Class 12 Secured Transactions, Fall, 2018 Priority: Purchase Money SIs 4/5/2019 Class 12 Secured Transactions, Fall, 2018 Priority: Purchase Money SIs Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2001-18 Randal C. Picker. All Rights Reserved.

4/5/2019 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.

9-103(a) (a) [Definitions.] In this section: 4/5/2019 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

4/5/2019 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.

9-103(b) (b) [Purchase-money security interest in goods.] 4/5/2019 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;

4/5/2019 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

4-23: Cross Collateralization: Equipment 4/5/2019 TTYN 4-23: Cross Collateralization: Equipment Std PMSI Status 3/3 $10K Eq 3/3 $10K Debt Ordinary SI Status 4/1 $10K Eq 4/1 $10K Debt Std PMSI Status “Debtor hereby grants a security interest in equipment, now owned or hereafter acquired, to secure all obligations, now owed or subsequently owed, of Debtor to Supplier.”

4-23: Cross Collateralization: Inventory 4/5/2019 TTYN 4-23: Cross Collateralization: Inventory Std PMSI Status 3/3 $10K Inv 3/3 $10K Debt Special PMSI Status: 9-103(b)(2) 4/1 $10K Inv 4/1 $10K Debt Std PMSI Status “Debtor hereby grants a security interest in inventory, now owned or hereafter acquired, to secure all obligations, now owed or subsequently owed, of Debtor to Supplier.”

Does Raytheon have priority in AR? 4/5/2019 MBank Alamo Howe Dupont < 1/10/83 SA: AR FS: AR Does Raytheon have priority in AR? < 1/10/83 SA: AR, INV FS: AR, INV > 1/10/83 Assignment of AR FS: AR Sale AR Customer Raytheon MBank

Understanding the Deal 4/5/2019 Understanding the Deal Raytheon Claims PMSI in AR Howe sells x-ray machine on credit to customer creating AR

Understanding the Deal 4/5/2019 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.”

Understanding the Deal 4/5/2019 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)

Understanding the Deal 4/5/2019 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

Understanding the Deal 4/5/2019 Understanding the Deal Couldn’t Raytheon have just sought subordinations from MBank and DuPont?

Alt Deal: Howe As Agent Howe Dupont Raytheon Customer M Bank 4/5/2019 Alt Deal: Howe As Agent Howe Dupont Makes Howe Agent Pay Commission Arranges Sale Guarantees AR Raytheon Customer M Bank Financed Sale AR

PMSIs and Consumers Debtor Bank Seller 4/5/2019 PMSIs and Consumers Debtor Bank 1/1: $ SA, FS: Collateral 2/1 Sale $, int pmt, pmt atty fees What is Seller’s status as to the purchase price? The interest obligation? The contingent debt for attorney’s fees? Does it matter whether this is a consumer-goods transaction (9-102(a)(24))? 2/6 FS: Collateral Seller

PMSI Consumer Definitions 9-102(a)(23): “Consumer goods” means goods that are used or bought for use primarily for personal, family, or household purposes. April 5, 2019

PMSI Consumer Definitions 9-102(a)(24): Consumer-goods transaction” means a consumer transaction in which: (A) an individual incurs an obligation primarily for personal, family, or household purposes; and (B) a security interest in consumer goods secures the obligation. April 5, 2019

Answer Non-Consumer-Goods Transaction Consumer-Goods Transaction 4/5/2019 Answer Non-Consumer-Goods Transaction New statute is clear that all of these charges are part of the purchase-money obligation under 9-103(a)(2); see comment 3 Consumer-Goods Transaction Left open under 9-103(f), (h)

3:1 Lends new $ to pay off 2/1 loan 4/5/2019 PMSIs and Refinancing Debtor Bank 1/1: $ SA, FS: Collateral 2/1: Sale $ SA, FA: Collateral 3:1 Lends new $ to pay off 2/1 loan Seller What is Seller’s status?

4/5/2019 9-103(f) (f) [No loss of status of purchase-money security interest in non-consumer-goods transaction.] In a transaction other than a consumer-goods 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;

4/5/2019 9-103(f) (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.

9-103(h) (h) [Non-consumer-goods transactions; no inference.] 4/5/2019 9-103(h) (h) [Non-consumer-goods transactions; no inference.] The limitation of the rules in subsections (e), (f), and (g) to transactions other than consumer-goods transactions is intended to leave to the court the determination of the proper rules in consumer-goods transactions.

4/5/2019 9-103(h) The court may not infer from that limitation the nature of the proper rule in consumer-goods transactions and may continue to apply established approaches.

Answer Non-consumer-goods transaction Consumer-goods transaction Refinancing doesn’t cause 3/1 loan to lose PMSI status (9-103(f)(3)) Consumer-goods transaction Answer open; see Billings April 5, 2019

Billings Factory Outlet Avco Is AVCO’s SI a PMSI? Financed Sale PMSI 4/5/2019 Billings The Billings Financed Sale PMSI Factory Outlet Refinancing: Cancel Note & SA New Note & SA Pre –Refinance Debt: $1087.86 After Refinancing: + $103.28 $89.61 for credit life and accident and health insurance $4.00 for a filing fee $9.67 for cash advanced to debtors Assignment Avco Is AVCO’s SI a PMSI?

4/5/2019 BC 522(f) (f)(1) Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is –

4/5/2019 BC 522(f) (B) a nonpossessory, nonpurchase-money security interest in any – (i) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;

BC 522(f) Household goods defined in BC 522(f)(4) 4/5/2019 BC 522(f) (ii) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; or (iii) professionally prescribed health aids for the debtor or a dependent of the debtor. Household goods defined in BC 522(f)(4)

Two Approaches Transformation Rule Dual Status Rule 4/5/2019 Two Approaches Transformation Rule Refinancing eliminates PMSI character Dual Status Rule Allows PMSI to maintain that character to extent that PMSI debt survives refinancing