Security Interests Flashcards
(3 cards)
Bank v. Finance Company
As between the bank and the finance company, the bank has the superior claim to the business’ equipment. The issue is which secured party has priority over the other due to timing in attachment and perfection of a valid security interest on the business’ equipment.
Secured transactions are governed under Article 9 of the U.C.C. In order to fall under Article 9’s provisions, the transaction must give rise to a security interest in a party. In order to be given superior rights, a creditor must be a secured party and generally whoever perfects the security interest first has priority over junior secured
parties who perfected later. In order to have attachment the following must be present: (1) an intent of both parties to give a security interest in collateral to the creditor which can generally be done by the debtor providing a security agreement, or by possession or control; (2) the creditor must give value to the debtor (usually an
advance or a loan; and (3) the debtor must have rights in the collateral (this is usually accomplished by the debtor retaining value in the goods). Here both parties have attachment and both bank and finance company are secured parties.
Priority
If there are two or more secured parties who claim a security interest in a piece of collateral, generally the perfected party has priority. If both parties have perfected, then the first to perfect has priority. While attachment gives the secured party rights in the collateral as against the debtor, perfection gives the world notice that the secured party has rights in the collateral. There are several ways to perfect depending upon what the collateral is; the most common way to perfect is to file a financing statement with the appropriate state office, usually the secretary of state.
There are formalities required when filing so that filing the financing statement is not seriously misleading and that third parties can have notice that a secured party has an interest. Here, it seems both parties went through appropriate means in which to file a financing statement. Bank filed a financing statement on March 1 and financing company filed a financing statement on March 15. However, perfection can never come before attachment. But, once attachment is achieved, the perfection date can relate back to when the financing statement was filed. Here, it was filed on March 1, bank’s security interest attached March 21, and so the date
will relate back to March 1. Because Bank was the first to file its perfected security interest, it has priority in the
business’ equipment over financing company.
Equipment sold to Competitor
The claims of the bank and finance company to the business’ equipment continue in the item of equipment sold to the competitor. The issue is whether the competitor bought the equipment free and clear of the security interest or whether the security interest remains in the equipment despite the sale.
As a general matter, secured parties not only have a security interest in the collateral at the time the interest attached, but the secured party will have an interest in any proceeds from the collateral. For example, if the collateral was inventory and the debtor sold the inventory in the regular course of business, the secured party
generally, would no longer have a security interest in the inventory in the hands of the buyer but would have a security interest in the proceeds in the hands of the seller-debtor. However, the manufacturing business does not seem to be a business that usually sells its equipment. In fact, equipment is a type of collateral
that is used primarily for the business. Generally, a debtor cannot sell the collateral free and clear of the security interest, unless it is contemplated by the parties, it is a consumer good and sold to another consumer having no notice of a security interest
(garage sale), or it is a buyer in the ordinary course of business (usually an inventory situation). Here, the manufacturing business falls into none of these categories. The fact that the competitor did not know of the prior transactions with the bank and the finance company and acted in good faith, does not protect it from the security interest that the bank and finance company have in the equipment.
