When does a security interest attach; or become legally enforceable?
Secured interest must be supported by consideration given. Preexisting claim, although not consideration, is value and is OK
Debtor must actually own the rights to the collateral or have possession. However, debtor is not required to have actual legal title
Secured interest much be recorded
How does perfection occur in a secured transaction?
By filing a financing statement - secured party
By possessing the collateral - secured party
Automatic perfection can occur, but ONLY with consumer goods
When does automatic perfection occur in a secured transaction?
Purchase money security interest in consumer goods (PMSI):
Store sells a consumer good on credit - Store retains security interest
A bank finances the purchase of a consumer good - Bank retains security interest
NOTE: Automatic perfection can only occur with consumer goods - NOT inventory or equipment
What are the priority rules for payment in a secured transaction?
- If two parties are perfected; then the first one to file wins
Exception: A PMSI may take priority over all other security interests, even those security interests perfected prior to the PMSI
- If goods are equipment or consumer; PMSI has 20 DAYS after debtor receives possession of collateral to perfect the PMSI - If PMSI party follows this rule, then they will win over other perfected interests in the same collateral (Consumer goods)
Exception: If the goods are inventory, the PMSI party must perform two tasks to gain priority over earlier perfected interests:
a. Perfection must occur prior to or simultaneously to the debtor receiving the inventory (No 20-day window for inventory)
b. Written notice must be given to all holders of prior perfected security interests in the collateral
2. If neither party is perfected; then the first one to attach wins
What are the characteristics of perfection of interest in a secured transaction?
Gets higher priority over others claiming rights to collateral after the perfection takes place
Attachment must take place BEFORE perfection
What is a security agreement?
What are the requirements of a valid security agreement?
A security agreement is an agreement between a debtor and creditor, which gives the creditor a security interest in the debtor’s collateral
Requirements of a valid security agreement (also attachment):
- The agreement must be in writing, unless the creditor has physical possession of the collateral (a pledge) - in this case the agreement can be oral
- Must be signed by the debtor; creditor’s signature is not required
- A reasonable description of the collateral
- Value must be given to debtor by creditor
- Debtor must have Rights in the collateral
What are the advantages of a creditor holding a lien in a secured transaction?
Creditor holds priority over claims to collateral vs. unperfected security interests
Beats perfected security interests filed after lien attachment
Exceptions: Purchase money security interest; which has a 10 day grace period to be filed
Buyers purchasing in the ordinary course of business are immune from security interests held by merchants
General rule regarding Automatic perfection
Automatic perfection is NOT effective against bona fide purchaser for value who buys goods from consumer for consumer use
However, it is effective if the secured party had filed financing statement first. This means the company that filed a financing statement could get back their property if the customer they sold it to sold it to another party, even if that other party was a consumer
However, if the consumer who purchased the item from the customer used it for a NON-consumer purpose; then the consumer would NOT be free of the Company security interest, even if the Company had not filed a financing statement; the consumer who bought the item wouldn’t be able to keep it
Secured creditors vs. Lien creditor
Who wins?
- Possessor of negotiable document of title has priority over other creditors
- Lien creditor -
a. has priority over an Unperfected security interest (knowledge of security interest doesn’t matter)
b. has priority over a security interest perfected after attachment of the lien; UNLESS it is a PMSI perfected within the 20-day grace period
c. A security interest perfected BEFORE the lien usually has priority
Secured creditors vs. Trustee in bankruptcy as a lien creditor
Who wins?
Trustee has the rights of a lien creditor from the date of filing of petition in bankruptcy
- so they have priority over a security interest perfected AFTER date of filing petition, UNLESS it is a PMSI perfected within the 20-day grace period
Trustee also takes the position of any existing lien creditor
A security interest perfected BEFORE the bankruptcy usually has priority
Secured creditors vs. subsequent buyers of collateral or a subsequent bona fide purchaser from a consumer
Who wins?
Buyers in the ordinary course of business take free of any security interest whether perfected or not
Buying in the ordinary course of business means buying from inventory of a person or company that normally deals with those goods
Contrast this with a subsequent bona fide purchaser from a consumer - applies to sale by consumer to consumer. In this case, just like a buyer in the ordinary course of business, the bona fide purchaser takes free of any security interest whether perfected or not UNLESS filing had took place BEFORE the sale or notice of the security interest was given to the bona fide purchaser
Note: Buyer has priority even if they knew about the security agreement, but the buyer MUST have possession
The purpose is to allow purchasers to buy from merchants without fear of security agreements between merchants and other parties
Under the Revised UCC Secured Transaction article, when collateral is in a secured party’s possession, what are the conditions that must be satisfied to have attachment?
Under the revised article 9 on secured transactions, attachment of a security interest takes place when the secured party gives value, the debtor has rights in the collateral and one of the following three is true:
- The secured party must possess the collateral if the debtor agrees to it
- The secured party must have control of certain types of collateral or
- The secured party must have a signed security agreement (or an authenticated electronic transmission)
What is a Purchase Money Security Interest (PMSI) Creditor?
A PMSI is a creditor who advances money or credit to enable a debtor to obtain collateral and takes a security interest in the collateral
What does Perfection by Filing a Financing Statement do?
Perfection by filing a financing statement does the following:
- Give constructive notice to all 3rd parties of the security interest
- Must contain:
a. Names & addresses of parties
b. General description of the collateral
c. Signature of debtor
- Filing is only way to perfect with A/R
- Generally good for 5 years. Creditor has to complete a continuation statement in order to get another 5 years
What happens if a creditor is Unperfected?
If Creditor is UNPERFECTED, then Creditor is UNPROTECTED
Can a creditor “perfect” by taking possession of the collateral held by a debtor?
Yes.
Perfection can occur by Creditor taking possession of the collateral with the debtor’s agreement
Note: The only way to perfect with negotiable instruments or stock and bonds is to do it this way
What is Perfection By Attachment?
Perfection By Attachment is an automatic but very limited type of perfection
- Can ONLY occur with PMSI Creditors in consumer goods
- One who perfects by attachments beats all other creditors
- One who perfects by attachment loses collateral to any consumer purchaser from debtor without notice of security interest - can protect against this by filing a financing statement BEFORE it’s sold to another person (non-creditor)
What are two exceptions when a Perfected Creditor will LOSE against a Purchaser from Debtor?
There are 2 exceptions when a perfected creditor losses to purchaser from debtor:
- One who perfects by attachment loses to purchaser of debtor without notice
- One who buys from a merchant in ordinary course of business takes free of all security interests even if they had notice of the security interest
Note: Usually a perfected creditor beats a purchaser from debtor
What is the exception in regards to PMSI Creditors who ARE NOT the first creditor to file or perfect?
Usually, the first creditor to file or perfect wins (1st in time is 1st in line)
Exception: PMSI Creditors
- PMSI creditor in NON-Inventory collateral has priority if they file within 20 Days of debtor getting possession
- PMSI creditor in INVENTORY collateral has priority IF before Debtor gets possession, they file and give written notice to creditors ahead of him
If collateral is perfected in 1 state and move to another state, how long is the collateral perfected?
The collateral is perfected for 4 months AFTER arrival in the new state
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