Secured Transactions February 2005 Flashcards
(4 cards)
Summary
Sal’s extension of credit to Bill provided the purchase money for Bill to buy the oven. When Bill signed the security agreement on March 1 granting Sal’s a security interest in the oven, which was “goods”at the time of the purchase, a purchase-money security interest attached in favor of Sal’s. It was not perfected as against other creditors atthat time because Sal’s had not filed a financing statement. However, a purchase-money secured creditor has 20 days after delivery of the collateralto perfect by filing. If the creditor does so, the security interest is perfected retroactively to the date of attachment. Under these facts, Sal’s perfected by filing on March 28, which was less than 20 days after the March 14 delivery to Bill.
Ordinarily, a lien creditor, such as Local Bank, would have priority over an earlier unperfected secured creditor. However, because of the retroactive effect of Sal’s filing its purchase-money interest, which related back to March 1 (the day Sal’s security interest attached), Sal’s prevails over Local Bank as to the oven.
However, Sal’s failure to effect a valid “fixture filing” produces the opposite result vis-à-vis Finance Company. The oven is clearly a fixture. In order to perfect its security interest in the oven as a fixture against persons with interest in the real estate, Sal’s was required to file a record of its interest in the local real estate records office designated by state law. Because Sal’s did not do this, Sal’s interest was not perfected as against Finance Company. Finance Company, as an “encumbrancer” by virtue of the mortgage granted to it by Bill, perfected its security interest in the building (and therefore in the fixtures as well) by filing in the appropriate real estate records office. Thus, Finance Company’s interest in the oven prevails over Sal’s.
Because Sal’s interest in the oven was a purchase-money security interest, Sal’s had priority over Local Bank, an intervening judicial lien creditor, even though Sal’s failed to file its financing statement until after the judicial lien arose.
Because Sal’s extension of credit enabled Bill to purchase the oven, Sal’s had a purchase-money security interest in “goods.” Uniform Commercial Code (UCC) §9-103(1)(b). The oven qualified as “goods” under UCC §9-102(44) because it was “moveable” when the security interest attached on March 1. Although a judicial lien creditor would normally have priority over an unperfected secured creditor, UCC §9-317(a)(2), in this case Sal’s lien had priority over the interest of Local Bank because Sal’s perfected a purchase-money security interest within the grace period provided for in UCC §9-317(e).
UCC §9-317(e) provides that, if a purchase-money secured creditor files its financing statement within 20 days after the debtor receives delivery of the collateral, then the secured creditor will take priority over the rights of a judicial lien creditor whose lien arose between the attachment of the purchase-money security interest and the filing of the financing statement. In this case, Sal’s perfected its interest on March 28 when it filed its financing statement in the Secretary of State’s Office. UCC §§9-308(a), 9-310(a) (attachment plus filing a financing statement will qualify as perfection). That date was more than 20 days after Sal’s security interest in the oven attached on March 1. UCC §9-203(b) (attachment occurs where the creditor has given value, the debtor has rights in the collateral, and the debtor has signed a security agreement). However, Sal’s perfected within 20 days after Bill received delivery of the collateral on March 14. Therefore, Sal’s perfected security interest in the oven relates back to the date of attachment, March 1, and takes priority over Local Bank’s judicial lien, which became perfected on March 26.
Because Sal’s failed to file in the local real estate records, Finance Company has priority over Sal’s; Finance Company is a subsequent mortgagee that perfected its interest in the restaurant building where the oven is located by filing in the local real estate records.
The oven in which Sal’s has a purchase-money security interest is a “fixture” under Article 9 and applicable state law because it is “so related to particular real property that an interest in [it] arises under real property law.” UCC §9-102(41).
The general rule under Article 9 for priority in fixtures is that a security interest in the fixture will be subordinate to “a conflicting interest of an encumbrancer or owner of the related real property other than the debtor.”UCC §9-334(c)). Here the related real property is the restaurant building, and Finance Company’s mortgage in that building qualifies as an encumbrance on it. Thus, Finance Company is as an “encumbrancer . . . of the related real property.”
UCC §9-334 includes a number of exceptions to the general rule that security interests in fixtures are subordinate to a conflicting interest of an owner or encumbrancer of the related real property. The only exceptions that might have been available to Sal’s in UCC §9-334(d) (purchase-money priority exception) and (e)(1) (where the debtor had a record interest in the realty) would require, among other things, that Sal’s had effected a proper “fixture filing.” UCC §9-102(30). A fixture filing must be recorded in the local real estate records office. UCC §9-502(b). In this case, Sal’s failed to file in the local real estate records office.
Because Finance Company is an encumbrancer of the related real property and because Sal’s fails to qualify for any of the exceptions listed in UCC §9-334, Finance Company has priority as to the oven even though Finance Company’s security interest was created after Sal’s perfected its interest in the oven by filing in the Secretary of State’s office.
