Perfection and Priorities Professor McKinsey OBE 118, Section 3, Fall 2004 Tuesday we explored security interests from the perspective of the seller relative to the buyer. Today we look at the bigger picture, the reality that there are many other parties out there that might seek a claim in the same property.

2 Security Interests Buyer Seller Security Agreement, $$ Goods But what if another party claims a right against the goods?.

3 Perfection To protect against claims by other parties, the seller must “perfect” its security interest. “First in time, first in right” is an old adage that often is accurate in the world of property rights. Keep this in mind. Usually, to perfect a claim, the secured party must file a financing statement.

4 Security Agreements Buyer Seller Security Agreement, $$ Goods

5 Perfection by Filing Financing Statement: –Name of debtor –Name of secured party –Identifies the collateral Filed with correct governmental office: –Often county office for most goods – Sometimes state office for special goods –Must look at specific state laws where resident lives or organization has executive office

6 Perfection by Possession It works. Morale? Always physically inspect property you are about use as collateral to loan you are going to make.

7 Security Agreements Buyer Seller Security Agreement, $$ Goods Government Financing Statement Third Party Notice

8 Perfection: Consumer Goods Purchase Money Security Interests (PMSI’s) automatically perfect in consumer goods (no filing required) What does this mean? Morale? Never let consumer goods already held by the consumer be used for collateral when loaning money unless they can show they paid cash for it.

9 Perfected Security Interests Good against all the world (from that point on) except against a buyer who buys the goods from a seller who routinely deals in such goods and who created the security interest. Buyer in Ordinary Course of Business (BIOC)- normally means buying in good faith from a seller who routinely deals in such goods, but good faith drops out for this exception, the buyer can even know of the security interest. Morale? Don’t loan money on inventory either.

10 Perfected Security Interests A security interest allows you to take possession of the collateral from the buyer and dispose of it (except for the inventory exception). A perfected security interest allows you to ignore later claims by other parties and first pay your claims. A perfected security interest allows you to take possession from another, later “owner” of the goods.

11 Priority Book spells it out real well. Perfection trumps over non-perfection First in time…. –First to perfect if both perfected –First to “attach” if none were perfected. Review: Main answer: