Secured Parties vs. Buyers

There are two problematic things about UCC Article 9 on the bar exam. Most people don't want it to show up, and it shows up.  An area that appears with some consistency deals with priority between a secured party and a buyer in the ordinary course of business.

First the easier case: a person who buys or leases collateral from a debtor generally has an interest in the collateral superior to a secured party who has an unperfected security interest in the collateral if the buyer or lessee without knowledge of the security interest gives value and receives delivery of the collateral. In other words, this is yet another situation in which a bona fide purchaser ("BFP") wins. There are certain types of collateral (for example "accounts") which cannot be delivered and so in those situations the delivery requirement is not applied.

Even an unperfected secured party may not be out of luck, though. If that party attaches a purchase-money security interest ("PMSI") in the debtor's collateral before the buyer or lessee pays value and receives delivery from the debtor, the unperfected interest will have priority over the buyer or lessee but only if that party perfects the interest by filing within 20 days after the debtor takes possession of the collateral.

Commonly tested is the priority between a buyer or lessee and a perfected security interest. Generally, a perfected security interest wins over the rights of a buyer or lessee who receives the collateral after the secured party has perfected his interest. But there are many exceptions. All of the following will allow a buyer or lessee to defeat even a perfected secured party.

--The secured party consents to a disposition of the collateral free of the security interest.

--A buyer or lessee in the ordinary course of business takes free of a perfected security interest unless the buyer knows that the sale or lease is in violation of the security interest. This is true even if the buyer knows that another party has a perfected security interest in the goods that they buyer is going to purchase. That alone will not prevent the buyer from having the status of a bonafide purchaser for purposes of Article 9.

--A consumer purchasing from a consumer has priority over a secured party who has a PMSI in consumer goods unless the purchaser knows of the security interest or a financing statement has been filed by the secured party.

--A buyer or lessee not in the ordinary course of business has priority over future advances or commitments to make future advances made by a secured party after the secured party learns of the purchase or lease as well as any future advances made more than 45 days after the purchase or lease.