Priority; taking free of a security interest

Question 1

*

When does a buyer take free of a perfected SI?

Answer 1

BOCB:
i) Buys goods (other than farm products);
ii) In the ordinary course;
iii) From a seller who is in the business of selling goods of that kind;
iv) In good faith; and
v) Without knowledge that the sale violates the rights of another in the same goods.

Note: the buyer can have knowledge of the SI, but not knowledge that purchase violates rights of SP (which don’t arise until default)

Question 2

When does a buyer take free of an unperfected SI?

Answer 2

i) Gives value; and

ii) Receives delivery of the collateral;

iii) Without knowledge of the existing security interest.

Question 3

When does a buyer take free of a perfected SI in consumer goods?

Answer 3

If the buyer buys (1) without knowledge of the security interest, (2) for value, (3) primarily for the buyer’s own personal, family, or household purposes, and (4) before a financing statement is filed.

Note: SP can avoid this by filing a FS (they wouldn’t ordinarily since PMSI in consumer goods perfects automatically)

Question 4

Can a buyer take free of a SI if the SP is in possession of the collateral?

Answer 4

No.

Question 5

Does the transferee of money or funds from a deposit account take free of a SI?

Answer 5

Yes, unless the transferee acts in collusion with the debtor in violating the rights of the secured party.

Question 6

Does a perfected SI in collateral continue after the collateral is transferred or otherwise disposed of?

Answer 6

Yes - generally continues in the original collateral and in any identifiable proceeds

Question 7

Order of priority when there is a perfected SI, but then a lien creditor comes along, and then the SP does another advance?

Answer 7

1. Lien creditor is subject to SI (no change in priority) if (i) the advance came 45 days or fewer after the LC creditor came along, or (ii) even if after 45 days, if the SP didn’t have knowledge
2. Lien creditor not subject to SI (SI is subordinated) if advance more than 45 days after LC AND the SP had knowledge of LC

Question 8

If debtor sells collateral to a buyer, then SP does another advance, what is the order of priority?

Answer 8

1. Buyer takes free of SI if (i) advance is 45 days or fewer after buyer came along & SP has knowledge of the purchase, or (ii) advance is 45 days or more after the purchase
2. Buyer takes subject to SI if advance is 45 days or fewer after buyer came along & SP doesn’t knowledge of the purchase