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“Tutorial is to give come an overview of what we call secured transactions secured transactions transactions arise under uniform commercial code article 9 article 9 was revised just a few ago. So all of the rules that apply to secured transactions are a little bit new and updated a secured transaction is basically a transaction where someone is making a loan and securing the loan by using collateral so we ll talk more about some definitions that go with those things now first of all if somebody often a bank wants to make a loan to someone else they want to do what s called create and perfect their security interest in the collateral. So the first step is the creation of the security interest and the steps here are basically not the well. There s a couple options.
One is that the creditor. The person making the loan has possession of the collateral. An example of this would be a pawnshop so if you take your watch to the pawnshop. Give them the watch and borrow money from then they give you cash they have the watch in their possession that creates a security interest in the wash.
Which means they have rights to the watch when you default the other option is that you have a written security agreement that explains who the creditor is what they ve loaned you money for and it describes what the collateral is that they now have a right in these are the transactions that are going to be more common with if you think about you know if you went to the bank and borrowed money and used your vehicle as collateral you wouldn t actually give your vehicle to the bank you would sign a security agreement that explained which car and that the bank has a security interest in your car in order for the security interest to be valid. The creditor has to give something of value to the debtor. So a person can t just get a security interest in someone else s property collateral. Without having given them something usually in this case.
It s going to be alone for some money and the third one is the debtor can t give the bank rights to the collateral. If the debtor doesn t have rights themselves. Now it is possible that the debtor could have something less than complete ownership of the collateral. The debtor could have a partial ownership interest in the collateral and so they would give that partial interest to the bank.
Whatever interests. They have can be used now once we ve met those requirements that we just talked about the security interest has been created and what we call that is attachment meaning. The collateral is basically now attached to that creditor and that creditor can enforce the security interest now a couple different kinds of collateral. These are pretty logical they make sense there s collateral.
That s tangible these the ones we usually think about we ve mentioned a watch a ring a car maybe your piano those kinds of things are tangible goods and then intangible goods are things like stocks and bonds accounts. Receivable. Chattel paper. Is listed here and interestingly enough channel paper is actually a security interest document.
So that would be the security agreement. But give someone the right to collateral. So that security interest could actually be pledged as collateral for a different moment. Okay.
Now once you ve created a security interest. Sometimes the problem will become. I have a security interest in someone s one we say. But what if another bank also has a security interest in that same wedding ring and what if that debtor defaults on payment on my loan and also defaults on the other banks alone who gets the ring.
So we have something called perfection that helps us to establish priority between the creditors perfection is usually done by filing. Something we call a financing statement and this gets filed with the state and it basically. It basically you can file the security agreement that we created before that says. I m the creditor.
I loaned this much money to this person. And they have pledged their wedding ring as the collateral. And this is the description of the ring. This is how much it s considered to be worth.
So have a description of what that is and it s going to be signed by them to show that i have that security interest now what the filing does is it goes to the state. And it becomes a publicly available record..
So what that means is if the debtor who owes me the money and has pledged their ring goes to bank b. And ask for a loan and says. I will pledge my ring fake b. Will first do a search a lot of times.
It s just called a dc seeking search sometimes. It s called a lien search. They will do a search and find out if that debtor has ever pledged that one to anyone else and the financing statement that i had the debtor sign will show up and they ll be able to look at it and say gosh this ring is already pledged as collateral. We don t want to be second in line.
We re not going to let you use that ring as collateral or they might say okay we can see that you only owe this other bank. Five hundred dollars. The ring is worth five thousand will loan you the difference there are a couple of ways actually to perfect without filing the first one is as i mentioned before like the pawnshop example. If the creditor actually has possession and the reason that we allow this to be perfection is that there s some level of notice.
If the debtor doesn t have access to the collateral at the time so if someone comes to me. And says i want to pledge my red wedding ring as collateral to borrow money and i say to them okay can i see the room and they say well no i don t have the ring. The pawnshop positively well that gives me notice that there is a perfected security interest out there already on that ring and i need to realize that i might be second in line. The next kind of perfection that can happen without filing is called a purchase money security interest sometimes we just reference.
The acronym pmsi. This is where the creditor is the one who loaned the money to buy the collateral. So these kinds of transactions are really common if you go to a furniture store and they provide financing so you buy the furniture. But you re not going to pay for it for a year and they re financing.
It then the furniture becomes collateral and the furniture stores the creditor or you buy your vehicle and the the car lot that sold you the vehicle is also financing the vehicle well these creditors are in a superior position. Because you would not have a clatter on the first place right not for them. We allow them to have automatic perfection and again. There s some ability to have notice.
If i m if you re telling me that you want to use your car as collateral on the loan. It makes sense for me to sort of ask the question. How is the vehicle financed right and has it is there a purchase money s very interest holder on that vehicle. Okay the next thing is what does the security interest include well obviously we can include things like a security interest in a vehicle.
But in a business setting when you think about consumer loans you might flush things like a rain or a car. But when you start thinking about more of a commercial setting you re thinking about a business like walmart borrowing money from a bank and how does walmart secure that interest well they might do it through things like mortgages on property or other ways. But for collateral. They may want to pledge things like their inventory.
And that creates some special problems because we know that inventory revolves. So if walmart were to give somebody security interesting in their currently existing inventory that wouldn t be very good for very long because the inventory moves quickly so one type of security interest that we can use is called a security interest in proceeds and this just says if walmart sells the item. My security agreement with them can say that i have a security interest in this currently existing inventory when they sell it i have a security interest in the cash that they get their receivables whatever. It is that they now have in place of that initial collateral.
Another way that we can use collateral. A little a little bit differently is by putting in the security agreement. There. There will be a security interest in property.
That s acquired after the security agreement is executed so a company might say you know right now they have cash or whatever. It is they have it can say that if they buy certain in or if they were if they were acquire additional vehicles or whatever..
It is we can put that in the security agreement that that will actually become collateral in addition. We can add future advances so on a continuing line of credit. We can say if you get additional money from the line of credit that can become collateral and finally. This is just another way to describe what we ve been talking about it s called a floating lien.
So think about it. The concept is that sometimes we describe having an interest in collateral as a lien. I have an interest in the property. The lien sort of floats over changing property and a good way to think about that again is with inventory.
The inventory comes in and out the lien floats above that inventory even though bicycle number one that walmart sold last month. Is not the same as bicycle number ten that they sold my security interest covers whichever bicycle happens to be in it in inventory at the time. Okay now here s where this whole idea about profession becomes important is when we establish who gets what first okay so the general rule is that when a debtor defaults and can t pay and the creditors have to start going after them. A perfected security interest.
Holder is going to have priority over this whole list. Okay. So if a creditor has created a security interest by attachment. Then perfected.
The security interest by one of the three ways that we talked about either by possession by being a purchase money security interest holder or by filing. The financing statement that creditor will get get first in line upon default over the creditor that s not secured at all a secured party that has attached their security interest. But did not perfect the security interest somebody else who gets a lien later some other kind of lien. Besides a what we re describing here is a security interest in collateral.
And there are all kinds of liens one example is a mechanic s lien somebody who comes to your house and doesn t work they automatically have the right to to put a lien on whatever. It is they worked on or if you take if you take something your car you take your car to the mechanic have them work on it they have the right to hang on to your car. Until you pay for it until you pay for your work. So that would be a mechanic s lien and if that lien happened after somebody already had a security interest in that car and that security interest or perfected.
The perfected security interest holder would win out over the mechanic. Who is keeping the car to wait for you to pay for repairs. They also have priority over a trustee in bankruptcy. So when you go bankrupt and they seize all your property.
The bankruptcy trustee would have to turn that collateral over to the person with the perfected security interest and then finally the buyer who buys the collateral not in the ordinary course of business. So this is particularly true. If you were trying to get rid of the collateral to avoid paying the debt okay. But if i m a buyer in the ordinary course of business.
So i m just a buyer to goes to walmart buys inventory and takes it home. I don t have to give whatever. It is i bought at walmart back to the perfected security interest holder. But if i m you know a person who s doing a deal with walmart then i go in and say you guys are having some financial trouble.
We ll agree to buy certain things that might not be in the ordinary course of business. Okay now what happens after that well before we before we go there let me just mention that generally we talk about the purchase money security interest holder as the sort of ultimate perfected. Secure interest. They are usually going to be first in line over.
Evan wells. So even over another perfected security interest holder..
That said. Let s just go down the line and see what happens so if you have two perfected security interest holders. Thank they has filed a financing statement. So has bank b.
Well whoever filed the financing statement. First wins. They get to be first in life to take the collateral. Now remember that the perfected.
The purchase money security interest holder will take over both of those he ll be first in line. Okay the next. One is if you have to unperfect its security interests. So these are creditors who have created a security interest by attachment.
But they did not file the financing statement or they do not have possession of the collateral or they re not a purchase money security interest holder here. We just say okay the first security interest to be created wins out of those two creditors first to attach obviously before we go on obviously. The perfected security interest. We ve said before has priority over you unperfect add security interest and then a security interest has priority over anybody else somebody who has borrowed money without putting collateral down that comes.
After the loans that have been polarized by security interest. Okay now if the security. If if the creditor decides to at any time. They can say i don t i don t want to have your collateral anymore.
But for whatever reason they have that right and ability to do that they can also assign it so they could take the contract take the security agreement and assign it over to somebody else then of course. The parties can really change the financing statement at any time. If they agree to do that once the debtor pays the debt that they re owed. The security interest has to be released at that time and they file a termination statement.
So that now when someone does a ucc search to look to see what kind of financing statements are existing on that collateral they find the termination. Statement. That says hey this loan has been paid so this collateral would be available again to back up some other debt. Now finally how does this actually happen well the article nine does it say what default is you find out how a debtor defaults on the loan by looking at what the security agreement says so the security agreement might say a default is when the debtor is a month late on their payment.
That might say it s when they miss two payments in a row. It could say it s when they are one day late on one payment. So. The security agreement will actually define what does default mean.
So. Once. The default has been triggered under the security agreement. Then the secured party s rights kick in and that s where they can at first they have the option to say we don t want the secured.
We don t want the collateral anymore. We re just going to try to go after the money if we can and they ll go through they ll go through a court proceeding to try to collect the money. A secured party might do that if the collateral has really devalued. And it s not worth much anymore.
They d rather just try to see if there s another way to try to collect the money from the debtor and the next option is they can go take the collateral. And there are a couple ways to do that one is repo man and that s where you ve seen it in the movies..
The guys you know drive up in the night or whenever and they go and they take the collateral. It s theirs they have the right to it as long as they do it in a peaceful manner. They can t do things like trespass or pull guns or do things that otherwise violate safety and peace or you can get the go through the court system to have them do the repossession and then the police will go and do the right possession for you. But that s going to cost you a little bit more now once you have repossessed the collateral.
You have a couple options. One is you can just keep the collateral. And say okay this pays the debt if it s a purchase money security interest and the debtor has already paid at least sixty percent. Then the debtor can t just keep the collateral.
Also the debtor can object the debtor can say no i don t want you to keep the collateral. I think it s worth more than what i owe you so i want you to sell it so that i can see if i can get some of the money back at the end when so so the debtor can say i don t want you to sell the secured party could also decide that they want to sell that that they would rather have cash and that s probably the most common situation especially with a bank. They don t necessarily want a whole bunch of stuff. They just want cash so options will be done at some kind of an auction and the rule is that it has to be any in a commercially reasonable manner so what that means is you re going to have an option you ve got to give public notice of the auction.
So that people can come. And there s a chance of getting something close to fair market value. The bank. Can t just call the bank president s.
Brother and say hey great deal. This guy only owes us. 5000 on his 40000. Truck and you know so all i care about getting is the 5 grand.
So why don t you buy the truck for me for 5 grand and it s taken care of the bank. Can t do that that would be a not a commercially reason manor. Once they ve gone through the process of making sure that they sell it in a commercially reasonable manner. But that doesn t mean they have to get fair market value.
There s a recognition that the bank isn t isn t going to go through the same process and steps that you might if you were selling your own car to try to get value. Which which goes to the question you know what should you do if you are in a situation. Where you are going to have to default or some other loan that house collateral. Probably what you ought to do is try to sell the vehicle.
Because you ll try to get more money for it than the bank will and pay the debt you don t want the you don t want to make to repossess your property finally once they ve collected the collateral. They can that what do they do with the money that they get well. They don t just get to keep it all first it goes to expenses so they had to pay repo man or they had to go through judicial proceedings to get the property back those get paid first next whatever debt you owed that gets paid off then if there s money left. It goes to junior liens and those of other liens.
We talked about so if there is a perfected security interest that was perfected later an unperfect. It s icky interest. A mechanic s lien holder. All those people will get paid next.
Then finally if there s money left. Whatever is left over goes back to the debtor. So that s the basic story of how secure transactions work if you you know when you watch tv. You might kind of watch for people doing work possessions and see if it kind of ” .
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