Comprehensive Volume, 18th Edition

Chapter 35: Secured Transactions

in Personal Property
 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’
Chapter
claims to the collateral, the secured party
35 must perfect the security interest.
 Creation of Security Interests
Signed by Debtor

Intent to Create Security Interest

Writing

Description of Collateral

(Oral OK if Creditor is in Possession of Collateral)

Contemporaneous Exchange
Value
Chapter Creditor Previously Gave Loan

35 Debtor’s Interest in Collateral

 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,
Chapter farm products, and
35 fixtures.
 Classes of Tangible Collateral
Consumer Goods
Used or bought primarily
for personal, family, or
household use
Inventory
Held by debtor primarily
for sale on lease to others;
Chapter or raw materials, work in
progress, or materials
35 consumed in a business
Equipment
Used or bought primarily
for business use
Farm Products
Crops or livestock or
supplies used or
produced in farming
 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,
Chapter when statutory protections are provided for

35 creditors for limited periods of time.

 Perfection of Security Interests
Possession -- Creditor Retains Possession of Collateral
PMSI in Consumer Goods -- Automatic Perfection Writing
Motor Vehicles -- Notation in Title Registration
Signed by Debtor
File Financing
Statement Description of Collateral
Address of Debtor
Address of Creditor

Where Depends on Type of Collateral

Local Central
Chapter

35 Consumers
Fixtures
Farm
Equipment Inventory
 Priority Among Creditors
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.
A perfected secured creditor takes
Chapter priority over an unperfected secured
35 creditor.
 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
Chapter perfect within ten days of attachment of
35 their interests.
 Priorities of Conflicting Interests
Priority
Unsecured vs. Unsecured Neither -- equal
goes to:

Priority
Unsecured vs. Secured Secured
goes to:

Priority One whose interest

Secured vs. Secured
goes to: attached first

Priority Perfected
Perfected Secured vs. Secured
goes to: Secured
Chapter

35 Perfected Secured vs.

Perfected Secured
Priority
goes to:
One who
perfected first
 Proceeds When Creditor Sells Collateral
When secured party repossesses collateral securing a debt,
he may dispose
Public Private Lease to
of it by: Sale Sale Third Party

Proceeds First, to pay the expenses of the

go to: secured party in connection
with the default
Second, to pay the primary debt
secured by this
collateral.

Third, to pay other

Chapter debts secured by

35 this collateral

Last, any balance

goes to debtor
 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
Chapter creditor (unless the buyer had
35 knowledge of the security interest).
 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.
Chapter

35
 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
Chapter the time the secured party disposes of it or
35 contracts to resell it.
 Priorities When Debtor Sells Collateral
When a debtor sells the
collateral securing a debt, What kind of buyer?
who has priority in the
collateral: the buyer or
Buyer not in
the creditor? Ordinary Course

Buyer in
Ordinary Does NOT have Has priority
Course
priority over: over:

Has priority over:

Perfected Unperfected
secured secured
creditor creditor
Chapter Perfected Unperfected (except consumer (Assuming buyer

35
secured secured PMSI –Then, buyer had no knowledge
creditor creditor has priority) of security interest)