OK, let's unpack this. Welcome to the deep dive where
we take complex topics, cut through the noise, and get
straight to the essential insights you need to be truly
well informed. Today, we're plunging into a
subject that for many law students and bar exam
candidates, can feel like a tangled web of rules.
A real beast sometimes, but mastering it is absolutely
critical for anyone preparing for a law school exam, or dare I
say it, the mighty multistate bar examination, or the Mee.
We're talking about Article 9 of the Uniform Commercial Code
Secured Transactions. That's right, What's fascinating
here, and highly relevant for your studies, is how frequently
secure transactions pop up on both the Mee and various state
specific essays. It comes up a lot.
It's undeniably a technical area, no doubt about it, but
understanding its core mechanics, you know how a
security interest is created, how it's protected against
others, and who wins when there are multiple claims.
While that provides immense clarity not just for acing
exams, but honestly for practical legal work in the real
world too, our mission today is to demystify these rules,
focusing on the the Nuggets of knowledge you'll genuinely need
to master the material and excel.
Think of this as your shortcut to understanding the critical
aspects of Article 9, equipping you to spot the issues and apply
the rules like a season pro. We'll be drawing from official
UCC provisions, practical insights from firms like HCMP
Law Offices and Blank Roma LLP, some real world case examples,
and even the, you know, common points of confusion found in bar
exam discussion forums like those on Reddit give you a
comprehensive yet digestible overview.
So before we get into the nitty gritty of the rules, what
exactly is a secured transaction?
It sounds, well, very legal, but what's the real world impact?
What does it actually mean? Right at its heart, a secured
transaction is a mutually agreed upon commercial arrangement.
It's where a debtor grants a security interest in specific
personal property or fixtures to a creditor, often called the
secured party. The primary purpose for the vast
majority of cases you'll see on an exam or in practice is to
secure an underlying obligation. Most commonly that's the
repayment of a loan. But it's not just about money.
Interestingly, a security interest can actually secure
povenance not to undertake a particular act or even the
timely performance of an act beyond just repaying a debt.
It's quite flexible. OK, so it's a way for a lender
to protect themselves beyond just, you know, suing for the
money. If things go wrong, they get a
specific piece of property as backed.
This sounds like an incredibly powerful tool for creditors.
Precisely. The core concept is that it's a
limited ownership interest. It's not full ownership, but an
interest. This interest gives the holder
the secured party recourse against specific property, what
we call the collateral. If the Oliger fails to perform
defaults, basically. And it's crucial to understand
that this recourse against the collateral is cumulative with
the Obligi's personal recourse against the Obliger.
In simpler terms, the creditor can still go after the debtor
personally and seize the collateral.
Give them options, multiple paths to recovery.
Now, a key distinction here, and one that sets secured
transactions apart from many other types of leads you might
study in law school, is that the creation of a security interest
is always a voluntary act by the debtor.
This voluntariness is absolutely key to how enforceability and
priority function with an Article 9.
It's not something imposed by law or a court judgement, you
know, like a tax lien or a judicial lien might be.
This mutual agreement is fundamental.
The debtor has to agree to grant this interest.
And if this collateral is personal property, that means
it's governed by Article 9 of the Uniform Commercial Code.
Every state has adopted the UCC, right?
Yeah. So the rules are generally
consistent across jurisdictions. That must help.
That's a great point. Yes, if the collateral is
personal property, the security interest is governed by Article
9 of the Uniform Commercial Code.
It's a uniform law, which means nearly every state has adopted
it, and that brings a much needed level of standardization
to commercial law, which is fantastic.
However, it's important to remember that there can be
slight variations between state versions.
So for your exam, while the core principles are universal, always
be mindful if a question points you to a specific state's
adopted statutes. For instance, in Washington,
their version is found at Title 62 A of their revised code,
often referred to as the RCW. Little differences can matter.
So why does all of this matter from a policy perspective and
for the parties involved? It's fundamentally about risk
mitigation and really facilitating commerce, making
deals happen. For lenders, it's a robust
mechanism ensuring they can recoup their loan by taking and
selling the collateral if the debtor defaults.
It gives them a safety net beyond just the debtors promise
to pay, making them more willing to lend, less risk, more
lending. For debtors, it's equally
important because it enables them to leverage existing assets
to gain access to capital or credit lines that might
otherwise be unavailable. Think about a burgeoning small
business. They might not get a crucial
loan to expand without offering their equipment or inventory as
collateral. It's a tradeoff that benefits
both sides of the transaction. The creditors interest in this
personal property provides actual enforceable property
rights in the collateral that become paramount upon the
debtors default, potentially including repossession,
liquidation, or even strict foreclosure.
It transforms what would be an unsecured debt into a secured 1,
giving the creditor a powerful position that significantly
improves their chances of recovery.
That makes sense. So it's essentially A
sophisticated way for a lender to say, look, I'll give you this
money, but if you don't pay me back, I get that specific thing
you own. And just to be super clear, our
deep dive today is strictly on personal property under Article
9, not real estate, correct? We're not talking about houses
or land here. Precisely for real property,
you'd be looking at mortgages, which fall under entirely
different state laws and common law like Title 61 RCW back in
Washington. Different world.
Our focus today is squarely on personal property under Article
9. This means we're talking about
tangible items like inventory, equipment, consumer goods, but
also intangible assets like accounts receivable, chattel
paper and even digital assets these days.
OK, let's unpack this next critical step, attachment.
This is where the security interest actually comes into
legal existence, right? Where it becomes enforceable
between the debtor and the creditor?
How does that happen and why is it so foundational?
Attachment is the crucial first step.
Absolutely foundational. Without it, a security interest
is not even enforceable against the debtor.
Forget third parties for a moment.
It's not even good against the person who granted it.
It's the legal foundation for all subsequent rights a secured
party might have, including the ability to perfect or enforce
later on. Think of it as the legal birth
of the security interest. Article 9 requires 3 core
elements to be satisfied for attachment to occur.
If any one of these is missing, the security interest simply
hasn't attached. Period.
And thus it's not enforceable against the better, much less
against their parties. You need all three like a legal
trifecta. The first element is value
given. The secured party must give
value, and this is interpreted incredibly broadly under Article
9, essentially meaning any consideration sufficient to
support a simple contract. It's a low bar.
Even a peppercorn, as the old saying goes, can be enough in
the right circumstances. It's not about the adequacy of
the value, but it's. So wait, if I promise to lend
you money next week, that promise itself could count as
value even before the cash actually changes hands.
Really. That's right, a binding
commitment to lend in the future is enough.
That counts as value given now. And here's an important nuance
that often surprises students. The value does not need to run
directly between the debtor and the secured party.
For instance, a common scenario and practice might involve a
company owner granting a security interest in her
personal car to a bank's holding company in exchange for a loan
from the bank, a separate corporate entity, to her
company. The value flows from the banks
to the company, but the owner grants the interest to the
holding company. This indirect flow is perfectly
acceptable for satisfying the value requirement under Article
9. Common example as you'll see on
exams include actual loans of money, extensions of existing
credit or the satisfaction of a pre-existing debt all count as
value. Now shifting our focus to the
second crucial element for attachment, the debtor must have
rights in the collateral. This reflects A fundamental
property law principle you've likely encountered.
Nemo deck quote non habit 1 cannot convey an interest they
do not have. You can't give what you don't
got. Essentially, the debtor must
have some legal interest in the collateral at the time the
security interest is granted. Does that mean they have to own
it outright, like full title ownership?
Or can they have a lesser interest?
Maybe just possession? Not necessarily full title.
This is a common point of confusion.
The debtor doesn't need full title ownership.
Any legal interest, even just an insurable interest, is
sufficient. The security interest nature and
extent can sort of well evolve with the debtors ownership
interest. So if a debtor has a leasehold
interest in a piece of equipment or maybe a partial ownership
stake in a business asset, they can grant a security interest up
to the extent of that interest. This principle also directly
ties into the concept of after acquired property.
Article 9 explicitly allows for security interests in after
acquired property, meaning collateral of the debtor will
acquire in the future. This is critical for businesses
with fluctuating inventory or equipment that changes
constantly. You need this for things like
inventory financing. However, and this is a key exam
point, for such a clause to be effective, it must be expressly
stated in the security agreement.
You need specific language using phrases like existing and after
acquired inventory or all equipment now or hereafter
owned, something like that. Without that explicit language,
the security interest would only attach to property the debtor
owned when the agreement was signed, potentially leaving a
secured party seriously under secure it as collateral changes.
Not good. There are also specific narrow
circumstances where a debtor can grant a security interest
potentially greater than their own interest.
Sort of exceptions to Nemo Dad essentially allowing a security
interest to override a defect in the debtors underlying title.
For instance, if a debtor is a good faith purchaser under the
UCC, they may grant an interest even if their underlying title
is voidable. Another example is if the debtor
bought the collateral as a buyer in the ordinary course of
business. In this case, they may grant a
security interest even if the seller's title was void.
These are important exceptions to remember for those tricky
exam questions. The 3rd and final element for
attachment, and the one that often involves the most
paperwork, is an objective manifestation of intent to grant
a security interest. This requirement is kind of like
the statute of frauds for real property conveyances.
Its purpose is to ensure clear, verifiable evidence of the
debtors intent to grant the security interest.
It prevents claims of secret or implied Linton's providing
certainty for everyone involved. So usually this means a written
agreement, like signed piece of paper.
And what makes that agreement legally sufficient?
What needs to be in it? Exactly The most common and
reliable method for satisfying this requirement is a signed
writing known as a security agreement.
This document must be authenticated by the debtor, and
authenticated is a broad term. Now it includes electronic or
digital signatures as long as it's a record that can be stored
and retrieved. Doesn't have to be wet ink.
The agreement must also contain an adequate description of the
collateral. While it doesn't need absolute
precision, generic classifications from Article
Nine, such as equipment and inventory, are generally
sufficient. The degree of precision is often
a matter of negotiation between the parties.
Debtors might want a very precise itemized list to limit
what's encumbered, while secured parties prefer broader
descriptions due to asset turnover.
It's a balance now, a very important point for bar exam
purposes and a classic trap that trips up many students.
For a security agreement, a super generic description like
all assets or all personal property is not sufficient to
adequately describe the collateral.
This is a critical distinction. You must remember it works for
something else we'll talk about, but not the security agreement
itself. The security agreement needs
some level of specificity. If you look at the security
agreement source document we have Section 1A defines
collateral to include specific types of tangible personal
property, fixtures, leasehold improvements and importantly
things like all general intangibles relating to or
arising from the personal property.
All cash and non cash proceeds, all products thereof and all
additions and accessions thereto, substitutions therefore
and replacements thereof. See that provides A detailed yet
categorized description that is sufficient.
And then Section 2, the grant of security interest explicitly
states to secure the obligations, the debtor as
debtor hereby assigns and grants to the secured party, a secured
party, a continuing lean on and security interest in the
collateral. That's the critical granting
language that shows the intent. Objectively it's non negotiable.
You need that grant. That distinction is incredibly
helpful. Wow, so authenticated by the
debtor and a specific enough description of the collateral
are key. But you mentioned other ways to
show intent besides a signed agreement.
Are those common or just edge cases?
Yes, there are other forms of manifestation, though less
common for general business assets, more for specific types
of collateral. Article 9 recognizes objective
intent without assigned writing in certain situations.
These methods are typically limited to situations where the
secured party has a physical manifestation of control or
possession over the collateral. This includes when the secured
party takes physical possession of tangible collateral, like a
pawn shop holding jewelry, or when the secured party gains
control over intangible collateral, which is sort of
like possession for things like deposit accounts or electronic
chattel paper, or even notation on certain certificated
documents like a stock certificate.
But the written agreement is the main way.
Finally, there are also specific scenarios where a security
interest automatically attaches without needing to explicitly
satisfy all three elements for that specific piece of property.
Sort of happens by magic under the rules.
The most common examples that security interests automatically
attached to identifiable proceeds of existing collateral.
So if a piece of equipment that's collateral is sold, the
security interest automatically extends to the cash or
promissory note received from that sale.
As long as the proceeds remain identifiable and fit the
existing financing statement description, it just follows the
value. They also automatically attached
to obligations supporting collateral.
For example, if your collateral is a promissory note, the
security interest automatically attaches to any personal
guarantee supporting that note, even if the guarantee isn't
separately lifted in the security agreement.
It's a neat rule that simplifies things for creditors.
So if I'm tracking all of this, the core insight for attachment
for both my exams and just understanding this is that you
need to tick all three boxes. Value given the debtor has
rights and there's a clear objective manifestation of
intent, usually assigned security agreement.
And watch out for those after acquired property clauses, they
must be explicit in the agreement.
Does that pretty much sum it up for our listeners?
You've nailed it. That's the essence of
attachment. And remember that classic exam
trap? The distinction in collateral
description? All assets works for a financing
statement, which we'll discuss next, but not for the security
agreement itself. Big difference.
Mastering attachment means you've established A valid claim
against the debtor. Now to protect that claim
against everyone else. Well, that brings us to
perfection. OK, here's where it gets really
interesting and obviously often quite confusing for students.
Perfection. Why do we need a detachment?
Sounds pretty good. What does perfection actually do
in the grand scheme of things? Right perfection.
It's the next logical step, and it's absolutely critical.
Perfection is the process by which a secured party makes a
security interest enforceable not just against the debtor, but
crucially, against others holding interest in the same
collateral. Think other lenders, buyers,
lien holders, bankruptcy trustees.
It's fundamental goal is to provide inquiry notice to the
world that a security interest exists.
It's putting everyone on notice. Without perfection, even an
attached security interest is vulnerable.
It's weak against subsequent lien holders, bankruptcy
trustees, or other buyers. It's essentially the public
declaration of your security interest, shouting it from the
rooftops. Legally speaking, it's important
to note that perfection doesn't affect enforceability against
the debtor. That's handled by attachment.
But perfection is entirely meaningless unless and until
attachment has already occurred. You can't perfect what hasn't
attached Attachment first, then perfection.
There are five basic methods of perfection recognized under
Article 9, and the available method often depends heavily on
the nature of the collateral itself.
What is the thing being used as security?
In many circumstances, more than one method might actually be
possible giving creditors options.
The 1st, and by far the most common and versatile method is
filing a UCC 1 financing statement.
This is the baseline method for most types of collateral under
Article 9, and it's quite similar to how real property
liens are recorded in county land records.
Public filing. It provides public notice to
anyone who bothers to search the public records maintained by the
Secretary of State, usually for exam purposes.
The contents of this financing statement are absolutely crucial
because small errors can have huge consequences, devastating
consequences really. It must state the names of the
debtor and the secured party or their representative and must
indicate the collateral. Those are the core requirements.
So getting the names right, especially the debtors, is
paramount. I've heard that's a common trap.
What's the rule of thumb there? How exact do you need to be?
Absolutely paramount. You're right, it's a frequent
point of failure in practice on exams, the whole system is
indexed by the debtors name, so any significant error can be
fatal to your perfection. If the debtor is an organization
registered with the Secretary of State, like a corporation or
LLC, you must use their exact registered name.
No abbreviations, no slight misspellings, exact match.
For individuals with a valid unexpired driver's license, the
modern rule is to use the name on the license.
That's the safe harbor. Otherwise you'd use their first
and last name. Generally critically trade names
or assumed names DB as alone are not sufficient.
Never sufficient. A misstated name can render the
filing ineffective. If a standard search under the
correct name wouldn't find it, the search logic matters.
For example, in that first source Bank versus Wilson Bank
and Trust case in Tennessee, a financing statement listing the
debtor as Wing Fine Food was held insufficient for Wing
Foods, Inc because a standard search wouldn't find it.
Ouch. That's a real world mistake with
significant consequences. Lost priority.
The financing statement also needs to indicate the
collateral. Now here the standard is much
more liberal than first security agreement.
Remember that distinction for a financing statement, a super
generic description like all assets or all personal property
is sufficient. Totally OK here.
While copying the text from the security agreement is often
done, a broader description here might actually be better for
future financing needs. Allowing for a wider range of
collateral to be covered without refiling gives you flexibility.
The debtor must authorize the filing of the financing
statement in assigned writing. Authenticated record,
technically, but the security agreement itself generally
provides this authorization for the collateral it covers and its
proceeds, so you don't typically need a separate authorization
form. It's built in.
A financing statement is generally effective for five
years, Five years. That's the standard duration to
keep it effective. You can file a continuation
statement, but only during the final six months of the existing
five year period. It's a very specific window
filed too early or too late, and it's ineffective.
You have to calendar this carefully.
Lapses imperfection can be disastrous for priority, causing
the security interest to lose its original place in line,
sometimes to the benefit of junior creditors.
You fall to the back. Financing statements can also be
amended, for example, for changes to names or addresses,
or terminated when the security interest is discharged.
Standard maintenance. The second method is the use of
an alternate filing system for certain types of collateral.
Article 9 actually defers to other specific regulatory
frameworks for perfection, it says.
Go look over there. Common examples include federal
schemes for aircraft, which require recording with the FAA
Aircraft registry, and seagoing vessels, which require filing
with the US Coast Guard. Big ticket items usually have
their own system on the state level.
Motor vehicle titles are a classic example.
For title vehicles, the secured party's name appears directly on
the certificate of title. That's how you perfect.
OK, so if I lend money to someone to buy a car, I don't
find a UCC one for that car? If it has a title, I just make
sure my name's on the title. That seems simpler.
Precisely once it's subject to the title statute, that's the
way. But there's a critical timing
point, and this is another area for exam caution.
This deferral only applies after the collateral becomes subject
to that alternative system. A brand new car sitting on a
dealer's lot is still considered inventory until a title is
issued to a specific buyer. A UCC one filing might still be
needed to perfect an interest in it as inventory.
It's inventory first, then a title vehicle.
Once the title is issued. And notation on the title is the
operative method. You rely on that title notation.
The status matters. The third method is possession.
A secured party can perfect a security interest, intangible
collateral by taking physical possession of it either directly
or through an agent. Think of a pawn shop, right?
Or a bank holding stock certificates in a vault for
money. Surprisingly, possession is
actually the only method of perfection available.
You can't file on cash. This method is effective only
while possession is maintained. If possession is relinquished
without another perfection method in place, perfection is
lost, poof, potentially exposing the creditor to risk. 4th, we
have control. This is analogous to possession
for tangible collateral, but applies specifically to certain
intangible collateral things you can't physically hold, such as
deposit accounts, bank accounts, or letter of credit rights.
In fact, for deposit accounts and letter of credit rights,
control is often the only method of perfection available.
Filing a UCC one usually doesn't work for these.
Control for deposit accounts exists if the secured party is
the depository institution itself, the bank where the
account is held, or has a control agreement with both the
bank and debtor, or is listed as the customer on the account.
These are the main ways to get control.
This method provides the secured party with direct power over the
account, ensuring they can access funds if necessary.
The 5th method is automatic perfection.
This has a limited scope covering a specific list of
transactions where perfection occurs automatically upon
creation without any further filing or action.
It just happens. The most common and important
example for bar exams is a purchase money security interest
or PMSI in consumer goods, provided those goods are not
regulated by a certificate of title statute.
So not cars or boats usually. For an example, if you take out
a loan specifically to buy a new washing machine for personal,
family, or household use, the security interest the lender has
in that washing machine is automatically perfected the
moment it attaches. No filing needed.
This automatic perfection often comes with super priority rules,
which we'll definitely dig into when we get to priority.
It's a powerful feature now because personal property is
inherently mobile. Article 9 has special choice of
law rules for perfection. Where do you file?
Which states law applies? Generally, the location of the
debtor determines the governing law for perfection.
This is a significant shift from earlier UCC versions, which
often focused on the collaterals location.
Now it's about the debtor. So if your debtor is a
registered organization, like a corporation, it's located in the
state where it's registered. Easy enough.
For an individual debtor, it's their principal residence where
they live. If it's an unregistered
organization, like a general partnership, it's the place of
business or its chief executive office if it has multiple
places. There are exceptions, though.
The law of the collaterals location governs if the secured
party has possession of the collateral or if the collateral
is a fixture, timber or extracted minerals at the
wellhead or Minehead. Location matters for those
specific types. This contrast with attachment.
Remember, where the governing law is usually fixed by the
security agreements. Choice of law provision,
Different rules for attachment versus perfection location.
Finally, we need to consider changes affecting perfection
which can trigger grace periods. These are ripe for bar exam
questions because they involve dates and deadlines.
A security interest automatically attaches to
identifiable proceeds, but if those proceeds don't fit the
existing financing statement description, there's a 21 day
grace period to amend the financing statement.
So if equipment is sold for cash, the interest extends to
the cash. But if the original filing only
described equipment, you might need to amend to reflect cash
proceeds within 21 days to stay perfected in the cash long term.
If a debtor changes their location to a different state,
there's a four month grace period to file a new financing
statement in the new state to follow the debtor.
If that change is due to a sale to a new debtor in a different
state, the grace period is one year.
More complex situation, more time, And if the debtor changes
their name significantly, an amendment to the financing
statement is necessary if the existing filing wouldn't appear
in a standard search under the new name.
If the old name won't find it, you have to update.
Beck's practice, of course, is always to update these filings
promptly. Don't rely on grace periods if
you can help it. Wow.
OK, so the big take away here is that perfection is all about
telling the world about your interest, putting them on
notice, and there are specific ways to do it depending on the
collateral. And for bar exam purposes, those
debtor name rules, the location rules, and those grace periods
for changes are absolutely crucial.
Making a state there could really cost you your priority,
couldn't it? Absolutely.
It could cost you everything in a bankruptcy.
The UCC operates on what's called a pure race system for
priority between perfected secured parties.
This means that actual knowledge of an unperfected security
interest by another party usually isn't relevant for
priority. What matters is who perfected
first. Generally, this underscores the
absolute necessity of getting perfection right.
Every detail matters. Many a secured creditor has
found their interest unperfected and avoidable in bankruptcy due
to small errors in naming or filing in the wrong
jurisdiction, as shown in cases like Henry Davis or Fleet
National Bank V Whippany Venture ILLC.
Real cases, real losses. It highlights the technical
nature of article by IT and why attention to detail is paramount
for secured creditors and for your exam success.
It's often the difference between getting paid and
becoming just another unsecured creditor fighting for scraps.
Now for the really high stakes part priority.
When multiple parties claim an interest in the same collateral,
maybe the debtor owes money to lots of people and there wasn't
enough collateral value to go around.
Who wins? Who gets paid first?
This where the rubber truly meets the road, right?
This is indeed where the rubber meets the road.
This is what it's often all about.
Priority rules reflect core principles like first in time,
1st and right, but also concepts of reliance in commercial
dealings. Who could reasonably rely on the
public record? Article 9 provides a clear,
albeit complex, ranking system for aliens and security
interests. When things inevitably go wrong
and a debtor can't pay everyone, your goal on the exam is to
correctly apply these rules to determine the winner in a given
fact pattern. The general rule for priority,
often paraphrased as first in time, 1st and right, states that
between two perfected security interests, the first to file a
financing statement or perfect their security interest,
whichever happens first, has priority.
This is provided that the filing of perfection has been
continuous, no lapses. So a creditor can file a
financing statement even before they've loaned any money or
attached the security interest and that filing will secure
their priority spot. As soon as the security interest
eventually attaches and becomes perfected, it locks in their
place in line. This is known as first to file
or perfect. That's the mantra.
If a perfection lapses, remember it loses its original position
and is re ranked from the date of reperfection, which can be
devastating for a creditor. That makes sense for two
perfected interests. First one to get their public
notice out there usually wins. What about when one is perfected
and the other isn't? Or if neither bothers to
perfect. That's simpler.
A perfected security interest always has priority over an
unperfected 1. Perfection beats non perfection
always. If neither security interest is
perfected, then the first to attach has priority.
Remember attachment that becomes the tiebreaker if no one
perfects. So, for example, if lender A
attaches first but never perfects, and lender B attaches
later but also never perfects, lender A wins based on the
earlier attachment date. Now let's talk about judicial
liens. These come from lawsuits and
court judgments. A judicial lien is subordinate
to a security interest if the security interest is perfected
before the judicial lien attaches, or even if not
perfected yet, if a financing statement is filed and there's
an objective manifestation of intent, like a signed security
agreement before the judicial lien attaches.
Filing plus agreement beats the lien.
As a Reddit thread we reviewed highlights, it's about when the
judicial lien attaches, meaning that the judgment is granted and
a levy or attachment to the specific collateral occurs, not
just when the lawsuit was filed. The timing of attachment is key.
A prior perfected security interest will almost always beat
a later judicial lien creditor. Similarly, possessory lands like
a mechanic's Linton for car repairs or maybe a
warehouseman's lens arising under other state laws generally
have priority over an Article 9 security interest unless that
other law specifically says otherwise.
Article 9 respects the specific service lanes.
OK, so first a filer perfect is the baseline, but then there are
these significant critical exceptions, especially what you
call the Super priority rules for PMS eyes.
Tell us about those again. They sound really important.
Ah. The Super priority rules for
perfected purchase money security interests, PMS eyes.
Yes, these are absolutely crucial for the bar exam and for
understanding how commercial finance actually works.
You have to know these. A PMSI arises when a creditor
finances the debtor's acquisition of the collateral
itself. The money enables the purchase.
There's a direct Nexus between the loan proceeds and the
collateral. The money was used to buy that
specific thing. Either the seller finances the
sale or lender provides the funds for that specific
purchase. The power of a PMSI is that a
perfected PMSI can have priority over a conflicting security
interest, regardless of when the competing interest was perfected
or filed, even if someone else filed years ago on all assets,
it essentially jumps the line, giving this specific kind of
lender a unique advantage. This rule incentivizes new
financing, making it easier for debtors to acquire new assets,
which benefits the overall economy.
You absolutely need to memorize the key categories for PMSI
super priority as the conditions differ depending on the type of
collateral A inventory. This one has extra hurdles.
APMSI in inventory has super priority only if all of the
following conditions are met. One, it's perfected when the
debtor takes possession of the inventory. 2.
The PMSI secured party sent an authenticated notice of its PMSI
interest to any other secured parties who have filed financing
statements covering inventory before the debtor gets the
inventory. Three.
Those other secured parties received that notice within five
years before the debtor received possession.
AND for the notice explicitly states that the sender has or
expects to acquire a PMSI and inventory of the debtor
describing the inventory. Q Lots of steps, expert speaker.
This notice is only required for competing parties who were
perfected before or within 20 days of the PSI filing.
You have to check the records and notify the right people.
The Sports Authority bankruptcy case serves as a stark reminder
here. Suppliers who provided goods on
consignment, which often functions like a PMSI, needed to
perfect their PMSI and notify other existing lenders with
inventory lanes. Many didn't, and they lost out
massively in the bankruptcy. This notice rule balances the
need for new inventory financing with protecting existing
creditors who rely on inventory value.
B Livestock. Similar notification rules to
inventory, but the notice must be received within six months
before the debtor takes possession of the livestock.
A slightly different time frame reflecting that industry.
C software. This is simpler.
A perfected PMSI in software has the same priority as a PMSI in
the goods in which the software is embedded or used.
It follows the hardware, basically all other goods.
Equipment is the big one here. This is much simpler than
inventory. For PMSI and other goods like
equipment. It has super priority if it is
perfected when the debtor obtains possession or within 20
days thereafter. Just perfect within that 20 day
window and you beat prior filers.
No notice requirement to other lenders here.
This 20 day grace period is critical because it gives the
PMSI lender a short window to get their filing done and still
achieve super priority. It prevents secret liens while
still facilitating equipment purchases.
This is one of the most frequently tested PMSI rules.
Consumer goods. As we discussed under automatic
perfection APMSI in consumer goods, those not requiring a
certificate of title is automatically perfected upon
attachment. And this automatic perfection
without any filing grants super priority over earlier filed
interests. No notice, no filing needed for
priority here. This simplifies things greatly
for everyday consumer purchases like appliances or furniture.
That's a lot of rules just for MSI is wow.
It really emphasizes the importance of timing and
especially for inventory, that notification requirement.
It sounds like a lot of nuances that could easily be missed in a
complicated bar exam question. It does, and honestly
understanding these nuances is what distinguishes a strong
Article 9 answer from a mediocre one.
They love testing these details. Another important concept for
priority is proceeds. Remember, a perfected security
interest extends to identifiable proceeds of collateral.
If the collateral is sold, the interest follows the money or
whatever it was received. The key here is traceability.
If collateral is sold and the funds are deposited into a
commingled bank account with other money, the lowest
intermediate balance rule often applies to determine what
portion of the funds constitutes the identifiable proceeds.
It's a tracing rule. This rule assumes that any
withdrawals from a commingled account are made from non
proceeds first, thus preserving the secured party's claim to the
lowest balance the proceeds reached in the account.
Next, let's talk about buyers in the ordinary course of business
by ICB. This is often referred to as the
king of the jungle in terms of priority.
Because they often take free of a security interest entirely,
they can defeat even a perfected secure creditor.
A BIOS CB takes free of a security interest created by
their seller, even if the security interest is perfected
and even if the buyer knows of its existence.
It's a very powerful rule. This isn't just about priority
and who gets first. The security interest is
actually extinguished as against the bio CB entirely gone.
To qualify as a bio CBA buyer must one buy in good faith 2
without knowledge that the sale violates the rights of another
person in the goods. Knowledge of the security
interest itself isn't disqualifying, but knowledge
that the sale is wrongful is. Three, buy from a seller in the
business of selling goods of that kind.
For example, buying a car from a car dealership, not from your
neighbor. And four, take the goods in the
ordinary course of that seller's business, meaning not a bulk
sale or in satisfaction of a pre-existing debt.
This rule is crucial for the fluid flow of commerce.
It protects unsuspecting consumers and businesses who buy
inventory from merchants. You don't have to check UCC
filings every time you buy something from a store.
There's also a specific related rule for a garage sale buyer.
A buyer of consumer goods from another consumer takes free of a
security interest unless the secured party filed A financing
statement before the purchase. This is why, despite automatic
perfection for PMS, IS and consumer goods, creditors might
still file a financing statement to protect against this specific
garage sale scenario and maintain their Lin against
subsequent consumer buyers. It's an extra layer of
protection for the creditor. Finally, and critically, we must
understand the impact of Lin creditors and bankruptcy
trustees. This is a major testable area
and a huge practical consideration for any secured
creditor. Bankruptcy looms large over
Article 9A bankruptcy trustee. Under their strong arm powers
found in Bankruptcy Code section 544 has the rights of a
hypothetical perfected lean creditor as of the bankruptcy
filing date. They step into the shoes of an
ideal creditor. What this means for you, the
secured creditor, is that the trustee can avoid any
unperfected security interests. If you didn't perfect before the
bankruptcy was filed, your interest can be wiped out by the
trustee. If your security interest is
avoided, it effectively becomes a general unsecured claim in
bankruptcy, which almost always means a significantly reduced
recovery, often pennies on the dollar or maybe nothing at all.
This underscores the paramount importance for creditors to
properly perfect their security interests before a debtor files
for bankruptcy. An unperfected security interest
is a massive risk in the face of bankruptcy.
Just a few more priority rules to keep in mind quickly.
Fixture filings are important for items that become
permanently attached to real estate, like a built in oven.
They require a special fixture filing in the local county land
records to protect against real property interests like
mortgages. APMSI and fixtures can still
prevail if filed within 20 days of the goods becoming a fixture.
For commingled goods, when collateral is mixed with other
goods like oil in a tank or grain in a silo, the security
interest continues in the resulting product or mass, not
the original specific item. You get a proportional share.
And for deposit accounts, priority is based on who has
control. The secured party listed as the
customer on the account has the highest priority, then the bank
itself. If it's the depository
institution holding the account, then a party who has obtain
control through a control agreement and finally a party
with no control like someone claiming proceeds via a UCC.
One filing has the lowest priority.
Control is king for MAD accounts.
Lastly, remember that Article 9 priority rules can be modified
by agreement between creditors through inter creditor
agreements which contractually define priority.
Especially in complex financing arrangements with multiple
lenders. They can agree to change the
statutory order. Also, a depository bank's common
law right of set off using funds in the debtors account to pay a
debt owed to the bank generally has priority over another
secured lenders Article 9 security interests in the
deposit account unless the secure creditor takes control of
the account or the bank agrees to subordinate its set off
right. Banks have a built in advantage.
OK. So if I'm preparing for the bar,
the key phrase for priority is first to file or perfect unless
and they're a big unlesses, unless it's a super priority
PMSI that meets its specific conditions.
Or a buyer in the ordinary course of business who takes
free. Or a specific type of collateral
like a deposit account or fixtures that has its own unique
hierarchy or filing rules. A lot of exceptions to that
general rule. It seems like the exceptions are
almost as important as the rule itself.
It really is. You absolutely nailed it.
And those PMI nuances, especially the notification
requirements for inventory and the 20 day grace period for
equipment are tested very, very frequently.
They want to see if you know those details.
Perfecting your security interest is your insurance
policy, especially against other creditors and the bankruptcy
trustee. Without it, you're often left
out in the cold. Understanding these priority
rules is where your detailed knowledge really pays off on an
exam and in practice. Right.
We've created the interest with attachment.
We've protected against the world through perfection, and we
know who wins in a priority fight.
Now, what happens when the debtor actually, well, doesn't
pay or breaches the agreement somehow?
How does the secured party actually get their money back?
What are the rules governing that whole process?
Right. This is the enforcement phase,
often where the rubber truly meets the road.
In real world scenarios when the deal goes bad, the right to
enforce a security interest is always conditional upon a
default in the secured obligation.
There has to be a default first. Interestingly, Article 9 itself
doesn't define default. It leaves it entirely to the
contracting parties, the debtor and creditor, to specify what
constitutes a default in their security agreement.
For example, the security agreement we looked at has a
detailed Section 8 on events of default, which includes common
triggers like failure to pay principal or interest within a
certain grace period, breach and other covenants in the
agreement, falsity of representations made by the
debtor and uninsured, loss of collateral or even the failure
of the security interest to remain first priority and
perfected. It can be quite broad.
So the first step in any enforcement scenario is always
to check the agreement has an event of default actually
occurred. According to the contract terms.
For tangible collateral such as equipment or inventory, the
secured party has several powerful options upon default.
First, they can engage in repossession or disabling the
collateral, taking it back. This can be done through
judicial process where they file a lawsuit, get a judgement and
obtain A writ instructing the sheriff to seize the property
the court supervised way. Or, and this is frequently
tested and a common area dispute, it can be done non
judicially through self help, as long as it's done without
breaching the peace. That's the crucial limitation.
Breach of the peace? That sounds like a really tricky
standard. What does that typically
involve? What should a secured party
absolutely avoid doing if they're trying to repossess
something themselves? It is indeed a highly fact
dependent question and the subject of many, many court
decisions. There's no bright line
definition. Courts generally find breaches
of the peace where there's violence or at the threat of
violence, of course, but also where there's property damage
like breaking a lock or damaging a fence, unauthorized entry into
a home or locked garage, or even subterfuge, meaning the secured
party uses trickery or deception to gain access or repossess.
Think lying to get into a gated community, any kind of
confrontation or seizing property over the debtors clear
objection on their premises would almost certainly be
considered a breach. Proceeding despite being told no
is usually a bad idea. Caution is always warranted when
attempting a non judicial repossession.
A secured party should probably consider judicial process if
there's any doubt or risk of confrontation.
It's safer. It's vital to remember that
repossession doesn't change title immediately.
The debtor remains the owner of the collateral.
At that point, the secured party in possession is merely a Bailey
owing duties of reasonable care to the debtor regarding the
collateral. the United States V Bayless case highlights this
duty. Neglecting repossessed
collateral, letting its value plummet by 88% was found to be a
breach of the secured party's duty of care.
Any practical expenses for care, like storage or insurance, are
chargeable back to the debtor. However, once the collateral is
repossessed, or even if it isn't, sometimes they sell it
from the debtor's location to change title and extract value.
The secured party has two main options, disposition or strict
foreclosure. Disposition involves selling,
leasing, or licensing the collateral to a third party,
usually for cash. This is the most common route.
The most critical requirement here and a huge area for
litigation is that the disposition must be commercially
reasonable in its method, manner, time, place and all
terms. Every aspect of the sale must be
reasonable. The secured party must also give
reasonable authenticated notice of the disposition to known
interested party, specifically the debtor, any secondary
obligers like guarantors, and any other secured parties or
lien holders who have filed financing statements or given
notice of their claim covering that collateral.
Notice requirements are relaxed for perishable goods or goods
sold on a recognized market, like publicly traded stocks, but
generally specific content is required in the notice for
consumer goods transactions. For example, Article 9 outlines
very precise content requirements for the notice,
including a description of the debtor and secured party,
description of collateral, the method of intended disposition,
public or private sale, timing of the sale, and explanation of
any potential deficiency the debtor might owe or surplus they
might receive, and the debtors right to an accounting of the
debt. Very specific failure to provide
adequate notice or, crucially, failure to conduct a
commercially reasonable sale, can actually preclude the
secured party from obtaining A deficiency judgement later if
the sale doesn't cover the full debt.
Huge penalty. So precision here is paramount.
The UCC Article 9 for Dummies sample notice provides a good
template. How are the proceeds from such a
disposition distributed? Is there a strict order?
Who gets paid first, second, third?
Yes, the distribution of proceeds after disposition is
very specific following a mandatory waterfall approach
under Article 9. First, the reasonable expenses
of repossessing, holding, preparing for disposition,
processing, and disposing of the collateral are paid.
This can include reasonable attorneys fees and legal
expenses, but only if provided for in the security agreement
and not prohibited by law as specified in Section nine of our
security agreement. Example.
Second, the secured obligation itself is paid off the debt owed
to the foreclosing secured party.
Third, any obligation secured by subordinate or junior security
interests or liens are paid, but only if they've made an
authenticated demand for payment before the distribution is
complete. They have to ask for it.
And finally, if there's anything leftover after all these
payments, the surplus funds go to the debtor.
It's important to note that senior liens, those with
priority over the foreclosing party, generally remain attached
to the collateral even after the sale.
The buyer takes it subject to those liens, but subordinate
liens are discharged by the sale, assuming the sale was
proper and their holders look to the proceeds for payment.
The second option for extracting value instead of selling is
strict foreclosure or acceptance of collateral.
Here the secured creditor takes title ownership of the
collateral in full or partial satisfaction of the secured
obligation. They effectively keep the
collateral instead of selling it.
This method requires the debtors consent, which can be given
after default or importantly, it's deemed consented if the
debtor fails to object within 20 days of receiving a proposal for
strict foreclosure from the secured party.
Silence can be consent here. For consumer transactions,
there's a special protective rule if the debtor has paid 60%
or more of the cash price for APMSI or 60% of the principal
amount for a non PMSI, strict foreclosure is not allowed.
The collateral must be disposed of by sale within 90 days after
repossession, unless the debtor specifically waves this right
after default. This prevents forfeiture when
the debtor has substantial equity.
Now, for intangible collateral like accounts receivable,
chattel paper or instruments, the enforcement process is
different. You can't physically repossess
an account receivable. Here, the secured party
essentially steps into the shoes of the debtor and directly
exercises the rights constituting the intangible
collateral. They collect what's owed.
This is however, subject to any defenses or set off rights that
the account debtor, the counterparty who owes the money
on the account receivable, may have against the original
debtor. So if the account debtor has a
valid reason not to pay the original debtor, like faulty
goods were delivered, they can usually assert that defense
against the secured party trying to collect.
The secured party instructs the account debtor to render
performance, usually payment directly to them.
After receiving this instruction, the account debtor
can only discharge their obligation by paying the secured
party. Paying the original debtor won't
count anymore. The distribution of proceeds
collected from intangible collateral follows the same
waterfall order as tangible collateral.
But in this case, senior lens are effectively terminated
because the underlying collateral itself, the right to
payment, has been discharged through performance by the
account debtor. Regardless of the collateral
type. If the disposition proceeds or
collections are less than the outstanding obligation plus
enforcement expenses, the secured party can usually seat a
deficiency judgement against the debtor personally for the
remaining amount. Conversely, if the proceeds
exceed the obligation and expenses, a surplus must be
distributed first to any subordinate lend holders who
made a demand and then the rest goes to the debtor.
Again, remember that critical point.
Failure to conduct a commercially reasonable sale or
provide proper notice can bar or limit the recovery of any
deficiency, making compliance with Article 9's enforcement
rules absolutely critical for creditors.
And what about the debtor side during all this?
Do they have any rights during this enforcement process?
It sounds a bit like the secured party holds all the cards once
the default occurs. That's a great point, and
Article 9 does provide important protections to balance the
scales somewhat. Debtors aren't powerless.
First, they have a right to redeem the collateral at any
time. Before the secured party
disposes of the collateral or enters into a contract for its
disposition, or accepts it in strict foreclosure, the debtor
can redeem it. To redeem, the debtor must
tender fulfillment of all obligations secured by the
collateral plus the reasonable expenses incurred by the the
secured party in repossession, holding and preparing for
disposition, including attorneys fees if allowed, basically pay
everything owed. Second, the debtor has the right
to object to a proposed strict foreclosure and can demand a
disposition sale instead. This forces the secured party to
try and sell the collateral in a commercially reasonable manner,
which might result in a surplus for the debtor or reduce any
deficiency. Finally, if the secured party
violates any of the provisions of Article 9 during enforcement,
like breaching the peace during repossession, failing to give
proper notice, or conducting A commercially unreasonable sale,
the debtor may recover actual damages caused by the non
compliance. And in some cases, particularly
involving consumer goods, the debtor may be entitled to
statutory damages even if they can't prove actual harm.
So there are teeth to these rules.
This balancing act between efficient creditor recovery and
debtor protection is a constant theme in Article 9, reflecting
its underlying policy goals. Indeed, this balancing act is
critical. And if you're a secured
creditor, that protection achieved through proper
perfection is absolutely paramount if the debtor ends up
in bankruptcy. Let's briefly recap some
bankruptcy basics as they relate to secured transactions as this
is a major area of concern in practice and definitely for your
exam. When a debtor files for Chapter
7 bankruptcy, it involves the liquidation of their non exempt
assets by a trustee. A crucial mechanism that
immediately kicks in upon filing is the automatic stay.
This is a powerful injunction under federal law that stops
most collection actions against the debtor or their property.
Creditors have to stop collections, lawsuits,
repossessions, everything freezes.
However, a secured creditor can ask the bankruptcy court to
grant relief from the stay to allow them to proceed against
their collateral. This might be granted if the
creditor can show there's no equity in the collateral that
could benefit the bankruptcy estate, meaning the debt owed is
more than the collateral is worth, or if the collateral
isn't necessary for an effective reorganization, which is more
relevant in Chapter 11 cases. The bankruptcy trustee also has
those potent avoiding powers, particularly under Bankruptcy
Code Section 544, also known as the strong arm powers.
We touched on this. This gives the trustee the
rights of a hypothetical perfected London creditor as of
the exact moment the bankruptcy petition has filed.
What this means for you, the secured creditor, is that the
trustee can avoid any unperfected security interests.
If you didn't perfect correctly and timely before the bankruptcy
filing, your interest can often be wiped out by the trustee
using these powers. If your security interest is
avoided, it effectively becomes a general unsecured claim in
bankruptcy. You lose your special rights to
the collateral. This can lead to massive losses.
As the Sports Authority bankruptcy case vividly
illustrated. Suppliers with consignment
agreements, which often function like unperfected security
interests if not handled correctly under Article 9, found
themselves at the back of the line.
They hadn't properly perfected their interest by filing
financing statements and notifying the existing lenders
as required for inventory PMSIS. Their unperfected claims became
unsecured and they lost out on millions.
A very harsh lesson in the importance of perfection before
bankruptcy hits. Despite a discharge in Chapter 7
bankruptcy releasing individual debtors from personal liability,
for most debts it's critical to remember the discharge does not
extinguish a properly perfected lien on property.
The lien rides through the bankruptcy.
So if your security interest is properly perfected before the
bankruptcy filing, your lien remains attached to the
collateral. Even if the debtors personal
obligation to pay the underlying debt is discharged, you can
still enforce the lien against the property after the stay is
lifted or the case is closed, usually through an in ream
action. Now for debtors who want to keep
secured property like a car they need for work, they might enter
into a reaffirmation agreement. This is a formal agreement
between the debtor and the creditor made during the
bankruptcy case where the debtor agrees to remain personally
liable and will continue to pay all or a portion of the money
owed even though the debt would otherwise be discharged.
They're essentially pulling that debt out of the discharge.
This must be done before the discharge order is entered.
It must be signed by both parties, filed with the court,
and often needs to be approved by the bankruptcy judge,
especially if the debtor doesn't have an attorney to ensure it
doesn't create an undue hardship for the debtor.
Reaffirmation is a serious commitment and just connecting
back to the security agreement. Remember that Section 8 listed
failure of the security interest to remain first priority and
perfected as an event of default.
This just emphasizes the ongoing importance for the creditor of
monitoring their secured position even outside of
bankruptcy. What a deep dive into UCC
Article 9. Wow.
From the initial handshake of attachment where the interest is
actually born, through the public declaration of perfection
protecting it against the rest of the world, and finally to the
high stakes game of priority and enforcement, it's really clear
why this area of law is so heavily tested and so vital for
anyone looking to enter the legal profession, especially in
commercial law or bankruptcy. It really is.
It touches so many areas. Understanding Article 9
requires, yes, attention to detail, but maybe more
importantly, it's about grasping the underlying logic.
That balance between commercial efficiency making lending
possible, and debtor protection for your law school exams and
the bar. Really focus on those core
elements of attachment value given debtors rights and that
objective manifestation of intent.
Remember the nuances of collateral description for the
security agreement versus the financing statement.
That's a classic. Then master the distinct methods
and vital details of perfection, especially the rules for debtor
names on financing statements, the location rules, and the
specific circumstances for alternative methods like
position or control. Know how to perfect different
things and finally, internalize the nuance.
Priority rules. Start with the first to file or
perfect baseline, but then layer on those super priority PMSI
rules. Know the conditions for
inventory versus equipment versus consumer goods.
And don't forget the King of the Jungle by IOCB rule and the
impact of judicial liens and crucially, the bankruptcy
trustees powers. Focus on those key areas,
practice applying them, and you'll be well prepared.
So what does this all mean for you, the learner, as you
continue your journey in law? It means that Article 9 isn't
just a set of dry, abstract rules to memorize for an exam.
It's the sophisticated framework that underpins a vast amount of
modern commerce. It gives you the power to
understand how financial risk is managed in lending, how credit
is actually extended to businesses and consumers, and
how disputes are resolved when things inevitably go sideways.
It's a subject where technical precision translates directly
into tangible outcomes. Protecting assets for lenders.
Facilitating credit for debtors mastering it provides a really
solid foundation for many areas of legal practice, from
transactional work, drafting these agreements to litigation
when disputes arise, and certainly bankruptcy.
Absolutely. And if we connect this to the
bigger picture thinking ahead, this raises an important
question, doesn't it, given the constant evolution of technology
and the emergence of entirely new forms of property?
Think about digital assets like NFTS, cryptocurrencies, or even
evolving forms of valuable data, things the drafters maybe didn't
fully anticipate. How do you think Article 9 will
continue to adapt? How will it handle these novel
types of collateral that might not fit neatly into current
classifications like goods or general intangibles?
What new perfection challenges might that create for future
lawyers? How might the principles we
discussed today, attachment, perfection, priority, apply or
maybe need to evolve to secure interests effectively in
tomorrow's increasingly digital economy?
That's definitely something to chew on as you continue your own
deep dive into the law. Thanks so much for joining us
for this essential exploration of secure transactions.