Transcript No Slide Title

Click your mouse anywhere on the screen to advance the
text in each slide. After the starburst appears, click a
blue triangle to move to the next slide or previous slide.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Quotes of the Day
“All progress is based on a universal
innate desire on the part of every
organism to live beyond its means.”
Samuel Butler,
English author
“Be not made a beggar by banqueting
on borrowing.”
Ecclesiasticus 18:33
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Article 9
 Article 9 of the Uniform Commercial
Code (UCC) governs secured
transactions in personal property.
 New Article 9 – some changes to Article
9 have been proposed, but have not
been adopted yet.
 Scope of Article 9
• Article 9 applies to any transaction intended
to create a security interest in personal
property or fixtures.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Collateral for Transactions
 May include, among other things:
• Instruments
• Documents of Title
• Accounts
• General Intangibles
• Chattel Paper
• Goods
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Attachment of a Security
Interest
 Attachment is a vital step in a secured
transaction.
• The two parties made a security agreement
and either, (1) it is in writing, describes the
collateral, and is signed by the debtor, or
(2) the secured party has possession of the
collateral.
• The secured party gave value in order to
get the security agreement.
• The debtor has rights in the collateral.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Future Property
 After-acquired property refers to items
that the debtor obtains after the parties
have made their security agreement.
• The parties may agree that the security
interest attaches to after-acquired property.
 Proceeds: what is obtained when
collateral is sold or disposed of.
• The secured party automatically obtains a
security interest in the proceeds, unless the
security agreement states otherwise.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Perfection
 Perfection guarantees the collateral’s
availability in case of default. It keeps
the collateral from being used for more
than one security agreement at a time.
 Methods of Perfecting
• Filing a financing statement
• Possession of the collateral
• Purchase money security interest in
consumer goods (PMSI)
(More detail about these on the next several slides.)
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Perfecting by Filing
 A financing statement gives the names
of all parties, describes the collateral,
and outlines the security interest.
 Contents of the Financing Statement
• A financing statement is sufficient if it
provides the name and address of the
debtor and the secured party, the signature
of the debtor, and a description of the
collateral.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Perfecting by Filing (cont’d)
 Place of Filing
• In general, state statutes require filing with
the Secretary of State (normally in the state
capital) and/or in the “local county.”
 Duration of Filing
• Generally, a filed financing statement is
good for five years unless the secured party
files a continuation statement within six
months prior to expiration. This extends
the protection for another five years.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Perfection by Possession
 When the debtor gives the collateral to
the secured party to hold during the
time of the loan, it is called a pledge.
 The advantages to the creditor of
holding the collateral are obvious – the
collateral is safe, its location is known, it
cannot be used to secure another loan,
and “repossession” is simple.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Perfection by Possession
(cont’d)
 Mandatory Possession
• Generally, a security interest in money or
instruments must be perfected by
possession.
 Care of the Collateral
• A secured party must use reasonable care
in the custody and preservation of collateral
in her possession.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Perfection: Consumer Goods
 The Code gives special treatment to
security interests in consumer goods.
 The purchase money security interest
(PMSI) is one taken by the person who
sells the collateral or by the person who
advances money so the debtor can buy
the collateral.
 A PMSI in consumer goods perfects
automatically, without filing.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Movable Goods and Fixtures

Movable Goods Generally

Motor Vehicles and Boats

Fixtures (goods permanently attached to real
estate – such as a furnace)
• A security interest perfected in one state is valid in
a second state for four months after the property
is brought into that new state.
• State title laws generally require that a security
interest in an automobile be noted directly on the
vehicle’s certificate of title.
• Using fixtures as collateral can become complex,
especially if someone else has an interest in the
real estate itself.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Protection of Buyers
 Generally, once a security interest is
perfected, it remains effective
regardless of whether the collateral is
sold, exchanged, or transferred.
 Buyers in Ordinary Course of Business
• One who buys goods in good faith from a
seller who routinely deals in such goods.
• A BIOC takes the goods free of a security
interest created by his seller even though
the security interest is perfected.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Protection of Buyers (cont'd)
 Buyers of Consumer Goods
• Buyer takes free of a security interest he is
not aware of, if he pays value for the goods,
he is buying for his own family or household
use, and the secured party has not yet filed
a financing statement.
 Buyers of Chattel Paper, Instruments,
and Documents
• If bought in the ordinary course of her
business, and she takes possession, she
generally takes free of any security interest.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Liens
 A lien is a security interest created by
law (rather than by agreement).
• Artisan’s lien, meaning a security interest in
personal property, is created when a worker
makes some improvements to the property.
• Mechanic’s lien is created when a worker
improves real property.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Priorities Among Creditors
 A party with a perfected security interest
takes priority over a party with an
unperfected interest.
 If neither secured party has perfected,
the first interest to attach gets priority.
 Between perfected security interests,
the first to file or perfect wins.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Priority Involving a PMSI
 PMSI in Inventory (goods that the seller
is holding for sale or lease in the
ordinary course of its business)
• Takes priority over a conflicting perfected
security interest (even one perfected
earlier), if two conditions are met:
– Before filing, the secured party must check for
earlier security interests and, if any, must notify
that holder concerning the new PMSI.
– The secured party must then perfect its PMSI
before the debtor receives the inventory.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Priority Involving a PMSI
(cont’d)
 PMSI in Non-Inventory Collateral
• A PMSI in collateral other than inventory
takes priority over a conflicting security
interest if the PMSI is perfected at the time
the debtor receives the collateral or within
10 days after he receives it.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Default and Termination


Default: when debtor fails to make payments
due or enters bankruptcy.
Taking Possession of the Collateral
• When the debtor defaults, the secured party may
take possession of the collateral.

Retention of Collateral
• If the secured party has possession, he may notify
the debtor that he will retain the collateral. If the
debtor does not object within 21 days, the secured
party automatically forecloses (obtains valid title).
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Disposal of the Collateral
 A secured party may sell, lease, or
otherwise dispose of the collateral in
any commercially reasonable manner.
• A debtor is liable for any deficiency
(insufficient funds to pay off the debt).
 Right of Redemption
• The debtor may redeem the collateral by
paying the full value of the debt at any point
before the secured party disposes of it.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Proceeding to Judgment
 Upon default, a secured party may sue
the debtor for the full debt instead of
seizing the collateral.
 This is sometimes done when the
collateral has decreased in value to an
amount less than the debt, and there is
reason to believe that other assets are
available to pay the debt.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Termination
 A termination statement is a document
indicating that there is no longer a
security interest in the collateral.
 This happens when the debtor has fully
paid off the debt.
 The termination statement must be filed
everywhere the financing statement had
been filed.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
Article 9 Revisions
 Some proposed revisions to Article 9:
• An expanded scope, to include secured
transactions in various accounts and
intangibles.
• Changes in creation and perfection
terminology, which would allow creditors to
use generic phrases like “all personal
property” when describing collateral.
• Simplified filing procedures, eliminating
most county-level filing.
26
Business Law and the Legal Environment for a New Century
Alternate Edition
“Secured transactions are
essential to modern
commerce but create pitfalls
for the unknowing. A person
doing business in ignorance
of Article 9 risks losing
goods and money.”
26
Business Law and the Legal Environment for a New Century
Alternate Edition