Priority of a Secured Party vs a Buyer of Collateral - Explained
How is a Security Interest Affected when Collateral is sold?
Written by Jason Gordon
Updated at April 6th, 2023
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What is the priority of buyers of collateral that is subject to a security interest?
Generally, a buyer of collateral subject to a security interest takes the property subject to that security interest. 9-315(a)(1) thru 320. That is, if a debtor sells collateral that is subject to a security interest, the security interest continues in the collateral following the sale to the buyer. 9-507(a). This is true for validly perfected security interests or if the buyer knows about the security interest at the time of purchase. If the security interest remains with the collateral, this means that the secured party can repossess the subject collateral in the event of default on the original loan or obligation.
Note: Repossessing goods from the purchaser of collateral subject to a security interest may require bringing a conversion action against the debtor in possession of the collateral.
Next Article: Protections of a Buyer in the Ordinary Course of Business Back to: SECURED TRANSACTIONS
What exceptions exist regarding the priority of buyers of collateral that is subject to a security interest?
The following exceptions apply to this rule:
Authorization of Secured Party - A primary exception to this rule is when the secured party authorizes the sale. A secured party's failure to object to the sale of the collateral may constitute authorization. Also, allowing prior sales of collateral without objecting may constitute an implied agreement authorizing the debtor to sell the collateral. 9-315(a)(1)
Buyers in the Ordinary Course of Business - A buyer in the ordinary course of business (BOCB) takes collateral free of any security interests created by the seller. This is true whether the security interest is perfected or no.
Consumers Purchasing Consumer Goods from Other Consumers - A purchaser of consumer goods from another consumer may take the goods free of an existing security interest. Two provisions protect consumers in this situation, UCC 9-320(b) and the Shelter Principle.
Each of the above rules protecting purchasers of collateral subject to a security interest is explained below.
Discussion Question
How do you feel about the principle that a purchaser of collateral subject to a security interest takes the goods subject to the security interest? Do you think the above-referenced exceptions to this rule are necessary? Why or why not? Are they adequate?
Practice Question
Mark purchases a piece of equipment from Iris. Mark has become concerned that the equipment was subject to a security interest when Iris sold it to him. What information will you need to know to determine whether Marks equipment is still subject to the security interest?
Related Topics
- Secured Transactions Law (Intro)
- What is a Security Interest?
- Collateral
- Pledge as Collateral
- Collateralize
- Cross Collateralization
- After-Acquired Collateral
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Unsecured Loan Definition
- Unencumbered Asset
- What is a Secured Creditor?
- Unsecured Creditor
- What are the benefits of security interests for creditors?
- Limited Recourse Debt
-
Uniform Commercial Code - Article 9
- What are the common types of security interest in real property (land)?
- What is a mortgage?
- How does a security interest protect the mortgage holder?
- Lis Pendens
- Deficiency Judgment
- What is a Deed of Trust or Security Deed?
- What is a Land Sale Contract?
- What is a security interest in personal property?
- How does one establish a security interest in personal property?
- What is Perfection of a security interest?
- What are the methods of perfecting a security interest in personal property?
- UCC-1 Statement
- How does one establish a security interest in real property (land)?
- Register of Deeds
- What is Automatic Perfection of a security interest?
- What is a Purchase Money Security Interest (PMSI) in consumer goods?
- What is a Purchase Money Grace Period for a PMSI in non-consumer goods?
- How does one continue perfection of a PMSI in non-consumer goods?
- What is Temporary Automatic Perfection in Proceeds from the sale of goods?
- How is a security interest created in Assignment of Accounts Receivable and Contract Rights?
- How does one perfect a security interest by Possession of the collateral?
- How does on perfect a security interest by Control of collateral?
- How does one perfect a security interest by Filing a Financing Statement?
- What authorization is required to file a financing statement?
- Where is the appropriate office to file a financing statement?
- Defeasance
- Continuation Statement
- What is Priority of a security interest?
- What role does perfection play in establishing the Priority of a secured party?
- What are the common conflicts arising as to priority of a security interest?
- What is the priority of parties secured by common law and statutory liens?
- Lien - Definition
- Blanket Lien Definition
- Unperfected Lien
- Possessory Lien
- Non-Possessory Lien
- Tax Lien
- Mechanics Lien Definition
- Construction Lien
- Cloud on Title
- What is the priority of a buyer of collateral that is subject to a security interest?
- What is required to be a buyer in the ordinary course of business?
- How does 9-320(b) protect consumers who purchase goods from other consumers?
- What is the Shelter Principle?
- What are the general Priority Rules for Conflicting security interests?
- Subordination Agreement
- Who has Priority in Proceeds from the sale of collateral?
- What is a secured party's priority in future advances to a debtor?
- What is the priority of a PMSI in goods (other than inventory and livestock)?
- What is the priority of a PMSI in inventory?
- What is the priority of conflicting PMSIs?
- What is the priority of security interests in fixtures?
- What is the scope of fixture priority rules?