1
Q
INTRODUCTION
A
- The heart of Article 9 is its allocation of priority among conflicting interests in the same collateral.
- Ex. one creditor has a PMSI in collateral & another creditor has a prior perfected security interest in the same collateral by virtue of an after-acquired property clause; if debtor defaults on the obligations owed to both creditors, which creditor has priority in the collateral?
2
Q
SECURED PARTY VS. SECURED PARTY: Priority Between Perfected Secured Parties
A
- When there are conflicting perfected security interests in same collateral, priority goes to whichever party was the first to either file/perfect—whichever is earlier—provided that there is no period thereafter when there is neither filing nor perfection.
3
Q
Tip
A
Remember that it’s the date of filing/perfection that determines priority—not date of attachment.
4
Q
Priority Between Unperfected Secured Parties
A
- When 2 unperfected security interests conflict, first to attach has priority
5
Q
Priority Between Unperfected and Perfected
Secured Parties
A
- A perfected security interest generally prevails over an unperfected security interest
6
Q
PMSI Superpriority
A
- PMSIs enjoy a superpriority—they’re superior to prior perfected security interests in the same collateral if certain conditions (discussed below) are met.
7
Q
PMSI in Goods Other than Inventory and Livestock
A
- A PMSI in goods other than inventory & livestock (ex. equipment) has priority over conflicting security interests in the same goods/their proceeds if the interest is perfected w/in 20 days after debtor receives possession of the goods.
8
Q
PMSI in Inventory and Livestock
A
- A PMSI in inventory collateral has priority over a conflicting security interest in the same inventory/ proceeds of the inventory that are chattel paper, instruments, or cash if:
(1) It is perfected at the time debtor gets possession of the inventory (filing must take place b/f inventory
is delivered to debtor), and
(2) Any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI b/f debtor receives possession of the inventory, & notification states that the purchase money party has/expects to take a PMSI in inventory of debtor described by kind/type. - The notification is effective for deliveries of the same type of collateral for 5 years.
- Note: A PMSI in livestock generally follows the same rules.
9
Q
Consignor Has PMSI in Inventory
A
- Under Article 9, a consignor’s interest in the consigned goods is considered to be a PMSI in inventory.
- Therefore, a consignor can acquire PMSI superpriority in consigned goods if the consignor complies with the above requirements for gaining PMSI superpriority in inventory.
10
Q
Conflicting PMSIs
A
- If more than one party has PMSI superpriority in collateral, the following rules apply:
(1) A secured party who has a PMSI in collateral as a seller (a seller-financed PMSI) has priority over a secured party who has a PMSI in the same collateral as a lender (a financer-financed PMSI)
(2) Otherwise, first secured party to file/perfect prevails
11
Q
Tip
A
- It’s very important to determine the class of collateral when a PMSI is involved because what’s
necessary for perfection varies. Remember:
(1) A PMSI in consumer goods is automatically perfected,
(2) A PMSI in equipment can be perfected (usually by filing) any time w/in 20 days after debtor gets possession of collateral, and
(3) A PMSI in inventory must be perfected (usually by filing) by the time debtor gets possession of the collateral— there is no 20-day grace period—& others w/ a previously filed security interest in the inventory must be given notice
12
Q
Special Priority Rules for Conflicting Security
Interests in Investment Property
A
- A security interest perfected by control has priority over a security interest perfected by any other method (by filing/automatic perfection).
- For conflicting security interests perfected by control, they rank according to the time of obtaining control (unless one of the secured parties w/ control is a securities intermediary, in which case the securities intermediary will prevail).
- In all other cases, the “first to file/perfect” rule governs priority questions for investment property.
13
Q
Special Priority Rules for Conflicting Security
Interests in Deposit Accounts
A
- A security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method (namely, as proceeds of other collateral).
- If there are conflicting security interests that are perfected by control, they rank according to the time of obtaining control, subject to the following exceptions:
(1) A secured party who has obtained control by putting deposit account in party’s name has priority over all other secured parties w/ control, and
(2) A bank that has control b/c it maintains the deposit account has priority over all secured parties w/ control, other than the party who has obtained control by putting account in their name. - Note: If debtor transfers money/deposit account funds (ex. by writing a check/making an electronic
funds transfer) to a person, that person takes free of any security interest in the money/funds, unless transferee acts in collusion w/ debtor in violating rights of secured party.
14
Q
“Purchasers” of Chattel Paper and
Instruments
A
- Article 9 contains special rules for “purchasers” chattel paper & instruments, which includes parties who take a security interest.
Chattel Paper Purchasers
- If a purchaser of chattel paper in good faith gives new value & takes possession of chattel paper in the ordinary course of business (or takes control of electronic chattel paper), purchaser has priority over:
(1) A security interest in chattel paper that arises merely as proceeds of inventory, as long as the chattel paper doesn’t indicate that it has been assigned to anyone other than the purchaser, and
(2) Any other security interest in chattel paper, as long as chattel paper purchaser acquired their interest
w/o knowledge that its purchase violated rights of secured party.
- Note: A chattel paper purchaser also has priority in the proceeds of chattel paper if either
(1) purchaser would have had priority under the general priority rules (the purchaser was the first party to file/perfect), or
(2) proceeds are the specific goods covered by the chattel paper/cash proceeds of the specific goods.
15
Q
“Purchasers” of Chattel Paper and
Instruments: Instrument Purchasers
A
- A purchaser of an instrument has priority over a perfected security interest in the instrument if the purchaser gives value & takes possession of the instrument in good faith & w/o knowledge that purchase violates rights of secured party.
(1) Gives value, (2) takes posssession, (3) in GF & w/o knowledge
16
Q
Priority in Proceeds
A
- For purposes of determining the priority of security interests in proceeds, the Code divides collateral into “filing collateral” & “non-filing collateral.”
- Filing collateral is collateral in which a secured party would normally achieve priority by filing a financing statement (ex. goods, accounts, commercial tort claims, general intangibles, & nonnegotiable documents).
- Non-filing collateral is collateral in which a secured party would normally achieve priority by possession or control, rather than filing (ex. cash, chattel paper, nonconsumer deposit accounts, negotiable
docs, instruments, & investment property).
(1) Filing collateral: FS; (2) Nonfiling: possession/control
17
Q
Priority in Proceeds: General Rule
A
- Generally, a perfected security interest in proceeds will have same date of priority as perfected security interest in the original collateral (ex. under the “first to file/perfect” rule), if perfection of security interest in the proceeds extends beyond the 20-day temporary perfection period.
- Recall that there are also special superpriority rules for certain proceeds of collateral subject to PMSIs
18
Q
Priority in Proceeds: Special Rule for Certain Proceeds of Non-Filing
Collateral
A
- Because the rules governing priority in non-filing collateral contain many exceptions to the “first to file or perfect” rule (ex. party w/ control over a deposit account has priority over a party w/o control, regardless of when control was obtained), the Code contains a special priority rule for certain proceeds of that collateral.
- A secured party has priority in the proceeds of non-filing collateral if:
(1) secured party has priority in original collateral,
(2) their security interest in the proceeds is perfected, and
(3) proceeds are cash proceeds/proceeds of the same type as original collateral. - If the proceeds are proceeds of proceeds, all intervening proceeds must be cash proceeds, proceeds of the same type as the original collateral, or accounts relating to the collateral.
19
Q
Priority in Proceeds: Special Rule for Certain Proceeds of Non-Filing Collateral - Exception—Filing Collateral as Proceeds of
Non-Filing Collateral
A
- If a security interest in original collateral that is non-filing collateral is perfected by a method other than filing, & proceeds of original collateral are filing collateral, the first secured party to file financing statement covering the proceeds has priority in the proceeds.
20
Q
SECURED PARTY VS. BUYER OR OTHER
TRANSFEREE
A
- When buyer (or lessee) buys/leases something w/ a security interest on it, security interest stays on the item.
- There are a few exceptions to this rule, discussed below.
21
Q
Authorized Sales
A
- If sale/lease of collateral is authorized by secured party free of security interest, transferee takes free of the security interest.
- The authorization may be express, or it may be implied from the type of sale/from seller’s conduct.
22
Q
Unauthorized Sales
a. General Rule—Buyers in the Ordinary Course
A
- Buyer in ordinary course of business ( “BIOC”) takes free of a nonpossessory security interest in the goods created by buyer’s seller, even though security interest is perfected & even though buyer knows of security interest.
-Note: This rule also applies to lessees of goods.
23
Q
Definition of “Buyer in the Ordinary Course”
A
- A “buyer in the ordinary course” is one who buys goods
(1) in good faith,
(2) w/o knowledge that sale violates rights of another person in the goods, and
(3) in the ordinary course of business from a seller in business of selling goods of the kind purchased. - The typical case of buyer knowing that sale violates rights of another is where buyer knows that sale violates security agreement.
24
Q
Buyers Not in the Ordinary Course of Business
A
- Buyers/lessees not in the ordinary course of business:
(1) Take subject to perfected security interests, and
(2) Take free from unperfected security interests unless they know of security interest when they give value/take delivery
25
Exception—Future Advances
- A buyer/lessee not in the ordinary course of business has priority over future advances/commitments to make future advances made by a secured party either after secured party learns of the purchase or lease/more than 45 days after purchase/lease.
26
Exception—PMSI Grace Period
If a secured party attaches a PMSI in the debtor’s collateral
before the buyer or lessee without knowledge pays
value and receives delivery, the secured party will have
priority over the buyer or lessee if the secured party
files within 20 days after the debtor receives the collateral.
27
Consumer-to-Consumer Sales
In the case of consumer goods, a buyer takes free of a
security interest, even though it’s perfected, if the buyer buys
(1) without knowledge of the security interest, (2) for value, (3)
for the buyer’s own personal, family, or household purposes,
and (4) before a financing statement covering the goods has
been filed. Note that the goods must be consumer goods in
the hands of both the buyer and the seller
28
Tip
Recall that PMSIs in consumer goods are perfected
automatically without filing. Nevertheless,
holders of these security interests will still lose to
consumer buyers under this rule unless they file.
29
Secured Party vs. Holder in Due Course or the
Like
A holder in due course of a negotiable instrument (and similar
holders of negotiable documents of title or securities) has
priority over a security interest in the negotiable instrument.
30
SECURED PARTY VS. JUDICIAL LIEN
CREDITOR OR HOLDER OF POSSESSORY
LIEN
5.4.1 Secured Party vs. Judicial Lien Creditor
A judicial lien creditor (that is, a person who has acquired a
lien on the collateral through judicial attachment, levy, or the
like, or a bankruptcy trustee) prevails over the holder of a
security interest in collateral if the lien creditor becomes such
before the security interest is perfected. On the other hand,
a prior perfected security interest has priority over a judicial
lien.
31
Tip
A creditor who has won a judgment in court becomes
a judicial lien creditor at the time of levy
(that is, seizure of the collateral by the sheriff).
Therefore, look to see when the sheriff levies on the collateral
and when the security interest is perfected (if at all) to
determine who has priority.
32
Prior Filed Security Interest May Also Have Priority
As noted above, the secured party has priority if the secured
party perfected before the judicial lien arose. However, the
secured party will also have priority if the secured party
obtained a security agreement and filed a financing statement
(but did not attach and perfect) before the judicial lien
arose, as long as the secured party eventually attaches and
perfects.
33
PMSI Grace Period Exception
If the secured party files a financing statement with respect
to a PMSI within 20 days after the debtor receives the collateral,
the secured party will have priority over a judicial lien
arising between the time the security interest attaches and
the time of filing.
34
Exception—Future Advances
For a perfected future advance to gain priority over a subsequent
judicial lien, the future advance must be made (1)
without knowledge of the lien, (2) within 45 days of the lien
arising, or (3) pursuant to a commitment entered into without
knowledge of the lien
35
Secured Party vs. Possessory (Statutory) Lien
Holder
A possessory lien imposed by other (that is, non-Code)
state law in favor of those who supply goods or services
(for example, an artisan’s lien or a materialman’s lien) has
priority over a security interest (even if perfected) as long as
SECURED TRANSACTIONS
NOTES
47
the goods or services were provided in the ordinary course
of business and the collateral remains in the lien holder’s
possession
36
SECURED PARTY VS. ARTICLE 2
CLAIMANT
If Article 2 grants a buyer or seller a possessory security
interest in goods (for example, if the buyer rightfully revokes
acceptance of goods), the Article 2 claimant has priority over
an Article 9 secured party as long as the Article 2 claimant
retains possession of the goods.
37
PRIORITIES IN A NUTSHELL
- When a debtor defaults & a number of persons have an interest in the same item of collateral, remember the following hierarchy—the person with the highest priority has first rights in the collateral; if any part of the collateral or its proceeds is left, the next person can recover, etc.
- Excluding investment property & nonconsumer deposit accounts,
in which the party w/ control generally has priority, the ranking is as follows:
* Buyer in the ordinary course of business, if the security interest is created by the buyer’s seller
* Holder in due course and the like of a negotiable instrument
* Transferee of money or funds from deposit accounts
* Certain purchasers of chattel paper or instruments who
have possession or control
* Possessory lienholder
* Article 2 claimant with possession of goods
* PMSI (except that a consumer purchaser from a consumer—
such as a neighbor buying from a neighbor—has priority over an automatically perfected PMSI in the consumer goods)
* Perfected security interests and judicial liens that have
attached to the collateral (including trustees in bankruptcy
as of the date the bankruptcy petition is filed)
* As between perfected security interests in the same collateral,
the first to file or perfect has priority
* As between a perfected security interest and an attached
lien, the attached lien generally has priority if it attached
before the security interest was perfected. Otherwise, the
security interest has priority
* Purchaser of collateral who buys for value and receives
delivery without notice of any unperfected security interest
* Unperfected security interests (rank in priority according
to order of attachment)
* Debtor
Secured Transactions
flashcards
Decks in class (6)
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