1. Secured Transactions Law

Secured Transactions Law

Playlist: 38 Videos: 83 Minutes


Topics: Learning Material

Introduction to Secured Transactions
Security interests are a cornerstone of finance and lending. Secured lending relates directly with the amount of risk a lender faces when extending credit to a borrower. A secured transaction is one in which a lender or seller acquires an interest in the property sold or purchased with the funds provided to the borrower or debtor. The law of secured transactions regulates the relationship between the secured lender and the borrower/debtor. It also regulates the relationship (or rights) between multiple secured lenders. This chapter introduces the concept of a security interest. It begins by exploring security interests in the context of real property before moving on to personal property. It examines the rights of the secured party and the debtor in numerous situations (or transactions) involving security interests. Notably, it explains the key concept of priority among secured parties. Priority is instrumental in assessing the risk to the secured party in a given transaction. For further written and video explanation, discussion and practice questions, see Secured Transactions Law (Intro)

What is a Security Interest
A security interest is a form of property interest in real or personal property. It is given by the owner of the property to provide assurance to a third party that the property owner will perform an obligation or pay a debt. Generally a security interest arises when one party loans money to another party. The borrower provides a security interest in property to give assurance that she will repay the loaned funds. Often the money borrowed is used to purchase the property securing the loan. If the borrower fails to repay the loan, the lender may seek to take possession of and sell the property securing the loan. The proceeds from sale of the property are then used to repay the debt. For further written and video explanation, discussion and practice questions, see What is a security interest?

Benefits of a Security Interest
Taking a security interest in collateral to secure a debt reduces the risk to the creditor. It dissuades the creditor from defaulting on the loan for fear of losing the collateral. Also, it provides the secured creditor the ability to recuperate some or all of the debt by repossessing and selling the collateral. A security interest in property entails the secured party’s right to “repossess” and “foreclose” upon the collateral in the event of default. Foreclosure is the use of the property to satisfy the outstanding debt. There are two types of foreclosure: Strict Foreclosure - Strict foreclosure is when a secured party repossesses and retains possession of the collateral in complete satisfaction of the outstanding debt. The secured party is required to provide written notice to the debtor of this intent and, if something other than consumer goods, notice to other creditors. The debtor or any creditor may object to a strict foreclosure and force the foreclosing creditor to undertake a foreclosure sale. Foreclosure Sale - A foreclosure sale is the process of selling the collateral in a private sale or at public auction. The foreclosing creditor must provide notice to the debtor and, if the goods are other than consumer goods, to other creditors. The sale must be carried out in a commercially reasonable manner. A debtor generally has the right to repay the outstanding debt and reclaim the property at any time prior to the creditor foreclosing on the property. This is known as a “right of redemption”. In some jurisdiction, debtors have a statutory right of redemption for a specified period following foreclosure. This is common in foreclosures of real estate. For further written and video explanation, discussion and practice questions, see What are the benefits of security interests for creditors?

Security Interests in Real Estate

Land or real property is an expensive asset that is often purchased through financing arrangements. As such, purchases of real property are often subject to a security interest. The most common forms of security interest in land include: Mortgages, Deeds of Trust, Land Sales Contracts. Each of these arrangements demonstrates the core principle of security interests. That is, there is an obligation (generally to make payments) that is secured by an interest in the real property. Each of these types of security interest is discussed in greater detail below. For further written and video explanation, discussion and practice questions, see What are the common types of security interest in real property (land)?

What is a “Mortgage”?
A mortgage is a loan that is secured by real property. A borrower acquires a loan and provides a security interest in the real property owned by the borrower to be purchased with the borrowed funds. This is a common method of using “equity” or one’s ownership interest in real property to obtain funds for other purposes. For further written and video explanation, discussion and practice questions, see What is a mortgage?

Security Interest Protects Mortgage Holder
If the borrower fails to repay the loan pursuant to the terms of the loan agreement, the mortgage holder may “foreclose” upon the property securing the mortgage loan. Foreclosure - Foreclosure is the process by which the mortgage holder takes control of the property securing a debt. The mortgage is foreclosed and the property is repossessed. Once repossessed, the property is sold at public auction to generate funds to repay the loan. Deficiency Judgment - If the property, once repossessed, does not generate sufficient proceeds from sale to repay the outstanding loan, there is a “deficiency”. Depending upon the mortgage foreclosure process employed by the secured lender, the property owner may still be liable for this deficiency. If so, the lender can bring a civil action asking for a “deficiency judgment” against the debtor. Right or Redemption - Many states offer protections to borrowers who default on loans and lose their properties to foreclosure. One of these protections is known as a “right of redemption”. This right affords a borrower a specific amount of time to repay the amount owed on the foreclosed property and regain possession. The government (generally the local Sheriff’s office) is involved in the process of repossessing and selling the foreclosed property. In foreclosures involving a personal residence, the process often begins with the lender seeking an eviction order against the residents of the property. Once eviction is complete, the lender may follow state procedures to list the property for sale. State law governs the sale of the property, which must be “commercially reasonable” in light of the circumstances. If the secured party pursues strict foreclosure, she may keep the collateral in complete satisfaction of the debt. In this situation, the secured lender cannot pursue a deficiency judgment against the debtor. For further written and video explanation, discussion and practice questions, see How does a security interest protect the mortgage holder?

“Deed of Trust” vs “Security Deed”
A “deed of trust”, or “security deed”, as it is known is some jurisdictions, is a form of mortgage. A borrower of money signs a promissory note demonstrating the debt owed to the lender. The promissory note will generally recite the purpose of the loan and indicate that it is secured by real property. The borrower then takes possession of the land and records her ownership. The borrower signs a deed of trust, which transfers the land to the lend. The deed cannot be recorded except upon default. This effectively grants the lender a security interest in the real property as security for the loan. The difference between a deed of trust and a standard mortgage arises in how the security interest is recorded. A traditional mortgage simply records the security interest in the public records (registrar of deeds office) where the property is located. The deed of trust takes a different tact. A third party serves as trustee and holds the deed transferring legal ownership of the land during the pendency of the mortgage. In some jurisdictions, the secured party will hold the deed, as apposed to employing the services of a third-party trustee. Once the mortgage is repaid, the trustee will surrender the deed to the purchaser. If the loan is not repaid, the lender will request that trustee turn over the deed. The lender will then record the deed in the public records to assume ownership of the property. The process of foreclosing on a deed of trust is commonly referred to as an “administrative foreclosure”. After recording the deed, the lender must then sell the property to recuperate the lent money. For further written and video explanation, discussion and practice questions, see What is a "deed of trust" or "security deed"?

What is a “Land Sale Contract”
A land-sale contract is a situation where the owner of land sells it subject to the condition that the seller retain title to the land until the buyer pays the full purchase price. Basically, it is a seller-financing scenario, where the seller retains ownership of the land until it is fully paid off. The rights of the buyer during this period are determined by agreement between the buyer and seller. Generally, the buyer acts as if she is the owner during the payment period. She has the legal right to possess and use the land and is responsible for paying taxes and insurance. If the purchaser fails to make any scheduled payment, she defaults under the agreement and forfeits her right to purchase the property. For further written and video explanation, discussion and practice questions, see What is a "land sale contract"?

Security Interest in Personal Property
A security interest in personal property involves using any form of personal property or fixture to secure a debt. A borrower signs a promissory note that identifies the personal property that will serve as collateral to secure the loan. Personal property that may serve as collateral includes tangible and intangible assets, commercial paper, and commercial liens. Tangible Assets - Consumer goods, business equipment, farm products, and inventory. Commercial Paper - Documents of title, chattel paper, and negotiable instruments. Intangible Assets - Intellectual property, accounts receivable, and general intangibles. Floating Liens: After-acquired collateral, future advances on collateral, and proceeds from the sale of collateral. For further written and video explanation, discussion and practice questions, see What is a security interest in personal property?

Establish a Security Interest in Personal Property
A security interest in property begins when personal property is identified as collateral for a loan. This is known as “attachment” or “attaching” the property. Attachment takes place when the following conditions are met: Security Agreement - The secured party and the party granting a security interest (debtor) must enter into a written security agreement. The security agreement must be signed by the debtor and contain a reasonable description of the collateral. Value Given - The secured party must give or transfer value to the debtor. This generally means that the loaned funds are transferred to the borrower. Ownership in Collateral - The debtor must acquire ownership of the collateral. The debtor does not necessarily have to own the collateral at the time of entering into the security agreement. In some cases the debtor will use the value received from the secured party to purchase the collateral. Also, the security agreement may include an “after-acquired collateral” clause. This means that property acquired by the debtor after the loan is made can serve as collateral for the original loan. For further written and video explanation, discussion and practice questions, see How does one establish a security interest in personal property?

Perfecting a Security Interest
“Perfection” is the process of putting the entire world on notice that the secured party claims a security interest in the debtor’s collateral. Recall, a security interest is enforceable against the debtor at the time that it attaches. That is, the attached security interest will allow the secured party to repossess the assets of the debtor in the event of non-payment of the secured debt. A problem arises when other creditors of the debtor seek to establish a security interest in the debtor’s property, including the collateral already securing existing debts. These parties are effectively claiming an interest in the collateral that competes with the original secured party’s interests. Secured parties must make certain that the security interest is enforceable as against third parties who claim a competing interest in the collateral. The security interest is only enforceable as against these third parties once it is perfected. Perfection allows the secured party to maintain “priority of payment” or “priority” above other creditors in the event the collateral must be repossessed and sold to pay outstanding debts. The concept of priority of security interests is discussed further below. For further written and video explanation, discussion and practice questions, see What is "perfection" of a security interest?

Perfecting a Security Interest in Personal Property
Establishing or making one’s security interest effective as against third parties is known as “perfection” of the security interest. Perfection takes place when the security interest has attached and the creditor has taken all proper steps required by Article 9 for perfection. Generally, Article 9 allows a secured party to perfect her security interest through the following methods: Financing Statement - The most common way of perfecting a security interest under Article 9 is to file a financing statement in the appropriate public office. State law establishes the system and location for filing a public financing statement. Most states allow for filing through the secretary of state’s office, while other states allow for filing at a public office (such as the courthouse) in the area where the collateral is located. Possession or Control - In some cases, the secured party may perfect a security interest by establishing possession of or control over the collateral securing the obligation. The theory behind this method of perfection is that a third party would not reasonably extend credit and take a security interest in collateral that the debtor supposedly owns but does not possess and cannot otherwise demonstrate ownership. Automatic Perfection - Some security interests are automatically perfected, either permanently or temporarily, upon attachment of the security interest to the collateral. Each of these methods of perfecting a security interest is discussed separately. For further written and video explanation, discussion and practice questions, see What are the methods of perfecting a security interest in personal property?

Establish Security Interest in Real Estate
Secured parties must perfect a security interests in land by publicly filing notice of the security in accordance with state recording statutes. Generally, mortgages and deeds of trust must be publicly registered in a government office where the land is located. This is typically known as the “recorder” or “register of deeds” office. This recording method is deemed necessary to give notice of ownership rights and interests to those who are interested in purchasing or loaning money for or against the property. For further written and video explanation, discussion and practice questions, see How does one establish a security interest in real property (land)?

Automatic Perfection of a Security Interest

In certain types of transactions, a secured party’s interest in collateral is automatically perfected without filing a financing statement and without taking possession or control of the collateral. This is known as “automatic perfection”. Depending upon the nature of the collateral, automatic perfection may be permanent or only last for a temporary period. Temporary automatic perfect allows a party a window of time to undertake procedures to permanently perfect the security interest. Below are the most common types of automatically perfected security interest: Purchase Money Security Interests in Consumer Goods, Purchase Money Security Interests in Non-Consumer Goods, Perfection in Proceeds from the Sale of Goods, and Assignments of Accounts Receivable and Contract Rights. Each of these types of security interests and the automatic perfection attributes are discussed in a separate lecture. For further written and video explanation, discussion and practice questions, see What is "automatic perfection" of a security interest?

Purchase Money Security Interest (PMSI)
A purchase money security interest (PMSI) arises in situations where the secured party provides the funds necessary to purchase the subject collateral. This can arise through a loan for identified collateral or when the secured party sells and then finances the collateral for the purchaser. A PMSI is automatically perfected when the security agreement attaches to collateral that is consumer goods. Consumer goods are goods primarily for personal use by the purchaser — rather than for business use or resale. An automatically-perfected PMSI in consumer goods is subject to certain exceptions. These exceptions allow subsequent purchasers of the collateral to take the collateral free of the secured party’s security interest. The purchaser of the consumer goods from the seller will take free in clear if all of the following conditions are met: No Knowledge of Security Interest - The buyer cannot know about the security interest in the collateral; Provide Value - The buyer must provide value for the goods; Personal Use - Must primarily use the goods for personal, family, household purposes. For further written and video explanation, discussion and practice questions, see What is a "purchase money security interest" (PMSI) in consumer goods?

Purchase Money Grace Period in Non-Consumer Goods
Sellers of non-consumer goods receive temporary automatic perfection of an attached PMSI in the collateral sold. As the name applies, the security interest is temporary in nature. The seller has a 20-day grace period for filing a financing statement following the attachment of the purchase money security interest in the collateral. If the financing statement is filed during this 20-day period, the date of permanent perfection dates back to the date the security interest attached to the collateral. If the secured party fails to file a financing statement during the 20-day grace period, the temporary automatic perfection is lost. For further written and video explanation, discussion and practice questions, see What is a "purchase money grace period" for a PMSI in non-consumer goods?

Continued Perfection of PMSI in Non-Consumer Goods
A secured party who takes a PMSI in non-consumer goods has a grace period to file her financing statement. To establish permanent perfection beyond the temporary grace period, she must file the appropriate financing statement within 20 days of the purchaser receiving the asset. If the secured party files the financing statement during this period, her security interest is perfected and has priority from the date of the extension of credit. Her security interest also extends to any proceeds from a later sale of the assets. This is particularly important if the goods are inventory to the purchaser. Failing to file a financing statement within this period can cause the secured party to lose priority to conflicting secured parties or lien holders who later perfect their security interests in the collateral. For further written and video explanation, discussion and practice questions, see How does one continue perfection of a PMSI in non-consumer goods?

Temporary Automatic Perfection in “Proceeds” from Sale of Goods
Proceeds is the money, assets, or value received in exchange for selling or transferring something. A perfected security interest in collateral automatically extends to the proceeds from the sale of that collateral (with certain exceptions) for 20 days following the sale. This is a form of temporary automatic perfection. The temporary period for automatic perfection terminates at the end of the 20 days. Any of the following scenarios will extend the period of temporary perfection past the 20-day period: Financing Statement & Similar Type of Collateral - The secured party must have a filed financing statement covering the original collateral at the time it was sold. Further, the secured party must be able to perfect a security interest in the proceeds of sale of that collateral by filing a financing statement in the same government office. This means that the proceeds from sale must also be some form of goods. Identifiable Proceeds - The cash or other proceeds from the sale of the collateral must be identifiable. This means that the cash or other proceeds is not so intermingled with other funds so as to no longer be traceable to the sale of the subject collateral. This can be an issue when cash proceeds are disbursed into multiple accounts that have constantly rising and falling balances. File New Financing Statement - The party may perfect a new security interest in the proceeds within 20 days of the sale of the collateral. If so, the security interest continues from the date of the original security interest in the collateral. It is important to note that a debtor generally cannot sell property subject to a security interest without the permission of the secured party. Further, selling an asset to a party and failing to indicate that it is subject to a security interest may constitute fraud against the purchaser. For further written and video explanation, discussion and practice questions, see What is "temporary automatic perfection" in "proceeds" from the sale of goods?

Security Interest in “Assignment of Accounts Receivable” and “Contract Rights”
Generally, the sale or assignment of rights in accounts, payment intangibles, or promissory notes (account) creates a security interest for the individual to whom the account is assigned. This attaches the security interest to the account. Article 9 requires that an individual file a financing statement to perfect a security interest in an account. There are, however, two exceptions that allow the assignee of the account to perfect a security interest without publicly filing a financing statement. Single Account to Satisfy a Debt - The assignment of a single account in satisfaction of a preexisting debt; Automatic Perfection - The assignor transfers a limited number of accounts to the assignee that does not constitute a significant number of the assignor’s accounts. For further written and video explanation, discussion and practice questions, see How is a security interest created in "assignment of accounts receivable" and "contract rights"?

Perfection of Security Interest by Possession of Collateral
Article 9 allows a secured party to perfect a security interest in goods, instruments, negotiable documents or tangible chattel paper by securing possession of the collateral. Securing possession can mean personal possession or possession by an agent. If an agent secures possession on behalf of the secured party, perfection may require the agent’s authenticated acknowledgement that the collateral is held on behalf of the secured party. For further written and video explanation, discussion and practice questions, see How does one perfect a security interest by "possession" of the collateral?

Perfection of a Security Interest by Control
Article 9 allows for perfection of a security interest in certain types of collateral by control. These types of assets include deposit accounts, investment properties, letter-of-credit rights, and electronic chattel paper. Control is related to possession and is generally established by a control agreement granting the secured party control over the account or naming the party as owning the account. The authority that the secured party has over the collateral equates to possession. For further written and video explanation, discussion and practice questions, see How does one perfect a security interest by "control" of collateral?

Perfection of a Security Interest by Filing a Financing Statement
Generally, to perfect a security interest, a secured party may file a security agreement in the appropriate government office. To be enforceable under the UCC, a financing statement must contain the following information: Debtor’s Name - Generally this requires a first and last name. It may also require any aliases or fictitious names necessary to identify the individual; Secured Party’s Name - Name of the secured party or her representative; and Identifies Collateral - A description of the collateral must be sufficient to identify the collateral or indicate that the financing statement covers “all assets” or “all personal property” of the debtor. Additionally, the financing statement must meet the following requirements: Standard Form - It must be in the form authorized by the filing office. Filing Fee - Must include a sufficient filing fee; Debtor’s Mailing Address - This requires an address where the debtor may receive notices with regard to the filing. Entity Status and Information - Debtor’s status as an organization (type, jurisdiction, organizational ID); and Secured Party’s Address - This requires an address where the secured party may receive notices with regard to the filing. For further written and video explanation, discussion and practice questions, see How does one perfect a security interest by "filing a financing statement"?

Authorization to File a Financing Statement
A secured party must be authorized to file a financing statement against the assets of the debtor. If the debtor is bound by a security agreement, authorization to file a financing statement is implied. If the debtor is not bound (or not yet bound) by the security agreement, the debtor must authenticate the financing statement. This is normally done by signing a confirmation document. If the financing statement is not authorized, it is ineffective and the secured party is obligated to file a termination statement (or the debtor may do so). The UCC provides for a statutory penalty of $500 against the unauthorized filer. For further written and video explanation, discussion and practice questions, see What authorization is required to file a financing statement?

Where to File a Financing Statement
Financing statements covering goods are generally filed or processed through the state secretary of state’s office. Some states, however, require that the financing statement be physically filed at the local courthouse where the debtor is located. If the debtor is a business entity, the appropriate location for filing the jurisdiction where the debtor is organized. If the collateral is real estate, timber, as-extracted collateral, or fixtures, the financing statement must be filed in the local public property records. Financing statements covering goods and real estate converge when personal property becomes a fixture. In such cases, the financing statement covering goods may need to be filed in the real property records where the real estate is located. For further written and video explanation, discussion and practice questions, see Where is the appropriate office to file a financing statement?

What is “Priority” of a Security Interest
The priority of a secured party regards the party’s right to payment in the event of default by a debtor. If a debtor defaults, a secured party with a security interest in collateral will have a claim of ownership in the collateral. As such, she can repossess the collateral, sell it, and use the proceeds to satisfy the debt. Many issues arise, however, when there are multiple creditors of the debtor. The situations gets more complicated when there are multiple secured parties claiming an interest in the subject collateral. This is when the concept of priority is most important. Priority - Priority establishes the order of who has the highest claim to assets or the proceeds from the sale of those assets. A secured party with the highest priority in collateral will receive payment of her claim before any other creditors receive payment. Subordinate secured creditors will only receive payment once the highest priority secured creditor is paid in full. Once the highest priority creditor is paid, the next highest priority creditor is paid, and so on. Risk and Creditor Status - The lower the priority of a creditor, the greater the risk that she will not receive any money from the sale of the collateral in the event of default. If a creditor’s claim is not paid in full, she becomes an unsecured creditor of the debtor. Unsecured creditors generally have the highest risk of non-payment. This is particularly troublesome if the debtor files for bankruptcy protection. In the event of debtor bankruptcy, unsecured creditors generally receive a fraction, if anything, of their claim amount. Secured creditors, on the other hand, must either be paid in full or they can force the sale or surrender of the collateral securing the obligation. For further written and video explanation, discussion and practice questions, see What is "priority" of a security interest?

Perfection and Priority of a Security Interest
A secured creditor must perfect her security interest to establish the priority of her security interest with relation to all other creditors. The first secure party to perfect a security interest in the collateral generally gives her priority above any other creditors who later attempt to establish a security interest in the collateral. In turn, failing to perfect a security interest allows a later creditor who perfects her security interest in the collateral to receive priority over the unperfected security interest. Most notably, an unperfected security interest is subordinate (lower priority) to certain lien creditors or a trustee in the event of bankruptcy. In short, perfecting a security interest is essential to ensure maintenance of the benefits of the security interest. For further written and video explanation, discussion and practice questions, see What role does perfection play in establishing the "priority" of a secured party?

Conflicts over Priority of a Security Interest
The following types of security interest are often in conflict: Lien Creditors vs. Security Interest - A lien creditor who establishes an interest in a debtor’s property prior to perfection by another secured party has priority over that secured party. Depending upon the type of lien, a lien creditor may have priority in collateral above a perfected secured party. This is true for “possessory liens” but not “non-possessory liens”. Buyers of Collateral vs. Security Interest - Generally, buyers who take possession of the collateral in many situation take the collateral subject to a perfected security interest. Two notable exceptions arise when 1) the collateral is a consumer good for personal use being sold to another consumer for personal use, and 2) when the collateral is inventory for the debtor. In either situation, a buyer of collateral subject to a security interest generally takes the collateral free of a security interest if the collateral is inventory for the seller or the security interest has not been perfected. Perfected vs Unperfected - A perfected security interest in collateral has priority over an unperfected security interest in the same collateral. This is true regardless of the timing of attachment of the security interest. Each of these scenarios are discussed in greater detail below. For further written and video explanation, discussion and practice questions, see What are the common conflicts arising as to priority of a security interest?

Priority of Common Law or Statutory Liens
Possessory Liens - A possessory lien is a common law or statutory interest in an asset that: secures a payment for services or material furnished in the ordinary course of business; is create pursuant to statute or common law; and the asset is under the control of the lien holder. A possessory lien, as the name implies, gives priority in situations where an individual has physical possession of the collateral. Non-Possessory Lien - A non-possessory lien generally arises through judicial or administrative order. A possessory lien has priority over an Article 9 security interest, unless the common law or statutory authority for creating the lien indicates otherwise. A non-possessory lien, on the other hand, does not have priority over a security interest that is perfected prior to the establishment of the lien. It does, however, have priority over an unperfected security interest. For further written and video explanation, discussion and practice questions, see What is the priority of parties secured by "common law and statutory liens"?

Priority when Purchasing Collateral Subject to Security Interest
Generally, a buyer of collateral subject to a security interest takes the property subject to that security interest. That is, if a debtor sells collateral that is subject to a security interest, the security interest continues in the collateral following the sale to the buyer. This is true for validly perfected security interests or if the buyer knows about the security interest at the time of purchase. If the security interest remains with the collateral, this means that the secured party can repossess the subject collateral in the event of default on the original loan or obligation. The following exceptions apply to this rule: Authorization of Secured Party - A primary exception to this rule is when the secured party authorizes the sale. A secured party’s failure to object to the sale of the collateral may constitute authorization. Also, allowing prior sales of collateral without objecting may constitute an implied agreement authorizing the debtor to sell the collateral. Buyers in the Ordinary Course of Business - A “buyer in the ordinary course of business” (BOCB) takes collateral free of any security interests created by the seller. This is true whether the security interest is perfected or no. Consumers Purchasing Consumer Goods from Other Consumers - A purchaser of consumer goods from another consumer may take the goods free of an existing security interest. Two provisions protect consumers in this situation, UCC § 9-320(b) and the “Shelter Principle”. Each of the above rules protecting purchasers of collateral subject to a security interest is explained below. For further written and video explanation, discussion and practice questions, see What is the priority of a buyer of collateral that is subject to a security interest?

Buyer in the Ordinary Course
A buyer in the ordinary course of business must meet the following characteristics: Good Faith - The purchaser of the collateral must buy it in good faith and without the intent to defraud or deceive; Not Aware of Violation of Rights - The buyer cannot know that the sale of the collateral violates the security interest of a third party. She can know about the security interest but cannot be aware that the sale of the collateral is not authorized; and Ordinary Course of Business - The buyer must purchase the goods under normal purchasing conditions from a seller of goods of that kind. Basically, the collateral purchased must be inventory that is regularly sold by the seller. The buyer-in-ordinary course exception only applies to security interests that were validly entered into by the seller of the goods of this kind. It does not protect anyone who later purchases the collateral from the BOCB. This harsh result is addressed via UCC § 9-320(b) and the Shelter Principle. For further written and video explanation, discussion and practice questions, see What is required to be a buyer in the ordinary course of business?

Section 9-320(b) Protections
The buyer-in-the-ordinary course protection does not apply to subsequent purchases from a buyer in the ordinary course because the seller is not a seller of goods of the kind. So, if a BYOC subsequently sells the collateral purchased, the purchaser will take the goods subject to the original secured party’s security interest. This is a harsh result for the unsuspecting purchaser. UCC § 9-320(b) may remedy this harsh result by offering protections to the buyer if the security interest is not perfected. Under § 9-320(b) the buyer takes the collateral free of the security interest under the following conditions: Consumer Goods - The goods are consumer goods in the hands of the seller; No Knowledge of Security Interest - The buyer buys without knowledge of the security interest; Provide Value for Goods - The buyer buys the collateral for value (generally cash); Personal Use - The buyer buys the collateral for his own personal, family, or household purposes; and No Financing Statement - The secured party has not filed a financing statement covering the goods prior to the purchase. This is a very limited protection when the secured party does not perfect or relies on automatic perfection of a security interest in the sale of consumer goods. Further, the buyer and in the ordinary course and the subsequent buyer must be consumers. For further written and video explanation, discussion and practice questions, see How does 9-320(b) protects consumers purchasing goods from other consumers?

Shelter Principle
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. For further written and video explanation, discussion and practice questions, see What is the "Shelter Principle"?

Priority Rules for Security Interests
The following are the general priority rules for security interests: Perfected vs Unperfected Security Interests - A perfected security interest has priority over an unperfected security interest. This is true even if the unperfected security interest was established well before the perfected security interest. Unperfected vs Unperfected Security Interests - Unperfected security interests have priority based upon the order of attachment of the security interest. In this case, the earlier party to establish the security interest has priority over those coming later. Multiple Perfected Security Interests - The first secured party to file or perfect is entitled to priority over secured parties later acquiring or perfecting their interest in the subject collateral. This situation also brings up an issue for temporary automatic perfection. If a party takes the steps necessary to continue the temporary automatic perfection, her perfection date is retroactive back to the date and time that the security interest attached. This becomes and issue when the collateral is also subject to an “after-acquired collateral” clause. If she fails to take the steps necessary to continue the security interest, any third party may establish a security interest in the collateral and gain priority over her unperfected security interest. These are default rules. Any of these rules can be changed pursuant to agreement between the parties. That is, a party can agree to subordinate her security interest to the security interests of others. This is important when new lenders require priority of a security interest before extending new credit to a debtor. For further written and video explanation, discussion and practice questions, see What are the general "priority rules" for security interests?

Priority in Proceeds from Sale of Collateral
A secured party who perfects her security interest in collateral may have a continued security interest in the proceeds from the sale of that collateral. Thus, a secured party with priority in collateral will also maintain priority in the proceeds from sale of that collateral. In this case, the date of perfection of the security interest in the proceeds is the same as the perfection date for a security interest in the collateral. The priority of secured parties following the sale of collateral is generally as follows: Cash or Similar Property Proceeds - A secured party has priority over a conflicting security interest in proceeds if she has perfected her security interest and the proceeds of sale are cash or of the same type as the collateral. Non-Filing Collateral - Special rules apply to a security interest in collateral that can only be perfected in a manner other than filing (control or possession). Common types of collateral perfected by possession include chattel paper, deposit accounts, negotiable documents, instruments, investment property, and letter of credit. Priority of security interests in the proceeds from the sale of non-filing collateral ranks according to the time of filing of a security interest in that collateral. This rule provides priority to the first secured party to file a security interest in the newly acquired proceeds. Secured parties that have already filed a security interest on “all equipment” of the debtor at the time of sale of the non-filing collateral generally have priority. For further written and video explanation, discussion and practice questions, see Who has "priority in proceeds" from the sale of collateral?

Priority in Future Advances of a Debtor
Future advances of funds are funds provided to a debtor based upon an existing lending agreement. This is common when a debtor establishes a line of credit with a lender. The lender will advance funds to the debtor when requested. Generally, a security agreement will provide that the lender is secured by any collateral securing a future advance or new collateral acquired with the advanced funds. The rules for priority in future advances are as follows: Time of Perfection - Generally, the time of perfection of a security interest establishes priority with respect to future advances. That is, if a lender makes an advance of funds based upon a prior agreement, the priority of the lender’s security interest in collateral securing the advance is determined by the time of the filing of the financing statement covering the collateral. If the debtor has secured creditors with priority above that of the lender, these creditors retain priority in the collateral despite the future advance. Priority over Lien Creditors - A secured party that advances additional funds and claims a security interest against the original collateral has priority over a lien creditors of the debtor if: The secured party made the advance of new credit within 45 days after the lien attaches, or The secured party made the advance of funds more than 45 days after the lien attaches, but without knowledge of the lien or pursuant to a prior agreement entered into without knowledge of the lien. Priority over Buyers of Collateral - A secured party who makes future advances against collateral has priority over a buyer of the collateral in the ordinary course if: The secured party’s advance is made within 45 days and without knowledge of the purchase; or The advance was made pursuant to a commitment established within 45 days of and without knowledge of the purchase. For further written and video explanation, discussion and practice questions, see What is a secured partys priority in future advances to a debtor?

Priority of PMSI in Goods
A purchase-money security interest (PMSI) is a security interest in collateral purchased with the value extended by the creditor. A seller or lender may also acquire a PMSI in goods sold if it finances the purchase. A perfected purchase-money security interest in goods (other than inventory or livestock) has priority over conflicting security interests if the security interest is perfected within 20 days of the debtor receiving possession of the goods. Also, the PMSI provides for priority in identifiable proceeds of the collateral if sold. There is, however, a potential conflict in this situation with secured parties perfected by control over deposit accounts. If the PMSI collateral is sold and the proceeds deposited in a controlled deposit account, a party with a security interest in the deposit account would have priority to the funds. For further written and video explanation, discussion and practice questions, see What is the priority of a PMSI in goods (other than inventory and livestock)?

Priority of a PMSI in Inventory
Special rules apply to purchase money security interests in inventory. In order to qualify for PMSI priority in inventory, the secured transaction must meet the following requirements: Perfection at Time of Possession - The PMSI must have been perfected at the time the debtor takes possession of the inventory. This means the security agreement and value extended must have taken place prior to the receipt of the inventory. Notice to Secured Parties - The secured party must provide authenticated notification to any holders of conflicting security interests in the debtor’s collateral prior to perfection. The holder of the conflicting security interest must receive the notice within 5 years prior to the debtor obtaining possession of the collateral. Description of PMSI Collateral - The notification to other secured parties must state that the creditor intends to take a PMSI in the debtor’s inventory and it must describe the inventory. The UCC extends PMSI priority to identifiable proceeds from the sale of the collateral. The priority in cash is limited, however, if the cash is deposited in a deposit account. For further written and video explanation, discussion and practice questions, see What is the priority of a PMSI in inventory?

Priority of Conflicting PMSIs
Often a debtor will acquire property subject to multiple purchase-money security interests. This happens when multiple parties lend money for the purchase (enabling loans) and the seller of the good finances part of the purchase. In such a situation, the UCC provides priority for the individual financing the purchase over individuals providing a financing loan. If all of the financiers or enabling lenders are the same, the UCC provides that the first to file or perfect the security interest determines priority. For further written and video explanation, discussion and practice questions, see What is the priority of conflicting PMSIs?

Priority of Security Interest in Fixtures
A fixture is a piece of personal property that is installed on and made one with real estate. The primary characteristic of a fixture is that it is not readily moveable. It has assumed a state of semi-permanence on the real estate. The downside to this situation is that it causes issues regarding the priority of security interests in the real estate and in the fixture. Under the UCC, a secured party with a security interest in a personal good that will become a fixture must make a fixture filing in the appropriate government office to establish the priority of her security interest in the fixture. If the secured party fails to make a fixture filing, a security interest in the fixture is subordinate to a conflicting interest of the owner of real property or party holding a security interest in the real property. For further written and video explanation, discussion and practice questions, see What is the priority of security interests in fixtures?

Scope of Fixture Priority Rules
The following rules govern the priority as between secured parties with security interests in fixtures and persons who claim in interest in real property to which the fixture attaches. Purchase-Money Priority in Fixtures - The UCC provides for priority for purchase money security interest in fixtures. To establish priority over conflicting security interests in the real estate, the following conditions must be met: Recorded Interest in Real Estate - The debtor has a record interest in or possession of the real estate; PMSI in Fixture - The secured party holds a purchase-money security interest in the fixture; Prior Ownership of Real Property - The interest of the mortgage holder of the real property arose before the goods became fixtures; and Prior Fixture Filing - The security interest is perfected by a fixture filing before the goods became fixtures or within 20 days thereafter. The twenty-day grace period can cause issues for the secured party holding a PMSI in the equipment. If a third-party perfects a security interest in the real estate after the fixture is installed but before the PMSI secured party can make a fixture filing, the third-party has priority in the fixture. The way to maintain priority is either file before the fixture is installed or the PMSI holder files before any third parties file an interest in the real estate. For further written and video explanation, discussion and practice questions, see What is the scope of fixture priority rules?


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