Editor’s note: Section 4 of PL 14-34 enacted a new chapter 10 entitled The Secured Transactions Act. The word “The” has been removed as unnecessary and to comport with standard code formatting.
SUBCHAPTER II
Perfection and Priority of Security Interests
SECTIONS
§ 1012. Perfection of security interest.
§ 1013. Continuity of perfection.
§ 1014. Priority among security interests in the same collateral.
§ 1015. Priority of lien holder.
§ 1016. Purchasers of collateral.
§ 1017. Lessees of collateral.
§ 1018. Disposition of collateral and proceeds.
§ 1019. Priority of purchase money security interest in goods.
§ 1020. Priority of purchase money security interest in inventory or livestock.
§ 1021. Priority of lien arising by operation of law.
§ 1022. Fixtures.
§ 1023. Crops.
§ 1024. Accessions.
§ 1025. Commingled goods.
§ 1026. Purchase of chattel paper and instruments.
§ 1027. Control of deposit account.
§ 1028. Priority of conflicting security interests in deposit accounts.
§ 1029. Transfers of money and funds from deposit accounts.
§ 1030. Right of recoupment or setoff against deposit account.
§ 1031. Inter-bank transactions.
Editor’s notes: PL 14-34 § 17 created this subchapter as subchapter 2. This subchapter entitled Perfection and Priority of Security Interest is redesignated as subchapter II for format consistency.
(1) Means of perfection. A security interest is perfected when it has attached to the collateral and a means of perfection has been completed. There are four means of perfecting a security interest:
(a) the filing of a notice in the filing office;
(b) perfection upon attachment of the security interest to collateral, without further action;
(c) possession of the collateral by the secured party; and
(d) control of the collateral by the secured party.
(2) Perfection by filing of notice. A notice must be filed in the filing office to perfect a security interest, unless this section provides otherwise.
(3) Perfection by attachment. The following security interests are perfected when they attach to the collateral and without the filing of a notice:
(a) a purchase money security interest in consumer goods;
(b) a security interest in proceeds, if the underlying security interest is perfected;
(c) an assignment for the benefit of all creditors of the transferor and subsequent transfers by the assignee thereunder.
(4) Perfection by possession.
(a) A security interest in goods, instruments, documents, or chattel paper may be perfected by the secured party’s taking possession, and without filing a notice.
(b) A security interest in money may be perfected only by the secured party’s taking possession of the money, except for cash proceeds.
(c) A security interest is perfected by possession from the time possession is taken and continues only so long as possession is retained.
(d) A security interest perfected by possession under this subsection may also be perfected by filing a notice before, during, or after a period of possession by a secured party.
(5) Perfection by control of collateral. A security interest in a deposit account may be perfected by the secured party’s taking control of the deposit account, as provided in section 1027 of this chapter and without filing a notice.
(6) Bailment. While goods are in the possession of a bailee that has issued a document covering the goods, a security interest in the goods may be perfected by perfecting a security interest in the document. Any security interest in the goods perfected by filing a notice during the period that goods are in the possession of the bailee is subordinate to a security interest perfected in the document.
(7) Guarantees. Perfection of a security interest in collateral also perfects a security interest in a guarantee supporting the collateral. The filing of a notice is not necessary to perfect a security interest in a guarantee.
(8) Right to payment secured by real property mortgage. Perfection of a security interest in a right to payment or performance also perfects a security interest in a mortgage on real property securing the right to payment.
(9) Property subject to a treaty. The filing of a notice is not necessary to perfect a security interest in property subject to a treaty under which the requirements for perfecting a security interest vary from the requirements of this chapter. Compliance with the requirements of the treaty to perfect a security interest is equivalent to the filing of a notice under this chapter.
(1) A security interest is perfected continuously if it is first perfected in one manner and later perfected in another manner, without a period when it is not perfected.
(2) If a secured party assigns a perfected security interest, a notice need not be filed under this chapter to continue perfection of the security interest against creditors of the debtor, transferees from the debtor, and lien holders.
(1) Security interests in the same collateral have priority according to time of filing of a notice or perfection, except as otherwise provided in this chapter.
(2) Priority is measured from the time the first notice is filed covering the collateral, or the time the security interest is first perfected, whichever is earlier, if there is no time after the first time of filing or perfection at which the notice was ineffective or the continuity of perfection was interrupted.
(3) The first security interest to attach to collateral has priority among security interests for which no effective notice covers the collateral and for which there is no perfection.
(4) A date of filing or perfection as to collateral is deemed to be the date of filing or perfection of a security interest in proceeds.
A security interest has priority over the rights of a lien holder unless a notice of the rights of the lien holder is filed in accordance with this chapter:
(1) before the security interest is perfected; and
(2) before a notice covering the collateral is filed.
(1) Generally. A purchaser takes collateral free of a security interest if the purchaser gives value for the collateral without actual or constructive knowledge of the security interest and before it is perfected. If the collateral is tangible, the purchaser must also take delivery of the collateral without actual or constructive knowledge of the security interest and before it is perfected.
(2) Buyer in the ordinary course of business. Notwithstanding subsection (1) of this section, a buyer in the ordinary course of business takes goods free of a security interest in the goods, even if the security interest is perfected and even if the buyer has actual or constructive knowledge of its existence.
(3) Purchaser of consumer goods. Notwithstanding subsections (1) and (2) of this section, a buyer of goods that are consumer goods of the seller takes the goods free of a security interest whether or not the security interest is perfected, if the person buys and takes delivery of the goods without actual or constructive knowledge of the security interest.
(4) Purchaser of a motor vehicle. Notwithstanding subsections (1) and (3) of this section, a person who buys a motor vehicle or who takes a security interest in a motor vehicle, other than a buyer in the ordinary course of business, takes the motor vehicle or security interest free of a prior security interest only if:
(a) the person bought without actual knowledge of the security interest; and
(b) the motor vehicle was not described, or was incorrectly described, by serial number in a filed notice.
(5) Purchaser of farm products. Notwithstanding any other provision of this section, a person who buys farm products takes the farm products free of any security interest.
(1) Generally. A lessee of goods takes its leasehold interest free of a security interest in the goods if the lessee receives delivery of the goods:
(a) without actual or constructive knowledge of the security interest; and
(b) before the security interest is perfected.
(2) Lessee in the ordinary course of business. Notwithstanding any other provision of this section, a lessee in the ordinary course of business takes the leasehold interest free of a security interest in the goods even if the security interest is perfected and even if the lessee has actual or constructive knowledge of its existence.
(3) Lessee of a motor vehicle. Notwithstanding any other provision of this section, a lessee, other than a lessee in the ordinary course of business, takes a motor vehicle free of a security interest only if the lessee leased:
(a) without actual knowledge of the security interest; and
(b) the motor vehicle was not described, or was incorrectly described, by serial number in a filed notice.
(1) A security interest continues in collateral notwithstanding sale, lease, license, exchange, or other disposition of the collateral, except as otherwise provided in this chapter or agreed upon by the parties.
(2) Upon the disposition of collateral, a security interest attaches to proceeds of the collateral, except as otherwise provided in this chapter or agreed upon by the parties.
(3) A security interest in proceeds is a continuously perfected security interest if the security interest in the original collateral was perfected. The security interest in proceeds becomes unperfected 20 days after the debtor receives the proceeds unless:
(a) a filed notice covers the original collateral, and the proceeds are cash proceeds or proceeds of a nature described in the notice; or
(b) the security interest in the proceeds is perfected before the expiration of the 20 day period.
Subject to the provisions of section 1020 of this chapter relating to security interests in inventory and livestock, a purchase money security interest in goods, perfected by the filing of a notice, has priority over a conflicting security interest in the same collateral and the interest of a lien holder, and also has priority in its proceeds, if the purchase money security interest is perfected when the debtor receives possession of the goods, or within five days thereafter.
A perfected purchase money security interest in inventory or livestock has priority over a conflicting security interest in the same inventory or livestock if:
(1) the purchase money security interest is perfected when the debtor receives possession of the inventory or livestock; and
(2) the purchase money secured party notifies in writing the holder of the conflicting security interest if the holder had filed a notice covering the same types of inventory or livestock before the time of a notice filed by the purchase money secured party. The notification must describe the inventory or livestock and state that the person giving the notification has or expects to acquire a purchase money security interest in inventory or livestock of the debtor.
A lien or right of retention arising by operation of law in goods has priority over a perfected security interest while the goods are in the possession of the person holding the right of retention if:
(1) the right of retention is created in favor of a person in possession of the goods to secure payment for materials or services with respect to the goods; and
(2) the materials or services are provided in the ordinary course of business.
(1) A security interest may be created in goods that are fixtures. A security interest may continue in goods that become fixtures.
(2) Notwithstanding subsection (1) of this section, a security interest in ordinary building materials is unenforceable when the building materials are incorporated into real property.
(3) This section does not determine priority in readily removable factory machines, office machines, and domestic appliances.
(4) A security interest in fixtures is subordinate to all other real rights in real property, except as provided in this section.
(5) A perfected security interest in fixtures has priority over the interest of the owner of real property, or a mortgagee notwithstanding any provision in the mortgage, if a notice is filed before the interest of the owner or the mortgagee is registered in the land registry.
(6) A perfected security interest in fixtures has priority over the interest of a lien holder if a notice is filed before the filing of a notice of the interest of the lien holder as required by this chapter.
(7) A perfected security interest in fixtures has priority over the interest of the owner of real property, a lien holder, or a mortgagee notwithstanding any provision in the mortgage, if the security interest is a purchase money security interest given by the debtor before the goods become fixtures, and a notice is filed before the goods become fixtures or within five days thereafter. The priority established in this subsection is not effective against a person who holds a construction mortgage. A mortgage is a construction mortgage to the extent that it secures an obligation to pay for the construction of an improvement on real property, if the mortgage is registered in accordance with the land law and if the mortgage indicates that it secures such an obligation.
A perfected security interest in crops growing on real property has priority over a conflicting interest of the owner or a mortgagee if the debtor is in possession of the real property or has an interest in the real property that is registered in accordance with the real property law.
(1) “Accession” means goods that are physically united with other goods in a manner such that the identity of the goods is not lost.
(2) A security interest may be created in an accession and continues in collateral that becomes an accession. If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the accession.
(3) On default, a secured party may remove an accession from other goods if the security interest in the accession has priority over the claims of every person having an interest in the whole.
(4) A secured party that removes an accession shall promptly reimburse the holder (other than the debtor) of any interest in the whole or the other goods for the cost of repair of any physical injury to the whole.
(a) A secured party that removes accessions shall promptly reimburse any other secured party for the cost of repair of any damage to the property.
(b) The secured party need not reimburse the debtor or other secured party for any diminution in value caused by the absence of the goods removed or by any necessity for replacing them.
(c) A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse.
(1) In this section, “commingled goods” means goods that are physically united with other goods in such a manner that their identity is lost in a product or mass.
(2) A security interest may not be created in commingled goods. However, a security interest may attach to a product or mass that results when goods become commingled goods.
(3) If collateral becomes commingled goods, a security interest in the collateral attaches to the product or mass.
(4) If a security interest in collateral is perfected before the collateral becomes commingled goods, the security interest that attaches to the product or mass is perfected without the need for filing a notice. The priority of the security interest in the product or mass is measured from the time of perfection of the security interest in the collateral that became commingled.
(5) If more than one security interest attaches to the product or mass, the following rules determine priority.
(a) A security interest that is perfected has priority over a security interest that is unperfected at the time the collateral becomes commingled goods;
(b) The first security interest to attach to the product or mass has priority among unperfected security interests; and
(c) If more than one security interest is perfected, the security interests rank equally in proportion to the value of the collateral at the time it became commingled goods.
A purchaser of chattel paper or instruments has priority over a conflicting security interest in the chattel paper or instruments and also has priority with respect to the proceeds of the chattel paper or instruments if:
(1) in the ordinary course of the purchaser’s business, the purchaser gives new value and takes possession of the chattel paper or instruments; and
(2) the chattel paper or instruments do not indicate an assignment to the person holding the conflicting security interest.
(1) A secured party has control of a deposit account if:
(a) the secured party is the bank with which the deposit account is maintained;
(b) the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor; or
(c) the secured party becomes the bank’s customer with respect to the deposit account.
(2) A secured party that has satisfied subsection (1) of this section has control, even if the debtor retains the right to direct the disposition of funds from the deposit account.
(1) A security interest held by a secured party having control of a deposit account has priority over a conflicting security interest held by a secured party that does not have control.
(2) Except as otherwise provided in subsections (3) and (4) of this section, security interests perfected by control have priority according to the time of obtaining control.
(3) Except as otherwise provided in subsection (4) of this section, a security interest held by the bank with which the deposit account is maintained has priority over a conflicting security interest held by another secured party.
(4) A security interest perfected by control has priority over a security interest held by the bank with which the deposit account is maintained if the secured party has become the customer of the bank with respect to the deposit account.
A transferee of money, including funds from a deposit account, takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
(1) Except as otherwise provided in subsection (2) of this section, a bank with which a deposit account is maintained may exercise any right of recoupment or setoff against a secured party that holds a security interest in the deposit account.
(2) A setoff by a bank based on a claim against a debtor is ineffective against a secured party that has established control of a deposit account by becoming the bank’s customer with respect to the deposit account.
Nothing in this chapter limits any special priorities, protections or preferences under the banking law, held by banks that acquire instruments or documents in a manner or under circumstances that entitles them to such priorities, protections or preferences. These interests take preference over an earlier security interest, even if perfected, to the extent provided by the banking law.