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There is no way to get around it. Revised Article 9, which is now the law in all 50 states and the District of Columbia, is a difficult read. Consider, for a moment, the definition of “purchase money security interest.” Under former UCC � 9-107, the term was defined in five or six lines. In contrast, Revised � 9-103 takes over 50 lines to present the definition and parse through several issues that require an application of that definition. DAUNTING CROSS-REFERENCES The amount of cross-referencing within Revised Article 9 can also be daunting. Revised UCC � 9-324(b), which deals with purchase money priority in inventory collateral, is a cross-referencing extravaganza. The subsection opens with a double cross-reference — “Subject to subsection (c) and except as otherwise provided in subsection (g).” Then, in the body of the text of the rule, there are two more cross-references — this time not to subsections of � 9-324 but to other sections in Revised Article 9 — �� 9-327 and 9-330. Finally, the inventory purchase money priority rule is made subject to four conditions precedent. In addition, the more one delves into the revised Article, the more one runs the risk of seeing things that are not there. One of the authors worried that there might be some statutory significance to the way in which the very same 33 words were visually presented in Revised � 9-608(b) as compared to Revised � 9-615(e). Revised � 9-608(b) states in one sentence (without any subparagraphs) the following: (b) If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes, the debtor is not entitled to any surplus, and the obligor is not liable for any deficiency. In Revised � 9-615(e), though, these same words are presented in a different format: (e) If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes: (1) the debtor is not entitled to any surplus; and (2) the obligor is not liable for any deficiency. Upon listening to this worry, the other author of this column suggested that his colleague have a good night’s sleep and consider the issue again in the clear light of day. Given these examples, you might expect that the statutory resolution of priority disputes involving “double debtors” would be another drafting nightmare, with cross-reference piled upon cross-reference — much like the purchase money priority rule in Revised � 9-324(b). Revised � 9-325, however, resolves double-debtor priority disputes without much cross-referencing. Still many lawyers may find the resolution of these disputes in Revised � 9-325 as not “blinding in its clarity.” Before we analyze how the Revised Article 9 resolves double debtor priority disputes, it would be helpful to review the more ordinary type of priority dispute involving one common debtor. � TRANSACTION I — On June 5, Firstbank lends Z $500,000 secured by Z’s existing and after acquired equipment. On June 7, Firstbank files a financing statement in the appropriate office to perfect its security interest. On Nov. 2, Z borrows $300,000 from Secondbank, also securing Secondbank’s loan with an interest in its exiting and after acquired equipment. On Nov. 3, Secondbank perfects its security interest by filing in the appropriate office. On Dec. 5, Z defaults on its loan repayments owed both Firstbank and Secondbank. The equipment on hand at the time of default is worth only $200,000. As between these two conflicting security interests in the same collateral, Revised � 9-322(a)(1) gives priority to the secured party who is first either to file a financing statement or perfect its security interest. Firstbank was first to file (Firstbank filed on June 7 — Secondbank filed on Nov. 3) and was also first to perfect (Firstbank perfected on June 7 — Secondbank perfected on Nov. 3). Therefore, Firstbank takes priority over Secondbank with respect to Z’s equipment. DISPUTE II: ONE COMMON DEBTOR � TRANSACTION II — On June 6, Bank Z lends Z $500,000 secured by Z’s equipment and after acquired equipment. On that same day, Bank Z files a financing statement, perfecting its security interest in Z’s equipment. On Aug. 15, without Bank Z’s authorization to dispose of the collateral free of the security interest, Z sells its equipment to Q, a non-ordinary-course buyer. On Oct. 22, Q borrows $300,000 from Bank Q and gives Bank Q a security interest in the equipment Q bought from Z. The next day, Oct. 23, Bank Q files its financing statement to perfect its security interest in the equipment. When Z defaults on its $500,000 debt owed Bank Z, Bank Z claims a first interest in the equipment. Bank Q, however, disputes Bank Z’s priority. In TRANSACTION II, each secured party was granted a security interest in the same collateral but by a different debtor — Z gave Bank Z a security interest in the equipment and Q gave Bank Q a security interest in the same equipment, acquired by Q from Z. In other words, this priority dispute involves not only double secured parties, but double debtors. To resolve this dispute, start with the general rule of priority in Revised � 9-322(a). Under the first to file or perfect rule, Bank Z was the first to file or perfect, so Bank Z should take priority over Bank Q. Revised � 9-322(f) now comes into play. This subsection states that subsection (a) is subject to “the other provisions of this part.” Revised �9-325 — the “double debtor” section — is another provision of this part, part 3 of Article 9. Therefore, we must see if Revised � 9-325 would override the first in time rule of Revised � 9-322(a). Revised � 9-325 is a rule of subordination that applies to Bank Q. It subordinates Bank Q’s security interest when that security interest would have priority under � 9-322(a). In TRANSACTION II, however, Bank Q does not have priority under Revised � 9-322(a) because Bank Z filed first. Therefore Revised � 9-325 does not affect Bank Z’s priority in the equipment. This result is consistent with common law nemo dat principles. When Q bought the equipment from Z, Q did not buy free of Bank Z’s already perfected security interest in the equipment. Therefore, Q took subject to Bank Z’s perfected security interest. When Q subsequently gave Bank Q a security interest in the equipment, Q could only give Bank Q a security interest in whatever rights Q had in the collateral. Q’s rights in the collateral were subject to the rights of Bank Z. Therefore, Q granted Bank Q a security interest in rights in the collateral that were already subject to Bank Z’s security interest. TRANSACTION III � TRANSACTION III — On June 6, Z granted Bank Z a security interest in Z’s existing and after acquired equipment. On July I, Q granted Bank Q a security interest in Q’s existing and after acquired equipment. Bank Q filed a financing statement in the requisite office on Aug. 17. Bank Z did not file a financing statement until 10 days later, on Aug. 27. On Oct. 5, Z sells its equipment to Q. Bank Z did not authorize Z to dispose of the equipment collateral free of Bank Z’s security interest. Z defaults on its loan to Bank Z. Bank Q argues that because it had a security interest in Z’s equipment through Q’s after-acquired property clause and because it filed a financing statement before Bank Z, it should have priority in Z’s equipment now owned by Q. If we begin with the general rules of priority in Revised � 9-322(a), Bank Q was the first to file and perfect its security interest in the equipment. Revised � 9-322(f), though, makes the general priority rule in subsection (a) subject to, inter alia, Revised � 9-325′s rule of subordination. If the three conditions listed in Revised � 9-325(a) are satisfied, Bank Q’s priority in the equipment will be subordinated to Bank Z’s. First, debtor Q must have acquired the equipment collateral subject to a security interest in the same collateral “created by another person.” In TRANSACTION III, Q did acquire the collateral subject to a security interest created by another person — Z had conveyed a security interest to Bank Z. Under Revised �9-315(a)(1), when there is a disposition of collateral, a security interest will continue in the collateral unless the secured party “authorized the disposition free of the security interest.” According to the facts of TRANSACTION III, Bank Z did not authorize the equipment to be sold free of its security interest. Therefore, under Revised � 9-315(a)(1), Q bought the equipment collateral “subject to” the Bank Z – Z security interest. Since Q bought Z’s equipment, Q could not have been a buyer in ordinary course and take free of Bank Z’s security interest on this basis. As a non-ordinary course buyer, Q bought subject to Bank Z’s perfected security interest under � 9-317(b). Second, the security interest created by debtor Z must have been perfected when debtor Q acquired the collateral. Debtor Q acquired the collateral from debtor Z on Oct. 5. Bank Z, had perfected its security interest in the equipment on Aug. 27. Therefore Bank Z’s security interest was perfected when Q acquired the equipment from Z. Third, there must have been no period of time when Bank Z’s security interest was unperfected. This might occur, for example, if Bank Z’s filing had lapsed. Nothing like that occurred in TRANSACTION III, however. Since the three conditions are satisfied, Bank Q’s security interest in the collateral which had priority under the general first in time rule of Revised � 9-322(a) is subordinated to Bank Z’s security interest. TRANSACTION IV � TRANSACTION IV — Bank Z takes a security interest in Z’s existing and after-acquired equipment on June 6. Bank Z files a valid financing statement on the same day. On Aug. 15, Z offers to sell a piece of its equipment to Q who wishes to use it in its manufacturing plant. Bank Z, however, had not authorized Z to dispose of any of the equipment — let alone dispose of it free of a security interest. On Nov. 7, Q decides to buy the piece of equipment from Z. Q asks Bank Q if it would lend Q $50,000 to buy the piece of equipment from Z. Bank Q agrees to make the loan and Bank Q satisfies all the necessary statutory prerequisites for purchase money status. On Nov. 9, Q pays Z for the equipment and gives Bank Q a purchase money security interest in the piece of equipment bought with its loan. Bank Q files a financing statement on Nov. 11 — the same day on which Q receives possession of the piece of equipment from Z. A purchase money lender such as Bank Q is afforded enhanced rights under UCC Article 9. One of the most important of these enhanced rights is the purchase money lender’s right to “superpriority.” Under Revised � 9-322(a), in a dispute between two secured parties with conflicting perfected security interests in the same collateral, the party who first files or perfects its security interest has priority over the second in time creditor. Under Revised � 9-322(f), however, this general rule is made subject to Revised � 9-324. Revised �9-324(a) gives priority to a qualifyng purchase money security interest in equipment over a first in time ordinary security interest in that equipment. Therefore, as a qualifying purchase money lender, Bank Q takes priority in the piece of equipment bought with its money over Bank Z which claims the new equipment under its after acquired property clause. But now there is one more rule to apply. Revised � 9-325(b) subordinates a security interest like Bank Q’s that has priority under Revised � 9-324 if the three statutory conditions referred to above are satisfied. The conditions are satisfied. Q bought the collateral subject to the security interest created by Z pursuant to Revised �� 9-315(a) and 9-317(b). The Bank Z security interest was perfected before Q acquired the collateral and finally there was no period of time when the security interest was unperfected. Under the “double debtor” rule of Revised � 9-325, Bank Z therefore prevails over Bank Q. TRANSACTION V � TRANSACTION V — On June 6, Bank Z takes a security interest in Z’s existing equipment and after acquired equipment. On July 2, Bank Q takes a security interest in Q’s existing and after acquired equipment. Bank Q files a financing statement on July 10. On Aug. 15 — again without any authorization from Bank Z — Z sells a piece of its equipment to Q. At the time of the sale, Q has no knowledge of Bank Z’s security interest. On Sept. 5, Z defaults on its loan repayments to Bank Z and Bank Z claims priority in the piece of equipment Z sold to Q. Bank Q, however, disputes Bank Z’s priority. In TRANSACTION V, Bank Q has priority in the piece of equipment. Under Revised � 9-317(b), a non-ordinary course buyer of goods such as Q (Q is not a buyer in ordinary course because Q does not buy inventory from seller Z) buys free of a security interest in those goods “if the buyer gives value and receives delivery of the collateral without knowledge of the security interest … and before it is perfected.” This rule applies whether or not Bank Z authorized Z to dispose of the collateral free of the security interest. In TRANSACTION V — buyer Q bought and received delivery of the collateral from Z on Aug. 15. Since Bank Z’s security interest was never perfected, Q bought the equipment free from, not subject to, Bank Z’s security interest pursuant to Revised � 9-317(b). Therefore, because the conditions stated in Revised � 9-325(a)(1) and (2) were not satisfied, Revised � 9-325 would not apply. Therefore, the Bank Q — Bank Z priority dispute will be decided according to general Article 9 priority rules. Revised � 9-322(a)’s first-in-time rule is made subject to the other provisions of this part. Revised � 9-317(b) says that if its conditions are met (which they are), then buyer Q buys free of Bank Z’s security interest. Therefore Bank Q received Q’s rights in the collateral when Q conveyed Bank Q a security interest. Q had full rights in the collateral. Therefore, Bank Q had the only security interest in the collateral. One author of this column thinks that the analysis of these double debtor problems was not difficult. The other author is noncommital. Gerald T. McLaughlin is a professor of law at Loyola Law School in Los Angeles. Neil B. Cohen is a professor at Brooklyn Law School.

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