After-Acquired Equipment, a PMSI Oven, and Competing Filings
On January 5, Lena Ortiz, a Minnesota sole proprietor, borrows $50,000 from First Bank and signs a security agreement granting First Bank a security interest in 'all equipment now owned or hereafter acquired' and 'all inventory.' First Bank files a financing statement on January 10 listing the debtor as 'Lena Ortiz'; her driver's license reads 'Lena M. Ortiz.' On February 1, Lena buys a $30,000 commercial oven from OvenCo on credit. OvenCo takes a purchase-money security interest in the oven, delivers it on February 3, and files its financing statement on February 20. On March 1, Lena borrows $20,000 from Second Bank, granting Second Bank a security interest in the same equipment; Second Bank files on March 5. Lena defaults on all three obligations. First Bank claims the oven under its after-acquired property clause; OvenCo claims PMSI priority; Second Bank claims its later filing still beats First Bank as to the oven.
1. Did First Bank attach and perfect its security interest in the oven? Does the name discrepancy matter?
Read the worked answer
First Bank likely attached and perfected its interest in the oven. Attachment requires value given by the secured party, the debtor's rights in the collateral, and a security agreement describing the collateral. First Bank gave $50,000, Lena had rights in the oven when she bought it, and the security agreement covers after-acquired equipment. Under UCC 9-204, an after-acquired property clause reaches equipment Lena acquired within the agreement's scope. Perfection occurred by filing. The name discrepancy is probably not fatal. For an individual debtor, the financing statement must use the debtor's individual name, but a minor error is ineffective only if it makes the filing seriously misleading. 'Lena Ortiz' versus 'Lena M. Ortiz' is unlikely to be seriously misleading because a standard search under the correct legal name would ordinarily still disclose the filing. First Bank therefore has a perfected security interest in the oven, though it is junior to a qualifying PMSI.
2. Who has priority in the oven between First Bank and OvenCo?
Read the worked answer
OvenCo likely has priority. OvenCo took a purchase-money security interest because it gave value to enable Lena to acquire the oven and took the interest in the oven itself. A PMSI in equipment has priority over an earlier-perfected security interest if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter. OvenCo delivered the oven on February 3 and filed on February 20, which is 17 days later and within the 20-day window. Its PMSI therefore primes First Bank's earlier after-acquired property interest in the oven. First Bank remains perfected in other equipment, but as to this oven its interest is subordinate to OvenCo's purchase-money interest.
3. What are Second Bank's rights against First Bank and OvenCo?
Read the worked answer
Second Bank is junior to both First Bank and OvenCo as to the oven. Second Bank filed on March 5, after First Bank's January 10 filing, and Second Bank does not have a purchase-money security interest. First-in-time filing generally gives First Bank priority over Second Bank as to the equipment covered by First Bank's after-acquired property clause. OvenCo, however, has a PMSI in the oven with priority over both earlier and later filers because it perfected within 20 days after Lena received possession. Second Bank's argument that its later filing beats First Bank 'as to the oven' confuses the PMSI rule with ordinary priority. Second Bank may have rights in other equipment, but its interest is subordinate to First Bank's earlier filing and to OvenCo's PMSI in the oven.