2023 New Mexico Statutes › Chapter 55 - Uniform Commercial Code › Article 9 - Secured Transactions › Part 3 - PERFECTION AND PRIORITY › Subpart 3 - PRIORITY › Section 55-9-331 - Priority of rights of purchasers of instruments, documents and securities under other articles; priority of interests in financial assets and security entitlements under Chapter 55, Article 8 NMSA 1978.55, Article 8 NMSA 1978.">

(a) Chapter 55, Article 9 NMSA 1978 does not limit the rights of a holder in due course of a negotiable instrument, a holder to which a negotiable document of title has been duly negotiated or a protected purchaser of a security. These holders or purchasers take priority over an earlier security interest, even if perfected, to the extent provided in Chapter 55, Articles 3, 7 and 8 NMSA 1978.
(b) Chapter 55, Article 9 NMSA 1978 does not limit the rights of or impose liability on a person to the extent that the person is protected against the assertion of a claim under Chapter 55, Article 8 NMSA 1978.
(c) Filing under Chapter 55, Article 9 NMSA 1978 does not constitute notice of a claim or defense to the holders, or purchasers, or persons described in Subsections (a) and (b) of this section.
History:
1978 Comp., § 55-9-331, enacted by Laws 2001, ch. 139, § 51; 2015, ch. 54, § 4.
OFFICIAL COMMENTS
UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.
1.
Source.
Former section 9-309.
2.
"Priority."
In some provisions, this article distinguishes between claimants that take collateral free of a security interest (in the sense that the security interest no longer encumbers the collateral) and those that take an interest in the collateral that is senior to a surviving security interest.
See, e.g.
, section 9-317. Whether a holder or purchaser referred to in this section takes free or is senior to a security interest depends on whether the purchaser is a buyer of the collateral or takes a security interest in it. The term "priority" is meant to encompass both scenarios, as it does in section 9-330.
3.
Rights Acquired by Purchasers.
The rights to which this section refers are set forth in sections 3-305 and 3-306 (holder in due course), 7-502 (holder to whom a negotiable document of title has been duly negotiated), and 8-303 (protected purchaser). The holders and purchasers referred to in this section do not always take priority over a security interest.
See, e.g.
, section 7-503 (affording paramount rights to certain owners and secured parties as against holder to whom a negotiable document of title has been duly negotiated). Accordingly, this section adds the clause, "to the extent provided in articles 3, 7, and 8" to former section 9-309.
The state-law Uniform Electronic Transactions Act (UETA) and the federal Electronic Signature in Global and National Commerce Act, 15 U.S.C. §§ 7001 et seq. (E-SIGN), provide certain rules for records referred to and defined as "transferable records." See UETA Section 16 and E-SIGN, 15 U.S.C. § 7021. When certain conditions have been met, those acts confer on a person the status of a "holder" (as defined in 1-201(b)(21), formerly Section 1-201(20)) of an "equivalent record" under pre-1998 Section 9-308 (now, in part, Section 9-330) and the rights and defenses of a "purchaser" under that section, among other effects. E-SIGN also refers to the rights and defenses of a purchaser under Section 9-330. As a matter of the application of the Uniform Commercial Code, those are not the only sections of the Uniform Commercial Code that would logically be affected by UETA and E-SIGN. For example, the rights of a holder in due course under Section 9-331(a) would also be covered by the application of those acts, when the conditions for applicability have been satisfied.
4.
Financial Assets and Security Entitlements.
New subsection (b) provides explicit protection for those who deal with financial assets and security entitlements and who are immunized from liability under article 8.
See, e.g.
, sections 8-502, 8-503(e), 8-510, and 8-511. The new subsection makes explicit in article 9 what is implicit in former article 9 and explicit in several provisions of article 8. It does not change the law.
5.
Collections by Junior Secured Party.
Under this section, a secured party with a junior security interest in receivables (accounts, chattel paper, promissory notes, or payment intangibles) may collect and retain the proceeds of those receivables free of the claim of a senior secured party to the same receivables, if the junior secured party is a holder in due course of the proceeds. In order to qualify as a holder in due course, the junior must satisfy the requirements of section 3-302, which include taking in "good faith." This means that the junior not only must act "honestly" but also must observe "reasonable commercial standards of fair dealing" under the particular circumstances.
See
section 9-102(a). Although "good faith" does not impose a general duty of inquiry,
e.g.
, a search of the records in filing offices, there may be circumstances in which "reasonable commercial standards of fair dealing" would require such a search.
Consider, for example, a junior secured party in the business of financing or buying accounts who fails to undertake a search to determine the existence of prior security interests. Because a search, under the usages of trade of that business, would enable it to know or learn upon reasonable inquiry that collecting the accounts violated the rights of a senior secured party, the junior may fail to meet the good-faith standard.
See Utility Contractors Financial Services, Inc. v. Amsouth Bank, NA
, 985 F.2d 1554 (11th Cir. 1993). Likewise, a junior secured party who collects accounts when it knows or should know under the particular circumstances that doing so would violate the rights of a senior secured party, because the debtor had agreed not to grant a junior security interest in, or sell, the accounts, may not meet the good-faith test. Thus, if a junior secured party conducted or should have conducted a search and a financing statement filed on behalf of the senior secured party states such a restriction, the junior's collection would not meet the good-faith standard. On the other hand, if there was a course of performance between the senior secured party and the debtor which placed no such restrictions on the debtor and allowed the debtor to collect and use the proceeds without any restrictions, the junior secured party may then satisfy the requirements for being a holder in due course. This would be more likely in those circumstances where the junior secured party was providing additional financing to the debtor on an on-going basis by lending against or buying the accounts and had no notice of any restrictions against doing so. Generally, the senior secured party would not be prejudiced because the practical effect of such payment to the junior secured party is little different than if the debtor itself had made the collections and subsequently paid the secured party from the debtor's general funds. Absent collusion, the junior secured party would take the funds free of the senior security interests.
See
section 9-332. In contrast, the senior secured party is likely to be prejudiced if the debtor is going out of business and the junior secured party collects the accounts by notifying the account debtors to make payments directly to the junior. Those collections may not be consistent with "reasonable commercial standards of fair dealing."
Whether the junior secured party qualifies as a holder in due course is fact-sensitive and should be decided on a case-by-case basis in the light of those circumstances. Decisions such as
Financial Management Services Inc. v. Familian
, 905 P.2d 506 (Ariz. App. Div. 1995) (finding holder in due course status) could be determined differently under this application of the good-faith requirement.
The concepts addressed in this comment are also applicable to junior secured parties as purchasers of instruments under section 9-330(d).
See
section 9-330, comment 7.
ANNOTATIONS
The 2015 amendment,
effective July 1, 2015, amended the Uniform Commercial Code, as enacted by New Mexico, to make it uniform; and in Subsection (b), after "assertion of", deleted "an adverse" and added "a".