Secured Transactions Flashcards
The issue is whether the secured creditor has the right to disable equipment that is part of the collateral when the debtor is in default under a security agreement? Rule
Ion has an enforceable security interest in the proton-therapy equipment under the criteria set forth in UCC § 9-203(b). The security interest is enforceable because (i) Ion gave value to PTT by providing credit to PTT, which PTT used to purchase the proton-therapy equipment, (ii) PTT acquired rights in the proton-therapy equipment when it purchased the equipment from Ion, and (iii) PTT authenticated (i.e., signed or its electronic equivalent) a security agreement that described the proton-therapy equipment and granted Ion a security interest in it.
Following a debtor’s default, if the collateral is “equipment,” a secured party may leave the equipment in place and render it unusable. UCC § 9-609(a)(2). The secured party may pursue this option “without judicial process, if it proceeds without breach of the peace.”
“Equipment” is a defined term under Article 9 of the UCC, referring to “goods other than inventory, farm products, or consumer goods.” UCC § 9-102(a)(33). The term “goods” means “all things that are movable when a security interest attaches” and also includes fixtures.
Application
Accordingly, because PTT has defaulted, Ion is entitled to disable the equipment if it can do so without breach of the peace. UCC § 9-609(b)(2). Here, its technician will be in the facility performing routine maintenance on the equipment and can disable it at that time. The technician will be lawfully in the facility, and there is nothing to indicate that the technician would have to engage in any violent, disruptive, or illegal behavior to prevent the equipment from being used. Without some reason to believe that there will be a breach of the peace, Ion can lawfully instruct its technician to disable the equipment.
If PTT does not pay its debts to either Bank or Ion, which of them has a superior claim to the proton-therapy equipment? Explain.
Bank has a mortgage on the land and the building in which the proton-therapy equipment is housed. The facts also state that, as a result of the installation, the equipment became a fixture. Accordingly, Bank’s mortgage extends to the equipment.
Ion has a perfected security interest in the proton-therapy equipment. The security interest is enforceable under UCC § 9-203(b), and thus (in the absence of an agreement to the contrary under UCC § 9-203(a)) the security interest is attached. This is because all three elements of UCC § 9-203(b) have been satisfied: “value” has been given (the proton-therapy equipment has been delivered to PTT), PTT has rights in the proton-therapy equipment, and the signed purchase agreement qualifies as a security agreement that contains a description of the collateral. Ion’s security interest is perfected under UCC §§ 9-308 and 9-310 because a financing statement properly listing the debtor and indicating the collateral was filed in the office of the State A Secretary of State. (State A is the correct state in which to file the financing statement because perfection of this security interest is governed by the law of the state in which PTT is located; in this case, PTT is located in State A because, as a corporation, PTT is a “registered organization” and, thus, is located in the state under whose laws it is organized.
Rule and Application
A security interest in fixtures (such as that of Ion), even if perfected, is ordinarily subordinate to a conflicting interest of an “encumbrancer . . . of the related real property,” such as Bank. UCC § 9-334(c). There are, however, a number of exceptions to this rule. One exception relates to the priority of a “purchase-money security interest” in fixtures as against an encumbrancer of the related real property. (Ion has a purchase-money security interest in the equipment because the equipment secures credit given by Ion to allow PTT to buy the equipment. UCC § 9-103.) Because the security interest of Ion is a purchase-money security interest, had Ion made a “fixture filing” before the equipment became a fixture or within 20 days thereafter, the security interest of Ion would have had priority over Bank’s mortgage. UCC § 9-334(d). Ion did not make a fixture filing, though. While Ion did perfect its security interest by filing the financing statement with the Secretary of State (see above), that financing statement did not qualify as a “fixture filing” because a fixture filing must provide a description of the real property to which the collateral is related and must be filed in the office in which a mortgage on the related real estate would be filed, not in the state’s central filing office. UCC §§ 9-501(a)(1)(B), 9-502(b). Therefore, no exception to the general rule is applicable and the security interest of Ion in the equipment is subordinate to the interest of Bank.
Does Ion have an enforceable and perfected security interest in any of PTT’s assets other than the proton-therapy equipment? Explain.
A secured party that has a security interest in collateral also has a security interest in any identifiable “proceeds” of the collateral. UCC § 9-315(a)(2). Proceeds include “whatever is acquired upon the . . . lease of collateral.” UCC § 9-102(a)(64)(A). Thus, PTT’s rights under the lease with Oncology are proceeds of the proton-therapy equipment in which it has a security interest. As a result, Ion has a security interest in PTT’s rights against Oncology under the lease. UCC § 9-315(a)(2).
Does a person who has a security interest in equipment also have a security interest in the debtor’s right to be paid by a lessee who leased the equipment? If so, is the security interest perfected?
Whether Ion’s security interest in the rights under the lease is perfected is important because this will determine Ion’s rights compared to those of other parties who have a claim to the rights under the lease. A security interest in proceeds of collateral is perfected for at least 20 days if the security interest in the original collateral was perfected. UCC §9-315(c). Ion’s security interest in the proton-therapy equipment was perfected by the filing of the financing statement with the Secretary of State. (See Point Two above.) As a result, Ion’s security interest in the proceeds of that equipment (the rights against Oncology under the lease) is perfected for at least 20 days. The security interest will remain perfected after the 20-day period if, inter alia, the security interest in the original collateral was perfected by a filing in the same office in which a security interest in the proceeds could be perfected by filing (see UCC § 9-315(d)). Here, PTT’s rights under the lease with Oncology constitute chattel paper because the lease evidences both a monetary obligation and a lease of specific goods. UCC § 9-102(a)(11). A security interest in chattel paper may be perfected by filing a financing statement in the Secretary of State’s office in State A, the same office in which PTT filed the financing statement with respect to the equipment. See UCC §9-501(a)(2) (state designates a single statewide office for filing of all security interests except certain real-estate-related interests). Thus, the security interest in the chattel paper (the proceeds) is perfected not only for the first 20 days but thereafter as well.
