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1
Business Law and the Legal Environment
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
2
Business Law and the Legal Environment
Revised Article 9
Article 9 of the Uniform Commercial
Code (UCC) governs secured
transactions in personal property.
Article 9, which was recently revised,
applies to any transaction intended to
create a security interest in personal
property or fixtures.
About ½ of all UCC lawsuits involve
Article 9. 26
3
Business Law and the Legal Environment
Definitions
Fixtures: goods that have become firmly
attached to real estate.
Security interest: interest in personal
property or fixtures that secures the
performance of an obligation.
Secured party: party who holds the
security interest.
Collateral: property subject to the
security interest.
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4
Business Law and the Legal Environment
More Definitions
Debtor: person who has some original
ownership in the collateral.
Obligor: person who must repay money.
Security agreement: contract which
gives a security interest to the secured
party.
Default: when the debtor fails to pay
Repossession: when the secured party
takes back the collateral because the
debtor has defaulted.
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5
Business Law and the Legal Environment
And More Definitions
Perfection: steps the secured party must
take to protect rights in the collateral
against people other than the debtor.
Financing statement: document filed by
secured party to give notice of security
interest in the collateral.
Record: information on paper or other
medium.
Authenticate: to sign a document (includes
use of symbols or electronic encryption.)
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6
Business Law and the Legal Environment
Article 9 Revisions
Throughout the 1990’s, revisions to
Article 9 were recommended and in
2000, the revisions were adopted.
Revised Article 9 is now law in all states.
Revisions include:
• Expansion of transactions covered
• Clarification of rules for creating, perfecting,
and enforcing security interests
• Adoption of a medium-neutral provision–
meaning that security interests may be filed
electronically, on paper, and in other forms.
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7
Business Law and the Legal Environment
Scope of Revised Article 9
Collateral for transactions may include,
among other things:
• Instruments
• Investment Property
• Documents of Title
• Accounts (now includes health-care-insurance
receivables)
• Commercial tort claims
• General Intangibles
• Chattel Paper (includes electronic chattel paper)
• Goods (Software is sometimes included in goods,
but not always.) 26
8
Business Law and the Legal Environment
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
9
Business Law and the Legal Environment
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
10
Business Law and the Legal Environment
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.)
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11
Business Law and the Legal Environment
Perfecting by Filing
Contents of the Financing Statement
• A financing statement is sufficient if it
provides the name of the debtor, the name
of the secured party and a description of
the collateral.
• Names must be the registered name of an
organization or legal name of a person.
• Under Revised Article 9, if a computer
search under the debtor’s correct name
would reveal the financing statement, the
record is valid. 26
12
Business Law and the Legal Environment
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.
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13
Business Law and the Legal Environment
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.
Possession may be used when the collateral
is goods, negotiable documents, instruments,
money, chattel paper that is tangible (non-
electronic), or most securities.
Mandatory Possession
• Generally, a security interest in money or
instruments must be perfected by possession. 26
14
Business Law and the Legal Environment
Perfection by Possession
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.
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15
Business Law and the Legal Environment
Perfection by Control
Control means that the secured party has
exclusive rights to dispose of the collateral.
• A security interest in investment property, deposit
accounts, letter-of-credit rights, and electronic chattel
paper may be perfected by control.
• Security interests in deposit accounts and letter-of-
credit rights may be perfected only by control.
A secured party must use reasonable care in
the custody and preservation of collateral in
her possession.
26
16
Business Law and the Legal Environment
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.
A PMSI may be created only in goods,
fixtures, or software.
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17
Business Law and the Legal Environment
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.
A PMSI may be created only in goods,
fixtures, or software.
26
18
Business Law and the Legal Environment
Movable Collateral
Movable Goods Generally
• 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. When the collateral
is transferred to a new state, the security interest
remains perfected for one year.
Motor Vehicles and the Like
• Code provisions for perfecting generally do not
apply to motor vehicles, trailer, mobile homes,
boats and tractors. State laws deal with these
situations.
• A security interest in an automobile (and in some
states, boats) generally must be noted on the
vehicle’s certificate of title.
26
19
Business Law and the Legal Environment
Fixtures
Fixtures are goods permanently
attached to real estate – such as a
furnace.
Using fixtures as collateral can become
complex, especially if someone else
has an interest in the real estate itself.
26
20
Business Law and the Legal Environment
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
21
Business Law and the Legal Environment
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
22
Business Law and the Legal Environment
Liens
A lien is a security interest created by
law (rather than by agreement).
• Artisan’s lien is a security interest in
personal property created when a worker
makes some improvements to the property.
• Mechanic’s lien is created when a worker
improves real property.
• A landlord’s lien is when a landlord gains
an interest in the tenant’s personal property
after the tenant fails to pay rent.
Article 9 does not apply to liens. 26
23
Business Law and the Legal Environment
Priorities Among Creditors
A a perfected security interest takes
priority over one 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.
A secured party controlling or possessing
an instrument, deposit account,
investment property and letter-of-credit 26
rights wins over a party that merely filed.
24
Business Law and the Legal Environment
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
25
Business Law and the Legal Environment
Priority Involving a PMSI
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.
Article 9 now explicitly provides for the
rights and duties of third parties (ones
who are neither the debtor nor the
secured party). 26
26
Business Law and the Legal Environment
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.
• The secured party can take the collateral
without a court order if it can be done
without disturbing the peace.
26
27
Business Law and the Legal Environment
Disposition of 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).
• Any surplus is to be returned to the debtor.
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.
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28
Business Law and the Legal Environment
Acceptance of Collateral
If the secured party has possession, he may
notify the debtor that he intends to retain the
collateral as full or partial satisfaction of the
debt.
If the debtor does not object within 20 days, the
secured party may keep the collateral as full
payment, but not as partial.
If the debtor objects to acceptance, the
secured party must sell or otherwise dispose of
the collateral.
Consumer goods may not be repossessed if
the debtor has possession or has paid more 26
than 60% of the debt.
29
Business Law and the Legal Environment
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
30
Business Law and the Legal Environment
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
31
Business Law and the Legal Environment
“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
32
Business Law and the Legal Environment
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Business Law and the Legal Environment
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