Secured Transactions Question

(Study Tips, Dealing With Stress, Maintaining a Social Life, Financial Aid, Internships, Bar Exam, Careers in Law . . . )
SammyJ
Posts: 82
Joined: Tue Feb 28, 2012 4:36 pm

Secured Transactions Question

Postby SammyJ » Thu Nov 29, 2012 6:45 pm

Hey all, I need some help from you secured transactions geniuses out there (because lord knows I am not one).

Hypo: I want to buy a television for my home and it costs $1000. I borrow $500 each from two lenders and grant each one a PMSI in the TV. In the event I default, which secured creditor has priority?

turkeysub
Posts: 100
Joined: Fri Sep 10, 2010 9:48 am

Re: Secured Transactions Question

Postby turkeysub » Thu Nov 29, 2012 6:57 pm

I'm studying for this class right now too so I'll take a shot

I think the Provision is 9-324(g) which says "if more than one security interest qualifies for priority in the collateral under subsection (a), (b), (d), (f) (which are the PMSI statutes), a security interest securing an obligation incurred as all or part of the price of the collateral has priority over a security interest securing an obligation incurred for value given to enable the debtor to acquire rights in or use the collateral"

What it means is that if one party that has the PMSI is selling the good to the debtor, and the other party (like a bank) is just taking the PMSI in the loan to allow the debtor to buy the good (known as "enabling loans"), the seller would have priority over the bank.

If both parties are just doing enabling loans, then the first to file or perfect rule in 9-322 applies.

The rule is explained more in Comment 13 to 9-324(g)

Hope this helps!

SammyJ
Posts: 82
Joined: Tue Feb 28, 2012 4:36 pm

Re: Secured Transactions Question

Postby SammyJ » Thu Nov 29, 2012 7:14 pm

turkeysub wrote:I'm studying for this class right now too so I'll take a shot

I think the Provision is 9-324(g) which says "if more than one security interest qualifies for priority in the collateral under subsection (a), (b), (d), (f) (which are the PMSI statutes), a security interest securing an obligation incurred as all or part of the price of the collateral has priority over a security interest securing an obligation incurred for value given to enable the debtor to acquire rights in or use the collateral"

What it means is that if one party that has the PMSI is selling the good to the debtor, and the other party (like a bank) is just taking the PMSI in the loan to allow the debtor to buy the good (known as "enabling loans"), the seller would have priority over the bank.

If both parties are just doing enabling loans, then the first to file or perfect rule in 9-322 applies.

The rule is explained more in Comment 13 to 9-324(g)

Hope this helps!


Thanks alot for your response. I am still confused by this situation... Here's why: If both secured creditors have PMSIs in consumer goods, they automatically perfect upon attachment (9-309(1)). Therefore, SCs do not need to file a financing statement. The result of this seems to be that both SCs are perfected at the same time. Am I missing something?

turkeysub
Posts: 100
Joined: Fri Sep 10, 2010 9:48 am

Re: Secured Transactions Question

Postby turkeysub » Thu Nov 29, 2012 7:31 pm

I think then that what happen is that in terms of order of perfection, whichever one satisfied the attachment conditions under 9-203 first is perfected first since perfection occurs automatically upon attachment.

How I understand it is that this would serve as the priority order unless the party that attached 2nd somehow got a financing statement filed before the 1st party attached. Even though the financing statement doesn't matter at all for perfection purposes, it may still matter for priority purposes under 9-322 which is first to file or perfect.

Four Ten
Posts: 14
Joined: Thu Oct 18, 2012 8:36 pm

Re: Secured Transactions Question

Postby Four Ten » Thu Nov 29, 2012 7:39 pm

I'm not 100% sure about this, but I believe that each creditor will be considered a PMSI lender as to the portion of the goods his loan actually enabled the purchase of. Therefore, Lender A will have priority over half of the goods, and Lender B will have priority over the other half.

Four Ten
Posts: 14
Joined: Thu Oct 18, 2012 8:36 pm

Re: Secured Transactions Question

Postby Four Ten » Thu Nov 29, 2012 7:42 pm

However, I'll add that this is kind of a bifurcation issue. And since the bifurcation rules of the Code don't strictly apply to consumer transactions, the answer I gave above could be completely off.

User avatar
I.P. Daly
Posts: 920
Joined: Fri Nov 19, 2010 3:27 pm

Re: Secured Transactions Question

Postby I.P. Daly » Thu Nov 29, 2012 7:55 pm

Sorry, I don't remember the UCC cite, but as to competing PMSIs, the first to file or perfect rule applies; except a seller's PMSI takes priority over a lender's PMSI.

User avatar
Hodgy
Posts: 1981
Joined: Fri Feb 26, 2010 4:38 pm

Re: Secured Transactions Question

Postby Hodgy » Thu Nov 29, 2012 10:44 pm

I.P. Daly wrote:Sorry, I don't remember the UCC cite, but as to competing PMSIs, the first to file or perfect rule applies; except a seller's PMSI takes priority over a lender's PMSI.


From Mastering Secured Transactions:
More than one PMSI can exist in the same inventory. For example, a debtor may seek a loan from a lender for part of the purchase price of the inventory and finance the balance of the purchase price from the seller of the collateral. If each creditor takes a SI in the purchase-money collateral, each has a PMSI. Additionally, more than one lender can advance funds to enable the buyer to purchase inventory and secure the loan with a security interest in the purchase-money inventory. If more than one PMSI satisfies the section 9-324(b) requirements for priority, section 9-324(g)(1) awards priority to the purchase-money seller over the purchase-money lender. If there is no purchase-money seller, section 9-324(g)(2) allows the first-to-file-or-perfect rule of section 9-322(a) to determine priority between purchase-money lenders.


So, that is correct. Though I would think the common scenario is flipped so that it is:
General Rule - Seller PMSI > Lender PMSI
except,
If 2 Lender PMSI, first to file/perfect rule applies

SammyJ
Posts: 82
Joined: Tue Feb 28, 2012 4:36 pm

Re: Secured Transactions Question

Postby SammyJ » Fri Nov 30, 2012 10:40 am

Thanks for your responses, guys. I apologize if I am not being clear, but I do not think that 9-324(g)(2) really answers the question. That section assumes that when there are two purchase-money lenders, one of them has filed or perfected before the other. I am just not sure that this is usually the case. Please correct me if I am wrong or missing something, but if the two purchase-money lenders obtained that PMSI in consumer-goods, they are both perfected automatically (that is, once the security interest attaches to the collateral). Because the security interest perfects automatically (per 9-309(b)), the lenders in this case will probably not be filing a financing statement. The result is that both lenders have perfected at the same time--when the debtor obtains rights in the collateral (i.e., when he buys it with the lenders' money). How does 9-322(a) solve this issue?

User avatar
I.P. Daly
Posts: 920
Joined: Fri Nov 19, 2010 3:27 pm

Re: Secured Transactions Question

Postby I.P. Daly » Fri Nov 30, 2012 11:21 am

The two PMSI holders are left to compete under the first-to-file-or-perfect rule of §9-322(a)(1). It's going to be a matter of timing, and which PMSI holder did what and when. See the last line of Comment 13 to §9-324:
[t]he first-to-file-or-perfect rule of section 9-322 applies to multiple purchase-money security interests securing enabling loans.

SammyJ
Posts: 82
Joined: Tue Feb 28, 2012 4:36 pm

Re: Secured Transactions Question

Postby SammyJ » Fri Nov 30, 2012 11:29 am

I.P. Daly wrote:The two PMSI holders are left to compete under the first-to-file-or-perfect rule of §9-322(a)(1). It's going to be a matter of timing, and which PMSI holder did what and when. See the last line of Comment 13 to §9-324:
[t]he first-to-file-or-perfect rule of section 9-322 applies to multiple purchase-money security interests securing enabling loans.


But aren't both lenders perfected at the exact same time?

User avatar
Hodgy
Posts: 1981
Joined: Fri Feb 26, 2010 4:38 pm

Re: Secured Transactions Question

Postby Hodgy » Fri Nov 30, 2012 11:32 am

SammyJ wrote:Thanks for your responses, guys. I apologize if I am not being clear, but I do not think that 9-324(g)(2) really answers the question. That section assumes that when there are two purchase-money lenders, one of them has filed or perfected before the other. I am just not sure that this is usually the case. Please correct me if I am wrong or missing something, but if the two purchase-money lenders obtained that PMSI in consumer-goods, they are both perfected automatically (that is, once the security interest attaches to the collateral). Because the security interest perfects automatically (per 9-309(b)), the lenders in this case will probably not be filing a financing statement. The result is that both lenders have perfected at the same time--when the debtor obtains rights in the collateral (i.e., when he buys it with the lenders' money). How does 9-322(a) solve this issue?



I think it is because you are describing a situation that probably NEVER occurs outside of a law school classroom. A lender will not lend money to the purchaser of a consumer good on credit and not file a financing statement if it knows that it is not lending the full value of the consumer good. At the very least I would expect the lender to require disclosure of who will provide the additional funds. Generally, a lender obtaining a PMSI will only provide the funds if there is some sort of way to establish that it is in fact obtaining a PMSI - essentially not handing over the money unless it knows the consumer won't go out and use the funds to purchase non-purchase-money collateral.

If this has happened, maybe courts decide the issue as whoever extended the money first? As in, the consumer did not obtain simultaneous financing. Or, maybe courts just assign priority in a pro rata share of the collateral? Though that sounds weird. You can't split a couch 50/50. It would have to be based on the proceeds of the collateral. I doubt it ever comes to this in real life. I have a hard time seeing two lenders bitching over who has superior right to a worn out couch and the potential proceeds of that couch. Wouldn't either lender rather sue based on contract?

SammyJ
Posts: 82
Joined: Tue Feb 28, 2012 4:36 pm

Re: Secured Transactions Question

Postby SammyJ » Fri Nov 30, 2012 11:58 am

I do understand what you're saying and I don't necessarily disagree. Unfortunately, while this situation may really only occur in theory, that's the way it is on all law school exams (as I am sure you know). Why do you say that lenders treat consumer-goods PMSIs differently than non-consumer goods PMSIs? Surely a lender will want to make certain that a loan for, let's say equipment, will actually be used to purchase that equipment, no?

My thinking in regards to how courts would deal with this situation is similar to yours. I disagree, however, that lenders won't fight over the proceeds of a couch. What if its a really expensive piece of furniture or a $10,000 television? Perhaps the lenders would want to sue based on contract, but it seems to me that the UCC should still apply to this scenario.

User avatar
LAWYER2
Posts: 576
Joined: Fri Jul 16, 2010 9:15 pm

Re: Secured Transactions Question

Postby LAWYER2 » Fri Nov 30, 2012 12:02 pm

Please excuse me if this has already been addressed, but I thought there is no need to file a FS for consumer goods

User avatar
typ3
Posts: 1362
Joined: Sun Feb 28, 2010 12:04 am

Re: Secured Transactions Question

Postby typ3 » Fri Nov 30, 2012 12:09 pm

Hodgy wrote:
SammyJ wrote:Thanks for your responses, guys. I apologize if I am not being clear, but I do not think that 9-324(g)(2) really answers the question. That section assumes that when there are two purchase-money lenders, one of them has filed or perfected before the other. I am just not sure that this is usually the case. Please correct me if I am wrong or missing something, but if the two purchase-money lenders obtained that PMSI in consumer-goods, they are both perfected automatically (that is, once the security interest attaches to the collateral). Because the security interest perfects automatically (per 9-309(b)), the lenders in this case will probably not be filing a financing statement. The result is that both lenders have perfected at the same time--when the debtor obtains rights in the collateral (i.e., when he buys it with the lenders' money). How does 9-322(a) solve this issue?



I think it is because you are describing a situation that probably NEVER occurs outside of a law school classroom. A lender will not lend money to the purchaser of a consumer good on credit and not file a financing statement if it knows that it is not lending the full value of the consumer good. At the very least I would expect the lender to require disclosure of who will provide the additional funds. Generally, a lender obtaining a PMSI will only provide the funds if there is some sort of way to establish that it is in fact obtaining a PMSI - essentially not handing over the money unless it knows the consumer won't go out and use the funds to purchase non-purchase-money collateral.

If this has happened, maybe courts decide the issue as whoever extended the money first? As in, the consumer did not obtain simultaneous financing. Or, maybe courts just assign priority in a pro rata share of the collateral? Though that sounds weird. You can't split a couch 50/50. It would have to be based on the proceeds of the collateral. I doubt it ever comes to this in real life. I have a hard time seeing two lenders bitching over who has superior right to a worn out couch and the potential proceeds of that couch. Wouldn't either lender rather sue based on contract?


Shh.... Don't tell the law professors their hypothetical wouldn't happen in the real world- that would put them out of a job.

SammyJ
Posts: 82
Joined: Tue Feb 28, 2012 4:36 pm

Re: Secured Transactions Question

Postby SammyJ » Fri Nov 30, 2012 12:10 pm

typ3 wrote:
Hodgy wrote:
SammyJ wrote:Thanks for your responses, guys. I apologize if I am not being clear, but I do not think that 9-324(g)(2) really answers the question. That section assumes that when there are two purchase-money lenders, one of them has filed or perfected before the other. I am just not sure that this is usually the case. Please correct me if I am wrong or missing something, but if the two purchase-money lenders obtained that PMSI in consumer-goods, they are both perfected automatically (that is, once the security interest attaches to the collateral). Because the security interest perfects automatically (per 9-309(b)), the lenders in this case will probably not be filing a financing statement. The result is that both lenders have perfected at the same time--when the debtor obtains rights in the collateral (i.e., when he buys it with the lenders' money). How does 9-322(a) solve this issue?



I think it is because you are describing a situation that probably NEVER occurs outside of a law school classroom. A lender will not lend money to the purchaser of a consumer good on credit and not file a financing statement if it knows that it is not lending the full value of the consumer good. At the very least I would expect the lender to require disclosure of who will provide the additional funds. Generally, a lender obtaining a PMSI will only provide the funds if there is some sort of way to establish that it is in fact obtaining a PMSI - essentially not handing over the money unless it knows the consumer won't go out and use the funds to purchase non-purchase-money collateral.

If this has happened, maybe courts decide the issue as whoever extended the money first? As in, the consumer did not obtain simultaneous financing. Or, maybe courts just assign priority in a pro rata share of the collateral? Though that sounds weird. You can't split a couch 50/50. It would have to be based on the proceeds of the collateral. I doubt it ever comes to this in real life. I have a hard time seeing two lenders bitching over who has superior right to a worn out couch and the potential proceeds of that couch. Wouldn't either lender rather sue based on contract?


Shh.... Don't tell the law professors their hypothetical wouldn't happen in the real world- that would put them out of a job.


:)

User avatar
Hodgy
Posts: 1981
Joined: Fri Feb 26, 2010 4:38 pm

Re: Secured Transactions Question

Postby Hodgy » Fri Nov 30, 2012 12:53 pm

SammyJ wrote:I do understand what you're saying and I don't necessarily disagree. Unfortunately, while this situation may really only occur in theory, that's the way it is on all law school exams (as I am sure you know). Why do you say that lenders treat consumer-goods PMSIs differently than non-consumer goods PMSIs? Surely a lender will want to make certain that a loan for, let's say equipment, will actually be used to purchase that equipment, no?

My thinking in regards to how courts would deal with this situation is similar to yours. I disagree, however, that lenders won't fight over the proceeds of a couch. What if its a really expensive piece of furniture or a $10,000 television? Perhaps the lenders would want to sue based on contract, but it seems to me that the UCC should still apply to this scenario.


Yeah, but the automatic perfection requirement applies to consumer good PMSIs. And, a 2nd lender is NOT likely to provide financing to a consumer by taking a security interest in that consumer's consumer good (Hey, can you give me a $1,000 loan and I will grant you a security interest in my MacBook?) because of the high risk that there is an automatically perfected PMSI in that consumer good and a record search would be futile. But, it would probably do so (subject to non-law school real world factors of course) in the equipment depending on the results of the records search.

NotMyRealName09
Posts: 1394
Joined: Mon Nov 09, 2009 5:50 pm

Re: Secured Transactions Question

Postby NotMyRealName09 » Fri Nov 30, 2012 10:50 pm

Edit: er, UFC 9-324(g) says seller of goods wins, but if no seller, seems to be a tie, and UCC is silent. Then equity comes in and says first in time, first in right.

A PMSI in a consumer good perfects upon attachment (no need for filing statement). UCC 9-302(1).

Attachment occurs when (1) debtor takes possession or signs a security agreement ID'ing the collateral, (2) debtor gives value, and (3) debtor aquires rights. UFC 9-203(1).

In your scenario, (3) will happen at the same time for both - the moment the store gives title to the TV to the debtor. Thus attachment occurs at the same time. Uh-oh. But as noted by someone above, ucc 9-324(g) says seller of the good wins. But if no seller, well, go cry equity to the court. ("we dealt with the debtor first, your honor, come on!")

You won't be asked this question, but if you are, there is your answer.

P.s. Secured transactions are tough sometimes. Thankfully real life doesn't typically get so complicated.
Last edited by NotMyRealName09 on Fri Nov 30, 2012 11:20 pm, edited 1 time in total.

NotMyRealName09
Posts: 1394
Joined: Mon Nov 09, 2009 5:50 pm

Re: Secured Transactions Question

Postby NotMyRealName09 » Fri Nov 30, 2012 11:18 pm

SammyJ wrote:
I.P. Daly wrote:The two PMSI holders are left to compete under the first-to-file-or-perfect rule of §9-322(a)(1). It's going to be a matter of timing, and which PMSI holder did what and when. See the last line of Comment 13 to §9-324:
[t]he first-to-file-or-perfect rule of section 9-322 applies to multiple purchase-money security interests securing enabling loans.


But aren't both lenders perfected at the exact same time?


If neither is the seller, I think so, yes.




Return to “Forum for Law School Students”

Who is online

Users browsing this forum: Nylon and 12 guests