Presentation on theme: "Class 14 Secured Transactions, Fall, 2014 Priority: Purchase Money SIs Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law."— Presentation transcript:
2 F9-107 n A security interest is a “purchase money security interest” to the extent that it is u (a) taken or retained by the seller of the collateral to secure all or part of its price; or u (b) taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used.
3 9-103(a) n (a) [Definitions.] In this section: u (1) “purchase-money collateral” means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and
4 9-103(a) u (2) “purchase-money obligation” means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.
5 9-103(b) n (b) [Purchase-money security interest in goods.] u A security interest in goods is a purchase-money security interest: w (1) to the extent that the goods are purchase- money collateral with respect to that security interest;
6 9-103(b) w (2) if the security interest is in inventory that is or was purchase-money collateral, also to the extent that the security interest secures a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a purchase-money security interest; and
7 9-103(b) w (3) also to the extent that the security interest secures a purchase-money obligation incurred with respect to software in which the secured party holds or held a purchase-money security interest.
8 9-103(e) n (e) [Application of payment in non- consumer-goods transaction.] u In a transaction other than a consumer-goods transaction, if the extent to which a security interest is a purchase-money security interest depends on the application of a payment to a particular obligation, the payment must be applied:
9 9-103(e) w (1) in accordance with any reasonable method of application to which the parties agree; w (2) in the absence of the parties’ agreement to a reasonable method, in accordance with any intention of the obligor manifested at or before the time of payment; or
10 9-103(e) w (3) in the absence of an agreement to a reasonable method and a timely manifestation of the obligor’s intention, in the following order: (A) to obligations that are not secured; and (B) if more than one obligation is secured, to obligations secured by purchase-money security interests in the order in which those obligations were incurred.
11 9-324(a): Priority of PMSI n (a) [General rule: purchase-money priority.] u Except as otherwise provided in subsection (g), a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in Section 9 ‑ 327, a perfected security interest in its identifiable proceeds also has priority,
12 9-324(a): Priority of PMSI u if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.
13 9-324(b): Inventory PMSI Priority n (b) [Inventory purchase-money priority.] u Subject to subsection (c) and except as otherwise provided in subsection (g), a perfected purchase- money security interest in inventory has priority over a conflicting security interest in the same inventory, … and, except as otherwise provided in Section 9 ‑ 327, also has priority in identifiable cash proceeds of the inventory to the extent the
14 9-324(b): Inventory PMSI Priority u identifiable cash proceeds are received on or before the delivery of the inventory to a buyer, if: w (1) the purchase-money security interest is perfected when the debtor receives possession of the inventory; w (2) the purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest;
15 9-324(b): Inventory PMSI Priority w (3) the holder of the conflicting security interest receives the notification within five years before the debtor receives possession of the inventory; and w (4) the notification states that the person sending the notification has or expects to acquire a purchase-money security interest in inventory of the debtor and describes the inventory.
16 4-12: PMSIs and Current Assets Bank Debtor Supplier 1/1 SA & FS: EQ, Inv, PR and AA Prop 3/1: S sells Inv to D SA: Inv FS: Inv 3/2: Notice 2/1 Debtor sells Inv Bank’s SI is cutoff 3/2: What are the respective rights of Bank and Supplier?
17 4-12: Answer n Need to be sensitive to timing requirements of 9-324(b) n For PMSI status: u Need to be perfected when D receives possession of inventory (9-324(b)(1)) u Notice must be given to competing SI holder before D takes possession (9-324(b)(2,3))
18 Better Structure Bank Debtor Supplier 1/1 SA & FS: EQ, Inv, PR and AA Prop 3/3: SA: Inv S sells Inv to D 3/1: Notice 2/1 Debtor sells Inv Bank’s SI is cutoff 3/2 FS: Inv
19 4-13: PMSIs and Categorization of the Collateral (1/2) Bank Accountant Seller 2/1 SA & FS: INV, EQ, AR, GI TO & TAA 3/1 Computer Sale SA: Computer 3/6: What are the respective rights of Bank and Seller? 3/6 FS: Computer
20 4-13: Answer n Answer u Key is classifying the collateral given different notice rules for inventory (9-324(b)) and other goods (9-324(a)) u Computer will be equipment in Accountant’s hands (9-102(a)(33))
21 4-13: Answer u Equipment is residuals category for goods u 20 days after possession to perfect and no notice required u Seller has good PMSI and will have priority
22 4-13: PMSIs and Categorization of the Collateral (2/2) Bank Retailer Mfg 2/1 SA & FS: INV, EQ, AR, GI TO & TAA 3/1 Computer Sale SA: Computer 3/6: What are the respective rights of Bank and Seller? 3/6 FS: Computer
23 4-13: Answer n Answer u Computer is inventory in Retailer’s hands u Mfg perfected after R received possession, in violation of 9-324(b)(1) u M did not give notice to Bank as required by 9- 324(b)(2,3) u M has lost PMSI status u M perfected, but junior to Bank under 9-322(a)(1)
24 4-14: PMSIs and Multiple Debts Bank Debtor Seller 1/1 SA: Equipment 2/1 Copy Mach Sale $, int pmt, pmt atty fees Assume the copier is equipment in Debtor’s hands 2/6 FS: Copy Mach What is Seller’s status as to the purchase price? The interest obligation? The contingent debt for attorney’s fees?
25 4-14: Answer n Not completely clear under old statute n New statute is clear that all of these charges are part of the purchase-money obligation under 9-103(a)(2); see comment 3
26 4-15: PMSIs and The Date of Possession Debtor Seller 1/1: 3 month true lease for computer 4/1: Financed Sale SA: Computer FS: Computer 4/1 Does Seller have a PMSI?
27 4-15: Answer n Answer u Key here is that statute requires perfection within 20 days of date of taking possession of the collateral u Collateral is defined as property subject to a security interest (9-102(a)(12))
28 4-15: Answer u Not collateral until loan was made on 4/1, so should be OK u Do note D took possession of the computer on 1/1
29 4 ‑ 16: PMSIs, Defective Notice and Circular Priority Bank Debtor 1/1 SA: Inventory FS: Inventory 2/1 SA: Inventory FS: Inventory Creditco Supplier 2/3: Inv Sale SA: Inv FS: Inv Filed before Delivery 2/2: Notice What are the relative priorities of Bank, Creditco, and Supplier? Notice
30 4 ‑ 16: Answer n Answer u Bank > Creditco: 9-322(a)(1) u Creditco > Supplier: 9-322(a)(1) u Supplier > Bank: 9-324(b) u Notice: condition good as to one and not the other introduces circular priority possibility
31 MBank Alamo Howe Dupont MBank Raytheon Customer < 1/10/83 SA: AR, INV FS: AR, INV Sale AR < 1/10/83 SA: AR FS: AR > 1/10/83 Assignment of AR FS: AR Does Raytheon have priority in AR?
32 Understanding the Deal n Raytheon Claims PMSI in AR u Howe sells x-ray machine on credit to customer creating AR
33 Understanding the Deal u Raytheon says its extension of credit enable Howe to acquire AR: w “Raytheon, by agreeing to extend credit on its equipment, enabled Howe X-Ray to enter into subsequent contracts of sale with its customers, thereby acquiring rights in the contract accounts which, upon the specific advance and delivery of equipment, blossomed into a right to the collateral accounts receivable.”
34 Understanding the Deal n Why didn’t Raytheon claim PMSI priority in inventory in Howe’s hands? n Answer u Failed to give the notice required under 9-324(b)
35 Understanding the Deal n Suppose Raytheon had given the notice: What result? n Answer u Note that priority in inventory does not extend to priority in the AR as proceeds of the inventory (9- 324(b)) u Need to track the progress of the collateral and possible changes in priority
36 Understanding the Deal n Couldn’t Raytheon have just sought subordinations from MBank and DuPont?
37 Alt Deal: Howe As Agent Howe Dupont M Bank Raytheon Customer Makes Howe Agent Arranges Sale Financed Sale AR Pay Commission Guarantees AR