Welcome back to the Deep Dive. Today, we're really plunging
into something fundamental in commercial law.
We're talking secured transactions under UCC Article
9. That's right.
And you've given us some great lecture notes focusing squarely
on 2 huge concepts, perfection and priority.
Absolutely huge. They're they're really the core
of making a security interest stick against the rest of the
world. So our mission here is to unpack
those notes, pull out the absolute essentials, you know,
help you get a handle on what you need for law school for
exam. Even for the bar.
Honestly, these concepts are everywhere.
Right, we want to cut through the complexity, explain the what
and the why. Exactly.
Perfection and priority are like you said, where the rubber meets
the road. A security interest might be
totally fine between the debtor and the creditor.
That's attachment under Article 9, but without nailing
perfection and priority, that interest could be well worthless
against everybody else. OK.
So we're going to break down what perfection actually means,
how you do it, the different methods like filing, possession
control. And automatic perfection.
Can't forget that one. Right.
And then we'll tackle the priority rules.
Who wins when multiple people claim the same thing?
That can get pretty interesting, sometimes counterintuitive.
Definitely. We'll use the examples and cases
from your notes to make it really concrete.
OK, let's get started on this deep dive.
First things first, that distinction your notes make
between attachment and perfection.
It seems critical. It is.
You absolutely have to separate them in your mind.
Attachment comes first. That's under UCC section 9-2O3.
It's when the security interest actually becomes enforceable
between the debtor and the secured party.
And that happens when three things line up.
Typically, yes. One, the secured party has to
give value, you know, lend the money, sell the goods on credit.
2, the debtor needs to have rights in the collateral, they
have to own it or have the power to grant an interest in it.
And three, there generally needs to be an authenticated security
agreement, usually assigned writing that reasonably
describes the collateral. Those ducks in a row.
And boom, you have attachment, you have a valid claim against
that specific debtor regarding that collateral.
O attachment is like making that private deal the contract hase.
Exactly. Spot on.
It's the necessary first step. You've got the agreement, the
value's been given, the debtor has rights.
Your claim exists on paper between the two of you.
But, and this is the big but, your notes emphasize, attachment
alone isn't enough protection against the rest of the world
third parties. Not even close.
It leaves you incredibly vulnerable.
Think about it. If your deal is just between you
and the debtor, who else knows what stops the debtor from
pledging the exact same collateral to another lender
tomorrow? Nothing I guess.
Right. Or what if the debtor doesn't
pay their taxes and the government tries to seize the
asset? Or a supplier wins a lawsuit and
gets a judgement Lin against the debtor's property.
If your interest isn't public, somehow those other parties have
no way of knowing you have a claim.
Exactly, and they could potentially take the collateral
right out from under you even though you have a perfectly
valid attached security interest against the debtor.
And that is the problem perfection solves.
It's the process to establish your rights against those third
parties. Precisely.
Perfection is the step that broadcast your claim.
It takes it from a private agreement to a publicly
recognized interest. It's what gives your claim teeth
against other secured creditors, judgment creditors, lien
creditors, and, critically, the bankruptcy trustee.
AH. Yes, the bankruptcy trustee,
your notes really highlighted that one.
Why is the trustee such a major threat here?
Because under the Bankruptcy Code the trustee is given
special powers. One of the most important is the
strong arm power which basically lets the trustee step into the
shoes of a hypothetical lien creditor who got a lien on all
the debtors property the very instant the bankruptcy petition
was filed. So if your security interest
wasn't perfected at that exact moment, the moment of bankruptcy
filing, the trustees hypothetical lien beats your
unperfected interest. Section 9317 tells us an
unperfected security interest is subordinate to a lien.
Who gets their lien before? Perfection.
And the trustee is that lien creditor, hypothetically
speaking? Right, so you get knocked down
from being a secured creditor to just a general unsecured
creditor. And in most bankruptcies,
unseared creditors get pennies on the dollar in anything.
It's often a total wipeout for the unperfected secured party.
Wow. OK.
So perfection is absolutely vital.
It's the shield against other lenders, judgement creditors and
the bankruptcy trustee. It's your armor in the
commercial world. But just to reiterate the point
from the notes, perfection isn't needed for the interest to be
valid, just between the debtor and the secured party, right?
That's attachments job. Correct attachment makes it
enforceable between the two of them.
Perfection makes it enforceable against almost everyone else.
You could have a perfectly attached interest, $1,000,000
loan, solid paperwork, but if you don't perfect and someone
else does perfect or a judgement creditor levies before you do,
you're likely out of luck regarding that collateral.
It's like having the deed to a house but never recording it.
That's a great analogy. Someone else could buy the house
from the same seller, record their deed first, and they'd
likely win. Perfection under Article 9
serves that public notice function similar to recording a
deed in real estate. OK, so attachment is the
handshake. Perfection is shouting it from
the rooftops. Or at least, you know, putting
it on the public bulletin board. Exactly, and Article 9 provides
specific ways to do that, shouting specific methods of
perfection. Your notes list the four main
ones. Knowing which method to use for
which type of collateral is, well, it's essential.
Let's dig into those methods, then the how of perfection
filing, possession control, and automatic perfection, right?
These are the tools in the Perfection Toolkit.
Let's start with the most common one, perfection by filing.
OK, Section 9310. That's the one for most types of
collateral. Think equipment, inventory,
general intangibles, accounts receivable.
The standard way to perfect is by filing a document called the
UCC 1 Financing Statement. And you file this where the
notes seem really specific about this debtors location, not
collateral location. Yes, very specific and crucial.
This is a major difference from real estate law where you record
where the land is. For most Article 9 collateral,
you filed A financing statement in the central filing office,
usually the Secretary of State's Office of the State where the
debtor is located. And how do you know where the
debtor is located? Article 9 defines it.
For an individual debtor, it's their principal residence.
For a registered organization, that's your corporations LLC's
limited partnerships created by a state filing.
Their location is the state where they are organized or
incorporated. So if you're lending to a
Delaware corporation, you file in Delaware, even if all their
equipment and operations are in California.
Exactly. File in the wrong state and your
filing is generally ineffective. A searcher looking in Delaware
won't find your California filing.
OK, debtors location is key. What about what goes in the
financing statement? The notes mention three basics,
daughter's name, secured party's name and indication of
collateral. Correct.
And let's really pause on the debtor's name.
This is probably the single biggest area where mistakes
happen with catastrophic consequences.
Why is the name so critical? Because the entire UCC filing
system is indexed by the debtor's name, if you get the
name wrong even slightly, searches run under the debtor's
correct legal name might not find your filing.
And if it can't be found, it doesn't provide notice.
Exactly. Which brings us to that case
your notes flagged in re Leonard.
It's the classic example. Tell us about Leonard.
OK. The debtors actual legal name
was Edwin Charles Leonard. The secured party filed the
financing statement under Edwin C Leonard.
Just use the middle initial instead of the full middle name.
Seems like a minor typo. You'd think so, but the court
looked at Section 9-5O6, which asks if an error makes the
financing statement seriously misleading.
The test is objective. Would a search using the filing
offices standard search logic under the debtors correct legal
name find the financing statement despite the error?
And in Leonard. Using the search logic of that
particular office at that time, searching for Edwin Charles
Leonard did not retrieve the filing made under Edwin C
Leonard. Therefore, the court held the
filing was seriously misleading, ineffective, and the secured
party's interest was unperfected.
They lost out to the bankruptcy trustee.
Wow, just for using C instead of Charles?
That's brutal. It underscores the need for
absolute precision. For an individual, you generally
need the name on their unexpired driver's license if they have
one. For a registered organization,
you need the exact name shown on its public organic record, the
articles of incorporation or certificate of formation filed
with the state. No trade names, no shortcuts.
OK, message received. Get the debtor's name exactly
right. What about the collateral
description on the financing statement?
The notes contrast this with the security agreement.
Right. Another important distinction.
The security agreement, the actual contract creating the
interest needs a description that reasonably identifies the
collateral. It often requires more
specificity. You're defining the scope of the
deal. The financing statement though,
its purpose is just notice, so Article 9 allows for a more
general indication of the collateral.
So things like all assets or all personal property are actually
OK on a UCC 1. Yes, absolutely.
That's perfectly acceptable, even encouraged sometimes for
broad coverage. Your notes have that Acme
manufacturing example. First Bank takes an interest in
specific equipment and inventory spelled out in the security
agreement, but the financing statement they file can just say
all assets of debtor or all personal property.
And that works. It works for notice.
It tells the world, hey, First Bank might have a claim on some
or all of Acme's stuff. If you're thinking of dealing
with Acme's assets, you should probably ask First Bank for more
details. It puts other parties on inquiry
notice. Inquiry notice, meaning they
have a duty to investigate further.
Precisely. They see the broad filing.
They should then contact the secured party whose name and
address are on the filing and ask about the specifics.
Maybe request the security agreement?
Got it. So for filing right state
debtors location exact legal name Leonard Barrett and the
collateral indication can be broad for notice that covers
filing what's method #2. Method 2 is perfection by
possession. Section 9313 covers this.
It's simpler in concept, but applies to fewer types of
collateral. This is where the secured party
physically holds a collateral. Exactly.
If the secured party has physical possession of the
asset, that itself serves as notice to the world that the
debtor doesn't have unfettered control.
Like the pawnbroker example in the notes, they hold your
necklace, their interest is perfected.
Perfect example, Possession works to perfect interest in
things like negotiable instruments, promissory notes,
checks, tangible chattel paper money, and certificated
securities, actual paper stock certificates.
If you can hold it and you are holding it as collateral, you're
perfected without needing to file a UCC 1.
Makes sense, if the debtor doesn't have it, someone else
probably has a claim on it. That's the underlying logic
position provides very clear, tangible notice.
OK, moving on. Method 3.
Perfection by control. This sounds like it's for things
you can't physically possess. That's exactly right.
Section 9314 introduces perfection by control.
This is the primary method for perfecting security interests in
certain types of intangible or electronic assets.
Likewise, the big ones are deposit accounts, bank accounts,
investment property like stocks and bonds held through a broker
in electronic form and electronic chattel paper.
So how do you get control over, say, my checking account?
It's just electronic entries. Good question.
Article 9 spells out specific ways to achieve control, and it
varies slightly by asset type. For deposit accounts, your notes
outline the three main ways. 1 The secured party is the bank
where the account is held. If Bank A lends you money and
takes a security interest in your checking account at Bank A,
they automatically have control. They're already the institution
managing the account. OK, that's easy.
What if the lender is different from the bank holding the
account? Then you need option two or
three. Option 2 is the most common, a
three-way agreement called a control agreement.
The debtor, the secured party and the bank where the account
is held, the depositary bank, all sign it.
In that agreement, the depositary bank agrees that it
will follow instructions from the secured party regarding the
funds in the account without needing further consent from the
debtor. That gives the secured party
control. So the bank essentially agrees
to listen to the lender instead of the account holder if push
comes to shove. Precisely the third way, less
common, is for the secured party to actually become the bank's
customer with respect to that specific deposit account.
The account gets put in the secured party's name
effectively. So control is like the
intangible version of possession.
It gives the secured party the ultimate power to direct what
happens with the asset. That's a great way to think
about it. It establishes the secured
party's dominance over that intangible asset.
For investment property held via a broker, control usually
involves similar mechanisms, either the secured party being
the broker or agreements where the broker agrees to follow the
secured party's instruction. OK.
Control for key financial intangibles.
Now the 4th method. Automatic perfection.
This one sounds too good to be true.
It is easy when it applies, but its scope is very narrow.
Section 9 and three O 9 lists several types of security
interests that are perfected automatically the instant they
attach. No filing, no possession, no
control needed. And then example.
By far the most important one for you to know for exams is the
purchase money, security interest, the PMSI and consumer
goods. Right, the furniture stores
selling a couch on credit to someone buying it for their
home. Exactly.
The store retains a security interest to secure the purchase
price. That makes it a PMSI.
And because the couch is a consumer good bought for
personal, family or household use, that security interest is
automatically perfected the moment the sale happens and the
interest attaches. Why the special treatment for
consumer goods? PMS Eyes.
Purely practicality, imagine the burden if every store selling
appliances or furniture on credit had to file a UCC one for
every single transaction. The system would collapse.
These are typically lower value, high volume transactions.
So Article 9 give sellers this shortcut.
But you said it's narrow, so this doesn't apply if the goods
aren't consumer goods. Critically important
distinction, Yes, Automatic perfection for Pmsis generally
applies only to consumer goods. If that same furniture store
sells couches on credit to a hotel to furnish its lobby,
that's equipment for the hotel, or to another retailer to sell
in their store, that's inventory for the retailer.
The sellers. PMSI is not automatically
perfected. So for Pmsis and equipment or
inventory, the seller must take other steps to perfect like
filing. Yes, if they want their PMSI to
be perfected and potentially gain priority over other
creditors of the hotel or retailer, they absolutely must
file a financing statement or sometimes take possession.
But filing is typical for these goods.
Relying on automatic perfection outside the consumer goods
context is a recipe for disaster.
OK, that's a huge take away. Automatic perfection.
Primarily PMS is in consumer goods for business assets you
need to file or possess control. You got it.
Those are the four main doors to perfection.
Filing the workhorse possession for tangibles, you can hold
control for key intangibles and automatic mostly for consumer
goods. PMS is.
So now we know how to get perfected.
The next big question your notes tackle is priority.
What happens when multiple parties have claims, maybe even
perfected claims, on the same collateral?
Who gets paid first? Right.
This is The Who gets what part. You could have two banks with
perfected security interests, or a perfected party versus an
unperfected one, or versus a buyer or a lien creditor.
Article 9 provides a set of rules to sort this out.
And the main rule, the starting point is the first to file or
perfect rule section 9322. That's the bedrock principle.
It governs priority battles between competing perfected
secured parties. The rule is simple.
Priority goes to whichever party was the first to either file a
financing statement covering the collateral or perfect their
security interest by some other means like possession or
control, which ever occurred earlier. 1st in time wins. 1st
in time of filing or perfection wins.
And here's the kicker, your nose highlight filing can establish
your priority date even before you've actually made the loan or
the security interest has attached.
That seems odd. How can filing before the deal
is done give you priority? Let's use that hypothetical from
the notes again. Widget Co needs money.
First Bank is thinking about lending against Widget Co's
equipment. On January 1st, First Bank files
a UCC 1 covering equipment. At this point, there's no loan
yet. No security agreement, nothing
attached, nothing perfected. They just filed.
On January 15th, Second Bank actually makes a loan loan to
Widget Co, takes a security interest in the same equipment
via a signed agreement and gives value.
Let's say they file their UCC one on January 20th.
So Second Bank attached and perfected on Jan 20th so.
Second bank is perfected first. They perfected first, yes, But
watch what happens on February 1st.
First Bank finally makes its loan to Widget Co, gets its
security agreement signed. Now First Bank's interest
attaches and because they already filed back on January
1st, their interest becomes perfected at the moment of
attachment on February. OK.
So now both are perfected. Who has priority in the
equipment? First Bank wins.
Why? Because the rule is first to
file or perfect. First Bank filed on January 1st.
Second Bank filed on January 20th.
First Bank's filing date was earlier, so they get priority
even though Second Bank's interest attached and became
perfected weeks before First Banks did.
Wow, so filing really does act like reserving your spot in
line. Exactly.
It encourages early filing and provides certainty.
A potential lender like Second Bank could search the records on
Jan 18th, see First Bank's Jan 1st filing, and know that any
interest First Bank eventually perfects relating to that filing
will beat theirs. It allows lenders to assess risk
based on the public record. File early, file correctly.
OK, so first a file are perfect is the general rule.
Powerful stuff, but like always with the UCC, there are
exceptions, big ones that can flip the outcome.
Absolutely critical exceptions and prime territory for exams.
The first huge one we need to unpack is the purchase money,
security interest, the PMSI. We talked about it for automatic
perfection, but it also has special priority rules.
Your notes call it super priority.
It does. Section 9324 grants PMS eyes
priority over conflicting security interests in the same
collateral, even if those other interests were filed or
perfected first, provided the PMSI holder follows specific
rules. Why does Article 9 give this
special boost to PMS MSIS? The policy is to encourage
enabling loans financing that allows the debtor to acquire new
assets. The thinking is that specific
new collateral wouldn't even be available to any creditor if the
PMSI lender hadn't provided the funds or credit for its
purchase. So that lender deserves first
dibs on that specific new asset they enabled the debtor to get.
OK, makes sense. But the rules for getting the
Super priority are different depending on the type of
collateral, right? Your notes really stress this.
Dramatically different. You absolutely must know the
distinction. Let's start with Pmsis and goods
other than inventory or livestock.
This mainly covers equipment and also consumer goods, though for
consumer goods, remember, perfection is often automatic.
This priority rule helps beat other perfected interests even
earlier filed ones. So PMSI and equipment, how does
it get super priority? The PMSI holder gets priority
over a conflicting security interest, like an earlier
blanket lien, if they perfect their PMSI no later than 20 days
after the debtor receives possession of the goods.
A 20 day grace period. Exactly.
Let's go back to our hypothetical.
First Bank filed its blanket line on equipment Jan.
First. Second Bank provides financing
for Widget Co to buy a specific new machine, a PMSI.
Widget Co receives the machine on February 1st if Second Bank
files its financing statement specifically covering that new
machine on, say, February 15th. That's within the 20 days.
Right. So Second Bank's PMSI in that
new machine gets priority over First Bank's earlier filed
blanket Lin, but only as to that machine.
First Bank still has priority on all the other equipment Widget
Co already owned. OK.
So for equipment, PMS is perfect within 20 days of delivery to
get super priority on that specific item.
What about PMSI as in inventory Notes say it's much stricter.
Much much stricter and a very common place for mistakes or
exam questions for a PMSI in inventory to get super priority
over an earlier filed conflicting interest like that
bank with the blanket inventory limb, the PMSI lender must do
two things and do them before the debtor receives possession
of the inventory. One, they must perfect the PMSI
before the debtor receives possession.
There is no 20 day grace period for inventory file first.
OK, no grades period. What's the second thing?
2 They must send an authenticated notification to
any other secured party who has already filed A financing
statement covering the same type of inventory.
This notice basically says, hey, I have or expect to get a PMSI
in inventory the debtor is receiving.
The notice has to describe the inventory and must be received
by those prior filers within five years before the debtor
gets the inventory. Wow, so for inventory you have
to perfect and notify existing lenders before the goods even
show up. Why the extra hoops?
It's because inventory financing is different.
Inventory turns over constantly. An existing lender with a
blanket Lin is relying on that floating pool of collateral.
If new inventory could constantly come in subject to a
senior PMS island without them knowing, it would undermine
their security. The notice requirement gives the
existing lender a heads up, allowing them to adjust their
own lending or monitor the situation.
In that case, Farmer State Bank V Production Credit Association.
Classic example, the PMSI lender in that case apparently didn't
perfectly follow the timing and notice rules for their PMSI and
livestock, which is treated like inventory for these rules.
Because they slipped up on the strict requirements, they lost
the Super priority. Their interest fell back under
the general first to file rule and the earlier blanket filer
one. It shows courts mean business
when they say strict compliance is needed for inventory.
PMSI super priority. Definitely hammers on the point.
Know the collateral. Know the exact PMSI rule for
that collateral. OK, what's the next major
exception to 1st to file? Buyers in the ordinary course of
business or biocybes section 9320.
This is fundamental for commerce to function smoothly.
How so? What does it do?
It says that a person who buys goods in good faith without
knowledge that the sale violates the rights of another person,
like a secured party in the ordinary course of business,
from a seller who is in the business of selling goods of
that kind, takes the goods free of a security interest created
by their seller, even if that security interest is perfected
and the buyer knows it exists. OK, unpack that a bit.
The example was the customer buying a widget from Acme.
Exactly. Acme sells widgets.
That's their business. First Bank has a perfected
security interest in Acme's inventory of widgets created by
Acme the seller. You, a regular customer, walk
into Acme's store and buy a widget.
You're a bio cop. Even if I somehow knew First
Bank had financed Acme's inventory.
Generally, yes, as long as you don't know that the specific
sale to you is actually prohibited by First Bank's
agreement with Acme, which is rare for inventory sales.
As a bio cob, you take that widget free and clear of First
Bank security interest. First Bank can't come to your
house and repossess it. That makes sense, otherwise
shopping would be terrifying. Precisely.
Commerce would grind to a halt if buyers had to worry about
liens created by the retailers they buy from.
The security interest doesn't disappear entirely.
It continues in the proceeds that Acme received from the sale
the cash or account receivable. The lender follows the money,
not the goods sold to ordinary buyers.
Protects the flow of goods. Got it.
And the last big priority contest mentioned is against
lien creditors. Right.
Section 9317 again once we touched on with bankruptcy, this
deals with priority between a secured party and someone who
gets the lien through the judicial process like a judgment
creditor who levies on the debtors property.
And the rule is basically perfection wins.
Pretty much a perfected security interest has priority over a
judicial lien if the perfection occurred before the lien
attached. But if the security interest is
unperfected when the sheriff shows up to levy.
Then the lien creditor wins. The unperfected security
interest is subordinate to the lien creditor who acquires their
lien before perfection happens. It's another race perfect before
the lien attaches or before bankruptcy is filed, triggering
the trustees hypothetical lien. It really highlights the cost of
delaying perfection. OK.
So those are the big priority rules, first a file or perfect
as a baseline, then PMSI super priority with different rules
for goods versus inventory, Biocybes taking free and
perfected interest beating later lien creditors.
What about that special topic of proceeds?
Proceeds are super important because collateral rarely stays
in one form forever. Inventory gets sold, accounts
get collected, equipment gets traded.
In Section 9315 says a security interest automatically attaches
to any identifiable proceeds of the original collateral.
So the security interest follows the value.
Exactly. If First Bank had an interest in
Acme's inventory, and Acme sells some inventory for cash, First
Bank's interest now attaches to that cash.
If they sell it on credit, creating an account receivable,
the interest attaches to the account.
If the account is later paid, the interest attaches to the
payment received. Seems straightforward as long as
you can trace it. The notes mentioned challenges
with cash proceeds, especially in commingled accounts.
Yes, that's where it gets tricky.
If the debtor takes cash proceeds and deposits them into
their general operating bank account mixed with funds from
other sources, how do you prove which dollars in the account are
your proceeds? Right, money is fungible.
Exactly. So courts often use tracing
rules. The most common one mentioned in
your notes is the lowest intermediate balance rule, or Li
BR. How does Li BR work?
It's an equitable tracing principle generally favorable to
the secured party. It presumes that as funds are
withdrawn from the commingled account, the debtor spends their
own money or non proceeds money first before spending the
secured parties identifiable proceeds.
OK. So the secured parties claim to
the funds remaining in the account is limited to the amount
of their proceeds that were deposited, but no more than the
lowest balance the account reached after the proceeds went
in and before they try to claim the funds?
Can you give a quick example? Sure.
Account has $1000. Debtor deposits 5000 dollars of
your identifiable cash proceeds. Balance is $6000.
Debtor then pay some bills, balance drops to $2000.
Then debtor gets paid by someone else.
Deposits $4000. Balance is now $6000.
Again under Libya. Your claim against that final
$6000 is limited to the lowest intermediate balance the account
hit after your $5000 went in, which was $2000.
Even though $5000 money went in, the presumption is that $3000 of
it was spent when the balance dropped, leaving only $2000
continuously traceable. So the lowest dip in the balance
after your proceeds go in effectively caps your traceable
claim. That's the essence of it.
It provides a way to trace, but it can limit recovery if the
account balance fluctuates significantly.
This complexity is one reason why taking control over deposit
accounts is often preferred by lenders when feasible.
Makes sense. OK.
We've hit the major perfection methods, priority rules and
proceeds. We talked Leonard for debtor
names and Farmer State Bank for PMSI strictness.
Any other key cases from the notes?
The notes mentioned in Repair Grant Entertainment Ltd quickly.
It's useful because it applied the standard Article 9 first
file rule to a less common type of collateral, copyrights and
films, which are general intangibles.
There was a fight between a lender who perfected by filing a
UCC 1 and another party who had recorded something with the US
Copyright Office. The court basically said for
Article 9 priority purposes regarding the general intangible
itself, the UCC filing system governs and the first to file
the UCC 11. It reinforces that the Article 9
framework is broad and usually applies unless there's a
specific federal law that completely preempts it for
perfection and priority. So even for fancy collateral
like film rights, the basic UCC rules often control.
Follow the Article 9 steps. Generally yes, always check for
specific federal rules like for aircraft or ships.
But for many intangibles, Article 9 and UCC filing is the
way. These cases really do drive home
how technical this area is. Precision matters.
Immensely secured transactions is statutory law.
You follow the statutes requirements or you risk losing
your secured status. OK, let's quickly run through
that main hypothetical again to solidify the interaction between
the rules. Widget Co gives first Bank
interest in inventory, equipment.
First bank files Jan 1. Widget Co gives second Bank
interest in equipment. Second bank loans Feb one files
Feb 5. Right priority on the equipment.
First bank wins they filed 1st Jan one versus second Bank of
Feb first to file rule. Perfect.
Now the PMSI twist. What if Second Bank's loan was a
PMSI for a specific new machine Widget Co received on say,
January 25th? OK Second Bank has a PMSI in
equipment they need perfect within 20 days of Wichico
getting possession Jan 25th. They're filing on Feb 5th.
Jan 25 to Feb 5 is 11 days. That's within 20 days.
So, so Second Bank's PMSI get super priority over first Bank's
earlier filing, but only for that new machine.
Exactly. And if Second Bank had filed on
Feb 20th instead. That's more than 20 days after
Jan 25th. They'd missed the grace period,
meaning meaning they lose the Super priority.
Their interest is just a regularly perfected interest and
priority reverts to 1st to file. First Bank filed Jan 1st.
So First Bank would win even on the new machine.
You nailed it. That hypothetical perfectly
shows the interplay between the general rule and the PMSI
exception for equipment. Classic exam pattern.
Definitely need to watch those dates and collateral types.
Yeah, OK. One last mechanical piece from
the notes maintaining perfection.
Once you file that UCC one, you're not done forever.
Not usually, no. A filed financing statement has
a limited lifespan under Section 9515.
It's generally effective for five years from the data filing.
And if you do nothing before the five years are.
Up it lapses. The financing statement ceases
to be effective. Perfection is lost.
And the consequence of lapsing. It's bad, right?
It can be very bad if perfection lapses.
The security interest is treated as if it had never been
perfected against purchasers of the collateral or holders of
liens that arose before the lapse.
So someone who is junior to you while you're filing was
effective can suddenly jump ahead in priority if you let it
lapse. Ouch.
So you could do everything right initially, be first in line, but
forget to renew and suddenly be behind someone else.
Absolutely, it's a crucial maintenance step.
To prevent lapse you have to file a continuation statement.
And there's a specific window for that.
Yes. A continuation statement is only
effective if it's filed within the six month period immediately
before the five year expiration date of the financing statement.
File it too early, it doesn't count.
File it too late. After lapse it doesn't count.
Get it right in that six month window.
And it continues the effectiveness of the original
filing for another five years, measured from the original
expiration date. You can keep filing continuation
statements every five years as needed.
OK, so continue to stay perfected.
What about when the debt is finally paid off?
Then you generally need to file a termination statement under
section 9513. This officially terminates the
effectiveness of the financing statement and clears the public
record. Does the secured party have to
do this automatically? For consumer goods collateral,
yes, the secured party usually has an affirmative obligation to
file it within a certain time after the debt is paid and
there's no further commitment to lend.
For other types of collateral, the secured party generally only
has to file it if the debtor makes an authenticated demand
for them to do so. Once demanded, they have to
comply promptly. So file to perfect, continue to
maintain, terminate when the gets done.
That's the life cycle. That's the administrative life
cycle for perfection by filing. Exactly.
Wow. OK, that was incredibly
thorough. We've really dug into perfection
why you need it, the methods like filing possession control
automatic and then the whole priority puzzle first to file
the huge PMSI exception with its different flavors bio salmons
lien creditors. Plus how the interest follows
proceeds, the tracing issues, and the importance of just
managing the filings through continuation and termination
statements. It's a lot, but it all fits
together. It definitely feels like the
kind of material where understanding the structure and
the key rules is crucial for exams.
Hopefully breaking down the lecture notes this way gives
everyone a solid framework. Absolutely.
And remember the details in any secured transactions, Hypodates,
collateral descriptions, party types.
They are almost always there for a reason, usually to test one of
these specific rules or exceptions.
Precision is key. Right.
And Speaking of what's next, your note suggests the next
topic is default and remedies what happens when the debtor
can't pay. Exactly.
That's the enforcement side. How does the secured party
actually exercise its rights against the collateral
repossession sale, dealing with deficiencies or surpluses?
Another area full of important rules.
Sounds like another essential deep dive.
Indeed, it's where the security interest shows its practical
value. So as you're reviewing all this
perfection and priority material, here's something to
Mull over kind of pulling together the threads.
Article 9 clearly puts a huge premium on being the first to
file creating certainty. Yeah, but it also creates this
powerful PMSI exception that lets later lenders jump the line
if they finance specific new assets.
So what's the bigger policy goal here?
Is the system ultimately tilted more towards protecting the
certainty of the first filer with a blanket limb, or is it
more focused on facilitating new acquisitions by debtors, even if
it disrupts the first sellers position on those new assets?
Where does the balance really lie?
Something to think about as you connect these dots.
An excellent question. It really gets to the heart of
the compromises inherent and Article 9 structure.
Well, thanks for joining us for this deep dive into perfection
and priority. We really hope breaking it down
helps clarify these complex but absolutely vital concepts.