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BU451 Lecture Notes - Chattel Mortgage, Floating Charge, Secured Creditor

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Charles Davidson

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Chapter 30: Secured Transactions
Meaning of “Security”
Types of Security
- Consensual security interests give creditors collateral security (a right to take specified assets in
satisfaction of the debt)
- Some security interests just arise from normal transactions, these are non-consensual security
Security Practices
- Don’t need collateral security when extending credit to normal customers; unsecured
transactions are simpler and cheaper to record, may not be good to offend customer by
demanding security; losing a couple sales to defaults is better than incurring more costs for
requiring security for each sale
- Security establishes creditor’s priority relative to other creditors
- Security is most often used just as an incentive to pay the money owing
Rights of a Secured Creditor
- Unsecured creditors may ultimately acquire security interest through court action to collect
overdue debt (seizing assets)
- Secured creditor doesn’t need judgement, can proceed on their own to enforce rights over the
security (like a self-help remedy) moreover, unsecured creditors generally can’t touch assets
already subject to a security of another creditor (they have priority)
- Key: whether or not you are secured or unsecured
Methods of Securing Credit
Credit Devices Previously Considered (other credit devices)
- Mortgages (real property vs. this chapter which is personal property), Leases (a security device
on its own, while personal property is acquired on credit), Consignments (indirect type of
secured credit), Other Credit Devices
Conditional Sales
- Very similar to leases
o Both lessee and conditional buyer are bailees of the good
- Lets secured party right to look to goods to satisfy debtor’s obligation, and a priority in the
goods over the interests of 3rd parties (ie. Other creditors)
- Creditor can sue for unpaid balance of debt, but can also retake possession on default
Def’n: redeem – reclaim the goods and continue with the conditional sale
Def’n: Acceleration clause – the full outstanding amount of a debt becomes immediately payable if the
debtor defaults in making any instalment payment
- Many merchants sell/assign their conditional sale agreements to finance companies that collect
the instalments and administer the contracts
Chattel Mortgages
- Intangibles are not chattels;
- 2 basic cases: first case, vendor of an article of property “takes back” a mortgage on the
property sold effect is similar to conditional sale
o 2nd case, owner of property mortgages it as security for a loan
- Borrower retains possession of the property, and lender’s security interest is in the title to
specific goods
o By contrast, a pledge is a form of bailment
- Under a chattel mortgage, the purchaser borrows funds for the purchase of movable personal
property (the chattel) from the lender. The lender then secures the loan with a mortgage over
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