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Chapter 23 - Secured Transactions.docx

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MKT 100
Jennifer Fraser

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Chapter 23: Secured Transactions Creditors have 2 ways of managing risk that debtor will not pay: • Security Interests • Guarantees Security Interest: Allows a creditor to seize some of a debtor’s personal property if a debt is not repaid. Collateral: Property that is subject to a security interest. Secured Party: A creditor that has a security interest • A security interest can be given over any type of property to any type of creditor Guarantee: A contractual promise by a third party, called a guarantor, to satisfy the principal debtor’s obligation if that debtor fails to do so Chattel Mortgage: A transaction in which a debtor gives a creditor title to some specific personal property to secure the performance of an obligation it owes to the creditor Conditional Sales Conditional Sale: Occurs when the seller retains ownership of the goods to secure payment of the purchase price by the buyer Special Cases • Consignment: Occurs when the owner of goods transfers possession, but not ownership, to someone else Consignor: The owner of goods who transfers possession of the goods, but not ownership, to someone else Consignee: The person who receives possession of the goods, but not ownership Business reasons for creating a consignment • The consignee may be examining the goods for possible purchase • The consignee may have agreed to try to sell the goods on the consignor’s behalf Lease: A relationship where the lessor retains ownership of an asset but gives possession of it to the lessee for a period of time in return for the lessee’s promise to make regular payments Assignment of Accounts Receivable Accounts Receivable: The amounts that a business is entitled to collect from its customers Assignment of Accounts Receivable: Allows a creditor to collect debts owing to a debtor if the debtor does not fulfill their obligations to the creditor Granting a Security Interest in all of the Debtor’s Assets General Security Agreement: Provides a creditor with a security interest in all of the debtor’s assets Floating Charge: A security interest that hovers above the debtor’s assets until some event causes the charge to become fixed or crystalized on those assets Facilitating Risk Management for Creditors Priority: A secured creditor’s claim is the ranking of the creditor’s right to enforce its claim against a piece of collateral compared to the claims of other secured creditors in the same collateral Scope of Application Leases • PPS legislation avoids the problem of determining when a lease creates a security interest by providing that any lease of personal property that has a term of over one year is subject to the province’s PPS legislation o If a lease is subject to PPS the priority of the lessor’s security interest is determined by the legislation o If it is not subject to PPS the lessor’s ownership of the leased assets typically gives it a claim ranking ahead of all other creditors of the lessee, including those who have registered under the legislation. Always lessor’s preferred result Exceptions • PPS does not apply to all forms of interests in personal property • Rights created by statute, rather than agreement are not caught. o Most important Statutory Rights:  Right of Distress or Distraint: Allows a landlord to seize property that is on the rented premises and belongs to the tenant, sell it, and us the sale proceeds to pay the outstanding rent. Right cannot be used against commercial tenants  Deemed Trust: Some assets of a business are deemed as a matter of law to be held for the benefit of the government and cannot be used for the business  Lien: Allows a person who has not been paid to retain possession of goods that the person has repaired or stored until payment is made Protecting Security Interests under PPS Legislation Attachment: Allows a security interest to be enforced against a third party • Occurs when three requirements are met: o The debtor signs a written security agreement containing a description of the collateral or the secured party gets possession of collateral o The secured party gives some value, such as a loan, to the debtor o The debtor has some rights in the collateral Perfection: Usually occurs when a security interest has attached and the secured party has registered the interest under the PPS legislation • Also possible but less common for a secured party to perfect its security interest by taking possession of the collateral Financing Statement: The document that is filed to register a security interest under PPS legislation • Security interest perfected by registration has priority over all subsequently registered security interests in the same collateral, but not over previously registered security interests. • Identifies the debtor, the secured party, and the general nature of the security interest Priorities under PPS Legislation Unperfected Security Interest: A security interest that has not been perfected. • Subordinate to: o Any perfected interest o Other unperfected interests that attached earlier o A
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