Chapter 28: Secured Transactions

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
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Chapter 28:
Secured Transactions

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Learning Objectives
• Distinguish between secured and unsecured debt.
• Understand the scope or Article 9 of the UCC.
• Describe the creation of a security interest.
• Describe the perfection of a security interest.
• Explain floating liens.
• Discuss priority issues for secured transactions.
• Compare a secured party and buyers of collateral.
• Contrast a secured party from other secured parties.
• Distinguish between secured party and lien creditors.
• Recognize rights and duties on debtor’s default.

S-3
In the News
60 Minutes News Explains Foreclosure
Fraud (6:07) http://bvtlab.com/88899
Banks so poorly handled documentation on
millions of mortgages that many today cannot
prove that they own the homes they want to
foreclose on.
• What is a foreclosure?
• Discuss the foreclosure sale process.

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28.1 Introduction
Unsecured creditors
– Do not have any source other than the debtor
from which to collect the debt
– If the debtor fails to repay voluntarily:
• Sue the debtor and obtain a judgment
• Pursue the enforcement procedures available
to a judgment creditor
Secured debt
– Secured creditor has an interest in one or
more items of debtor’s personal property.

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28.2a In General Article 9
Article 9 deals primarily with secured
transactions.
• Certain credit transactions are expressly
excluded from Article 9 coverage.
- Landlord’s lien
- An assignment of wages
- A transfer of an insurance policy
- An artisan’s lien

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28.2b Classifications of Collateral
(Slide 1 of 4)
Collateral may be classified according to its
physical makeup into three types:
• Tangible, physical property or goods
• Documentary property that has physical
existence
• Purely intangible property

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(Slide 2 of 4)
Tangible property (goods)
• Any personal property that is movable at the time
the security interest attaches or that is a fixture
(A fixture is a special type of Article 9 collateral.)
• Goods are classified as one of the following:
– Consumer goods
– Equipment
– Farm products
– Inventory

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(Slide 3 of 4)
Documentary collateral
• Involves some indispensable piece of paper and
has both tangible and intangible aspects
• Documentary collateral is classified into one of
the following:
– Chattel paper
– Documents
– Instruments

S-9
(Slide 4 of 4)
Intangible property
• This property is not evidenced by an
indispensable writing, which distinguishes it
from documentary collateral.
• Intangible property consists of one of the
following:
– Account
– General intangibles

S-10
28.3a Introduction: Creation of a
Security Interest
Attachment process:
– Make a security agreement with the debtor
– Make sure the debtor has “rights in the
collateral”
– Give value
– Make the security interest enforceable either
by putting the security agreement in
writing, which the debtor signs, or by taking
possession of the collateral pursuant to the
agreement

S-11
28.4a Introduction: Perfection of a
Security Interest (Slide 1 of 2)
• Perfection is designed to give notice to
third parties that financing is occurring on
the basis of collateral described.
• Article 9 provides ways in which a
security interest can be perfected.
– Filing a financing statement
– Taking possession of the collateral
– Automatic perfection

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28.4a Introduction: Perfection of a
Security Interest (Slide 2 of 2)
Factors that determine which method is
appropriate in any given transaction:
• Kind of collateral in which security interest
was created
• Use the debtor intends to make of the
collateral
• Status of the debtor in relation to the
secured party

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28.4b Critical Thinking
CASE: Sterling United Inc.
This bankruptcy case examines the sufficiency of a
description of collateral included in a financing
statement. Court held that statement filed by
creditor was sufficient to perfect security interest in
debtor’s collateral because it contained
unambiguous “all assets” language and “illustrative”
language did not limit description.
• Why did court find description sufficient?
• Was phrase “including, but not limited to,” a limitation
according to court? Why? Do you think another court
could find this language misleading?

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28.5 Floating Liens
• Created when the security agreement
describes the collateral as including property
acquired in the future by the debtor.
• Common when the collateral is inventory.
• After-Acquired Property
• Future Advances
• Proceeds

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28.5d Critical Thinking
CASE: Wiersma
This bankruptcy case examines the reach of
after-acquired property and proceeds clauses.
• What do you believe is the difference between a
“claim” and “a right to payment”?
• Why was this provision revised? Does the
revision favor debtors or creditors?

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28.6 Priority Issues in General (Slide 1 of 2)
Secured party’s claim of priority fall into
the following two basic categories:
• Those who purchase the collateral from
debtor
• Those who are creditors of the debtor

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28.6 Priority Issues in General (Slide 2 of 2)
Per Article 9, secured party has priority over:
• Those who purchase the collateral from the
debtor
• Those who are also creditors of the debtor
• Those who represent creditors in insolvency
proceedings instituted by, or against, the
debtor

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28.7 Secured Party versus
Buyers of Collateral
• Secured party’s security interest continues in
any collateral sold or transferred unless the
security agreement authorizes such a sale
free of the security interest.
• Buyers in the Ordinary Course of Business
– Take possession free of a security
• Buyers of Consumer Goods
– Priority over a secured party who has relied on
perfection by attachment

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28.7c Critical Thinking
CASE: Meskill
The bank would be required to file a
financing statement to perfect security
interest in a boat, unless the arrangement
is a PMSI.
– Why did the buyer of consumer goods
exception apply?
– What actions should the bank have
undertaken?

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28.8 Secured Party vs Secured Party
Section 9-322 governs most secured
party versus secured party priority
contests.
• First creditor to file or to perfect, if filing is
not required, will have priority.
• Exceptions exist when PMSIs are involved.
– PMSI in inventory collateral
– PMSI in non-inventory collateral

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28.9 Secured Party vs Lien Creditors
Four types of liens created by law may
come into conflict with an Article 9
security interest:
• Federal tax lien
• Laborer’s, artisan’s, or material person’s
lien
• Judgment creditor’s lien
• Bankruptcy trustee’s lien

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28.10a Introduction: Rights and Duties
on Debtor’s Default
Part 6 of Article 9 permits the secured party
to take possession of the collateral and
dispose of it to satisfy the claim.
• Foreclosure sale: Proceeds are to be
applied to the unpaid debt
• Strict foreclosure: Secured creditor retains
collateral in satisfaction of debt.
- Must establish a default by the debtor

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28.10b Rights and Duties of Secured
Party in Possession
• Any reasonable expenses incurred are
chargeable to the debtor and are secured
by the collateral.
• Risk of accidental loss or damage to the
collateral is on the debtor.
• Entitled to hold as additional security any
increase in or profits received from the
collateral, unless the increase or profit is
money

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28.10c Foreclosure Sale
After default, a secured party may sell,
lease, or otherwise dispose of the collateral.
• The usual disposition is by public or private
foreclosure sale.
• Code restrictions on the secured party:
– Reasonable notification sale given to the debtor
– Reasonable timing of the foreclosure sale
– Commercial reasonableness
• Code allows secured party to buy at any public
sale but not at a private sale.

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28.10d Rights of Parties after
Foreclosure
• Buyer of the collateral at a foreclosure sale
receives it free of the security interest.
• Proceeds of the sale will be distributed and
applied as follows:
– Expenses the secured party incurred
– Used to satisfy the debt owed to the secured party
– Indebtedness owed to persons who have inferior
security interest
– Any surplus will be returned to the debtor.
– Debtor is liable for any deficiency.

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28.10e Strict Foreclosure (Slide 1 of 2)
• Must send written notice to the debtor
indicating strict foreclosure
• If collateral other than consumer goods is
involved, written notice proposing strict
foreclosure must be sent to all persons
who have filed a financing statement
covering the collateral.

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28.10e Strict Foreclosure (Slide 2 of 2)
• If collateral is consumer goods and 60% of
the purchase price or loan amount has been
paid, the consumer goods must be sold
within ninety days of the secured party’s
possession of them.
• Any debtor or interested party may object to
the strict foreclosure and force a foreclosure
sale. This objection must be given in writing
within twenty days of the secured party’s
notice of strict foreclosure being sent.

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28.10f Debtor’s General Remedies
• Debtor has the right to redeem interest in
the collateral until:
– Property has been sold or contracted to
be sold
– Obligation has been satisfied by the
retention of the property
• Debtor must, as a condition of
redemption, tender the full amount of the
obligation secured by the collateral plus
expenses incurred.

Chapter 28: Secured Transactions

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