SECURED TRANSACTIONS — ANNOTATED MODEL ESSAY
This essay models a high-scoring response to a UCC Article 9 question covering attachment, perfection (including a PMSI), and competing-creditor priority. Read the black text as your timed answer; the gold boxes explain what each move earns.
Delta Diner, a restaurant, needed financing. On March 1, Bank loaned Delta $80,000 and took a security interest in "all of Delta's present and after-acquired equipment and inventory." Delta signed a security agreement that day; Bank filed a financing statement covering "all equipment and inventory" on March 3.
On April 10, Oven Co. sold Delta a commercial oven on credit, retaining a security interest in the oven to secure its $12,000 price. Delta signed Oven Co.'s security agreement and received the oven the same day. Oven Co. filed a financing statement covering the oven on April 25.
On May 1, Delta sold a used freezer (part of its equipment) to Buyer, a neighboring cafe, for cash; Buyer knew Delta had given Bank a security interest in its equipment. Delta then defaulted on both loans. Bank, Oven Co., and Buyer all claim rights in the relevant collateral.
(1) Did Bank's security interest attach and become perfected? (2) As between Bank and Oven Co., who has priority in the oven? (3) Does Buyer take the freezer free of Bank's security interest?
Model Answer — with annotations
Black text is the answer you could realistically write under timed conditions. The gold boxes explain why each move earns points.
I. Attachment and Perfection of Bank's Security Interest
A security interest attaches and becomes enforceable when three requirements are met: (i) value has been given; (ii) the debtor has rights in the collateral; and (iii) the debtor has authenticated a security agreement describing the collateral (or the secured party has possession or control). Here, Bank gave value (the $80,000 loan), Delta had rights in its equipment and inventory, and Delta signed a security agreement describing "all present and after-acquired equipment and inventory." All three elements are satisfied, so Bank's interest attached on March 1.
An after-acquired property clause is enforceable for equipment and inventory, so Bank's interest reaches collateral Delta acquires later. The collateral description by type ("equipment and inventory") is sufficient under Article 9, which permits description by UCC category for non-consumer collateral.
Perfection of a security interest in equipment and inventory is accomplished by filing a financing statement that provides the debtor's name, the secured party's name, and an indication of the collateral. Bank filed on March 3 covering "all equipment and inventory," which adequately indicates the collateral. Bank's interest was therefore perfected by filing as of March 3.
II. Bank v. Oven Co. — Priority in the Oven (PMSI)
The general priority rule is first to file or perfect. Bank filed March 3 and Oven Co. filed April 25, so Bank would win under the general rule and its after-acquired clause would otherwise reach the oven. But a purchase-money security interest in equipment has priority over a conflicting interest in the same goods if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter.
Oven Co. has a PMSI: it sold the oven and retained a security interest to secure the oven's purchase price. The oven is equipment (used in Delta's restaurant business). Delta received the oven on April 10, and Oven Co. filed on April 25 — 15 days later, within the 20-day grace period for a PMSI in equipment. Oven Co.'s PMSI is therefore perfected within the grace period and takes priority over Bank's earlier-filed interest in the oven, even though Bank filed first and has an after-acquired clause.
Note that the equipment 20-day grace period applies here; had the oven been inventory, Oven Co. would have needed to perfect before the debtor received possession and to send authenticated notice to Bank. Because the oven is equipment, only the 20-day rule applies and no advance notice was required.
III. Buyer's Rights in the Freezer
A buyer in the ordinary course of business takes free of a security interest created by the seller, even if perfected and even if the buyer knows of it, provided the buyer buys in good faith, without knowledge that the sale violates another's rights, and from a seller in the business of selling goods of that kind. The freezer, however, was equipment in Delta's hands, and Delta — a restaurant — is not in the business of selling freezers. A casual sale of used business equipment does not make Buyer a buyer in ordinary course.
Because Buyer is not a buyer in ordinary course, the relevant rule is the buyer-not-in-ordinary-course rule: such a buyer takes free of a security interest only if the buyer gives value and receives delivery without knowledge of the security interest and before it is perfected. Here, Bank's interest was already perfected by filing (March 3) before the May 1 sale, and Buyer in fact knew of Bank's security interest. Buyer therefore takes the freezer subject to Bank's perfected security interest, and Bank may repossess it on default.
- Walks the three attachment elements before perfection, and validates the after-acquired clause and by-type description.
- States the first-to-file default, then correctly applies the PMSI equipment superpriority with explicit date arithmetic inside the 20-day grace period.
- Distinguishes the stricter inventory-PMSI requirements (advance perfection plus notice) to show why they do not control.
- Correctly rejects buyer-in-ordinary-course status because the seller does not deal in goods of that kind.
- Applies the buyer-not-in-ordinary-course rule, using prior perfection and Buyer's knowledge to keep the freezer subject to Bank's lien.
- Pins concrete dates throughout so each priority contest is resolved on the timeline, not by assertion.
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