Question/Answer for Assignment 7

1. Can a transaction involve a security interest that is both purchase money and nonpurchase money? Suppose that in Problem 1, Esbeck had purchased the guillotine for personal use, such that PCB had a purchase-money security interest in consumer goods that was automatically perfected? Does that mean that its security interest in the stock is also automatically perfected? How can the security interest be both a PMSI and a nonPMSI?

Keep in mind that a security agreement creates a security interest with respect to each item of collateral that is covered by the security agreement. Thus, in Problem 1, the agreement between PCB and Esbeck creates two security agreements: one in the guillotine, and another in the Apple stock.

Thus, there is no problem with saying that PCB's security interest in the guillotine is a PMSI — which it clearly is, since PCB loaned him the money to acquire it, he used the money to acquire it, and he granted PCB a security interest in it — while at the same time saying that PCB's security interest in the stock is not a PMSI (it isn't, since Esbeck already owned the stock and the loan thus did not enable him to acquire the stock, meaning the stock cannot be "purchase money collateral").

If the guillotine had been consumer goods in Esbeck's hands, then PCB's PMSI in the guillotine would've been automatically perfected under § 9-309(1). The fact that PCB filed its financing statement under the wrong name would've been irrelevant as to PCB's PMSI in the guillotine, since no filing was needed. However, it would be critical as to PCB's interest in the stock; because that was not a PMSI, automatic perfection is not available; PCB would have to perfect its security interest in the stock in some other method, and in Problem 1 its filed financing statement would not be sufficient because of the mistake in the Debtor's name. Thus, unless PCB does something else to perfect its interest in the stock, that SI is unperfected.

2. Is the stock in Problem 1 even consumer goods?

No, technically, it isn't, even if Esbeck acquired it for personal, family, or household purposes. The stock is instead categorized by Article 9 as "investment property." But the point in Problem 1 is still the same; Esbeck already owned the stock, and thus the security interest in the stock is not a PMSI.

3. Suppose Bank loans Debtor $1,000 to buy a lawn mower and Debtor agrees to grant the Bank a security interest in the mower, signing a security agreement covering the mower Debtor plans to purchase (assume the description is sufficient). On the way to the store, Debtor runs into a friend whom Debtor owes $1,000, and uses the loan proceeds to pay the friend. Debtor then takes $1,000 out of his savings account to buy the mower. In this case, am I correct that Bank does not have a PMSI?

That's right. The obligation is not a "purchase money obligation" because even though Bank may have loaned Debtor the money to enable Debtor to acquire the mower, Debtor did not actually use the loan proceeds to acquire the mower. Thus, the obligation is not a purchase money obligation, which means the mower is not purchase money collateral, which means Bank's security interest is not a PMSI (although it is a valid SI). Thus, even if the mower is consumer goods in the hands of the Debtor, Bank would have to file a financing statement for this interest to be perfected.

Following up: So how would the Bank prevent this from happening?

Rather than just give the Debtor $1,000 and trust the Debtor, the Bank could issue a check to Debtor, jointly payable to the Debtor and to the store from which Debtor is purchasing the mower. If the check is jointly payable to Debtor and the store owner, the check can't be cashed or cleared without the cooperation of the store owner, which the store owner won't provide unless the store owner is getting the money (in exchange for the mower). This ensures that the loan proceeds are actually used by the Debtor to acquire the intended purchase money collateral.

One more follow-up: Can you have multiple PMSIs in the same item? What if Bank had loaned Debtor $1,000, but the mower cost $1,200 and Store extended credit for the additional $200 and Debtor granted Store a security interest to secure that additional $200? What happens then?

In this situation, both Bank and Store would have PMSIs; both obligations are "purchase money obligations." In this situation, section 9-324(g) would give priority to the purchase money seller (Store) over the purchase money lender (Bank). We'll discuss this situation more in a later assignment on priority.