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Roger then goes into some final details about secured transactions. Jurisdiction to file secured transaction petitions is based on the location of the debtor, not the location of the collateral. Creditor priority in a secured transaction follows a specific order, beginning with a buyer in the ordinary course of business if the asset was inventory in the hands of the seller (inventory rule). Second is the holder of a statutory lien, such as a tradesman's lien, etc. Creditors' duties when asserting a security interest are to exercise reasonable care to preserve all collateral in their possession, to confirm the unpaid amount upon the debtor's request, and to file or mail to the debtor a notice of termination releasing the collateral once the debt is repaid.
Once the debtor defaults, he or she initially has a right to repayment. However, if the debtor fails to repay the property, the creditor can take possession of the property, sell it, and keep the proceeds. If the amount owed by the debtor exceeds the proceeds, the creditor can pursue the debtor for judgment of deficiency if the loan was made with recourse.
Roger also discusses what happens when the proceeds from the sale of the collateral property exceed the amount of the loan due, as well as the “strict foreclosure” situation allowed in some jurisdictions.
Finally, Roger gives a nice overview and summary of the secured transactions.
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Preview the video transcript:
The inventory rule states: "When goods are acquired in the ordinary course of business, the inventory passes to the seller. The buyer's claim takes precedence over all other claims. Thus, if the goods are purchased from a retailer, the inventory is acquired free and clear of all other claims, even if the buyer has knowledge of the claim." So even if I know that this priority claim exists, I still receive the goods free and clear of that claim.
A couple of other minor things, filings. /"Jurisdiction for almost all filings is determined by the location of the debtor, not the location of the collateral. Priority among creditors…/" Who gets it first? Under the inventory rule, a buyer in the ordinary course of business gets it. /"Holders of a statutory lien, such as a craftsman's lien. Then a PMSI if it is attached and perfected. And then among other perfections by filing, other perfected interests or judicial liens, and if not, then one is perfected in the order of attachment./" So that's kind of a hierarchy of who gets what.
/"What are creditors' responsibilities for the collateral? Exercise reasonable care to preserve all collateral in their possession. Confirm the outstanding balance of the debt if the debtor requests it. File or send the debtor a notice of termination releasing the collateral once the debt is paid. What are the procedures in case of default? The debtor has the right to repayment as soon as/" in other words, to repay it, /"the debtor's right to repayment expires, and the creditor repossesses the property and forces a sale./" That's what happens if they don't pay.
/"If the proceeds are insufficient, the lender has no further claim under a non-recourse loan. Under a recourse loan, the debtor is personally responsible for the unpaid portion, which is called a deficit judgment. If the proceeds exceed the amounts owed by the highest priority secured creditor, with any excess applied first to the claims of other secured creditors, with the highest priority secured creditor and then the lower priority, the debtor is entitled to the remaining proceeds. An objection must be filed within 21 days. In consumer goods, if a creditor is not permitted to keep the goods," it says, /"and is not permitted to keep the property and is required to dispose of it within 90 days, he pays at least 60 percent./"
So let's say this law was passed for the following reason. What happened is I loan you money. You get this asset and I take it as collateral. You're a little bit behind, uh, don't worry. You're behind on payment, don't worry. You're behind on payment, don't worry… You pay off 98 percent of it. You're behind, I repossess it and say, sorry, I'm keeping it.
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