On a debtor's default the secured party can take peaceful possession of the collateral without first going to court under UCC 9-609(b). Yet the UCC does not define what is peaceful. Consider the case of Mauro v. GMAC 626 N.Y.S.2d 374 1995, a New York court case where GMAC sent Tri City Auto Recovery to repossess the car. As employees Anthony and Edward Russo were in the process of towing the vehicle at 8:30pm from the home of the Mr. & Mrs Mauro, Maureen Mauro saw her headlights on and went out with an unloaded shotgun. She pointed it at Anthony Russo who was behind the wheel of the car and ordered him out of the car. He steps out and grabs the gun from her. After calling the police Mr. Mauro comes out and struggles with Anthony Russo. A fight ensues. The Mauro's thereafter file a a lawsuit against GMAC alleging that the repossession constituted a breach of peaceful possession and wanted a significant sum. What do you think and how do you think the court came to its conclusion?

OVE RVI EW It is essential to your knowledge of business law to understand some of the concepts of the area known as secured transactions. We deal with this concept when we are discussing the sale and purchase of personal property such as equipment, machinery, vehicles, inventory, and even accounts receivable. How so? From the standpoint of being the purchaser of a business, and let's say a pizzeria that has a pizza oven, a cash register, chairs, tables, mixers, and other kitchen equipment, how do you determine if the current owner owes a bank or finance company any money on those itemsjust referenced that are part of the purchase price of what is being sold to you? What if the current owner does owe money on those items, what can happen. If those items have been pledged as security for a loan and the bank wanted those items as collateral, they typically will have the borrower(owner of the business) sign a security agreement giving the bank the right to repossess those items pledged in the event there is a default in payment of the promissory note. If the bank has properly perfected its lien against that personal property by ling a nancing statement under the UCC that it prepares with the Department of State in Albany, then in the event of default in payment of the loan it can repossess the property to satisfy the debt that is due. There are other ways to perfect your security interest in personal property that we will discuss in further detail below. So if you are the potential buyer of that business how do you make sure that you are not paying the current owner of the business the purchase price for the business under your contract with them and later learn that they owed money on that equipment and the bank is demanding the money from you or telling you that they coming to get their equipment that was pledged(repossession)? There is what is called a UCC search! The Department of State will search its records for you(not free of course) to determine if any lender has led any nancing statements involving that owner. lfyou give the state the correct spelling and name and nothing turns up as led, you are good to go. That means if you close the deal and someone later turns up saying that the old owner pledged that property has security for a loan, to bad for them. Tell them to hit the road and track down the old owner, it is not your problem if they did not properly perfect their lien. This concept of law holds true even if you werejust interested in buying one piece of equipment from the current owner not the entire business. So ifjust wanted the pizza oven, for example, for your existing pizza shop, you should order a UCC search from the Department of State in Albany to be sure there are no liens on it. I think you can better understand now why this concept is so important to your knowledge of business law. We nd a good outline of the denitions for the terms outlined above on page 520, 515 of the text. As you can see these concepts under the law are spelled out in signicant detail under Article 9 of the UCC. We will now investigate some of these concepts in greater detail. PERFECTING A SECURITY INTEREST(P.518) Are there ways to perfect a security interest in personal property other than by ling the nancing statement with the government after the borrower has signed a security agreement? Yes. What kinds of personal property can this pledge of property be utilized? It applies to both of the two basic categories of personal property-tangible personal property and intangible personal property. Tangible personal property are things you can feel touch and hold, such as goods(furniture, TV, computer), equipment, machinery, inventory, livestock, crops, and timber. Intangible personal property is property that is created by generated legal rights, such as a note, a certificate of deposit, a draft, intellectual property such as a trademark, copyright, or patent, and can include a savings account, checking account, accounts receivable, and even insurance policies. See the concept summary of these categories of tangible and intangible property on page 514. Remember that security interest can be created in both of these broad categories of personal property. So now that we know what types of personal property this concept is applicable to what other ways are there to perfect the security interest in the personal property without ling? One of the ways to do it would be by transferring possession of the collateral to the secured party. This would be known as a pledge. See page 520. Think for example ifyou wanted to borrow $500 from me and I say okay provided you give me your Rolex watch. I will return it to you when you pay me back. That creates a security interest in the watch for me without filing the nancing statement under UCC 9-310, 312, & 313. The second large category and there are 14 others under the UCC that we will not deal with(UCC 9-309), is called a Purchase Money Security lnterest(PMSl).(P.521) This is not that hard to understand actually although the name makes it sound difficult. Think about those advertisements on TV selling furniture. The company gives you terms. "No payments until June ifyou buy now. Easy financing with us." Typically then we are dealing with consumer goods where the security interest is created in that installment sales agreement or contract that you sign at the time of purchase.(UCC 9-102(a)(2). It will say in it that if you default in payment that they can repossess your leather recliner for example. They don't need to file anything to have that right. Now there is one major exception to this rule and it deals with situations where there is a certicate of title required to transfer ownership. Examples would be automobiles, motorcycles, trailers, boats, mobile homes, and certain recreational vehicles. in New York and in most states the secured party must get the title from the owner and ll out a form indicating it has a lien on the vehicle for example. The Department of Motor Vehicles will issue a new title to the owner showing that the lender(bank or nance company) is a lienholder(that is owed money on the vehicle purchase), and can repossess the vehicle in the event there is a default in payment. So if you are purchaser of that item the way you are protected is to look at the title to the item before you give the seller the money. If the title shows a lienholder you must have the seller get a release from the bank to clear the title. What pitfalls might there otherwise be when perfecting a security interest. First, they last only 5 years before they need to be renewed or continued.UCC 9-515. So if the loan repayment is for longer than 5 years, the lender had better remember that and le the continuation statement under UCC 9-515d, or they could lose their rights to the collateral particularly if the owner sells the items to a good faith purchaser for value. Does the security agreement need to be in writing? Surprisingly not. It can be authenticated by means of any signing or electronic record. See P.521 under UCC 9-102(a)(7). That means if you send an email to the entity you are borrowing money from or want credit from acknowledging their right to a security interest in the property, that can be enough! And guess what, the UCC form, that is the nancing statement itself that is sent to the Department of State for ling does not need to be and is not signed by the borrower. I have attached here a UCC Financing Statement for your perusal. UCC-1 Financing Statementdocx V You must be careful to get that the nancing statement contain the name of the debtor and the secured party accurately. For a corporation be sure to know the name of the company as filed with the Department of State. Do not use a trade name or variation of the filed name. For a sole proprietorship do not use only the DBA(doing business as name), like Ted's Golfshop. Use the person's first and last name who is the proprietor of the business, as well as the trade name. The security agreement and nancing statement must accurately describe the collateral. You can use broad general descriptions of the collateral, such as "all the equipment" or "all personal property". UCC 9-504. But it is denitely better to be specic. A lot of financing statements will even include the make, model and serial number of the equipment involved. If a corporation was organized in one state has offices in a second where the collateral is located, I would le the nancing statement in both states to be sure to cover the situation. You should always le it in the state where the company was formed. For an individual debtor, it is led in the state of their residence , not necessarily where the collateral is located. But again, le it in both places. It is relatively cheap around $45 to le the financing statement in New York. Why take a chance on a problem for that kind of money, and it is easy to do. SCOPE OF SECURITY INTEREST(P.5224) if a piece of equipment that has been given as security for loan is sold to a customer in the ordinary course of business, the proceeds(UCC 9-102(a)62 from that sale are then the security instead ofthe piece equipment. Let's say further that the company sells the equipment on an installment sale, the secured party would have a right to the future payments made by that buyer if there was a default. Another category is called after-acquired property. This is typical where a business pledges its inventory as security. Well the inventory that is there on the date of the execution of the security agreement is often sold and replaced with more current inventory. The security agreement and nancing statement do not need to be changed, updated or refiled when this happens. The security agreement typically provides for the lien to follow and attach itself to the current inventory. The security agreement can say the property is pledged also for future advances made by the lender. See the example on page 505. This concept covering these issues is sometimes referred to as a oating lien. PRIORITIES(P.524) In some instances there are conicts between parties as to who has a right to the collateral in the event of a default. Start with the general rule: 1. A perfected security interest in property has priority over unsecured creditors and unperfected security interests. UCC 9-322(a)(2). 2. When two or more parties have a perfected security interest in the same property, the rst to perfect by ling has priority.UCC 9-322(a)(1). 3. If two parties have unperfected security interests the rst one that is created has priority.UCC 9-322(a)3. Now are there exceptions to this "general rule". Of course there are. One of the most important rules applies to "BUYERS IN THE ORDINARY COURSE OF BUSINESS". Think about this for a moment. If you went into a store in the mail it is likely that some of the items on the shelf for sale to retail customers might have been pledged as security for a loan that the store got from its bank. Do you need a lien release to buy that item. of course not. Ifyou pay a retail price and it is in the ordinary course of business(not a wholesale sale of the business), and in good faith, then you take the goods free from any security interest even ifyou knew they were pledged! UCC 9324(a). A second important exception occurs where a company pledges as security any after acquired equipment to its bank as part of its security agreement, but that equipment itself is nanced with the company it bought it from. So as an example, when you start your business you pledge all of your business equipment as security for a bank loan that you need. Subsequently you want to buy a new photocopy machine made from XYZ Office Systems. They arrange for financing for you and you agree to pay installments of $400 for 4 years. If you default on your original business loan can the bank repossess your photocopier. Answer no, unless the original bank pays off the loan on the photocopier. This is the PMSI rule outlined on page 521 of the text. Can the company that financed the photocopier repossess it ifyou default in payment to them yes. DEFAU LT(P.535, 527) What happens ifthere is a default in payment. There are remedies under UCC 9-601 and they are cumulative, meaning if the creditor does not get all of their money using one method they can go on to the next one. The first method is repossession. 0n default a secured party can take peaceful possession of the collateral withoutgoing to court. UCC 9-609(b). Peaceful is not dened under the UCC, but court cases have indicated this means: without trespass to land, assault or battery, or breaking or entering. 0n taking possession, the secured party may retain the collateral for satisfaction of the debt(UCC 9-620) or resell the goods and apply the proceeds toward the debt(UCC 9-610). A creditor can get a court order requiring the debtor to turn over the secured property to them if it is unable to be obtained in a peaceful manner. The debtor can also be sued on the debt, the loan and the creditor gets a judgment that can be used to execute on other property of the debtor. So if the collateral is not in great shape they are not limited to that remedy. What does the creditor due with the repossessed collateral. They can retain it if they are not consumer goods and the debtor has not paid off 60% or more of the purchase price in a PMSI transaction. Where it is a paid off 60% it must be sold in a commercially reasonable manner within 90 days under UCC 9-620e. If the creditor voluntarily sells the collateral, they must apply the proceeds to the debt, and can ask for a deciency judgment from the court. There are redemption rights where the debtor can get their property back if it has not been sold at auction. See page 530