Assignment 8: Automatic Perfection
(with an Introduction to the Purchase
Money Security Interest)
Reference: Understanding Secured
Transactions §§ 1.05, 7.01, 7.02
“Purchase Money” Financing
• Debtors often obtain financing to enable them
to acquire the item(s) in which they are
granting a security interest
– This is “purchase money” financing
• “Purchase money” status can be important
– For priority purposes (PMSI may get priority over
previously filed UCC-1 covering collateral)
– For perfection purposes
“Purchase Money” Definitions
• SI in goods is a “purchase-money SI” if goods
are “purchase-money collateral” [§ 9-103(b)(1)]
• Goods are “purchase-money collateral” if they
secure a “purchase-money obligation” with
respect to the collateral [§ 9-103(a)(1)]
• “Purchase-money obligation” is one:
– Incurred to seller, to secure all/part of the price of the
collateral, or
– Incurred to lender, in exchange for value given to
enable the debtor to acquire the collateral (and
actually so used by debtor) [§ 9-103(a)(2)]
Automatic Perfection
• PMSI in consumer goods is automatically
perfected upon attachment (no need for
secured party to make UCC-1 filing) [§ 9309(1)]
– Rationale 1: cost of filing would drive up price of
consumer goods
– Rationale 2: even without a UCC-1 filing, lenders
can anticipate that debtor may have obtained
consumer goods using PM credit
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• Carl H. Esbeck borrows
$20,000 from Putnam County
Bank to buy a guillotine
Problem 1
– He signs agreement granting
Bank a SI in (1) 1,000 shares of
Apple stock and (2) the guillotine
– PCB files a UCC-1, but it
mistakenly identifies the debtor
as “Carl Hesbeck”
• Does Bank have a perfected SI?
Problem 1 Analysis
• Q1: PCB appears to have a PMSI in guillotine
[§ 9-103(a), (b)], but not the Apple stock
– PCB loaned $20K to Esbeck to buy the guillotine
– Esbeck used that $20K to buy the guillotine
– Esbeck granted PCB a SI in the guillotine
• Q2: Is the guillotine “consumer goods” in the
hands of Esbeck?
Problem 1: Questions
• PMSI in consumer goods is automatically
perfected upon attachment, even if no UCC-1
filing covers the collateral [§ 9-309(1)]
• Answer to Problem 1 thus depends on 2
questions:
– Question 1: Does Bank have a PMSI?
– Question 2: Is the collateral “consumer goods”?
• If Esbeck acquired the guillotine for personal
use, it is “consumer goods” [§ 9-102(a)(23)],
and thus Bank’s PMSI in it was automatically
perfected when it attached [§ 9-309(1)]
– If so, the mistake in Esbeck’s name on UCC-1 is
irrelevant, b/c PMSI was automatically perfected
• If Esbeck’s primary use was for a business
purpose, the guillotine is “equipment”
– No automatic perfection; UCC-1 would be
necessary to perfect [§ 9-310(a)]
– Bank’s UCC-1 is ineffective (error in name was
seriously misleading) [§§ 9-502(a), 9-506(b)]
2
• Abrams buys a minivan from
Columbia Honda for personal use
• Abrams agrees to pay $25,000
sale price in 72 equal monthly
installments by contract stating
“Debtor hereby grants Columbia
Honda a PMSI in the collateral
[the minivan].”
• Is Columbia Honda’s SI in the
minivan automatically perfected
upon attachment?
• You sold a 60-inch TV to
Joe Smith for $1,000
– Smith paid with a check, but
it bounced
– You let Smith keep the TV if
(1) he paid by end of month,
with interest and (2) he
granted you a SI in the TV
– Smith signed an agreement to
this effect
• Do you have to file a UCC1 to perfect?
Synthesis
Problem
PMSIs and Titled Goods
• § 9-309(1) automatic perfection rule for PMSIs in
consumer goods does NOT apply if the collateral is
a titled vehicle (“Except as otherwise provided in
Section 9-311(b) with respect to consumer goods
that are subject to [certificate of title act]….)”
– Perfection requires compliance w/certificate of title act [§
9-311(a)]
– This makes sense, as 3d parties will look to title
certificate for relevant information
Problem 2
Problem 2
• Problem: at time Smith signed the security
agreement, Smith already had acquired
rights in the TV, which you originally sold
him on unsecured credit (by check)
– In that situation, is it proper to call the TV
“purchase money collateral” and to call the SI a
PMSI?
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§ 9-103, Official Comment 3
“The concept of ‘purchase-money security interest’
requires a close nexus between the acquisition of
collateral and the secured obligation. Thus, a
security interest does not qualify as a purchasemoney security interest if a debtor acquires property
on unsecured credit and subsequently creates the
security interest to secure the purchase price.”
Problem 2 Compared
• Question: Is Problem 2 different from the
previous example (where debtor bought
furniture “90 days same as cash”)? Is there an
argument for treating the secured party in
Problem 2 as having a PMSI?
• If so, what specific language in the UCC
supports that argument?
§ 9-103, Comment 3 Example
• January 1: X buys furniture from Dealer for
$5,000 on “90 days same as cash” basis
• April 1: X still hasn’t paid; offers to grant
Dealer a SI in the furniture if Dealer will give
X an additional 90 days to pay
– This SI would not be a PMSI, b/c it didn’t enable X
to acquire the furniture (X already owned rights in
the furniture)
Problem 2: Your Argument?
• Because Smith paid for the TV with a “bad check,” his
title in the TV was “voidable” [§ 2-403(1)(b)]
• Thus, you could “void” his title, and then agree to re-sell
the TV to him on a secured basis
– If so, the re-extension of credit would have enabled him to
re-acquire rights in the TV (after previous rights were
“voided”), so this would be a “purchase money obligation”
under § 9-103
• Note: This argument would not apply in the “90 days
same as cash” hypo (in that example, X’s title would not
have been “voidable” under § 2-403(1))
4
• Lambert buys a flat screen TV at
BestBuy, signing a contract to
pay in 24 monthly installments;
BestBuy retains PMSI in TV
Troupe
Hypo
– Contract: “Buyer warrants that he is
buying the goods for personal,
family, or household use”
– BestBuy doesn’t file a UCC-1
– But, Lambert places the TV in the
waiting room of his law office!
• Is BestBuy’s SI perfected?
• At one level, Troupe reasoning seems
problematic, if not wrong
– A 3rd party dealing with Lambert would believe that
the TV was equipment, not consumer goods
– Here, because the issue is perfection (3rd party
rights), why should a statement in the security
agreement control?
• Still, other decisions are consistent with Troupe
– Contrary result would potentially increase consumer
credit costs (additional secured party “due diligence”
would increase cost of consumer credit)
Troupe
• Court held that the secured party could rely on the
debtor’s representation, in security agreement, that
debtor was acquiring goods for personal use [p. 5]
– On this reasoning, TV is consumer goods, and Best Buy’s
PMSI is automatically perfected under § 9-309(1), even if
the representation turns out to have been false
• Is this a good result? Is there a persuasive
counterargument?
Purchase Money Security Interests
• Most PMSI transactions are what might be
called “one-to-one” transactions, e.g.,
– Purchase money secured party extends credit
for debtor to buy a specific asset (e.g., Seller of
TV extends credit to Buyer of TV), and
– Purchase money secured party takes SI in only
that asset (e.g., Seller takes SI in that TV)
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• In some cases, however, this is not true
• E.g., Problem 1: Esbeck takes out loan to buy a
guillotine and grants SI in the guillotine, but also in
Apple stock he already owns
• E.g., a security agreement may “cross-collateralize”
multiple loans
– Suppose that ABC, Inc. buys a bulldozer and a copier in
separate secured transactions
– Each time, ABC borrows the money for the purchase price of
each item, and signs a security agreement that says: “Debtor
hereby grants Bank a SI in [the bulldozer] [the copier], and
Debtor agrees that the collateral shall secure all sums owed to
Bank, presently owed or incurred in the future.”
“Transformation Rule”
• Prior to 2000, some courts held that if a SI in an
item of collateral also secured a debt other than the
purchase price of that collateral, the SI could not
be a PMSI [see, e.g., In re Parish]
– Rationale: PM status required “one-to-one” nexus
between debt and collateral; cross-collateralization
destroyed PM character of each individual transaction
• Transformation rule (if applied) could defeat
Secured Party’s ability to rely on automatic
perfection rule
• In ABC, Inc. example, this agreement
would “cross-collateralize” the two loans
– I.e., the copier would now secure repayment of
(a) the loan used to acquire the copier AND (b)
the loan used to acquire the bulldozer
– Likewise, the bulldozer would secure
repayment of both (a) the loan used to acquire it
AND (b) the loan used to acquire the copier
• What’s the advantage of such a clause?
“Dual Status Rule”: Pre-2000
• Other courts instead applied the “dual
status” rule
– Old § 9-107: “A security interest is a PMSI to
the extent that” it secures the purchase price
– Under the “dual status” rule, a SI can be both a
PMSI (to the extent of the unpaid balance of the
PM obligation) and a nonPMSI (to the extent it
secures repayment of nonPM obligations)
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“Dual Status Rule”
• Revised Article 9 adopted the “dual status”
rule [§§ 9-103(b)(1), 9-103(f)]
§ 9-103(f). In a transaction other than a consumergoods transaction, a purchase money security interest
does not lose its status as such, even if:
(1) the purchase money collateral also secures an
obligation that is not a purchase money obligation;
(2) collateral that is not purchase money collateral
also secures the purchase money obligation; or
(3) the purchase money obligation has been
renewed, refinanced, consolidated, or restructured.
• Note, however, that § 9-103(f) does not mandate that
the court apply the “dual status” rule in a
“consumer-goods transaction” [§ 9-102(a)(24)]
• § 9-103(h): in a “consumer-goods transaction,”
courts are free to apply “established approaches,”
which includes the transformation rule
– Thus, a court that had applied the transformation rule
prior to 2000 (as in Parish) could continue to do so in
consumer goods transactions
– In those states, a consumer lender whose documents
use cross-collateralization provisions could not rely
on automatic perfection (but would have to file to
perfect)
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