I. Introduction.......................................................................................................................................................................................... 2

II. Nature of the Security Interest.............................................................................................................................................................5

III. Attachment......................................................................................................................................................................................... 6

A. Authenticated Security Agreement.................................................................................................................................................6

B. Description Requirement.................................................................................................................................................................8

C. Rights in the Collateral.....................................................................................................................................................................9

IV. Perfection..........................................................................................................................................................................................11

A. Collateral Categorization...............................................................................................................................................................11

B. Sufficiency of Financing Statement................................................................................................................................................13

1. Debtor’s Name...........................................................................................................................................................................13

2. Creditor’s Name.........................................................................................................................................................................15

3. Description Requirement...........................................................................................................................................................16

C. Possession......................................................................................................................................................................................16

C. Deposit Accounts & Control...........................................................................................................................................................18

V. Priority............................................................................................................................................................................................... 19

A. Introduction, Theory, & Mechanics...............................................................................................................................................19

B. Nature & Limits..............................................................................................................................................................................21

C. Secured & Unsecured Creditors.....................................................................................................................................................24

D. Purchase Money Security Interests...............................................................................................................................................26

VI. Proceeds........................................................................................................................................................................................... 30

VII. Deposit Accounts/Transfer of Property............................................................................................................................................32

VIII. Changes...........................................................................................................................................................................................35

A. Change of Location & Choice of Law..............................................................................................................................................35

1. Law............................................................................................................................................................................................ 35

2. Debtor Location.........................................................................................................................................................................36

B. Change in Debts & Debtors............................................................................................................................................................38

1. After-Acquired Property............................................................................................................................................................38

2. Future Advances........................................................................................................................................................................38

C. Change in Name & Entity Structure...............................................................................................................................................40

IX. Default.............................................................................................................................................................................................. 42

X. Limits..................................................................................................................................................................................................47

A. Intellectual Property......................................................................................................................................................................47

B. Federal Property, Set-off................................................................................................................................................................48

C. Characterization.............................................................................................................................................................................49

D. Securitization.................................................................................................................................................................................50

I. Introduction Understanding Banks

o Bank Deposit = Unsecured Loan Customer who deposits money in bank becomes creditor of bank Not a shoebox/technical trust relationship Debtor and creditor

o What do the banks do with the money? Following the money

o Demand deposit Customer deposits $1000 into checking account Bank has reserve requirement of 10%

So, must hold $100 as vault cash Or as balance with local Federal Reserve Bank

Bank can lend $900 to someoneo Bank Makes the Loan

Bank collects fee Alternatives

Traditional lendingo Bank waits to collect loan when due

Securitization o Bank sells loan to third party and gets more cash nowo Bank lends that out and restarts cycle

o Focus on volume of lending that can be supported as function of different mechanism for lending Who finances the banks? Where does the money come from that supports the additions loans made during securitizations?

Making Loanso Framing the Lending Decision

Loan Amount = F (Anticipated Cash Flows, Anticipated Asset Values) What weight should we attach to cash flow? What weight should we attach to anticipated values?

Allocation Schemes under Insufficiencyo The Situation

Many entities have claims/settlementso Starting Points

Creditor beats debtor But true of every creditor Not every claim can be satisfied We need an allocation rule

Ex Ante Schemeso Private Ordering through Contract

Article 9 is permissive structure Will allow some parties to agree to allocation/priority rules for assets

o Protective Schemes Special priority positions given to those who cannot protect themselves through contract May be nonconsensual creditors generally

Tort victims Government

Rights are implemented through specific statutory priorities Or through state or federal liens

Ex Post Schemeso Core idea

These schemes look to facts as determined at time of insufficiency as basis for allocationso First Come, First Served

Grab law Race to the assets

o Individualized Assessment Systems Keyed to need or ability to use assets effectively

o Lottery Schemes Random distributions at time of insufficiency

Questions about Possibilitieso Private v. Public Ordering

What judgments should we make about relative role of private & public offerings? Should private orderings (contractual parties) have some special status? Should we seek to create mandatory public ordering?

o Rent-Seeking Might ppl invest resources in fight for hearts of public officials empowered to impose ordering? Would this fight dissipate any of the advantages to be achieved from public ordering?

o Implementation Costs How much should we care about cost of implementing the allocation scheme? Are individualized determination based on complex info such as need/ability to use assets good? Do we again face rent-seeking if these determinations are allowed?

o Fairness Would scheme of random distributions achieve low cost at price of some fairness? Would law or large numbers achieve fairness when many cases considerered?

4 Steps for Creating a Perfected Security Interesto Creditor lends $ to Debtoro Debtor promises to repay loan to Creditoro Debtor grants a security interest in a particular asset to Creditoro Creditor gives notice of security interest to public

Key attributes of security interesto Property rights

Secured creditor has right to repossess collateral after default [9-609] Also has right to sell property [9-610) Or keep property it in satisfaction of debt [9-620]

o Priority rights Secured creditor has priority over unsecured creditors [9-201]

Reified Priority Systemo Key Idea

Priority not tied only to time in line, but to time in line as to particular assets Having special property in one asset creates no rights in another asset Article 9 as Assets Reservation System

o Priority Rule Creditor that files first FS for class of assets usually has priority [9-322(a)(a)] This matters when creditors have competing security interests in same assets

Problemo Facts

1/1: $10K loan from Finco to Corp; SA & FS for equipment 2/1: $10K loan from Bank to Corp; SA & GS for inventory 3/1: $10K loan from Creditco to Corp; Unsecured 3/15: INV = $5K; EQ = $15K

o Security Interests Finco: SI in EQ worth $15K; owed $10K Bank: SI in INV worth $5K; owed $10K

o Unsecured Debts Finco: $0 Bank: $5K

Creditco: $10Ko Asssets

$5K in EQo Pro Rata Rule

Total Debts: 0 + 5 + 10 = 15 Total Assets: 5

Bank gets (5/15) x 5 = $1,667 Creditco gets (10/15) x 5 = $3,333

o Final Distribution Finco gets $10K Bank gets $5K + $1,667 = $6,667 Creditco gets $3,333

Unsecured Creditor Hypoo Facts

Three unsecured creditors A is owed $100 B is owed $200 C is owed $300

o Pro Rata Calculation Total Debts = $600 A gets (100/600) = 1/6 of assets B gets (200/600) = 1/3 of assets C gets (300/600) = 1/2 of assets

Pro Rata Rule (Bankruptcy Code)o Total the unsecured claims against assetso Total the assetso For each creditor, give that creditor the fraction of the assets that creditor holds of claims

Equal Asset Distribution Ruleo Key Idea

Creditors should share assets equally Line up creditors and pass out dollar bills until run out or creditor fully paid

Equal Loss Distribution Ruleo Creditors should bear losses equallyo Line up creditors in order of debts from high to low

Hand dollar bills to one owed most until his debt equals second highest debt Then hand bills to the next until equals the third highest Do this until money runs out of creditor fully paid

Assessing the 3 Ruleso Distributional Differences

Largest Claimant Equal Loss > Pro Rata > Equal Assets

Smallest Claimant Equal Assets > Pro Rata > Equal Loss

o Aggregate amount of debt v. distribution of debt Equal assets

Best situation for two creditors versus third is to have equal debts Pro rata

No transfer incentives (no advantageous reallocation) Equal loss

Best situation for two creditors versus third is to pool debtso Bottom Line

Distribution v. Total Distribution of debts rather than just amount of debt matters under some rules

Added Monitoring Burden Rules might create substantial monitoring burden that otherwise does not exist w pro rata

Our situation We do not have pure pro rata Priority hierarchies create similar monitoring burdens as other loss regimes

II. Nature of the Security Interest Priority Rule [9-322(a)(1)]

o Priority dates from the earlier of the time A filing covering the collateral is first made or Security interest of agricultural lien is first perfected

o If there is no period thereafter when there is neither filing nor perfectiono Can negotiate contractual subordination in face of prior FS

First-to-File Ruleo Ignoring perfection through possession, first to file a FS wins

Problem 1o Facts

1/1: $10K loan from Finco to Debtor; SA & FS = EQ 2/1: $10L loan from Bank to Debtor; SA & FS = EQ

o Priority Finco filed first, so Finco wins

Problem 2o Facts

1/1: $10K loan from Finco to Debtor; SA = EQ 2/1: $10K loan from Bank to Debtor; SA & FS = EQ 2/2: Debtor files FS = EQ

o Priority Bank filed first, so Bank wins

Problem 3o Facts

1/1: FS = EQ bt Debtor & Finco 2/1: $10K loan from Bank to Debtor; SA & FS = EQ 3/1: $10K loan from Finco to Debtor: SA = EQ

o Priority Finco filed first so Finco wins

Possessiono Perfection through possession (or control) complicateso Leads to “earlier of” formulation

Problemo Facts

1/1: $10K loan from Finco to Debtor; SA = Computer; Perfect = possession 2/1: $10K loan from Bank to Debtor; SA/FS = Computer 3/1: Finco FS = Computer; Gives up possession of Computer

o Priority Earlier of time a filing covering collateral is first made OR SI is first perfected Finco wins

Definition of Security Interest [1-201(b)(35)]o Interest in personal property or fixtures which secures payment or performance of an obligation

III. Attachment

A. Authenticated Security Agreement Attachment [9-203(a)]

o Security interest attaches to collateral when It becomes enforceable against the debtor with response to collateral Unless an agreement expressly postpones the time of attachment

Enforceability [9-203(b)]o Security interest is enforceable against debtor and third parties w respect to collateral only if

Value has been given; The debtor has rights in the collateral or the power to transfer rights to a secured party; and One of the following conditions is met

Debtor has authenticated a security agreement that provides description of collateral Simple Security Interest

o Facts 1/1: Promissory note bt Bank & Debtor; SA = EQ “Debtor gives SI in copier (serial number X) to Bank to secure debt”

o Bank’s rights Standard SI

Money is lent SA is signed Collateral described appropriately w serial number

After-Acquired Property [9-204(a)]o Allows Debtor to grant SI in after-acquired propertyo Simplifies transactionso Debtor need not repeatedly execute new SAs as assets change

Problemo Facts

1/1: $ loans by Bank to Debtor; SA = INV, EQ, GI (now & after owned, include Das Kapital) 1/1: Debtor expects Das Kapital 7/1: Debtor gets Das Kapital

o SI in Das Kapital Debtor cannot grant SI unless they have interest in property Thus, SI does not arise until 7/1, when debtor acquires Das Kapital

Waiving the Right to Seize Collateralo Facts

1/1: $ loan by Bank to Debtor; SA = EQ “D hereby grants Bank SI in EQ, but Bank hereby waives its rights to repossess”

o Limits on Seizure Noting requires that secured creditor seize collateral after default Breach of peace rule limits utility of right of repossession, anyway Bankruptcy filing by debtor also could prevent seizure

o Waiver Waiver of rights generally okay, but only debtors have non-waivable rights [9-602(2)]

o Security Interest? Yes, this creates an effective security interest

Waiving Priority Rightso Facts

1/1: $ loaned by B to D; SA = EQ “D grants B SI in EQ, but Bank must share value of EQ pro rata w/ D’s unsecured creditors”

o Division of Proceeds Art 9 does NOT limit how SC distributes proceeds of collateral SP could agree to share proceeds w another creditor

o Security Interest? Yes, this SI should be good

Building the SI Brick-by-Bricko Problem 1

Facts 1/1: $ loaned by B to D; Agmt “On default, B has right to exercise rights that Art. 9 SC would have”

Need collateral No specific collateral is described – fails 9-203(b)(3)(A) This transaction only has right to repossess

o Problem 2

Facts 1/1: $ loaned from B to D; Agmt “On default, B has rights that SC would have under Part VI of Art. 9”

Description Issue Question re description of collateral Otherwise, gives lender property rights of SC SC should be able to waive priority rights If collateral had been specified, this would be fine to create SI Since it is outside standard practice, it is a risk

Clarko Facts

Chrysler lends Clark $85K Clarke gives mortgage of an Inn; FS = Liquor License Licenses are not assignable

o After-Acquired Property Chrysler could have avoided problems by including AAP clause in K AAP covers property that D later acquires, and stuff D has that later becomes property

o Property Interest Requirement Negative rights v. positive rights Chrysler had not right to act against property – no right to repossess, sell, or keep

o How Big Must Property Be? 1-201(b)(25) says nothing about the scope of the positive rights required to have SI More limited rights may suffice as long as positive rights

o Negative Rights May influence likelihood of payment

Close to securing payment or performance of obligation Probably just give rise to right to sue for breach rather than ability to get injunction enforcing

Incomplete interestso If intended that SC have less than full set of rights

Safer to create SI and remove rights Less safe to create the desired rights individually

Bollingero Facts

1/13/72: ICC PN $150K to B; SA/FS = Mach & EQ 12/5/74: Z&J PN $150K to B; FS = Mach &EQ

o 3 Possible Docs as SAs Does FS suffice?

Case law is splito American Card = No; need SI granto Amex-Protein = Yes; no magic phrases required

Reality is that it does NOT sufficeo Good reason to file FS before SI as way of reserving priority positiono Deals can fall through, though, leaving FS naked

Does PN suffice? “PN is further secured by SI in certain SA to be delivered”

o This contemplates an addt document of SA “PN is secured by SI in certain SA bt B & ICC”

o Why isn’t this enough? Do letters suffice?

Pre-deal letterso Sating it will do deal if given security

Post-deal docso B send list of collateral to Z&Jo Letters discussing management of collateral

Court finds these letters show intent to create SA

o Thus, intent suffices to create SAo But, intents can change and what about statute of frauds re 3rd parties

Third-Party Effectso How do we burden 3rd parties?o Will Debtor internalize costs?o Why should we require authenticated SA?

Ex Ante Effectso How sensitive/elastic will party behavior be to formal rule we announce for SA requirementso Soft rules encourage parties to be carelesso Third party effects and ex post costs should control the rule we select

Status of Financing Statementso Don’t infer too mucho FS does not contain creation or grant language, usuallyo Careful SC will file FS before lending $, so FS is record before SI is created

B. Description Requirement Description requirement generally

o Structurally Implements the Reified Priority System

o Read to K! Just a Q of K interpretation in statutory framework provided by sections 9-108 and 9-203

Sufficiency of Description [9-108(a)]o Description sufficient – whether or not specific – if it reasonably identifies what is described

Examples of reasonable ID [9-108(b)]o Description reasonably IDs collateral if it IDs by

Specific listing Category A type of collateral defined in UCC Quantity Computation/allocational formula or procedure Any other method if the identity of collateral is objectively determinable

Supergenic description not sufficient [9-108(c)]o Description of collateral as “debtor’s assets” or “all personal property” or similar words NOT okay

When description by type is insufficient [9-108(e)]o Description by type only is insufficient for

Commercial tort claim In consumer transaction, consumer goods, security entitlement, securities account, commodities

account Baldwin

o Facts North Dakota, 2004 B places cattle on CC feedlots Cattle eat, get fat, get sold C claims SI in certain of B’s cattle Cattle feeding agmt – lot # is not filled in

o Farm Products [9-102(a)(34)] Means goods, other than standing timber, w respect to which D engaged in farming and are

Crops grown, growing, or to be grown including Livestock, born or unborn Supplies used in farming operation Products of crops/livestock in their unmanufactured states

Shelby Countyo Facts

VD sells inventory on credit to H

11/2/82: FS = all inventory, notes, accounts receivable, machinery and equipment now owned or later acquired, including all replacements or subs”

12/97: B loans $ to H; SA = Inventory and GIo Priority for inventory

Key clause All inventory, including but not limited to X whether now owned or later acquired,

including Y Comma is key

No comma after X in Shelbyo Third party reliance on SA

What can Bank rely on? SA? Letter? FS ? – what risks does above FS have?

o Answer 9-322(a)(1) Priority Rule

Earlier of first to file or perfect wins VD filed first Later granted SI in all inventory – beats Bank based on first filing

Moral FS sets risk for loss of priority

Rules of Constructiono Anti-Drafter Rules (Contra Proferentum)

Drafters will often face rules that will resolve ambiguities against draftero Anti-Broad Security Interest Rules

Although Article 9 is neutral, judges often reluctant to enforce broad Siso More is Less

Adding info to description may give judge basis for excluding collateral – if too broado Tethering

Given important 3rd party effects of, useful to tie K defs and collateral descriptions to objects that are readily assessable to 3rd parties

Includes Article 9 defs and standard industry practices

C. Rights in the Collateral Derivation Principle

o Secured Creditor takes through its Debtoro Example

D leases goods SC can take D’s lessee interest in collateral But SC’s rights will be limited to those held by debtor

Debtors and Obligorso Definition of Debtor [9-102(a)(28)]

Person having interest, other than SI/lien, in collateral (whether or not obligor) Seller of accounts, chattel paper, payment intangibles, or promissory notes Consignee

o Definition of Obligor [9-102(a)(59)] Person that, with respect to obligation secured by SI in (or agricultural lien on) collateral

Owes payment or other performance of obligation Has provided property other than collateral to secure payment or other performance or

obligation, or Is otherwise accountable in whole or in part for payment or other performance of

obligation People’s Bank

o Facts 10/5/99: $ from C to Brooks; SA/FS = Cattle

FS says “Louie Dickerson” 11/02: $ from P to Brook; SA/FS = Cattle

FS says “Brooks L. Dickerson Version 1

5/5: Brooks sells cattle to Bryan Version 2

5/5 Glenbrook Cattle Company sells cattle to Bryano Farm Security Act [7 USC 1631]

Purchases free of SI Buyer in ordinary course of biz buys farm product from seller engaged in farming

operation - purchases free of security interest by seller Even if SI is perfected Even if buyer knows of the SI

Purchases subject to SI Buyer of farm products takes subject to SI created by seller if

o In case farm product produced in state that has central filing system Buyer has failed to register w Sec of St. prior to purchase of products SP has filed effective FS or notice that covers products being sold

Mogliao Trust as Entity

Run-up 1/1: Fee transfer of Hope Diamond from Corp to 3rd party 2/1: Corp grants SI in HD to Bank

Bank’s rights First transfer ends rights of corp in HD Corp has no rights in HD so cannot later grant SI in it

Facts 1/1: Trust gives $14 M to USC

o “Only USC can collect, no SI allowed”o Title transfers if change of control of outboard

2/1: Outboard grants SI in corp’s rights in trust to Banko Trust as K

Run up 1/1: Corp grants SI in HD to Bank 2/1 Corp does fee transfer of HD to 3rd party

Bank’s rights SI now granted prior to fee transfer SI survives fee transfer – unless buyer in ordinary course of business

Facts 1/1: Conditional Fee transfer of $14M from outboard to USC

o “Only USC can collect and no SI allowed” 2/1: Outboard grants SI in corp’s rights in HD

Negative Pledgeso Facts

1/1: Corps borrows $100 from Bank unsecured 2/1: Corp borrows $200 from Finco w/ negative pledge

“Corp promises to not grant SI in any of its assets” 3/1: Corp borrows $300 from Creditco; SA/FS = All assets

Corp broke promise to Finco $400 in assets and now is insolvent

3/1: Sharing agmt bt Finco & Creditcoo Possible Answers

Proceed pair by pair Creditco > Bank Bank = Finco Finco ? Creditco

Separate property rights from purely contractual rights Step 1 = $300 to Creditco on its SI Step 2 = $100 pro rata to Bank & Finco as USCs Step 3 = Neg pledge as contractual right of parity bt Cred & Finco

o Reallocate their funds pro rata

IV. Perfection

A. Collateral Categorization Perfection of SI [9-308(a)]

o SI perfected if it has attached and all applicable requirements in 9-310 – 9-316 satisfiedo SI perfected when it attaches if requirements have been met before attachment

SIs Perfected on Attachment – long list [9-309]o Certain PMSIs in consumer goodso Assignment of accounts or payment of intangibles

Which does not transfer significant part of assignor’s outstanding accounts or payment intangibles

Either by itself or with other assignment to same assignee)o SI created by assignment of Health Care Insurance receivable to provider of health careo SI in investment property created by broker of securities intermediary

General rule – perfection by filing [9-310]o Financing statement must be filed to perfect all SIs/agricultural lienso Exceptions where filing not necessary

9-312, 9-313, 9-314 Exceptions [9-312]

o Perfection by filing permitted SI in chattel paper, negotiable documents, instruments, or investment property May be perfected by filing

o Control of possession or certain collateral SI in deposit account may be perfected only by control SI in letter-of-credit may be perfected only by control SI in $ may be perfected only by SP taking possession

Perfection Through Possession or Delivery [9-313]o SP may perfect SI in negotiable doc, good, instrument, $, tangible chattel paper by taking possessiono Account and general intangibles

Can’t take possession of account and general intangibles – must file as to them Perfection Through Control [9-314]

o SI in investment property, deposit accounts, letter-of-credit rights, or electronic chattel paper may be perfected by control

Problem 1o Facts

1/1: Bank lends $ to Corp; SA/FS = Glompho Is Bank perfected?

Not if you need to take possession or control So, depends on what a glomph is

Problem 2o Facts

1/1: Bank lends $ to Corp; SA = Glomph; Possession of Glompho Is Bank perfected?

Not if you need to file or take control Again, depends on what Glomph is

Problem 3o Facts

1/1: Bank lends $ to Corp; SA = Glomph; Control of Glomph

o Is Bank perfected? Not if you need to file or take possession Again, depends on what Glomph is

Problem 4o Facts

1/1: Bank lends $ to Corp; SA/FS = Glomph; Possession & Control of Glompho Is Bank perfected?

Yes – must be perfected Doesn’t matter what Glomph is

Bean Timberlando Facts

Bank lends to Bean; SA/FS = Timber Bean sales cut timber to P and I

o Is the timber inventory such that P and I are Buyers in Ordinary Course of Biz? Goods = All things movable when SI attaches

Inclusionso Fixtureso Standing timber that is to be cut and removed under conveyance/saleo Unborn young of animalso Crops grown, growing, or to be growno Manufactured homes

Exclusionso Accountso Chattel Papero Commercial Tort Claimso Deposit Accountso Docso General Intangibleso Instrumentso Investment Propertyo Letter of credit rightso Letters of crido Moneyo Oil, gas, other minerals before extraction

Equipment = Goods other than inventory, farm products, or consumer goods Consumer goods = Those bought for use primarily for personal, family, household purposes Farm products = goods other than standing timber with respect to which D engaged in farming &

Are crops grown, growing, to be grown includingo Crops produced in trees, etc.o Aquatic goods o Livestocko Supplies used of produced in farming operationo Products of crops or livestock in unmanufactured state

Inventory = goods other than farm products which Are leased by person as lessor Are held by person for sale or lease or to be furnished under K of service Are furnished by person under K of service Consist of raw materials, work in process, materials usd or consumed in business

Vienna Parko Facts

CMC lends $ to VP VP gives CMC 300 1st Deeds of Trust through assignment VP sells condos and 300 2nd Deeds of Trust to VPA

VPA escrow account w banko Are Banks perfected as to Escrow Account residual?

Money [1-201(b)(24)] Medium of exchange authorized by govt as part of currency

Deposit Account [9-102(a)(29)] Demand, time, savings, passbook, similar maintained w bank Does not include investment property/accounts evidenced by instrument

General intangible = Any personal property including things in action Inclusions

o Payment intangibleso software

Exclusionso Accountso Chattel papero Commercial tort claimso Deposit accountso Docso Goodso Instrumentso Investment propertyo Letter-of-credit rightso Letters of credito Moneyo Oil, gas, other minerals before extraction

B. Sufficiency of Financing Statement

1. Debtor’s Name Sufficiency of Financing Statement [9-502(a)]

o FS sufficient only if it Provides name of debtor Provides name of SP or rep of SP; and Indicates collateral covered by FS

Indexingo FSs indexed by debtor’s nameo Most manual filing systems – debtor’s name only access point for getting info on FSso Accurate debtor’s name is therefore essential to finding filed FSs

Scope of Acceptable Debtor Nameso Key issue

What names will be help effective In choosing , we allocate burdens bt filing creditors and searching creditors (many are both) Need rule that minimizes Aggregate costs of filing and searching creditors

o Possible Choices Allow debtor’s legal name Allow legal name and any name by which debtor is known (trade name) Allow only name by which debtor is best known

o Narrow Rules ID costs

Narrow filings rules (legal name/best name) impose some costs on both filers/searcherso By requiring them to identify single applicable name

Costs especially high for a best name system o Litigation over which name met that standard

Benefit Rules minimize number of names that searching creditor must look under

o Broad Rules

Any relevant name minimizes cost for filing creditors but increases costs for searchers Sufficiency of debtor’s name [9-503(a)]

o FS sufficiently provides name of the debtor If the debtor is registered org

Only if FS provides name of debtor indicated on public record of debtor’s JX In other cases

If debtor has a name o Only if it provides the individual or org name of debtor;

If debtor has no nameo Only if it provides names of partners, member, associates, or other persons

comprising the debtor Debtor’s Trade Name Insufficient [9-503(c)]

o FS that provides only D’s trade name does not sufficiently provide name of debtor Mistakes

o Should we insist on perfection? Doing so will mean minor mistakes have major consequences Punishment schemes will create incentives to meet standard

But may induce SCs to invest too many resources in ensuring statements are perfect Penalizing mistakes turns on

Costs that mistake impose AND Costs of running admin system that forces us to sort mistakes that matter and don’t

Errors or Omissions o Minor Errors or Omissions [9-506(a)]

FS substantially satisfying requirement of this part is effective even if it has minor errors Unless errors or omissions make FS seriously misleading

o FS Seriously Misleading [9-506(b)] FS that fails to sufficiently provide name of debtor is seriously misleading

o FS NOT Seriously Misleading [9-506(c)] Search of records of filing office under debtor’s correct name

Using standard search logic If search would disclose FS that fails to sufficiently provide D’s name Then name provided does NOT make FS seriously misleading

Tyringham Holdingso Facts

Legal name = Tyringham Holdings, Inc. Filed name = Tyringham Holdings

o Is FS effective? Debtor is registered org – so name on FS needs to be public name from JX of D

That name is legal name Tyringham Holdings, Inc. Need to do search for correct name

Did not yield incorrect filed name of Tyringham Holdings Thus , seriously misleading and SC is unperfected

Case 2o Facts

Legal name = Rodger House Filed name = Roger House

o Is FS effective? This is “other case” bc not registered org So, individual name of debtor Then do same seriously misleading analysis

2. Creditor’s Name Sufficiency of Financing Statement [9-502(a)]

o FS sufficient only if it Provides name of debtor Provides name of SP or rep of SP; and

Indicates collateral covered by FS Starting Point

o Presence of SC name will give searching creditor a second source of info re debtor’s affairs Representative capacity [9-503(d)]

o Failure to indicate representative/re capacity of SP does NOT affect sufficiency of FS Multiple Debtors & Secured Parties [9-503(e)]

o FS may provide name of more than 1 D and more than 1 SP Mistakes

o Accurate or inaccurate SC name is irrelevant to finding FS bc indexed by debtor nameo Thus, mistakes less importanto Main Q (given mistake in SC name) - does FS still allow searching creditor to get info from SC?

Mistakes in Legal Name of Secured Partyo Facts

1/1: FS = Big Bank, Inc. but has correct address for SC Deal is done with Really Big Bank (at same address filed)

o Has SC perfected? Use minor error standard – as long as not sufficiently misleading, this FS is fine

Trade Names for Secured Partieso Facts

1/1: FS = BigBank, Inc. (lists correct address) Deal is done with Really Big Bank, Inc – but does biz as BigBank, Inc.

o Has SC perfected? Yes, this is probably okay

Omitted Secured Creditor’s Nameo Facts

1/1: FS = Creditor A Deal is done with Creditor A & Creditor B

o Has B perfected? No – B has almost certainly not perfectly bc seriously misleading to not be on FS Searcher could not see that B is part of deal to get this addt info on debtor from B

Cooper Kingo Facts

1984: PN bt Copper King and Noonan & Patterson (managers) 2/1/86: Copper King gets $100K from trust; SA = Furn/EQ; FS = SPs are N&P; $225K in debt 1/15/87: Copper King Files Ch 11

o Which SPs are perfected? Should all be okay based on Comment 3 (below)?

Secured Creditors and Agentso Facts

1/1: SCs give D $ 2/1 Trustco appointed collateral agent 3/1: FS = trustco

o Has either SC perfected? FS is effective if it names Bank A as secured part and not the actual SPs

Even if it omits Bank A’s representative capacity So this is okay and both SCs should be perfected

Submicrono Facts

Same schemes as above re secured creditors and agentso Holding

FS names both debtor and SP (collateral agent), provides addresses, describes collateral Thus, any SP searching would be on notice to communicate w collateral agent This is sufficient so SPs are perfected!

3. Description Requirement Sufficiency of Financing Statement [9-502(a)]

o FS sufficient only if it Provides name of debtor Provides name of SP or rep of SP; and Indicates collateral covered by FS

Indication of Collateral [9-504]o FS sufficiently indicates collateral if FS provides

Description of collateral per 9-108 OR An indication that FS covers all assets or all personal property

Scope of the FSo Facts

1/1: Corp gets $ from Bank; SA/FS = EQ 2/1 Corp gets more $ from Bank; SA = EQ

o To what extent is Bank perfected? FS good for both SAs – covers both deals

Thorp Commercialo Facts

5/13/71: Bank loans $6500 to Northgate; SA = AR & Proceeds 5/21/71 FS = Minn SS “Assignment AR” & Proceeds

4/2/72: Thorp loans $ to Northgate; SA/FS = ARo What has priority in AR?

F 2 Views of Description Requirement

o Notice FS adequately covers collateral if is reasonably puts subsequent creditor on notice

Of a need for further inquiry about possibility that collateral is subject to prior SI Reasonableness of notice depends on balancing of factors

Difficulty of making further inquiry VS. Likelihood collateral described in FS is of interest to subsequent creditors

o Independent Sufficiency FS suffices to perfect SI in collateral if FS itself contains reasonable description of collateral Reasonableness of description determined by balancing of factors

Ease with which prior creditor could make description of collateral more precise VS Danger that subsequent creditor might fail to recognize that collateral is covered

FS Description defines Extent of Priorityo Scope of possible priority held by SC is defined by description in FSo Inquiry might tell subsequent part scope of SA todayo Cannot tell what will happen in future, thougho Subsequent SC must control prior FS though K or risk loss of position through interpretation

C. Possession Perfection though Possession [9-313]

o No definition of possessiono Possession effective for certain collateral categorieso New statute offers greater specificity regarding rules in 3rd party situations

Collateral in possession of person other than debtor [9-313(c)]o For collateral other than

Certificated securities Goods covered by document

o SP takes possession of collateral in possession of person (or lessee in OCB) (other than debtor) when Person in possession authenticates a record that it holds possession of collateral for SP’s benefit Person that takes possession of collateral after having recorded that it will hold for SP’s benefit

Secured party’s delivery to person other than debtor [9-313(h)]o SP having possession of collateral does NOT relinquish possession by delivering to

A person other than debtor OR A lessee of collateral from the debtor in ordinary course of debtor’s business

o If person was instructed before delivery or is instructed contemporaneously with delivery To hold possession of collateral for secured party’s benefit OR To redeliver collateral to secured party

Simple Possessiono Facts

1/1: $50 loan from B to D; Watch & receipt are possessed by Bank as collateralo Has perfected SI been created?

Watch is a good under 9-102(a)(44) Goods are possession eligible under 9-313(a) Watch is in possession of SP under 9-313 for purposes of 9-203(b)(3)(B)

Possession & Baileeso Problem 1

Facts 1/1: $50 loan from B to D; Watch & receipt possess by Bank 2/1: Bank gives watch to bailee

Is Bank still perfected? Needs to satisfy mechanics of 9-313(h) If bailee was instructed that holding it for Bank’s benefit as SP then fine

o Problem 2 Facts

1/1: $50 loan from B to D; Watch & receipt possess by Bank 2/1: Bank gives watch back to debtor as bailee

Is Bank still perfected? Undercuts ostensible ownership concern

o It will look like D owns to watch, when really it does not have rights This should NOT be effective – not person other than debtor and not lessee per 9-313(h)

Coral Petroleumo Notice under Old Article 9

Possession used to be effective once SP gave bailee notice that it was being help for SP benefit Now, need authenticated record – acknowledgment from bailee

o Inter-creditor agmt Definition of Collateral

Personal property & fixtures of D Whether now owned or hereafter acquired Wherever located Of any description

Specific security interest Perfected and enforceable SI of S in any of following collateral including proceeds

o Collateral in possession of C (or agent or bailee)o Collateral which is specifically IDed in SA

General security interest Any perfected and enforceable SI of C in collateral, however arising, other than specific

Specific SI > General SI PMSI > Non-PMSI Pro Rata for General SI

General SI of each creditor ranks equally in priority w/in same collateral Normal Timing Rules Called Off

C. Deposit Accounts & Control Perfection Through Control [9-314]

o SI in investment property, deposit accounts, letter-of-credit rights, or electronic chattel papero May be perfected by control

Perfection by filing permitted [9-312(a)]

o SI in chattel paper or investment property may also be perfected by filing Control or possession of certain collateral [9-312(b)]

o SI in deposit account may be perfected ONLY BY CONTROL Deposit Account [9-102(a)(29)]

o Demand, time, savings, passbook, similar account maintained w banko Does not include investment property or accounts evidenced by instrument

Control of Deposit Account [9-104]o Requirements

SP has control of Deposit Account if SP is the bank with which the deposit account is maintained D, SP, and bank have agreed in authenticated record that bank will

o Comply with instruction originated by SP directing disposition of fundso Without further consent by debtor

SP becomes bank’s customer w respect to deposit accounto Debtor’s right to direct disposition

SP has that has done above has control Even if debtor retains right to direct disposition of fund from deposit account

Chattel Paper [9-102(a)(11)]o Records that evidence both

Monetary obligation and SI in specific goods/software used in goods/lease of specific goods

Electronic CP [9-102(a)(31)]o Chattel paper evidence by records consisting of info stored as electronic medium

CP Problemo Facts

1/1: $ from Finco to Debtor; SA/FS = EQ (tangible) 2/1: $ from Bank to Finco

SI: SA or possess under agmt Perfect: File or possess

CPE Problemo Facts

1/1: $ from Finco to Debtor; SA/FS = EQ (electronic) 2/1: $ from Bank to Finco

SI: SA or control under agmt Perfect: File or control

Control of ECP [9-105]o SP has control of ECP is records comprising CP are created, stores, assigned in manner that

Single authoritative copy of record exists which is Unique Identifiable Unalterable

Authoritative copy identifies the SP as assignee or record Authoritative copy is communicated to and maintained by SP or custodian Copies/revisions that add/change an IDed assignee or authoritative copy can be made only w SP Each copy of authoritative copy is readily identifiable Any revision of authoritative copy is readily identifiable as authorized or unauthorized revision

Why does method of perfection matter?o Priority rules give better rights if you possess or control chattel paper

Benedict Counsellero Facts

B lends $ to D; SA/FS = Deposit Accounto Has Perfected SI been created?

NO Control required for non-proceeds interest in deposit account

o Key Question

Should SC be able to have perfected SI even if debtor retains ability to dispose of collateral? NO

Selling Positionso Problem 1

Facts Bank lends $ to D; SA/FS = EQ Bank then sells position to Creditco

To what extent is Creditco perfected? Assignment of perfected SI [9-310(c)]

o If SP assigns perfected SI, filing not required to continue perfectiono Problem 2

Facts Bank lends $ to D; SA = EQ; Bank takes possession of asset Bank then sells position (and transfer possession) to Creditco

To what extent is Creditco perfected? Creditco is fine – perfected

o Assigning is allowed for other methods than filings – like control As long as collateral is maintained by assignor or assignee, no further steps needed

V. Priority

A. Introduction, Theory, & Mechanics Modigliani Miller – Irrelevance Theorem

o Yogi Berra & the Pizza Size of pie is independent of how many slices it is cut into Corporate capital structure is irrelevant for value of firm

o Intuition – Anything you can do I can do Key to theorem is that investors can replicate any debt/equity ratio created by the firm internally By externally creating a portfolio of stock of the pure-equity firm and gov’t bonds

o Key Idea If all-equity firm could create market value by introducing debt into capital structure - by issuing

bonds and using proceeds to buy back stock Then investors in form could have done so by adding bonds to their investment portfolios

Any internal debt move could be matched (offset) by an external debt move So investors should not be willing to pay any premium for internal efforts to create

optimal debt/equity ration Value of firm is therefore independent of capital structure

Hypoo Facts

1st project When value is $100, it works 50% of time $101 project value - 25% success and goes o More value, probability it works declines until it gets close to 0%

2nd project When project value is $1, it works 49% of time $100 project value = 25% success But 1% of time, it is huge payout

o Society Project 1 v. Project 2 depends on the size of X

o Equity Once $100 is in hand and lenders have fixed payment, always prefer project 2

o Why Modigliani-Miller is wrong Capital structure matters – it sets incentives for use of assets

Debtor will chose projects with deft that it would reject in all-equity structure

Creditors need to police this w monitoringo Could secured credit do this?

Can use SI to allocate debtor monitoring burden among creditors Need monitoring to control debtor

Fears of creditor grab may lead to over-monitoring Instead, grab ex ante thu SI to reduce over-monitoring incentive

Implications for Project Choiceo Need for Monitoring

Debtor misbehavior means monitoring by creditors is requiredo Monitoring Consequences

Controls debtor misbehavior But also makes possible deviations from pro rata

o SI allocates monitoring among creditors Key Priority Contexts

o Secured Creditor vs. Other SC USC Lien Creditor Other 3rd parties –like purchasers

General effectiveness [9-201(a)]o SA is effective according to its terms bt parties, against purchasers of collateral, and against creditors

Conflicting Security Interests & Rights of Lien Creditors [9-317(a)]o SI or agricultural lien is subordinate to rights of

Person entitled to priority under 9-322 and Person that becomes lien creditor before earlier time when:

SI or agricultural lien is perfected One of the conditions specified in 9-203(b)(3) is met and FS is filed

Lien Creditor [9-102(a)(52)]o A creditor that has acquired lien on property by attachment, levy, or the like;o An assignee for benefit of creditors from the time of assignment;o Trustee in bankruptcy from date of filing of petition; oro Receiver in equity from time of appointment

Five-year effectiveness [9-515(a)]o A filed FS is effective for 5 years after date of filing

Lapse & Continuation of FS [9-515(c)]o Effectiveness of FS lapses on expiration of period of effectiveness unless continuation statement is filed

before the lapse When continuation statement may be filed [9-515(d)]

o CS may be filed only within 6 mos before expiration of 5 yr period or w/in 30 yr period from (b) Continuous perfection; Perfection by Different Methods [9-308(c)]

o SI or AL is perfected continuously if It is originally perfected by one method under this article and Is later perfected by another method under this article Without an intermediate period when it is unperfected

Conflicting Perfected Security Interests [9-322(a)(1)]o Conflicting perfected SIs and ALs rank according to their priority at time of filing or perfectiono Priority dates from earlier of

Time filing covering collateral is first made OR SI or AL is first perfected

o If no period thereafter when there is neither filing nor perfection Foos

o Facts 1966: Foos and Bank FS = Farm EQ 6/18/80: Foos buys tractor from Rural; SA/FS = tractor

Rural assigns to Case

11/24/82: Case mistakenly terminates FS 12/82: Foos borrows $ from Bank; SA/FS = tractor 2/83: Case files new FS

o Pure Race Statute SC who wins race to file first without regard to creditor’s state of mind Other conclusion would cause confusion and uncertainty and mess up Article 9 Thus, Foos wins bc filed first (both originally and before Case re-filed)

Mixed Perfection & Priorityo Facts

1/1: Corp borrows $10K from Finco; SA = CPU; Perfect via possession 2/1: Corp borrows $10K from Bank; SA/FS = CPU 3/1: Finco FS = Computer; Gives up Possession of CPU

o Who has priority? Earlier of time a filing covering collateral is first made or SI is first perfected Finco wins bc perfected first!

Mixed Financing Statements & Priorityo Facts

1/1/79: Corp borrows $ from Bank; SA/FS = EQ 2/1/79: Corp borrow $ from Finco; SA/FS = EQ 12/1/83: Bank files new FS 1/1/84: Bank’s original FS lapses

o Who has priority? This is Hillyard This is fine – Bank’s financing statement is continuously perfected and they filed first

B. Nature & Limits Possible Priority Devices

o Article 9 Events as Basis for Priorityo Attachment, Perfection, or Filing?

Attachment Difficulties Third parties would find attachment relatively more difficult to know Attachment usually depends on execution of SA, giving value by SC, and D having rights

in Collateral When value is given could be subject to dispute, as could when debtor had rights in

collateral Perfection Difficulties

Perfection requires both attachment and (possession, filing, or control) As ordering device, it has same problems as attachment Has no advantage relative to filing

o Textured Rules Knowledge Good Faith

Knowledge & Textured-Priority Ruleso Facts

1/1: Debtor borrows $100 from Bank; SA = EQ; Bad FS = EQ 2/1: Debtor borrows $100 from Finco; SA/FS = EQ; With Knowledge of Bank 3/1: Debtor borrows $100 from Creditco; SA/FS = EQ; No Knowledge of Bank

o Who has priority? Knowledge: B > F First to make good filing: F > C No knowledge, Bank unperfected: C > B

Marshaling o Problem 1 (TRADITIONAL SEQUENCE)

Facts 1/1: $100 from B to D; SA/FS = EQ, INV

2/1: $100 from F to D; SA/FS = EQ 3/1: $100 from USC to D 3/2: EQ = $100; INV = $99

How should we divide INV & EQ? Inventory first scheme

o $99 from INV to Bo $1 from EQ to Banko $99 from EQ to Fo $0 to USC

Equipment first schemeo $100 from EQ to Bo $49.50 from INV to Fo $49.50 from INV to USC

Marshaling Doctrineo Two parties both secured for one asset, but first party also secured for addt asseto Must collect from asset not shared by both creditors from 1st creditor firsto Here, collect from INV first

o Problem 2 Facts

1/1: $100 from B to D; SA/FS = EQ 2/1: $100 from F to D; SA/FS = EQ 3/1: $100 from USC to D 3/2: EQ = $100; INV = $99

How do we divide assets? Inventory first scheme

o $33 from INV to eacho $67 from EQ to Bo $33 from EQ to USC

Equipment first schemeo $100 from EQ to Bo $49.50 from INV to Fo $49.50 from INV to USC

o Problem 3 Facts

1/1: $100 from B to D; SA/FS = EQ 2/1: $100 from F to D 3/1: $100 from USC to D 3/2: EQ = $100; INV = $99

How do we divide assets? INV first scheme

o $33 from INV to eacho $67 from EQ to Bo $16.50 from EQ to F & USC

EQ first schemeo $100 from EQ to Bo $49.50 from INV to Fo $49.50 from INV to USC

o Problem 4 Facts

1/1: $100 from B to D; SA/FS = EQ 2/1: $100 from F to D 3/1: $100 from USC to D 3/2: EQ = $80; INV = $99

How do we divide assets? INV first scheme

o $33 from INV to eacho $67 from EQ to Bo $6.50 from EQ to F & USC

EQ first schemeo $80 from EQ to Bo $9 from INV to Bo $45 from INV to Fo $45 from INV to USC

o Problem 5 Facts

1/1: $100 from B to D; SA/FS = EQ 1/1: B’s owner does Guarantee 2/1: $100 from F to D; SA/FS = EQ 2/2: EQ = $100; Owners Assets = $99

How do we divide assets? Owner’s assets first

o $99 from owner to Bo $1 from EQ to Bo $99 from EQ to F

EQ firsto $100 from EQ to Banko $0 to F

What should F do? Buy Bank’s Position? See Delaware Truck

Sequence of Realization Matterso True when there are multiple SIs (Problem 1)o But also true with single SI if SC is under-secured (Problem 4)

Delaware Trucko Initial Deals

8/20/84: $75K from Royal to Del Repair 8/29/84: FS for Del Truck/Del Repair Deal = INV, EQ 9/23/84: SA/FS from Royal/Del Repair deal= INV, EQ, AR 9/6/84: Financed Sale bt Del Truck/Del Repair 10/4/84: FS for Del Truck/Del Repair = AR too F and W guarantee Del Truck W guarantee and mortgages Royal Truck sues Repair and F/W

o Agmts Suit bt Del Repair and Royal Suit bt W and Royal Customers give $99K to Del Truck on AR Dep Repair does surrender agmt to Truck Royal and Del Truck assignment settlemnent

Position to Del Truck Subordination

o Priority in the AR Royal filed first, so it does

o Surrender Agmt Transfer of assets from Repair to Truck should reduce Truck debt SI of Royal will survive Truck still has guarantee against F

o AR agmt Collections by junior secured creditors [9-607 Comment 5] May exercise right to collect even if subordinate to conflicting SI in same right

Court says Royal had right to collecto Settlement Agmt

Intent of parties is clearo Marshaling

The Computer Room

o Facts 7/1/81: $ from FAB to CPR; SA/FS = AR, INV, CR 9/18/81: $ from P to CPR; SA = AR Matthews guarantees P

o How should INV and AR be divided up? Marshaling as to SIs

Traditional doctrine applies where SC1 had access to 1 fund and SC2 has 2 funds Marshaling only if no harm to two-funds creditor

Marshaling as to Guarantee Conflict in cases Trustee in bankruptcy looking to reduce claims against estate Guarantor may just substitute for creditor

Meaning of Marshaling for Priority Theoryo Extends priority

By taking SI in equipment, for example With marshaling, SC effectively also has superior claim to INV

C. Secured & Unsecured Creditors Secured Creditors & Lien Creditors

o Problem 1 Facts

1/1: Corp gets $ from Bank; SA = Collateral 2/1: FS for Corp/Bank Deal = Collateral 3/1: LC Runs State Law Process on Corp’s assets

Who has priority? Perfected (attached and filed) before lien creditor status Bank wins!

o Problem 2 Facts

1/1: Corp gets $ from Bank; SA = Collateral 2/1: LC Runs State Law Process on Corp’s assets 3/1: FS for Corp/Bank Deal = Collateral

Who has Priority? LC did process before Bank perfected LC wins!

o Problem 3 Facts

1/1: FS bt Bank and Corp = Collateral 2/1: LC Runs State Law Process on Corp’s assets 3/1: $ loaned by Bank to Corp; SA = Collateral

Who has Priority? Naked financing statement insufficient Not perfected before LC does process bc no attachment LC wins!

o Problem 4 Facts

1/1: No $ yet, but SA bt Corp and Bank = Collateral 2/1: No $ yet, but FS bt Corp and Bank = Collateral 3/1: LC does state run process to collect 3/2 $ finally lent from Bank to Corp

Who has Priority? SI not perfected on 3/1 – no money lent, so no value given, so NOT attached This is change from prior law LC wins!

Lien Creditors & Filing – Should Filing Matter?o At time of lending, USC risks losing priority to a later filing SC

USC should therefore not rely on state of files when they extend credit Little reason to check those files for USC

o USC may check files at time that they seek to levy collateral Reliance at the point may relate to costs expended in levying

o We could give those costs priority relative to unperfected SC without giving the US debt priority Would more closely match time of levy reliance on filing system

Aptixo Facts

$2M USC from M to Aptix 7/20/00: $4.2M in atty fees ordered to Q from A 7/25/00: $9.7M over time from M to Aptix; SA = All assets 8/16/00: FS from A/M deal

o Who has priority? Law = debtor may pay one creditor in favor of other

Negative Pledgeso Facts

1/1: $10K from Creditco to Corp; USC 2/1: $20K from Finco to Corp; Neg pledge

“Corp won’t grant SI in any assets” 3/1: $30K from Bank to Corp; SA/FS = All assets 3/1: $40K in assets

o Who has priority? Separate property rights from purely contractual rights Step 1 - $30K to bank on its SI Step 2 - $10K pro rata to C and F as USCs

C gets $3,333 F gets $6,667

Step 3 – Treat neg pledge as contractual right of parity bt F and B Reallocate their funds pro rata

o F gets $14,667o B gets $22,000

Mudgeo Facts

7/31/81: Financed Sale bt Mudge and Redding; Neg. Price 9/81: $100K from Bank to Redding; SA = INV, EQ

o Tortious Interference w Contracts One who interferes with K such that party can’t perform Subject to loss resulting to other from failure of 3rd person to perform Requires knowledge by party accused of interfering

Difficult to know, though Creates circular priority possibilities Would be cleaner if we just required filing of negative pledge

o Then lack of knowledge would not be an excuse bc would be easy to findo Alienability of Debtor’s Rights [9-401]

Whether a D’s rights in collateral may be transferred is governed by other law Agmt bt D and SP which prohibits transfer of D’s rights does not prevent transfer

o Negative Pledge Covenant [9-401 Comment 5] D has rights in collateral which it can transfer and which Cs can reach So, D can breach neg pledge and transfer (bc we rarely enforce limitations on alienability)

But, agmt w neg pledge not necessarily ineffective, so D’s breach may cause default Person bound by negative pledge should just breach it and then deal with issue of damages

D. Purchase Money Security Interests SI = PMSI to extent that it is [F9-107]

o Taken or retained by seller of collateral To secure all or part of its price; OR

o Taken by person who By making advances or incurring obligation Gives value to enable debtor to acquire rights in or use collateral If such value is, in fact, used

Definitions [9-103(a)]o Purchase money collateral

Goods or software that secures purchase money obligation incurred w respect to that collateralo Purchase money obligation

Obligation incurred as all or part of price of collateral or value given to enable A to Acquire rights in or use collateral If value is in fact used

Purchase –money security interest in goodso SI in goods = PMSI

To extent that goods are purchase money collateral W respect to that SI

o If SI is in inventory that is or was purchase money collateral To extent that SI secures Purchase money obligation incurred

W respect to other inventory in which SP holds PMSIo If SI is in software that is or was purchase money collateral

To extent that SI secures PM obligation incurred w respect to software in which SP has PMSI Application of payment in non-consumer-goods transaction [9-103(e)]

o In transaction other than consumer-goods transaction If extent to which SI is PMSI depends on application of payment to particular obligation The payment must be applied

In accordance w reasonable method of application to which parties agree In absence of parties’ agmt to reasonable method

o In accordance w any intention of obligor manifested at/before time of payment or In absence of agmt to reasonable method, in following order

o To obligations that are not securedo If more than one obligation is secured

To obligations secured by PMSI in order in which incurred Priority of PMSI

o Goods purchase-money priority (general rule) [9-324(a)] Perfected PMSI in goods (other than inventory/livestock) has priority over conflicting SI in same

goods (also perfected SI in its identifiable proceeds has priority) IF PMSI is perfected when D receives possession of collateral Or within 20 days after

o Inventory purchase-money priority [9-324(b)] Perfected PMSI in inventory has priority over conflicting SI in same inventory (also has priority

in identifiable cash proceeds of inventory - to extent proceeds are rec’d on or before delivery of inventory to buyer) IF

PMSI is perfected when D receives possession of inventory PMS party sends authenticated notification to holder of conflicting SI Holder of conflicting SI receives notification w/in 5 yrs b4 D receives inventory AMD Notification states that notifying party has or expects to get PMSI in inventory and

describes the inventory PMSIs and Current Assets

o Facts

1/1: D and B do deal; SA/FS = EQ, INV, PR, AA Prop 2/1: D sells INV; B’s SI is cutoff 3/1: Supplier sells INV to D; SA/FS = INV 3/2 Supplier give notice to B

o What are rights of Bank and Supplier? Be sensitive to timing For PMSI status

Need to be perfected when D receives possession Notice must be given to competing SI holder before D takes possession

o Better structure 1/1: D and B do deal; SA/FS = EQ, INV, PR, AA Prop 2/1: D sells INV; B’s SI is cutoff 3/1: Supplier notice to Bank 3/2 FS bc D and supplier = INV 3/3: Supplier sells INV to D; SA = INV

PMSIs and Categorization of Collateralo Problem 1

Facts 2/1: Accountant and B do deal; SA/FS = EQ, INV, PR, AA Prop 3/1: Seller sells Computer to Accountant; SA = CPU 3/6: FS bt Accoutn and Seller = CPU

What are rights of Bank and seller? Classifying collateral given different notice rules for INV and GOODS

o CPU = EQ in accountant’s hands EQ = residual category of GOODS

20 days after possession to perfect and no notice required Seller had good PMSI and will have priority

o Problem 2 Facts

2/1: Retailer and B do deal; SA/FS = EQ, INV, PR, AA Prop 3/1: MFG gives Computer to Retailer; SA = CPU 3/6: FS bt MFG and Retailer = CPU

What are respective rights of Bank and Seller? Now CPU is inventory bc retailer MFG perfected after R rec’d possession M also did not give notice to Bank M thus loses PMSI status – perfected, but junior to Bank

PMSIs and Multiple Debtso Facts

1/1: D and B deal; SA = EQ 2/1: D and Seller copy machine sale; $, int payments 2/6: D and Seller deal FS = Copy Machine Assume copier is EQ in D’s hands

o What is Seller’s status? Part of purchase money obligation

PMSIs and Date of Possessiono Facts

1/1: D and S; 3 month true lease for CPU 4/1: Financed sale bt D and Seller; SA/FS = CPU

o Does Seller have PMSI? Statute requires perfection within 20 days of taking possession of collateral Collateral = prop subject to SI Not collateral until loan made on 4/1 (even though D took possession on 1/1) Should be okay – yes PMSI!

PMSIs, Defective Notice, and Circular Priorityo Facts

1/1: Debtor and Bank; SA/FS = INV 2/1: Debtor and Creditco; SA/FS = INV 2/2: Supplier INV sale to Creditco and Debtor; SA/FS = INV before delivery 2/2 Notice from Supplier to Bank and Debtor Supplier didn’t give notice to Creditco

o What are relative priorities of B, S, and C? Bank > Creditco Creditco > Supplier Supplier > Bank Notice: condition good as to one and not other introduces circular priority problem

M Bank Alamoo Facts

R claims PMSI in AR H sells X-ray machine on credit to customer creating AR R says its extension of credit enabled H to acquire AR

Why didn’t R claim PMSI priority inventory in H’s hands? Failed to give notice required by 324(b) for inventory

What if R had given notice? Priority in inventory does NOT extend to priority in AR as proceeds of inventory Need to track progress of collateral and possible changes in priority

o Holding Priority in INV does not extend to priority in AR as proceeds of the inventory

Cross Collateralization o Equipment Problem

3/3: $10K EQ/Debt Std PMSI status 4/1 $10K EQ/Debt Std PMSI status Debtor grants SI in EQ no owned or later acquired to secure all obligations ORDINARY PMSI status

o Inventory Problem 3/3: $10K INV/Debt Std PMSI status 4/1 $10K INV/Debt Std PMSI status Debtor grants SI in INV now owned or later acquired to secure all obligations SPECIAL PMSI STATUS – 9-103(b)(2)

Billingso Facts

Financed Sale bt Factory Outlet and Billings - PMSI Outlet Assigned to Avco Billings refinanced – New Nota and SA

o Does AVCO have PMSI? F

No loss of status of PMSI in non-consumer goods transaction [9-103(f)]o In transaction other than consumer goods, PMSI does not lose status even if

PM collateral also secures obligation that is not PMSI Collateral that is not PM collateral secures PM obligation or PM obligation has been renewed, refinanced, consolidated, restructured

Non-consumer goods trans – no inference [9-103(h)]o Intended to leave to court determination of proper rules in consumer-goods transactionso Court may not infer from limitation, the nature of rule – apply established approaches

Bankruptcy Code 522(f)o D may avoid fixing of lien on interest of debtor to extent that lien impairs exemption that D would have

been entitled to if such lien is Non-possessory, non PMSI interest in

Household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, jewelry that are help primarily for personal, family household use of D

Implements, professional books, tools of D’s trade

Professionally prescribed health aids of D Two approaches

o Transformation Rule Refinancing eliminates PMSI character

o Dual Status Rule Allows PMSI to maintain that character to extent that PMSI debt survives refinancing

Graupnero Facts

G buys 2002 Chevy G buys 2005 Chevy

At this time, 2002 Chevy has $6K negative equityo Meaning he owed $16K and it was worth $10K

Cash price of 2005 = $33K Finances, secured by new car, $36K

o Represents part purchase price of new car and part neg equity of old Chapter 11 Bankruptcy 10 months later

Debt to Creditor = $33K Claimed market value for new car was $23K Debtor wants to bifurcate debt under BC

o Secured debt for $23Ko USC debt for $10K

Hanging Paragrapho For motor vehicles for personal use

o Hypo 1 Facts

Debtor sells used car to 3rd party for $10Ko Pays down debt o Still owes sells $6K

D buys new car for $30Ko New seller turns over new car o New sellers gives $6K in cash

Now, financed secured debt of $36K PMSI?

Fo Hypo 2

Facts D buys 2002 car

o Drives for 3 yearso Returns to original dealer

Dealer buys used car for $10K credited to debto D still owes dealer $6K

D buys new car from dealer for $30Ko Financed secured debt now $36K

VI. Proceeds Proceeds & Supporting Obligations [9-203(f)]

o Attachment of SI in collateral Gives SP rights to proceeds Is also attachment of SI in supporting obligation of collateral

Disposition of collateral: continuation of SI; Proceeds [9-315(a)]o SI continues in collateral notwithstanding sale, lease, license, exchange, other disposition

Unless SP authorized disposition free of the SIo SI attaches to any identifiable proceeds of collateral

Continuation of SI following disposition of collateral [Official Comment 2]

o SI survives disposition of collateral such that SP may Repossess collateral from transferee OR maintain action for conversion Claim both proceeds and original collateral (may only have 1 satisfaction, though)

Incentives for Purchaser o Selling the House, Going to Rio

X buys home – financed by real estate mortgage in favor of Bank Bank takes appropriate steps to note mortgage in RE records X sells house to buyer – pockets cash and disappears to Rio Mortgage survives sale

o Where does this put Bank & Buyer? When commingled proceeds identifiable [9-315(b)]

o If proceeds are goods Proceeds that are commingled w other property are identifiable proceeds

o If proceeds NOT goods Proceeds that are commingled w other property are identifiable proceeds

To extent that SP identifies proceeds by method of tracing (including application of equitable principles)

That is permitted under other law w respect to type of commingled property Perfection of SI in proceeds [9-315(c)]

o SI in proceeds is perfected IF SI in original collateral was perfected (perfected automatically for 20 days)

Continuation of perfection [9-315(d)]o Perfected SI in proceeds becomes unperfected on 21st day after SI attaches to proceeds UNLESS

(1)Following conditions are satisfied Filed financing statement covers original collateral Proceeds are collateral in which SI may be perfected by filing AND Proceeds are not acquired w cash proceeds

(2)Proceeds are identifiable cash proceeds OR (3)SI in proceeds is perfected (other than under (c)) when

SI attaches to proceeds OR Within 20 days thereafter

Time of perfection: proceeds and supporting obligations [9-322(b)(1)]o Time of filing/perfection as to SI in collateral is also time of filing/perfection as to SI in proceeds

Proceeds Definitionso Proceeds means the following property [9-102(a)(64)]

Whatever is acquired upon sale, lease, license, exchange, or other disposition of collateral Whatever is collected on, or distributed on account of, collateral Rights arising out of collateral Claims arising out of loss, nonconformity, interference w use, defects of infringement of rights in,

or damage to, the collateral To extent of value of collateral only

Insurance payable by reason of loss of nonconformity of, defects or infringement of rights in, or damage to, the collateral

To extend of value of collateral and to extent payable to debtor or SPo Cash proceeds means [9-102(a)(9)]

Proceeds that are money, checks, deposit accounts, or the like Unremarkable Proceeds Example

o Scenario 1 2/1: $ loans from Bank to Debtor; SA/FS = Painting and all proceeds

o What are Bank’s rights? Bank has SI in painter per 9-315

o Scenario 2 2/1: $ loans from Bank to Debtor; SA/FS = Painting and all proceeds 3/1: Debtor Swaps Painting with 3rd Party for Computer

o What are Bank’s rights? 9-203(f) – interest in original collateral creates rights

CPU will be proceeds of painting per 9-102(a)(64) Will be identifiable per 315(a)(2)

Perfection Initially perfected Thereafter perfected per 9-315(d)(1)

Priority Same date of priority of original collateral per (9-322)(b)(1)

o Scenario 3 2/1: $ loans from Bank to Debtor; SA/FS = Painting and all proceeds 4/1: Painting $ CPU

o What are Bank’s rights? Painting exchanged for $

Attachmento Is this an identifiable proceed?

Perfectiono OK – identifiable cash proceeds are covered

Priorityo Same time as original so this is no problem for Bank to win

$ exchanged for CPU Attachment

o $ = proceeds of paintingo These proceeds are collateralo Thus, CPU is proceeds of $o Attachment!

Perfectiono 20 day grace periodo Does NOT get benefit of (d)(1) – eliminated for 2nd gen proceedso Need to affirmatively perfect before 20 days

o Scenario 4 2/1: $ loans from Bank to Debtor; SA/FS = Painting and all proceeds 6/1: Painting exchanged for $2K, which is put in checking account

Checking had $1K in it on 6/1 6/2: $2K check used to buy CPU

o What are Bank’s rights? Painting for $

As above – it is a perfected SI still in the $ bc proceeds from original $ into Deposit Account

DA counts as cash proceedso Proceeds of proceeds like this are fine

But here there is commingling of proceeds and non-proceedso $1K already in account before $2K is deposited as proceedso Requires tracing to meet ID standard

Perfection appears to be covered Used check to buy CPU

CPU must be at least partially purchased w proceeds CPU will therefore be proceeds of proceeds which is fine Automatic 20 day perfection if file new FS Again, don’t get 315(d)(1) bc 2nd generation proceeds

o Scenario 5 2/1: $ loans from Bank to Debtor; SA/FS = Painting and all proceeds 7/1: Painting bought by third party on $2K credit via debtor 8/1: 3rd party paid off D w/ interest = $2,020 8/2: Bank credits deposit account of Debtor

o What are Bank’s rights? Initial credit sale

Credit sale creates an account Account will be proceeds but not cash proceeds Good attachment, 20 day auto-perfection Continued perfection under 9-315(d)(1)(A)

Payment w Interest via Check Check is not cash proceeds Continued perfection via (d)(3)

Deposit into checking account Same as above – it is proceeds or proceeds and legit

Orixo Facts

O and Beach; SA = All Assets, 2 FCC Licenses Beach then sells licenses to Purchaser for $140K

o Does Orix have SI in proceeds of license?

VII. Deposit Accounts/Transfer of Property Proceeds and Priority

o Hypo1 2/1: B $ to D; SA/FS = INV and PR 3/1: F $ to D; SA/FS = AC and PR

o Who has priority? No conflict – Bank wins for INV and Finco wins for AC

o Hypo2 2/1: B $ to D; SA/FS = INV and PR 3/1: F $ to D; SA/FS = AC and PR 4/1: D sells inventory on credit

o Who has priority? Sale on credit gives rise to account F claims interest as original collateral by has SI in AC B claims interests as proceeds by says account is proceed of INV F’s priority dates from 3/1; B’s to 2/1 (so Bank would win)

o Hypo3 2/1: B $ to D; SA/FS = AC and PR 3/1: F $ to D; SA/FS = INV and PR

o Who has priority? No conflict – Bank wins for AC and Finco wins for INV

o Hypo4 2/1: B $ to D; SA/FS = AC and PR 3/1: F $ to D; SA/FS = INV and PR 4/1: D sells inventory on credit

o Who has priority? Sale on credit gives rise to account F claims interest as original collateral by has SI in AC B claims interests as proceeds by says account is proceed of INV F’s priority dates from 3/1; B’s to 3/1 (so Finco would win)

Diamond Walnuto Facts

Bella and Bank 1981: $ from Bank to Bella; USC SA/FS = 1983 Crop $ PR/FS

Bella and Diamond $ is lent and Bella Delivers crop to Diamond

SA = Member proceeds 1983 Walnut Crop FS = Calif SS

Diamond and Customers Customer pay $ Diamond sells crop

o Who has priority of crop and who has priority of proceeds? D

Control of Deposit Account – Requirements [9-104(a)]o SP has control of deposit account if

SP is bank with which DA is maintained; Debtor, SP, and Bank have agreed on authenticated record that Bank will comply w

Instructions originated by SP directing disposition of funds in account Without need of further consent of debtor

SP becomes Bank’s customer w respect to deposit account Deposit Account Priority [9-327]

o Following rules govern priority among conflicting SIs in same DA (1) SI held by SP having control of DA has priority over conflicting SI held by SP w/out control (2) SIs perfected by control rank according to priority in time of obtaining control (3) SI held by bank w which DA is maintained has priority over conflicting SI held be another SP (4) SI perfected by control has priority over SI held by bank w which DA is maintained

o Examples SP as Customer v. Bank in Control

SP wins SP Otherwise v. Bank in Control

Bank wins SP Control v. SP Control

First in time wins SP Control v. SP Non-Control

Controlling SP wins Control v. Proceeds Interest

o Scenario 1 2/1: $ from B to D; B has control of DA 3/1: $ from F to D; SA/FS = INV/ACC/PR 4/1: D sells INV and gets $10K in Account (controlled by Bank)

o Who has priority? Bank has right to account on 4/1 Finco is not fully perfected

o Scenario 2 2/1: $ from B to D; B has control of DA 3/1: $ from F to D; SA/FS = INV/ACC/PR 5/1: Customer pays D via check and D deposits into account

o Who has priority? Finco has perfected SI in DA as proceeds DA is identifiable cash proceeds, so covered under 9-315(d)(2) Bank wins under 9-327(1) even under this check scenario

o Scenario 3 2/1: $ from B to D; B has control of DA 3/1: $ from F to D; SA/FS = INV/ACC/PR 4/1 Debtor sells INV for $ 5/1: Customer pays D via check and D deposits into account

o Who has priority? Doesn’t change things to sell on 4/1 bc priority is not temporal Method of perfection control Timing does NOT control Bank still wins

Proceeds v. Proceeds

o Facts: 2/1: $ from B to D; B has control of DA 3/1: $ from F to D; SA/FS = INV/ACC/PR 5/2: Debtor withdraws $ from DA and buys new inventory

o Who are relative priorities of Bank and Finco? Proceeds or controlled collateral per 9-322(c), (d), (e)

Special Priority Rules; Proceeds and Supporting Obligations [9-322(c)]o SI in collateral which qualifies for priority over conflicting SI also has priority over conflicting SI in

Any supporting obligation for the collateral Proceeds of the collateral IF

SI in proceeds is perfected Proceeds are cash proceeds OR of same type as collateral; AND For proceeds or proceeds, all intervening proceeds are cash proceeds, of same type, or

account relating to collateral First to file priority rule for certain collateral [9-322(d)]

o IF SI is perfected by method other than filingo Then conflicting perfected SIs in proceeds of collateral rank according to priority in time of filingo For certain SIs

Chattel paper Deposit accounts Negotiable docs Instruments Investment property Letter-of-credit rights

o Only applies if proceeds of collateral are NOT Cash proceeds Chattel paper Negotiable documents Instruments Investment property OR Letter-of-credit rights

Continuation of SI after Transfer [9-315]o (a) Disposition of collateral; continuation of SI or agricultural lien; proceeds

SI continues in collateral notwithstanding sale, lease, disposition, etc Unless SP authorized disposition free of SI

Buyer in Ordinary Course of Biz [9-320(a)]o BIOCOC (other than person buying farm products from person engaged in farming operation)

Takes free of SI created by Buyer’s seller Even if SI is perfected and buyer knows of its existence

o BIOCOC means Person that buys goods in good faith Without knowledge that sale violates rights of another person in good And in ordinary course from person (other than pawnbroker) in biz of selling goods of that kind Also the following satisfies

If Sale to person comports with usual/customary practices in kind of biz in which seller engages or

With seller’s usual or customary practices Sales from INV

o Facts 1/1: Bank to Debtor; SA/FS = PP, TO, TA 2/1: Debtor sells Washing machine to Customer

o Does Bank’s SI in washing machine survive sale? Customer takes free and clear of Bank’s SI!!! BIOCOB

Bean Timberland

o Facts Bank and Bean – SA/FS = Timber Bean sells cut Timber to P and I

o Is Timber inventory such that P and I are BIOCOB? Need to check def of inventory

VIII. Changes

A. Change of Location & Choice of Law

1. Law Choice of Law by Parties

o Generally Respected [1-301/2]o Called off for perfection in Article 9 [1-301(g)(8)]

Old Article 9o Property w natural location

Substantive law of JX where located controlso Property w/out natural location

Location of Debtor controls – covers accounts, in tangible, and mobile goods New Article 9 [9-301]

o Following Rules determine law governing perfection and effect of perfection/priority While D located in JX, local law of JX governs perfection, effect, and priority While collateral located in JX, local law of JX governs perfection, effect, and priority of a

POSSESSORY SI While negotiable docs, goods, instruments, $, tangible chattel located in JX, local law governs

Perfection of SI in goods by filing fixture filing Perfection of SI in timber to be cut Effect of perfection and priority of NON-POSSESSORY SI in collateral

Local law of JX in which wellhead or minehead is located governs perfection, effect of perfection, and priority of AS-EXTRACTED COLLATERAL

Two Questionso Are you Perfected?

Green = governs perfectiono If you are perfected, with what consequences?

Purple – governs effect of perfection and priority of SI in collateral Filings Offices

o If local law of State governs perfection, office where to file to perfect is filing office Location of Debtor [9-307]

o (a) Place of business – place where debtor conducts its affairso (b) Debtor’s location – following rules determine D’s location

(1) If D is individual, then located at principal residence (2) if D is org w 1 place of biz, then located at place of biz (3) if D is org w several places of biz, then located at chief executive office

o (e) Location of registered org under State law Located in state where registered

Rolling Down Highway Hypoo Facts

1/1: PA Debtor gets $ from Bank; SA=INV, AC, CR, CP, Inst FS filed in PA

2/1: PA Debtor buys from MI Seller some steel bars in Michigan 2/6: LC seizes bars and sues in MI state court

o Who has priority? Old answer

Collateral’s natural location was in MI – MI law woud apply

MI filing would be needed and Bank didn’t file yet in MI so LC would win New statute

Perfectiono Use location of Debtor hereo Debtor located in PA bc PA corporation – PA law governso Bank perfected under PA law

Effect of perfectiono Use law from location of collateral – MI law hereo Perfected SC in MI beats LCo Bank wins

New Statute Simplifies Filing Locationo Need not file in location of collateral to perfecto Used to have to keep filing wherever collateral locatedo Now just file in location of debtor

New Statute Misses Accounts and General Intangibleso Not covered so effect of perfection and priority governed by D locationo Perfection always covered by D locationo For accounts/GIs, though, everything covered by location of D

Effect on perfection of change in governing law [9-316]o SI perfected per law of JX remains perfected until earliest of

(1)time perfection would have ceased under law of JX (2)expiration of 4 months after change of D’s location to another JX (3)expiration of 1 year after transfer of collateral to person that becomes debtor and is located in

other JX

2. Debtor Location Debtor Changes Location

o Facts 2/1: Deal bt Bank and NY Corp; SA = INV

FS filed in NY 3/1: NY Corp reincorporates in NJ

o Is Bank perfected on 3/1 and 8/1? Remains perfected until 4 mos after change of D’s location to another JX Perfected on 3/1 still Not perfected on 8/1 bc more than 4 months and no re-filing

Move of Debtor Company Testo Old statute – CEO location

(1) from which place does debtor manage the main part of biz operations; AND (2) where would creditors reasonably be expected to search for credit info

o New Statute CEO location irrelevant for corps Still matters for some entities

Unanticipated Movements of Collateralo Facts

2/1: Deal Bt Bank and NY Corp; SA = INV FS filed in NYC

3/1: Corp Debtor moves to NJ 5/1: Corp deal with Finco; SA = INV

FS filed in NJo Who has priority on 6/1 and 8/1?

Old statute – SI brought into new state perfected for 4 months – then must refile New Statute – file based on location of debtor

Movement of collateral from JX to JX is irrelevant NY corp remains NY corp and perfected there

SO Bank is perfected at each point

Secured Creditor v. Buyero Hypo 1

2/1: Bank and Debtor deal – FS/SA = ??? Debtor then sells to Buyer

o Does Bank still have SI? – normally SI survives unless SP authorized free and clear– even if SP knows BUT IF BIOCOB

Buyer takes free and clear Even if knowledge of SI

BUT IF NOT BIOCOB Buyer takes free and clear only if

o NO knowledge of SIo Receives delivery before SI perfects

This was regular buyer Becomes debtor – person having not security interest in collateral

o Hypo 2 Same thing and buyer is NY Corp – BIOCOB

o Is Bank perfect on 3/1, 4/1, one year later? SI survived and FS is still effective Bank is still perfected one year later – no change in location

o Hypo 3 Same thing as BIOCOB but buyer is now NJ corp

o Is Bank perfected? 3/1 bank is perfected bc SI remains effective But a year later – Bank would need to refuel before year bc change in location triggered 9-316(a)

(3) If no refilling, then Bank on 4/1 has taken subject to unperfected SI – what happens then?

Buyer takes free and clear of SI Security Interest perfected or unperfected under new law of JX [9-316(b)]

o If SI becomes unperfected under law of new JX before earlier time, it remains perfectedo If it does not perfect before time, it is unperfected and is deemed never to have been perfected

Knowledge [1-202]o Person has notice when the person

Has actual knowledge Has rec’d notice or notification From all facts known to person, has reason to know

o Person has knowledge when They have actual knowledge Knows means same thing

Pearl Rivero 9-317 provides takes free of SI under retroactive unperfection but knowledge prevents thato Filed FS should not suffice as knowledge

B. Change in Debts & Debtors

1. After-Acquired Property After-Aquired Property [9-204]

o (a)SA may create SI in after-acquired collateralo (b)SA does NOT attach under AAP clause to

(1)consumer goods, other than accession, when given as addt security Unless D acquires rights in them w/in 10 days after SP gives value

(2)commercial tort claim Inventory Turnover

o Facts 1/1: $10K Deal bt Debtor and Bank; SA/FS = INV 2/1: D has sold and replaced INV

o What are Bank’s rights? Bank has perfected SI in 2/1 inventory based on 1/1 SA Could be clearer by saying “now owned or hereinafter acquired” Perfected still and priority dates back to 1/1

Zartmano Key Structural Points

SI on inventory does NOT create absolute lien on AAP, but one that ripens on repossession General Creditors can defeat this interest prior to repossession but not after!

o Bank’s Argument Mortgage did not create absolute lien But operated as executor contract to deliver possession upon default And to place property as it then existed under lien or mortgage Taking possession ripens the lien

o Mortgage Holder v. USC Wont treat K to give mortgage upon subject to come into existence in the future as mortgage

actually then given If result would deprive general creditors w superior equities (so far as AAP is concerned) their

only chance to collect debts

2. Future Advances Future Advances and other Value [9-204(c)]

o SA may provide that collateral secures (or accounts, chattel paper, payment intangibles, promissory notes are sold in connection with) FUTURE ADVANCES or other value

Whether or not the advances or value are given pursuant to commitment Future Advances and Secured Creditors

o General Rule for SP v. SP = Date of advance irrelevant to priorityo Thus, SP takes subject to all advances secured by competing SI having priority

Multiple Advances, Single Financing Statemento Facts

2/1: $10 Deal bt Debtor and Bank; SA/FS = EQ 3/1: $10K Deal again bt Debtor and Bank; SA = EQ

o What is Bank’s status and priority? Single FS gives notice for all SAs covered by it Bank perfected for both loans with priority back to 2/1

Competing Secured Creditorso Facts

2/1: $10K Deal bt Debtor and Bank; SA=EQ, covering all owned now and later FS says just EQ

2/15: $10 Deal bt Bank and Finco; SA/FS=EQ 6/1: Another $10K deal bt Bank and Debtor 6/15: EQ Worth $20K

o How to split EQ? FS perfected EQ on 2/1 – priority for both loans covered by this FS Bank wins whole $20K

Future Advances and Lien Creditors [9-323(b)]o SI is subordinate to rights of lien creditor if SI secures advance made more than 45 days after person

became a LC unless advance is made w/out knowledge or lien; or pursuant to commitment entered into w/out knowledge of lien

Secured Creditor v. Lien Creditoro Hypo 1

Facts 2/1: $10K deal bt Bank and Debtor; SA = EQ now and later; FS = EQ 2/15: USC bc LC owed $10K 6/1: Addt $10K is loaned from Bank to Debtor 6/15: $20K of EQ

How to split EQ $? Bank protected for 45 days – and longer if no knowledge Bank thus gets priority for both loans and wins $20K

o Hypo 2 Facts

2/1: $10K deal bt Bank and Debtor; SA = EQ now and later; FS = EQ 2/15: USC bc LC owed $10K 2/16: LC gives Bank knowledge of lien 6/1: Addt $10K is loaned from Bank to Debtor 6/15: $20K of EQ

How to split EQ $? Bank protected for 45 days – and longer if no knowledge But Bank has knowledge so only protected 45 days after 2/16 Bank win $10K from first loan and then LC wins $10K for their lien

Summaryo SP v. SP

Prior SP has absolute right to advance and junior SP falls farther behindo SP v. LC

IF SP not knowledge of lien, has absolute right like above IF SP has knowledge, LC can limit SP to 45 day window of advances

Baseline problemso Hypo 1

Facts 2/1:$10K deal bt Bank and Debtor; SA/FS = EQ now and later for all debts 2/15: $10K deal bt Finco and Debtor; SA/FS = EQ 3/5:$10K deal bt USC and Debtor 4/15: $20K in EQ

How is EQ $ split? $10K each to B and F; $0 to USC

o Hypo 2 Facts

2/1:$10K deal bt Bank and Debtor; SA/FS = EQ now and later for all debts 2/15: $10K deal bt Finco and Debtor; SA/FS = EQ 3/5:$10K deal bt USC and Debtor 4/5: Bank lends $10K to Debtor to repay USC 4/15: $20K in EQ

How is EQ $ split? USC already paid by Bank Bank gets $20K bc priority date to both loans

C. Change in Name & Entity Structure Assignment Problem:

o Facts 2/1:$10K deal bt Bank and Debtor; SA/FS = EQ now and later for all debts 2/15: $10K deal bt Finco and Debtor; SA/FS = EQ 3/5:$10K deal bt USC and Debtor 4/5: Bank buys USC debt for $9K 4/15: $20K in EQ

o How is EQ $ split? This is simple version of Fretz

Name Change Problemso Hypo 1

Facts 2/1: Deal bt Bank and Smith; SA/FS = EQ 2/2 Smith changes name to Jones 2/3: Deal by Dones and Finco; FS/SA = EQ

What are Bank and Finco’s rights as of 4/1? Seriously misleading name change?

o Searing for Smith would not find Jones o Thus, seriously misleading

9-507(c) still says Bank winso Preexisting FS good for all pre-change prop and for prop acquired w/in 4 mos

o Hypo 2 Facts

1/31: Bank knows of coming name change from Smith to Jones 2/1: Deal bt Bank and Smith; SA/FS = EQ 2/2 Smith changes name to Jones 2/3: Deal by Dones and Finco; FS/SA = EQ

Does knowledge by Bank change outcome? Statute does not suggest that knowledge matters Given 4 month rule, largely self-policing Knowledge would create risk of circular priority BANK WINS still

o Hypo 3 Facts

1/30: Bank knows of coming name change from Smith to Jones 1/31: Smith changes name to Jones 2/1: Deal bt Bank and Smith; SA/FS = EQ 3/1: Deal by Dones and Finco; FS/SA = EQ

Does this change outcome? Does original FS become effective when made with corp that no longer nominally exists That is only issue – it probably should not be effective bc seriously misleading

Incorporation of Sole Proprietorshipso Facts

2/1: Deal bt Bank and Joe’s Place; SA = All Assets and AAP; FS = Joe 2/28: Joes incorporates to Joe’s Place Inc. 3/1: Finco and Joe’s Place Inc do deal; SA = AA and AAP; FS = Joe Inc

o Who has priority Pre-change assets

SI survives transfer under 9-315(a)(1) FS remains effective under 9-507(a) Bank wins!

Post-change assets Bank has no SI with Joes, Inc. Thus, no way to get SI in JPI assets except thru proceeds rule Revised 9 creates some special rules though

o Attachment of SI (9-203) Original creditor who did Joes Place, for example, can get SI in new

assets acquired by JPI Independent of any proceeds interest that Bank might claim

o Is SI perfected? (9-508) Bank’s SI in AAP acquired by acquired by JPI is perfected as to prop

acquired w/in 4 mos And thereafter too if Debtors new name does not make old FS seriously

misleadingo Priority of SI (9-326)

Bank loses to Finco as to AAP acquired by JPI Bank will be perfected as to that solely thru 9-508 Thus, subordinate to Finco who perfected not solely thru 9-508

Debtor Definitionso New debtor [9-102(a)(56)]

Person that becomes bound as debtor by SA previously entered into by another

o Original debtor [9-102(a)(60)] Person that, as debtor, entered into SA to which new debtor has become bound

When person becomes bound by another’s SA [9-203(d)]o Person becomes bound as debtor by SA entered into by another if, by operation of law,

(1) SA becomes effective to create SI in person’s property; or (2) person becomes generally obligated for obligations of other person, including SA, and

acquires or succeeds to all assets of the other person Effect of new debtor becoming bound [9-203(e)]

o If new debtor bound as debtor by SA enter into by another (1) agreement satisfies (b)(3) w respect to existing or AAP or new debtor to extent property is

described in agmt; AND (2) another agmt no necessary to make SI in property enforceable

Financing Statement naming Original Debtor [9-508(a)]o Filed FS naming original debtor IS effective to perfect SI in collateral in which new D has/gets rightso To extent that FS would have been effective had original debtor acquired rights in the collateral

FS becoming seriously misleading [9-508(b)]o If difference bt name of original D and new D causes FS to be seriously misleading

(1)FS is effective to perfect a SI in collateral acquired by new D (before and within 4 mos after new D becomes bound by 9-203) AND

(2)FS is NOT effective to perfect SI in collateral acquired by new D more than 4 mos after new D becomes bound by 9-203(d) (unless initial FS providing name of new D filed before expiration)

When section NOT applicable (9-508)o Section does NOT apply to collateral as to which filed FS remains effective against new D

Subordination of SI created by new debtor [9-326(a)]o SI created by new D which is perfected by filed FS that is effective per 9-508 in collateral in which a new

D has or acquires rightso Subordinate to SI in same collateral which is perfected other than by filed FS that is effective per 9-508

Priority under other provisions; multiples originals Ds [9-326(b)]o Other provisions determine priority among conflicting SIs in same collateral perfected by filed FS that are

effective solely per 9-508o However, if SA to which new D becomes bound as D were not entered into by same original D,

Then conflicting SI rank according to priority in time of new D’s having become bound Summit Staffing

o Facts 8/22/01: Deal bt Randy and A Bank

9/4/01: FS for this deal filed – named SS as 2nd debtor 3/14/02: Randy incorporates as Summit Staffing of Polk County

o What is SP’s position on 10/16/02? New corp is generally obligated per old sole proprietorship Has all obligations and assets of old, include SA Holding

o Duty to Search v. Duty to Look Searcher NOT required to conduct multiple searches However, must reasonably examine results of proper search using D’s correct name If reasonably diligent searcher would find erroneous FS among results, then notice is good

Planned Furnitureo Facts

2/4/99: Deal bt Ben and Laura Y and Bank; SA = INV, EQ, ALL assets of Salem 2/22/99: FS = B and L Y 2/25/99: B and L Y incorporate to Ben Youngblood, Inc. 7/9/01: modification done w B and L

o What is Bank’s position on 10/16/02? Search for correct would yield erroneous (old) FS NOT seriously misleading Bank still had SI perfected at time, so no case against Bank

SUMMARY

o Name changes and 4 month rule of 9-507(c) Name change of debtor is key given indexing rules for FSs Burden allocation issue by initial SPs and subsequent SPs IF change is misleading, initial SC loses perfection in property acquired after 4 mos after change SC aware of pending name change wise to file both names

o Incorporations Transferred Collateral

Attachment of SI continues for transferred collateral FS remains effective

After acquired assets Old FS effective as to new debtor New D liable in some ccs

Priority 4 month rule but subordinated also to regularly filed FS File against new entity!

IX. Default Key Attributes of Security

o Property Rights SC has right to repossess collateral after default [9-609] Also right to sell property or keep in satisfaction of debt

o Priority Rights SC has priority over USCs

Basic Structure of Default [9-601(a)]o After default, SP has rights provided in this part except as those provided by agmt of parties

Extensive set of non-waivable obligations [9-602]o (a)Agreed standards

Parties may determine by agmt standards for measuring fulfillment of rights of Do (b) Agreed standards inapplicable to breach of peace

Above does not apply to duty to refrain from breaching peace Turning Collateral into Cash

o Need to focus on practical issues posed by realizing value from collateral INV/EQ

D can hold it up and won’t want to give it up GI

How could you grab trademark? Could you sell it? Accounts

Not held by D, so maybe worthwhile DA

Same as accounts, good Collection & Enforcement Generally [9-607]

o If so agreed and in any event after default, SP (1)may notify account D or other person obligated on collateral

To make payment or otherwise render performance to benefit of SP (3)may enforce obligations on Collateral and exercise rights of D (4)if it holds a SI in deposit account perfected by control, may apply balance of account (5) same as 4 but may instruct bank to pay off balance of DA for benefit of 3rd party

Commercially reasonable Collection and Enforcement [9-607(c)]o SP shall proceed in commercially reasonable manner if SP

(1)undertakes to collect from or enforce an obligation of account debtor or other person obligated (2)is entitled to charge back uncollected collateral or otherwise to full or limited recourse per D

Application of proceeds, surplus, and deficiency if obligation secured [9-608(a)]o If SI secures payment, following rules apply

(1)SP shall apply or pay over for application of cash proceeds or collection in follow order to

(A)reasonable expenses of collection (B)satisfaction of obligations secured (C)satisfaction of obligations secured by any subordinate SI

(3)SP need not apply or pay over for noncash proceeds of collection (4)SP shall account to and pay a debtor for any surplus and obligor is liable for deficiency

No surplus or deficiency in sales of certain rights to payment [9-608(b)]o If underlying trans is sale of accounts, D is not entitled to any surplus; obligor not liable for deficiency

Breach of the Peaceo Possession; rendering EQ unusable, disposition on D’s premises [9-609(a)]

After Default, SP (1)may take possession of collateral and (2)without removal, may render equipment unusable and dispose of collateral on D’s

premiseso Judicial and nonjudicial process [9-609(b)]

SP may proceed under subsection (a) (1)Pursuant to judicial process (2)Without judicial process if it proceeds WITHOUT BREACH OF PEACE

o Assembly of collateral [9-609(c)] If agreed and in event after default SP may require D to assemble collateral and make available for SP At place designated by SP which is reasonably convenient to both parties

Salisburyo Facts

Related third party private property Rural setting Early in AM No exchange or confrontation

o Holding Jury Q posed on breach of peace

Williamso Facts

Shard private property driveway Early in AM Polite verbal exchange bt Williams and repo men

o Holding JNOV reversing $5000 in damages against Ford No breach

Stone Machineryo Facts

Prior communications suggested physical confrontation possible “someone would get hurt”

Sheriff: “we come to pick up tractor” Kessler objects but does not physically resist

o Holding K wins – likihood of violence – shouldn’t have to fight to win Restatement on civil breach – done by violence or likely to cause immediate public disturbance

Secured Creditor Opportunismo Opportunism I

D entitles to surplus left over after disposition SP won’t care about size of surplus, just getting owed debts paid in full Stone Machinery = SP was owed $7448 and tractor sold for same price – not coincidence

o Opportunism II Reeves = SP tells D that SP will keep collateral is satisfaction when collateral is worth MORE

Debtor Indifference & Ignoranceo Debtor Indifference

D may not get to keep surplus anyhow Just goes to other Cs a lot of time, so Ds don’t care Need to get those w stake in disposition of collateral involved!

o Debtor Ignorance In consumer settings, D may not fully understand consequences of decisions re collateral

Key Changeso Now allows retention of collateral in partial satisfaction of debt [9-620]

Before, it was all or nothing Not applicable to consumer situations, though

o Adopts rebuttable presumption rule for actions on surplus or deficiency [9-626] Resolves 3-way state split under old statute Not applicable to consumer situations

Disposition after default [9—610(a)]o After default, SP may sell, lease, license, otherwise dispose of any or all collateral

In present condition or after commercially reasonable processing Commercially reasonable disposition [9-610(b)]

o Every aspect of disposition of collateral must be commercially reasonable Including time, method, manner, place, etc.

o If commercially reasonable, SP may dispose of collateral by private or public proceeding Purchase by SP [9-610(c)]

o SP may purchase collateral (1) at public disposition (2) at private disposition only if collateral is of kind that is customarily sold on recognized market

or subject of widely distributed standard price quotes General Notice Provisions [9-611]

o (b)Notification of disposition required DP that disposes of collateral must sent to person specified in (c) Reasonable authenticated notification of disposition

o (c) Persons to be notified SP shall send notice to

(1) debtor (2)any secondary obligor; AND (3)if collateral is other than consumer goods, certain other parties

Notice Time Periods [9-612]o (a) Reasonable time

Q of facto (b) 10-day sufficiency period in non-consumer trans

Notification send after default and 10 days before earliest time of disposition is reasonable Form of Notice

o For Non-Consumer Trans [9-613]o For Consumer Trans [9-614]

Application of Proceeds of Disposition [9-615]o (a) Expenses of dispotition, then secured debt being pursued, then junior secured debtso (c) Noncash proceeds rule o (d) Surplus and deficiency structureo (f) calculation of surplus or deficiency in disposition to person related to SP

Surplus or deficiency following disposition - calculated based on amount of proceeds that would have been realized in disposition complying with this part to a transferee other than SP IF

(1)transferee in disposition is SP, person related, secondary obligor, OR (2)amount of proceeds of disposition is significantly below range of proceeds that

complying disposition to person other than SP would have brought Comment 6

This low price can even be true if it is conducted in commercially reasonable way But low price does not = noncompliance

o (g) Cash proceeds rec’d byJunior secured parties

SP that receives cash proceeds of disposition in good faith and w/out knowledge that receipt violates rights of other SIs:

(1) takes cash proceeds free of SI (2) not obligated to apply proceeds of disposition to satisfaction of other SIs (3) is not obligated to account to or pay holder of SI for any surplus

This applies when junior announces and senior creditor does nothing Notice to senior SC required Notice is NOT knowledge of possible existence of SI

Rights of Transferees [9-617]o (a) Effect of disposition

SP’s disposition of collateral after default (1)Transfers to transferee for value all of D’s rights in collateral (2)discharges SI under which disposition is made (3)discharges any subordinate SI

o (b)Rights of good-faith transferee Transferee that acts in good faith takes free of rights and interests described in (a) Even if SP fails to comply w this article of judicial proceeding

Retention of Collateral [9-620]o (a) Conditions to acceptance in satisfaction

SP may accept collateral in full/partial satisfaction of obligation it secures only IF (1)D consents to acceptance (2)SP does not receive notification of objection of proposal authenticated by

o (A) person to which SP was required to send proposal too (B)any other person other than D holding interest in collateral subordinate to SI

o (b) Purported acceptance ineffective Purported or apparent acceptance of collateral ineffective unless

(1)SP consents to acceptance in authenticated record or sends proposal to D AND (2) conditions of (a) are met

o (c) Debtor’s consent (1) D consents to acceptance of collateral in partial satisfaction only if

D agrees to terms of acceptance in record authenticated after default AND (2) D consents to acceptance in full satisfaction it secures only IF

D agrees to terms of acceptance OR SP

o (A)sends to D after default proposal that is conditional upon collateral not in possession of SP be maintained AND

o (B) in proposal proposes to accept collateral in full satisfaction ANDo (C) does not receive notification of objection authenticated by D within 20 days

after proposal is sent Consequences [9-622]

o (a) Effect of acceptance SP’s acceptance of collateral in full or partial satisfaction of obligation it secures

(1) Discharges Obligation to extent consented by D (2) transfers SP all D’s rights in collateral (3) discharges SI subject of D’s consent and any subordinate SI AND (4)terminates other subordinate interest

Redemption [9-623]o (a) Persons that may redeem

D, any secondary obligor, or any other SP or lien-holder may redeem collateralo (b) Requirement for redemption

To redeem collateral, person shall tender (1) fulfillment of obligations secured by collateral AND (2) reasonable expense and atty fees described

o (c) when redemption may occur Any time before SP

(1) has collected collateral (2)has disposed of collateral or entered into K for its disposition OR (3) has accepted collateral in full or partial satisfaction of obligation it secures

Secured Party Mistakeso Damages [9-625]

(a) judicial order concerning non-compliance Court may restrain collection

(b) damages for non-compliance Person is liable for damages in amount of any loss caused by failure to comply

(d) recovery when deficiency eliminated or reduced D whose deficiency eliminated or reduced may NOT otherwise recover for non-

complianceo Rebuttable Presumption Rule [9-626]

(a) applicable rules if amount of deficiency or surplus is issue (1)SP need not prove compliance (2)SP’s compliance at issue, then SP has burden of establishing that (3) liability of D for deficiency is limited

o (A) proceeds of collection ORo (B) proceeds that would have been realized had noncomplying party complied

(4)3b is equal to sum of secured obligation, expenses, and atty fees (b) Non consumer trans; no inference

o Commercial Reasonableness Standards [9-627] (a) fact that greater amount could have been obtained is NOT sufficient to show lack of

reasonableness (b) Dispositions that are commercially reasonable if made

(1) in usual manner recognized by market (2)at price current in recognized market (3)otherwise in conformity

(c) approval by court, creditors – good if (1) judicial proceeds (2) bona fide creditors committee (3)representative of Cs (4) assignee for benefit of C

(d) lack of approval of C does not mean NOT reasonableo Limitations on Liability [9-628]

Excello Presso Facts

Metlife sales Sold M1000 for $550K Sole M110 for $550K Deficiency capped at $900K – actual deficiency = $1.6M Appraisal value of presses = $1.2M

Exello Sales Sold two 5 color presses at public auction for $950L

Notice and Knowledge Metlife to E: Mailed notice saying it was selling presses, not when or how Metlife opted out of E’s public auction

o Was this commercially reasonable sale? Reeves

X. LimitsA. Section 9-109

1. 9-109(c) Extent to which Article Doesn't Applya) When preempted by US statute, regulation or treaty

2. 9-109(d) – Specific Areas of Inapplicability.a) Landlord's lienb) Sale of accounts as part of sale of a business.c) Txfr of interest/assignment of claim under insurance policy, with exceptions?d) Real Property interests/liense) Right of recoupment or set-offs (with exceptions)f) Assignment of tort claims

3. 9-311 Perfection/Priority Governed By other systems outside of Article 9a) FS not necessary to perfect SI subject to a statute whose requirements for obtaining priority

over the rights of a lien creditor preempt 9-310(a).b) NOTE – F9-302 simply asked, "is there an alternate filing system."

4. Changes from Former Article 9a) Scope taken right up to limit of preemption. Less deferential.

A. Intellectual Property

1. Copyrightsa) 17 USC 205 (slide 14 et seq Class 22)

1) First SA wins if filed within a month or before later SA. 2) Otherwise, later SA wins if filed, and no notice of earlier txfr.3) Index by copyright number, not as convenient as filing by debtor, requires filing for

each item of collateral.b) Peregrine

1) Must file in Copyright Office2) UCC A9 doesn't control3) Not clear under new article 9

2. Patentsa) 35 USC 261 (Slide 32b) Cybernetic Services

1) Court limits 261's applicability to title transfers, not SI's. 2) No preemption, Article 9 rules patents

3. Bottom Line – a) File in both systemsb) Copyrights

1) File in Copyright Office under Peregrine2) New Article 9 statue unclear.

c) Patents1) File in UCC under Cybernetic Services2) Just 9th Circuit

d) Trademarks1) Case law says UCC all the way.

B. Federal Property, Set-off1. Definition

a) Set Off:

Medomak Underwood

DT Supplier

SA: All Assets

Sale of Raw materials

Raw Materials

Finished Product

1) Bank owes customer the $X listed as account balance2) Customer owest bank the $X of a loan. Let's call it even 3) Looks like bank paying itself out of customer account.

b) Recoupment1) Fee for services in managing account. 2) Bank pays itself for services out of account balance.

2. Class of rights of bank in the accounts of customers who it loans unsecured money to. a) Outside article 9. No security interestb) 9-109(d)(10) clearly exempts set-offs from Article 9.c) Grant Gilmore: "Of course a right of set-off is not a security interest and has never been

confused with one: the statute might as appropriately exclude fan dancing."3. But is largely indistinguishable from an SI in deposit accounts with set-off as a right of repossession.

Harkens back to our earlier discussions on what is a SI, and how do you get one. In this case, you don't want it but maybe you have it. . .

4. Statutesa) 9-109(d)(10): Article 9 doesn't apply to set offs and recoupmentsb) 9-340: A bank can exercise set-off/recoupment against an account despite presence of a

security interest in that account unless that SI is perfected by control under 104(a)(3) – the SP has become the bank's customer with regards to the account. But the bank can still do recoupment in that case.

c) 9-341: The bank's rights and duties towards a deposit account at the bank are not modified by a security interest in the deposit account in any way, except as 340(c) notes.

5. National Acceptance Corp. (374)a) B has deposit account for C. NAC has SA in C's ARs. The money in the DA is proceeds from

ARs. Can bank setoff account to satisfy some USC and SC?b) Under VA law, setoff required good faith, lack of knowledge. c) Bank knew/should have known. Lostd) Under Revised Art. 9, Bank's control set off defeats proceeds interest under 340 and 341.

6. Medomak (380)a) Underwood provides materials to M, who then makes a finished product that it transfers

back to Underwood, and Underwood pays a fee to Medomak. Medomak failed with both raw materials and finished products still in its possession

b) How this comes out depends on how we characterize the relationship between U and M.1) Sale of raw materials on credit, with sale of finished products back to U paid for by a

fee representing the difference of debts.2) Bailment of raw materials to Medomak for processing, with return to U and

payment of processing fee (think dry cleaners).

c) Under the former, M owns all materials in its possession, and U is merely an unsecured creditor who loses to DT. Under the latter, M never had the assets any more than a dry cleaner owns the shirts brought for cleaning. The assets remain U's, and upon M's failure they revert back to U.

1) Court found bailment.d) The economics are not so different. e) Try a new hypothetical under above mechanics

1) Facts(A) U loans M $ for SA in Inv & AR (jr. to DT)(B) M buys raw materials with $ from Supplier(C) M sells finished product to U(D) U pays net of loan (price finished product minus loan debt owed it).

2) Result?(A) Filing issues, PMSI's, notice(B) Complicated, but economics same.

C. Characterization1. OLD Law

a) F1-201(37): Inclusion of option to purchase does not of itself make a lease an SI. And a lease ending option to own for no or nominal consideration does make the lease an SI.

2. Marhoefer (392)a) Two sausage stuffers acquired, one a financed sale with PMSI. One a lease.b) Lease: Two lease ending options

1) Buy for 10K2) Lease 4 more years and then buy for $1.

c) Lease or SI?1) Have to look at what happens at end of lease? Court finds neither option at this

point is "nominal" consideration(A) 10K is lower than actual value of 20K, but not nominal(B) Lease 4 more years not a nominal option (but choice not really a lease).

d) PICKER – court respects sophisticated parties who drew clean lines, operated in good faith.3. NEW LAW. 1-201(37) Whether a lease is an SI or a true lease . . . factors:

a) Original term of lease is equal/greater than economic life of goodsb) lessee is bound to renew lease for remaining life of goods, or bound to become owner of

goods.c) lessee has renewal option for remaining economic life of goods for no/nominal

consideration, or option to own for no/nominal consideration.d) Other factors. . .

4. Why do we care?a) Bankruptcy.b) A true lease keeps property out of BR estate, and SC doesn't get muckymucked around by

trustee, with payment delayed, no repossession.c) Lessor can opt out of BR and keep assets separate.

5. Final Note – Look to how much of economic value is transferred to lessee. If all of it, more sale. If not so much of it, more lease. If lessee can return object (meaningfully) more lease. If option to return is meaningless or nonexistent, more sale.

D. Securitization1. Statute Sections

a) 9-109(a)(3) – Article 9 applies to sales of accounts, CP, payment intangibles, or promissory notes. (Except in sale of business situations.)

b) 9-102(a)(61) Payment Intangible – means general intangible undr which the account debtor's principal obligation is a monetary obligation

c) 9-102(a)(65) Promissory Note – instrument that evidences a promis to pay a $ obligation, doe not evidence an order to pay, and doesn't contain an acknowledgement by a bank that it has received for deposit a sum of $.

d) 1-201(37) Security Interest – includes interest of a consignor and buyer of accounts, CP, PI, or PN.

e) 9-102(a)(12)(B) Collateral – accounts, CP, PI, PN that have been soldf) 9-102(a)(28)(B) Debtor – includes seller of accounts, CP, PI, PN.g) 9-102(a)(72)(D) Secured Party – person to whom AR, CP, PI, PN have been sold.h) 9-318 Sellers of Accounts:

1) 318(a) – debtor that sells AR, CP, PI, PN does not retain a legal or equitable interest in the collateral sold .

(A) <Octagon Gas is Dead> Debtor that has sold an acct/etc doesn’t retain an interest in the collateral sold.

2) 318(b) – Deemed Rights – For purposes of determining the rights of creditors of (and purchasers for value of ) AR, CP . . . . the selling debtor is deemed to have rights and title identical to what it sold SO LONG as the buyer's SI remains unperfected. Note, sale of PI and PN perfect upon attachment. 9-309(3),(4).

(A) Example from Comment 3: Debtor sells accts to B1 who doesn’t perfect. Debtor then sells same accts to B2 who does perfect. Under 9-318(b), Debtor still has rights b/c B1 never perfected, and so B2 gets them. B2’s SI attaches, is perfected by filing, and beats B1’s.

3) <Moral – buyer has to perfect or risk being unperfected versus a Lien Creditor – specifically the hypothetical LC in BR.> See Comment 5.

i) Perfection of Sales of AR, CP, PI, PN.1) 9-309:

(A) 309(3), (4) – sale of PI's and PN's perfect upon attachment.(B) 309(2) – the spot sale/assignment of an Account will perfect upon

attachment. But the regular assignment of AR will likely defeat this provision file.

2) Chattel Paper(A) TCP – file[312(a)] or possess[313(a)](B) ECP – file[312(a)] or control[314(a)]

j) Chattel Paper Purchaser Priority1) 9-330 gives CP buyer priority over other SI's in CP. Generally requires good faith,

ordinary course of business purchase, etc.2) See for specifics – some differences for types of SI's in the CP.

2. When Do We Carea) Perfected Versus Unperfected Sales

1) If the buyer isn't perfected, even though there are NO LEGAL RIGHTS remaining in debtor. . .

2) Other creditors and Lien Creditors can jump ahead because of the deemed rights remaining in the debtor.

3) Simply perfect and not a problem.b) Surplus and Deficiency

1) Statutes(A) 9-608(b) and 9-615(e) – If underlying transaction is sale of AR, CO, PI, PN,

debtor not entitled to any surplus or obligated for deficiency2) Major's Furniture Mart

c) Bankruptcy1) Accounts as SI go into BR estate. Accounts sold are outside BR estate. Securitization

transactions try to make assets bankruptcy remote by selling them to special entities.

2) Octagon Gas – fucked with securitization by saying debtor must retain an interest in unperfected sale, putting sold accounts into BR. New 9-318 kills this.

3. How do we determine if there is a True Sale?a) It isn't defined in the UCCb) Factors involve level of exposure of purchaser to risk of ownership

1) Seller "guarantees" accounts? Less sale2) Buyer have recourse against seller for uncollectables? Less Sale3) Seller sells puts guaranteeing buyback? Less Sale

c) Major's Furniture Mart . 1) Lots of warranties and guarantees2) Not much risk of ownership.;