Secured TransactionsProf. Mussleman

Fall 2000

Chapter 1 – Introduction

Subject matter of secured transactions under the UCC – rights relating to personal property collateral

Article 9 is primary source of relevant law- deals generally with all “security interests” in personal property and fixtures (no real estate or

leases)

Secured transaction – an arrangement between a “debtor” (9-105(d)) and a “secured party” (9-105(m)) which gives the secured party a limited interest in some or all of the debtor’s personalty and fixtures- this property interest is called a “security interest” (1-201(37) – an interest in personal

property or fixtures which secures payment or performance of an obligation- the property subject to the security interest is called collateral (not defined by UCC)- security interest serves to ensure the payment or performance of an obligation – if payment is

made or the obligation is performed, the property interest disappears; if payment is not made or the obligation is not performed, the secured party may use that property interest to seize possession of the collateral; secured party may retain the collateral or sell it and apply the proceeds to the debt; if the proceeds are insufficient to satisfy the debt, secured party may then sue the debtor to recover a “deficiency judgment”

Security interest is valuable for at least 3 reasons:(1) ease of seizure - gives the secured party specific rights in specific property of the debtor;

allows secured party to seize collateral without going to court through self-help repossession

(2) priority against other creditors - the rights given by a security interest are given priority over most other rights, including most rights of the debtor’s other creditors and transferees; priority means primarily that when the collateral is sold, the net proceeds of the sale will be applied first to the secured party’s debt; if and only if it is paid in full will any money go to pay the other creditors

(3) protection in bankruptcy - the rights created by a security interest can give the secured party priority over the rights of other creditors even if the debtor goes into bankruptcy; while most unsecured creditors receive nothing at all in a bankruptcy case, secured creditors are normally entitled to payment of the entire amount of their secured claim; secured party also has rights during pendency of bankruptcy case (e.g. the value of the collateral must be protected)

Pledge – exists when the debtor has given the secured party physical possession of the collateral- this was the only type of personal property security interest tolerated by the common law

because a non-possessory security agreement can mislead third parties - “secret lien” problem - non-possessory security agreement allows debtor to retain physical

possession of the collateral and use it; third parties assume from debtor’s continued possession and use of the property that debtor is the owner of the property, with the power to transfer it; based on that assumption, a third party may lend money to debtor on secured or unsecured credit or buy the property assuming debtor can transfer good title

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Solution to secret lien problem:Recordation – permits non-possessory security interests but requires that a public record of the interest be made; failure to record invalidates the interest or renders it subordinate to various third party rights; this was adopted by UCC Article 9

2 simple steps to create and to give priority to any type of security interest:(1) Art. 9 secured party obtains a security interest through “attachment” via a security

agreement(2) Secured party obtains priority over third party claimants to the collateral by “perfection”-Perfection involves public notice of the security interest, usually by filing a “financing statement” in the appropriate county or state offices

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Chapter 2 – Scope of Article 9

9-102 – Art. 9 governs any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures

Security interest (1-201(37)) – any interest in personal property or fixtures which secures payment or performance of an obligation

True leases are not covered by Art. 9, but leases that are really disguised sales (the lease is in fact obtaining ownership of the property which does not occur in a true lease) are covered

Problem 2-1

(a) see 9-102 for scope of Art. 9(1) are parties intending to create security interest in personal property? Here, coin collection

= personal property(2) what is a “security interest”? see 1-201(37)

-here, clearly they are creating some interest in the personal property (coin collection)-is it for the payment or performance of an obligation or debt? Yes, Michelle owes Lee $4,000; in substance, there is an intent that Lee get the coin collection in return as security for the debt)-effectively, Lee is not getting outright title; therefore, this is a pledge. As a result, Art. 9 applies

What does this mean (Art. 9 transaction applies)?Means Lee has to properly create this security interest and comply with Art. 9 provisions and Lee must find way under Art. 9 to give notice to the world that he has possession of the propertyUnderlying policy: people should not be able to take secret interest in personal property; others wouldn’t know and there could be fraud problems

Ways to give notice: (1) possession of the property; (2) file some notice in some public office (gives world constructive notice)

Once Art. 9 applies, burden put on creditor to give notice (“perfect” the transaction)

(b) Does Art. 9 apply? Title isn’t passing (seller retaining title)9-102(1)(a) – not looking at form; are the parties creating an interest in the personal property to secure an obligation or debt?- here, there is an obligation - $3500 due within 30 days- 1-201(37) says the retention or reservation of title by seller of goods notwithstanding

shipment or delivery to the buyer is limited in effect to a reservation of a “security interest” – therefore, seller not retaining title of property (masks)

Jester v. State of Alabama

Issue: whether a father who lent his son money to buy an automobile was a “bona fide lienholder” whose interest was not subject to forfeiture when the State moved to condemn the vehicle after the son’s arrest for possession of marijuana

Automobile subject to certificate of title – father listed as “first lienholder”Father claimed his interest in the vehicle was protected from forfeiture by virtue of Alabama statute 20-2-93(h)

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State argued to be a bona fide lienholder, you have to be a secured party under Art. 9--contended father was not a secured party and therefore not a bona fide lienholder because the document signed by the father and son did not create a security interest in the vehicle and therefore the document was not a security agreement

Why was it important for the document to create a security interest (i.e. why couldn’t party just testify to that)? Why would anything have to be in writing?Art. 9 concept re: notice (i.e. give constructive notice to the world of your security interest in the property)

security agreement (9-105(1)(l) – an agreement which creates or provides for a security interest

security interest (1-201(37)) – an interest in personal property or fixtures which secures payment or performance of an obligation

9-102(1)(a) – Art. 9 applies to any transaction (regardless of its form) which is intended to create a security interest

White & Summers Test to Determine Whether a Security Agreement is Established:(1) whether language embodied in the writing objectively indicates that the parties may have

intended to create or provide for a security agreement-no parol evidence admissible

If yes to part 1, (2) whether the parties actually intended to create a security interest

-parol evidence admissible

Note: no magic words necessary or precise form required to evidence a possible security interest- court refers to general contract law to determine whether the parties intended to create a

security interest- the language of the instrument “need only lead to the logical conclusion that it was the

intention of the parties that a security interest be created”- court will determine intent “from the transaction as a whole”

p. 13 Question – doesn’t matter if know Art. 9 exists- look objectively and subjectively at parties’ intent

II. Specific Exclusions from Coverage (9-104)

9-104 specifically excludes certain transactions regardless of whether an interpretation of 9-102 would dictate coverage (e.g. entire transactions or parts of transactions which are governed by federal law are excluded)

Problem 2-2

Interest in farm is NOT subject to Art. 9 – see 9-104(j) – real estate transactions not included in coverage- see also 9-102(1)(a) – personal property (not real estate)Art. 9 does NOT apply to Bank’s mortgage because it is also real estate (see cites above)

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Problem 2-3

(a) 9-105(1)(h) says definition of goods includes “growing crops”- crops are not real estate for purposes of Art. 9

(b) landlord’s lien is NOT subject to Art. 9 under 9-104(b)- what if the landlord had Kelley sign a lease agreement specifically providing for it? Art. 9

generally only applies to “consensual” liens (i.e. the debtor agrees to the lien to secure payment)

- if Kelley signs the lease agreement and agrees to give landlord interest in her personal property to secure payment of the lease, this is a consensual lien and IS covered by Art. 9

(c) Bank’s right of setoff is NOT subject to Art. 9 under 9-104(i)

(d) A transfer of an interest in any deposit account (defined in 9-105(1)(e)) is NOT subject to Art. 9 under 9-104(l)

(e) A transfer of an interest in or claim in or under any policy of insurance is NOT subject to Art. 9 under 9-104(g)

(f) A transfer of any claim arising out of tort is NOT subject Art. 9 under 9-104(k)

In Re Berry

A trustee in bankruptcy must search for any transfer, etc. that he can invalidate and preserve for the debtor’s bankruptcy estate for the benefit of all unsecured creditors- the trustee is paid a percentage of the property he is able to bring in

11 U.S.C. 544 (“strongarm statute) – allows trustee to invalidate any unperfected security interest (here, it was unperfected because the financing statement was not filed with the Sec of State or other registry)

Trustee argued transaction was a security interest under Art. 9 and Bank failed to file a financing statement; therefore, Bank had an unperfected security interest and the trustee could invalidate based on the strongarm statute

Bank said it was an absolute assignment that did not create a security interest; therefore, the Bank is the outright owner and there was no need to file a financing statement under Art. 9

Art. 9 is written to apply to a broad, wide-range of transactions- Reason: drafters trying to avoid creditors creating “secret liens” and allow debtor to

misrepresent to 3rd parties that no one else had interest in their personal property (i.e. gives 3rd

parties a way to find out that these interests exist)

Is it possible to create a security interest in the renewal commissions? Yes. This was structured as an outright assignment- remember, it is not the form of the transaction but the substance of the transaction that you

must focus on

9-106 – defines “account” as any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper

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Therefore, these renewal payments were accounts under Art. 9 and they are personal property and not excluded under 9-104; therefore, they are subject to Art. 9

Court distinguishes absolute assignments from assignments intended as security

BUT, court could have avoided all this discussion – 9-102(1)(b) states Art. 9 applies to any sale of accounts; 9-102(2) states Art. 9 applies to security interests created by contract including assignment

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Chapter 3 – Attachment and Classification of Collateral

I. Introduction

A security agreement is created upon “attachment”

Attachment, under 9-203(1), requires:

(a) agreement – debtor must agree to give a security interest in personal property or fixtures to the creditor

(b) value – creditor must give value for the security interest; and

(c) rights in the collateral – the debtor must have rights in the collateral (the personal property or fixtures subject to the security interest)

II. The Security Agreement

An agreement is required because there must be an intent to create a security interest- no formal document is necessary; the requisite agreement may be oral if the secured creditor

has possession of the collateral with the consent of the debtor (i.e. no writing requirement if creditor retains possession with debtor’s consent)

The necessary consent for an oral agreement to suffice is consent by the debtor to grant a security interest in the collateral

If the creditor does NOT have possession of the collateral with the debtor’s consent, the creditor must have a written security agreement, signed by the debtor, and it must contain a description of the collateral- if the collateral includes crops, growing or to be grown, or timber to be cut, the agreement

must contain a description of the land on which the crops or timber are located (9-203(1))

A. Form and Formality

In Re Hance

Issue: did the saleschecks (sales receipts) by themselves satisfy the security agreement requirement of 9-203(1)(a)?

Debtor claimed the sales receipts (checks) by themselves did not equal a security agreement

The creditor (Sears) claimed the sales receipts and the purchasing history between the parties evidenced an intent by the parties to create a security interest in the collateral

Court cites rule from Bollinger – when the parties have neglected to sign a separate security agreement, the better and more practical view is to look at the transaction as a whole in order to determine if there is a writing or writings signed by the debtor describing the collateral which demonstrates an intent to create a security interest in the collateral.

2 Policies Satisfied by Looking at the Transaction as a Whole:

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(1) evidentiary function is served (shows intent, relationship, between the parties)(2) a written agreement obviates any statute of frauds problems with the debtor-creditor

relationship (this is primary reason for written requirement of security agreement; prevents fraud being committed on 3rd parties)

Hoffman v. Schlegel

Issue: did the documents, taken together, qualify as a security agreement?

Bankruptcy trustee claimed: (1) financing statement and agreement do not constitute a security agreement because neither document contained language explicitly granting a security interest in the debtor’s fixtures and furniture; and (2) no valid description of the collateral existed in the agreement

Court said the 2 documents signed by the debtor did constitute a security agreement- court applied the Composite Document Rule

Composite Document Rule – there need not be a separate document labeled “security agreement” but rather all relevant loan documents may be examined to determine whether a security agreement exists (i.e. a security interest has been granted)- several documents signed by the debtor, may, taken together, constitute the execution of a

security agreement(note: this is the same rule from Bollinger, cited in In re Hance)

Remember: no “magic,” formal words are required; just read the documents and look at whether the parties objectively intended to create a security interest in the collateral

Gibson Co. Farm Bureau Coop. Assn v. Greer

Issue: whether a financing statement may also serve as a security agreement under Art. 9

Purpose of the security agreement requirement is to show a security interest came into existence between the secured party and the debtor

Purpose of the financing statement is to perfect the security interest and to put the whole world (3rd persons) on constructive notice that the secured party may have an interest in the collateral

Requirements for attachment of a security interst (9-203(1)(a)-(c)):(a) secured party has possession of the collateral or debtor has signed security agreement which

contains a description of the collateral;(b) value has been given; and(c) the debtor has rights in the collateral

When does a security interest attach? 9-203(2) – a security interest attaches when it becomes enforceable against the debtor with respect to the collateral (i.e. as soon as all of the events in 9-203(1) have taken place)

When is a security interest perfected? 4 requirements (3 requirements for attachment plus9-303 – says security interest perfected when already attached and any necessary/applicable steps required for perfection have been taken- either later of filing (9-302) or when it attaches

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- 9-402(1) says a party may file a financing statement before a security interest has attached (when a party files before attachment, the perfection occurs at time of attachment)

9-402 gives requirements of a financing statement

9-402(1) - A security agreement may serve as a financing statement if it contains the information required of a financing statement and is signed by the debtor.

The UCC is silent, however, about whether a financing statement may serve as a security agreement

Most courts have said you can’t just have a financing statement standing alone to create a security interest; you need something else to satisfy the intent

This court doesn’t follow the majority of courts, but uses the White & Summers test:(1) objective intent to create a security interest (language in the writing indicates intent); and(2) subjective intent (actually intended to create a security interest)

Court said they met part (1) for the objective intent based on the writing, the UCC-1 financing statement)

For subjective prong, court said they could look at any evidence and that the trial court found the parties intended to create a security interest so therefore unless appellate court thinks the trial court was wrong, this ruling stands

Mussleman says this case probably goes too far- reasoning: under 9-402(1), financing statement can be filed before attachment; if this is done

under 9-303(1), the interest is perfected immediately because filing has already been made and upon attachment, it is perfected

Why would secured party want to get signed financing statement and file it even before security interest attaches or before they even have a deal?So nobody “beats him to the courthouse” for priority purposes as to the collateral. The date of filing the financing statement is important in establishing priority

Does execution of a financing statement, by itself, indicate intent for a security agreement?Not necessarily

Best rule – financing statement with probably anything else can equal a security agreement (i.e. it describes collateral adequately, signed by debtor, etc. PLUS must have something showing present intent to create a security interest

B. Signature Requirement

Problem 3-1

Is this a proper signature? (1 spouse signs where both are debtors)9-203(1)(a) requires a debtor to sign the security agreement9-105(1)(d) defines “debtor”Other issues that arise: contract law, agency principles (apparent/actual authority), community property law

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This problem points out that the debtor has to sign the security agreement and that other issues arise

C. Description of Collateral

1. Classification of Collateral

Collateral is the item or items of personal property and/or fixtures which are subject to a security interest- both the security agreement which may be needed for attachment (9-203) and the financing

statement (9-402) require an adequate description of collateral, met by specifically describing the collateral

Why do we need to classify collateral? For perfection purposes, priority rules, attachment purposes

There are 9 different types of classifications of collateral under Art. 9

Problem 3-2

Note: everything is goods under 9-105(1)(h) in this problem – you must go to 9-109 to sub-classify the goods

Note: goods in 9-109 are classified entirely on how they are used

(a) Inventory under 9-109(4) (goods held for sale)

(b) Inventory under 9-109(4) (goods held for sale or lease)

(c) Consumer goods under 9-109(1) (fishing trips = personal purposes)

(d) Have to ask who the debtor is:If company is debtor – auto is equipment under 9-109(2) (used primarily in business)If president is debtor – auto is consumer goods under 9-109(1) (used primarily for personal purposes)

(e) Inventory under 9-109(4) (note: not farm products because slaughtering does not fall under farming operations)

(f) Farm products under 9-109(3) (livestock produced in farming operations)- note: the size of the farm (small or large, incorporated doesn’t matter; farming operation =

farming operation)

(g) Chicken soup is inventory under 9-109(4) (held for sale); chickens are farm products under 9-109(3) (livestock used in farming operations)

(h) Inventory under 9-109(4) (paint is raw material because it is incorporated into the product)

(i) Equipment under 9-109(2) (see comment 3 – machinery used in manufacturing is equipment and not inventory)

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(j) Is timber even a good? Yes; 9-105(1)(h) – “goods” also include standing timber which is to be cut and removed under conveyance or contract for sale

-if it is, it is a good-assuming it is, sub-classify it under 9-109 – could be a “farm product” if timber could be considered a crop-but crops and timber have been distinguished in 9-105(1)(h)-therefore, probably inventory under 9-109(4)(Mussleman pointed out there was a case which held trees on a Christmas tree farm were a crop)

(k) Equipment under 9-109(2); the primary use of the tractor was as equipment (i.e. it was equipment for most of its life and they are not selling tractor in ordinary course of business)

(l) Inventory under 9-109(4); not farm products because comment 4 states if put into possession of a marketing agency for sale or distribution, they become inventory)

(m) Issue raised is how boat is used – here, partly used for business and partly for personal- when dealing with multi-use property, the key is its principal use – here, 5 days a week of

business so its equipment under 9-109(2)- What if debtor makes misrepresentation to the lender as to how he will use it? Doesn’t make

much difference for attachment purposes; for perfection, it is what it was when it attaches

(n) Equipment under 9-109(2); it is fixed asset, expect it to last, not held for sale

(o) Inventory under 9-109(4); it is raw material, held to be purchased

Problem 3-3

Collateral for Azar is chattel paper under 9-105(1)(b) – a writing or writings which evidence both a monetary obligation and a security interest in or a leas of specific goodsThe first transaction between Azar and CD is a secured transaction (specifically, a purchase money security interest (PMSI)); the loader would probably be classified as equipment under 9-109(2)Chattel paper comes into play when Azar goes to the bank to borrow funds and uses CD’s debt (i.e. Azar’s right to the payment of money) as collateralThe retail installment contract used by Azar as collateral is a 2nd secured transaction (Azar becomes debtor; bank becomes creditor)Azar created chattel paper when it sold the loader to CD on credit- but don’t care about it until Azar uses it as collateral to borrow from bank- Azar’s collateral = chattel paper

Problem 3-4

What is the collateral? CD’s right to the progress payments from the City to be earned from time to time

How do you characterize this collateral for this 2nd secured transaction? Account under 9-106 – any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance-note: it doesn’t matter if the right to payment has been earned yet or not

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Why is it not chattel paper? There is no security interest (CD’s right to the progress payments is not secured by anything; if it was, the 2nd transaction would be chattel paper)

Why is it not an instrument? See 9-105(1)(i) – it is not a promissory note or check; it is a contract

Problem 3-5

Everything falls under general intangibles under 9-106 – any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, investment property, rights to proceed of written letters of credit, and moneyWhy? General intangible is the catchall – if no other place to put them in the other categories

Note: in part (d) for the right to share in gate receipts, if this was shared by the band who provided the service, it would be an account under 9-106

Problem 3-6

Document under 9-105(1)(f); see also 1-201(15) for “document of title” – includes bill of lading

Problem 3-7

Instrument under 9-105(1)(i); instruments include promissory notes and checks

2. Sloppy Descriptions

Creditor uses wrong classification term to describe the collateral; description is faulty because it is too narrow (e.g. including equipment in the description but failing to list inventory which was also intended collateral)

A description of collateral is required both in the security agreement (9-203) and in a financing statement (9-402) if a financing statement is filed for perfection of the security interest

Problem 3-8

This is a bad way to define collateral (“all debtor’s assets) – debtor can move stuff around, even if only intended the equipment at 310 South Vine- should just say “all equipment” or specifically describe by serial number

Here, they did not properly describe the collateral on Elm Street; therefore, this collateral should not attach- secured creditor should say it was his intent and then use the tests: White & Summers and

Composite Document Rule

Overbroad Descriptions – such description as “all debtor’s assets” has been declared too broad

3. Change of Use

What happens when the use of collateral changes so that it apparently is some new type of collateal?

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9-401(3) – provides that the place for filing does not change merely because the debtor’s use of the collateral changes- there is no similar language in Art. 9 specifically concerning the issue as to change of use and

how that affects the “description” of the collateral in either the security agreement necessary for attachment or the financing statement, which is necessary for perfection

General rule: a creditor can ignore changes in collateral classification

Problem 3-9

Deals with what happens when you take a security interest and classify collateral as one thing and then debtor later changes the way he is using it- probably not a whole lot of changes from security agreement perspective- becomes more important when it comes to “perfection” issues (i.e. where you file becomes

important)- under Art. 9, once you’ve perfected it, changed use doesn’t affect the perfection- there may be an estoppel argument if the creditor knew about the change, but generally it’s

not an issue and not available

4. Description of Real Estate

9-110 – for purposes of Art. 9, any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described- purpose is to allow people to tell what it is (what is trying to be desribed)

Problem 3-10

The issue is how good does the description have to be for real estate in a security agreement where you have to describe it

Is a legal description required? No. Just have to adequately describe the real estate so you can figure out what it is- “360 acres more or less in Clay County” is probably not adequate enough- “360 acres at the corner of County Road ‘J’ and County Road 3” is better and may be

adequate enough

III. Debtor must have “Rights in the Collateral”

Trust Co. Bank v. Gloucester Corp.

Trust’s argument – their property interest defeated the defendant’s because Gloucester could not acquire “rights in the collateral” before obtaining FDA release of the scallops (i.e. Gloucester didn’t have title in the scallops because the contract had a condition about an FDA release, and the condition hadn’t been satisfied; therefore, no sale, so no title)

“Rights in the collateral” is not defined in the UCC

Rule: while a debtor’s mere possession of goods usually is not enough to satisfy the “rights in the collateral” requirement of 9-203(c), where a debtor gains possession of collateral pursuant to an agreement endowing him with any interest other than naked possession, the debtor has acquired such rights as would allow a security interest to attach under 9-203.

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Rule: A debtor’s possession of goods with contingent rights of ownership gives the debtor rights in the collateral

Rule: If the goods are entirely owned by a 3rd party, mere acquisition of possession by the debtor will not be enough- but, where the debtor acquires less than the full ownership, courts hold this is enough for

attachment to the extent of the value of the rights- almost any rights in the collateral will suffice under 9-203

Here, court looks to UCC Art. 2 to govern the provisions of the sale and that Gloucester obtained rights through the sale (2-501(1) recognizes that, from the moment goods are identified to a contract of sale, the buyer has a special property and an insurable interest)- the delivery of the scallops by Sigma to Gloucester pursuant to their sales agreement gave

Gloucester “rights in the collateral” for purposes of 9-203- the agreement of sale made the sale and payment subject to inspection by a government

agency; that condition, if not satisfied, may have relieved Gloucester of its obligation to pay, but the condition did not negate the existence of an actual sales agreement between Gloucester and Sigma

- note: the UCC emphasizes that the concept of “title” is immaterial to whether a security interest attaches

Lessor wins over Bank because lessor has title to the property, even assuming Bank and lessee created a security agreement with a security interest in the leased propertyLessee clearly has property interest to grant security interest to BankWhat does lessee really have as security agreement (own or power to convey)? All you can convey is what you own, unless statute says power to convey more (e.g. entrustment doctrine in 2-403, which discusses power of merchant to convey title they don’t have).Art. 9 does not say this; therefore, lessee can grant a security interest in the leased property equal to the lessee’s interest in the property (no lessor interest can be conveyed to the Bank)

After Acquired Collateral – 9-204(1) states except as provided in (2), a security agreement may provide that any or all obligations covered by the security agreement are to be secured by after acquired collateral

Most commercial credit transactions are designed so that the creditor may have a continuing security interest in the debtor’s collateral as the debtor acquires new items of collateral- creditor insures that the security interest attaches not only to items in which the debtor has

rights at the time of original attachment but also in items of collateral that are acquired later than the original transaction (i.e. after acquired collateral)

Since the agreement must describe collateral, the UCC requires, as a general rule, that the creditor’s intent to take after acquired collateral be noted in the description of collateral in the security agreement- “all equipment now owned and hereafter acquired by debtor”

Some courts have held that with respect to certain types of collateral—inventory and accounts—no after acquired clause is deemed necessary in the security agreement- rationale is that such security interest in this type of collateral is presumed to include after

acquired collateral because it is assumed that the debtor will regularly be acquiring new

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collateral within this description (transaction assumes debtor knows the security interest is to attach to later acquired items within these types of collateral)

No after acquired description is ever necessary in the financing statement (see comment 5 to 9-204)

Proceeds – 9-306(1)- “proceeds” are whatever is received by the debtor when the debtor disposes of the collateral- cash proceeds are money, checks, deposit accounts and the like- non-cash proceeds are all other types of proceeds

9-306(2) – a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.- attachment in proceeds depends upon identification and that in turn depends upon tracing the

disposition through to the property claimed as proceeds- no mention of proceeds is necessary in the security agreement- attachment occurs upon identification even though the creditor authorized the disposition of

the original collateral

IV. Creditor Must Give “Value”

Secured party has to give value to the debtor – value is the obligation that is secured (i.e. that the debtor owes to the creditor)

Problem 3-11

“Value” is defined in general definitions in 1-201(44)- 1-201(44)(b) – a person gives “value” for his rights if he acquires them as security for or in

total or partial satisfaction of a pre-existing claim- therefore, “value” is satisfied by securing a pre-existing debt; the security interest continues

to be effective

Problem 3-12

Perfection – when security interest attaches and other steps – i.e. security interest attaches under 9-203(2) when the last of the 3 requirements are satisfied

This problem goes to the timing of value

1-201(44)(a) says a person gives “value” for rights if he acquires them in return for a binding commitment to extend credit . . . whether or not drawn upon . . .

Therefore, value was given when they extended the credit – December 10, 1998- value can be given before money is actually transferred- the binding commitment itself constitutes value (they made a binding commitment on

December 10, 1998)

Hill v. Farmers & Merchants Bank of Waterloo

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Bank argues that Hill did not give value as required by 9-203(b) to create a security agreement because the $25,000 Hill loaned Sharp and Agee had been payable to her father, not to her (i.e. it was Hill’s father, not Hill, who have “value” and that Hill’s security interest never attached

Court rejects this argument

Rule: Generally, any consideration sufficient to support a simple contract is sufficient “value” to establish a security interest (1-201(44)(d))

Rule: a contract is not rendered invalid merely by the fact that the underlying consideration is provided by an uninvolved 3rd party

Future Advances9-204(3) – obligations covered by a security agreement may include future advances or other value whether or not the advances or value are given pursuant to commitment

Future advances are advances of value by the creditor that occur subsequent to the creditor’s additional advance of value (i.e. after the advance of value that was necessary for initial attachment of the security interest)- the issue as to attachment and future advances is whether the attachment of the original

security interest—its enforceability—is good as to only the amounts remaining on the initial advance or also as to amounts owing on the later future advance.

9-203(3) – specifically states that obligations covered by a security agreement may include future advances, whether or not the advances are given pursuant to the creditor’s earlier commitment to give advances in the security agreement

To ensure attachment continues to the extent of the future advance, a clause should be included in the security agreement noting that the debtor intends to give a security interest in collateral for payment of future advances as well as initial advances- if there is no future advance clause in the original security agreement, the creditor must have

the debtor execute a new security agreement or an agreement modifying the original security agreement at the time a later advance is made

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Chapter 4 – Perfection

I. Introduction

Attachment – gives rise to the creditor’s right to enforce the security interest against the debtor (i.e. creates the interest)

Perfection has nothing to do with issues that arise between the secured party and debtorPerfection relates to rights you have as a secured party with respect to property (collateral) against 3rd parties claiming an interest in the same property (collateral)Attachment is important with respect to gaining Art. 9 rights both against the debtor and against 3rd parties in priority disputes.While perfection is very important to priority disputes, it is not relevant to disputes between the secured party and the debtor

Perfection, therefore, involves a priority battle between a secured party and 3rd party(ies)

Purpose of perfection: for secured party to maximize its rights under Art. 9 to the property (collateral)

In order to be “perfected,” the secured creditor must show:(1) attachment; and(2) an applicable step of perfection (i.e. “perfecting act”)

3 Alternative Applicable Steps of Perfection (need at least 1 along with attachment to achieve perfected status):

(1) filing a financing statement(2) possession by the creditor of the collateral(3) automatic perfection which, when available, occurs at the moment of attachment

II. Perfection by Filing Under Article 9

A. When to File

Some security interests may be perfected without filingSome perfection is outside Art. 99-304(1) – no security interest in money or instruments may be perfected by filing

Where filing under Art. 9 is an applicable step for perfection, the sooner it is done the better

9-402(1) – provides that a financing statement may be filed before a security interest is attached(note: filing a financing statement before attachment would not create perfection because 9-303 requires both an applicable step such as filing plus attachment)

B. What to File

9-402 provides what has to be in the financing statement – a financing statement is sufficient if it:(1) gives names of secured party and debtor;(2) is signed by the debtor(3) gives an address of the secured party(4) mailing address of the debtor

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(5) contains a statement indicating the types or describing the items of collateral

Problem 4-1

Issue here is does it sufficiently give the name of the debtor as required by 9-402? No. She is signing as an individual instead of as the debtor corporation- Molly may be able to use the agency theory to get around this problem

Problem 4-2

9-402(2)(a)-(d) provides instances where the debtor is not required to sign the security agreement

Here, 9-402(2)(a) applies – a financing statement which otherwise complies with subsection (1) is sufficient when it is signed by the secured party instead of the debtor if it is filed to perfect a security interest in collateral already subject to a security interest in another jurisdiction when it is brought into this state, or when the debtor’s location is changed to this state.

Problem 4-3

Wrong street on the financing statement. Is it still valid? Probably still valid – 9-402(8) allows minor errors (“a financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading”)- the party searching usually knows the address of the debtor- most courts will likely uphold a financing statement even if the address is wrong- a question like this is very fact intensive

Problem 4-4

9-402(1) states the financing statement must include the name of the debtor9-402(7) states a financing statement sufficiently shows the name of the debtor if it gives the individual, partnership or corporate name of the debtor, whether or not it adds other trade names or names of partners- this doesn’t help here because they didn’t use the actual corporate (legal) name of the debtor;

they just used the trade name (would be okay if used both)The name is much more important because under 9-403(4) the financing statement is indexed by the debtor after it is filed- i.e. people search for name and can’t find it because some discrepancy in it – this isn’t

effective noticeBUT, if they didn’t comply with it because of the wrong name – see “no harm no foul” rule in 9-402(8) – financing statement substantially complying with requirements is effective even though it contains minor errors not seriously misleading

Factors to Determine Whether Error Renders Financing Statement Misleading and Ineffective:

(1) Size of the jurisdiction covered by the filing office (central – Sec of State; local – Harris Co.)- will you still find it even if not filed under the right name (if the jurisdiction contains vast

amounts of files, the error is more misleading)

(2) Filing and searching procedures at the filing office – computer or manually?

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(3) How major or minor the error is

Bottom line: some courts have just searched under correct name - if they find it = minor error; if can’t find it = major error

American Restaurant Supply Co. v. Wilson

Issue: was collateral description in security agreement sufficient?

Rule: a security agreement cannot be enforced against the debtor or 3rd parties unless the collateral is in the possession of the secured party or the security agreement contains a description of the collateral

Rule: the description of collateral is sufficient whether or not it is specific if it reasonably identifies what is described (9-110)

Note: 9-110 regarding sufficiency of description applies to security agreements and financing statements

Test of sufficiency of a description: that the description do the job assigned to it that it make possible the identification of the thing described

Court says a description of collateral sufficient for a financing statement might not be sufficient in a security agreementWhy? The financing statement and the security agreement serve different purposes

Purpose of the financing statement – to provide notice of a possible security interest in the collateral in question9-402 – requires that the financing statement contain a description indicating the types of collateral in which the secured party may have a security interest

Rule: the description of collateral in a financing statement is sufficient if it reasonably informs 3rd

parties that an item in the possession of the debtor may be subject to a prior security interest, thus putting the parties on notice that further inquiry may be necessary- just effectively put you on notice what it might be; don’t have to fully describe the collateral

– just must effectively put on notice what it might be- just using the applicable “type” is okay in the description- there is a duty of inquiry on 3rd party for purposes of the financing statement – 1st thing look

at is security agreement and any loan documents; under 9-208 party can request statement from secured party as to what they think they have security interest in

Security agreement – the contract between the parties; specifies what the security interest is- greater particularity in the description of the collateral is required in the security agreement

than in the financing statement

Rule: a description of collateral in a security agreement is sufficient if the description makes possible the identification of the items in which a security interest is claimed- security agreement should describe the collateral with details sufficient for 3rd parties to be able to reasonably identify the particular assets covered

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Here, the court said the financing statement description was okay, but the general description of the collateral in the security agreement was inadequate- specifically, they didn’t cover all of the food service equipment and supplies (i.e. it was

underinclusive and not specific enough)- therefore, the security interest never attached

Thorp Commercial Corp. v. Northgate Industries

Function of security agreement – defines what the collateral is so that, if necessary, the creditor can identify and claim it, and the debtor or other interested parties can limit the creditor’s rights in the collateral given as security; the security agreement must describe the collateral

Function of financing statement – puts subsequent creditors on notice that the debtor’s property is encumbered so that they may make further inquiry; description of collateral does not function to identify the collateral and define property which the creditor may claim, but rather to warn other subsequent creditors of the prior interest; the financing statement must contain a description only of the type of collateral

Art. 9 does not require that the financing statement describe anything more than the type of collateral and leaves to interested parties the burden of seeking more information

Purpose of allowing a broad financing statement: to allow a creditor that envisions an ongoing financial arrangement to protect the priority of its interest by filing at an early date a notice to 3rd parties which will cover the existing arrangement and broad range of potential future modifications

Comment 2, 9-402 – the financing statement is valid to cover after-acquired property and future advances under security agreements whether or not mentioned in the financing statement

C. Where to File

9-401(1) contains 3 alternatives regarding the proper place to file in order to perfect a security interest

Alternative 2 is the only one used for the exam!

Your security interest is unperfected if filed in the wrong place (1 exception – 9-401(2)

If there is any doubt where to file the financing statement (i.e. difficulty in classifying the collateral), just file it in multiple places to cover it

Problem 4-5Use 3rd alternative to 9-401(1)

(a) 1. farm tractor used by farmer in her business – county (9-401(1)(a))2. farm tractor held for sale by a farm implement dealer – it is inventory (9-401(1)(c)) so file with Sec of State and possible local filing3. farm tractor held for sale by a farm tractor manufacturer – same as 24. small farm tractor used by a homeowner for mowing and garden work – it is consumer goods (9-401(1)(a)) so file with county

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(b) consumer goods – 9-401(1)(a) so file with county

(c) account – 9-401(1)(c) so file with Sec of State; 2 places of business in state so no county filing

(d) if this is fixture – 9-401(1)(b); fixture filing is more than local filing; filed in real estate records

(e) equipment – 9-401(1)(c) so file with Sec of State; do they do business in more than 1 state? If so, no local filing

(f) 9-103 – in which state is it proper to file- 9-401 of the particular state; its inventory so 9-401(1)(c) – file in Sec of State and probably

local filing

Problem 4-6Use 2nd alternative (know this alternative for exam!)

(a) 1. farm tractor used by farmer in her business – county (9-401(1)(a))2. farm tractor held for sale by a farm implement dealer – it is inventory (9-401(1)(c)) so file with Sec of State and possible local filing3. farm tractor held for sale by a farm tractor manufacturer – same as 24. small farm tractor used by a homeowner for mowing and garden work – it is consumer goods (9-401(1)(a)) so file with county

(p) consumer goods so 9-401(1)(a) – county

(q) account so 9-401(1)(c) – Sec of State only

(r) fixture so 9-401(1)(b) – office where a mortgage on the real estate would be filed

(s) equipment so 9-401(1)(c) – Sec of State only

(t) inventory so 9-401(1)(c) – Sec of State only; see 9-103 for which state!

D. Mechanics and Duration of Filing

“Filing” is accomplished by delivering a certain number of copies of the financing statement to the appropriate recording office with the appropriate feeThe filing officer then numbers the financing statement, and stamps it with the date and time of filingMost local filing offices merely retain 1 or more paper copies of each financing statement and file them by the debtor’s name in alphabetical order

Who bears the risk of a misfiling, a late filing, or an erroneous search? The subsequent creditorThe drafters of Art. 9 opted for a purely “race” statute – with very rare exceptions, the creditor who is the first to file a proper financing statement to the right clerk has first priority

9-403(2) – generally, a financing statement is effective for 5 years from the date of filing, although the parties may by agreement reduce (but not extend) this period

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- secured party can extend the duration of the effectiveness of a financing statement by filing a "continuation statement" at any time during the 6 months prior to the expiration of the 5-year period; a subsequent continuation statement will extend the effectiveness of the filing for a further 5 years

The only things which cause a filing to lapse are:(1) the expiration of the 5 year period;(2) the filing of a termination statement by the secured party; or(3) the removal of the collateral from the state- if the debtor changes the collateral’s location within the state, no new filing is required- if the debtor changes its name, no new filing is required to continue perfection of the security

interest in the original collateral

9-402(7) – a financing statement sufficiently shows the name of the debtor if it gives the individual, partnership or corporate name of the debtor, whether or not it adds other trade names or names of partners. Where the debtor so changes his name or in the case of an organization its name, identity or corporate structure that a filed financing statement becomes seriously misleading, the filing is not effective to perfect a security interest in collateral acquired by the debtor more than 4 months after the change, unless a new appropriate financing statement is filed before the expiration of that time.A filed financing statement remains effective with respect to collateral transferred by the debtor even though the secured party knows of or consents to the transfer.

This rule only applies to after-acquired collateral (the original financing statement remains effective for that collateral)This rule affects perfection

Problem 4-7

(a) March 1 – still perfected; under 9-402(7), it is still within the 4 months after the name changed

August 1 – still perfected if no new collateral is acquired; if new collateral acquired, security interest is not perfected

(b) Yes for both; still within the 4 months after the name changed

(c) No for both; it has been more than 4 months since the name changed

(d) (1) No. It is Friendly’s responsibility to monitor the name change—that is why there is a 4 month grace period; the burden is on the secured party

(2) No. 9-402(2)(d) says secured party can sign instead of the debtor; debtor doesn’t have to sign

(e) (1) Yes, but only as of September 1; it is perfected when filed; problem is someone could come in and file financing statement during this gap in time (they lose priority to anyone else who comes in after July 1 (when financing statement lapses) and before September 1 (when new financing statement is filed)); there is a gap in perfection

(2) Yes, but only as of September 1; same problem with gap in perfection

In re Taylorville Eisner Agency

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Trustee objected to Bank’s claim as to inventory acquired after the 4 month period based on the second sentence in 9-402(7) because no new financing statement was filed

There was a perfected security interest that attached in the equipmentThe equipment was transferred by individual debtors to a corporation; no new equipment was obtained; therefore, it was transferred collateral

Mussleman says have to determine whether you continue to have a security interest in the transferred collateral (the security interest in the collateral can become detached in the transfer) – for transfer, have to ask if secured party knew of the transfer (authorized it); if so, security interest is cut off

Here, Bank didn’t know of transfer, therefore, security interest continues and perfection is automatic (perfected in first place)- clearly here, security interest in equipment continued

Was the inventory transferred?After-acquired inventory had to be bought from somewhere else (they sold all other inventory that was originally transferred)

The appellate court was wrong in saying inventory was transferred; therefore, don’t apply the 3rd sentence of 9-402(7)

For 2nd sentence of 9-402(7) to apply, they would have to argue they changed their form (reorganized) – name change by debtor or corporation changed its corporate structure

Mussleman says they set up entirely new/different entity- if can successfully argue that it was a reorganization under 9-402(7) second sentence, Bank

wuold have had to file new financing statement and since they didn't – trustee wins as to the inventory

If 9-402(7) doesn’t apply – need security agreement, signed by debtor describing the property, and value given

The corporation assumed debtor’s obligation to the Bank (i.e. assume debtor’s obligation under the security agreement)Is it perfected? They must file a financing statement covering inventory in the name of the corporationThey didn’t do it so no perfection

Important Points:(1) 2nd sentence of 9-402(7) does NOT APPLY to a TRANSFER of collateral(2) 3rd sentence only applies to a TRANSFER of collateral

Problem 4-8

(a) 9-403(2) – financing statements only effective for 5 years from date of filing; here, it is a 5 years and a day, so it has lapsed

(b) 9-403(3) – continuation statement must be filed within 6 months prior to the expiration of the 5 year period (here, after December 1, 2001)

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- they’ve filed the continuation statement too early; not timely, so it has lapsed

(c) Yes. 9-403(2) – if a security interest perfected by filing exists at the time insolvency proceedings are commenced by or against the debtor, the security interest remains perfected until termination of the insolvency proceedings and thereafter for a period of 60 days or until expiration of the 5 year period, whichever occurs later.

(d) see 9-404(1) regarding Termination Statements for consumer goods (last sentence) – if the affected secured party fails to file such a termination statement as required by this subsection, or to send such a termination statement within 10 days after proper demand therefor, he shall be liable to the debtor for $100, and in addition for any loss caused to the debtor by such failure-therefore, if collateral is consumer goods – liable to debtor for $1000 and any loss caused to debtor- if not consumer goods – no automatic termination statement; only when debtor requests one

through written demand

III. Perfection by Possession

Except where the collateral is accounts or general intangibles, perfection may be accomplished by possession (see also Ch. 11)

IV. Automatic Perfection

When the secured party has the advantage of automatic perfection, perfection occurs immediately upon attachment

V. Defining Purchase Money Security Interests

9-107 – a security interest is a “purchase money security interest” to the extent that it is(a) taken or retained by the seller of the collateral to secure all or part of its price (seller’s PMSI);

or(b) taken by a person who by making advances or incurring an obligation gives value to enable

the debtor to acquire rights in or the use of collateral if such value is in fact so used (lender’s PMSI)

- must advance credit, give value to enable debtor to have rights in or use collateral I such value is in fact used

The form of security interest is important for perfection; if you have a PMSI in consumer goods, 9-302(1)(d) says the security interest is automatically perfected upon attachment (no additional step to perfect the security interest)

PMSI is also important for priority; 9-312(3),(4) gives greater priority rights for PMSIsProblem 4-9

(a) This is a seller’s PMSI under 9-107(a)What if the secured party assigns its interest to someone else—does the assignee also have a PMSI? Yes. The assignee steps into the shoes of the assignor and obtains the same interest- assignee also does not have to re-perfect – 9-302(2)

(b) No PMSI. The money loan was not used to buy the thing they took a security interest in (the security interest was taken in the front-end loader, not the concrete mixer)

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(c) This is a lender’s PMSI under 9-107(b)

(d) No PMSI. Mary already owned the bulldozer; it was not “to enable the debtor to acquire rights in or the use of collateral”

(e) Yes. Now Mary merely has possession, not ownership. This is a lender’s PMSI under 9-107(b) because it was “to enable the debtor to acquire rights in or the use of collateral”

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Chapter 5 – Introduction to Priorities

Priority rules vary depending upon the types of parties involved- first need to figure out who the parties are (secured party, other party)- then figure out what priority rule applies

Problem 5-1

Who are the parties?Mike – Art. 9 secured party with an unperfected security interestDentist – unsecured creditorSee 9-201- a security agreement is effective…against creditorsTherefore, Mike has priority- here, he doesn’t even need to perfect (do not have to perfect your interest to have priority

over unsecured creditors)

Problem 5-2

Mike – Art. 9 secured party with an unperfected security interestMolly – lien creditor under 9-301(3) – when sheriff executes a writ and seizes the property, a judicial lien is attached to that seized propertySecured party with unperfected interest v. lien creditorPriority rule: 9-301(1)(b) – an unperfected security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfected- you become a lien creditor when the lien attaches (i.e. when sheriff seizes that property)Therefore, Molly has priority

Problem 5-3

Mike – Art. 9 secured party with an unperfected security interestTrustee in bankruptcy – lien creditor under 9-301(3)When does a trustee in bankruptcy become a lien creditor? When the petition in bankruptcy is filedSecured party with unperfected interest v. lien creditorPriority rule: 9-301(1)(b) – an unperfected security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfectedTherefore, trustee has priority

Problem 5-4

Mike – Art. 9 secured party with an unperfected security interestFrank – Art. 9 secured party with a perfected security interestArt. 9 secured party v. Art. 9 secured partyPriority rule: 9-301(1)(a) – an unperfected security interest is subordinate to the rights of persons entitled to priority under 9-312

9-312(5) is basic rule for priority between two Art. 9 secured parties – priority to the first to file or perfect-here, Frank has perfected; therefore, he has priority

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Problem 5-5

Time for perfection is governed by 9-303 – perfected when attachment and filing9-203 – when did security interest attach?

Mike didn’t give value until July 16, when he loaned the moneyFrank perfected June 16, but Mike filed June 15

Mike has priority – Rule: 1st to file or perfect, whichever comes 1st - this means filing always controls because filing will occur before or at same time of

perfection (never after)- Pure Race Statute!Once Mike filed, he can attach at any timeFrank’s options: he has constructive notice; put burden on debtor to get termination statement to remove the 1st filed financing statement

Problem 5-6

This is an exception to the 1st to file rule

John – has a lender’s PMSI under 9-107(b) and has priority under 9-312(4)9-312(4) – a PMSI in collateral other than inventory (i.e. goods) has priority over a conflicting security interest in the same collateral or its proceeds if the purchase money security interest is perfected at the time the debtor receives possession of the collateral or within 10 days thereafter

Here, debtor got possession of the crane on May 16, 1998Did John perfect his PMSI within 10 days of this? Yes; on May 22, 1998Therefore, John has “super priority” over First Finance

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Chapter 6 – Equipment Financing

I. Introduction

Static financing – financing in which the creditor requires equipment and motor vehicles as collateral; the extension of credit is most commonly secured only by specific items of collateral- Did my security interest attach?- Am I perfected?- Is the collateral properly insured/maintained?- Has my debtor transferred the property to someone else?- Did my debtor have clear title to the equipment when the security interest attached/was

perfected?

Floating lien or blanket financing – financing which uses accounts or inventory as collateral; in nearly all cases the extension of credit is secured not by specific goods but by a type of property

II. Basic Priority Rules

“First in time/first in right”

Problem 6-1

(a) No PMSI here, so apply the general rule 9-312(5) – first to file or perfectUnder 9-312(5), Friendly was the first to file – he has priority and gets $1 millionBob’s Bank gets what’s left over - $500,000

(b) (1) Bob’s Bank security interest is NOT perfected – they only filed in 1 place; Friendly filed in the right places so they did perfect

BUT, what about 9-401(2) (no harm no foul rule) – Bob’s filing is still effective- requires “good faith” – defined in Art. 1 as subjective honesty- also requires Friendly to have knowledge; 1-201(25) says knowledge means actual subjective

knowledge of contents of the financial statementHere, Friendly did have knowledge—they found Bob’s local filingBob’s security interest, therefore, is perfected ONLY AS AGAINST FRIENDLY and they have priority over Friendly(2) Bob’s has priority and would get the $1 million; Friendly would get the $500,000 left over

(c) They would both be unsecured creditors; Mussleman says this almost never happens

III. Future Advance Issues

Allis Chalmers Credit Corp. v. Cheney Investment, Inc.

Priority battle between 2 Art. 9 secured parties over farm equipment9-312

11/16/70 – debtor (Catlin) signs a retail installment contract for combine #1 with Ochs, Inc. (defined debt as $10,000 obligation; NO future advance clause in the contract)

contract was assigned to Allis-Chalmers, who financed the transaction (note: assignee steps into the shoes of secured creditor and isn’t required to do anything else)

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11/27/70 – Allis-Chalmers’ financing statement #1

12/19/70 – Cheney made cash advance to Catlin, taking a security interest in combine #1

12/24/70 – Cheney filed financing statement

9/17/71 – Catlin purchased combine #2 from another Highway Garage; Allis-Chalmers rolled debt over from 1st transaction into new retail installment contract and created security interest in combine #1 and #2(new contract canceled 1st contract)

9/29/71 – Allis-Chalmers’ financing statement #2

2/16/72 – Allis-Chalmers notified Cheney of its claim to a senior security interest on combine #1, as Cheney had taken possession of it when Catlin defaulted on his loan to Cheney

5/30/72 – Allis-Chalmers and Cheney execute letter agreement to allow combine #1 to be returned to Catlin (debtor) with each party to notify the other if Catlin defaulted on either financing agreement

Debtor defaults; Allis-Chalmers sues Cheney for conversion of combine #1, claiming priority

Trial court ruled for Cheney – said contract #1 was canceled when contract #2 was entered into; said contract #1 included no future advance clause; said contract #2 was not covered by the original financing statement; therefore, the only good financing statement was #2, which came after Cheney financing statement

Appellate court reverses in favor of Allis-Chalmers; said it had priority over Cheney

Majority rule: where originally a security agreement is executed, an indebtedness created, and a financing statement describing the collateral filed, followed at a later date by another advance made pursuant to a subsequent security agreement covering the same collateral, the lender has a perfected security interest in the collateral not only for the original debt but also for the later advance.

App. Court said 9-312(7) controlled the outcome

Also, 9-402 comment 2 and 9-204 comment 5 state the financing statement doesn’t require mention of future advances/after acquired collateral

But what about the security agreement making no mention of future advances?

9-203(1)(a) doesn’t require a description of the obligation at all BUT value must be given to have a security interest- must be able to relate obligation to collateral that secures it so most security agreements

describe the obligations

9-204 – security agreement can provide for future advances (future advance clause)Can do a 2nd security agreement which describes new loan and same collateral to cover a future advance

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- security agreement will attach to secure 2nd obligation

1st financing statement contains all requisite info to perfect 2nd security agreement; may file before security interest attaches- so 1st financing statement has priority because first to file wins

Doesn’t matter when future advance is made as long as you have a security interest that attaches in the same collateral with respect to the new obligation. Will always have priority because first to file financing statement

BUT 9-301(4) – if subsequent creditor is a lien creditor, then have priority only in future advances (1) made before party becomes a lien creditor (when lien attaches; when property levied by sheriff); later of: (2) made within 45 days after lien attaches; or (3) made without actual knowledge of the lien

9-307(3) – same rule for buyer with respect to future advances; whichever first occurs: (2) or (3) above

Sale of collateral – who has priority? Buyer or secured party?Generally, purchase of collateral does NOT defeat security interest9-306(2) – security interest continues in collateral unless secured party authorizes sale

IV. Superpriority Rights of Certain Purchase Money Security Interests

9-312(4) – exception to the first to file rule in 9-312(5)- a purchase money security interest (PMSI) in collateral other than inventory (i.e. goods) has

priority over a conflicting security interest in the same collateral or its proceeds if the purchase money security interest is perfected at the time the debtor receives possession of the collateral or within 10 days thereafter

In re Prior Brothers, Inc.Bank was 1st to fileIH was claiming exception to 1st to file rule that they had a PMSI and filed it within 10 days (9-312(4) – PMSI in collateral other than inventory)IH had a seller’s PMSI under 9-107(a)

IH argued it was a sale on approval (2-326); PBI did not become a debtor under the code until it had signaled its acceptance of the contract and made the down payment, and that it did not possess the tractor as a debtor until that time; claimed it had 10 days from Apr. 22, 1976, the date it received PBI’s down payment, to perfect its PMSI; since its financing statement was filed on Apr. 27, 1976, 5 days after receipt of the down payment, it did file within the 10 days allowed under 9-312(4) and its security interest is prior to the Bank’s.- IH focused on the language in 9-312(4) of “at the time the debtor receives possession of the collateral …” (i.e. PBI was not debtor until contract was final—until PBI accepted the contract and tractor wasn’t collateral until that same time)

Bank argues the sales contract signed by Prior on Apr. 8, 1976 was the complete agreement between the parties and that the financing statement should have been filed within 10 days of Apr. 8 in order to enjoy protection of –312(4)

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Court said PBI became the debtor in possession of the tractor collateral when it accepted the conditional contract of sale on Apr. 22, 1976; thus IH’s financing statement was timely filed on Apr. 27, 1976

If its an absolute sale on Apr. 8, 1976, the Bank winsIf it was a sale on approval – IH wins

Problem 6-3

(a) Beta has a seller’s PMSI under 9-107(a); but Bucksa doesn’t have a PMSI (debtor Alpha already had the collateral)

Use 1st to file rule – Friendly has priority over Bucksa

(b) Yes. If Bucksa took an assignment from Beta’s PMSI interest, the take an assignment in the PMSI (i.e. Bucksa steps into the shoes of Beta and thus has a seller’s PMSI)

The PMSI has super priority so Bucksa would win

(c) The 2nd loan of $25,000 is NOT a PMSI-Bucksa is not the seller, they are the lender – but 9-107(b) does not apply9-312(7) – future advances doesn’t apply because it is for purposes of 9-312(5) (the 1st to file rule)-future advances for PMSIs don’t get the same status as those under the 1st to file rule

Problem 6-4

Is it a lender’s PMSI under 9-107(b)? The value was not used to buy the collateral that Village took a security interest in; therefore, Village does not have a PMSI

- have to show the money lent to the debtor was used to obtain that collateral that was subject of the security interest

- Gigantic didn’t use the money to buy the robots (collateral)Some courts would say that destroyed the PMSI nature of the $1 million– i.e. Village would have a security interest but not the PMSI and since Chaste filed 1st, it has priority over VillageOther courts are more lenient

Way to solve this problem: make check out themselves to seller of robots or make it out jointly

Note: the special priority for PMSIs under 9-312(4) extends not only to the collateral subject to the PMSI but to all PROCEEDS of that collateral- so in the last problem, if Village has priority in the robots and the robots are later sold for

$500,000, Village also has priority in the $500,000

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Chapter 7 – Inventory

I. General Principles

Inventory financing typically involves not specific items of collateral, but a shifting pool of collateral

Floating lien – a security interest in a type of generically described collateral, which attaches to whatever property of that type the debtor happens to have at any given time

II. Basic Priority Rules

The basic priority rules for inventory are the usual first-in-time, first-in-right rules that apply throughout Art. 9

Fleetwood Credit v. RI Hospital Trust

Fighting over $62,000 proceeds from Hospital Trust to debtor- both Hospital Trust and Fleetwood were claiming interest in the proceedsSecured party v. secured party-usual rule: 9-312(5) – first to file rule (here Hospital Trust would win based on this rule)

Fleetwood has to argue an exception: 9-312(3) – priority in inventory and in “identifiable cash proceeds”

Issue: does Fleetwood qualify under 9-312(3)?

Requirements under 9-312(3):(1) PMSI – yes, Fleetwood had a lender’s PMSI under 9-107(b)(2) PMSI is perfected at time the debtor receives possession of the inventory – yes, this is

satisfied(3) PMSI secured party gives notice in writing to holder of conflicting security interest

Burden of proof on Fleetwood to prove notice

9-312(3) - A perfected purchase money security interest in inventory has priority over a conflicting security interest in the same inventory and also has priority in identifiable cash proceeds received on or before the delivery of the inventory to a buyer if the following conditions are met:(a) the PMSI is perfected at the time the debtor receives possession of the inventory; and(b) the purchase money secured party gives notification in writing to the holder of the conflicting

security interest if the holder had filed a financing statement covering the same types of inventory (i) before the date of the filing made by the purchase money secured party, or (ii) before the beginning of the 21 day period where the PMSI is temporarily perfected without filing or possession (9-304(5)); and

(c) the holder of the conflicting security interest receives the notification within 5 years before the debtor receives possession of the inventory; and

(d) the notification states the person giving the notice has or expects to acquire a PMSI in inventory of the debtor, describing such inventory by item or type.

The burden of proof is on the party claiming the PMSI

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This case boils down the PROCEEDS – 9-306- who had priority over the $62,000 cash proceeds?? Same as who had priority over the RVs

9-312(3) –super priority extends to proceeds from the inventory PMSI

NoteWhy is burden of proving that notice was given on the 2nd secured party? Because they are in a better position to prove (its impossible to show you didn’t receive notice)How would this burden be met? 1-201(26) – person gives notice to another by taking such steps as may be reasonably required to inform the other in ordinary course whether or not such other actually comes to know of it.

III. Rights of Buyers and Lessees

9-306(2) – a security interest continues in collateral notwithstanding sale, exchange, or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor

- if transfer was authorized by the secured party, the security interest is forever cutoff as to the transferee and all other parties

9-307(1) - A buyer in the ordinary course of business (defined in 1-201(9)) takes free of security interest created by his seller (has to be the debtor) even though the security interest is perfected and even though the buyer knows of its existence

Problem 7-1

(a) No, under 9-307(1)Buyer in the ordinary course (BOCB) – see 1-201(9)Is Ruth a BOCB? 4 Requirements1) good faith – 1-201(19) – means subjective good faith (note: most courts use the objective test

—reasonable person test)2) without knowledge – can’t know that you’re violating the security interest in some way (i.e.

violating terms)- can still know of a security interest – 9-307(1); just no knowledge that you’re violating the

terms of the security interest- 1-201(25) – knowledge means actual knowledge3) buys in the ordinary course 4) from a person in the business of selling goods of that kind (not incl a pawnbroker)

There is a question of ordinary course of business – does Ruth ordinarily sell 1,919 socks at a time?Also, under 1-201(9), is this a “transfer in bulk”? Look at case law to determine

If transfer not authorized under 9-306(2), look to 9-307(1)Who is “his seller” in 9-307(1)? The debtorThis doesn’t apply to remote buyers (it does in 9-306(2)); only applies to 1st transfer from debtor to 1st buyer

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(b) Yes. Joe is not in the business of selling computers; therefore, not a buyer in the ordinary course under 1-201(9); therefore, 9-307(1) doesn’t apply so Friendly still has its security interest

(c) 9-402(7) – security interest remains perfected even though collateral has been transferred, even if given with consent to it (it is subject to the secured party’s interest)

- no re-perfection required; 1st financing statement filed is sufficient

Sears Consumer Financial Corp v. Thunderbird Products

Sears sues for conversion- their options: 1) go after collateral; 2) try to find proceeds from sale of collateral

(identifiable); 3) conversion of right of possession to the property (as soon as debtor defaults) – measure of damages = value of property at time of conversion and sale (note: this is what Sears did – they had to show priority over Thunderbird)

Priority Battle:1) Identify your parties/what type of party?Sears – Art. 9 secured party (their security interest is unperfected)Thunderbird – Art. 9 secured party (as assignee of ITT who was Art. 9 secured party; they step into ITT’s shoes; note: ITT had perfected its security interest, so Thunderbird didn’t have to take any additional steps)2) What are they fighting over?Boat

9-312(5) First to File Rule – Thunderbird has priority based on ITT’s assignment- you can really only apply 9-312 when both secured parties have received a security interest in

the same collateral from the same debtor- here, 9-312 doesn’t work because there are 2 debtors

Anytime collateral is transferred, you have to look at transfer rules- ways transferees can get priority over Art. 9 secured parties

General rule: you can only transfer rights in what you own unless some statute/rule gives you power to transfer more than what you own

Debtor can transfer collateral free of the security interest:(1) 9-306(2) – if secured party somehow authorized the transfer (here there was no authorization by Thunderbird to D&J to sell the boat)

(2) 9-307(1) – made to BOCB, defined in 1-201(9), by the ORIGINAL debtor in the transaction and didn’t create the security interest (here, this doesn’t apply because D&J wasn’t original debtor—it was transferor)

Under 9-307(1) – security interest is cut off as to any BOCB (1st transfer)- as to any subsequent transferees from the BOCB, courts have struggled- most courts say subsequent transferees are NOT covered by 9-307(1) because it will never be

seller that created the security interest- this doesn’t make sense given the shelter doctrine in 9-306(2)

Where do you go since 9-307(1) or 9-306(2)??

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Court looked at entrustment doctrine in 2-403(2)- Thunderbird entrusted the boat to D&J- D&J is a merchant who deals with goods of that kind; therefore, D&J had “power” to transfer

all rights of Thunderbird to a BOCB

Was Abernathy a buyer in the ordinary course of business (BOCB) as defined in 1-201(19)??- court didn’t get into it, but probably was- there may be some question about good faith

Problem 7-2

Sears doesn’t control here because there was no entrustment- could argue Bank sort of entrusted it to Bennets when took security interest but left it in the

Bennets possession- this doesn’t trigger 2-403(2) so Art. 9 applies

9-306(2) – doesn’t apply because the Bank didn’t authorize the transfer9-307(1) – doesn’t apply because Bennets are not in the business of selling boat as required by 1-201(9); therefore, Collins is not a BOCB

SUMMARY OF ANALYSIS 1) 9-306(2) – if authorized the disposition, security interest is cut off forever and transferee

takes free (so do subsequent transferees) IF NO AUTHORIZATION,2) 9-307(1)3) 9-301(1)(c), (d)4) 9-307(3) – future advances

Note: the authorization for purposes of 9-306(2) does not have to be explicit; it can be implied through course of dealing between the parties, for example

Problem 7-3

(a) Douglas is transferee-does Douglas get priority based on 9-307(1)? No. Problem is Zifel didn’t create the security interest (original debtor is Hooterville)- 9-307(1) only applies to 1st transfer from debtor (here, that is Zifel)- shelter doctrine doesn’t apply to subsequent transferees, even if you are BOCB

In these situations, some courts have bent over backwards to show that 9-306(2) applies (authorization of the transfer by the secured party – shelter doctrine would then apply)

Here, Friendly required prior approval and Hooterville didn’t obtain it; therefore, it was an unauthorized transfer- conditions on authorization of sale must be followed

General rule: courts have looked at these conditional authorizations and have upheld these conditions

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(b) Yes. Some courts hold that a condition imposed on an authorization to sell is ineffective unless the buyer can control performance of the condition (Pillsbury case)

(c) see 1-205 – Course of dealing and usage of trade; see also Gretna case

Production Credit Ass’n of Baraboo v. The Pillsbury Co.

Conditional authorization

By conditioning the authorization, a secured party may preserve its security interest even after an authorized sale

Where conditions to a sale are imposed by the secured party, a sale by the debtor in violation of the conditions is unauthorized, and the security interest continues

But if the condition imposed on an authorization to sell is ineffective, the authorization is unconditional and the security interest does not survive the sale

Majority rule: a condition imposed on an authorization to sell is ineffective, unless performance of the condition is within the buyer’s control- the buyer who inquires regarding authorization to sell can structure the sale to comply with

the condition and avoid taking subject to the security interest

Minority rule: the buyer who inquires and learns of a condition not within the buyer’s control must risk taking subject to the security interest or refuse to buy

Northern Commercial Co. v. Cobb

Was there an impliedly authorized sale that cut off the security interest?

A retained right to proceeds does NOT indicate an implied authorization to sell the collateral

The mere absence of a restriction on sale in the security agreement does not constitute implied authorization to sell

Consent to a sale must consist of more that mere absence of restrictions- implied agreement to sale should be found with extreme hesitancy and should generally be

limited to the situation of a prior course of dealing with the debtor permitting disposition- a transferee of collateral should bear the burden of showing that the sale was authorized

9-306(2) is silent as to whether you have to say something to prohibit sales in your security agreement- the assumption is that the security interest will continue unless something else is otherwise

provided in the security agreement

9-306(2) does 2 things:1) continuing security interest in collateral sold, exchanged or otherwise disposed of2) automatically attached security interest in proceeds

Mussleman agrees this case is the better view – purchaser can easily protect himself by:1) checking the records for any security interests in the item

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2) requiring proof of consent3) making payment directly to the creditor

Gretna State Bank v. Cornbelt Livestock Co.

Gretna sued Cornbelt for conversion, claiming Cornbelt sold dairy cattle in which Gretna had a perfected security interest.Cornbelt claimed that Gretna had consented to and authorized the salesGretna never enforced the provision in the security agreement which expressly prohibited the sale of the collateral without the prior written consent of Gretna

Court held Gretna’s course of conduct constituted a waiver of its security interest in the cattle

9-306(2) states a security interest continues in collateral notwithstanding sale, exchange, or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise…

The “otherwise” language in 9-306(2) includes prior course of conduct constituting authority to sell pledged collateral

Rule: performance under a security agreement, including the failure of the secured party to rebuke the debtor or object to the debtor’s conduct in selling collateral in violation of the terms of the security agreement, may amount to a waiver of the lender’s contractual right to require its written consent to a sale of collateral.

Problem 7-4

Waivers can be retracted. River Bank must notify its debtors in writing that it is now going to start enforcing the condition

Note: 9-307(1) doesn’t help Pillsbury, Cobb, or Gretna cases because they all involve sales of farm products; therefore, courts will try to help with 9-306(2) authorization

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Chapter 8 – Motor Vehicles and Other Titled Goods

I. Introduction

9-302(3)(b) – The filing of a financing statement otherwise required by Art. 9 is not necessary or effective to perfect a security interest in property subject to any certificate of title statute covering automobiles, trailers, mobile homes, boats, farm tractors, or the like…

Certificate of title system – basic principle is that every vehicle has but 1 certificate of title issued by an appropriate state

Motor vehicles held as inventory are not subject to certificate of titles until they are sold

If an item of personalty is a motor vehicle covered by certificate of title statutes, perfection must be by having the lien noted on the certificate of title (no filing a financing statement or automatic perfection)

Creditor typically sends an application to the DMV for the issuance of a new title with the creditor’s lien noted thereonIf the application and fee are appropriate, the DMV is to issue a title with the lien noted (typically on the back of the title)Generally, perfection is deemed to exist from the time the fee and application arrive plus a reasonable time specified in the motor vehicle statutes designed to allow processing of the title and notation of the lienThe creditor retains possession of the title with the lien

II. “Buyers in the Ordinary Course” v. Article 9 Secured Creditor

Remember these statutes:

9-307(1) – a buyer in the ordinary course of business (other than person buying farm products from a person engaged in farming operations) takes free of a security interest created by his seller (the debtor) even though the security interest is perfected and even though the buyer knows of its existence

1-201(9) – “buyer in the ordinary course of business” means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a 3rd party in the goods buys in the ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker- buying does not include a transfer in bulk or as security for or in total or partial satisfaction of

a money debt

DBC Capital Fund v. Snodgrass

Trial court said Snodgrass was under 9-307(1) as a BOCBGeneral rule: if there are grounds for suspecting that a security interest is being imperiled by the mode of dealing, a transaction cannot be considered in the ordinary course of businss

Here, court said DBC failed to prove that the mode of dealing was grounds for such a suspicion; therefore, Snodgrass was a BOCB under 9-307(1) and took free of the security interest held by DBC

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This case represents the majority opinion that buyers of vehicles take free of any security interests created by the seller.

Problem 8-1

Relief of a debt is not “buying” under 1-201(9) – (buying does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt)

Was Jake a BOCB? Was Jake in good faith (1-201(19) – good faith means honesty in fact in the conduct or transaction concerned)?He was former partner; familiar with business dealings – he probably knew about the security agreement; he probably also knew Mary was not paying the debtTherefore, Jake probably knew he was violating the rights of a 3rd party and so he would not be in good faithFirst Bank would win

Schultz v. Bank of the West, C.B.C.

Issue: whether a consumer, who purchases a used motor home from a dealer who was selling the motor home on consignment, acquires that vehicle free of a creditor’s prior perfected security interest in it

If Gateleys were seller, plaintiffs could be BOCBs, BUT the Gateleys didn’t create the security interest (they were not the original debtor as required by 9-307(1))

If Muirs were seller, they did create the security interest, BUT the Muirs weren’t in the ordinary course of selling RVs.

Plaintiffs claimed they were BOCBs because Gateleys were Muir’s agent and as such Gateleys do sell RVs in the ordinary course of business

But the Muirs were the real sellers because they had title and therefore they created the security interest

Bank claimed the seller in 9-307(1) should be the same as in 1-201(9)

Court agrees with Plaintiffs- says 1-201(9) does NOT require that the “person” from whom the goods are purchased have

title (i.e. they don’t have to be the “seller” as under 9-307(1))- court uses “seller” in 9-307(1) and says “seller” under this is the one who possesses legal title

to the goodsHolding:A BOCB is NOT required to buy directly from the “seller”; a buyer may buy in the ordinary course, so long as the person who holds out the goods for sale is one who is in the business of selling goods of that kindIt is not necessary that the person holding the goods out for sale have actual title to the goods; the seller may entrust the goods to the person But when it comes to the security interest, 9-307(1) requires that the “seller” be the one who created the security interest (the original debtor)

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Dissent says Muirs were seller of motor home, but since they were not in business of selling them, 9-307(1) doesn’t help plaintiffs

Who’s right from policy perspective—majority or dissent?

Successive sales cases – secured party takes security interest in boat of debtor—debtor sells boat to buyer 1—buyer 1 sells boat to buyer 2- majority rule– says buyer 2 can NEVER take free of security interest because his seller

(buyer 1) didn’t create the security interest in 9-307(1), even if buyer 2 is a BOCB- dissent says in this situation the Gateleys (buyer 1) selling to Schulzes (buyer 2) would never

take free of the security interest in sales case so why should it be different if it was a consignment case

Question (p. 154)

Would 9-307(2) have been any help to the Schulzes?9-307(2) – property has to be consumer goods in hands of seller and buyer (“garage sale” provision)

If have PMSI in consumer goods, you don’t have to file under 9-302(1)(d); but under 9-307(2), you will lose the security interest in it if sold to someone else as consumer goods

None of this applies to goods covered by certificate of title because no financing statement is filed; therefore, 9-307(2) would never help someone like the Schulzes-the security interest would be noted on the certificate of title

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Chapter 9 – Statutory Liens

9-310 – when a person in the ordinary course of his business furnishes services or materials with respect to goods subject to a security interest, a lien upon goods in the possession of such person given by statute or rule of law for such materials or services takes priority over a perfected security interest unless the lien is statutory and the statute expressly provides otherwise.

Problem 9-1

Under 9-310, Cattleman’s would have priority if it retains possessionPriority if Cattleman’s returns the embryos?This cause problems—courts interpret 9-310 2 different ways:1) Art. 9 secured party has priority because no possession—9-310 applies to every security

battle2) 9-310 doesn’t apply here; only applies for possessory lien- if 9-310 doesn’t apply, then Art. 9 doesn’t apply- start at statute or common law rule to see if they provide for priority

Brazier Forest Products v. Northern Transport

This case represents the MAJORITY view

Were the liens possessory liens?Lien claimants – said non-possessory liens are outside scope of 9-310Bank – argued 9-310 does apply to all conflicts between Art. 9 secured party and lien holder, including non-possessory lien holder

Court agreed with lien claimants – said 9-310 only applies to possessory liens- non-possessory liens are outside the scope of 9-310; therefore, look to the law outside the

UCC

If 9-310 doesn’t apply, most lien claimants will win (unless lien statute says otherwise, which they usually don’t)

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Chapter 11 – Possessory Security Interests

I. Introduction

Focus here is on what possession means and the duty of care of a creditor as to collateral within its possession whether the possession is by consent of the debtor or because of a repossession upon default

9-305 – a security interest in goods, instruments, money, negotiable documents, or chattel paper may be perfected by the secured party’s taking possession of the collateral- a security interest in the right to proceeds of a written letter of credit may be perfected by the

secured party’s taking possession of the letter of credit- if such collateral other than goods covered by a negotiable document is held by a bailee, the

secured party is deemed to have possession from the time the bailee receives notification of the secured party’s interest

- a security interest is perfected by possession from the time possession is taken without a relation back and continues only so long as possession is retained

9-304(1) – a security interest in chattel paper or negotiable documents may be perfected by filing. - A security interest in the rights to proceeds of a written letter of credit can be perfected only

by the secured party’s taking possession of the letter of credit. - A security interest in money or instruments (other than instruments which constitute part of

chattel paper) can be perfected only by the secured party’s taking possession

II. Meaning of Possession

In re Allen

Trustee in bankruptcy has status of a lien creditor

Issue: was security interest perfected?Trustee argued no perfection because failed to take possession of the note and deed of trust (i.e. no perfection under 9-304(1))

Why was possession necessary?9-304(1) states a security interest in money or instruments can be perfected only by the secured party’s taking possession of the collateral(remember: a promisory note is an instrument under 9-105(1)(i)

There was no physical possession of the note, but Casa Grande argued “constructive” possession, which satisfies 9-305

Rule: if a security interest in instruments is held by a bailee, the secured party is deemed to have possession from the time the bailee receives notification of the secured party’s interest (9-305)

Comment 2 to 9-305 – possession may be by the secured party himself or by an agent on his behalf; however, the debtor or a person controlled by him cannot qualify as an agent for the secured party

9-305 allows for 2 forms of constructive possession:1) through a bailee

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2) through an agent

Some courts require that the holder of the instruments be within the secured party’s exclusive control

Other courts are satisfied by a showing that the holder is not within the debtor’s exclusive control, so long as the holder has notice of the secured party’s interest

Why can’t debtor be secured party’s agent? (see last part of Problem 11-1)Because of concept of notice to the world of the security interest; if debtor still had possession, this would not give others notice

Problem 11-1

What does secured party have to show to have priority over the judicial lien creditor?9-301(1)(b) – the secured party has priority over the judicial lien creditor as long as they perfected before the other party became a judicial lien creditor

Does Hank have perfected security interest in the Lincoln?The problem with perfecting security interest in Lincoln by possession is that its probably covered by a certificate of title; therefore, you would have to comply with the certificate of title statute and perfection is not completed by possession

Does Hank have perfected security interest in the watch?What about the fact that there was no security agreement signed? Doesn’t matter; it perfects and attaches because he has possession of collateral

If Hank had agreed to take possession of the watch but to let Johnny use it as long as he told everyone that he was holding it for Hank, this would not be sufficient possession by Hank; the debtor cannot be an agent for the secured party (comment 2 to 9-305)

III. Care of Collateral in Creditor’s Possession

The creditor who is in possession of the debtor’s collateral has obligations with respect to such collateral 9-207 – a secured party must use reasonable care in the custody and preservation of collateral in his possession. In the case of an instrument or chattel paper, reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreedProblem 11-2

Look at 9-207 (obligations of the secured party when secured party has possession of the collateral)

What did she do wrong? The Art. 3 note was not presented for payment9-207(1) – secured party must use reasonable care in custody and preservation of collateral in its possession

Maria is probably liable for failing to present it—the fact that she was on the cruise likely does not excuse her

Problem 11-3

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Did the secured party, through some unreasonable behavior, cause the debtor to have some loss as to the value of the collateral?(note: this happens a lot as to market instruments—securities, stocks, etc)

Courts have differed:Depending on whether the value of the collateral exceeds the debt – courts sometimes hold in favor of debtorsOr value of collateral less than the debt – courts have ignored the debtor’s claim

Theory is 1-203, which imposes good faith obligation (good faith in failing to sell the collateral)

Problem 11-4

9-207(2)(b) – the risk of accidental loss or damage is on the debtor to the extent of any deficiency in any effective insurance coverageBUT, court will inquire into the duty of reasonable care by the secured party- if debtor can show negligence by the secured party caused the damage, the secured party is

liable

Problem 11-5

There is negligence involved (not secured to ground bolts); there was constructive possessionThe sheriff was acting on the bank’s behalf (agent); therefore, any negligence by sheriff is charged to the bank and the bank is therefore liable

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Chapter 12 – Fixtures and Realty-Related Interests

I. Borderline Collateral

When a fixture is used as collateral, the parties may use either Art. 9 or general real estate law.

Article 9 secured parties v. claimants of interest in real estate under state real property laws

Mixed collateral – real property and personal property (e.g. the use of a note secured by a mortgage as collateral for a loan)

Rodney v. Arizona Bank

Does Art. 9 apply to creation and perfection of a security interest in a promissory note when the note itself is secured by a deed of trust on real property?

Promissory note = personal property under Art. 9Deed of trust or mortgage = interest in real estate; Art. 9 doesn’t apply

Court says the mortgage goes with the noteA debt for purchase of real property (and the promissory note that is evidence of that debt) cannot be separated from the mortgage (or deed of trust) securing that debt

9-102(3) – the application of Art. 9 to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which Art. 9 does not apply

Comment 4 to 9-102(3) – Art. 9 is intended to apply in some measure to a security interest transfer of a note and mortgage; Art. 9 governs perfection of a security interest in the note and no action need be taken with regard to the mortgage, nor any filing be done in the real estate records

9-104(j) - Art. 9 does not apply to the creation or transfer of an interest in or lien on real estate

9-105(1)(i) – promissory note = instrument

Art. 9 applies to creating the security interest in the note; then look to real property law for what is required to be done with regard to the real estate

Problem 12-1

Lessee has interest in real estate leaseLessor is owner of real estate – has the right to payments from lessee- use right to royalty payments as collateral (interest in personal property – Art. 9 does apply)

How would you perfect a security interest of this type? It is a general intangible (doesn’t fit any other category)

Similar to land-sale installment contract – agreement where seller sells and buyer buys but seller retains title to it until its all paid off

II. What on Earth (in Earth?) is a Fixture?

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9-313(1)(a) – goods are fixtures when they become so related to particular real estate that an interest in them arises under real estate law

3 Possibilities that Property Could Fall Into:

(1) if related to real estate in casual, non-permanent way so that attached casually – personal property

- Art. 9 applies (e.g. washer)

(2) incorporated something into real estate so completely that have to destroy the thing to get it out (considered part of real estate and Art. 9 does NOT apply) – ordinary building materials

- 9-313(2) – (e.g. driveway)

(3) incorporated something into real estate in such a way that an interest in the state real estate law (i.e. whoever acquires interest in real estate also acquires interest in this property - fixture- 9-313 applies to determine who gets priority over the fixture

Primary Issue: with whom is the Art. 9 secured party competing?If the competing party is a real estate claimant, then 9-313 is appliedWhen 9-313 applies, it normally requires the 9-313 party to perform a fixture filing (9-313(1)(b)) (it is a real estate filing)

9-313(1)(b) – fixture filing is the filing in the office where a mortgage on the real estate would be filed or recorded of a financing statement covering goods which are or are to become fixtures and conforming to the requirements of 9-402(5)

9-402(5) – tells what a fixture filing must include – must show that it covers this type of collateral, must recite that it is to be filed in the real estate records, and must contain a description of the real estate

9-313(4)-(7) are the basic priority rules for fixtures

In re Gain Electronics Corp.2 Tests for Determining Whether an Item was a Fixture:

(1) traditional test – intention of the parties is the dominant factor; did they intend them to be fixtures?

(2) institutional doctrine – test is whether the chattel is permanently essential to the completeness of the structure or its use; chattel is a fixture if its severance from the structure would cause material damage to the structure or prevent the structure from being used for the purposes for which it was erected or for which it has been adapted

Court doesn’t use either of these 2 tests—says the proper test is (3) will its removal cause irreparable or serious physical injury or damage to the freehold (irreparable injury test)

The burden of proof rests with the part who asserts that the items are fixtures

Lewiston Bottled Gas Co. v. Key Bank of Maine

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Issue: were the 90 units fixtures?Key Bank will win if it’s a fixture – they would have an interest in them under real estate law and only if they are fixturesLBG’s fixture filing was inadequate – not appropriate nameIf goods aren’t fixtures, LBG wins because Bank has no interest in the property (only an interest in them under real estate law if they are fixtures)

3 Prong Test to Determine if Goods are Fixtures: (combines both the traditional and institutional tests)

(1) property is physically annexed to the real estate;

(2) property is adapted to the use to which the real estate is put (the personal and real property are united in the carrying out of a common purpose); and

(3) property is annexed with the intent to make it part of the realty

Court here looks at the intent of the parties objectively based upon what they did (not the parties’ subjective intent)- structure and mode of attachment- purpose and use for which the annexation has been made- the relation and use of the party making it

Note p. 199 – given the confusion regarding fixtures, if a secured party is not sure if it is a fixture or not, they should do a fixture filing and an Art. 9 filing

Problem 12-2

(a) institutional test – they are fixtures; seats are integral to the operation of the theatertraditional test – intent? It is objective intent – probably did intend for them to become fixturesIn re Gain (irreparable injury test) – maybe not fixtures

(b) Would want to know how the cash register is installed- if just plugged in – probably no fixture under any test (it would be equipment)- if easy to remove, it would be hard to find it as a fixture, even though integral to the operation- if permanently installed – maybe more like a fixture (would it cause damage?)

(c) Central A/C contains a number of components; sits out on a concrete slab- institutional doctrine – maybe a fixture since integral- to remove the piping (electrical) – may cause severe damage; could be ordinary building

materials and a part of the real estate if built into the wall (real estate law and not Art. 9 applies)

(d) Just plugging it into wall and its on wheels – not a fixture

(e) Depends on the kind of pool and how you had to remove it- if cemented in and would cause damage – probably ordinary building material- if could take it out without destroying it and leave hold in ground – maybe a fixture

(e) would have to destroy it to get to it – ordinary building material

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III. Perfection in Fixtures/Fixture Filing

9-402(5) - To qualify as a fixture filing, the financing statement must:(1) contain a description of the real estate to which the fixture is attached;(2) include a statement that it covers fixtures(3) have a recitation that it is to be filed in the real estate records; and(4) if the debtor does not have an interest of record in underlying real estate, it must give the

name of the record owner

9-401(1) – the fixture filing must be made in the office where a mortgage on the real estate would be filed or recorded

IV. Priorities in Fixtures

See 9-313(3)-(7)

Problem 12-3

(a) Under 9-313(4)(d) O’Hara has priority – a perfected security interest in fixtures has priority over the conflicting interest of an encumbrancer or owner of the real estate where the conflicting interest is a lien on the real estate obtained by legal or equitable proceedings after the security interest was perfected by any method permitted by Art. 9

- a fixture filing is NOT required; perfected by “any” method permitted by Art. 9- can do anything Art. 9 allows for perfection for personal property or a fixture- just need to file before conflicting party obtains lien

Why “any” method? They are not going to look in real estate records, property records—they have a judgment and won’t look(compare to requiring a fixture filing because the competing party will be looking in the real property records)

(b) 9-313(a),(b) require fixture filing – here, none was made so they don’t help; therefore, 9-313(7) (default rule) applies and owner (Kennedy) wins

(c) O’Hara has priority if dishwasher is not a fixture- if fixture, under 9-313(4)(c) – if domestic appliance which is consumer good, you can perfect by any method permitted by Art. 9- is dishwasher a readily removable replacement; a domestic appliance; a fixture; it must be a

consumer good (note: not a consumer good if renting the house)- if 9-313(4)(c) is satisfied – security interest has priority

What if they hadn’t filed?PMSI in consumer goods is 9-302(1)(d) and automatically perfected

Problem 12-4

First question: has the mobile home now become a fixture (by attachment to the real estate)?If no, then just apply Art. 9 – property subject to certificate of title; to perfect, note the interest on the certificate of title

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Does 9-313 apply?If no fixture filing, 9-313(a) or (b) doesn’t help; 9-313(c) doesn’t work unless “construction mortgage”If none of these apply, then the owner would have priority

Issue: does certificate of title still control the goods?9-302(3) &(4) – certificate of title statute governs for perfectionBut does certificate of title here still control? Look to certificate of title statute to see if it answers the question

9-401(3) – changing use of collateral- Mussleman says not applicable here; says 9-401(3) is meant to apply when collateral remains

personal property (NOT becomes a fixture)

Problem 12-5Helpful has a seller’s PMSI under 9-107(1)(a)Helpful has priority under 9-313(4)(a) because it satisfies all 4 requirements: 1) security interest is a PMSI; 2) interest of the encumbrancer or owner arises BEFORE the goods become fixtures; 3) security interest is perfected by a fixture filing before the goods become fixtures or WITHIN 10 days thereafter; and 4) debtor has an interest of record in the real estate or is in possession of the real estate

When do goods become fixtures?When they are actually attached/installed to the real estate

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Chapter 13 – Accounts

I. General Principles

9-106 – account means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance

The account creditor can either sell the account to a 3rd party factor or use it as collateral for a loan

Think of purchasing the accounts as a LOAN; think of the assignment of accounts for money as granting a security interest

II. Applicability of Article 9 Rules

In re B. Hollis Knight Co.

Since an account need not be earned by performance, the retainage was properly classified as part of BHK’s outstanding accounts although it would not be paid until the job was satisfactorily completed

9-302(1)(e) – a financing statement must be filed to perfect all security interests except an assignment of accounts which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts of the assignor

The determination of whether an assignment constitutes a significant part of the assignor’s outstanding accounts must be made on the basis of the facts available at the time of the assignmentThe term “significant part” is not defined by the UCC

2 Tests in Interpreting What is a “Significant Part” of the Debtor’s Accounts Receivable:

(1) casual or isolated test – requires a court to examine the circumstances surrounding the transaction, including the status of the assignee, to determine whether the assignment was casual or isolated; if a court finds that the transaction was not part of a regular course of commercial financing, it will not require filing

- policy: it would not be unreasonable to require a secured creditor to file if he regularly takes assignments of a debtor’s accounts; but it would be unreasonable if this was not the usual practice

(2) percentage test – focuses on the size of the assignment in relation to the size of the outstanding accounts; attempts to define the term “significant part” in a manner that is consistent with the statute and that promotes certainty in application

- based on language of 9-302(1)(e)The court here applied both tests (statutory and policy)

Chapter 14 – Chattel Paper and Leases

I. Introduction

Chattel paper – comprises a writing or writings which evidence both an obligation to pay and either a security agreement or a lease of personal property

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The holder of the chattel paper can sell or obtain credit on the paper

In re The Bennett Funding Group

9-105(1)(b) – chattel paper means a writing or writings which evidence both a monetary obligation and a security interest in or a lease of specific goods

Personal property leases always = chattel paper

Attachment – 9-203(1)1) security agreement or possession of the collateral by the secured party;2) value has been given; and3) debtor has rights in the collateral

9-102(1)(b) – Art. 9 applies to outright sales involving chattel paper

Perfection9-305 – secured party takes possession9-304(1) – filing a financing statement9-401(1) – tells where to file financing statement9-402 – tells formal requisites of a financing statement

Banks claim – they hold a perfected security interest in both the leases and the income stream derived therefrom b virtue of their having filed proper financing statements, as well as being in possession of the original leases

Trustee claim – in some instances the security interests of the Banks may not have been properly perfected and that as a hypothetical lien creditor pursuant to 544(a) he is entitled to avoid the security interests

Are the leases chattel paper? YesChattel paper – monetary obligation owed to the debtor

How do you create a security interest in chattel paper?Must have either possession of the collateral or a security agreement signed by the debtor describing the collateral; value must be given; debtor must have rights in the collateral

Was there a security agreement? The bill of sale will constitute a security agreement

How do you perfect a security interest in chattel paper?Either by filing a financing statement or by taking possession of the chattel paper – 9-304

II. Secured Parties and Third-Party Assignees

Problem 14-1

TCC’s interest – transferee of the checksBank’s interest – perfected security interest in the checks

But the checks are proceeds of chattel paper

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9-306(2) – security interest in collateral continues notwithstanding sale, exchange, or other disposition and also continues in any identifiable proceeds

The Bank has a perfected security interest in the checks and therefore has priority over TCC

checks = commercial paper under Art. 39-309 – Art. 9 does not limit the rights of a holder in due course of a negotiable instrument (3-302)3-302 – defines “holder in due course” of an instrument3-104 – defines instrument (negotiable instrument = checks)

Would result change if Southfence had paid Tarp by checks drawn on its own bank account?Now the debtor is not endorsing the checks (no holder in due course issue)

(diagram)

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Problem 14-2

See diagram above – River Bank = C; Mary Belles = A; Lovejoy = B

Does River Bank still have a security interest in the table?The security interest in the table was cut off when Mary Belles sold the table to Lovejoy (9-306(2) or 9-307(1))Mary Belles repossess the table – can River Bank reacquire a security interest in the table? (Assuming Mary Belles is in default and still has possession of the table)Not under any after-acquired property clause, BUT 9-306(5)(a) – River Bank’s security interest reattaches

What if Mary Belles sells the chattel paper to Finance Co?River Bank claiming a security interest in the repossessed table and Mary Belles is in default as to both River Bank and Finance Co

Finance Co = secured party in chattel paperDoes Finance Co have security interest in table and does it have priority over River Bank?9-306(5)(a) – security interest reattaches for River Bank9-306(5)(b) – Finance Co also has security interest in the goods(both are Art. 9 secured parties)

Who has priority? See 9-306(5)(b) – prior to security interest asserted under 9-306(5)(a) to the extent that the transferee of the chattel paper was entitled to priority under 9-308Now look to 9-308 – whoever wins as to the chattel paper under 9-308 wins as to the table under 9-306(5)(b)

River Bank has perfected under 9-306 as to proceeds- chattel paper is proceeds of the retail installment contract inventory

See if 9-308(b) applies 1st

9-308(b) applies whenever secured party (River Bank) has security interest in chattel paper ONLY because it is proceeds of inventory subject to security interest; purchaser (Finance Co) gets priority regardless of knowledge as to the chattel paper9-306(5)(b) then says Finance Co gets priority as to the table because of their priority under 9-308(b) of the chattel paper

9-308(a) only applies when secured party has interest actually in the goods; purchaser (Finance Co) must act without knowledge or River Bank’s security interest

GMAC v. 3 rd National Bank in Nashville

Priority battle between GMAC and 3rd National Bank over the truck

GMAC lost its original security interest in the truck under 9-307(1)Look to 9-306(5) to see if GMAC has interest in the truck- GMAC has perfected security interest under 9-306(5)(a) – security interest reattaches- 3rd National Bank has perfected security interest under 9-306(5)(b)

Battle between 2 Art. 9 secured parties

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Note: 9-312 1st to file rule only applies if some other rule doesn’t apply- here, 9-308 does apply so 9-312 does not

Now look to 9-308 to see who has priority as to the chattel paper- whoever has priority to the chattel paper then has priority under 9-306(5)(b) as to the goods

(truck)

9-308GMAC only as security interest in inventory; therefore, only way can assert security interest in chattel paper is through the proceeds of the inventory (truck); therefore, 9-308(b) appliesBecause 9-308(b) applies, 3rd National Bank’s knowledge of GMAC’s security interest doesn’t matterBecause 3rd National bank has priority over chattel paper in 9-308, it also has priority under 9-306(5)

Problem 14-3

1. Friendly is purchaser of chattel paper - note: sale or assignment of chattel paper is treated as secured transaction – 9-102(1)(b)Except for 9-104(f) exceptions, sale/assignment of accounts or chattel paper is treated as secured transactionTherefore, Friendly is also a secured partyNUTS is also a secured party under Art. 9 because perfected security interestIf 9-308 is not satisfied – go to 9-312 (1st to file rule)Does 9-308 apply? Not 9-308(b) because NUTS didn’t take security interest in the proceeds of inventory (there isn't even a security interest in inventory)Look to 9-308(a) because they are claiming a security interest in the chattel paperHere, Friendly took with knowledge of NUTS’ financing statement so 9-308(a) may not be metBUT, comment 3 to 9-308 states “mere knowledge of an Art. 9 filing against chattel paper does not give knowledge of the existence of a security interest in the chattel paper”Why? Knowledge means actual knowledge – it could be different chattel paper (must have knowledge of security interest in the particular chattel paper that they are buying)

2. What could NUTS have done to protect themselves?Taken possession of all chattel paper they were taking a security interest inIf debtor (Muck) keeps possession of the chattel paper – see comment 3 of 9-308 – Friendly can stamp or note on the paper the fact that it has been assigned to them

Problem 14-4

Village Bank – security interest in all inventory and chattel paper of ReliableReliable sells to Bucksa Bank $500,000 of the chattel paperBucksa knows the chattel paper is subject to Village Bank’s security interestPriority between Village and Bucksa?9-308(a) doesn’t apply because Bucksa has knowledge9-308(b) – what does “merely as proceeds…” mean?Look at facts – what are they really claiming a security interest in – chattel paper or inventoryCourts would look to fact that Village never taken possession of/examined Reliable’s chattel paper and doesn’t require Reliable to account for its chattel paperReally looks like Village claiming a security interest in proceeds of inventory; therefore Bucksa’s knowledge doesn’t matter

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III. Leases

Credit sale v. lease

Look to 1-201(37)- is it really a lease (Art. 2A would apply – lessor doesn’t have to give any notice to purchaser)

or a credit sale with a security interest (Art. 9 would apply – must give notice)

Problem 14-5

Is this really a lease or a sale with retention of security interest to secure payment of the purchase price?

Start at 1-201(37) – whether a transaction creates a security interest or lease is determined by the facts of each case

2 Requirements under 1-201(37) to conclusively establish that the transaction creates a security interest:1) lessee cannot terminate lease prior to the initial term of the lease; and2) either (a)-(d)

Other factors if the 2 requirements aren’t met and lessee can’t terminate prior to lease term- see (a) – (e) on p. 31 of Code (right side)

Here, you have to treat each term like a separate lease – here it is 5 year 1st term-look at 1-201(37)(a) – has to pay $7000 at end of term; therefore, it retains its economic life1-201(37)(c) – is $200 nominal consideration to renew the lease? Probably notHere it cannot be conclusively determined from the 1st set of rules that the transaction is a sale (i.e. neither (a) – (d) seems to apply)Then must look at all facts and circumstances of the caseMost important factor courts look at: whether lessor is retaining reversionary interest in the good that has significant value to the lessor

Problem 14-6

Don’t look at this as a big 52-week lease because they have option to return it each week-look at it as series of 52 1-week leases (i.e. 52 separate leases)1-201(37)(a)-(d) aren’t satisfied for 1st week(d) will kick in for the last week – therefore, only the last week looks like a sale; the other 51

weeks are probably true leases

Addison v. Burnett

Circumstances that create a security interest as a matter of law – 2 part test:(1) if the lessee does not have the right to cancel the purported lease prior to the expiration of its

term, the parties will be considered to have entered into a security agreement; if the relationship is terminable by the lessee at any time, the instrument is a true lease

(2) at least 1 of the 4 enumerated conditions must be present

If none of the enumerated conditions are present, a security interest will not conclusively be found to exist

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The court will then look at the facts of the case to determine whether the lessor has retained a “meaningful residual interest” in the goods- if so, a lease will be found- if lessor cannot reasonably expect to receive back anything of value at the end of the lease,

the lease creates a security interestCourt looked at 2 features to determine this – any option to purchase and any provision for the lessee's acquisition of equity in the goods

Option for executive at end of lease term controlled ultimate outcome – executive didn’t have to sell the car at end of lease term; they could appraise it, sell it or keep it- court said, therefore, he had a reversionary interest and it was a true lease

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Chapter 15 – Instruments, Investment Securities, General Intangibles

I. Instruments

9-105(1)(i) – instrument means a negotiable instrument (3-104) or any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is in ordinary course of business transferred by delivery with any necessary indorsement or assignment

Problem 15-1

Stamping something (notice) on the chattel paper to make sure anyone who gets possession of the chattel paper will have notice

What if Friendly detached the notes from the security agreement?- if person is holder in due course under 3-302, they may get priority under 3-306 To prevent this from happening, could do something to make it a non-negotiable instrument under Art. 3 – e.g. put statement in there “This note is not negotiable”)

What if they were promissory notes? These are instruments, so can only perfect security interest in an instrument by possession

In re Investors & Lenders, Ltd.

Non-negotiable notes = instruments (all notes are probably treated as instruments)Instruments can only be perfected by possessionWhy?It’s kind of like money; want it to flow through commerce like money

The defendants argued that the notes were not negotiable and therefore Art. 9 did not applyCourt looked to 9-102(3) and said that application of Art. 9 to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which Art. 9 does not applyDoes instrument include non-negotiable note and therefore fall under Art. 9?Yes. Instrument under 9-105(1)(i) includes non-negotiable instruments

II. Investment Securities

Note: we did not go over this section in class

III. General Intangibles

9-106 – general intangibles means any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, investment property, rights to proceeds of written letters of credit, and money

catch-all category for Art. 9 collateralexamples include literary rights, performance rights, copyrights, trademarks and patents

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Brown v. Yousif

Rule: while perfection is generally needed to enforce a security agreement covering general intangibles against other secured creditors, it is not needed against transferees who either did not give value or had knowledge of the security interest (9-301(1)(d))

Here, Yousif (transferee) did give value, but he had knowledge of Brown’s security interest; therefore, Brown did not have to file

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Chapter 16 – Multi-State Transactions

I. Introduction

Determining which state’s rules apply to the perfection of a security interest (choice of law rules)

See 9-103

1-105 – codifies recognition by the law of contractual freedom of choice of law (i.e. parties can include in contract their own choice of law)

2 Issues:1) How to perfect a security interest in collateral (9-401 tells where to file)- here, the focus is on WHICH STATE to file the financing statement in- 9-103 provides some rules

2) Once initially perfected, what happens if the debtor moves the collateral to a new state?

The rules in 9-103 depend on the type of collateral – there are 6 types/subsections1st step is to figure out which subset you are in

Problem 16-1

(a) Goods under 9-105(1)(h) and inventory under 9-109What about under 9-103?When you have goods, look to subsections 2,3 & 5 first to see if applicableIf not, subsection 1 ordinary goods applies- here, 2,3 or 5 doesn’t apply so it is ordinary goods under 9-103(1)(a)

(b) accounts under 9-103(3)(a)

(c) cars are problematic under 9-103- look at subsections 2 & 3Are cars subject to certificate of title? 9-302(3) – goods covered by certificate of title; certificate of title law controls for perfection- new cars aren’t until sold- used cars areIf cars (new or used) held as inventory by dealer – must file financing statementAre they mobile goods under 9-103(3)? NoThen go to default rule 9-103(1)Note: cars held for ordinary sale by dealer are ordinary goods

(d) personal property leases are chattel paper and fall under 9-103(4)

(e) certificated security = investment property under 9-103(6)NOTE: this type of collateral will not be on the exam!

(f) right to royalty payments = accounts; accounts fall under 9-103(3)

II. Documents, Instruments, and Ordinary Goods

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9-103(1) – documents, instruments, letters of credit, and ordinary goods- the choice of law rules are based on the location of the collateral, not the debtor- usually look to the location of the collateral at the time of the transaction when asking where

to perfect initially- when the collateral is moved to another state, the secured party has a limited time to re-

perfect in that state

Problem 16-2

9-103 – 1st characterize the collateralTractor – look at 9-103(2)? NO; 9-103(3)? NOBull – 9-103(2)? NO; 9-103(3)? NOBoth are mobile? But look at the definition of mobile goods – must be mobile and normally used in more than 1 jurisdictionTherefore, they both fall under the default rule as ordinary goods under 9-103(1)

Where do you file to perfect 1st?General rule: 9-103(1)(b) – “Last event test” – where is collateral at the time the last event occurred which perfects? It is that state’s rules which governWhat events are we talking about?Events that must take place for perfection9-203 (attachment) – need 3 events; plus any other necessary steps for perfection

When did events in 9-203 occur and when did perfecting act occur?Whatever the last of these 4 events is the triggering date

Tractor – 9-2031) security agreement on March 12) value given – when was tractor transferred (when did debtor really get title to the tractor) –

possibly March 1, even though no physical deliveryWhen was financing statement filed? March 4 in VirginiaIf security interest attached on March 1 and was filed on March 4, it was perfected on March 4If security interest didn’t attach until March 8 (filed on March 4), it was perfected on March 8

“Last event test” doesn’t really matter for tractor because it never left Virginia9-103(1)(b) – collateral location test

But the issue does come up for the bullLast event? Same analysis as above – question is when was value given (when did debtor get title to the tractor) – March 4 or 8?Where was bull when last event occurred? Under March 8 – bull was in Virginia so no problem because filing was in Virginia; if March 4 – there is a problem because the bull was in N. Carolina on this date

Other Example of “Last Event Test”There is an after-acquired property clause in the security agreement – debtor and lender are in TXFinancing statement is filed in TXDebtor wants to buy $100,000 piece of equipment from manufacturer in CaliforniaBy arrangement, debtor takes title to the equipment in California at the shipping pointIs the financing statement filed in TX effective to perfect the security interest in the equipment that debtor is taking title to in California?

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Analysis: equipment is ordinary good under 9-103(1) so “last event test” appliesWhen is last event? When debtor gets title (rights in the collateral)Where is equipment when debtor gets title? CaliforniaIf apply 9-103(1)(b) technically – filing is inappropriate in TX – debtor should file in CaliforniaMussleman says this result is ludicrous- courts that have looked at this situation say, while collateral is outside TX, that security

interest is in fact unperfected (White & Summers position also)- once collateral actually arrives in TX, you’re fine- therefore, you are only unperfected for a while

Note: the 4-month rule in 9-103(1)(d) only applies when there is perfection somewhere 1st Note: the exception to the “last event test” in 9-103(1)(c) only applies to a PMSI in goods

Gennet v. Fason

9-103(1)(d) – when goods subject to a perfected security interest in 1 state are transferred to another state, the security interest remains perfected if, within 4 months after the transfer, the goods are perfected in the transferee state- the creditor loses his perfected status if he does not re-perfect his interest in the transferee

state within the 4-month period

How to continue perfection: 1) take possession of the collateral; or 2) refile in the destination state

Note: each item of collateral gets a separate 9-103(1)(d) 4-month application

What are the rights when someone takes a security interest within the 4 months (the grace period)?It depends on who they are9-103(1)(d)(i) – if 4 month period of time to re-perfect and don’t do it within this grace period, if other party is a purchaser your security interest is unperfected as to the time the collateral was moved

Who is a purchaser?1-201(33) – defines purchaser (but not very helpful)see also 1-201(32) – defines purchaseArt. 9 secured party is included in the definition of purchaser under 1-201(33) because they have a “voluntary transaction creating an interest in property”Note: a lien creditor, including a trustee in bankruptcy, is NOT included within the definition of purchaser in 1-201(33)

Secured party gets absolute protection from someone who is not a purchaser, even if they don’t re-perfect within the 4-month grace period

III. Good Covered by Certificates of Title

9-103(2) – certificate of title

Orix Credit Alliance v. Heard Family Trucking

2 Requirements for 9-103(2) to apply:

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(1) must be a certificate of title issued somewhere(2) a certificate of title statute must require the security interest be noted on the certificate of title

Trustee argued the Mississippi certificate of title law, not the UCC and since no security interest noted on the Mississippi certificate of title, it was unperfected

The court fins an exception to the statuteThis case is an example of a court saying that a state’s certificate of title law is superior to Art. 9 of UCC – i.e. they just ignored 9-103(2)

Drafters intended that certificate of title be issued by any state and the security interest be noted on that certificate of title- doesn’t matter which state issued it

What happens if more than 1 certificate of title?e.g. certificate of title in debtor’s car issued by Ohio; security interest noted on the certificate of title; debtor moves to TX; new certificate of title on carWhat should happen? TX should require debtor to surrender the Ohio certificate of title and note the Ohio security interest on the new TX certificate of title (once you surrender Ohio certificate of title, it is over under 9-103(2)(b))If TX fails to note security interest on the new TX certificate of title:- look to 9-103(2)(b) – the security interest is instantly unperfected

What if TX issues new certificate of title but does not require debtor to surrender the Ohio certificate of title (no liens noted on the TX certificate of title)?Which state’s laws govern?Most courts have said that the last certificate of title outstanding is effective- here, secured party is screwed – unperfected security interestWhy? Protects innocent 3rd party in TX who buys it later without knowing the secured party’s interest

Chrysler Credit Corp. v. Religa (In re Males)

What does it mean to “register” in another jurisdiction under 9-103(2)(b)?

Majority rule: the term “register,” under 9-103(2)(b), means registering and obtaining a new certificate of title- it is the certificate of title which should control notice to 3rd parties as to the existence of a

secured lienholder, not registration or other documentation which may fail to list the security holder’s interest

IV. Accounts, General Intangibles, and Mobile Goods

9-103(3) – for accounts and general intangibles, UCC looks to the location of the debtor to determine choice of law; the debtor’s state determines the rules for perfection; and if the debtor moves to another state, the secured party has the usual 4-month grace period to re-perfect in the new state- the same rule applies to mobile goods, which are goods ordinarily used in multiple

jurisdictions

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Problem 16-4

Multi-state problem9-103(3) applies because there are 2 types of collateral: 1) equipment and 2) receivablesReceivables = accountsHarvesting equipment = mobile goods (e.g. “commercial harvesting machinery” is an example of a mobile good noted under 9-103(3)); note it also must be leased or held for lease by the debtor – here it is (goods used in debtor’s business)

General rule for determining where to initially file the financing statement for 9-103(3):9-103(3)(b) – the law of the jurisdiction where the debtor is located governs the perfection- see 9-103(3)(d) – the debtor shall be deemed located at his place of business if he has one, at

his chief executive office if he has more than one place of business- chief executive office – defined in comment 5(c) p. 651 of the Code (“the place from which

in fact the debtor manages the main part of his business operations”)MUST file – KansasSHOULD file – if have some doubt whether ordinary goods (9-103(1)) – use “last event test”-file anywhere you think appropriate just to be safe

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Chapter 17 – Proceeds

I. General Considerations

9-306 – proceeds includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds- insurance payable by reason of loss or damage to the collateral is proceeds- any payments or distributions made with respect to investment property collateral are

proceeds- money, checks, deposit accounts, and the like are “cash proceeds;” all other proceeds are

non-cash proceeds

A security interest continues in any identifiable proceeds including collections received by the debtor (automatic attachment) if secured party has security interest in the collateral

II. Defining Proceeds

Problem 17-1

(1) $4000 down payment ($2500 check; $1500 cash) – these are cash proceeds under 9-306(1)(2) trade-in computer – non-cash proceeds under 9-306(2)(3) promise to pay the remaining $28,000 in a retail installment contract – non-cash proceeds

under 9-306(2) because not within the definition of cash proceeds in 9-306(1)- this is chattel paper under 9-105(1)(b)

Note: you can have proceeds of proceeds – these are second generation proceeds

In re Mintz

Issue: whether the debtor’s distribution rights were proceeds under Art. 9Court says these distribution rights were general intangibles under 9-106; therefore, you must file to perfect (9-302)

Proceeds includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds (9-306(1))

Court says: (1) the future payments are not as a result of the sale or exchange of the distribution rights; (2) “collection” in the UCC context relates to accounts, as in 9-502(1), not relevant to these facts; (3) “other disposition” must be limited to the phrases which preceded it, under the principle of ejusdem generis

Therefore, the court holds that the future payments are NOT proceeds- Mussleman says most courts hold this way- Rental income is not proceeds

Citizens Savings Bank v. Miller

9-312(5) – 1st to file rule would applyBank arguing they had PMSI in 15 cattle and had “super priority” under 9-312(4)Court rejects this argument – says the son’s 15 cattle were not identifiable because they weren’t even around anymore, even though there were still cattle in the herd

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Bank then argues that even though they can’t identify the original 15 cattle, there were cattle in the herd that were “proceeds” of the 15 in the herd

Court rejects this – says only replacement cattle can meet definition of “proceeds,” but not the herd’s offspring; court says Bank hasn’t been able to prove replacement cattle

Offspring are not proceeds because there has been no disposition under 9-306(1)

What Bank should have done – dad could have assumed all of son’s debt under son’s original security agreement, rather than create another security agreement

III. Attachment

Problem 17-2

(a) Insurance proceeds = proceeds under 9-306(1)- security interest continues automatically in collateral and any identifiable proceeds under 9-

306(2)

(b) $100,000 is cash proceeds- as long as can trace the $50,000 into race horse – can have proceeds of proceeds (2nd

generation proceeds)

(c) Offspring are not proceeds – there has been no disposition under 9-306(1) (see Miller case above)

- secured party would have to describe the offspring in the security agreement

(e) No, because there has been no disposition or sale of the racehorse- this is similar to coins in a slot machine – this is earnings or income from the collateral)

Bombardier Capital v. Key Bank of Maine

Tracing proceeds through bank account

“Lowest Intermediate Balance Rule” – this rule is used to trace money through bank accounts when funds have been commingled; this is the most common tracing rule usedHow does it work?Debtor sells inventory for $20,000; deposits it into bank account (these are proceeds)- the proceeds sink directly to the bottom of the account- as money is withdrawn from the account, it is skimmed off the top- keep track of proceeds vs. non-proceeds in the accountIf account balance before the $20,000 proceeds was $5,000 – account = $25,000 ($20,000 proceeds; $5000 non-proceeds)If debtor withdraws $3000 from the account – it is non-proceeds- you have account balance of $22,000; still have $20,000 of proceedsIf debtor puts $8000 in account of non-proceeds- $30,000 account balance ($20,000 proceeds; $10,000 non-proceeds)If debtor takes $12,000 out of the account- $18,000 account balance – all are proceeds

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IV. Perfection

9-306(3) – continuously perfected security interest only continues 10 days unless a, b, or d

Problem 17-3

Security interest in computer inventoryInvoice from sale of computer – classified as an account under 9-106 (right to payment for goods sold)Bank does have a security interest under 9-306(2)Is it continuously perfected under 9-306(3)(a) or (b)?It is non-cash proceeds so look to 9-306(3)(a)Determine where to file financing statement covering same collateral – 9-401(see 9-103 if multi-state transaction)Here, Sec of State would be proper location to file financing statement to perfect security interest for inventory- also file financing statement for accounts in Sec of State (same office where original

financing statement was filed)If you do account financing, just be aware that if another secured party has security interest in inventory, you will be second banana

Problem 17-4

Should secured party list accounts or chattel paper in its financing statement? Not necessary to have perfected security interest in proceeds – 9-306(2) & (3)(a)- if rely only on security interest for chattel paper as proceeds of _ and someone else purchases

it, then secured party will lose (9-308(b)); but could get priority if name in financing statement as original collateral and indicate on chattel paper then _ under 9-308(a)

- may help maintain perfection if security interest in chattel paper or accounts in certain circumstances

Problem 17-5

(a) S has security interest in bulldozer under 9-306(2) because it is proceeds under 9-306(1) because it was from the exchange of tractor which is original collateral

- perfected security interest for 10 days – 9-306(3)- may not be continuously perfected because under 9-401(1) alternatives 2 &4, farm equipment

is filed locally and regular equipment is filed centrally so if bulldozer is equipment, would need to file centrally; so original financing statement re-filed in place where financing statement on equipment needs to be filed; so 9-306(3)(a) does not apply

- if under alternative 1, then okay because both farm equipment and regular equipment filed centrally; if bulldozer is consumer goods then filed both locally so would be perfected

(b) S has security interest in TV under 9-306(2) because received cash proceeds for original collateral and TV is proceeds of proceeds (2nd generation proceeds) – 9-306(1)

- since can trace cash proceeds into what was purchased, still have identifiable proceeds- S does not have perfected security interest - TV is consumer goods and under 9-401(1)

alternatives 2 &3, consumer goods and farm equipment filed locally; BUT since TV was acquired with cash proceeds, there needs to be a description of the collateral in the financing statement since financing statement does not cover consumer goods; therefore, he is not perfected with respect to the TV

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(c) S has security interest in$10,000 originally as cash proceeds – 9-306(3)(b) – must show that a filed financing statement covers the original collateral and the proceeds are identifiable cash proceeds

-account is still cash proceeds and is identifiable because the balance is greater than $10,000 so he has perfected security interest in account – 9-306(3)(b)- use lowest intermediate balance rule – the $10,000 can still be traced

Problem 17-6

(1) Bank has security interest in account as proceeds from inventory sale (9-306(1),(2))Voltaire has security interest in account as proceeds from living room setBank is 1st to file and original financing statement covered after-acquired accounts so it has perfected security interest (9-303(a))Voltaire has perfected security interest because accounts and inventory both filed centrally under 9-401(1); it is automatically perfected under 9-306(3)(a)

Priority – 9-312- normally 9-312(5) 1st to file- under 9-312(8) – only have PMSI in identifiable CASH proceeds of inventory- account is not cash proceeds so Voltaire does not have PMSI in accountsTherefore, Bank has priority as 1st to file

(2) Bank and Voltaire have security interest in chattel paper as proceeds and perfected – 9-306(3)(a)

- like above, Voltaire as 1st to file would win (9-312(5)) because Voltaire does not have PMSI in non-cash proceeds

- 9-306(5)(a) – when goods sold for chattel paper and returned to seller then if seller debt still unpaid, original security interest re-attaches; therefore, Voltaire would win as a PMSI in inventory (9-312(3))

9-306(5)(a)1) goods are collateral at time of sale2) debt still unpaid3) sale of collateral results in account or chattel paper4) repossessed by seller or secured party- then original security interest reattaches and is continuous from the time the goods sold and

remains perfectedTherefore, Voltaire reattaches PMSI in inventoryBank has regular perfected security interest in inventoryVoltaire has priority – 9-312(3)

Problem 17-7

Analyze the interests of the deposit accountBank – perfected security interest under after-acquired property clause; the security interest in the cash proceeds is perfectedPinwriter – PMSI in the machinery – this continues to the cash proceedsBoth have perfected security interests – 9-312 applies- 9-312(4) – Pinwriter has super priority and gets all $3000

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Chapter 19 – Bankruptcy

I. Introduction

Secured parties, if properly perfected, have a favored spot in insolvency proceedings and in fact are likely to get nearly all of the available property

Bankruptcy is federal law; UCC is state law- Bankruptcy code wins out when the 2 conflict under the Supremacy Clause

2 Types of General Bankruptcy:

1) Liquidation (Ch. 7) – all of debtor’s non-exempt assets are sold or liquidated and the proceeds are distributed to creditors

2) Reorganization (Ch 11 & 13) – debtor keeps most or all of assets and proposes plan to pay back over time

II. Effect of Filing—General

Debtor-in-possession – same as trustee

III. Effect of Filing—After-Acquired Property

§ 552 Bankruptcy Code – restricts the effectiveness of an after-acquired property clause- the only property acquired post-petition that is subject to the security interest is proceeds,

product, offspring, or profits of pre-petition collateral- to have security interest in proceeds post-petition – the security agreement has to provide for

this

IV. Effect of Filing—Bifurcation of Undersecured Obligations; Interest on Claims

Creditors file claims with the Bankruptcy court- secured or unsecured claim

Secured claim – gets paid in full (creditor wants this)Unsecured claim – generally get paid much less (often nothing)To the extent any money is left over after secured claims are paid, the unsecured claims get paid based on priority by the Bankruptcy Code

Generally, from the time the petition is filed until the time that the case is either closed or a plan of reorganization begins, no interest is payable on any claim- if there is a plan of reorganization, interest will be payable on both claims during the plan

period—i.e. during the time the debtor is making payments on the plan

Exception to the “no interest on claims” rule: if the obligation underlying the claim is oversecured, then interest will continue to run until the surplus is completely exhausted

Oversecured claim – value of collateral is GREATER THAN what the debtor owes the creditor-these are entitled to interest during the Bankruptcy proceeding (interest rate based on what debtor and creditor agreed to in the security agreement)

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Trustee in Bankruptcy represent the unsecured creditors’ interest (NOT the secured creditor)- trustee compensated based on value of property obtained for benefit of the estate (i.e. the

unsecured creditors) – avoiding payment of security claims

Problem 19-1

How do you classify a claim in a bankruptcy proceeding?§ 506 (pp. 352-53)- basically it’s a secured claim – Art. 9 security interest (perfected and filed) up to and not

exceeding the value of property at time of bankruptcy proceeding- issue: what really is the value of the property – this determines whether they (Bank) have

fully secured claim or notIf trustee is right – all that is really going to happen is that once the property is sold, the secured party (Bank) is going to get all of it (even if $800,000)§ 554 – the trustee would probably abandon the property to the creditor and let creditor do what he wants to do (note: under §554(b), the court can ORDER the trustee to abandon)- this is probably what trustee would do here- if trustee thinks a sale would be more than $1 million - §721 – trustee can OPERATE the

business

V. Effect of Filing—Automatic Stay

A. Introduction

Under §362 of the Bankruptcy Code, bankruptcy triggers a stay of virtually any private action against the debtor or the debtor’s property

B. Scope of the Stay

§362 – once bankruptcy petition is filed, virtually everything is stayed

Problem 19-2

(a) §362(a)(1) – would stay it (very broad; covers most actions); §362(a)(6) may also act to stay the continuation of the lawsuit

(b) same as (a); probably §362(a)(1) would stay it(c) §362(a)(3) – would stay it; §362(a)(4) would also stay it; §362(a)(5) may be violated if taking

action against property of the DEBTORNote: once debtor files bankruptcy petition – property becomes estate property; any property acquired by debtor after filing is debtor’s property; §362(a)(6) may also apply(d) stayed – can’t ask for it; send bill or statement (considered act to collect debt under §362(a)

(6)(e) stayed under §362(a)(1); BUT, exceptions to stay in §362(b)- see §362(b)(1) – no stay of a commencement or continuation of a criminal action or

proceeding against the debtor(f) stayed under §362(a)(1) or (6)any exceptions? §362(b)(4) – governmental units’ police and regulatory power – does collecting a debt constitute this – probably not so it’s stayed(g) §362(b)(4) would probably applied so it’s stayed (governmental units’ police and regulatory

power)

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(h) debtor = corporation; this is an action against the president of a corporation and has nothing to do with bankruptcy of the corporation

- §362 does not apply so it’s not stayed- if president himself was in bankruptcy – would be stayed under §362(a) - any exception? Yes §362(b)(2)(B) – to qualify under §362(b)(2)(B), have to be an action to

collect back alimony that was not paid AFTER the filing of the petition- back alimony not paid BEFORE filing – it’s stayed; would have to collect from the estate(i) §362(b)(9)(a) – not stayed(j) §362(a)(8) – stayed

Commercial Credit Corp. v. Reed

Deals with violation of a stay and what constitutes a violationRemedy for violation of an automatic stay – motion for contempt§362(h) – remedy for willful violation of a stay – actual damages including costs and attorney’s fees and in appropriate circumstances, punitives

Basic Rule – a refusal or failure to take action may constitute an act within the scope of the automatic stay; thus, an entity which has violated the stay has an obligation to restore the status quo by undoing its previous action and preventing the continuation of the consequences of the stay violation

An entity’s failure to comply with its duty to restore the status quo and undo its previous actions which violated the stay may constitute a willful violation of the stay- a creditor must act IMMEDIATELY to restore the status quo once it learns it has violated the

stay

Here, creditor argued it acted “reasonably” in returning the car back to the debtor after 19 ½ hours

Appellate court said reasonable is element of restoring debtor to status quo, including seeking legal advice, as long as no delay in seeking this advice

C. Duration of the Stay

In most cases, the stay continues until the case is closed or dismissed - §362(c)- if property is abandoned from the debtor’s estate, the stay terminates with regard to that

property

Way to prematurely lift the stay (§362(d)) – go to court to seek relief from the stay (takes 30 days usually; file motion with Bankruptcy Court)

D. Termination of the Stay

§362(d) – options creditor has when debtor files for bankruptcy and wants relief from the automatic stay

3 Ways (we focus on §362(d)(1)&(2))

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(1) adequate protection – see §361 (based on theory that holder of secured claim should get that property at some point; court can award some kind of relief so creditor gets their secured claim)

(2) (A) collateral must be worth less than what the debtor owes AND (B) Ch. 7 doesn’t apply here (this subsection is difficult to show because most property IS necessary to reorganization)

United Savings v. Timbers of Inwood Forest Assoc.

Undersecured = less collateral than your debt

Court said if collateral was declining in value, creditor is entitled to adequate protection based upon declining amount of their secured claim

Undersecured creditor is NOT entitled to interest during the pendency of the claim, not even as adequate protection

§506(b) – equity cushion = difference between debt (claim) and value of collateral (if value of collateral is higher than debt = oversecured creditor)

value of collateral __________________

equity cushion

debt (claim) ___________________

Under §506(b) – creditor is entitled to interest to the extent of the equity cushion

Adequate protection does not equal interest on the debt

Here, United could not get relief under §362(d)(2) so they tried to argue that they were not getting adequate protection under §361United argued they were undersecured and could therefore not get interest and should get adequate protectionCourt said not entitled to adequate protectionUnder §506(b), you can’t get interest up to the amount of the equity cushion if you are oversecuredCourt said since Congress did not allow undersecured creditors to get interest, they were not going to change this

Problem 19-3

Start with §362(d)(2) – if trucks are $3.7 million, debtor does have equity in them (not clear here for §362(d)(2)(A))Even assuming no equity, the debtor probably needs these trucks for effective reorganization (§362(d)(2)(B))Then look to §362(d)(1) – if value of trucks is $3.7 million, there is equity cushion and therefore no need for adequate protectionIf the trucks are equal or less than $3.5 million and trucks are declining in value – clearly, under United Savings they would be entitled to adequate protection

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What type of adequate protection? Pay creditor from extra cash around to make up difference in declining value of the property- court could grant substitute lien on different property

If no extra money or property to adequately protect creditor – court will grant relief from the stayWhy? Constitutionally, security interest has to be protected because it is a property interest

-

E. Penalties for Violation of the Stay

Majority of courts have said all actions in violation of the stay are VOID (they have no legal effect of any kind)

A knowing violation of the stay is punishable as contempt of court’

§362(h) – an individual injured by willful violation of a stay shall recover actual damages, including costs and attorneys’ fees, and possibly punitive damages

VII. Delayed Perfection and Attachment—Strong-Arm Clause, Preferences, Etc.

Trustee’s job is to invalidate any liens (i.e. invalidate security interest) on estate to increase the amount that will be distributed to unsecured creditors

Trustee’s Power to do this:

(1) §558 – steps into shoes of debtor and has any defense debtor would have against any obligation or contract

- secured party has to show, therefore, that its security interest has attached and has done nothing to invalidate or defeat its security interest

(2) §903(1)(d) & §554(a)(1) – trustee gets all rights of a hypothetical lien creditor as of time of filing for bankruptcy

- statutory scheme of priority between trustee in bankruptcy (lien creditor under Art. 9)- if not perfected security interest at time of bankruptcy filing, security interest is gone because

trustee is lien creditor

(3) Avoidance – even though properly filed and perfected security interest- §101(54) – “transfer” = grant of security interest in property- allows trustee to avoid transfer of grant of security interest- §554(b) – trustee can avoid (terminate) any transfer of an interest of debtor in property

avoidable under state law (important when fraudulent transfer of security interest in property by debtor)

- if fraudulent under state law, trustee, if can find unsecured creditor who could avoid the fraudulent transfer, can step into that unsecured creditor’s shoes and avoid

§548 – trustee can avoid fraudulent transfer made from 1 year of date of bankruptcy filing

§547 – Preferences- §547(b) = basic rule- prevents debtor from preferring 1 creditor over others; if preferences, can avoid the security

interest

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Exceptions to §547(b) in §547(c)

Start analysis with §547(b) – what is a preference

Problem 19-4

Issue: was the June 1 transaction an avoidable preference- go to §547(b)(1) transfer of property(2) to or for benefit of creditor(3) for or on account of pre-existing debt owed by debtor before such transfer made(4) transfer made while debtor was insolvent(5) transfer made on or within 90 days before date of filing of petition(6) transfer enables such creditor to receive more than such creditor would receive (will always

be the case because if no transfer – you are unsecured creditor and probably get nothing from bankruptcy)

You must know when the transfer was made!§547(e)(2) – says when transfer is made (3 choices) – need to see when security interest was perfected and attached§547(e)(2)(A)(B) or (C) – determine when transfer is made

When did security interest attach (9-203)?Attachment occurred on June 1Perfection occurred on June 7Therefore, §547(e)(2)(A) applies and transfer deemed made when ATTACHED (here June 1)

Now go back to §547(b)- if transfer made after the debt occurred, trustee can avoid

Here, loan and transfer are exactly contemporaneous; therefore, it was NOT transfer on account of pre-existing debt so trustee can NOT avoid

(k) Start when transfer was madePerfection didn’t occur until 14 days later§547(e)(2)(A) – not applicable (not at or within 10 days)§547(e)(2)(B) – case of delayed perfection – no maintaining “secret lien”Trustee can avoidPolicy: don’t want debtor frustrating distribution scheme of bankruptcy – no preferring by debtor to certain creditors

(l) 9-203 – attached on June 1Transfer occurred on June 15 when it was perfectedDebtor didn’t file for §547(e)(2) bankruptcy within 90 day period of transferTrustee cannot avoid

(m) Attach – 9-203 – security agreement executed June 6Perfected on June 15 – financing statement filed; made within 10 days so apply §547(e)(2)(A)Transfer date is June 6Trustee can avoid because transfer for or on account of pre-existing debtDelayed attachment is the problem here

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(n) Transfer didn’t occur because occurred before debtor was insolventTrustee cannot avoid

VIII. Preference Exceptions

A. Introduction

§547(c) – focus on §547(c)(1) & (5)

B. Substantially Contemporaneous Exchanges

§547(c)(1) – a preference is not avoidable if the parties intended a “contemporaneous exchange for new value given to the debtor” AND the exchange was “in fact a substantially contemporaneous exchange”

Dye v. Rivera (In re Marino)

Under §547(g), as party asserting the contemporaneous exchange defense, Rivera has burden of proving 1) that the parties intended the transfer to be a contemporaneous exchange for new value; 2) that the exchange was in fact contemporaneous; and 3) that new value was given

First determine if trustee can avoid under §547(b) – look to §547(e)(2) to determine when transfer was made

Under §547(c)(1) – the trustee can not avoid to the extent that the transfer was 1) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and 2) the transfer must be in fact a SUBSTANTIALLY contemporaneous exchange

Rule: when the delayed perfection of a security interest can be satisfactorily explained, the transfer may still be characterized as substantially contemporaneous in fact

The intent requirement is generally easily satisfied with all new loansWas the transfer substantially contemporaneous with the transfer? The court looked to the shortness of the delay and also that the delay was outside of the secured party’s control

Note: there is a split in authority:1) §547(c)(1) is not available for delayed perfection cases2) (Dye case) inquires into all circumstances of case – circumstances beyond secured creditor’s

control - length of delay, reason for delay, intention of parties, etc.

§547(g) – trustee has burden of proof to show transfer is avoidable- if all elements of §547(b) are met, burden shifts to creditor to show §547(c) exception applies

Problem 19-5

Delayed perfection problemTransfer was July 27Trustee will argue under §547(b)(2) – assuming the trustee can avoid under §547(b)(2), the creditor will argue that the exchange was contemporaneous under §547(c)(1)§547(c)(1)(A) – intention is pretty easy to show

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Big question: was transfer in fact substantially contemporaneous with the loan?Note the 2 lines of cases re: delayed perfection problemAssuming Dye v. Rivera jurisdiction – how long was delay? 22 days (probably not too long)Reason for delay? When did courthouse close? Bank couldn’t have filed because it was closed

C. Purchase Money Security Interests

§547(c)(3) – provides a 20-day grace period during which perfection may be accomplished without subjecting the security interest to avoidance as a preference

D. Floating Liens

§547(c)(5) – applies ONLY to security interest in INVENTORY and ACCOUNTS

§547(b) – Key is when the transfer was made- look to §547(e)(2) to help figure this out§547(e)(3) – a transfer is NOT made UNTIL the debtor has acquired rights in the property transferred§547(c)(5) – net result rule or improvement in position rule- take 2 dates: date that is beginning of preference period- did secured party improve his position during bankruptcy with regard to the debtor - to extent he did improve his position, debtor’s trustee may avoid this amount

How do you figure out if secured party improved his position?Begin with preference period – how much a debtor’s obligation (what is collateral worth)

90 days beforeBankruptcy Bankruptcy

D’s obligation toSecured party =

Value of collateral =

1) if oversecured 90 days before bankruptcy, you’re done—trustee can’t avoid because impossible to improve position before end of 90 days

2) if undersecured 90 days before bankruptcy, look to date of bankruptcy filing and ask D’s obligation to secured party and value of collateral

Problem 19-6

(a) Value of collateral = $80,000D’s obligation = $100,000Look at §547(b) to see if trustee can avoid something- only way is if debtor acquired new inventory during 90-day period – Looks like yesWill §547(c)(5) help to disallow this avoidance-here secured party is undersecured by $20,000Now go to bankruptcy filing date – D’s obligation = $74,000; collateral = $69,000; secured party is undersecured by $5000

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Did secured party improve his position during this 90-day period? Yes, improved position by $15,000Trustee can avoid the secured party’s claim by $15,000$69,00 - $15,000 = $54,000 (this is secured claim)

(b) secured party oversecured by $5000 so STOP – position can not be improved-whatever secured claim on bankruptcy filing is what you get - $35,000-anything that happens during the 90 days – ignore it for purposes of §547(c)(5)

(c) There was no after-acquired property during 90-day preference period; therefore, §547(b) doesn’t apply because no transfer

Trustee can’t avoidAsk 1st: to what extent were there transfers during the preference period

(d) 90 days before bankruptcy - $250,000 undersecuredAt time of bankruptcy - $250,000 undersecuredNo improvement of position therefore no avoidanceCourt doesn’t worry about any other exceptions when dealing with §547(c)(5)

Galloway v. First Alabama Bank (In re Wesley Industries)

Bank is $937,000 undersecured at beginning of 90-day periodBank is $964,000 undersecured at time of bankruptcyBank is really worse off; therefore, bank didn’t improve its position so nothing to avoid by trustee

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Chapter 20 – Default, Foreclosure, and Sale

I. Introduction

Dealing with issues between the secured party and the debtor – no issues of priority

II. Default

See 9-501

Art. 9 does not define default- depends on basic contract law and how you define it in the security agreement

Problem 20-1

(a) courts will generally enforce what parties define default in the security agreement- some exceptions to this re: consumer credit- therefore, these provisions will generally be enforceable in commercial context

(b) (1) – (3) non of these constitute default according to Mussleman(4) this clause occurs a lot (e.g. farm agreements); debtor just taking chance the secured party won’t exercise its discretion under this clauseAny limitations on right of the secured party for this clause:1-208 – secured party has to act in “good faith”; definition of “good faith” in 1-201(19) – honesty in fact (this is subjective and not helpful)Most courts in applying good faith standard will use objective, reasonableness standard under commercial standards

Under 1-103 – all areas of law are applicable (fraud, duress, capacity)Debtor can argue that not in default, even though he has done something which under the security agreement looks like default (e.g. waiver, estoppel)

9-503 – gives secured party, on default of debtor, the right to take possession of the collateral

Debtor has action against secured party for wrongful repossession if not in default at time of repossession

Cobb v. Midwest Recovery Bureau Co.

Suit for wrongful repossessionDebtor argued that the secured party let the debtor make late payments and therefore waived its right to declare default based on late payments as described in the security agreementTrial court gave debtor a lot of damages

What rights does the secured party have to repossess collateral without notice?

Majority view - Some courts have held that the acceptance of late payments does NOT waive or otherwise affect the right of a creditor to repossess without notice after subsequent late payment defaults

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Minority view - Other courts have imposed a duty on the creditor to notify the debtor that strict compliance with the time for payment will be required in the future or else the contract remedies may be invoked

This court held that the repeated acceptance of late payments by a creditor who has the contractual right to repossess the property imposes a duty on the creditor to notify the debtor that strict compliance with the contract terms will be required before the creditor can lawfully repossess the collateral (Minority view)

III. Alternatives Upon Default

Proceed under Art. 9 or under common law- bring a breach of contract action

IV. Repossession

9-503 – right of repossessionSecured party has right on default to take possession of collateralIn taking possession of collateral, secured party may proceed without judicial process if it can be done without breaching the peace

What constitutes a “breach of the peace”?Every jurisdiction has a different standard

Williams v. Ford Motor Credit

This is the Arkansas standard for what constitutes “breach of the peace”

Breach of peace occurs where force, or threats of force, or risk of invoking violence accompany the repossession

The majority held that there was no breach of peace because she would have had to object to the men repossessing the vehicle in order for a breach of peace to have occurred

Mussleman says the Dissent probably states the better rule (i.e. the Majority rule)- in case of any confrontation of any kind by the debtor or other, the repossessor should

stop and retreat

Once there is a confrontation (e.g. person says don’t take the good), anything that happens after that point is probably not good- don’t wait until breach of peace actually occurs

Problem 20-2

(a) Friendly is not stealing it – they have a right to repossess it and can do so only by peaceful means

How far can they go? Every court would say this is okay, even if have to break a window – as long as no confrontation occurs in the process

(b) Private driveway? It’s okay as long as no confrontation by debtorUnlocked private garage? Depends

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Locked private garage? Is it attached to house – part of private home? Was garage door down or locked?Fenced backyard? Questionable breach; some courts may let you; most wouldn’tHome of debtor? BREACH OF PEACE!

Note: the closer you get to the private home of the debtor – more trouble or closer you get to breaching the peace according to almost all courts(Stay away from private homes to repossess collateral!!)

Some courts hold breaking and entering a business premises is a breach of peace

(c) Probably okay as long as doesn’t get someone’s attention(d) No. Any torts committed by agent are your torts – can’t avoid liability by contracting

Problem 20-3

This is breach of peace given devastating disasterLying to get property – some courts say repossession by fraud, trick or deception is a breach of peace

Problem 20-4

(a) If you have property of someone else – you are involuntary bailee and owe operation of reasonable care until can get it back to the debtor

(b) Same as in (a); may have security interest in CB under rule of accession (9-314)(c) Did they know or should they have known? Did they do reasonable inspection? If not,

they’ve breached their duty of ordinary care as involuntary bailee(d) Describe the security interest broadly enough to include the contents - otherwise, take reasonable care if don’t

Intangible payment obligation (accounts or instruments) – 9-502Secured party under 9-502 may collect on accounts or instruments directly from the underlying obligor upon the debtor’s default- gives this right to the secured party even in circumstances where the security agreement did

not- requires that the secured party account to the debtor for any surplus if the underlying

transaction merely created a security interest in the accounts or other collateral- if the underlying transaction was a sale of accounts or chattel paper, the debtor is ordinarily

not entitled to any surplus

V. Disposition of Collateral

9-504 – selling the collateral to satisfy the debtDebtor must ordinarily be given notice of the resaleOccasionally, other secured parties must also be given notice, if and only if the collateral is not consumer goods and the secured party making the sale has received written notice from the other secured party of its interest in the collateral

9-506 – debtor has a rarely-used right to redeem

Sale may be a public sale (auction) or a private sale

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All that is required is that the sale be “commercially reasonable”- the sale proceeds used to 1st pay the expenses of the sale, then applied to each claim in order

of priority- if any surplus from the sale (rare), secured party must pay surplus to debtor- when sale doesn’t produce enough to pay the secured obligations, the secured party is entitled

to sue the debtor for the deficiency

Hall v. Owen County State Bank

2 main issues

1) Notice is required when have possession – give debtor opportunity to protect himself9-504(3) – what kind of notice has to be given?Reasonable notification of time and place of any public sale or of time after which any private saleWhat type of notice?Is it a public sale or private sale?Waiver of notice has to be in writing after default

What is “reasonable notification”? Not defined anywhere in UCCNotice – 1-201(26)How much notice? Reasonable under the facts and circumstances

1-201(38) – defines “send”Most courts hold this definition implies that the notice has to be in writing (TX – can give oral notice)

What happens if secured party fails to do something they are supposed to do under part 5 of Art. 9 – what is debtor’s remedy?9-507 – debtor is entitled to recover damagesWhat are debtor’s damages? Have to show sale of collateral brought too low of a price; debtor has to prove actual value of collateral at time of sale (this is problem because debtor doesn’t have control of the sale – secured party has possession of the collateral)

Courts have developed 2 separate rules to apply whenever secured party has done something wrong re: repossession and disposition

1) absolute bar rule (TX rule) – no deficiency judgment for secured party if they’ve done something wrong

2) rebuttable presumption rule (majority rule) – secured party allowed right to deficiency judgment against debtor; there is presumption that actual value of collateral at sale was equal to the debt (i.e. there is no deficiency); burden on secured party to rebut the presumption and show value of collateral was true value at time it was sold- Policy: secured party in best position to do this (i.e. determine value of the collateral)- This is the fairer rule according to MusslemanHow do you rebut the presumption?Other credible evidence of value besides value received from sale or from secured creditor’s employee’s testimony

Sale in deficiency judgment must be commercially reasonable

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What is “commercially reasonable” manner?9-507(2) – examples of what would be commercially reasonable sale (note: not an exclusive list)- this is a question of fact- burden of proof on secured partyList of Factors:1) price received at sale (most important factor)- but see 9-507(2) – this 1st factor is not in and of itself sufficient to show not commercially

reasonable2) if buyer of collateral at foreclosure sale subsequently resells it and gets a higher price for it3) the market – retail vs. wholesale market (wholesale market is usually the proper market given

the expense of selling on the retail market)4) in private sale – the number of bidspublic sale – time and place of sale; advertisement

Problem 20-5

What did VMI do wrong in repossessing and reselling?2 Issues:1) no notice given to debtor- is notice excused under 9-504(3)? Doesn’t look like it (not perishable, not sold on recognized

market)- did debtor waive right to notice? No; no written statement waiving right to notice

2) commercial reasonableness of all aspects of the sale- only involved 1 buyer- sold for 25% of its retail price (selling at retail vs. wholesale market)

VMI could argue BFB was logical purchaser

Remedies for debtor? Absolute bar rule – VMI not entitled to deficiency action v. rebuttable presumption rule (burden on VMI to establish what the value of the collateral was at the time of the sale)9-507(1) – debtor has to prove up his damages

Problem 20-6

9-504 – did they act in a commercially reasonable manner in all respects?Illegally injecting horse is not commercially reasonableWhat is debtor’s remedy? 2 approaches (absolute bar rule v. rebuttable presumption rule)

Problem 20-7

9-506 (rarely ever used) – debtor’s right to redeem collateral- to redeem, have to pay ALL DEBT owed (entire obligation)- Here, debtor didn’t pay all debt (obligation) so Bank’s actions were proper

VI. Strict Foreclosure

9-505 – secured party can usually elect to keep, rather than to resell, the collateral- notice must be given to the debtor and to those secured parties who have given the

foreclosing secured party written notice of their interests

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- if no objection is made within 21 days, the secured party may keep the collateral and the debt is satisfied

9-505(1) – use when dealing with CONSUMER GOODS9-505(2) – use when dealing with ANYTHING OTHER THAN CONSUMER GOODSIf debtor objects to this within 21 days – secured party must proceed under 9-504

Reeves v. Foutz and Tanner, Inc.

Issue: can a secured party who sends notice of intent to retain collateral sell the collateral in its regular course of business without complying with 9-504?

This is a pawn shop transaction = pledge under Art. 9The value of the jewelry far exceeded the value of the loan

Defendant argued that once it complied with 9-505(2) and sent notice of intent to retain, it could do as it pleased with the property once the 30 days had elapsed without objection

Plaintiffs argue that the trial court was correct in applying 9-504 to require that any surplus from the sale of collateral be returned to the debtor (i.e. what should control when secured party sends out notice of intent to retain collateral is secured party’s true intention)

Court held that the defendant can do as he pleases with the property, but where he intends to sell the property in the regular course of his business, which is in substance selling the property as contemplated by 9-504, he must account for a surplus in conformity with 9-504Can only exercise 9-505 when you truly intend to KEEP the collateral

Court found secured party did not act in good faith

Criticism of this case – rather than looking to intent of the secured party at time of notice to keep the collateral, if going to sell, can’t use 9-505- look to 1-203 – obligation of good faith; if secured party doesn’t act in good faith, punish

them

Purpose of 9-505:Works when value of collateral somewhat less or closely approximates the value of the debtSecured party doesn’t have to worry about bringing a deficiency judgmentDebtor want this when no surplus or little surplus and helps avoid being sued for deficiency judgment

Problem 20-8

(a) look at 9-505 – does Bank have right to keep cab in satisfaction of the obligation or are they required to sell it

Is this cab a consumer good at time of transaction?Probably equipment under 9-101 when 1st boughtLater, being used for personal use (consumer goods)9-401(3) – important time for classifying collateral is when it attachedProbably perfected when cab was equipment used in debtor’s business – change in use of good doesn’t matter

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Bank – will argue they made loan in reliance on debtor claiming he was using the cab in a businessDebtor – will argue the time collateral was repossessed, it was consumer goods

Mussleman says secured party argument probably better

(b) Is this a waiver by debtor under 9-505? No. debtor has to be in default, waiver has to be clear, and in writing

- here, the waiver is NOT in writing (if it was, Bank may have better argument)- also, “you guys keep it” is not real clear as to whether debtor is waiving

Problem 20-9

(a) Focus on good faith1-203 – every contract or duty under the UCC imposes obligation of good faithDebtor’s argument – obligation on Bank to advise him of new appraisalMussleman says debtor probably has best chance of winning based on underlying policy of 9-505

(b) Jewelry Co = merchant dealing with goods of those kindArt. 1 – subjective standard applies to Art. 9 transactionsArt. 2 – objective standard only applies to Art. 2 transactionsCourts have said Art. 1 standard applies only to Art. 9; Art. 2 standard applies only to Art. 2But in practice, it doesn’t matter – courts have used objective standard; therefore, focus on OBJECTIVE STANDARD of good faithSecured party will probably be found to have NOT acted in good faith, regardless of Bank or Jewelry store

(c) Once secured party elects under 9-505(2) to retain it, it can’t sue for deficiency; it has no obligation to turn over the surplus

- here, they’re just screwed

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