Opinion ID: 1979782
Heading Depth: 1
Heading Rank: 2

Heading: Unauthorized trade-ins and priority.

Text: For purposes of argument, DACC assumes that LFI breached its security agreement with the bank, SGFI's assignor, when it traded in its old combine and equipment for the new ones, the collateral in dispute. It maintains this event has no bearing on the issue of priority under chapter 554. We agree. The resolution of this issue depends on what provision of chapter 554 establishes priority between the security interests of the parties. SGFI argues section 554.9306(2), by virtue of section 554.9312(1), gives priority to its blanket security interest. Section 554.9312(1) provides [t]he rules of priority stated in other sections of this Part ... shall govern when applicable.... SGFI argues this language encompasses section 554.9306(2), which provides that a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds.... In contrast, DACC argues the pertinent statute governing priority is section 554.9312(4), which provides: A purchase money security interest... has priority over a conflicting security interest in the same collateral or its proceeds if the purchase money security interest is perfected at the time the debtor receives possession of the collateral or within twenty days thereafter. We believe that section 554.9306(2) was not intended to establish priority between security interests in the same collateral. Section 554.9306(2) is concerned with perfection: What it means [in section 9-306(2) ] is that the secured party's hold on the collateral is as firm after the debtor's disposition of the collateral as it was before. Put another way, that means that anyone dealing with the collateral deals with it subject to the continuing security interest. Always? No, not always.       The security interest continues through that disposition. This is not to say that that security interest may not be rudely cut off by some other Code section ..., but only that the unauthorized disposition does not unsettle any security interest. T. Quinn, UCC Commentary and Law Digest § 9-306[a][2], at 9-169; 9-306[a][12], at 9-175 (1978); accord, John Deere Co., Inc. v. Production Credit Association, 39 UCC Rep. 1882, 1884 (N.Y.S.C.1984) (an unauthorized trade-in does not magically convert a security interest into a PMSI). We agree with those commentators who have rejected the notion that the Uniform Commercial Code counterpart to Iowa Code section 554.9306(2) relates to the priority of security interests. E.g., J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code 1040-41 n. 19 (1980) (Clearly [section 9-312] is a priority provision; no words in [section 9-306] show it to be anything but a statement that a certain interest is perfected.); Quinn, supra, § 9-306[a][2], at 9-169; § 9-306[a][12], at 9-175; Kripke, Suggestions for Clarifying Article 9: Intangibles, Proceeds, and Priorities, 41 N.Y.U.L.Rev. 687, 726 (1966); see also, R. Dole, The Fundamentals of Article 9 of the Uniform Commercial Code § 5.4, at 183 (1982) (purchase money security interests have a privileged status); 2 A. Squillante & J. Fonseca, The Law of Modern Commercial Practices § 11.38, at 276 (1986 cum. supp.) (Purchase money security interests have long had the protection of priority rules.); but see Henson, Counter Suggestions Regarding Article 9: A Reply to Professor Kripke, 42 N.Y.U.L.Rev. 74, 75-77 (1967). Adopting the contrary view would cause great disruption in the financing of the purchase of farm equipment; a financier... would have no assurance that its PMSI was good against all others, which is precisely the situation sought to be avoided by § 9-312(4).... John Deere Co., Inc., 39 UCC Rep. at 1884. Unfortunately for the secured party, a covenant with the debtor in the security agreement requiring prior authority for the disposition of collateral is only as valuable as compliance with it. On the other hand, SGFI's interest continues in the combine and equipment traded in by LFI, and it can seek recovery for that in another action. We hold that, under the circumstances of this case, the PMSI held by DACC was properly perfected by the filing of the first financing statement. In addition, the debtor's unauthorized disposition of collateral did not affect the priority between the competing security interests, established in section 554.9312(4). AFFIRMED.