What is a PMSI? (3 Main Elements?
Purchase Money Security Interest
(1) A PMSI exists when a seller loans a borrower the money to purchase items, and the seller obtains a security interest in those items.
(2) PMSIs receive higher priority
(3) Perfection for a PMSI used to purchase consumer goods happen automatically upon attachment.
What needs to happen for a seller and secured interest holder to have rights against another claimant in a security interest of a debtor?
To have rights against other claimants, the security interest must be perfected.
How are rights against the debtor established?
Established via attachment
What are the requirements of attachment?
(1) Agreement to the security interest which can happen via (i) a valid security agreement, (ii) possession, or (iii) control.
(2) Creditor provides value
(3) The debtor has rights in the collateral (ownership as an example).
What are the primary ways secured interests in goods can be perfected?
(1) Possession
(2) Control
(3) Filing of a finance statement
(4) Automatic perfection (PMSI)
What is the purpose of attachment?
Attachment establishes the secured party's interest against the borrower.
What is the purpose of attachment?
Establishes the secured party's interest in the collateral against other claimants (not the borrower).
Who has higher priority between 2 claimants that are both perfected?
The party that either perfected or filed the security agreement first has higher priority.
Who has higher priority between 2 claimants that are both NOT perfected?
The party who attached first has higher priority.
Who has higher priority between 2 claimants, on who has perfected, and one who has not perfected?
The perfected party wins.
What is PMSI super priority?
In most circumstances, the PMSI security interest has priority over most other claimant's interest.
What are accessions?
Physical items that are connect, joined, or otherwise united with other items, but the still can be separated and used independently.
A good example is tires on an airplane. They can be removed and used on another plane or vehicle.
If there is a security interest in an accession and a security interest in a larger item into which the accession is installed, which security interest has priority?
Generally, the security interest in the larger item has priority of the security interest in the accession.
What effect does a consumer to consumer sale have on a security interest in the goods sold?
The buyer may take the goods free of any security interest if certain conditions are met.
What conditions are needed for one to take the goods free of a security under the consumer to consumer sale doctrine?
(1) The buyer did not know that there was a security interest
(2) The buyer paid value for the goods
(3) The buyer bought the goods for their own personal use / purpose
(4) The buyer bought before any financing statement was filed.
What are the required elements of attachment?
(1) Agreement (security agreement, possession, or control)
(2) Borrower paid value
(3) Borrower has rights in the secured item.
What are the required elements of perfection?
(1) Attachment
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(2) One of the following: possession, control, filing of the financing statement (most common), PMSI automatic perfection
There is also an option for "temporary" perfection.
What is a BIOC?
Buyer in the ordinary course of business.
Purchasers that buy goods in their ordinary course of business (a boat dealership buying a boat for example) takes secured items free of the security interest if certain conditions are met.
What are the conditions necessary for the BIOC protection to apply?
(1) Items were purchased in good faith
(2) the purchaser did not know that purchasing the goods violated the security interest of another
(3) The seller is in the business of selling goods of that kind
What are the two instances in which a security interest can be automatically perfected?
(1) PMSI
(2) "Small scale" deposit accounts
What is the primary way perfection occurs in collateral?
The filing of a finance statement.
What is the only way a security interest in a deposit account can be perfected?
By control
What is the only way a security interest in money can be perfected?
Possession.
Where does a financing statement need to be filed?
Generally, the secretary of state's office.
However, this is usually not the case if the secured item is real estate.
What must be contained in a valid financing statement?
(1) Name / address of secured party
(2) Name / address of borrower
(3) description of item that is secured by the financing statement
When do errors in the financing statement prevent it from being valid / effective?
When the errors are "seriously misleading"
What is an example of a seriously misleading error?
When the financing statement does not accurately reflect the borrower's legal name, whether the borrower is a person or a company.
Note: Use of a nickname or a trade name on a financing statement is not sufficient.
What are 2 non-automatic methods for obtaining control over a non-consumer deposit account?
(1) placing the account under the secured party's name
(2) An authenticated agreement between (1) the secured party, (2) the borrower, and (3) the bank where the deposit account is located.
What types of errors in a financing statement will make it invalid? What types of errors will not make it invalid?
Seriously misleading errors make the financing statement void.
Minor errors will not void the financing statement.
An error is minor if standard search logic would still be able to locate the financing statement despite the error.
Which has higher priority? A perfected security interest or a Judicial Lien that has been leveed?
The leveed judicial lien has higher priority.
Under Article 9, what is the secured parties remedy for a default on secured collateral?
Repossess and sell the collateral
If a secured party sells collateral, what is the requirement of that sale?
It must be a commercially reasonable sale.
What happens if the sale is not commercially reasonable?
The seller / secured party loses any right to a deficiency payment from the borrower.
May secured parties use "self help" to repossess?
Yes, as long as the self help does not "breach the peace"
Does UCC article 9 define "breach of the peace"?
Nope. Use common sense. No physical force applied to the borrower, no violence, no intimidation.
What is the effect of a borrower protesting during a repossession?
A repossession under protest is considered a breach of the peace.
What is the primary remedy available to a debtor after default?
Redemption. (pay off the debt / buy back the collateral)
May a contract waive the right of redemption?
Yes, the right of redemption can be contractually waived.
When can redemption be waived?
Only AFTER default. Otherwise, the waiver is invalid.
What is the general remedy available to a defaulting debtor after default, when the secured party has not followed Article 9 guidelines? (Besides redemption)
Damages. Debtor can recover for any damages caused by the secured party’s failure to follow article 9 rules.
What is the effect on a deficiency if the secured party breaks article 9 rules?
They will not be entitled to any deficiency, UNLESS they can show that their conduct did not cause the deficiency in the first place.
How is a PMSI perfected?
Automatic
How is equipment perfected?
Filing within 20 days
How is inventory perfected?
Filing, 20 day grace period. Others having a security interest in the same inventory must be given notice.
What may the secured party do with repossessed collateral?
(1) Sell (Public sale / Auction or Private sale) (2) Lease (3) License
What must the secured party do before selling repossessed items?
Notice must be sent to the borrower within a reasonable time before sale.
When is notice NOT required before a sale and after default?
When . . .
(1) Perishable items need to be sold quickly (2) there is potential for the collateral to rapidly decline in value (3) the collateral is the type sold in a "recognized market"