Secured Transactions February 2006 Flashcards
(4 cards)
Summary
The effect of Specialty’s consignment of the speakers to Giant and Giant’s grant of a security interest in “inventory” is that Bank acquired a security interest in thespeakers. It does not matter that Specialty retained title to the speakers.
Specialty’s interest in the speakers is a purchase money security interest under Article 9. Because Specialty did not file a financing statement to perfect its interest, the interest is junior to Bank’s.
Specialty’s interest could have been made senior to Bank’s security interest if Specialty had filed a financing statement when it delivered the speakers to Giant.
Bank’s collateral includes the Specialty speakers, even though they are not owned by Giant, because Giant is deemed to have all the rights and title in the speakers that Specialty has, and Giant gave Bank a security interest that covered the speakers.
Bank had a security interest in Giant’s inventory. Ordinarily, Bank’s security interest would only attach to property in which the debtor (Giant) had rights, and it would only be effective to the extent of Giant’s rights. See UCC §9-203(b)(2). Under the terms of the consignment arrangement, the Specialty speakers are not owned by Giant (Specialty retains title), and accordingly, Giant would not ordinarily have ownership rights in them for purposes of attachment. However, UCC § 9-319(a) provides that, for purposes of determining the rights of a creditor of a consignee (e.g., the rights of Bank in this case), the consignee of goods under a consignment governed by Article 9 is “deemed to have rights and title to the goods identical to those [of] the consignor.” Thus, if this consignment is governed by Article 9, Giant will be treated as having had the full ownership interest that Specialty had in the speakers, and Bank’s security interest will attach to the speakers.
On these facts, the Giant-Specialty transaction created an Article 9 consignment. Under UCC § 9-102(a)(20), an Article 9 consignment exists where goods are delivered to a merchant (other than an auctioneer) for the purpose of sale, the merchant deals in those goods under a name other than the name of the consignor, the goods are not consumer goods immediately before their delivery to the merchant, the value of the goods exceeds $1,000, and the transaction does not otherwise create a security interest. Here, goods valued over $1,000 were delivered to Giant (a merchant dealing in goods of that kind under its own name). Although destined to be sold to consumers, the goods were not consumer goods before delivery; they were part of Specialty’sinventory. Compare § 9-102(a)(23) (consumer goods are goods used or bought for “personal, family, or household purposes”) with § 9-102(a)(48) (inventory means goods held for sale). There is no indication that the Specialty-Giant transaction otherwise created a security interest. In short, the transaction is a consignment governed by Article 9, and Giant will be treated as having right and title to the speakers for Article 9 purposes.
As a result, Bank’s security interest attaches to the Specialty speakers. Now that Giant has defaulted on its debt, Bank has the right to repossess the speakers, sell them within the guidelines of Article 9, and be repaid on its debt from the proceeds. See UCC § 9-610(a). Specialty would have no cause of action against Bank for doing so unless Bank conducted its sale in a commercially unreasonable manner or otherwise violated the dictates of Article 9’s foreclosure provisions.
[NOTE: The facts don’t indicate any Article 9 violations by Bank, and the question does not invite applicants to hypothesize such violations. Points can be given for short mentions of violations that would actually result in monetary harm to Specialty, but the main thrust of answers should be that there is nothing inherently wrongful in Bank’s proceeding against Specialty’s property, due to the consignment and attachment rules discussed above.]
Specialty is treated as having a security interest in the speakers, and this interest is unperfected. Accordingly, Specialty’s interest is junior to Bank’s perfected security interest, and it is therefore extinguished upon Bank’s foreclosure.
Although Specialty is the outright owner of the speakers, Article 9 treats Specialty as if its interest in the speakers were a purchase-money security interest in inventory. See UCC §§ 9-102(a)(72)(c), 9-103(d). So the question is whether Specialty’spurchase-money security interest in inventory has priority over Bank’s ordinary security interest in the speakers as inventory of Giant such that Specialty can recover the proceeds of the sale of the speakers.
On these facts, Bank’s interest clearly prevails. Bank perfected its interest by filing a financing statement, whereas Specialty’s interest is unperfected. Perfection of a purchase-money security interest in inventory would normally require Specialty to file a financing statement. See UCC § 9-310(a). There is no indication in the facts that Specialty took this step. Indeed, there is no hint that Specialty did anything to alert third parties to its interest, and the facts say explicitly that “as far as any third party can discern, the speakers are part of Giant’s own inventory.”
A perfected security interest in inventory has priority over an unperfected security interest in the same inventory, even if the unperfected interest is a purchase-money interest. UCC § 9-322(a)(2). This priority over the inventory extends to the proceeds of that inventory. See UCC 9-322(b)(1). Thus, Bank has priority over Specialty as to the proceeds of the sale of the speakers.
Specialty could have achieved priority over Bank by promptly filing a financing statement against Giant.
As noted above, Article 9 treats Specialty’s ownership of the speakers as if it were a purchase-money security interest. See UCC § 9-103(d). Specialty could have protected its interest in the speakers had it filed a financing statement to perfect that interest. Had Specialty perfected its interest before Bank, Specialty would have achieved priority. See § 9-322(a)(1). Moreover, because Specialty’s interest is treated as a “purchase-money security interest in inventory,” it could have prevailed over Bank even if it perfected after Bank perfected, so long as it (1) filed a financing statement against Giant by the time Giant received the speakers, and (2) sent a notification to all holders of conflicting security interests in Giant’s inventory explaining that Specialty was keeping a purchase money security interest in the consigned speakers.
[NOTE: Had Specialty achieved priority over Bank, Bank would technically still have had the right to foreclose on Specialty’s speakers (because any junior party is free to foreclose, see UCC §9-610(a)), but Specialty’s senior security interest would not be discharged by such a foreclosure. See UCC §§ 9-617(a)(3), 9-201(a). In other words, Specialty’s interest would attach to the proceeds of the sale. Moreover, Specialty’s interest would follow the speakers into the hands of anyone who bought them at Bank’s foreclosure sale, and Specialty would be able to take the speakers back from the buyer since they are, after all, Specialty’s property. See UCC §9-601(g).]
