The Shelter Principle and Buyers of Collateral - Explained
How Does the Shelter Principle Protect Buyers of Collateral?
Written by Jason Gordon
Updated at April 6th, 2023
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What is the Shelter Principle - Section 2-403(1)?
The shelter principle offers additional protections for buyers of collateral from other consumers. Basically, this equitable principle states that a good faith purchaser of property acquires all of the rights that the transferor of that property. The shelter rule will provide the purchaser with a claim of interests that may be superior to a previously perfected secured creditor. The shelter principle is broader than the BYOC and UCC 9-320 protections. It protects consumer and non-consumers who purchase collateral from a buyer in the ordinary course. Further, it protects the buyer in situations where the secured party has filed a security interest covering the collateral, which is outside of the scope of 9-320.
Example: Suppose Biz, LLC purchases a good used personally by a consumer, Tom. The good was subject to a perfected security interest as inventory in the hands of the seller, Seller, Inc., when it was originally sold to Tom. Tom, as a consumer, would have taken the item free and clear of the security interest in the inventory. When Tom later sells the item to Biz, LLC, the shelter principle is the only rule to protects it. Biz, LLC does not qualify as a purchaser in the ordinary course and is not protected as a consumer under UCC 9-320. Biz, LLC, as a subsequent purchaser or transferee of that collateral from the buyer, receives all of Toms rights in the collateral. As such, Biz, LLC takes the collateral free and clear of the original security interest. It does not matter whether Seller, Inc., filed a financing statement to perfect the security interest.
Next Article: Priority Rules for Conflicting Security Interests Back to: SECURED TRANSACTIONS
Discussion Question
How do you feel about the Shelter Principle? What do you think are the objectives behind the Shelter Principle? Is the rule adequate or overly broad? Why? Do the protections for business and consumers against filed and unfiled security interests affect your opinion?
Practice Question
Yolanda purchases a couch from ABC Inc. ABC perfects a security interest in the couch. Yolanda later sells the couch to Zora. Is Zora's couch still subject to ABCs security interest? What information do we need to know to answer this question?
Related Topics
- Secured Transactions Law (Intro)
- What is a Security Interest?
- Collateral
- Pledge as Collateral
- Collateralize
- Cross Collateralization
- After-Acquired Collateral
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Unsecured Loan Definition
- Unencumbered Asset
- What is a Secured Creditor?
- Unsecured Creditor
- What are the benefits of security interests for creditors?
- Limited Recourse Debt
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Uniform Commercial Code - Article 9
- What are the common types of security interest in real property (land)?
- What is a mortgage?
- How does a security interest protect the mortgage holder?
- Lis Pendens
- Deficiency Judgment
- What is a Deed of Trust or Security Deed?
- What is a Land Sale Contract?
- What is a security interest in personal property?
- How does one establish a security interest in personal property?
- What is Perfection of a security interest?
- What are the methods of perfecting a security interest in personal property?
- UCC-1 Statement
- How does one establish a security interest in real property (land)?
- Register of Deeds
- What is Automatic Perfection of a security interest?
- What is a Purchase Money Security Interest (PMSI) in consumer goods?
- What is a Purchase Money Grace Period for a PMSI in non-consumer goods?
- How does one continue perfection of a PMSI in non-consumer goods?
- What is Temporary Automatic Perfection in Proceeds from the sale of goods?
- How is a security interest created in Assignment of Accounts Receivable and Contract Rights?
- How does one perfect a security interest by Possession of the collateral?
- How does on perfect a security interest by Control of collateral?
- How does one perfect a security interest by Filing a Financing Statement?
- What authorization is required to file a financing statement?
- Where is the appropriate office to file a financing statement?
- Defeasance
- Continuation Statement
- What is Priority of a security interest?
- What role does perfection play in establishing the Priority of a secured party?
- What are the common conflicts arising as to priority of a security interest?
- What is the priority of parties secured by common law and statutory liens?
- Lien - Definition
- Blanket Lien Definition
- Unperfected Lien
- Possessory Lien
- Non-Possessory Lien
- Tax Lien
- Mechanics Lien Definition
- Construction Lien
- Cloud on Title
- What is the priority of a buyer of collateral that is subject to a security interest?
- What is required to be a buyer in the ordinary course of business?
- How does 9-320(b) protect consumers who purchase goods from other consumers?
- What is the Shelter Principle?
- What are the general Priority Rules for Conflicting security interests?
- Subordination Agreement
- Who has Priority in Proceeds from the sale of collateral?
- What is a secured party's priority in future advances to a debtor?
- What is the priority of a PMSI in goods (other than inventory and livestock)?
- What is the priority of a PMSI in inventory?
- What is the priority of conflicting PMSIs?
- What is the priority of security interests in fixtures?
- What is the scope of fixture priority rules?
