Secured Transactions - Lesson 5 - YouTube

Let's talk about the inventory rule.

Now, the inventory rule is a special rule.

And think about it this way.

Let's say I go to the store, and I buy that big screen TV.

I love it, I'm so excited to get it home.

And then I go, you know what I need?

I think I need a DVD, DVR, and Blu-ray.

I don't even know what the heck is new and current.

But I need one of those.

So, I go to my favorite store, Costco.

And I go in there, and I see this beautiful Sony Blu-ray, schmoolie-ray, whatever player.

So, I bring it up the front, and I go, here's 200 bucks.

Here you go, hey before I pay you, have you paid Sony, Mr. Costco?

Because if you haven't, I don't want to be sitting there with popcorn and friends, and

all of a sudden.

Hello?

Uh, yeah.

Sony at the door.

Hmm, honey, did you invite Sony over?

No, hey Sony, what's up?

And they come in and go, hey, Costco never paid us.

We're repossessing the Blu-ray player.

What, how am I supposed to know?

Well, you know what, in order to encourage sales, in order to encourage commerce, they

go, you know what?

If you're buying the item, and it is inventory in the hands of the seller, you get it free

of any prior interest.

You don't get it free of the interest you create.

But you get it free of any prior interest, even if you're aware of it.

So, for example, let's pretend, let me come over here, and let's get rid of my dots.

Let's pretend, and this is called the inventory rule, the inventory rule.

Here's the manufacturer, here's the wholesaler, here's the retailer of the goods.

He sells it to another retailer.

He sells it to a consumer, and he sells it to a company where they use it as equipment.

All right, so here's the rule.

The manufacturer sells it to the wholesaler.

What do they do?

They file a financing statement.

They perfect their interest.

Now, if the wholesaler goes bankrupt, they have the right to get back the interest.

If the wholesaler sells it as cash, they have a right to attach to the proceeds.

They can take other assets, other inventory, other, and so on.

But if the wholesaler sells it to this person, when they bought it, what was it...

Doesn't matter what it is to them.

What was it in the hands of the seller?

To them it's inventory, to them it's inventory, to them it's inventory, to them it's inventory,

to them consumer goods, to them equipment.

All right, so, what is it to the person selling it?

Its inventory to them, you get it free of the prior interest.

If you create an interest, you don't get if free of that.

But if they buy it from this person, even if they haven't paid them, this person cannot

come to them and take it back.

They can take it back, but if I pay cash, I walk away.

That's called the inventory rule.

Let's go to the next step.

They sell it to him, to them, to them.

Does it matter what it is to them?

No, what it is to this person is inventory, which means whether they buy it cash or whatever,

they get it free of this interest.

So, here they filed as well.

They get it free of the prior perfected interest.

They get it free of this interest.

This is me, consumer.

Me, my TV, I go to Costco to buy this DVR.

They bought it from them, they bought it from them.

As long as I paid cash, I get it free and clear, because it's inventory.

Not if it's equipment, not if it's consumer goods.

This is called the inventory rule.

All right, let's go another.

They sell it, sell it, and sell it.

He, they sell, boom, boom.

Now, here it's inventory.

Can they take it back from them?

No, inventory rule.

Here, can they take it back from them?

Yes, as long as they filed, they can take it back from a subsequent purchaser.

Here, can they take it back?

Sure, so you could take it back here.

You just can't take it back here, because it was inventory to the seller.

It was not inventory, not inventory.

Let's do another question.

20 day window.

Does the 20 day window...?

Or let's do automatic perfection.

Can this person automatically perfect here?

No, can they automatically perfect here?

Yes, can you automatically perfect here?

No, because it's not consumer goods.

What was automatic perfection?

It is where you're a PMSI in consumer goods.

So, if it's consumer goods to the buyer, you can automatically perfect.

20 day window, this is important.

The 20 day window still exists if it's equipment or if it's consumer goods.

There's no window with inventory.

So, when he sells it here, it's inventory, no PMSI, no automatic.

Here, automatic, here, no automatic, but here, do they have a 20 day window?

Yes.

Here, do they have a 20 day window?

Yes, so the 20 day window applies, whether it's consumer goods or equipment.

The difference is, if its consumer goods, you don't have to file and you automatically

perfect.

But if you want to close the loophole, file within 20 days.

If its equipment, no automatic perfection.

However, if you file within 20 days, we still give you that window.

Why is there no window with inventory?

Because here's inventory, if they haven't filed, if they sell it, they get it free anyway,

because it's not retroactive.

Plus, they get it free because it was inventory.

So, that's called the inventory rule, and you can see why.

Because, I'm not going to buy stuff here if I'm worried about this.

If its inventory to them, not to me, inventory to the seller, anyone who buys it gets it

free of the prior interest, not free of the interest you create.

Does that make sense?

Kind of nod, mm-hmm, yeah, I can see you nodding.

That's what it says.