CHAPTER
29
SECURITY INTERESTS IN PERSONAL
PROPERTY
I. OBJECTNES:
This chapter is intended to give the students an understanding of the Code rules that
govern
secured transactions in personal property. After reading the chapter and attending class, a
student
should be able
to:
1. Recognize and describe the different classes or types of collateral that can be used
as
collateral.
2. List and explain the three requirements for creating a security interest under Article 9 of
the
Uniform Commercial
Code.
3. Explain why it is important that the creditor perfect his security interest and list the
three
main ways of perfecting a security
interest.
4. Recall the general priority rules that the Code sets out for determining which of
any
conflicting security interests take precedence over other security interests or
liens.
5. Explain what is meant by a purchase money security interest and discuss why the
Code
accords it preferential
treatment.
6. Describe the steps a creditor can take when there is a default on the part of the
debtor.
II. ANSWER TO
INTRODUCTORY PROBLEM
A. The first question following the hypothetical that appears at the beginning of the chapter
asks
what the bank had to do to protect its interest in the Honda until Emily paid off the loan.
The
bank can protect itself by obtaining a security interest in the Honda and then perfecting
the
security interest by having it noted on the car’s
title.
B. The second question asks whether the bank’s lien would have priority over the lien of
an
artisan or mechanic who had done repair work on the car and was still in possession of it.
The possessory lien of the artisan or mechanic would have priority over the bank’s
lien.
C. The third question asks whether the bank was within its rights in repossessing the car in
the
manner it did. While the creditor has the right to repossess the collateral on a default by
the
debtor, it can only use self-help to do so if it can be accomplished without a breach of
the
peace. In this instance, it appears that there was a breach of the peace and the
repossession
effort should have been stopped when it became apparent that this was the
case.
III. SUGGESTIONS FOR LECTURE
PREPARATION:
A.
Introduction
1. Review the history of security devices contained in Chapter 28. It should be
emphasized
that Article 9 of the Code is designed to reconcile the competing interests of
debtors,
creditors, and third-party claimants to the collateral, especially by eliminating secret liens
on property. Note what is at stake for the creditor if he does not comply with
the
statutory
requirements.
Chapter 29 – Security Interests in Personal
Property
29-1
© 2016
by McGraw-Hill Education.
This
is proprietary material solely
for
authorized instructor use. Not authorized for
sale or
distribution in any
manner. This document may
not
be copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website, in whole
or
part.
2. You may wish to review the nature of the lien or security interest, perhaps by using
the
string and the toy car illustration suggested in Chapter 28 of this teacher’s manual.
List
and discuss the various classifications of collateral covered by Article 9. Explain
that
these classifications affect how a creditor goes about obtaining an enforceable
security
interest in that type of collateral. Note that an item can fall into different
classifications,
depending on its
owner.
Ask the students what type of collateral are the
following:
a. Stan buys a stereo at Store and grants Store a security interest in the
stereo.
(Consumer
goods)
b. General Motors Corp. buys a machine for its assembly line from Assembly Co.
and
grants Assembly Co. a security interest in the machine.
(
Equipment
)
c. Joe borrows $500 from Mary and gives her 10 shares of General Motors stock
as
collateral. (Investment
property
)
d. Same as #c, except Joe gives Mary his rights to a copyrighted song.
(
General
intangible
)
e. Retail Co. borrows $5,000 from Bank and gives Bank a security interest in its
accounts receivable.
(
Accounts
)
f. Joan buys roofing shingles from Lumber Co. and grants Lumber Co. a
security
interest in the shingles. Joan installs the shingles on the roof of her
house.
(
Fixtures
).
g. Retail Co. buys TVs for resale from Sharp TV Manufacturing Co. Retail gives
Sharp
a security interest in the TVs.
(
Inventory
)
Additional Example Problem Case
#1.
As a lead in to the material that follows in the text, briefly note the three
main
concepts of Article 9: attachment, perfection, and priority. Attachment permits
the
creditor to enforce his security interest
against
the debtor. Perfection may permit
the
creditor to obtain a priority over other creditors and claimants to the
property.
Perfection is a way to obtain priority, but priority may not always be
obtained
although perfection is accomplished in timely
fashion.
B. Attachment of the Security
Interest
1. Attachment. Note that attachment is a technical legal term not having the same
meaning
as it is given in common English usage. A security interest attaches to the collateral
when
it is enforceable against the debtor. Point out that attachment does not ensure that
the
creditor has a priority over other creditors. It merely means that he can enforce
the
security interest against the debtor; that is, he has rights in the collateral superior to
the
debtor upon
default.
List the requirements for attachment. (1) There must be an agreement to create a
security
interest. (2) The creditor must give value, and (3) the debtor must have rights in
the
collateral.
2. Security Agreement. Note that the security agreement generally must be in writing
and
“authenticated”
by the debtor. Refer the students to the security agreement reproduced in
the text and point out the parts of the security agreement that create a valid
security
interest. Note the importance of including a clear description
of the collateral.
In Re Shire! (page 802). The court concluded that the credit card application
which
included-in
small type in the middle of a seven page
document-a
statement
granting
Sight’N
Sound a security interest in all merchandise purchased with the credit was
not
sufficient to grant the creditor a security interest in a refrigerator subsequently
purchased
by the debtor using the credit
card.
Points for Discussion: Note the court‘s focus on the sufficiency of the description of
the
collateral and whether it reasonably identified the collateral in which the debtor
was
granting a security interest to the creditor. Ask the student what steps
Sight’N Sound
should take to make sure that it would obtain an enforceable security interest
in
subsequent sales of merchandise by buyers using its credit
card.
Example: Problem Case
#2.
Cyber Law in Action: Revised Article 9 is e-Commerce Friendly (page 804): Note
that
Revised Article 9 no longer requires that a security agreement creating a security interest
be
“signed” by the
debtor-instead
it allows an “authenticated
record–one
produced by
a
consumer
online-to
substitute for the signed
writing.
3. Future Advances. Define future advances. Note that they can be covered by a
security
agreement and that the creditor has advanced value when the advance is actually
made.
4. After-Acquired Property. Note that a security agreement may be drafted to give a
creditor
a security interest in after-acquired property of the debtor. Explain when the
security
interest attaches to such property and note the potential for conflict with other
creditors
who may already claim an interest in that same
property.
5. Proceeds. Note that proceeds from the disposal of the collateral covered by a
security
agreement are automatically covered as well. This is important where the debtor sells
the
property or it is damaged or destroyed but is covered by
insurance.
C. Perfecting the Security
Interest
1. Perfection. Indicate how perfection occurs and what advantage perfection confers upon
a
creditor. Note that perfection is a means of obtaining priority, but that timely
perfection
does not ensure priority, especially when purchase money security interests are
involved.
2. Perfection by Public Filing. List the requirements a financing statement must meet
and
the
potential place of filing. Note the purpose of a public filing: to place others on
notice
of the secured party’s claim against the collateral. Hence, the filing requirement
helps
eliminate secret liens. Note that the financing statement is valid for up to five years
and
that a continuation statement may be filed to extend the time. Note also that the debtor is
entitled to have a termination statement filed when the obligation being secured is
fulfilled.
Note, also, the new version of the Financing Statement contained in
Revised
Article 9 is reproduced in the text as Figure 1 (pages
805-806).
3. Possession by Secured Party as Public Notice. Discuss the rationale for
achieving
perfection by possession at the collateral by the creditor. Note that when a debtor
does
no
t
have possession of the collateral a person should be cautious about taking a
security
interest in it. A creditor’s possession of the collateral puts other creditors on notice of
the
first creditor’s security interest. Take some care in explaining field warehousing as
that
subject has appeared frequently on the CPA
Exam.
4. Perfection by Attachment. Perfection by attachment alone is a difficult and
important
concept, and deserves special attention. You should note that a secret lien is created
by
this rule. However, the burden on the few persons over whom the secured creditor
who
perfects by attachment has priority is deemed outweighed by the benefit to the
secured
creditor and commerce by not requiring a public filing. Most security interests that
are
perfected by attachment alone are ones accompanying sales transactions that
commonly
are secured. The most significant security interest perfected by attachment is
the
purchase money security interest in consumer
goods.
Note that the creditor with a security interest perfected by attachment alone
has
incomplete priority. Some persons will take priority over the security interest despite
the
existence of the perfection by
attachment.
At this point you should define clearly the purchase money security interest. Which
of
the following are purchase money security interests (PMSI) and, as such, may
be
perfected by
attachment:
a. Hal buys a camera on credit from Camera Store and gives Camera Store a
security
interest in the camera.
(PMSI)
b. Same as #1 except Bank loans Hal the money to buy the camera and Hal gives
Bank
a security interest in the camera.
(PMSI)
c. Hal gets a loan from Bank to pay for his camera, which he bought on credit
from
Camera Store two months earlier. Hal gives Bank a security interest in the
camera.
(
NotaPMSI
)
In re Lance (page 808). Where a Credit Union provided funds for the purchase of
a
snowmobile, it obtained a purchase money security interest that was
automatically
perfected as a consumer good that had been acquired for personal use. Because
the
snowmobile did not qualify as a motor vehicle under Missouri law, the Credit Union
was
not required to perfect by placing notice of its security interest on a title issued by
the
state.
Points for Discussion: This case provides a good opportunity to discuss the principle
(
and
limits) of perfection by attachment of security interests to consumer goods. Note that
if
the
consumer sold the snowmobile to his neighbor who had no notice that it was
subject
to the Credit Union’s security interest, the neighbor would take free and clear of
the
security interest as the automatic perfection provides no protection against a good
faith
purchaser for
value.
Examples: Problem Cases #3 and
#4.
5. Motor Vehicles. Note the rules that apply when state law requires a certificate of
title,
i.e., that the security interest be noted on the
title.
6. Fixtures. Note the special rules that apply to fixtures, particularly the requirement
that
the notice of the security interest be filed with the real estate records. Briefly review
the
material on fixtures in Chapter
24.
D. Priority
Rules
1. Importance of determining priority. Discuss the importance to a creditor of obtaining
a
priority position over other creditors relative to the collateral of a debtor and the
problems
a creditor may face if he does not have
priority.
2. General Priority Rules. List on the chalkboard (or distribute to students) the priority
rules.
29-4
©
2013 by McGraw-Hill Education.
This is
proprietary material solely
for
authorized instructor use.
Not
authorized
for
sale
or
distribution
in
any
manner. This document may
not be
copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
part.
a. General rule as between
creditors
(1) the first to file or to perfect
wins
(2) if none are perfected, the first to attach
wins.
Woven Treasures, Inc. Hudson Capital, L.L.C. (page 811). Where a consignor
that
held a security interest in inventory failed to perfect that security interest, its
interest
was inferior to a security interest granted to a subsequent creditor that took a
security
in the inventory of a debtor (including the consigned items) and perfected
that
interest.
b. PMSI in inventory has priority over a conflicting security interest if filed and
notice
in writing is given to creditor holding the conflicting security interest before
the
inventory is
delivered.
Example: Problem Case
#5.
c. PMSI (purchase money security interest) in equipment or other
non-inventory
collateral has priority over conflicting security interest if filed within twenty
days
after the equipment is
delivered.
Example: Problem Case
#6.
d. PMSI in fixtures has priority over conflicting security interest if filed within
twenty
days after affixed to real
estate.
In Re Borden (page 813). Where a debtor removed his property without
permission
from the premises of a common law lien holder who had performed repairs on
the
equipment, the court held that the artisan did not lose the artisan’s lien it held on
the
property and that when the property was later returned to it, it had a superior right
to
the equipment over the competing claim of the holder of a security interest in
the
equipment.
Points for discussion: What policy considerations influenced the court’s decision in
this
case?
e. Artisan’s lien created in ordinary course of business has priority over
conflicting
security
interest.
Example: Problem Case
#8.
f. BITOCOB (buyer in the ordinary course of business) takes free of security
interest
(usually PMSI in inventory) created by his seller even if filed and BITOCOB
knows
of the security
interest.
Example: Problem case
#7.
g. Bona fide consumer purchaser for value takes free of unknown, unfiled PMSI in
consumer
goods.
29-5
©
2016 by McGraw-Hill Education. This
is
proprietary material solely
for
authorized instructor use.
Not
authorized for sale
or
distribution
in
any
manner. This document may
not be
copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
part.
Since these rules are difficult to understand in the abstract, you should illustrate
each
rule with an example, such as those used in the text. With each example explain
when
perfection occurs, state who has priority, and give the purpose of the
applicable
priority
rule. Using examples like those in the textbook will help students
understand
that perfection does not ensure
priority.
h. Fixtures. In certain situations, the holder over a security interest in a fixture
has
priority over an encumbrancer or the owner of the real
estate.
E. Default and
Foreclosure
1. Default. Note the events that constitute default are not defined in the Code but rather
are
left to the parties to decide by agreement in good
faith.
2. Right to Possession. Remind the students that repossession is the “pulling of the
string”
attached to the collateral. An important issue concerning repossession is whether
the
creditor has breached the peace. Ask the students whether the following repossessions
are
breaches of the
peace:
a. The debtor is intimidated by the size of a 6 foot, 5 inch, 275 pound
repossession
agent. (Not a breach of the
peace.
)
b. A repossessor enters a locked door of a home. (Breach
of the
peace.
)
c. A creditor repossesses a locked car parked on the street. (Not a breach of the
peace
).
d. A creditor repossesses a car in the debtor’s driveway. (Not a breach of the
peace.
)
e. A creditor repossesses a car in the debtor’s garage. (Not a breach of the peace if
the
garage door is open; a breach of the peace if the garage door is
locked.
)
Giles v. First Virginia Credit Services, Inc. (page. 783): The court held that the
agent
for First Virginia Credit Services had not breached the peace in the course
of
repossessing the
automobile.
Points for Discussion: Contrast the situation here to the one in Problem case
#9.
What kinds of situations is the rule re breach of the peace trying to
avoid?
3. Sale of the Collateral/Consumer Goods. Note that the debtor always has the power
to
force the creditor to sell the collateral. The procedure that must be followed
to
exercise
this power depends upon the type of collateral and the extent to which
the
debtor has paid his debt. The seller may propose to keep the collateral upon
proper
notice to the debtor, but if the debtor disagrees, the collateral must be sold at a
public
sale. The Code makes it difficult for the seller to retain the collateral in satisfaction
of
the debt. (To prevent the creditor from getting a windfall
profit.
)
Example: Problem
#10.
4. Distribution of Proceeds. List the order which the proceeds are distributed on the sale
of
the collateral. Note when the debtor may be liable for a deficiency
judgment.
5. Liability of Creditor. Note that a creditor must be careful to comply with the
provisions
of Article 9 or he may become liable to any person injured as a
result.
6. Ethics in Action: What is the Ethical Thing To Do? (page 821): Here the students
must
consider whether their interest stops at protecting their own financial interest–or
whether
they should put themselves into the shoes of the other party to the transaction and
ask
how
they would like to be
treated
IV. SUGGESTED
REFERENCES:
A. James Brook, Secured
Transactions:
Examples
and
Explanations (5th edition), Aspen
Law
and Business,
2010.
B. Hagedorn, Uniform Commercial Code in a Nutshell, West,
2007.
C. Uniform
Commercial
Code
Reporting
Service, Chicago, Callaghan
&
Co. A complete
Code
service including the Code and variations made by adopting states. This service
publishes
many of the Code cases, which are easily accessed through the service’s indexing
system.
D. James J. White
&
Robert S. Summers, Principles
of
Secured
Transactions (Concise
Hornbook
2007) An excellent hornbook for Article 9, this book presents the history of the
law
concerning secured transactions, explains why the law is what it is, and studies ambiguities in
the
Code.
E. Steven
0.
Weise, “A Comparison of the Current Article 9 and the New Article 9″ and
“A
Comparison of Security Agreements Under the Current Article 9 and the New Article
9″,
Uniform Commercial Code Law Journal (Winter 2000). A very useful comparison of
the
former and revised versions of Article
9.
29-9
©
2013 by McGraw-Hill Education. This
is
proprietary material solely
for
authorized instructor use.
Not
authorized
for
sale
or
distribution
in
any
manner. This document may
not
be copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
part.