest will not protect a secured party against certain other third parties having claims to the collateral buyers in the ordinary course of business: -a buyer in the ordinary course of business who in good faith buys goods from a party in the business of selling such goods -they take the goods free from any security interest created by the seller even if the security interest is perfected and the buyer know of its existence PMSI in inventory: -a perfected PMSI interest in inventory has priority over a conflicting security interest in the same inventory -the holder of the PMSI must notify the holder of the conflicting security interest on or before the time the debtor takes possession of the inventory

perfection w/o filing: perfection by attachment-PMSI

-purchase money security interest in consumer goods -created when a seller agrees to extend credit to a buyer for part or all of the purchase price of the goods in a sales transaction -entity that extends the credit can be either the seller/ bank that lends the buyer the funds with which to purchase the goods automatic perfection: -PMSI in consumer goods is perfected automatic's ally at the time of a credit sale; seller doesn't need to do anything more to perfect their interest exceptions: 1. certain types of security interests that are subject to other federal or state laws that may require additional steps to be perfected 2. PMSIs in non consumer goods

perfection w/o filing: perfection by possession

-security agreement doesn't need to be in writing if the collateral is transferred to the secured party ex: stocks, bonds, negotiable instruments, jewelry -for most collateral possession by the secured party is impractical b/c it would prevent the debtor from using it to produce income to pay off the debt

disposition of collateral: redemption rights

-the debtor or any other secured party can exercise the right of redemption of the collateral -redemption may occur at any time before the secured party disposes of the collateral, enters into a contract for its disposition, or discharges the debtor's obligation by retaining the collateral -to redeem the collateral, the debtor or other secured party must tender the entire obligation that is owed, plus any reasonable expenses and fees incurred by the secured party in retaking and maintaining the collateral

creation of a security interest: written or authenticated security agreement

-when the collateral is not in the possession of the secured party, the security agreement must either be written or authenticated -security agreement must include a description of the collateral that reasonably identifies it; cannot be vague

rights & duties of debtors and creditors: termination statement

-when the debtor has fully paid the debt, if the secured party perfected the security interest by filing, the debtor is entitled to have a termination statement filed -this statement demonstrates to the public that the filed perfected security interest has been terminated -when consumer goods are involved, the secured party must file a termination statement within 1 month of the final payment or within 20 days of receiving the debtor's authenticated demand -when its not consumer goods, the secured party isn't required to file or to send a termination statement unless the debtor demands one

perfection and the classification of collateral

2 classifications of collateral: 1. tangible 2. intangible

perfection by filing: description of the collateral

both the security agreement and financing statement must describe the collateral in which the secured party has a security interest -security agreement must describe the collateral b/c no security interest in goods can exist unless the parties agree on which goods are subject to the security interest -financing statement must describe the collateral to provide public notice of the fact that certain goods of the debtor are subject to a security interest -description in the security agreement must be more precise than the description in the financing statement; UCC allows general descriptions in the financing statement

floating lien: inventory and shifting stock of goods

inventory: -floating liens commonly arise in the financing of inventories -lien floats from one item to another as the inventory changes shifting stock of goods: -lien can start with raw materials, move to finished goods, and continues as the goods are sold and turned into A/R and cash

default: disposition of collateral

once default has occurred and the secured party has obtained possession of the collateral, the secured party can: 1. retain the collateral in full or partial satisfaction of the debt 2. sell, lease, license or otherwise dispose of the collateral in any commercially reasonable manner and apply the proceeds toward satisfaction of the debt

perfection by filing

perfection of interest by filing financing statement with state agency -gives public notice to 3rd parties of the secured party's security interest -must provide the names of the debtor and the secured party and must indicate the collateral covered by the financing statement -can be filed even before a security agreement is made or a security interest attaches

disposition of collateral: proceeds from disposition

proceeds from the disposition of collateral after default on the underlying default are distributed in the following order: 1. reasonable expenses incurred by the selling party in repossessing and reselling the collateral 2.balance of the debt owed to the secured party 3. junior lien holders who have made written or authenticated demands 4. any surplus to the debtor, unless the collateral consists of accounts, payable intangibles, promissory notes, or chattel paper

scope of a security interest: proceeds

proceeds=the cash or property received when collateral is sold or disposed of in some other way -a security interest in the collateral gives the secured party a security interest in the proceeds acquired from the sale of that collateral -a security interest in proceeds is automatically perfected at the same time as the secured party perfected its security interest in the original collateral; remains protected for 20 days after the debtor receives the proceeds from the sale of collateral -parties can agree to extend the perfection period in the original security agreement

priorities:general rules

rules of priority: 1. perfected security interest vs. unsecured creditors and unperfected security interests -when 2 or more parties have claims to the same collateral, a perfected security party's interest has priority over the interests of most other parties 2. conflicting perfected security interests -when 2 or more secured parties have perfected security interests in the same collateral, generally the first to perfect has priority 3. conflicting unperfected security interests - when 2 conflicting security interests are unperfected, the first to attach has priority (first in time rule)

creation of a security interest: secured party must give value

secured party must give something of value to the debtor -value can include a binding commitment to extend credit, and any consideration sufficient to support a simple contract -value given by a secured party involves a direct loan or a commitment to sell goods on credit

terms of secured transactions

secured party=any creditor who has a security interest in the debtor's collateral debtor=party who owes payment/performance of a secured obligation security interest=interest in the collateral that secures payment/ performance of an obligation security agreement=an agreement that creates/provides for a security interest collateral=subject of the security interest financing statement=the instrument normally filed to give public notice to third parties of the secured party's secured interest

perfection of a security interest

the legal process by which secured parties protect themselves against the claims of 3rd parties who may wish to have their debts satisfied out of the same collateral -perfection is accomplished by filing a financial statement

disposition of collateral: non cash proceeds

the secured party must make a value determination and apply this value in a commercially reasonable manner

basic requirements for creation of a security interest

to become a secured party, the creditor must obtain a secured interest in the collateral of the debtor 1. unless the creditor has possession of the collateral, there must be a written or authenticated security agreement that clearly describes the collateral subject to the security interest; must be signed by the debtor 2. secured party must give the debtor something of value 3. the debtor must have rights in the collateral -once these requirements have been met, the creditors rights are said to attach to the collateral attachment: gives the creditor an enforceable security interest in the collateral

perfection w/o filing

two situations: 1. when the collateral is transferred into the possession of the secured party 2. when the security interest is one that can be perfected on attachment perfected on attachment=these security interests are automatically perfected at the time of their creation, w/o a filing and w/o possession of the goods -2 common: purchase money security interest, assignment of a beneficial interest in an estate of a deceased person