Secured Transactions – Lesson 6

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In this video, 20.03 – Secured Transactions – Lesson 6, Roger Philipp, CPA, CGMA, adds to the discussion of the inventory rule by reading the formal rule. He explains that even if the buyer is aware of a prior security interest in an asset, the buyer is still free from that prior security interest when it buys the asset if the asset is inventory in the hands of the seller.

Roger then covers some final details on secured transactions. The jurisdiction for filings for secured transactions is determined by the debtor’s location, not the location of the collateral. Priority among creditors in a secured transaction follows a certain order, starting with a buyer in the ordinary course of business if the asset was inventory in the hands of the seller (inventory rule). Second priority goes to the holder of a statutory lien such as a mechanic’s lien, and so on. Creditor responsibilities upon asserting a security interest are to use reasonable care to preserve any collateral in their possession, confirm the unpaid amount when requested by the debtor, and file or send the debtor a termination statement releasing the collateral once the debt is repaid.

Once the debtor is in default, the debtor does have initial right of redemption, but if the debtor fails to redeem the property, the creditor may take possession of the property, sell it, and keep the proceeds. If the amount owed by the debtor exceeds the proceeds, the creditor may pursue the debtor for the deficiency judgment if the loan was made with recourse.

Roger also covers what happens if the proceeds from the sale of the property pledged as collateral exceed the defaulted loan amount, as well as the situation of ‘strict foreclosure’ allowed in some jurisdictions.

Finally, Roger concludes with a nice overview and summary of secured transactions.

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Video Transcript Sneak Peek:

Inventory rule, it says, “If acquiring goods in the ordinary course of business, inventory to seller. Buyer’s claim is superior to all other claims, so if the goods are purchased from a retailer, the inventory is acquired free of all other claims, even if a purchaser is aware of the claim.” So, even if I know there’s that prior claim, I still get it free of that claim.

Couple of other minor things, filings. “The jurisdiction for almost all filings is determined by the debtor’s location, not where the collateral is. The priority among creditors…” Who gets it first? The inventory rule, a buyer in the ordinary course of business gets it. “Holder of a statutory lien, like a mechanic’s lien. Then a PMSI when attached and perfected. And then among other perfections by filing, other perfected interests or judicial liens, and then if not one perfects in order of attachment.” So, that’s kind of hierarchy of who gets what.

“What are the creditors’ responsibilities for the collateral? Use reasonable care to preserve any collateral in their possession. Confirm the unpaid balance of the amount of the debt when requested by the debtor. File or send the debtor a termination statement releasing the collateral once the debt has been paid. What are the procedures on default? The debtor has the right of redemption once,” in other words, to redeem it, “the debtor’s right redemption is terminated, and the creditor repossesses the property, and forces a sale.” That’s what happens once they don’t pay.

“If the proceeds are not sufficient, if the loan is without recourse, the lender has no further claim. If the loan is with recourse, the debtor will be personally responsible for any unpaid portion, referred to as a deficiency judgement. If the proceeds exceed the amounts of the secured creditor, with the highest priority, any excess if first applied to the claims of other secured creditors being with secured creditor with the highest priority followed with the lower, then the debtor will be entitled to any remaining proceeds. Any objection would be required within 21 days. In the case of consumer goods, if a creditor may not retain the goods,” it says, “and the property and is required to dispose of it within 90 days, they pay at least 60 percent.”

So, let’s say, and this law came out because of the following. What happened is, I would loan you money. You would get this asset, I take it as collateral. You’re a little bit late, eh, don’t worry about it. You’re late on the payment, don’t worry about it. You’re late on the payment, don’t worry… You pay 98 percent of it off. You’re late, I repossess it, and I go, sorry, I’m going to keep it.

Secured Debtor, Secured Transactions – Lesson 6.

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