Business Law and the Regulation of Business Chapter 38: Secured Transactions and Suretyship By...

Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 38: Secured Transactions Chapter 38: Secured Transactions

and Suretyshipand Suretyship

Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 38: Secured Transactions Chapter 38: Secured Transactions

and Suretyshipand Suretyship

ByBy

Richard A. MannRichard A. Mann

&&

Barry S. RobertsBarry S. Roberts

Topics Covered in this ChapterTopics Covered in this Chapter

I. Secured Transactions In Personal PropertyI. Secured Transactions In Personal Property A. Essentials of Secured TransactionsA. Essentials of Secured Transactions B. Classification of CollateralB. Classification of Collateral C. AttachmentC. Attachment D. PerfectionD. Perfection E. Priorities Among Competing InterestsE. Priorities Among Competing Interests F. DefaultF. Default

II. SuretyshipII. Suretyship A. Nature and FormationA. Nature and Formation B. Rights of SuretyB. Rights of Surety C. Defenses of Surety and Principal DebtorC. Defenses of Surety and Principal Debtor

Secured Transactions Secured Transactions in Personal Propertyin Personal Property

Definition of Secured TransactionDefinition of Secured Transaction – – an an agreement by which one party obtains a agreement by which one party obtains a security interest in the personal property of security interest in the personal property of another to secure the payment of a debtanother to secure the payment of a debt

DebtorDebtor – – person who has an interest in the person who has an interest in the collateral other than a security interest; collateral other than a security interest; typically is the person obligated on the debt typically is the person obligated on the debt secured by the security interestsecured by the security interest

Secured PartySecured Party – – person in whose favor a person in whose favor a security interest in the collateral is created or security interest in the collateral is created or provided for under the security agreementprovided for under the security agreement

Secured Transactions Secured Transactions in Personal Propertyin Personal Property

CollateralCollateral – – property subject to a security property subject to a security interestinterest

Security AgreementSecurity Agreement – – agreement that agreement that creates or provides for a security interestcreates or provides for a security interest

Security InterestSecurity Interest – – right in personal property right in personal property that secures payment or performance of an that secures payment or performance of an obligationobligation

Purchase Money Security InterestPurchase Money Security Interest – – security interest in goods purchased; interest security interest in goods purchased; interest is retained either by the seller of the goods or is retained either by the seller of the goods or by a lender who advances the purchase priceby a lender who advances the purchase price

RightsRights

Fundamental Rights of DebtorFundamental Rights of Debtor – – – to redeem collateral by payment of the to redeem collateral by payment of the

debtdebt– – – to possess general rights of ownershipto possess general rights of ownership

Fundamental Rights of Secured PartyFundamental Rights of Secured Party – – – to recover amount of debtto recover amount of debt– – – to have collateral applied to payment of to have collateral applied to payment of

debt upon defaultdebt upon default

Classification of CollateralClassification of Collateral

GoodsGoods – – things that are movable when things that are movable when a security interest attachesa security interest attaches

Indispensable PaperIndispensable Paper IntangiblesIntangibles

Types of Goods Types of Goods

Consumer GoodsConsumer Goods – –bought or used primarily bought or used primarily for personal, family, or household purposesfor personal, family, or household purposes

Farm ProductsFarm Products – –part of a farming operation part of a farming operation including crops, livestock, or supplies used or including crops, livestock, or supplies used or produced in farmingproduced in farming

InventoryInventory – –non-farm product goods (1) held non-farm product goods (1) held for sale, lease, or to be furnished under a for sale, lease, or to be furnished under a service contract, or (2) raw materials, work in service contract, or (2) raw materials, work in process, or materials used in a businessprocess, or materials used in a business

Types of Goods Types of Goods

EquipmentEquipment – – goods not included in the goods not included in the definition of consumer goods, inventory, definition of consumer goods, inventory, or farm productsor farm products

FixturesFixtures – – goods that are so related to goods that are so related to real property that they are considered real property that they are considered part of the real estatepart of the real estate

AccessionAccession – – goods installed in or goods installed in or firmly affixed to personal propertyfirmly affixed to personal property

Indispensable PaperIndispensable Paper Chattel PaperChattel Paper – – tangible or electronic record tangible or electronic record

that evidences both a debt and a security that evidences both a debt and a security interest in specific goodsinterest in specific goods

InstrumentsInstruments – – negotiable instruments or any negotiable instruments or any other writing that evidences a right to other writing that evidences a right to payment of money that is transferable by payment of money that is transferable by delivery with any necessary indorsementdelivery with any necessary indorsement

DocumentsDocuments – – documents of titledocuments of title Investment PropertyInvestment Property – – investment security investment security

(stocks and bonds), security accounts, (stocks and bonds), security accounts, commodity contracts, and commodity commodity contracts, and commodity accountsaccounts

IntangiblesIntangibles AccountAccount – – right to payment for (1) goods right to payment for (1) goods

sold, leased, licensed, or otherwise disposed sold, leased, licensed, or otherwise disposed of or (2) services rendered.of or (2) services rendered.

General IntangiblesGeneral Intangibles – – catch-all category; catch-all category; software, goodwill, literary rights, interests in software, goodwill, literary rights, interests in patents, trademarks, and copyrights.patents, trademarks, and copyrights.

ProceedsProceeds – – whatever is received upon sale, whatever is received upon sale, lease, license, exchange, or other disposition lease, license, exchange, or other disposition of collateral.of collateral.

Deposit AccountsDeposit Accounts – – a demand, savings, a demand, savings, time, or similar account maintained with a time, or similar account maintained with a bank.bank.

AttachmentAttachment

DefinitionDefinition – – security interest that is security interest that is enforceable against the debtor.enforceable against the debtor.

ValueValue – – consideration under contract law, a consideration under contract law, a binding commitment to extend credit, or an binding commitment to extend credit, or an antecedent debt.antecedent debt.

Debtor's Rights in CollateralDebtor's Rights in Collateral – – a debtor is a debtor is deemed to have rightsdeemed to have rights in personal property in personal property the debtor owns, possesses, is in the process the debtor owns, possesses, is in the process of acquiring, or has the power to transfer of acquiring, or has the power to transfer rights to a secured party.rights to a secured party.

Security AgreementSecurity Agreement

An agreement between debtor and An agreement between debtor and creditor creating a security interest: creditor creating a security interest: must be in a record authenticated by the must be in a record authenticated by the debtor, unless, in the case of most debtor, unless, in the case of most types of collateral, the secured party types of collateral, the secured party has possession of the collateral, and has possession of the collateral, and must contain a reasonable description must contain a reasonable description of.of.

Sample Security AgreementSample Security Agreement

SECURITY AGREEMENT

Daniel Debtor of 113 Hillsborough Street, City of Raleigh, County of Wake, State of North Carolina, hereinafter called the “Debtor,” does hereby grant to S.P. & Assoc., Inc., of Raleigh, North Carolina, hereinafter called “S.P.,” its successors and assigns, a security interest in the following described property, hereinafter called the “Collateral,” to-wit:

One (1) Deluxe Personal ComputerSerial number VDL16794321Manufacturer: Apex Mechanical Equipment Co.Model 420A

to secure the payment of Debtor’s note or notes of even date herewith in the aggregate principal or aggregate face amount of Seven Thousand Five Hundred Dollars ($7,500.00), together with interest and any renewal or extension thereof, in whole or in part, and any and all other debts, obligations, and liabilities of any kind of Debtor to S.P., however created, arising, or evidenced, whether direct or indirect, joint or several, whether as maker, indorser, surety, guarantor or otherwise, whether now or hereafter existing, whether due or not due, and however acquired by S.P. (all hereinafter called the “Obligations”).

August 22, 1996

Sample Security Agreement Sample Security Agreement (cont.)(cont.)

DEBTOR WARRANTS AND AGREES THAT:

1. Except for the security interest hereby granted, the Debtor will use the proceeds of advances made hereunder, which proceeds may be paid by the S.P. directly to the seller of the Collateral, to become the owner of marketable title to the Collateral free from any prior lien, security interest or encumbrance, and the Debtor will defend the Collateral against all claims and demands of all persons at any time claiming an interest therein.

2. The Collateral is and will be used primarily for personal, family, or household purposes, and the Debtor’s residence is that shown at the beginning of this Agreement.

3. The Collateral will be kept at the Debtor’s address shown at the beginning of this Agreement.

4. There are no financing statements covering any of the Collateral on file in any public office, and the Debtor has not executed in favor of other secured parties financing statements that could be placed on file prior to any of the S.P.’s financing statements


5. DEBTOR AGREES THAT:

A. He will pay to S.P. all amounts due on the note or notes mentioned above and the other Obligations secured hereby as and when same shall be due and payable, whether by maturity, acceleration, or otherwise, and will pay to S.P. reasonable attorney’s fees incurred by S.P. in collection of said Obligations or enforcement of this Security Agreement.

B. He will maintain all mechanical equipment and machinery hereby covered in sound and efficient operating condition, including the procurement and installation of such new parts, attachments, and replacements as may be necessary or desirable to maintain said Collateral in proper operating condition.

C. He will maintain such insurance upon all of the Collateral as S.P. may require, payable to Debtor and S.P. as their interest may appear, in an amount not less than the actual value of the Collateral.

D. He will pay all insurance premiums and taxes, licenses, or other charges assessed against the Collateral or required to be paid in connection with the use and ownership of the Collateral. If Debtor shall fail to pay such insurance premiums, taxes, licenses, or other charges when they are due, S.P., at its option, may pay the cost thereof, and the amounts so paid and advanced shall be added to the indebtedness secured hereby and shall bear interest at the maximum rate permitted by Law.

E. He will not (a) permit any liens or security interest to attach to any of the Collateral; (b) permit any of the Collateral to be levied upon under any legal process; (c) sell or dispose of any of the Collateral without prior written consent of S.P.; (d) permit anything to be done that may impair the value of the Collateral or the security intended to be afforded by this Agreement.

F. He will immediately notify S.P. in writing of any change of the Debtor’s place of residence, place or places of business, or the location of the Collateral.

G. He will not remove the Collateral from the State of North Carolina without prior written consent by S.P.


6. IT IS FURTHER AGREED THAT THE DEBTOR SHALL BE IN DEFAULTUNDER THIS AGREEMENT:

A. If the Debtor uses any of the Collateral in violation of any statute or ordinance or the Debtor is found to have a record or reputation for violating the laws of the United States or any State relating to liquor or narcotics; or

B. If the Debtor shall fail to perform any covenant or Agreement made by him herein; or

C. If the Debtor shall fail to make due and punctual payment of any of the Obligations secured hereby when and as any part or all of such Obligation becomes due and payable; or

D. If any warranty, representation, or statement made or furnished to S.P. by or on behalf of the Debtor in connection with this Agreement proves to have been false in any material respect when made or furnished; or

E. If the Collateral suffers material damage or destruction; or

F. If any bankruptcy or insolvency proceedings are commenced by or against the Debtor or any guarantor or surety for the Debtor; or


G. If the Debtor dies, becomes incompetent, is dissolved, or the Debtor’s existence otherwise terminates. Upon the happening of any of the above events of default or in the event that S.P., in good faith, deems itself insecure, S.P. may, at its option, declare all Obligations secured hereby due and payable immediately and have, in addition to other rights and remedies, the rights and remedies of a secured party upon default under the North Carolina Uniform Commercial Code. The waiver of any particular default of the Debtor hereunder shall not be a waiver of any other or subsequent default of the Debtor.

Any requirement of the North Carolina Uniform Commercial Code of reasonable notification of time and place of public sale, or the time on or after which private sale may be held, may be met by sending written notice by registered or certified mail to the above address of the Debtor at least five (5) days prior to public sale or the date after which private sale may be made.

The Debtor shall be and remain liable for any deficiency remaining after applying the proceeds of disposition of the Collateral first to the reasonable expenses of re-taking, holding, preparing for sale, selling, and the like, including the reasonable attorney’s fees, incurred by S.P. in connection therewith, and then to satisfaction of the Obligations secured hereby.


This Agreement and all rights, remedies, and duties hereunder, including matters of construction, shall be governed by the laws of North Carolina.

This Agreement shall apply to, inure to the benefit of, and be binding upon the heirs, administrators, executors, and assigns of S.P. and the Debtor. This is the entire agreement of the parties, and no amendment, alteration, deletion, or addition hereto shall be effective and binding unless it is in writing and signed by the parties.

Debtor acknowledges that this Agreement is and shall be effective upon execution by the Debtor and delivery hereof to S.P., and it shall not be necessary for S.P. to execute or otherwise signify its acceptance hereof.

Signed and delivered on the day first above written.

_________________________(SEAL)Daniel Debtor S.P. & Assoc., Inc.(Secured Party)By: __________________________


PerfectionPerfection

EffectEffect – – enforceable against most third enforceable against most third parties.parties.

Automatic PerfectionAutomatic Perfection – – perfection upon perfection upon attachment; applies to a purchase money attachment; applies to a purchase money security interest in consumer goods and security interest in consumer goods and isolated assignments of accounts.isolated assignments of accounts.

Temporary PerfectionTemporary Perfection – – a security interest in a security interest in certificated securities, instruments, and certificated securities, instruments, and negotiable documents is automatically negotiable documents is automatically perfected for twenty days.perfected for twenty days.

Methods of PerfectingMethods of Perfecting

Filing a Financing StatementFiling a Financing Statement – – document document filed to provide notice of a security interest; filed to provide notice of a security interest; may be used for all collateral except deposit may be used for all collateral except deposit accounts, letter-of-credit rights, and money.accounts, letter-of-credit rights, and money.

PossessionPossession – – by the secured party (a by the secured party (a pledge); may be used for goods, pledge); may be used for goods, instruments, money, negotiable documents, instruments, money, negotiable documents, tangible chattel paper, or certificated tangible chattel paper, or certificated securities.securities.

ControlControl – – may be use to perfect a security may be use to perfect a security interest in electronic chattel paper, interest in electronic chattel paper, investment property, non-consumer deposit investment property, non-consumer deposit accounts, and letter-of-credit rights.accounts, and letter-of-credit rights.

Methods of Perfecting Security Methods of Perfecting Security InterestsInterests

Applicable Method of Perfection

Collateral Filing Possession Automatic Temporary

Goods

Consumer M M PMSI

Equipment M M

Farm products M M

Inventory M M

Fixtures M M

Indispensable paper

Chattel paper M M

Instrument M 21 days

Document M M 21 days

Intangibles

Account M IsolatedAssignment

General intangibles M

Requirements for Enforceability of Requirements for Enforceability of Security InterestsSecurity Interests

I. Attachment II Perfection

A. Agreement1. in writing (unless SP has

possession),2. providing a security interest,3. in described collateral,4. signed by debtor,

B. Value given by secured party, and

C. Debtor has rights in collateral.

A. Files a financing statement, or

B. SP takes possession, or

C. Automatically, or

D. Temporarily.

Priorities among Secured PartiesPriorities among Secured Parties

RepossessionRepossession– – the secured party may take the secured party may take possession of the collateral on default without possession of the collateral on default without judicial process if it can be done without a judicial process if it can be done without a breach of the peace.breach of the peace.

SaleSale– – the secured party may sell, lease, the secured party may sell, lease, license or otherwise dispose of any collateral.license or otherwise dispose of any collateral.

AcceptanceAcceptance– – the secured party, unless the the secured party, unless the debtor objects, may retain the collateral in full debtor objects, may retain the collateral in full or partial satisfaction of the obligation (with or partial satisfaction of the obligation (with the exception of the compulsory disposition of the exception of the compulsory disposition of some consumer goods).some consumer goods).

PrioritiesPriorities

VS

UnsecuredCreditor

Creditor withUnperfectedSecurity Interest

Creditor withPerfected SecurityInterest

Creditor with PerfectedPurchase MoneySecurity Interest

Unsecured creditor = Creditor withunperfected securityinterest

first to attach

Creditor with perfectedsecurity interest-noninventory

first to file orperfect if PMSI perfected

within grace period

Creditor with perfectedsecurity interest-inventory

first to file orperfect

if PMSI gives notice

and perfects by timedebtor gets possession

Buyer in ordinarycourse of business if created by

immediate seller

Consumer buyer ofconsumer goods if not filed

Lien creditor (includingtrustee in bankruptcy) first in time first in time, but PMSI has

grace period

Trustee in bankruptcy-voidable preferences if secured party

perfects withingrace period

if PMSI perfects within

grace period

Suretyship -- Suretyship -- Nature and Nature and FormationFormation

SuretySurety – – a person who promises to a person who promises to answer for the payment of a debt or the answer for the payment of a debt or the performance of a duty owed to the performance of a duty owed to the creditor by the principal debtor, upon creditor by the principal debtor, upon the principal debtor's failure to perform.the principal debtor's failure to perform.

Principal DebtorPrincipal Debtor – – the party primarily the party primarily liable on the obligation.liable on the obligation.

Suretyship RelationshipSuretyship Relationship

Creditor

PrincipalDebtor

Surety

C vs. PD:C’s rights under contractCollateral

S vs. PD:ExonerationReimbursementSubrogation

C vs. S:C’s rights under contractCollateral

Types of SuretiesTypes of Sureties CosuretyCosurety – – each of two or more each of two or more

sureties who are liable for the same sureties who are liable for the same debt of the principal debtor.debt of the principal debtor.

Absolute SuretyAbsolute Surety – – surety liable to a surety liable to a creditor immediately upon the default of creditor immediately upon the default of a principal debtor.a principal debtor.

Conditional Guarantor of CollectionConditional Guarantor of Collection – – surety liable to a creditor only after the surety liable to a creditor only after the creditor has exhausted the legal creditor has exhausted the legal remedies against the principal debtor.remedies against the principal debtor.

Rights of SuretyRights of Surety

ExonerationExoneration – – the right to be relieved of his the right to be relieved of his obligation to the creditor by having the obligation to the creditor by having the principal debtor perform the obligation.principal debtor perform the obligation.

ReimbursementReimbursement – – the right to be repaid by the right to be repaid by the principal debtor.the principal debtor.

SubrogationSubrogation – – the right of a surety who has the right of a surety who has paid the creditor to assume all the rights the paid the creditor to assume all the rights the creditor has against the principal debtor.creditor has against the principal debtor.

ContributionContribution – – the right to payment from the right to payment from each cosurety of his proportionate share of each cosurety of his proportionate share of the amount paid to the creditor.the amount paid to the creditor.

Fundamental Rights of Debtor and Fundamental Rights of Debtor and Secured PartySecured Party

SP

(1) To redeem collateral by payment of debt

(2) To possess general rights of ownership as limited by security agreement

(1) To recover amount of debt

(2) To have collateral applied to payment of the debt on default

money/credit

security interest in collateral

D

Personal Personal Defenses Defenses

… … of Principal Debtorof Principal Debtor – – incapacity, incapacity, discharge in bankruptcy, and setoff.discharge in bankruptcy, and setoff.

… … of Suretyof Surety – – incapacity, the statute of incapacity, the statute of frauds, contract defenses to suretyship frauds, contract defenses to suretyship undertaking, setoff, modification of the undertaking, setoff, modification of the contract between the creditor and the contract between the creditor and the principal debtor, and the creditor's release of principal debtor, and the creditor's release of security or a cosurety.security or a cosurety.

… … of Both Surety and Principal Debtorof Both Surety and Principal Debtor – – include contract defenses to the contract include contract defenses to the contract between the creditor and the principal debtor.between the creditor and the principal debtor.

PrincipalDebtor

Surety

Defenses of Surety & Principal DebtorDefenses of Surety & Principal Debtor

PD’s incapacity PD’s discharge in bankruptcy PD’s setoff against C

Forgery of PD’s signatureC’s fraud or duress on PDFraudulent and material alteration of contractAbsence of mutual assent or consideration for PD’s contractC’s nonperformance of PD’s contractIllegality or impossibility of PD’s contractPayment or performance of PD’s obligationC’s release of PD unless C reserves his rights against SC’s refusal of tender

S’s incapacityStatute of fraudsAbsence of mutual assent or consideration for S’s contractC’s fraud or duress on SCosurety’s failure to sign contractS’s setoff against CModification of contract between PD and CExtension of time unless C reserves rights against SRelease of securityRelease of cosurety unless C reserves his rights against S

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