Elements of Attachment
- To be enforceable, i.e. for a SI to attach to collateral, three things must be satisfied:
- Creditor gives value
- Debtor has rights in the collateral
- Authenticated security agreement that describes the collateral or secured party has possession or control of the collateral
Requirements for valid security agreement
- (1) be in a record, (2) contain a description of the collateral, and (3) be authenticated by the debtor.
- Description cannot be super-generic, but can just refer to an Article 9 defined category.
Is after-acquired collateral valid?
- Allowed, but must be indicated in security agreement.
- EXCEPTION: some states allow inventory to include after acquired collateral
- NOT allowed in consumer goods unless acquired within 10 days after executing the security agreement
Does NOT need to be listed in financing statement.
Define PMSI
PMSI in goods exist when the funds advanced are used to purchase the collateral by which the obligation is secured. Either purchasing on credit (seller PMSI) or getting a loan to buy the property (lender PMSI)
Accession vs. Commingled Goods
- Accession - goods that are physically united with other goods, but the identity is not lost. Therefore, the SI is not lost.
- Commingled - goods that are physically united such that there identity is lost. SI does not continue in that collateral but attaches to the whole.
Perfection by Filing - What is required in the financing statement?
- (1) the debtor’s name, (2) the secured party’s name, (3) a description of the collateral
Debtor’s authorization required (Security Agreement counts)
Filing location - RP - local, PP - Debtor’s state of residence
Perfected for 5 years
Perfecting by possession
- If something can be possessed, then you can probably perfect by having it in your possession.
This is the ONLY way to perfect an SI in cash
Perfecting by Control
- Letter of credit rights or deposit account - this is the only way to perfect
Automatic Perfection (Three types)
- PMSI in consumer goods
- Temporary perfection (move of collateral or debtor)
- Proceeds (temporary sometimes, permanent other)
Automatic perfection in proceeds
- Automatically attach and are perfected for 20 days following the disposition
- Indefinitely perfected in following situations:
- Financing statement covers the proceeds
- Cash proceeds are perfected indefinitely
- Same office rule - if proceeds can be perfected by filing in same office, then automatically perfected. But does not include things bought with cash proceeds.
How can you perfect in a vehicle?
- Vehicles can only be perfected by a notation on the title. Filing a financing statement is not enough.
Priority of a judicial lien creditor
Generally, Perfected SI wins. Unperfected SI loses (unless only reason unperfected is because no value given).
Special rules:
PMSI - if perfected within 20 days, it wins.
Future Advancements - if made 45+ days after lien creditor attaches, then it will not have priority. But if made within 45 days, it will have priority
Statutory Lienholder (mechanics lien)
- Possessory lien has priority over any SI if it secures payment for goods or services
Priority of Transferees
Generally, SI follows the collateral, subject to three main exceptions:
BFP
BIOCB
Garage Sale
When does Buyer take free of SI? (BFP exception)
Buyer (1) gives value, (2) receives delivery, and (3) without notice of the SI. Takes free of SI
Buyer in the ordinary course of business exception
BIOCB - (1) buys goods by giving new value, (2) in the ordinary course, (3) from a seller in the business of selling goods of that kind, (4) in good faith, and (5) without knowledge that the sale violates secured party’s rights.
Consumer buyer (garage sale) exception
- Consumer buyer (garage sale) - (1) buys consumer goods for value, (2) for his own personal, family, or household use, (3) from a consumer seller, (4) without knowledge of the security interest.
- Important, the secured party can file a financing statement and then the consumer buyer will not take free.
PMSI Super-Priority
PMSI in non-inventory or non-livestock - priority over all other SI if perfected within 20 days of receipt
PMSI in inventory or livestock - super-priority if (1) perfected at time of possession, and (2) prior notice given to all other secured parties.
Importantly, proceeds from PMSI sale retain super-priority.
Priority in fixtures rule
- Fixture SI beats RP SI if fixture filing filed before RP recorded
- Perfected SI in fixtures has priority over judicial lien
- PMSI in fixtures - has priority over RP if perfected upon receipt or within 20 days
- EXCEPTION: Prior construction mortgage beats fixtures
Priority for Deposit Accounts
SP with control has priority over SP without control.
Consequence of Default (secured transaction)
- Secured Party may
- seek possession of collateral and retain or sell it
- sue for a judgment based on the obligation
Dispossion of collateral upon default
commercially reasonable
SP cannot buy collateral if private sale (public sale OK)
Notice must be given to debtor and other SP UNLESS goods are perishable, threatens to speedily decline in value, or is of a type sold in a recognized market and person has waived right to notice. Failure to give notice can forfeit right to deficiency.
Surplus or deficiency, unless collateral is accounts, chattel paper, promissory notes, or payment intangibles
Acceptance of collateral upon default
Effective to discharge obligation IF:
- Full satisfaction - (1) debtor consents in authenticated record, or (2) debtor does not object to proposal within 20 days
- Partial satisfaction - only if debtor consents in authenticated record (not allowed for consumer transactions)
- Foreclosing secured party MUST provide notice to other secured parties
Limit for consumer goods: cannot do this strict foreclosure if paid more than 60% of obligation.
Debtor’s right to redemption (secured transactions)
Cannot be exercised after sale has taken place
