Question

Please answer with at least a paragraph for each question

• Are secured transactions where the collateral is real property covered under Article 9?

• What do you think is the reason the drafters of the Code made PMSIs in consumer goods automatically perfected but other PMSIs are not?

Answer 1

A. Transactions where security interests are taken in real property are regulated not by Article 9, but by real property laws that vary among jurisdictions. However, the assignment or conveyance of a contract secured by real property may be regulated by Article 3 to the extent that the contract is a negotiable instrument. Both must be distinguished from a secured interest in a promissory note that is secured by a mortgage or deed of trust on real property, which is regulated by Article 9. This latter distinction is important in the context of the sale and purchase of promissory notes secured by real property.

B.  A purchase money security interest (PMSI) is a legal claim that allows a lender to repossess property financed with its loan or demand repayment in cash if the borrower defaults. It gives the lender priority over other creditors' claims.

The protection provided by a PMSI is one reason for the growth of point-of-sale financing, in which a retailer offers a buyer direct financing for major purchases. In the case of default, the retailer may repossess the items purchased and may do so before any other creditors are satisfied.

A PMSI is automatically perfected when the security agreement establishes a security interest and the collateral is consumer goods (other than vehicles subject to certificate of title or fixtures). Must primarily use the goods for personal, family, household purposes.