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Secured Transactions

A way to get debtor to voluntarily put up collateral

Security Interest

An interest in personal property or fixtures that secures payment or performance of an obligation - that is, the interest granted the secured party

Secured Party/Creditor

A lender, seller, or other person in whose favor a security interest exists


A person who owes payment or other performance of the obligation that is secured, regardless of whether he or she owns or has rights in the collateral

Security Agreement

A security arrangement between the debtor and the secured party - the agreement that creates the security interest


The property subject to a security interest


The taking, by a secured creditor, of those steps which are required under the UCC in order for his or her security interest to be valid as against other creditors

Financing Statement

The instrument filed to give public notice of the security interest in the collateral

Tangible Goods

Touchable personal property

Consumer Goods

Used or bought for personal or household purposes

Farm Products

Crops, livestock, supplies used in farming and ranching


Held by debtor for lease or sale to the public


Used by a business to make goods and/or services to sell to the public

Intangible Goods

Not touchable property
Negotiable instruments, stocks, bonds


An attachment (or hook)

How to create security interest?

-Create a contract (security agreement) in which Debtor gives Secured Party a "lien" on his collateral
-Secured party must give value to debtor (loan, $)
-Debtor must own collateral (now or in future)

How to perfect security interest?

Filing of a Financing Statement

Contents of a Financing Statement

Name and address of debtor and secured party, and the description of the collateral

3rd Party Buyers

1) If Buyer in ordinary course of business - Buyer takes free of secured party's security interest in collateral - except farm products
2) If Buyer NOT in ordinary course of business - Buyer usually doesn't take free of the security interest - liquidator

Floating Lien Theory

Lien "floats" over to other property and/or to secure other debts

After-Acquired Property

All equipment now owned or HEREAFTER located at debtor's factory - even future property

Mother-Hubbard Clause

Everything is collateralized to first bank

Future Advances

These goods shall serve as collateral for this debt as well as any future debts I have with you
Collateral secures any other debts I have


Not only do these goods serve as collateral, but also any $ received from their sale - retail store

Secured vs. Unsecured Interest

Secured gets 1st bite before unsecured and for enough collateral to satisfy their secured debt

Secured vs. Secured Interest

1st secured to perfect gets bite before other secured parties

Default by Debtor:

1) Sue debtor and hope to collect from non-exempt property (difficult in Texas)
2) Go to court and get Judge to foreclose security interest
3) Use "self-help" to re-possess the collateral? -> OK if done PEACEFULLY - no violence or threat of violence
4) Debtor peacefully surrenders the property


When the creditor realized they can't collect from debtor
Turns any time instrument to sight instrument, but creditor must have reason

Disposal of Collateral


Public Sale

Preferred, give debtor notice

Private Sale

Perishable goods or recognized market

Can secured party be buyer?

Yes, usually only bidder

Innocent Buyer

Takes free of old owner's interest in goods and old owner "can't get goods back" - USUALLY

Keep the Collateral? In Satisfaction of the Debt?

Yes, the creditor can keep the collateral, but it depends - if consumer good and if debtor has paid:
1) More than or equal to 60%, Bank must sell and give equity to the debtor
2) Less than 60%, Bank can keep but debt is now paid in full

Application of Proceeds of Sale of Collateral

1) Sales Expenses - advertising, auctioneer, attorney fees
2) Payment of 1st secured party's debt
3) Payment of any other secured party who has security interest in SAME COLLATERAL
4) Remainder (if any) to debtor - NOT to unsecured creditors


If proceeds are less than 1,2 and 3, then creditor can sue debtor for shortage or deficiency plus attorney fees

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