Legal Definitions - Secured party

A secured party is an individual or entity (such as a bank, a credit union, or a seller) that holds a legal claim, known as a security interest, over another person's property or assets (referred to as collateral). This claim is typically established through a formal agreement to ensure that a debt or obligation is repaid. If the debtor fails to meet their obligation, the secured party has the right to take possession of or sell the collateral to satisfy the debt. The term also applies to those who hold certain other specific legal claims, such as an agricultural lien, or who have purchased certain types of financial assets like accounts receivable or promissory notes.

• Example 1: Car Loan

  Imagine Sarah buys a new car and finances it through "City Bank." As part of the loan agreement, City Bank requires the car itself to serve as collateral for the loan. If Sarah stops making her monthly payments, City Bank has the right to repossess and sell the car to recover the outstanding loan amount.

  In this scenario, City Bank is the secured party because it holds a security interest in Sarah's car, which acts as collateral for the loan. This gives the bank a legal claim on the car to ensure the debt is repaid.

• Example 2: Business Equipment Financing

  A small manufacturing company, "Precision Parts Inc.," needs to purchase a new, expensive piece of machinery to expand its operations. They secure a loan from "Regional Credit Union" to fund this purchase. The credit union stipulates that the new machinery itself will serve as collateral for the loan.

  Here, Regional Credit Union is the secured party. It has a security interest in the machinery, meaning if Precision Parts Inc. defaults on the loan, the credit union can seize and sell the machinery to recover the money it lent.

• Example 3: Consignment of Art

  An artist, David, places several of his original paintings in "Artistic Gallery" to be displayed and sold. Under their agreement, David retains ownership of the paintings until they are actually purchased by a customer, and the gallery will receive a commission on any sales.

  In this situation, David, the artist, is considered a secured party (specifically, a consignor). He retains a form of security interest in his paintings while they are at the gallery. This means that if the gallery were to face financial difficulties or bankruptcy, David would have a legal claim to retrieve his unsold artwork, rather than it being treated as an asset of the gallery's creditors.