how does possession of the collateral give notice to the prospective creditor that there is a security interest in the collateral is possessed?
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- Secured Transaction Transaction in which payment of a debt is guranteed by personal property owned by the debtor or in which the debtor has a legal interest. Security Interest- Interest in the collateral that secures payment or performance of an obligation. Secured Party- Creditor in whose favor there is a security interest in the debtor's collateral. Collateral- The subject of a security interest. Debtor- The party who owes payment. Creation of a Security Interest A. Two Concerns- If a debtor fails to pay: 1. Satisfaction of the debt through possession or sale of the collateral 2. Priority over other creditors to the collateral. B. Three Requirements: 1. Written or Authenticated Security Agreement 1. Must be written and authenticated (including electronic media, or records) 2. Describe the Collateral 3. Be signed or authenticated by the debtor. Or the secured party must possess the collateral. If the debtor's name changes, the financing statement must be amended within 4 months to include the change and continue in effect. 2.Secured Party Must Give Value- Value is any consideration that supports a contract. 3. Debtor Must Have Rights in the Collateral- Debtor must have an ownership interest or right (current or future legal interest) to obtain possession of the collateral. Perfection of a Security Interest Process by which secured parties protect themselves against the claims of others who wish to satisfy their debts out of the same collateral. A. Perfection by Filing B. Perfection Without Filing Perfection by Filing Most common means of perfecting. 1. What a Financing Statement Must Contain 1. Names of the debtor and the credit (a trade name is not sufficient) 2. Description of the collateral 2. Where to File a Financing Statement- Depending on how collateral is classified, filing is with a county (timber, fixtures, etc.) or a state (other collateral). The specific office depends on the debtor's location... 1. Individual debtors: The state of the debtor's residence. 2. Chartered entity (corporation): State of charter or filing. 3. Other: State in which business or chief executive office is Perfection Without Filing 1. Perfection by Possession- A creditor can possess collateral and return it when the debt is paid. A. For some securities, instruments, and jewelry, this is the only way to perfect. 2. Perfection by Attachment A. Purchase-Money Security Interest (PMSI)- A PMSI is: 1. Retained in, or taken by a seller of, goods to secure part or all of the price, or 2. Taken by a lender, such as a bank, as part of a loan to enable a debtor to buy the collateral B. Pefection of a PMSI- A PMSI in consumer goods is perfected automatically when it is created. The seller need do nothing more. C. Exceptions- Security interests subject to other federal or state laws that require additional Effective Time Duration of Perfection A financing statement is effective for 5 years. A continuation statement filed within 6 months before the expiration date continues the effectiveness for 5 more years (and so on). The Scope of a Security Interest A. Proceeds- Include whatever is received when collateral is sold or otherwise disposed of. A secured party has an interest in proceeds that perfects automatically on perfection of the security interest and remains perfected for 20 days after the debtor receives the proceeds. The interest remains perfected for more than 20 days if: 1. A filed financing statement covers the original collateral and the proceeds. 2. There is a filed statement that covers the original collateral and the proceeds are identifiable cash proceeds. B. After-Acquired Property- A security agreement may provide for coverage of after-acquired property- collateral acquired by a debtor after execution of a security agreement. C. Future Advances- A security agreement may provide that future advances against a line of credit are subject to a security interest in the collateral. D. The Floating-Lien Concept- A floating lien is a security agreement that provides for the creation of a security interest in any (or all) of the above. The concept can apply to a shifting stock of goods- the lien can start with raw materials and follow them as they become finished goods and inventories and as they are sold, turning into accounts receivable, chattel paper, or cash. Secured Parties v Other Secured Parties Priorities 1. The general rule- The 1st interest to be filed or perfected has priority over other filed or perfected security interests. If none of the interests has been perfected, the 1st to attach has priority 2. Exception-Commingled or Processed Goods: When goods have lost their identity into a product or mass, security interests attach in a ratio of the cost of the goods to which each interest originally attached to the cost of the total product or mass. 3. Exception- Purchase-Money Security Interest (PMSI): A. Inventory- A perfected Purchase-Money Security Interest (PMSI) prevails over a previously perfected security interest if the holder of the PMSI perfects and gives the holder of the other interest written notice of the PMSI before the debtor takes possession of the new inventory. B. Software- If software is used in goods subject to a PMSI, priority is according to the classification of the goods. C. Other Collateral- A perfected PMSI prevails over a previously perfected security interest if the holder of the PMSI perfects before the debtor takes possession of the collateral or within 20 days. Secured Parties v Unsecured Parties Priorities Secured parties (perfected or not) prevail over unsecured creditors and creditors who have obtained judgements against the debtor but who have not begun the legal process to collect on those judgements. Secured Parties v Buyers 1. The general rule- A security interest in collateral continues even after the collateral has been sold unless the secured party authorized the sale. 2. Exception- Buyer in the Ordinary Course of Business: Takes goods free of any security interest (unless the buyer knows that the purchase violates third party's rights) 3. Exception- Buyers of Consumer Goods Purchased outside the Ordinary Course of Business: The buyer must give value and not know of the security interest; the purchase must occur before the secured party perfects by filing. 4. Exception- Buyers of Instruments, Documents, or Securities: A holder in due course, a holder to whom a negotiable instrument has been negotiated, and a bona fide purchaser of securities have priority over a previously perfected security interest. 5. Exception- Buyers of Farm Products- A buyer from a farm has priority over a perfected security interest unless, in some states, the secured party has filed centrally an effective financing statement or the buyer has notice before the sale. Rights and Duties of Debitors and Creditors A. Information Reuests- When filing, creditors and debtors can ask the filing officer to furnish a copy of the statement with the file number, the date, and the hour. Others (such as prospective creditors) can ask the filing officer to provide a certificate that gives information on possible perfected financing statements. B. Release, Assignment, and Amendment- A secured party can release all or part of the collateral, or assign part or all of the security interest. A filing can be amended, if both parties agree. C. Confirmation or Accounting Request by Debtor- When the debtor asks, the secured party must tell the debtor the amount of the unpaid debt (within 2 weeks of the debtor's request). D. Termination Statement- When a debt is paid, the secured party can send a termination statement to the debtor or file it in with the original financing statement. 1. If the Collateral is Consumer Goods- The statement must be filed within 1 month after the debt is paid, or- if the debtor requests the statement in writing-within 20 days of receipt of the request, whichever is earlier. 2. If the Collateral is Other Goods- The statement must be filed or furnished to the debtor within 20 days after a written request is made by the debtor. Default Whatever the parties stipulate in their agreement. 1. Occurs most often when debtors fail to make payment or go bankrupt. A. Basic Remedies 1. Repossession of the Collateral-The Self-Help Remedy: A secured party can take possession of the collateral without a court order, if it can be done without a breach of the peace, and retain it for satisfaction of the debt or resell it and apply the proceeds towards the debt. 2. Execution and Levy- A secured party can give up the security interest and proceed to judgement on the debt (this is done if the value of the collateral is less than the debt and the debtor has other assets.) B. Disposition of Collateral 1. Retention of Collateral by the Secured Party A. Notice- A secured party must give written notice to the debtor. In all cases except consumer goods, notice must also be sent to any other secured party from whom the secured party has received notice of a claim. B. If Debtor or Other Secured Party Objects within 20 days- The secured party must sell or otherwise dispose of the collateral. 2. Consumer Goods- If the collateral is consumer goods with a PMSI and the debtor has paid 60 percent or more on the price or loan in a non-PMSI, the secured party must sell within 90 days. 3. Disposition Procedures- 1. Disposition must be in a commercially reasonable manner. 2. The debtor must be notified of the sale. A. Disposition- After default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral. "Commercially reasonable" means the method, manner, time, place, and other terms. B. The Secured Party Must Give Written Notice to the Debtor- In all cases except consumer goods, notice must also be sent to any other secured party from whom the secured party has received notice of a claim, unless the collateral is perishable or is customarily sold in a recognized market. C. Failure to Act in a Commercially Reasonable Manner or Give Proper Notice- Any deficiency of the debtor can be reduced to the extent of the creditor's failure affected rice received on the sale. 4. Proceeds from Disposition- Must be applied to: 1. Expenses stemming from retaking, storing, or reselling 2. Balance of the Debt 3. Junior Lien holders 4. Surplus to the debtor 5. Noncash Proceeds- The value of noncash proceeds received on a disposition of collateral must be applied in a commercially reasonable manner. 6. Deficiency Judgement- In most cases, if a sale of collateral does not repay the debt, the debtor is liable for any deficiency. A creditor can obtain a judgement to collect. 7. Redemption Rights- Before the secured party retains or disposes of the collateral, the debtor or any other secured party can take the collateral by tendering performance of all secured obligations and paying the secured party's expenses.
- Jul 20, 2016 at 7:44pm
This question was asked on Jul 19, 2016 and answered on Jul 19, 2016 for the course MGMT 597 597 at Keller Graduate School of Management.
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