Class 14Secured Transactions, Fall, 2014

Priority: Purchase Money SIs

Randal C. PickerJames Parker Hall Distinguished Service Professor of Law

The Law School

The University of Chicago773.702.0864/r-picker@uchicago.eduCopyright © 2001-14 Randal C. Picker. All Rights Reserved.

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F9-107 A security interest is a “purchase money security interest”

to the extent that it is (a) taken or retained by the seller of the collateral to secure

all or part of its price; or (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.

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9-103(a) (a) [Definitions.] In this section:

(1) “purchase-money collateral” means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and

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9-103(a) (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.

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9-103(b) (b) [Purchase-money security interest in goods.]

A security interest in goods is a purchase-money security interest:

(1) to the extent that the goods are purchase-money collateral with respect to that security interest;

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9-103(b) (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

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9-103(b) (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.

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9-103(e) (e) [Application of payment in non-consumer-goods

transaction.] 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:

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9-103(e) (1) in accordance with any reasonable method of application

to which the parties agree; (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

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9-103(e) (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.

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9-324(a): Priority of PMSI (a) [General rule: purchase-money priority.]

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,

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9-324(a): Priority of PMSI if the purchase-money security interest is perfected when

the debtor receives possession of the collateral or within 20 days thereafter.

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9-324(b): Inventory PMSI Priority (b) [Inventory purchase-money priority.]

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

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9-324(b): Inventory PMSI Priority identifiable cash proceeds are received on or before the

delivery of the inventory to a buyer, if: (1) the purchase-money security interest is perfected when

the debtor receives possession of the inventory; (2) the purchase-money secured party sends an authenticated

notification to the holder of the conflicting security interest;

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9-324(b): Inventory PMSI Priority (3) the holder of the conflicting security interest receives the

notification within five years before the debtor receives possession of the inventory; and

(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.

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4-12: PMSIs and Current Assets

BankDebtor

Supplier

1/1SA & FS: EQ, Inv,PR and AA Prop

3/1: S sells Inv to DSA: InvFS: Inv

3/2: Notice

2/1Debtor sells Inv

Bank’s SI is cutoff

3/2: What are the respective rights of Bank and Supplier?

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4-12: Answer

Need to be sensitive to timing requirements of 9-324(b)

For PMSI status: Need to be perfected when D receives possession

of inventory (9-324(b)(1)) Notice must be given to competing SI holder

before D takes possession (9-324(b)(2,3))

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Better Structure

BankDebtor

Supplier

1/1SA & FS: EQ, Inv,PR and AA Prop

3/3: SA: Inv

S sells Inv to D

3/1: Notice

2/1Debtor sells Inv

Bank’s SI is cutoff3/2

FS: Inv

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4-13: PMSIs and Categorization of the Collateral (1/2)

BankAccountant

Seller

2/1SA & FS: INV, EQ,

AR, GITO & TAA

3/1Computer SaleSA: Computer

3/6: What are the respective rights of Bank and Seller?

3/6FS: Computer

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4-13: Answer

Answer Key is classifying the collateral given different

notice rules for inventory (9-324(b)) and other goods (9-324(a))

Computer will be equipment in Accountant’s hands (9-102(a)(33))

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4-13: Answer

Equipment is residuals category for goods 20 days after possession to perfect and no notice

required Seller has good PMSI and will have priority

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4-13: PMSIs and Categorization of the Collateral (2/2)

BankRetailer

Mfg

2/1SA & FS: INV, EQ,

AR, GITO & TAA

3/1Computer SaleSA: Computer

3/6: What are the respective rights of Bank and Seller?

3/6FS: Computer

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4-13: Answer

Answer Computer is inventory in Retailer’s hands Mfg perfected after R received possession, in

violation of 9-324(b)(1) M did not give notice to Bank as required by 9-

324(b)(2,3) M has lost PMSI status M perfected, but junior to Bank under 9-322(a)(1)

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4-14: PMSIs and Multiple Debts

BankDebtor

Seller

1/1SA: Equipment2/1

Copy Mach Sale$, int pmt,

pmt atty fees

Assume the copier is equipment in Debtor’s hands

2/6FS: Copy Mach

What is Seller’s status as to the purchase price? The interest obligation? The contingent debt for attorney’s fees?

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4-14: Answer

Not completely clear under old statute New statute is clear that all of these charges

are part of the purchase-money obligation under 9-103(a)(2); see comment 3

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4-15: PMSIs and The Date of Possession

Debtor Seller

1/1: 3 month true lease for computer

4/1: Financed SaleSA: ComputerFS: Computer

4/1 Does Seller have a PMSI?

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4-15: Answer

Answer Key here is that statute requires perfection within

20 days of date of taking possession of the collateral

Collateral is defined as property subject to a security interest (9-102(a)(12))

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4-15: Answer

Not collateral until loan was made on 4/1, so should be OK

Do note D took possession of the computer on 1/1

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4‑16: PMSIs, Defective Notice and Circular Priority

Bank

Debtor

1/1SA: InventoryFS: Inventory

2/1SA: InventoryFS: Inventory

Creditco

Supplier

2/3: Inv SaleSA: InvFS: Inv

Filed before Delivery

2/2: Notice

What are the relative priorities of Bank, Creditco, and Supplier?

Notice

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4‑16: Answer

Answer Bank > Creditco: 9-322(a)(1) Creditco > Supplier: 9-322(a)(1) Supplier > Bank: 9-324(b) Notice: condition good as to one and not the other

introduces circular priority possibility

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MBank Alamo

Howe Dupont

MBank RaytheonCustomer

< 1/10/83SA: AR, INVFS: AR, INV Sale AR

< 1/10/83SA: ARFS: AR

> 1/10/83Assignment of AR

FS: AR

Does Raytheon have priority in AR?

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Understanding the Deal Raytheon Claims PMSI in AR

Howe sells x-ray machine on credit to customer creating AR

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Understanding the Deal Raytheon says its extension of credit enable Howe to

acquire AR: “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.”

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Understanding the Deal Why didn’t Raytheon claim PMSI priority in inventory in

Howe’s hands? Answer

Failed to give the notice required under 9-324(b)

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Understanding the Deal Suppose Raytheon had given the notice: What result? Answer

Note that priority in inventory does not extend to priority in the AR as proceeds of the inventory (9-324(b))

Need to track the progress of the collateral and possible changes in priority

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Understanding the Deal Couldn’t Raytheon have just sought subordinations from

MBank and DuPont?

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Alt Deal: Howe As Agent

Howe Dupont

M BankRaytheonCustomer

Makes HoweAgent

Arranges Sale

Financed SaleAR

PayCommission

GuaranteesAR