Secured Transactions Part 2

In addition to all to whom a perfected secure party loses, the unperfected secured party loses to:

1. Any perfected security interest

2. A unperfected secured party that attached first

3. Any buyer of the collateral without notice

4. Lien Creditors

Suppose there are 2 or more unperfected secured parties. Who wins?

Who ever attached first

Lien creditors

Through a legal process a court appoints a trustee in bankruptcy to manage the debtor's assets and distribute them to creditors.

How does a trustee in bankruptcy defeat an unperfected secured party?

It cuts off all unperfected security interests

Debtor bought an engagement ring from Jewelry Store on credit and signed a security agreement covering the ring. Jewelry Store did not file a financing statement.

Debtor gave the ring to his fiancée. Later Debtor defaulted on the loan and declared bankruptcy. The Trustee in Bankruptcy and Jewelry Store each claimed the ring and, of course, so did the fiancée.

Who gets the ring? Be sure to identify the status and priority of each party?

The fiancee gets the ring.

1. Jewelry Store → unperfected secure party

2. Trustee in Bankruptcy → Lien creditor

3. Fiancee → Donee → has same right as debtor

4. Debtor → secure party

Whether or not perfected, a secured party loses in these 6 situations:

1. Possessory Lien Holders (Artisan’s Lien)

2. Buyers in the ordinary course of the debtor’s business

3. If there are 2 or more perfected liens, priority goes to whichever filed or perfected first

4. Subordination Agreement

5. If the collateral is moved out of state, the secured party loses its perfection in the new state after 4 months unless it has re-perfected there.

6. Consumer to Consumer Resale

You buy a laptop on credit for personal use what happens in result to possessory lien holders

Store gets attachment from pmsi and laptop is ampsi → when you repair the laptop you defaulted and store wants to pay → they have to pay the bill before the loan

When does a secured party lose its security interest in collateral sold by the debtor?

The secured party loses its interest if the collateral is inventory and is sold to a buyer in the ordinary course of business.

If there are 2 or more perfected liens, priority goes to whichever filed what first?

Whoever gives constructive notice first or files/perfects first gets priority.

Suppose a secured party was first to file and perfect. Can any later secured party come ahead of them?

Yes, if the first secured party gives them permission to get ahead in line.

Subordination Agreement

When the first creditor lowers it priority for the later creditor → example: if you got to a bank they may ask for a subordination

If a collateral moves out of state, after how many months does the secured party loses its perfection?

After four months unless they re-perfected in their new state.

What are two recommendations for SP-1 to avoid these problems:

A. You can put a statement in the document saying the collateral cannot move out of the state and they can only move within the state

B. Periodically inspect the collateral to make sure they are there → At least every four months you should inspect the collateral

Consumer to consumer resale rule?

When a consumer to consumer resale happens, the second consumer takes the collaterall free of any lien of which they had no notice

Consumer 1 sells to another consumer the consumer-goods collateral she had bought on credit from Store, then she defaults.

Store was automatically perfected.

But Store loses if Consumer 2 buys the collateral from Consumer 1 without notice of Store’s lien.

If Store had filed a financing statement, would Consumer 2 have to give Store the collateral?

The store would win as by filing financing statement gives consumer 2 a constructive notice

Marta is looking to buy art for her family room. She found two paintings, one being sold by Old Art Gallery, the other being sold by a private collector not in the art business. Each painting costs approximately $50,000.

In which case should Marta look for financing statements before buying the painting?

Private collector → If creditors comes to repossess the painting Martha losses because a private collector is not in the business of selling art. → No need to search for financing statements for art gallery as they are in the business of selling art.

Upon any default, a secured party can do what?

They can repossess the collateral, sell it, and apply the proceeds.

What are the limitations on secured party’s rights

1. when repossessing, the secured party cannot breach the peace and must act in a reasonable manner

2. The secured party must give the debtor the right of redemption

3. There is no specific process for selling the collateral, but every aspect of the sale must be reasonable

What is the order of distribution of proceeds from collateral after its sale?

1. Secured party’s reasonable expenses (e.g., taking, holding, selling)

2. Secured debt

3. Other secured creditors

4. Debtors with lower priority (if any funds remain)

When repossessing what can the secured party not do?

1. No violence

2. They cannot repossess if they vocally tell you no

3. If asset is in private place you need permission of owner

Right of redemption

Upon till the time of when the secured party sells the collateral the debtor has the option to buy it by paying off the secured debt if it hasn’t been sold

Suppose the sales proceeds are less than the secured debt. Is Debtor still liable?

Yes, as you still owe the deficiency and can go to court to go after other assets

Deficiency Judgement

A court order that makes a borrower liable for the difference between the amount owed on a loan and the amount received from the sale of the collateral.