Secured Transactions Flashcards
Summary
Because the man’s mother owns the portable welding machine, and there is no indication that the man has any ownership or other rights in it, the bank does not have an enforceable security interest in the machine.
The man granted the bank an enforceable security interest in all of the man’s present and future equipment. This security interest, which covers the later-acquired tools, was perfected by the bank’s filing of its financing statement. The tool seller also has a perfected security interest in the tools. Although the financing statement perfecting the tool seller’s security interest was filed after that of the bank, the tool seller’s security interest has priority because it is a purchase-money security interest that was perfected within 20 days of the debtor’s possession of the collateral.
Does the bank have an enforceable security interest in the portable welding machine?
The bank does not have a security interest in the portable welding machine because the man had neither any rights in the machine nor the power to transfer any rights in it.
Rule and Application
For a security interest to be enforceable, three requirements must be satisfied. UCC § 9-203(b). The first requirement is that “value” must be given. UCC § 9-203(b)(1). The second requirement is that the debtor must have “rights in the collateral or the power to transfer rights in the collateral to a secured party.” UCC § 9-203(b)(2). The third requirement, in the context of a security interest in goods not in the secured party’s possession, is that the debtor must have authenticated (signed or its electronic equivalent) a security agreement containing a description of the collateral. UCC § 9-203(b)(3)(a).
Two of the requirements for enforceability are met on the facts of this problem. First, value was given when the bank loaned the man $50,000. UCC § 1-204. Second, the man signed an agreement granting the bank a security interest in all of the man’s equipment. Because this agreement creates or provides for a security interest, it is a security agreement. UCC § 9-102(a)(74). Moreover, because “equipment” means “goods other than inventory, farm products, or consumer goods,” the portable welding machine is equipment and thus the security agreement contains a sufficient description of the collateral. See UCC §§ 9-102(a)(33), 9-108.
However, the third requirement (that the man have “rights in the collateral or the power to transfer rights . . . to a secured party”) is not satisfied on these facts. The portable welding machine belongs to the man’s mother, and he has no rights in it. There is no indication that the man’s mother transferred any ownership interest or other rights in the machine to him. Indeed, the mother expressly stated that the man had no right to use the welding machine. Moreover, there is nothing in the facts that would indicate that the man ever had the power to transfer rights in the welding machine to anyone.
Because only two of the three criteria for the creation of an enforceable security interest were satisfied, the bank does not have an enforceable security interest in the welding machine.
Does the bank have an enforceable security interest in the diesel-engine repair tools?
The bank has an enforceable security interest in the diesel-engine repair tools that the man bought after entering into the security agreement with the bank because all three statutory criteria are satisfied.
Rule and Application
While the man did not own the diesel-engine repair tools at the time that he borrowed money from the bank, the security agreement that he signed stated that he granted the bank a security interest in “all my equipment, including equipment hereafter acquired.” This is permitted by UCC § 9-204(a), which provides that “a security agreement may create or provide for a security interest in after-acquired collateral.”
Once the man acquired the diesel-engine repair tools, all three elements of an enforceable security interest were satisfied. First, the bank gave value to the man by loaning him money. See UCC § 9-203(b)(1). Second, once the man acquired the tools, he had rights in them (notwithstanding that he had not paid the entire purchase price yet). See UCC § 9-203(b)(2).
Third, the man signed a security agreement granting the bank a security interest in his “equipment.” Under UCC Article 9, equipment consists of goods that are not “inventory, farm products, or consumer goods.” The tools do not fit into any of those categories, which are terms of art defined in UCC § 9-102. The tools are not farm products; they are not inventory because they are not held by the man for sale or lease and are not materials to be consumed in the business; and because the tools are used for business purposes, not “personal, family, or household purposes,” they are not consumer goods. Thus, the tools are “equipment” as the term is defined in UCC Article 9. As a result, the third criterion of an enforceable nonpossessory security interest in goods (that the debtor authenticated a security agreement containing a description of the collateral) is satisfied. UCC § 9-203(b)(3)(A). Moreover, the description meets the standards for a sufficient description of the collateral because it reasonably identifies what is described. UCC § 9-108.
Does the tool seller have an enforceable security interest in these tools?
The tool seller also has an enforceable security interest in the diesel-engine repair tools because all three statutory criteria are satisfied.
The tool seller also has an enforceable security interest in the diesel-engine repair tools because all three elements of UCC § 9-203(b) are met: value has been given, the debtor has rights in the collateral, and the debtor authenticated a security agreement containing a description of the collateral. (See Points One and Two(a) for more detailed descriptions of these criteria.
Assuming that both the bank and the tool seller have such security interests in these tools, whose interest has priority?
Both the security interest of the tool seller and the security interest of the bank are perfected by the filing of financing statements. Because the tool seller’s security interest is a purchase-money security interest in non-inventory collateral, it has priority over the earlier-filed security interest of the bank.
Perfection
In determining the priority between two secured parties with enforceable security interests in the same assets of a debtor, it is important to determine first whether each of the security interests is perfected. A security interest is perfected if it has “attached” and the applicable additional requirements for perfection are met. UCC § 9-308(a). A security interest attaches when it becomes enforceable unless attachment is postponed to a later time by agreement. UCC § 9-203(a).
Here, both security interests are enforceable and there are no facts to indicate an agreement to postpone attachment, so both security interests attached when they became enforceable. The additional requirement for perfection of a nonpossessory security interest in goods is that a financing statement be filed with respect to the collateral. UCC § 9-310(a). As the facts indicate, both the bank and the tool seller filed properly completed financing statements listing the man as debtor and containing an indication of the collateral. (Under UCC § 9-504, an indication of collateral in a financing statement is sufficient if it satisfies the requirements set out in UCC § 9-108 for description of collateral in a security agreement.) Thus, both the security interest of the bank and the security interest of the tool seller were perfected.
Priority
Normally, between two secured parties, each of whom has a perfected security interest in the same collateral, priority is determined by the “first to file or perfect” rule of UCC § 9‑322(a)(1) (“Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest . . . is first perfected . . . .”). Under that rule, the bank’s security interest in the diesel-engine repair tools would have priority over the security interest of the tool seller because the bank’s financing statement was filed before the tool seller’s financing statement was filed.
The priority rule in UCC § 9‑322(a)(1) is, however, subject to special rules with respect to purchase-money security interests in UCC § 9-324. The tool seller’s security interest is a purchase-money security interest (PMSI), as that term is defined in UCC § 9-103(b)(1), because the collateral secures an obligation to pay the remaining purchase price of the diesel-engine repair tools (a “purchase-money obligation”) and thus the collateral is “purchase-money collateral” with respect to the security interest. See UCC § 9-103(a).
Because the tool seller’s perfected security interest is a purchase-money security interest and the collateral is not inventory, the special priority rule in UCC § 9-324(a) applies. Under that rule, a perfected purchase-money security interest in goods other than inventory “has priority over a conflicting security interest in the same goods” so long as the interest was perfected “when the debtor receive[d] possession of the collateral or within 20 days thereafter.” UCC § 9-324(a). The tool seller delivered the tools to the man on June 10, and it perfected its security interest by filing a financing statement on June 11, one day later. Because the tool seller’s security interest was perfected within 20 days of the man’s receiving possession of the diesel-engine repair tools, the tool seller’s perfected PMSI has priority over the bank’s security interest, even though the bank’s financing statement was filed earlier than that of the tool seller.
[NOTE: The bank’s security interest is not a purchase-money security interest even if funds provided by the bank were used to make the down payment for the tools. That’s because the man’s obligation to the bank (to repay the loan) was not incurred as part of the purchase price for the tools and nothing indicates that the bank made the loan specifically “to enable the debtor to acquire rights in” the tools. UCC § 9-103(a).]
