7.2 UCC Article 9 Attachment, Perfection, and Priority

7.2 UCC Article 9 Attachment, Perfection, and Priority

REG Blueprint II.C continues: distinguish a secured creditor from an unsecured one, and apply the requirements to perfect a security interest. Article 9 is state commercial law (the uniform text AICPA tests after majority adoption). It is not the Bankruptcy Code. Chapter 7 distribution, the trustee's strong-arm power, and federal exemptions are 9.1 Bankruptcy Types and Discharge. Suretyship and unsecured collection tools are the prior section, 7.1.

A security interest is a consensual lien in personal property or fixtures that secures payment or performance. Until it attaches, it is not even enforceable against the debtor. Until it is perfected, it is weak against most third parties.

Attachment — §9-203

A security interest attaches when it becomes enforceable against the debtor with respect to the collateral. Three conditions, all required:

1. Value has been given. A loan, a binding commitment to lend, or a preexisting claim is value. The creditor need not have disbursed every dollar.
2. The debtor has rights in the collateral (or the power to transfer rights). You cannot grant a security interest in someone else's machine, except to the extent the debtor has voidable title or other transfer power the Code recognizes.
3. One of the evidentiary routes: the debtor has authenticated (signed or otherwise adopted) a security agreement that describes the collateral; or the secured party has possession pursuant to the security agreement (a pledge); or the secured party has control of the right kind of collateral (deposit accounts, investment property, electronic chattel paper, letter-of-credit rights) pursuant to the security agreement.

A financing statement is not a security agreement. Filing a UCC-1 without attachment perfects nothing. A description is sufficient if it reasonably identifies the collateral ("all equipment," "the 2024 Haas mill, serial …"). Super-generic "all assets" is acceptable in a financing statement; the security-agreement description REG expects is a category or a specific item.

After-acquired property / floating lien. §9-204 allows a security agreement to cover collateral the debtor acquires later. A floating lien on inventory and accounts is the standard working-capital pattern: today's agreement and today's filing reach tomorrow's stock. After-acquired consumer goods are limited: an after-acquired clause does not reach consumer goods acquired more than 10 days after the secured party gives value (except accessions).

Perfection

Perfection makes the interest effective against most subsequent creditors, buyers, and lien creditors. Attachment is a prerequisite; you perfect an attached interest.

Debtor name is the highest-yield filing fact. For a registered organization, use the name on the public organic record (articles), not a trade name. A seriously misleading name error makes the filing ineffective.

Certificate-of-title goods. Motor vehicles (and, in many states, boats) covered by a certificate of title are perfected by notation on the title, not by a central UCC filing — except inventory held by a dealer, which is perfected by filing like other inventory.

Priority

Unsecured creditor: no Article 9 interest. Must get a judgment and become a lien creditor, or take a security interest and attach.

Unperfected attached SI: enforceable against the debtor; loses to a perfected SI, to a lien creditor who becomes such before perfection, and to many buyers.

Perfected SI: generally good against later creditors.

First to file or perfect — §9-322(a)(1). Between conflicting perfected security interests, priority dates from the earlier of (i) the time of filing (even if the SI has not yet attached) or (ii) the time of perfection, provided there is no period thereafter when the SI is unperfected. A bank that files a financing statement in January and lends against after-acquired equipment in June has a January priority date once the June interest attaches.

PMSI superpriority — §9-324. A purchase-money security interest secures the price of the collateral, or value given to enable the debtor to acquire it when the value is in fact so used. A seller-financed machine and a third-party lender whose funds pay the seller are the two PMSI patterns.

• Non-inventory goods (equipment, and consumer goods if you are racing a filing): the PMSI has priority over a conflicting SI in the same goods if the PMSI is perfected when the debtor receives possession or within 20 days thereafter §9-324(a). No advance notice to prior filers is required.
• Inventory: the PMSI is perfected when the debtor receives possession (no 20-day grace) and the PMSI secured party sends an authenticated notification to holders of conflicting SIs who filed covering the same inventory before the PMSI financing statement was filed. The notification must be received within five years before the debtor gets the goods and must state that the sender expects to take a PMSI in the described inventory.

Buyers in ordinary course — §9-320(a). A buyer in ordinary course of business (buys goods from a person in the business of selling goods of that kind, in good faith, without knowledge that the sale violates another's rights) takes free of a security interest created by the buyer's seller, even if the SI is perfected and the buyer knows it exists. Knowledge of the security interest is not knowledge that the sale violates it. A buyer not in ordinary course generally takes subject to a perfected SI. Consumer-to-consumer sales of consumer goods: a buyer who buys without knowledge of the SI, for value, for personal use, takes free of an automatically perfected PMSI unless a financing statement was filed.

Default and repossession (REG level)

After default, the secured party may:

• Exercise self-help repossession if it can be done without breach of the peace (§9-609). Entering a closed garage over objection, or a threat of violence, is a breach of the peace; the creditor must then use judicial process.
• Dispose of the collateral in a commercially reasonable manner (§9-610) — public or private sale, commercially reasonable as to method, manner, time, place, and terms. Authenticated notice to the debtor (and other specified parties) is required unless the collateral is perishable or threatens to decline speedily.
• Apply proceeds to expenses, then the SI, then junior interests; surplus to the debtor; deficiency still owed unless the agreement or a consumer-goods rule cuts it off.
• Strict foreclosure: accept the collateral in full (and, outside consumer-goods full-satisfaction limits, sometimes partial) satisfaction with the required consents and notices.
• The debtor may redeem before disposal by paying the full obligation plus reasonable expenses.

A commercially unreasonable sale does not vaporize the debt; it creates a rebuttable presumption (or, in some consumer settings, a bar) on the deficiency.

Worked scenario: Bank files first; equipment lender takes a PMSI and files on day 10

Facts. On January 2, First Bank authenticates a security agreement with Metro Fab covering "all equipment now owned or hereafter acquired," gives a $400,000 revolving line, and files a financing statement covering equipment in Metro's state of organization. On August 1, Metro buys a CNC mill from EquipCo on credit. EquipCo retains a PMSI in the mill. Metro receives possession August 1. EquipCo files a financing statement covering the mill on August 11 (day 10). First Bank claims the mill as after-acquired equipment. No one sent notifications.

Analysis.

1. Bank attached in January to then-owned equipment and, under the after-acquired clause, attached to the mill when Metro acquired rights in it. Bank's financing statement was already on file, so Bank was perfected in the mill upon attachment. Bank's §9-322 date is January 2.
2. EquipCo attached when it gave value (the mill), Metro had rights, and the authenticated PMSI agreement described the mill. EquipCo perfected by filing on day 10.
3. Ordinary first-to-file-or-perfect would give Bank the mill. This is non-inventory goods. §9-324(a) gives a PMSI superpriority if perfected when the debtor receives possession or within 20 days. Day 10 is inside the window. EquipCo has priority in the mill.
4. If EquipCo had filed on day 25, the window would have closed and Bank would win.
5. If the mill had been inventory (a dealer-held machine), EquipCo would also have needed authenticated notification to Bank before Metro received possession. Filing on day 10, even within 20 days, would not have been enough. Notification is an inventory-PMSI requirement, not an equipment-PMSI requirement.
6. If a customer later bought a machine from Metro's showroom in ordinary course, that buyer would take free of a SI created by Metro as seller — the classic inventory-financer result — even if the buyer knew a bank had filed. BIOC does not strip a PMSI created by someone other than the seller in a sale that is not in the ordinary course of that seller's business.

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