1 Secured Transactions Assignment 32 Secured Creditors against Secured Creditors

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Secured TransactionsAssignment 32

Secured Creditors against Secured Creditors

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The system of priority is basically “first in time, first in right.”

Question: Precisely what must a creditor do first to be first?

Competitors: Security interest §9-322(a) Security interest

Priority time: (perfection is the last of three attachment requirements and the perfection requirement)

The earlier of: perfection or filing

(perfection is the last of three attachment requirements and the perfection requirement)

The Priority Rules

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Priority time: The earlier of perfection or filing




The Priority Rules

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The Priority Rules

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Competitors: PMSI §9-324(a) Security interest




The Priority Rules

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Competitors: PMSI §9-324(a) Security interest


But PMSI always wins if perfected when debtor receives possession or within 20 days



The Priority Rules

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Competitors: PMSI Sellerwho perfected within 20 days

§9-324(g) PMSI Lender who perfected within 20 days

Priority time: The earlier of: perfection or filing

The Priority Rules

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Competitors: PMSI Sellerwho perfected within 20 days

§9-324(g) PMSI Lender who perfected within 20 days

Priority time: Seller wins The earlier of: perfection or filing

The Priority Rules

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Competitors: PMSI Lender who perfected within 20 days

§9-324(g)

§9-322(a)

PMSI Lender who perfected within 20 days


The Priority Rules

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Competitors: PMSI Lender who perfected within 20 days

§9-324(g)

§9-322(a)

PMSI Lender who perfected within 20 days



The Priority Rules

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9-317(e). If a person files a financing statement with respect to a purchase-money security interest

Priority Rule: PMSI versus Lien Creditor, §9-317(e)

PMSIFiling

Lien creditor

12

Delivery

9-317(e). If a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery

20 day grace


PMSIFiling

Lien creditor

13

Delivery

9-317(e). If a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery . . . the security interest takes priority over the rights of a . . . lien creditor

20 day grace


PMSILien creditor

Filing

Lien creditor

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Delivery

9-317(e). If a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery . . . the security interest takes priority over the rights of a . . . lien creditor which arise between the time the security interest attaches and the time of filing.

20 day grace


PMSILien creditor

Filing Attachment

Lien creditor

15

Possession 20 day grace

Priority Rule: PMSI versusSecurity Interest, §9-324(a)

PMSIFiling

SI

§9-324(a). A perfected purchase-money security interest in goods . . . has priority over a conflicting security interest in the same goods . . . if the purchase money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.

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Possession

§9-324(a). A perfected purchase-money security interest in goods . . . has priority over a conflicting security interest in the same goods . . . if the purchase money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.

20 day grace

Priority Rule: PMSI versusSecurity Interest, §9-324(a)

PMSISI

Filing

Filing

17

Delivery


20 day grace

PMSILien creditor

Filing

Possession

§9-324(a). A perfected purchase-money security interest in goods . . . has priority over a conflicting security interest in the same goods . . . if the purchase money security interest is perfected when the debtor receives possession . . . or within 20 days thereafter.

20 day gracePMSISI

Filing

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Delivery


20 day grace

PMSILien creditor

Filing

Possession


20 day gracePMSISI

Filing

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Delivery


20 day grace

PMSILien creditor

Filing Attachment

Levy

Possession


20 day gracePMSISI

Filing

Filing

20

Delivery


20 day grace

PMSILien creditor

Filing Attachment

Levy

Possession


20 day gracePMSISI

Filing

Filing

Levy

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SA and FS2009 covers

Debtor’s “equipment”

Priority Rule: Transferor SI versus Transferee SI, §9-325(a)

Debtor

Secured 1

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Debtor

Secured 1

Reservation of priority against other lenders against the collateral.

23




Another Debtor

Secured 2 Secured 1 SA and FS2012 coversAnother’s

“equipment”


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Another Debtor

Secured 2 Secured 1

Sale(unauthorized)

SA and FS2012 coversAnother’s

“equipment”




25

Sale(unauthorized)


Another Debtor


“equipment”




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Sale(unauthorized)


Another Debtor

Secured 2 Secured 1

§9-322(a)(1). Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest . . . is first perfected . . .


“equipment”



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Sale(unauthorized)


Another Debtor

Secured 2 Secured 1


Secured 1 appears to win!


“equipment”



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Another Debtor

Secured 2 Secured 1


Secured 1 appears to win!

But if Secured 1 wins, Secured 2 won’t lend. Unauthorized sale would take Secured 1’s priority.


“equipment”



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Sale(unauthorized)

§9-325(a). [Notwithstanding § 9-322(a) and 9-324] a security interest created by a debtor is subordinate to a security interest in the same collateral created by another person if:

(1) The debtor acquired the collateral subject to the security interest created by the other person;

(2) The security interest created by the other person was perfected when the debtor acquired the collateral . . .


Another Debtor


“equipment”



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Problem 32.1, page 531 Bank1files

Aug 1

31


Aug 1

Bank2 filesSA, lends

Aug 5

32

C-DogsLevies


Aug 1


Aug 5 Aug 7

33

C-DogsLevies


Aug 1

Bank1SA, lends


Aug 5 Aug 7 Aug 10

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C-DogsLevies


Aug 1

Bank1 versus Bank2. Who wins?

Bank1SA, lends


Aug 5 Aug 7 Aug 10

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C-DogsLevies


Aug 1

Bank1 versus Bank2. Who wins? Bank1, filed before Bank2 filed or perfected. §9-322(a)(1).

Bank1SA, lends


Aug 5 Aug 7 Aug 10

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C-DogsLevies


Aug 1


Bank2 versus C-Dogs. Who wins?

Bank1SA, lends


Aug 5 Aug 7 Aug 10

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C-DogsLevies


Aug 1


Bank2 versus C-Dogs. Who wins? Bank2, perfected before C-Dogs levied. §9-317(a)(2).

Bank1SA, lends


Aug 5 Aug 7 Aug 10

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C-DogsLevies


Aug 1



C-Dogs versus Bank1. Who wins?

Bank1SA, lends


Aug 5 Aug 7 Aug 10

39

C-DogsLevies


Aug 1



C-Dogs versus Bank1. Who wins? C-Dogs, levied before Bank 1 perfected or filed and complied with §9-203(b)(3).

Who is first?

Bank1SA, lends


Aug 5 Aug 7 Aug 10

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C-DogsLevies


Aug 1




Who is first?

Bank1SA, lends


Aug 5 Aug 7 Aug 10

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C-DogsLevies


Aug 1




Who is first? “Circularity of liens.”

Bank1SA, lends


Aug 5 Aug 7 Aug 10

C-Dogs

Bank1Bank2

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C-DogsLevies


Aug 1




Who is first? “Circularity of liens.”

Key: Bank1 has two priority dates

Bank1SA, lends


Aug 5 Aug 7 Aug 10

C-Dogs

Bank1Bank2

43

Centurion lends to Airco, perfects in flight simulation equipment, including after acquired.

Problem 32.2, page 531 Centurion lendsto Airco, perfects

Mar 21

44


Firstbank lends to FlightCo, perfects in flight simulation equipment, including after acquired.

Problem 32.2, page 531 FirstBank lends

to FlightCo, perfects

Jul 21

Centurion lendsto Airco, perfects

Mar 21

45



FlightCo sells MD-80 flight simulation equipment to Centurion in an unauthorized sale.



Jul 21 Nov 4


Mar 21

FlightCo sells MD-80to Airco

46




a. Who is first in the MD-80 flight simulation equipment?



Jul 21 Nov 4


Mar 21


47




a. Who is first in the MD-80 flight simulation equipment? Firstbank, §9-325



Jul 21 Nov 4


Mar 21


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Sale(unauthorized)

§9-325(a). [Notwithstanding § 9-322(a)] a security interest created by [Airco] is subordinate to a security interest in the same collateral created by [FlightCo] if:

(1) [Airco] acquired the collateral subject to the security interest created by [FlightCo];

(2) The security interest created by [FlightCo] was perfected when [Airco] acquired the collateral . . .


FlightCo Airco

First Bank Centurion

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Jul 21 Nov 4


Mar 21


b. Airco paid FlightCo $750K. FlightCo deposited to Centurion.

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Jul 21 Nov 4


Mar 21



Does Centurion have a security interest in FlightCo’s Centurion account?

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Jul 21 Nov 4


Mar 21



Does Centurion have a security interest in FlightCo’s Centurion account? Yes, §9-203(b), boilerplate.

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Jul 21 Nov 4


Mar 21




Is Centurion perfected in the account?

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Jul 21 Nov 4


Mar 21




Is Centurion perfected in the account? Yes, §9-104(a)(1).

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Jul 21 Nov 4


Mar 21





Does FirstBank have a security interest in the $750,000?

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Jul 21 Nov 4


Mar 21





Does FirstBank have a security interest in the $750,000? Yes, §9-102(a)(64), §9-315(a)(2) and (b). LIB rule.

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Jul 21 Nov 4


Mar 21






Is Firstbank perfected in the $750,000?

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Jul 21 Nov 4


Mar 21






Is Firstbank perfected in the $750,000? Yes, §9-315(c), (d)(2)

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Jul 21 Nov 4


Mar 21







Who’s first? §9-327(1) and (3).

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Jul 21 Nov 4


Mar 21







Who’s first? §9-327(1) and (3). Centurion has control; Firstbank doesn’t. §9-104(a)(1). So Centurion has priority.

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Jul 21 Nov 4


Mar 21







Who’s first? §9-327(1) and (3). Centurion has control; Firstbank doesn’t. §9-104(a)(1). So Centurion has priority. Bank accounts are black holes!

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Problem 32.3, page 532 ONB lends

on computer

A year ago: ONB perfects in the computer and any “substitutions, replacements or accessions.” No provisions regarding future advances.

62

ONB lendson computer

A year ago: ONB perfects in the computer and any “substitutions, replacements or accessions.” No provisions regarding future advances. Financing statement describes collateral as “equipment.”

Problem 32.3, page 532 ONB files against

“equipment”

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Now: ONB lends against dry cleaning equipment.

ONB lends on dry cleaning equipment


“equipment”

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Now: ONB lends against dry cleaning equipment. Is a new financing statement necessary?



“equipment”

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Now: ONB lends against dry cleaning equipment. Is a new financing statement necessary?

No. The new security interest will have priority as of the old financing statement. “Equipment” describes the dry cleaning equipment. §9-502(d).


ONB files against “equipment”

Problem 32.3, page 532

66


1K

a. Carol loans $1K secured.

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1K

45K

a. Carol loans $1K secured. BCA loans $45K secured

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1K

32K

45K


Assume boat worth about $32K.

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1K

32K

45K


Assume boat worth about $32K. BCA repossesses.

70


1K

32K

45K



What effect if Carol advances $31K?

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32K

32K

45Ka. Carol loans $1K secured. BCA

loans $45K secured



Advance will have priority §9-322(a)(1) (provided SA signed)

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32K

Before After

32K

45Ka. Carol loans $1K secured. BCA

loans $45K secured




What title passes at the sale?

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32K


32K

Before After

32K

45K

32K






Buyer takes subject to $32K.

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32K


32K

Before After

32K

45K

32K







What can BCA expect from this sale?

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32K


32K

Before After

32K

45K

32K








Nothing. Bob beat BCA!

76

32K


32K

Before After

32K

45K

32K









b. Same facts, except Carol had only a financing statement on file?

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32K


32K

Before After

32K

45K

32K









b. Same facts, except Carol had only a financing statement on file? Still works.

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32K

BCA wants to continue lending in second position, but doesn’t want the first to be able to lend more money after BCA makes its loan.

1K

45K

79


32K


How can BCA accomplish that?

1K

45K

80


32K


How can BCA accomplish that? Subordination agreements with the first lenders. 1K

45K

81


32K


How can BCA accomplish that? Subordination agreements with the first lenders.

Why would the first lenders give them?

1K

45K

82


32K




1. Their borrowers want them.

1K

45K

83


32K




1. Their borrowers want them.

2. First lender gives up only the right to make a loan it doesn’t want to make.

1K

45K

84

Sara sells speakers; on default, the inventory lender takes them.


DealersSara

Inventory LenderSecurityInterestSpeakers

85


How can Sara get priority?


DealersSara


86


How can Sara get priority? PMSI.


DealersSara


PMSI

87



What must she do?


DealersSara


PMSI

88



What must she do?


DealersSara


PMSI

§9-324(b). A perfected purchase money security interest in inventory has priority over a conflicting security interest . . . if

89



What must she do?


DealersSara


PMSI


(1) The PMSI is perfected when the debtor receives possession

90



What must she do?


DealersSara


PMSI



(2) The PMSI party sends an authenticated notification to the holder of the conflicting security interest

91



What must she do?


DealersSara


PMSI




(3) The holder . . . receives the notification within five years before the debtor receives possession

92



What must she do?


DealersSara


PMSI





(4) The notification states that the sender expects to acquire a PMSI in inventory and describes the inventory.

93



What must she do?


DealersSara


PMSI





(4) The notification states that the sender expects to acquire a PMSI in inventory and describes the inventory.

What problems do you foresee? What can Sara do about them?

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What must she do?


DealersSara


Sara’s own LenderSecurityInterest

SI

95



What must she do?


DealersSara


§9-325. A security interest created by a debtor [Dealers] is subordinate to a security interest in the same collateral created by another person [Sara] if:


SI

96



What must she do?


DealersSara



(1) The debtor [Dealers] acquired the collateral subject to the security interest created by the other person [Sara];


SI

97



What must she do?


DealersSara




(2) The security interest created by the other person [Sara] was perfected when the debtor [Dealers] acquired the collateral;


SI

98



What must she do?


DealersSara




(2) The security interest created by the other person [Sara] was perfected when the debtor [Dealers] acquired the collateral; and

(3) There is no period thereafter when the SI is unperfected.


SI

99



What must she do?


DealersSara




(2) The security interest created by the other person [Sara] was perfected when the debtor [Dealers] acquired the collateral; and

(3) There is no period thereafter when the SI is unperfected.


SI

but 9-320(a)

123


2.0M1.2M

1.5M700K

90 days before

800K800K

§547(c)(5). “The trustee may not avoid . . . a transfer . . . that creates a perfected security interest in inventory or a receivable . . . except to the extent that the aggregate of all such transfers . . . caused a reduction, as of the date of filing . . . of any amount by which the debt secured . . . exceeded the value of all security interests . . . 90 days before the filing of the petition.” $0

Bankruptcy

Day loanborrowed

Day loanrepaid

2.5M1.2M

91 days before

Documents

1 Secured Transactions Assignment 32 Secured Creditors against Secured Creditors