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Chapter 29
Secured Transactions
See Separate Lecture Outline System
INTRODUCTION
To study this chapter, students should understand two major concepts. First, they should understand why secured
transactions are necessary in business. Nearly every time a retailer makes a significant purchase, a wholesaler buys a large
quantity of stock, or a manufacturer buys raw materials necessary for production, secured credit is involved.
Second, students should understand what a security interest is—that it is not a retention of title to goods, but a lien on
them. A secured transaction is a borrowing of money for a security interest in goods (the debtor’s property.
Thus, a key to understanding a secured transaction is viewing it from a creditor’s perspective. From this perspective, basic
questions are: (1) If a debtor defaults, does the creditor have an enforceable security interest in the debtor’s property? (2) If an
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enforceable security interest in a debtor’s property exists, will the creditor’s security interest take priority over other security
interests and creditors’ claims? The answers to these questions form the basis for the law of secured transactions.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following audio and video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 29.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Legal Conflicts in Business
Secured Transactions—The Loan Is Past Due, Is the Editing Machine Lost?—Since the advertising company is in
default on a loan, its bank threatens to repossess the firm’s editing equipment.
CHAPTER OUTLINE
I. The Terminology of Secured Transactions
UCC terminology is used in all documents in secured transactions. A number of these terms are defined in the text.
ENHANCING YOUR LECTURE—
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ARTICLE SECURITY INTEREST
Prior to the drafting of Article 9 of the Uniform Commercial Code and its adoption by the states, secured
transactions were governed by a patchwork of security devices. The following summary of these devices will help you
to understand the significance and landmark status of Article 9.
SECURITY DEVICES PRIOR TO ARTICLE 9
The security devices in use prior to the adoption of Article 9 were replete with variations that, according to many,
made no logical sense. These devices included chattel mortgages, trust receipts, conditional sales contracts,
assignments of accounts, and pledges. Additionally, each device had its own jargon. Depending on the device used, for
example, a debtor could be called variously a pledgor, a mortgagor, a conditional vendee, an assignor, or a borrower.
ARTICLE 9 STREAMLINED THE LAW GOVERNING SECURED TRANSACTIONS
The pledge and many other types of security devices were all designed to protect creditors’ interests.
Nonetheless, creditors still faced several legal problems. For example, in many states, a security interest could not be
taken in inventory or stock in trade, such as cars for a car dealer or chocolate for a candy manufacturer. Sometimes,
highly technical limitations were placed on the use of a particular security device. If a court determined that a
particular security device was not appropriate for a given transaction, it might void the security interest.
APPLICATION TO TODAY’S WORLD
Although the law of secured transactions is still far from simple, it is now—thanks to the drafters of Article 9—far
more rational and uniform than it was in the days prior to the UCC. The revised Article 9, which became totally
effective in 2001, further streamlined secured transactions law by, among other things, simplifying the filing process
and allowing secured transactions documents to be filed electronically with the appropriate government officials.
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II. Creation of a Security Interest
To have an enforceable security interest: (1) unless a creditor has possession of the collateral, there must be an agree-
ment written or authenticated; (2) a creditor must give value to the debtor; and (3) the debtor must have rights in the
collateral. When these requirements are met, a creditor’s rights attach to the collateral [UCC 9–203].
A. WRITTEN OR AUTHENTICATED SECURITY AGREEMENT
A written or authenticated security agreement must describe (reasonably identify) the collateral and be signed or
authenticated by the debtor [UCC 9–102(a)(7), 9–203(1), 9–108(c)].
B. SECURED PARTY MUST GIVE VALUE
Value is any consideration that supports a simple contract [UCC 1–201(44)]. Value can be security given for a
preexisting (antecedent) obligation or any binding commitment to extend credit.
C. DEBTOR MUST HAVE RIGHTS IN THE COLLATERAL
The debtor’s rights can represent a current or future interest. Title is not a requirement.
ANSWER TO VIDEO QUESTION LTR. A
This chapter lists three requirements for creating a security interest. In the video, which requirement does Laura
assert has not been met? Laura is claiming that the first requirement for creating a security interest has not been met.
The first requirement is that either (a) the collateral must be in the possession of the secured party in accordance with
an agreement, or (b) there must be a written or authenticated security agreement that describes the collateral subject
to the security interest and that is signed or authenticated by the debtor. Laura’s advertising firm is obviously in
possession of the editing equipment. Her claim is that the written and signed loan document did not create a security
III. Perfection of a Security Interest
Perfection protects a security interest against some claims of third parties who may wish to have their debts satisfied
out of the same collateral. Collateral is generally considered either tangible or intangible. The text lists the types of
property that fall into each category and the methods for perfecting security interests in them.
A. PERFECTION BY FILING
The most common method of perfecting a security interest under Article 9 is to file a financing statement with
the appropriate public office. This may be done electronically [UCC 9–102(a)(18)]. A financing statement must
1. The Debtor’s Name
A security agreement must be filed under the name of the debtor. Slight variations are not misleading if a
name can be found by the filing office’s search methods. Other potential problems with this requirement
discussed in the text include—
a. Specific Types of Debtors
A corporate debtor’s name on the financing statement must match its name in the “public records”
b. Trade Names
A debtor’s trade name alone is not sufficient [UCC 9–503(c)].
2. Changes in the Debtor’s Name
3. Description of the Collateral
4. Where to File
Depending on the classification of the collateral, a financing statement is filed in the appropriate state
office of the state in which the debtor is located, or locally with a county official when the collateral
consists of timber to be cut, fixtures, or collateral to be extracted (oil, coal, gas, and minerals) [UCC 9–
301(3), (4); 9–502(b)]. The location of the debtor is—
• For individual debtors, the state of the debtor’s principal residence.
5. Consequences of an Improper Filing
The secured party’s claim, in bankruptcy, is reduced to that of an unsecured creditor.
ANSWER TO VIDEO QUESTION LTR. B
What, if anything, must the bank have done to perfect its interest in the editing equipment? Because the collateral
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involved here is business equipment (the editing machine), the bank should have perfected its interest in the goods by
filing a financing statement with the appropriate government official [UCC 9–301, 9–310(a), 9–313(a)]. Although
B. PERFECTION WITHOUT FILING
1. Perfection by Possession
2. Perfection by Attachment—Purchase Money Security Interest in Consumer Goods
a. Automatic Perfection
A purchase-money security interest (PMSI) can be perfected automatically when it is created under a
written security agreement.
b. Exceptions to Automatic Perfection
Exceptions include security interests that are subject to other federal or state laws, and sales to
businesses or other entities that do not qualify as consumers [UCC 9–311, 9–324].
ENHANCING YOUR LECTURE—
HOW DO YOU PERFECT A SECURITY INTEREST?
The importance of perfecting your security interest cannot be overemphasized, particularly when the debt is large
and you wish to maximize the priority of your security interest in the debtor’s collateral. Failure to perfect or to perfect
properly may result in your becoming the equivalent of an unsecured creditor.
PERFECTION BY FILING
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interest will not be perfected.
TRANSACTIONS OUTSIDE NORMAL BUSINESS RELATIONSHIPS
Sometimes, credit transactions occur outside normal business relationships. You may be asked, for example, to aid
an associate, a relative, or a friend. At that moment, you should reflect on your need for security for any debt that will
be owed to you.
If there is a need for security, then you should perfect your security interest, even if you believe this action is
unnecessary because the debtor is a friend or a relative. That particular friendship or blood relationship is irrelevant
CHECKLIST FOR PERFECTING YOUR SECURITY INTEREST
1. File a financing statement promptly.
2. Describe the collateral sufficiently—sometimes, it is better to err by giving too much detail than by giving too little.
3. Even with friends, relatives, or associates, be sure to perfect your security interest, perhaps by having the debtor
transfer the collateral to your possession.
C. EFFECTIVE TIME DURATION OF PERFECTION
A financing statement is effective for five years from the date of filing [UCC 9–515]. A continuation statement
filed within six months before the expiration date continues the effectiveness for five more years [UCC 9–515(d),
(e)].
ADDITIONAL BACKGROUND—
What Happens When Collateral Is Moved to Another State?
Generally, a properly perfected security interest in collateral moved into a new state continues to be perfected
in the new state for a period of up to four months from the date it was moved or for the period remaining under the
perfection in the original state, whichever expires first [UCC 9–103(1)(d), 9–103(3)(e)]. (Thus, for instance, if there is a
properly perfected interest in harvesting equipment that a debtor takes into a neighboring state, the interest remains
may not have a four-month limitation, and the original filing may have continuous priority [see UCC 9–403(3)].
As for automobiles, perfection of a security interest in a motor vehicle varies according to state law, but typically
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IV. The Scope of a Security Interest
A. PROCEEDS
A secured party has an automatically perfected interest in proceeds from the sale, exchange, or other disposal of
collateral [UCC 9–315]. The interest remains perfected for twenty days after the debtor’s receipt of the proceeds.
When collateral is of a type that is likely to be sold, a security agreement typically provides for extended cover-
age.
B. AFTER-ACQUIRED PROPERTY
This is property acquired after the execution of a security agreement [UCC 9–204(a)].
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D. THE FLOATING-LIEN CONCEPT
Altogether, this is described as a floating lien (a lien that changes over time). The concept applies to inventory as
it is bought and sold, and to goods as they are processed from raw materials to finished goods and sold, turning
into accounts receivable, chattel paper, or cash.
V. Priorities
The text briefly sets out the priority of interests on a debtor’s default. In slightly different (and more abbreviated)
terms, the priorities are—
A. SECURED PARTIES V. OTHER SECURED PARTIES
The first interest to be filed or perfected has priority over other filed or perfected security interests. If no interest
has been perfected, the first to attach has priority [UCC 9–322(a)(1), (3)].
1. Exception—Commingled or Processed Goods
2. Exception—Purchase-Money Security Interest (PMSI)
3. Exception—Security Interest in Inventory
A perfected PMSI prevails over a previously perfected security interest if the holder of the PMSI perfects and
gives the holder of the other interest written notice of the PMSI before the debtor takes possession of the
new inventory [UCC 9–324(b)].
CASE SYNOPSIS—
Case 29.1: Citizens National Bank of Jessamine County
v. Washington Mutual Bank
Rose Day sold a parcel of real estate and a mobile home to Anthony and Kim Reynolds. Washington Mutual Bank
recorded a mortgage in the Reynolds’ names. Later, the Reynolds took out a second mortgage in favor of Citizens
National Bank of Jessamine County. The mobile home was not mentioned in the deed or either mortgage, and Day was
the owner listed on the title certificate. Washington Mutual filed a suit in a Kentucky state court against Citizens,
claiming priority to the land and mobile home. Washington Mutual cited its complaint and a lis pendens notice in
support of its claim. Citizens then signed a title lien statement with the Reynolds on the home, and filed it in the
appropriate state office. The court awarded priority to Washington Mutual’s claim. Citizens appealed.
A state intermediate appellate court reversed. Under the UCC “the sole means of perfecting a security interest in
personal property for which a certificate of title is issued is by placing a notation of the lien on the certificate of title.
There is no dispute Citizens has so perfected its lien but Washington Mutual has not. . . . Unperfected security
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interests are subordinate to perfected security interests.”
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Notes and Questions
How might the parties have avoided this trial and the appeal? The lessons here are obvious: read a document
before you sign it—or, as in this case, file it with the state—be sure it says what you intend, and get anything you’ve
ANSWERS TO QUESTIONS AT THE END OF CASE 29.1
1. According to the court, which of the two security interests in the land on which the manufactured home was
situated had priority? As the court noted in its opinion, “There is no question that Washington Mutual Bank has a valid
2. Suppose that the manufactured home was affixed to the land and regarded as real property. In that situation,
which of the two security interests would have taken priority? In this situation, Washington Mutual’s security interest
would have taken priority because it had perfected its security interest in the real property before Citizens acquired its
security interest in the property. If the mobile home had been affixed to the land, it would have been deemed a part of
the real property subject to Washington Mutual’s security interest.
B. SECURED PARTIES V. UNSECURED PARTIES
Secured parties (perfected or not) prevail over unsecured creditors and creditors who have obtained judgments
against the debtor but who have not begun the legal process to collect on those judgments [UCC 9–201(a)].
C. SECURED PARTIES V. BUYERS
1. Exception—Buyer in the Ordinary Course of Business
2. Exception—Buyers of Consumer Goods Purchased outside the Ordinary Course of Business
3. Exception—Buyers of Chattel Paper (Instruments, Documents, and Securities)
4. Exception—Buyers of Farm Products
A buyer from a farmer has priority over a perfected security interest unless, in some states, the secured
party has filed centrally an effective financing statement or the buyer has notice before the sale.
VI. Rights and Duties of Debtors and Creditors
If a security agreement does not provide to the contrary—
A. INFORMATION REQUESTS
When filing a financing statement, a creditor can ask for a copy [UCC 9–523(a)]. A prospective creditor can ask for
information on possible perfected financing statements involving a named individual [UCC 9–523(c), (d)].
B. RELEASE, ASSIGNMENT, AND AMENDMENT
A secured party can release collateral and end his or her security interest [UCC 9–512], or assign the interest to
another [UCC 9–514]. Both parties must sign an amendment to a financing statement [UCC 9–512].
C. CONFIRMATION OR ACCOUNTING REQUEST BY DEBTOR
A debtor can ask about the amount of a debt as of a specific date [UCC 9–210].
VII. Default
Because Article 9 does not define default, the parties can decide for themselves what constitutes default. Default
occurs most commonly when a debtor fails to make payments or goes bankrupt.
A. BASIC REMEDIES
The creditors’ remedies are cumulative.
1. Repossession of the Collateral—The Self-Help Remedy
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A secured party can take possession of collateral on default unless the security agreement states otherwise,
as long as there is no breach of the peace. Otherwise the party must resort to judicial process [UCC 9–609].
Other state law determines what constitutes breach of the peace (generally, trespass onto real property,
assault, battery, or breaking and entering).
ADDITIONAL BACKGROUND—
Breach of the Peace
George Salisbury III borrowed $13,000 from Colorado Central Credit Union, giving as collateral several vehicles that
he owned. Salisbury defaulted on the loan, and Colorado Central hired a repossession company to repossess the
vehicles. The repossession crew towed away one of the vehicles from Salisbury’s property in Slater, Colorado, near the
Wyoming border. The crew found two other vehicles on a ranch just across the border, after following a private
In Salisbury Livestock Co. v. Colorado Central Credit Union, 793 P.2d 470 (Wyo. 1990), the Supreme Court of
Wyoming reversed the trial court’s decision and remanded the case for trial. The state supreme court concluded that
2. Judicial Remedies
A secured party’s other basic remedies include proceeding to judgment on the underlying debt (execution
and levy). This is rarely used, unless the value of the collateral is considerably below the amount of the debt
and the debtor has other assets to satisfy the debt [UCC 9–601(a)].
CASE SYNOPSIS—
Case 29.2: First National Bank of Litchfield v. Miller
CHAPTER 29: SECURED TRANSACTIONS 703
The Millers signed a contract to buy a boat from Norwest Marine. The form stated that the Millers had inspected
and accepted the boat. The Millers obtained financing through Norwest with First National Bank of Litchfield. They
signed a loan agreement with the bank, which sent Norwest full payment and received title. After Norwest performed a
warranty repair, however, the Millers refused to pick up the boat. They told the bank that they did not want it and
the terms of the loan, among other things. One of the issues was whether the Millers had accepted delivery of the
The Connecticut Supreme Court held that the Millers had accepted delivery of the boat under the UCC. The Millers’
purchase agreement provided that they had inspected the boat and were satisfied. Their contract with the bank stated
that they had accepted delivery of the boat, which was registered in their names.
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Notes and Questions
Assuming that the bank filed a financing statement, didn’t the statement protect the bank’s security interest in the
boat? Presumably, the boat was bought by a buyer in the ordinary course of business, who of course took the good
free of any such security interest.
Should the bank have attempted to resolve the consumer problem suffered by the Millers rather than suing them
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 29.2
How could Norwest and the bank have avoided the problem that arose in this case? The bank and Norwest could
not have done much differently. The Millers acted improperly after the fact—all paperwork was in order and the bank
and Norwest acted properly.”
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 29.2
Why should the Millers be held responsible for a statement that Norwest made in the retail installment contract,
which said the boat had been accepted by the Millers? The Millers signed a contract that contained an explicit
terms of their agreement even if they did not read those terms or were unaware of the terms in the contract. In this
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case, the Millers took possession of the boat, registered it, and then brought it back for repairs and asked for additional
parts to be installed on it (a depth finder and radio). Therefore, it is not unfair or unethical for the court to decide that
the Millers had accepted the boat.
B. DISPOSITION OF COLLATERAL
After default and repossession, a secured party can retain the collateral or sell, lease, or otherwise dispose of it in
any commercially reasonable manner [UCC 9–602, 9–603, 9–610, 9–620].
1. Retention of the Collateral by the Secured Party
2. Consumer Goods
3. Disposition Procedures
To dispose of collateral, a public sale is not required, and there are no specific time requirements.
Generally, for a sale to be conducted in a commercially reasonable manner, notice of the place, time, and
manner of sale is required [UCC 9–602, 9–603, 9–610, 9–613].
CASE SYNOPSIS—
Case 29.3: Hicklin v. Onyx Acceptance Corp.
Shannon Hicklin bought a 1993 Ford Explorer under an installment sales contract. When she fell three payments
behind—still owing $5,741.65—Onyx Acceptance Corp. repossessed the car. It sold for $1,500 at a private auction.
After deducting costs, there was a deficiency of $5,018.88. Onyx filed a suit in a Delaware state court to collect this