Secured Transactions Flashcards
Security Interest
While Supplier and Company described their transaction with respect to the machine as one in which Supplier was agreeing to sell the machine to Company but would retain title to it until Company finished paying the purchase price, the Uniform Commercial Code treats such an arrangement as a credit sale in which the buyer’s payment obligation is secured by a security interest in the goods sold. UCC § 2-401(1) states in relevant part that “[a]ny retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to reservation of a security interest.” Similarly, UCC § 1-201(b)(35), the UCC’s definition of “security interest,” states in relevant part, “The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under Section 2-401 is limited in effect to reservation of a ‘security interest.’” Thus, the interest retained by Supplier in the machine is a security interest.
Enforceability
In order for Supplier’s security interest to be enforceable, the three criteria in UCC § 9-203(b) must be satisfied. First, “value” must be given. UCC § 9-203(b)(1). Here, the agreement of Supplier to transfer the machine to Company in exchange for a down payment and the promise of future payments constituted value. See UCC § 1-204. Second, the debtor (Company) must have rights in the collateral (or the power to transfer rights). UCC § 9-203(b)(2). Here, once Company acquired the machine pursuant to the terms of the transaction, it had rights in it (regardless of whether its rights constituted ownership). Third, the debtor must have authenticated a security agreement containing a description of the collateral or the collateral must be in possession of the secured party. UCC § 9-203(b)(3)(A)–(B). (There are two other substitutes for an authenticated security agreement in UCC § 9-203(b)(3), but they are not germane here.) In this case, the signed agreement between Company and Supplier is a “security agreement” under UCC § 9-102(a)(74) because it “creates or provides for a security interest.” In addition, the agreement contains a description of the collateral, the machine. Thus, Supplier has an enforceable security interest in the machine.
Priority of two security interests
To determine the relative priority of two security interests in the same item of collateral, it must be determined whether each security interest was perfected. Pursuant to UCC § 9-308, a security interest is perfected if it has “attached” and the applicable additional steps for perfection have been satisfied. A security interest attaches when it becomes enforceable unless there was an agreement to delay attachment, which does not appear in these facts. Thus, since the security interests of both Supplier and BigBank attached to the machine (see Points One(a) and One(c)), each of the security interests would be perfected if the applicable additional steps were taken. In the context of the collateral here—the machine—the applicable additional step would be satisfied either if the secured party had possession of the collateral or if a financing statement with respect to the collateral was filed. UCC §§ 9-308, 9-310(a). Supplier neither had possession of the machine nor had filed a financing statement with respect to it. Therefore, Supplier’s enforceable and attached security interest was not perfected.
Financing Statement
On the other hand, BigBank filed a financing statement with respect to its security interest in the proper filing office on May 4. The financing statement contained the three required items of information—the name of the debtor, the name of the secured party, and an indication of the collateral. UCC § 9-502(a). An indication of collateral is sufficient if it identifies the collateral by a type of collateral defined in the Uniform Commercial Code. See UCC §§ 9-504(1) and 9-108. Equipment is a type of collateral defined under § 9-102(a)(33), and thus the indication of collateral is sufficient and the financing statement was effective to perfect BigBank’s security interest. See UCC § 9-310.
Priority
Priority between a perfected security interest and an unperfected security interest in the same item of collateral is governed by UCC § 9-322(a)(2). Pursuant to that provision, a perfected security interest has priority over a conflicting unperfected security interest in the same collateral. Therefore, because BigBank’s security interest in the machine was perfected, while the security interest of Supplier was unperfected, the security interest of BigBank has priority.
[NOTE: An examinee might state that, because Supplier’s security interest is a purchase-money security interest, it is perfected upon attachment without the need for the secured party to file a financing statement or take possession of the machine. This is incorrect. Only purchase-money security interests in consumer goods qualify for this special rule.
