Faced with two competing claims to the letter of

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letter of credit. Faced with two competing claims to the letter of credit, the bankruptcy court found that First National qualified as a bona fide purchaser for value and held an interest superior to Tradax’s equitable interest. Tradax appealed.Takeaway: Under the UCC, a perfected security interest in a debtor’s accounts receivable does not attach to a letter of credit that wasnever intended to be an account receivable. First National’s interest in the letter of credit derived from Howell’s unilateral and mistaken logging of the transaction, but simply listing a deal as an account receivable does not make it one under the law. Howell, accordingly, did not have sufficientrights in the deal to grant a security interest therein. Ch. 5: Perfection of the Security InterestPerfection is the process by which the creditor’s security interest becomes effective against the most of the rest of the worldA creditor’s security interest is perfectedwhen the creditor has taken all the steps required by the law to give that creditor top-dog priority in the collateral oIf a security interest is perfected, it is senior to most later creditor interests (especially that of the trustee in bankruptcy, should the debtor enter bankruptcy)The UCC’s most common means of perfection is by having the secured party, the creditor, file a financing statement in the appropriate place; the Code does, however, permit perfection in other ways, too:oPerfection of security interests in tangible goods (goods, instruments, documents, and chattel paper) may be accomplished by the creditor’s taking physical possessionof the collateral a common law pledgeoFor some types of collateral, the security interest is automatically perfectedwithout filing or possession attachment is all that’s requiredoFor some goods, such as vehicles, a security interest usually must be perfected by having a notation made on the certificate of titleoPerfection for some types of collateral can be accomplished by having controlover that collateral Perfection by Possession (Pledge)oIf the collateral is in the physical possession of the creditor, the world at large is alerted to that creditor’s possible interest in the property, and no other notice is therefore required obviously, only collateral having physical form can be possessedoThe Code’s drafters did not attempt to define “possession,” leaving that to common lawoSometimes the collateral is so large that possession by the secured party is too awkward or cumbersome; in that case, it may be possible to store the goods in a warehouse and get a negotiable warehouse receipt representing the goods such a receipt is governed by Art. 7 Automatic PerfectionoAutomatic perfectionmeans that the secured party need only make sure that its security interest has attached, and perfection is thereby accomplished without the need for any further steps
R. BallantyneFall 2019 - Secured Transactions Outline (McJohn)GRADE RECEIVED: A-oPurchase Money Security Interest (PMSI) in Consumer Goods

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