Secured TransactionsCzarnetzky, Spring 2005

PART I: THE CREDITOR-DEBTOR RELATIONSHIPCh. 1: Creditor’s Remedies Under State Law (p.1)

I. Introduction (p.1)II. Security and Foreclosure (p.3)

III. Repossession of Collateral (p.4)IV. Art. 9 and Deficiency (p.6)

Ch. 2: Creditor’s Remedies Under BankruptcyI. Federal Bankruptcy Law (p.8)

Ch. 3: Creation of Security Interests (p.11)I. Formalities for Attachment (p.11)

II. How to Describe Collateral in a Security Agreement (p.12)III. Proceeds, Products and Other Value-Tracing Concepts (p.13)IV. Legal Limits on What May be Collateral (p.14)

Ch. 4: Default (p.15)I. Default, Acceleration and Cure Under State Law (p.15)

Ch. 5: The Prototypical Secured Transaction (p.16)I. The Prototypical Secured Transaction (p.16)

PART II: THE CREDITOR-3RD PARTY RELATIONSHIPCh. 6: Perfection (p.17)

I. The Personal Property Filing System (p.17)II. Art. 9 Financing Statement: The D’s Name (p.18)

III. Art. 9 Financing Statement: Other Information (p.20)IV. Exceptions to the Art. 9 Filing Requirement (p.23)V. Purchase-Money Security Interests in Consumer Goods (p.24)

VI. Characterizing Collateral for the Purpose of Perfection (p.25)

Ch. 7: Maintaining Perfection (p.27)I. Maintaining Perfection Through Lapse and Bankruptcy (p.27)

II. Maintaining Perfection Through Changes of Name, Identity and Use (p.28)III. Maintaining Perfection Through Relocation of D or Collateral (p.31)

Ch. 9: Competitions for Collateral (p.33)I. Liens Cs Against SCs (p.33)

II. BTs Against SCs (p.34)III. SCs Against SCs (p.35)IV. Seller Against SCs (p.37)V. Buyer Against SCs (p.38)

VI. Statutory Lien Cs Against SCs (p.40)

PART I: THE CREDITOR-DEBTOR RELATIONSHIPChapter 1: Creditor’s Remedies Under State Law

I. Introduction1. General on Secured Credit

a) there is no federal commercial law, thus no uniformity…Article 9 of the UCC was drafted by scholars who felt there needed to be some proposed uniform

lawb) credit is the way entrepeneurs finance their businesses, unsecured credit has too high

of an interest rate so D take out loans which are secured by some form of collateral which D owns…the bank will then grant D an interest

rate significantly less than that of an UC b/c D has pledged some portion of D’s property…usually includes a pledge of all of a business’s assets plus some personal guaranty on D’s part which means that whatever can not be paid by the assets of the business will be paid by D

c) individuals can finance through:(1) unsecured credit (2) cash flow (3) secured credit

d) buying a car through credit is the most common type of secured transaction involving personal credit…buying a home is another but that deals w/ real property

(mortgages) and what we are focusing on is situations where the collateral is personal property

e) the whole idea of secured credit is to lower interest and allow for debt collectionf) important distinction:

(a) debt that is owed to the C and the security interest…if D borrows money from the bank, D has the personal obligation to pay the money back

(b) when a debt is secured through a security interest, what the D is doing is granting the SC a right to immediate possession of some or all

property of the D and the right to sell such property upon default by D *when we talk about avoiding a security interest, all we are doing is

taking away the right to the property, we are not removing the personal obligation to repay the debt

g) If a piano company borrows money from Bank A, giving the bank a security interest in the piano (its inventory) as collateral, the piano company is the D and the bank is

the SC. If the piano company sells a piano on credit to a musician, reserving a security interest in the piano until it is paid for (PMSI), the piano company is now the SC and the musician is the D. If the piano company then sells the musician’s promise to pay the debt (account receivable) to Bank A, then the piano company is the D and Bank A is the SC.2. UC’s Remedies

a) UC MUST get a judgment against the debtor before UC can attempt to get their money back…unsecured creditors can NOT use self-help to

collect the debtb) once UC obtains judgment against debtor, he must enroll the judgment in the

jurisdiction where the D has property…clerk then issues a writ to the sheriff who satisfies the debt by taking property of the D…duty is given to sheriff b/c this can be a dangerous situation…D that has defaulted is typically not very happy

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c) a garnishment is where money is periodically taken away from some source of the D’s income…this is the result of a lawsuit brought by the UC

against some individual who has money of the debtor…the D does not have to be a party to the lawsuit…the ONLY issue in a garnishment action is, “Does the 3rd party owe money to the debtor?”

*naturally a debt accrues b/t the debtor and his employer so the UC sues the employer to collect the debt the D owes to the

UC…every time the debt accrues b/t the employer and the D, a portion of the payment goes to the creditor

*however, there are some limits placed on these garnishments by state/federal law

*as an UC you should look for wages or bank accounts b/c in each instance there is a debtor/creditor relationship b/t

the bank or employer and the debtor so you as the UC can put yourself b/t the C (bank/employer) and

the Dc) exemptions allow D to keep the equity interest in the house/car/widget…if D

has no equity interest in the house, the exemption does nothing(1) debt is $20K, house valued at $100K, exemption in MS is $75K

-extent of exemption is $75K-amount of equity after exemption is $5K

(2) Czar owns H2 worth $30K and pledges it as collateral to secure a $10K loan, MS allows $2K exemption on automobile

-no exemption…debtor MUST have equity in the property to claim an exemption

(3) Czar owns H2 worth $10K, owes the bank $10K on a loan, MS exemption on car is $2K

-Czar gets to exempt $2K b/c he has equity in the H2…the loan is not connected to the H2 this time

-exemptions are born from the idea that no matter how crummy someone is, they deserve place to live, mode of transportation, and a way to make a

living*homestead exemption *automobile exemption

*tools of the trade exemptiond) fraudulent conveyances: 2 types of fraudulent conveyances that all states recognize:

1) actual fraudulent conveyance: property conveyed w/ intent to hinder, delay or defraud C…C can sue the transferee for the property

conveyed…law recognizes “badges of fraud” which are evidence of fraudulent conveyances:

(a) transfer of property right before judgment, and(b) transfer to a close relative or business partner

2) constructive fraudulent conveyance: do not have to prove intent to defraud C, all you have to show is that at the time the D was insolvent he

transferred property for less than it was worth…state laws differ as to whether they will recognize fraudulent conveyances

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a) many states hold that the smallest bit of consideration will prevent the C from asserting a fraudulent

conveyance (consideration sufficient to support a K)b) other states look into the consideration in order to determine if

the consideration is of “reasonably equivalent value”

e) debtor’s interrogatories: UC has judgment but really does not know what type of assets D has, most state’s laws permit UC to collect debtor’s

interrogatories whereby you ask them, “how much money is in your wallet?”, “do you own that watch?”, “how did you get here today?”

f) 4th amendment does NOT apply to debt collection, sheriff may enter D’s house w/out D’s permission and take whatever belongs to D

g) Art 9 gives SCs self-help remedies in that upon default by D, SC can go grab the personal property w/out involving the court

II. Security and Foreclosure (p.21-36)1. Liens

a) a security interest is a type of lien:1) security interest/consensual liens: arises as result of agreement b/t SC and D2) judicial liens: liens that arise when an UC gets a judgment against a D…non-

consensual liens…judgment automatically results in lien on real property but for personal property UC has to get enter judgment and get a writ of assistance issued to sheriff

3) statutory liens: arise purely by operation of law…non-consensual liens-mechanic’s lien: exists when person works on property of another, the

lien exists for up to the value of the work done-inn keeper’s lien: hotel can get lien on anything in the room

2. UC v. SCa) why would anyone want to be an UC?

1) higher interest rates, although it comes w/ higher risk2) sometimes there is no choice i.e. Πs who win tort-claims against Δs become

involuntary unsecured creditors3) sometimes people do not know they are doing it4) sometimes it is inappropriate to ask for security interest

b) UC v. SC1) security interests lead to lower interest rates and are better for creditors b/c they

have collateral…however, small mistake in security agreement can make SC an UC

2) main reason to have a security interest is leverage b/c it will intimidate D’sto think they can have their property taken

3) UC don’t like SC b/c SC get first dibs on the assets, but it would be almost impossible to outlaw security interests as long as economy believes

in free transferability of property4) UC will always lose to SC in judgments…even when SC comes along after UC

and even though UC did all the work in obtaining the judgment

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3. Substance Over Forma) under Art 9, if necessary courts will disregard what the parties call their agreement

(parties may call it a lease, while court may find it to be a security agreement)

b) parties can not avoid the requirements of Art 9 by cleverly disguising the transaction*Basil (p.27): if parties to the transaction characterize their transaction as a lease,

courts will still examine the transaction to determine if it is actually a security interest…e.g., where purchase of car is disguised as a lease in that payments on lease are exactly equal to payments on purchase of car

c) DANGER: in purchase disguised as a lease, D/C haven’t complied w/ Art 9, therefore the courts will go ahead and deem the transaction a purchase and give the C UC status

d) §109(a)(1): Art 9 applies to any transaction, regardless of form, where there is a security interest

4. Foreclosure Procedurea) judicial foreclosure: procedure by which C may go to court to get the property

*accomplished through entry of a court order – civil action; remedy is replevin*SC don’t have to go for personal property (b/c of self-help) but both SC and UC

have to go for real property and UC have to go for personal property

b) what is actually being foreclosed at foreclosure sale?*the right to redeem the property (right of D)…once this right has been

foreclosed, the D can not cure the default* “until the gavel drops” in all states including real property, the D has the right to

redeem the property by paying unpaid payments, plus interest, plus fees, plus cost of collection…D does not get to redeem by satisfying the

payments D has missed, D must pay the entire balance of the property plus any costs associated w/ collection (b/c of “acceleration clause”)…called tendering the debt

c) UCC foreclosure by sale: under Art 9 there is a right to redeem which ends when the gavel drops at the foreclosure sale of the collateral…after default the SC takes

possession of the collateral and then conducts a sale (w/out having to do public auction) and once the sale is final, then the D’s right to redeem is foreclosed

5. Problems*2.2 *2.5

III. Repossession of Collateral (p.37-58)1. Importance of Possession Pending Foreclosure

a) reasons why SC wants possession pending foreclosure:1) D whose rights in the collateral are about to extinguish has little interest in

preserving it

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2) use of the collateral b/t the time the right to foreclose accrues and the time it becomes final may have substantial economic value

3) if the D is in possession of the collateral leading up to the sale, then it may be difficult or impossible for prospective purchasers to evaluate the

property, thereby depressing the resale price

2. Right to Possession Pending Foreclosure – Personal Propertya) §9-609: SC has the right to take possession of the property immediately upon default if

as long as there is no breach of the peaceb) if a breach of the peace will result from repossessing the collateral then the SC must

get a court order, usually by filing an action for replevinc) no notice is required in order for a SC to repossess

*Dell’s Big Saver Food, Inc: SC went to court and got court order which granted the SC immediate possession of the collateral after the D defaulted

on payments…D was not given any notice of the proceeding and later claimed the order was a violation of D’s due process rights

*Ct held that due process only requires notice and an opportunity to be heard…this ex parte proceeding is not a final

judgment and there is an opportunity to be heard in the form of a post-seizure hearing

-also, the sheriff can seize collateral w/out notice so long as the D has the immediate right

to a hearing and SC may have to post a bond

d) if there is a resale of the property then it is only required to be commercially reasonable

3. Art 9 Right to Self-Help Repossession*§9-609: (a) After default, a secured party:

(1) may take possession of collateral; and(2) w/out removal, may render equipment unusable and dispose of

collateral on a D’s premises under §9-610*think large farm equip that is difficult to move

(b) A secured party may proceed under subsection (a):(1) pursuant to judicial process; or(2) w/out judicial process, if the secured party can proceed w/out

breach of the peace(c) If so agreed, and in any event after default, a secured party may

require a D to assemble the collateral and make it available to the secured party at a place to be designated by the secure party which is reasonably convenient to both parties

4. Limits of Self-Help: Breach of the Peacea) if there is possibility of breach of the peace, the SC must back off and resort to the

judicial process to repossess the collateral …the SC need not involve courts or public officials if the SC can get possession w/out a breach of the

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peace, but if the D resists repossession, then the SC MUST obtain a court order for repossession from the D

b) 2 factors to determine if breach of peace occurred:(1) potential for immediate violence, and(2) nature of the premises intruded upon

c) Salisbury Livestock (p.48): SC repossessed some cars from ranch and D claimed breach of the peace…D claims cars were parked close to the house which

resulted in breach of the peace even though there was no actual breach of the peace*there does not have to be an actual breach of the peace for D to

assert the repossession was prohibited, just a threat of a breach of the peace

*ALL Cts will prohibit SCs from:(1) entering D’s house even if door is unlocked(2) breaking into a private location to repossess property

*however, mere technical trespass is not a breach of the peaced) However, where an attempted repossession is halted upon protest by the D, nothing in

the Code forbids the SC from making second, third or more attempts at repossession

-HYPOS: p.505. Due Process and §9-609

a) in self-help repossession, due process requires:(1) D be provided w/ a hearing before the property/collateral is taken, or(2) D be provided w/ certain pre-seizure procedural safeguards, coupled w/ a

prompt post-deprivation hearing before final judgment

6. Self-Help Against Accounts as Collaterala) collateral can be “accounts receivable” of business…these accounts receivable are

personal property…problem is that SC can not use traditional method of repossession since the source of the collateral is intangible

b) Ways in which a security agreement may be structured when collateral is accounts:(1) Creditor could give debtor complete freedom to collect on accounts and use

the proceeds in his business.(2) Creditor could allow debtor to collect on accounts but require him to

immediately apply a portion of the proceeds to the loan.(3) Creditor may arrange with the debtor that the account debtors will pay directly

to the creditor.(4) Creditor may employ lock box method

c) Art 9 provides a self-help remedy to the SC…under §9-607 the SC who knows the identity of the account debtors can simply send them written notices to

directly pay the accounts receivable to the SC, basically just bypasses the gym and SC is allowed to collect collateral directly

e) another way to structure this is for business to have accounts receivable payments mailed to a PO Box and give the SC the key, this way

the business’s debtors do not know the business has defaulted on a security agreement…this method is known as “lockbox”

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7. Problems*3.2 *3.3

IV. Art 9 Sale and Deficiency (p.80-94)1. Strict Foreclosure Under Art 9

a) Art 9’s stated purpose is to secure repayment of debt by the liquidation of the collateral in the event of a default by the D…sales under Art 9 serve the same purpose as

judicial sales, they determine the value of the collateral and convert it into cash

b) In lieu of other remedies, the SC who repossesses goods may elect to keep them and forget the rest of the debt. This process is called strict foreclosure. SC

electing strict foreclosure must send an authentication notice to the D of the SC’s

intention to keep the collateral in satisfaction of the debt. The SC must also send such a notice to other Cs having an interest in the collateral if those Cs themselves have previously sent an authenticated notice to the repossessing SC of their interest OR filed a FS

c) If SC sends D a proposal for retention of the collateral in full satisfaction of the debt and does not receive a notification of objection to the proposal w/in 20

days, consent is impliedd) 3 situations where there MUST be a sale of the collateral:

1) if w/in 20 days after the notice is sent, any person entitled to notice objects to the SC’s proposal to retain the goods in satisfaction of the debt

2) if the collateral is in consumer goods, the D can consent, in writing or by silence, to strict foreclosure only after repossession

3) strict foreclosure is NOT permitted if the D has paid 60% of the cash price of consumer goods purchased on credit or 60% of the loan against

consumer goods

2. Sale Procedure Under Art 9a) if there is going to be a sale of collateral, there are two rules:

1) SC must provide notice of the sale to the D and all other lienholders (in case the collateral is sold for more than the amount owed to SC)

2) §9-610(b): “every aspect of the disposition – including the method, manner, time, place and terms – MUST be commercially reasonable”

b) persons to be notified:1) debtor2) any secondary obligors3) if the collateral is other that consumer goods:

*anyone that has notified the debtor that they want notice*any secured creditor that has requested notification*any other secured party with a security interest in the collateral that

requested notification.c) exceptions to providing notice:

1) if collateral is stock (b/c it already has FMV)2) if collateral is perishable goods

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d) failure to provide notice:1) failure to provide notice does not invalidate the sale, but it is a defect that can

have the effect of reducing the amount of deficiency the SC can recover

2) fact that sale will not be invalidated provides protection to good faith purchasers at Art 9 sale

e) types of sales:1) public sale: auction determined at specific time in specific public place2) private sale: anything other than a public auction…public is not invited

-in order to get maximum value, SC markets to individuals believed to be interested in the collateral

-“e-bay” creates an interesting problem whether it is private or publicf) Fed. Dep. Ins. Corp. (p.84): notice provided to D by SC did not make it clear where

sale was to take place...Ct said this did not invalidate the Art 9 sale of the collateral…Ct puts burden on D to find out where sale is if D is

truly interested…as a SC you should do all that is required to provide adequate notice, however, if the notice is reasonably informative to force the reasonable D to inquire further, the notice is probably commercially reasonable

g) HYPOS:1) notice says sale will occur on June 1 yet sale actually takes place on May 1

-if D proves he was told sale would be on June 1 and collateral was sold on May 1, D probably has claim…although honestly what

are the D’s damages…probably only has claim if as a result of the sale the SC is over-secured

2) notice says sale will occur on May 1 but sale actually occurs July 1-result probably different here b/c once D showed up for sale and no one

was there, a reasonable D would have inquired further as to where/when sale was to occur

3) notice provides no date or time as to sale of collateral-notice is still commercially reasonable so long as D has time to contact

the SC to find out time and location of sale*Art 9 attempts to lay down rules to provide some sense of certainty to

commercial transactions although Art 9 does not want rules to become so rigid as to hinder the transaction

*realize, the D has just had his property seized, if D is at all interested in the property, D will be doing everything he can to figure out when the

sale ish) contents of sufficient notice

-contents of notification are sufficient if:(a) describes the D and SC(b) describes the collateral that is subject to disposition(c) states method of intended disposition(d) states that the D is entitled to an accounting of unpaid indebtedness(e) states time and place of a public disposition or time after which any

other dispositions are made

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i) errors in notice-contents of notification providing substantially the information listed in §9-

613(1) are sufficient, even if the notification includes:(a) information not specified in §9-613(1), or(b) minor errors that are not “materially misleading”

*§9-614 provides proper notice where consumer goods are being soldj) commercially unreasonable sale

-where sale conducted by SC is determined to be commercially unreasonable, there is a rebuttable presumption that the value of the collateral

was at least that of the debt (meaning there will be NO chance for SC to bring deficiency action against D)

k) Chavers v. Frazier (p.86): what is the commercially reasonable manner to sell an airplane?...SC must conduct a commercially reasonable sale in the

context of the collateral…as a SC you want to do what is necessary to have a commercially reasonable sale b/c if you do not, then when you go after D for the deficiency, D will point to your sloppiness w/ the sale and that you did not maximize the value of the collateral

l) Problems*5.1 *5.2

Chapter 2: Creditor’s Remedies in BankruptcyI. Federal Bankruptcy Law

a) typically based on 2 principles: 1) D receives a discharge of all debts…personal obligation to pay is wiped clean2) bankruptcy process provides an orderly liquidation of the D’s financial assets

and an orderly distribution of those assets to Csb) Bankruptcy Law is not a means to erase security interests in a debtor’s collaterald) Liens ride through bankruptcy. What is erased is the debtor’s personal obligation to

repay the loan.

1. Chapter 7: Liquidation Bankruptcy/Straight Bankruptcya) D files petition for bankruptcy asking for protection of federal bankruptcy

court…official is appointed by the court (“bankruptcy trustee” (BT)) who owes a fiduciary duty to the Cs…trustee is not there to help the D but rather the C…trustee’s job is to gather up all of the D’s property, liquidate it and

distribute it to the Cs*caveat is that state law typically allows certain property to be exempted,

i.e. homestead, etc…this property will not be part of the bankruptcy proceeding

*you do not need a judgment to be a C at bankruptcy, just proof that you are owed money by D…trustee will investigate validity of

claim*anything earned by the D after time of filing is retained by D

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b) upon filing of bankruptcy, the D lists all Cs who are then sent a form that has the notice of bankruptcy on one side and a “proof of claim” on the other

side…trustee must then look over these claims in order to determine the validity of the claims…remember, the trustee has fiduciary duty to Cs to

maximize the estate for the UCsc) filing of bankruptcy petition gives rise to an automatic stay which is an injunction that

arises automatically the moment the bankruptcy petition is filed in bankruptcy court, it does not matter whether or not any C was provided notice*automatic stay stops ALL C collection activity of any sort, particularly in

an attempt to grab the D’s property…due to “supremacy clause” federal law of bankruptcy trumps Art 9 state law rights of

creditors*if an act is unknowingly committed by a C in violation of the automatic

stay, court can undo the action*if an act is knowingly committed by a C in violation of the automatic

stay, the C can be sued for punitive damages*many bankruptcy cases are filed just to invoke the automatic

stay...corporation may seek the protection of the automatic stay in order to determine whether they

are solvent or not* exceptions:

(1) criminal prosecutions are more important than bankruptcy charges

(2) actions for alimony, maintenance, child support*can go to judge in an attempt to lift automatic stay*NEVER tell a client they can continue collection activities

once the D has filed bankruptcyd) SCs are going to get their collateral which is one of the reasons they are SCs…if there

are no more assets remaining after SCs have been satisfied, the debt owed to the UCs is wiped clean and UCs get nothing…if there are assets remaining after SCs have been satisfied, assets are divided among the UCs on pro rata basis

*however, b/c of duty that trustee owes to ALL Cs, trustee MUST investigate every security interest asserted by the SCs…if

trustee finds imperfection in security interest then trustee can ask court to expunge the security interest and these assets are then divided up among the UCs on pro rata basis

e) all property that trustee gathers from D is called the estate…after collateral is distributed to SCs, the trustee takes all of the assets – including tort actions

that have not yet been filed (any legal or equitable rights) – and divide it up among the UCs on pro rata basis

*example of disposition of assets at bankruptcy:-UC1= $50K Assets= $1K UC1= $500-UC2= $30K UC2= $300-UC3= $20K UC3= $200

f) HYPO:

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1) under-SC loans D $100K for a car which the SC took a security interest in…D has made no payments and the car has depreciated in value to

$50K…what does under-SC get?*bifurcation of claims: C has a secured claim for whatever the car

is sold for b/c it is collateral (or perhaps C can keep the car itself if he wishes) AND C has an unsecured claim

for whatever remains of the $100K debt*under-SC is not entitled to interest on the debt b/c this would

merely complicate things and the idea of this process is to quickly and efficiently distribute D’s assets

*sometimes bankruptcy court will lift the automatic stay where the SC is under-secured b/c the D has no equity in the

collateral thus the SC is going to get it anyway, however, if the D does have equity in the collateral, the stay will not be lifted

2) over-SC loans D $50K for a car which SC takes a security interest in…D has made no payments…what does over-SC get?*interest will be allowed to accrue on the debt until either it

reaches $75K…this is only fair b/c this is the deal the D voluntarily made w/ the SC

g) Ds generally have no money so in a typical bankruptcy situation, the UC gets 0% recovery on every dollar of debt*ex: after SCs are satisfied, “hotch pot” of assets is $1K in it and claims of

UCs are $10K…UCs get .10c on every $1…once this is figured out, the trustee sends out checks to the UCs whose claims

have then been validated

2. Chapter 13 Bankruptcya) D gets to keep assets so long as D can propose a plan by which D will finance their

debts and pay Cs from future earnings…plan has to meet certain minimums or it automatically becomes a Chapter 7 Liquidation Bankruptcy

b) Individuals w/ a regular income can file Chapter 13 if:1) present plan to bankruptcy court by which:

a) D over the next 3 years will pay “disposable income” to Cs*this is income above and beyond that which is necessary to live

b) over 3 years, D must give Cs at least as much as Cs would have gotten had D filed a Chapter 7 bankruptcy

*must have some formula for interest b/c money will decrease over time

3. Chapter 11 Bankruptcya) same as Chapter 13, but D presents plans to Cs who vote on it…no time limit…most

appropriate for corporations b/c under Common law when corporation goes insolvent its creditors own it

b) if plan is rejected, it is converted to Chapter 7 bankruptcy…often creditors get shares of stock when corporation comes out of bankruptcy

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Chapter 3: Creation of Security InterestsI. Formalities for Attachment (p.135-155)1. Formalities for Art 9 Security Interests

a) “a security interest is meant to be enforceable not just b/t the D and C, but a perfected security interest also has binding effect as against the rest of the world”…

permits a SC to gain a property interest in some property of the D such that it prevents UC from looking to that property to satisfy a debt (hints at relation b/t SC & UC)

b) SC has a perfected security interest when 2 conditions are met:1) security interest attaches to the collateral2) all the steps necessary to perfect the security interest have taken place

c) in MS the way a SC perfects a security interest is to make a filing w/ the state or a SC creditor may perfect a security interest by taking possession of the

collateral*perfecting a security interest is a way to let the rest of the world know

that the SC has an interest in the collaterald) a security interest attaches to collateral when it becomes enforceable against the D w/

respect to collateral, unless an agreement expressly postpones the attachment

e) formalities required for the creation of a security interest enforceable against thedebtor…only when all 3 requirements are met will the security interest attach to

the collateral and become enforceable against the D:1) collateral must be in the possession of the SC, OR the D must have

“authenticated a security agreement which contains a description of the collateral”; (CREATION)

-“authenticated security agreement” must be able to be reduced to a writing (see infra)

2) value must have been given by SC; -“value” is anything sufficient to support a K

(consideration) but can also be something not (ATTACHMENT) sufficient to support a K (past

consideration)…extremely broad term-this is satisfied when SC provides the $$ for the loan

3) the D must have rights in the collateral-in basic sense, D can not grant a security interest in

property that D has no rights in…but also, this is important where security interest is being granted in goods as soon as they are identified w/ the buyer/D

-when disputes arise if often boils down to who the collateral was identified w/ first, who

perfected firstf) In re Ace Lumber (p.140): req’t of an authenticated security agreement is not always

satisfied by document that says “security agreement”…req’t is “something that can be reduced to tangible writing”…all the parties here agreed they had entered into a security agreement but there was no document that

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authenticated the security agreement…they had some documents that had been exchanged back and forth

*Ct applied the composite document doctrine: if the parties can piece together documents to be read together as a security

agreement, the cts will uphold it as sufficiently authenticating a security agreement

*the documents must contain some term indicating a security agreement and also some indication that the D authorized the

transactiong) Problem

*8.4

II. How to Describe Collateral in a Security Agreement (p.155-68)1. Sufficiency of Description: Art 9 Security Agreements

a) primary function of description of collateral in security agreement is to enable interested parties to identify the collateral…always include the D and C

but also may include 3rd partiesb) collateral can be described in a security agreement by either:

1) type-broad categories defined by Art 9 (see definitions page, attached)

2) item: requires particularity-serial #, etc.-washer would be sufficient b/c people only have one washer, but TV

would not b/c people have more than one TVc) description that says, “all the D’s assets or personal property” is NOT sufficient…it is

possible to reach the same result as this description using both particularity and categories of collateral

d) In re Shirel: Shirel applied for credit card w/ appliance store, complex K stated that anything purchased w/ the credit card would be used as collateral for the

debt created *Ct held that “all merchandise” was not a sufficient enough description to

create a security interest, although Czar questions this, the description was definitely more than what is used in

§9-108(c)e) practical advice: if you are describing collateral, put as much info in the description as

possible…the more detailed a description the better; however, there is a line of cases that says that generic descriptions are ok as long as a reasonable person would be able to identify the collateral from that description (applying a

community standard)

2. After-Acquired Property (§9-204)a) “after-acquired property” clause entails any property the D acquires after the

transaction takes place... “D grants to C a security interest in all _____ owned or hereinafter acquired”

b) this prevents the D and SC from having to re-negotiate a new security agreement each time the D acquired additional property covered in the security agreement

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as collateral…also creates a floating lien in that the $$ amount of the collateral ebbs and flows as the amount of inventory goes up and down

c) if security agreement grants a security interest in inventory, even if the security agreement does not contain an “after-acquired property” clause,

the cts will read one into the security agreement…however, most courts will NOT read an “after-acquired property” clause into a security agreement w/ any other type of collateral

3. Future Advances (§9-204)a) “future advance clauses”: clause that says the collateral mentioned in this security

agreement operates to cover both the advance now and any future advances…prevents parties from having to re-negotiate every time

they want to borrow money…usually works in coordination w/ an “after-acquired property” clause

b) future obligations that come into existence as a result of an additional extension of credit by the SC to the D are “future advances”

4. Dragnet Clausea) “dragnet clause”: a security agreement sometimes provides that the collateral will be

security not only for repayment of this loan but also for any other debts owed by the D to the SC now or in the future…clause in a security agreement that says, “I D grant security interest in this collateral…this secures all obligations the D has or will have w/ the C”

*prior to these clauses, D/SC had to do a new security agreement for every transaction…these clauses also have huge impact on priority…allowing a perfected security interest to attach to the collateral from the date of the original security agreement allows SCs to lock in their priority

III. Proceeds, Products and Other Value-Tracing Concepts (p.168-83)1. Proceeds

a) proceeds includes anything received by the D on the sale or any other kind of disposition of the collateral, whether or not the disposition was authorized

by Cb) even if security agreement does not mention proceeds, the security interest

automatically covers them (like “after-acquired property” clause and inventory)…proceeds are defined as part of collateral

c) McLemore v. Mid-South (p.170): PIK payments are part of gov’t subsidy whereby farmers K w/ gov’t not to grow crops…SC w/ security interest in the crops

on that property then argues that PIK payments are proceeds*Ct held that PIK payments were proceeds since they were a result of the

crops which is what the security agreement covered…very pro-C decision

d) HYPO:

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*D grants SC security interest in racehorse, horse wins race worth 1M, breaks ankle and is killed…there is no insurance…SC argues that

winnings are proceeds from the sale of the horse’s ability to run the race, this is so b/c horse declines in value as he runs the race…Czar says nice try but not enough, SC should have included this in security agreement

2. Termination of Security Interest in Collaterala) security interest continues in collateral unless SC authorizes sale of the collateral

*if SC does not authorize sale of collateral, but D sells it anyway, what remedies does SC have…security interest continues in collateral

b) if SC authorizes sale of collateral, the security interest continues in the form of proceeds…§9-315(a)(1): buyer takes free of the security interest and the

SC can only look to the D and the proceedsc) some states make it a crime to sell collateral covered in a security agreement, called

selling out of trust

3. Tracing Proceedsa) §9-315(a)(2): security interest attaches to any identifiable proceeds…§9-315(b)(2):

proceeds that are commingled with other property can be recovered if SC can identify them by tracing them (covered infra)

b) to determine what is identifiable, SCs use the lowest intermediate balance rule…make a chart (p.176)

Description Deposits W/drawals BalanceOpening balance $3,000Sale of Ford $12,000 $15,000Tuition payment $11,000 $4,000Student loan $6,000 $10,000Books $5,000 $5,000

-analysis:(a) what was opening balance on day deposit of proceeds was made(b) put deposits and withdrawals in chronological order(c) look at time b/t deposit of the proceeds and current date(d) lowest # (other than the opening balance) is the lowest intermediate

balance…this is what the SC gets…here it is $4,000c) if the lowest intermediate balance is $0 on day 1, then $12K is deposited, then $12K is

w/drawn for tuition, then the $12K can readily be traced to the schoold) if you as SC are unsure whether or not some potential collateral constitutes a proceed,

use specific terms in the security agreement to make sure you capture these other things

-calf born from cow that is collateral

4. Other Value Tracing Techniquesa) a secured party who wants to contract as nearly as possible for the value of its

collateral, it whatever form it may take, will want to employ some additional value tracing concepts.

b) Product – something the collateral produces

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*ex – wool is the product of sheepc) Profits – used to describe the excess revenue of a business over the expenses where the

business itself is the collateral*problem is that the word profits is ambiguous*anytime a security interest includes the term profits w/o any other evidence, the

court will interpret it to mean profit a prendre which gives the creditor the right to enter the debtor’s land and extract natural resources.

d) Rents – money paid for temporary use of the collateral. Offspring of collateral is most often used with regard to animals.

5. Non Value Tracing Concepts a) replacements, additions, or substitutions to the collateralb) they can pick up ppty acquired by the debtor eith value not derived from previously

existing collateral.b) Value in after acquired property, replacements, additions, and substitutions can come

entirely from some other source, such as unencumbered property of the debtor, a new loan, or a capital contribution by the debtor’s owners.

6. Problems*10.1 *10.2

IV. Legal Limits on What May be Collateral (p.196-217)1. Property that Cannot be Collateral

a) fixtures: if the fixture is removed from the property it would cause substantial damage to the real property…Art 9 covers interests in personal property, however,

there are some pieces of personal property that become so attached to the real property that the personal property is considered part of the real property…this is the only limit the UCC places on what may serve as collateral

b) Federal Trade Comm’n specifically lists other items that may not be used as collateral…since FTC is federal law and Art 9 is state law, supremacy

clause mandates that FTC wins:1) non-possessory, non-purchase money sec interest (PMSI) in D’s consumer

goods:-non-possessory: means that D retains possession of what was purchased

on credit and also retains possession of collateral-non-purchase money: means that the SC is not taking secured interest in

what was purchased but rather something else-FTC does not want SC taking security interest in collateral that is highly

personal in nature2) future income of D: not enforceable under Art 9…however, just b/c SC can

not grant a security interest in future income does not mean that SC can not get a judgment lien to garnish wages

3) pension rights: just not right for SC to tie up D’s retirement package w/ security interest

4) licenses: e.g., liquor license…gov’t issued license resembles property but gov’t considers it a privilege ONLY granted to the person named on the

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license…utilitarian definition of property is something you can sell, thus a license is not property

*however, it is not uncommon for D to grant a security interest in a liquor license among other things, if SC takes possession of the license then the issuing committee can then transfer the

rights under the liquor license…but, if gov’t wants to refuse them the right to transfer liquor license the gov’t most certainly can

* Debtors can create security interests in (1) the proceeds that come into existence when debtors sell those licenses and franchises and (2) the revenues that debtors derive from the use of the licenses and franchise.

Chapter 4: Default: The Gateway to RemediesI. Default, Acceleration and Cure Under State Law (p.217-39)1. Default & Acceleration

a) default is defined most simply as the D’s failure to pay the debt when due or otherwise perform the agreement b/t the D and C…terms of default will be in the security

agreement and can basically be whatever the D and C agree to…p.218: Standard Default Provisions…notice of default is not required

b) acceleration clause: term in security agreement that says that upon default, all obligations of the D under the K become due and owing…it is

malpractice not to put “acceleration provision” in security agreement if you are working

for SC

2. Limits on the Enforceability of Acceleration Clausesa) the SC has the right to exercise the acceleration clause even for a tiny default in

payment, however, SC can also exercise the acceleration clause if the SC “deems itself insecure” the SC has the right to accelerate ONLY if the SC in “good faith” believes the prospect of payment or performance is impaired

* “good faith” means honesty in fact and observance of reasonable commercial standards

b) Czar says this creates a little bit of uncertainty any time the SC exercises the right of acceleration upon default

c) JR Hale (p.223): stands for the proposition that some cts will entertain the notion that due to the behavior of the SC, certain duties must be imposed on SC

3. Lender Liabilitya) one area where all cts hold that SC has duty to D is where upon default the SC comes

in and takes over D’s business, SC has the duty to run the business appropriately and to satisfy debts to creditors as well as himself w/ $$ made

b) KMC (p.230): ct held SC liable for damages for foreclosing on D and ruining the D’s business even though SC had every right to foreclose

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c) Kham & Nates (p.230): ct held opposite of KMC and stated that “banks are not there to be your (D’s) friend”

4. Problems*13.4

Chapter 5: The Prototypical Secured TransactionI. The Prototypical Secured Transaction (p.253-73)1. Parties

a) SC: Deutsche Bankb) D: Bonnie’s Boat Worldc) Supplier: boat manufacturerd) Consumers: boat purchasers

2. Floor-Planning Agreement (Inventory Lending Agreement)a) 3 party agreement whereby SC agrees to finance but if SC has to repossess the boats

(b/c D defaults on security agreement), then SC can give the boats right back to Supplier/Manufacturer who will satisfy debts of D

b) D borrows money from SC to buy stuff from Supplier/Manufactuter…SC takes a security interest in “stuff”/boats being purchased w/ money loaned to D

3. Documentsa) security agreement (p.255)

-p.256, para.3: grant of the security interest…includes all categories of collateral except “farm products”…includes “after-acquired property”

clause…includes proceeds-p.257: obligations D(dealer) has to SC-p.260(a)-(s): terms of default-p.260-61: D’s obligations after default

b) financing statement (p.264) -document MUST be filed w/ state financing office in order to perfect a security

interest, unless SC perfects security interest by taking possession of collateral

-if this document is filed in wrong place, SC is actually a UC and although K w/ D is still enforceable, there will be other SCs who will have

priority over UCc) personal guarantee (p.265)

-since D/Bonnie’s Boat World is a corporation (which we know b/c it says “Inc.” on financing statement), D/Bonnie’s Boat World has limited

liability…so, SC/Deutsche Bank requires D/Bonnie’s Boat World to sign a personal guarantee which effectively suspends limited liability for the transaction…D/Bonnie’s Boat World is willing to sign this b/c if she doesn’t then SC/Deutsche Bank will not loan her the money

d) floorplan agreement

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-agreement b/t SC/Deutsche Bank and Suppler/boat manufacturer whereby SC/Deutsche Bank gets full balance on loan from manufacturer

4. Monitoringa) idea of “trust but verify”…theoretically, the D/Bonnie’s Boat World could attempt to

make some quick money if things went south…in order to prevent this, SC/Deutsche Bank (and maybe even Supplier/boat manufacturer

since they are on hook as well) will monitor the collateralb) there may be a provision in the security agreement which allows SC to enter premises

at any time to inspect and requiring D to produce books upon request

PART II: THE CREDITOR-3RD PARTY RELATIONSHIPChapter 6: Perfection

I. The Personal Property Filing Systems (p.275-94)1. Priority

a) focus has now shifted from relationship b/t D & C to relationship b/t SC and others claiming to have an interest in the collateral

b) if there is more than one lien against collateral, each lien will have priority…liens are commonly labeled “1st”, “2d”, “3d”…a lien w/ a higher priority over

another is referred to as a senior lien or prior lien and the other is referred to as a junior lien

c) if the value of the collateral is insufficient to pay all of the liens, the senior liens take priority over the junior liens

d) Peerless Packing (p.278): 6 UCs all supply a grocery store…one of them approaches D and demands a security interest in the business (past consideration is

sufficient to support a security interest)…D defaults on bills and SC takes possession of store to the dismay of the remaining 5 UCs who bring suit claiming unjust enrichment

*Ct said unjust enrichment is not a sufficient claim to defeat the claim of a SC…law prefers the person w/ priority over a D’s property

e) HYPO:*SC hires the D as manager of business then sends letter to UCs telling them that

the collateral is being retained by the SC in lieu of foreclosure…UCs are now “s-o-l” b/c if they sue the D he will file bankruptcy which discharges the debt owed to the UCs

f) the only way for an UC to destroy priority is to show that the security interest was never perfected or never attached thus security interest never became

effective

2. Priority Among UCsa) typically established by K or in bankruptcy Congress has stated that there are 12

different types of UCs who will be paid before the standard UC…a bondholder is an UC

3. Perfection of Security Interest

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a) perfecting a security interest establishes the SC’s priority…perfection is usually done through filing a financing statement w/ a state office…Czar says think of

this as the SC leaving a message for any subsequent searchers that I (the SC) have a security interest in this piece of collateral

b) subsequent searchers know where to look so this serves to protect them from loaning the D money on the same terms

c) excluding GA & LA, the office of filing is the state level, and SCs or subsequent searchers should go to the secretary of state’s office or some sub-office to

do a search or file a financing statement… “fixture filings” are different in that they are typically filed locally rather than on a state level…perfection of a copyright is also not done at the state level

d) National Peregrine, Inc (p.284): Congress has created office specifically for filing of financing statements in copyrights…moral of the story is that SC must

look everywhere he can think of and file a financing statement in every office SC feels may be relevant…all you are trying to do is notify all subsequent searchers that you (the SC) have a security interest in the collateral

*Patent Act does not preempt state filing system the same way that the Copyright Act does.

4. Problem*16.1

II. Art 9 Financing Statements: The D’s Name (p.294-312)1. Components of the Filing System

a) if perfection is going to be obtained by filing a financing statement, what information is required? (discussed infra)

b) Art 9 financing statement does not have to be perfect, it only has to be sufficient to provide notice to subsequent searchers that there is a security interest in

the property…§9-506(a): “a financing statement substantially complying w/ the requirements of [part 5 of Art 9] is effective, even if it includes minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading”

*seriously misleading errors make the financing statement defective and SC will become UC b/c security interest will not be

perfectedc) presumption that financing statements are effective.

2. Correct Names for Use on Financing Statementsa) personal property system is based on the name of the D…more personal property

exists than real property and if all system did was identify name of personal property, system would not work b/c so much personal property is similar while identical names are very uncommon

b) Individual as D(i) use name on driver’s license…if you are a SC lending money to an individual

D you should always get a copy of their driver’s license or birth certificate

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(ii) GP general partnerships are not corporations, thus when doing financing statement for general partnership, SC must determine names of all

partners*LP (limited partnership) follows same process as corporations

(iii) if you use some official record(s) of names, you at least have an argument that you used the proper name.

c) Corporation as D(i) name of the D indicated on the public record where D incorporated the

business(ii) this certificate of incorporation will show the one and only true name of the

corporation(iii) be careful not to put trade name on the financing statement…easiest way

to tell this is that corporation’s official name will have one of magic words after it, i.e. “Corp., Company, Co., Inc., LLC”…using only the trade name renders the financing statement ineffective. It does not automatically render a financing stmt ineffective, however it is not necessary nor sufficient.

*can use “McDonald’s, Inc. d/b/a McDonald’s”

3. Errors in the D’s Name on Financing Statementa) most searches are initiated by persons who intend to lend money to the D…they search

to assure themselves that no other SC has perfected a prior security interest in the collateral…search is conducted in the D name index and is for listings

under the name of the D, this search should discover any financing statements filed and indexed under that name

b) if the searcher searches under the correct name of the D, but does not find any prior filings b/c the prior SC listed an incorrect name on its financing statement,

the prior filing is ineffective…seriously misleading error in financing statement renders the statement ineffective which prevents the C from becoming a SC

c) if the searcher searches under the correct name of the D, but does not find prior filings made in the correct name of the D b/c the filing office indexed the prior

filings incorrectly, the prior filings are ineffective*in this case, the subsequent searcher may have a COA against the filing

officerd) however, if a search of the records of the filing office under the D’s correct name,

using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of

the D in accordance w/ §9-503(a), the name provided does not make the financing statement seriously misleading

*this is a way of keeping subsequent searchers in check b/c they are going to do all they can to claim that prior SC did not have a

perfected security interest*this is a hypothetical standard, all the test requires is a showing that

“had the subsequent searcher conducted a reasonable search, he or she would have discovered the financing statement”

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*purpose is the concept of noticee) Trans-American (p.304): “Ward Corp, Inc.” appeared on financing statement…name

on document of incorporation was “Wardcorp, Inc.”…although very close in relationship to one another, upon examination of how far these names would be from each other in an alphabetical search on a computer:

*Ct held that the name “Ward Corp, Inc.” was seriously misleading and thus the security interest of the previous SC was not

perfected*Ct applied test and determined that a reasonable search using the

standard search logic would not have disclosed the financing statement

-see also In re Tyler (p.308) (holding that erroneous filing of “Tri State Moulded Plastic, Inc.” where correct name

was “Tri State Molded Plastic, Inc.” was seriously misleading due to search being conducted on computer)

f) In re Alexander (p.308): SC made an erroneous filing in the local records of Benson Co., ND…Ds’ names were John Alexander and Larry Alexander…SC put

these names on the financing statement but also specified that the financing statement be filed under Alexander Farms

*Ct held the error was not seriously misleading b/c the “court believes it reasonable that a C interested in the property of John and

Larry Alexander w/in the largely rural county of Benson County, ND, would examine all financing statements filed under the name Alexander”

*however, this argument is now flawed b/c most filing systems now operate on a state rather than local level

III. Art 9 Financing Statements: Other Information (p.312-27)1. Information on Financing Statement

a) §9-502(a) requirements for effective financing statement(1) name of D(2) name of SC(3) indication of the collateral covered

b) §9-520(a) requires filing officer to refuse to accept it unless it contains items (1) and (2) and these additional items:(4) mailing address of the SC(5) mailing address of the D(6) indication of whether the D is an individual or corporation

c) §9-516(b)(5)(C), if the D is an organization also requires rejection of the financing statement unless it contains:(7) type of organization (corp., LLC, etc.)(8) D’s jurisdiction of organization(9) D’s organizational ID # (usually tax id#)

d) if the financing statement lacks any of these pieces of information other than (3) indication of the collateral covered, the filing officer should refuse to

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accept it and communicate to the filer the reason for refusal and the date and the time the record would have been filed

*however, if financing statement contains all info, then filing officer can not refuse to accept it

e) filing officer has NO duty to check the authenticity of the information, only should check to see whether or not it is there

f) filing can be done on Art 9 form which lists required information or may also be done electronically in jurisdictions which permit such

2. Wrongly Accepted Filingsa) if a filing officer mistakenly accepts a filing that contains items (1)-(3) above, but is

missing another item or items such that the filing officer was required to reject the filing pursuant to §§9-520(a) or 9-516(d), the filing is nevertheless effective

*however, if the missing information is from items (1)-(3) the financing statement will not be effective

b) this is b/c items (1)-(3) are effective to put the subsequent searcher on notice that there is a previous lien

3. Wrongly Rejected Filingsa) if the filing officer should accept an initial financing statement, either b/c it is correct

or b/c the manner in which it is incorrect does not warrant rejection under §9- 516(d), but the filing officer rejects it instead, the financing statement will not appear on the public index/record

b) instead, the filing officer will stamp it w/ the date and time of the attempted filing and return it to the filer…this attempt to file nevertheless perfects the

underlying security interest sufficiently to defeat lien creditors (UCs) and BTs*effectively creates a “secret lien” on the collateral which defeats

subsequent lien holders, however, this is not a big deal b/c lien holders do not collect debts based on what is in the filing system anyway

c) but, this non-filing is NOT sufficient to create priority over a subsequent SC b/c the subsequent SC depends on what is in the filing system when determining

whether to enter into C/D relationship or not

4. Filer (SC) Errors in Accepted Filingsa) if filer (SC) entirely omits from the financing statement a piece of required

information, the filing officer should reject the financing statement; however, if the required piece of information is merely incorrect, the filing officer can not reject the financing statement

*the effect of this financing statement will depend upon whether the error was made in items (1)-(3) or in items (4)-(9)

b) we are not talking about situation where filer (SC) fails to put this info in financing statement (b/c it would be automatically rejected), we are talking about

situation where filer (SC) has put info down, it is just wrong

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5. Information Necessary Only to Qualify for Filing ((4)-(9) incorrect)a) items (4)-(9) are not necessary for the sufficiency of a financing statement…if the

information furnished in response to any or all of these items is merely erroneous, the financing statement qualifies for a filing, however, this filing will not be fully effective

b) these filings will be effective against: (a) lien creditors, (b) BTs, and others, but NOT against purchasers who give value and act in reasonable reliance

on the incorrect informationc) how does a purchaser give value and act in reasonable reliance on the incorrect info?

*1st Bank is lending to John P. Smith who lives in LA…1st Bank conducts a search under that name which returns 30 filings all against John P.

Smith at a San Fran address…1st Bank checks the San Fran address and discovers that a person named John P. Smith (not 1st

Bank’s D) lives there, assuming that all 30 filings are against that JPS and not their JPS, 1st Bank loans the money…2d Bank in fact lent money to JPS in LA, but the clerk who filed the financing statement for 2d Bank put the address of JPS in San Fran so 2d Bank showed up as one of the 30 filings that 1st Bank saw…2d Bank’s filing is effective against lien holders but NOT against 1st Bank who gave value in reasonable reliance on the filing

6. Required Informationa) items (1)-(3) are necessary for the effectiveness of the financing statement…if the

financing statement substantially complies w/ the requirement to specify these items, the financing statement will be effective despite “minor errors or

omissions, unless the errors or omissions make the financing statement seriously misleading”

*inclusion of D’s name covered supra, here we are more concerned w/ SC’s name and description of collateral

b) Grabowski (p.318): financing statement granted security interest to Bank 1 in equipment…dispute arose as to whether the security interest was in all of

D’s equipment b/c a subsequent lender (SC) issued credit on that collateral*Ct held that Bank 1 wins…if description of collateral is going to limit the

collateral to collateral at a particular location, then it will probably say so rather than just saying equipment…Ct

essentially says that upon seeing the financing statement and having questions, the subsequent searcher should have called D and asked what collateral was covered by financing statement

c) in a financing statement, SC can use generic descriptions (all D’s personal property) b/c all financing statement is doing is providing notice…can NOT do this

w/ security agreement b/c it is a K binding on both parties

7. Authorization to File Financing Statement

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a) historically, financing statements had to be signed by D but w/ the increased use of electronic filing, this became difficult…now, a person may file a financing statement only if the D authorizes the filing in an authenticated record*by authenticating a security agreement, D authorizes the filing of

financing statement b) if there is no authenticated record and the financing statement is filed, the financing

statement is not authorized and thus does not perfect the SC’s interest in the collateral

IV. Exceptions to the Art 9 Filing Requirement (p.327-45)1. Ways to Perfect

a) filing financing statement b) SC can perfect by taking possession of collateralc) SC may enjoy automatic perfection by operation of lawd) SC may give notice to or through some person or organization that controls the

collateral

2. Possession as Perfection of Collateral - Possession Gives Notice Theorya) 9-313 there are certain types of collateral where possession perfects the security

interest and there is no reason to file…this collateral is 1) negotiable documents 2) goods 3) instruments 4) money 5) tangible chattel paper

these are all tangible thingsb) goods is the term for almost all tangible items of ppty i.e. equipment, inventory, and

farm productsb) instrument is a right to payment in a written form and this can be

possessed (tangible item i.e. check, promissory note, etc.)…if the right to payment is written in a document, the SC can use the

written document to take possession of the associated money

c) negotiable document is a document that gives its bearer the right to possession of goods, i.e. warehouse receipts (document issued that allows owner to get

goods out of warehouse), bills of lading, etc.d) tangible chattel paper is the combination of a note (written right to payment) and a

security interest…extremely important in buying cars…chattel paper can be used as collateral for the dealership b/c the chattel paper allows SC to step into the shoes of the business and allows SC to collect payment and right to the collateral

e) SC MUST file: SC can not perfect by possession of intangible goods such as accounts or general intangibles…these can ONLY be perfected by filing…if the

collateral does not fit into one of the categories under Art 9 then it is probably general intangibles…does not include deposit accounts

f) SC MUST possess: only collateral that MUST be perfected by possession is money b/c the gov’t wants to ensure the liquidity of money

g) possession does not necessarily mean that SC must have the collateral on his own property, but the SC does need to have control over the collateral…an

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agent could be used to take control over the property although typically taking possession does mean physical control

*legal right to possession*bank that loans $$ to casino doesn’t actually have possession of $$, it is

in the casino vault, however, if bank really wanted to, they could go take possession…they have a right of control over the $$

3. Possession or Filing a) w/ regard to goods, possession is an alternative, but for instruments, tangible chattel

paper, negotiable documents and certificated securities, perfection by possession is superior to perfection by filing

*possession is superior b/c this type of collateral are all types of written documents that give bearer right to collateral

b) purchasers who subsequently take possession of these kinds of collateral generally take priority over SC who previously perfected by filing…filing is however, fully

effective against lien creditors and trustees in bankruptcyc) searchers must check both the filing system and the collateral itself for goods or

negotiable documents (however, this does not include negotiable promissory notes)

d) in order to be safe, SC should always go look at collateral prior to taking a security interest in it

4. Collateral in the Control of the SCa) control, rather than possession, is sufficient to perfect a security interest in some types

of collateral such as:1) deposit accounts (bank accounts) 2) electronic chattel paper2) investment property 4) letter of credit rights

b) 3 ways for SC to take control of a deposit account: 1) SC may be the bank in which the deposit account is maintained2) D, SC, and bank can authenticate a record instructing the bank to comply w/

the SC’s instructions regarding the deposit account3) SC can become the bank’s “customer” meaning the deposit account can be put

in SC’s namec) all 3 methods result in a secret lien b/c none of this control paperwork has to be filed

and to a subsequent searcher it appears that D is in control/possession of collateral

V. Purchase Money Security Interest in Consumer Goods a) security interests in PMSIs in consumer goods are considered automatically

perfected…probably the most common secured transaction other than pawn shop…however, PMSIs in collateral other than consumer goods still has to be perfected either by filing or possession

1. Purchase Money Security Interest

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a) D borrows money to buy a good and signs security agreement whereby the good purchased w/ the borrowed money is the collateral…D has to use the

loaned money loaned to buy the goods/collateral or they don’t get it…SC/bank can pay directly to the seller to make sure D pays for the good/collateral w/ the loaned money

b) sometimes PMSIs function as priming liensc) we allow consumer goods to serve as collateral here and not in other parts of Art 9 b/c

the D is using the loaned money to purchase the good/collateral…this encourages free market economy by promoting efficiency and low prices

d) rationale is that there are tons of these type of transactions everyday.

2. Consumer Goodsa) goods that are used or bought primarily for personal, family or household useb) Gallatin National Bank (p.335): issue was whether or not a yacht was a consumer

good…for big ticket items in order to be safe, SC should file a financing statement to make sure they are secured…however, if state law

does not limit the value of consumer goods, big ticket items should be covered

c) not the nature of the goods, but rather the use which determines classification.d) certificate of title – major exception is with automobiles. All that an auto dealer has to

do to perfect a security interest in an automobile is note is somewhere in the title.

3. Security Interests Not Covered by Art 9a) wage claimsb) insurance policies and claimsc) real estate interestsd) non-commercial tort claimse) it is possible to get a security interest in each of these as collateral, however, Art 9 does

not cover itf) Bluxome (p.339): Ct held that if neither Art 9 nor legislation cover the method of

perfection, then security interest is automatically perfected

VI. Characterizing Collateral for the Purpose of Perfection (p.371-75)1. Inventory Distinguished from Equipment

a) distinction b/t categories of collateral, depends not on the intrinsic nature of the goods, but on the manner in which they are used

b) goods are inventory when they are held by a person for sale or lease or to be furnished under a K for service…if goods are inventory they are NOT

equipment…goods held for lease are explicitly included in the definition of inventory, thus the videocassettes held by Blockbuster for rental are inventory…on the other hand, the computers that Blockbuster uses to keep track of the videos will not be inventory even if Blockbuster has a policy of selling machinery when it becomes obsolete, b/c implicit in the definition of inventory is that the D must be in the business of selling or leasing goods of the kind

c) w/ motor vehicles:

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-if used by D as equipment, security interest in them as collateral is perfected by notation on the certificate of title

-if used by D as inventory held for sale or lease and D is in business of selling or leasing goods of the kind, security interest in them as collateral is

perfected by filing in statewide Art 9 system

2. Determining the Proper Method of Perfectiona) instruments distinguished from general intangibles

(i) Omega (p.363): if SC has a particularized piece of collateral that:(1) SC can not tell what category of collateral it fits in, and (2) the method of perfection of a security interest in that collateral will be

affected by manner in which court classifies collateral…in order to be sure, SC should file a financing statement and take possession of the collateral

b) true leases distinguished from leases intended as security (i) Art 9 applies to a secured transaction in personal property but not to true

leases…if court re-characterizes a transaction as a secured transaction, then Art 9 kicks in and SC better have done everything proper to perfect or else SC may actually be UC

(ii) HYPO:-Czar leased a stone smasher from Meyers and received the right to

purchase the stone smasher at the end of the lease…payments under the lease add up exactly to the economic value of the collateral

*Cts will typically re-characterize this as a secured transaction, thus Meyers must have

perfected his security interest in order to repossess stone smasher either through self-help or by other means

-same facts, but stone smasher is worth $50K and lease payments over 3yrs add up to $10K and at the end of the lease term Czar

has the right to purchase for $30K*since lease payments do not approach the actual value and

there is actual consideration for the purchase rather than nominal consideration, this is probably

a lease(iii) main characteristics for a disguised sale:

(a) lease payments add up to economic value of the collateral(b) is there an option to purchase at the end of the lease, is it for or

nominal consideration(c) is the lease for the economic life of the collateral

c) chattel papers and instruments distinguished from accounts (i) instruments are distinguished from accounts in that:

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(1) don’t really have a writing for an account;(2) definitions are very different

(ii) instrument is a writing that evidences a right to monetary payment(iii) account evidences a right to payment for goods sold or services

rendered, but not in writing(iv) general intangible is a right to payment, but not in writing and not for goods

sold or services rendered(v) chattel paper is a combination of monetary obligation to pay and a security

interest in specific goods

3. Multiple Items as Collaterala) In re Leasing Consultant (p.368): leased goods taken to NJ where ct re-characterizes

transaction as a sale…lessor (SC) makes clever argument to get collateral/property back, even if there was a sale, there were two

types of collateral, (a) leased goods, and (b) goods w/ a reversionary interest in them via K which was held by SC (attempt to perfect by possession)

*Ct totally rejects argument stating that when a transaction is re-characterized it means that the SC sold those goods so there

is no security interest in collateral or any reversionary interest-practical advice is to tell client to file financing statement here

4. Problem*21.1

Chapter 7: Maintaining PerfectionI. Maintaining Perfection Through Lapse and Bankruptcy (p.375-90)1. Termination and Release

a) termination: if the D has paid the secured obligation and the SC is not required by K to lend more money, the D can demand that the SC file a termination

statement w/in 20 days*if the SC fails to do so, the SC becomes liable for actual damages and in

addition, a civil penalty of $500b) upon filing of the termination statement, the financing statement to which it relates

becomes ineffective…when searching, it is not a bad idea to pair up all documents that relate to one another

c) release: the release of collateral covered by a financing statement is accomplished by amending the financing statement…this is totally up to the SC whether or

not he wishes to release some of the collateral in light of partial payment unless the SC is bound by K to do so

*amendment must state which collateral is being releasedd) termination statement or amendment must identify – by its file number – the financing

statement to which it relates…in addition the termination statement must identify that the identified financing statement is ineffective…an error in the termination statement leaves open the question as to whether or not the termination is effective, subject to the “seriously misleading” standard

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2. Self-Clearing and Continuation Under the Art 9 Filing Systema) while the filing system for real property enables searchers to trace real property all the

way back to the Civil War, the Art 9 filing system for personal property is a “self- clearing” meaning that after 5 years a financing statement is discarded

b) financing statements for personal property lapse after 5 years…however, these financing statements can be renewed or continued if done w/in 6 months

prior to the lapse*reason this can only be done w/in 6 months prior to the lapse is to

encourage SCs to monitor their security interests rather than simply file several continuances when the SCs file the original financing statement

*if filed after 6 month window expires, the continuation functions as a new financing statement which affects priority of the SC

*“tickler system” describes old system used where secretary kept track of when the lapse of a financing statement comes near and lets attorney know so they can file continuance…new computer systems have made this obsolete

c) SC can file continuation stmt w/o approval of Dd) upon lapse, the security interest becomes unperfected and is deemed never to have

been perfected against a purchaser of the collateral for value…one year after a financing statement lapses, the filing officer can remove it from the records and destroy it

*however, SC will retain priority over lien creditors and bankruptcy trustees so long as the security interest was perfected at

time of filing of bankruptcy or lien was leviede) Art 9 filing officers are required to index records w/in 2 days of their receipt, however,

this is one of the least followed rules in Art 9 simply b/c most Art 9 offices are understaffed and swamped

f) Worthern Bank (p.381): H grants security interest to NBC in all accounts receivable…all filings made…H decides to continue the agreement but

NBC does not file continuance w/in 6 month window so security interest lapses…NBC later realizes what happened and filed continuance…in the meantime, H files for bankruptcy...BT argues that financing statement lapsed prior to H

filing for bankruptcy so trustee should get everything…NBC found an old financing statement which they claimed was intended to be a continuation statement, but NBC had checked the wrong box

*Ct held this was not a continuation statement, thus the security interest lapsed making NBC an UC, thus losing out to BT-NBC argues this was harmless error, Czar says harmless

error is a good argument sometimes but NOT when you are filling out financing statements

g) However, continuation stmts are not stayed by the automatic stay in bankruptcy proceeding.

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II. Maintaining Perfection Through Changes of Name, Identity and Use (p.390-403)1. Changes in the D’s Name

a) even though a change in the D’s name renders a filed financing statement seriously misleading, the financing statement remains effective w/ regard to:(1) collateral owned by the D at the time of the name change; and(2) collateral acquired by the D in the first 4 months after the change.

b) rule really only affects SCs who have a security interest in collateral that is inventory or some other collateral that turns over…creates potential problem for SCs

w/ floating liensc) make sure you – as the attorney for a bank that is going into lending – include this rule

in preliminary discussion w/ bank’s officersd) even though the governing rules are similar, it is important to distinguish changes of

D’s name form the transfer of collateral to a new D…assume that Teresa Williams as individual borrowed money against the equipment of

her business…if Teresa later incorporates the business under the name Williams Electronics, Inc., this is not a change of name but rather a creation of a new entity probably followed by a transfer of collateral to a new D…the financing statement filed against Teresa would be effective against the collateral in the hands of William Electronics, Inc.

2. Changes in Use of Collateral Which Affect Description of Collaterala) Type 1 Change: change in circumstances that did not control the place of filing but

that does make the collateral difficult for the searcher to identify as covered by the filing…even if the change in circumstances has made the financing statement seriously misleading, the financing statement remains effective

*e.g., Bank1’s security agreement correctly describes the collateral as “Coyote Loader, serial # 8203G45”, that the D holds the

loader as inventory at the time Bank1 files its financing statement, and that the financing statement describes the type of collateral as inventory…Bank1 is perfected…later the D begins using the loader as equipment and seeks to borrow against it from Bank2…Bank2’s search will discover Bank1’s financing statement, but Bank2 may not realize the significance

*see infra #4 piece of advice for Bank…this is why you ask D if the collateral has been used for any other reason than it is now

being used forb) Type 2 Change: change in circumstances that is sufficient to affect the method of

perfection that would have been appropriate for the initial filing…collateral’s use has changed in a way that renders the initial financing statement seriously misleading and the means of perfection for the collateral now that it is being used in differently would be different…SC has to perfect using whatever method of perfection as would be appropriate for the collateral as it is being used now

*e.g., Dawson Lumber takes a security interest in lumber that it sells to Michelle Pfeiffer and perfect by filing a financing

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statement in the office of secretary of state…later Pfeiffer uses the lumber to build a hot tub that is attached to real property in such a manner that it becomes a fixture

3. Collateral Non-Cash Proceedsa) recall that under §9-315(82) that a perfected security interest attaches to any

identifiable proceeds…barter is the exchange of one commodity for another in a transaction in which no cash is involved, proceeds from the exchange are non- cash…rules governing exchange such as this are different from the rules governing cash proceeds

b) Type 0 Barter : proceeds received by the D fall w/in the description of collateral in the already-filed financing statement…SC does not have to do anything*e.g., the security agreement described the collateral as “Coyote Loader,

serial #8203G45” and the financing statement, properly filed only in the office of the secretary of state, described the type of collateral as “loader”…D trades the Coyote Loader for a Caterpillar Loader…the security interest attaches to the Caterpillar Loader as proceeds w/out a statement to that effect in the security agreement (attachment)…the security interest is perfected in the Caterpillar Loader b/c the description “Loader” in the financing statement is broad enough to encompass it…in this exchange, the SC has a perfected security interest in the new collateral on the basis of description rather than by §9-315

c) Type 1 Barter: proceeds received by D are property not covered by the description in the financing statement but are property in which the security interest

could be perfected by filing in the same office where the SC’s financing statement is already on file…SC remains perfected w/out a new filing

*e.g., D’s exchange of inventory for equipment would be a type 1 barter if the original financing statement covered only

inventory…the equipment is not covered by the description in the financing statement, but the filing needed to perfect in equipment as original collateral would be made in the same filing office

*e.g, financing statement covers only inventory and the D trades inventory for a circus elephant that will not be inventory…SC remains

perfected in the elephant w/out further actiond) Type 2 Barter: proceeds received by D are of a type in which filing is required in a

filing office other than the one in which the original collateral was perfected by filing…SC must re-file to perfect the security interest in the new collateral…to be continuously perfected, the SC must filings w/in 20 days from the time the D receives the proceeds

*e.g., D traded a Coyote Loader that is to be used as equipment for an automobile and an aircraft…security interests in equipment

is perfected by filing in office of secretary of state, security interest in automobile is perfected by recording on certificate of title

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by DMV, security interest in aircraft is perfected by filing in office of FAA

*In re Seaway Express Corp. (p.397): personal property as collateral exchanged by D for real property, SC was monitoring

collateral and notified the D that SC wanted D to record a deed conveying the property to SC…perfection of the security interest is different than perfection of the security interest before (type 2 barter)…SC did not get the deed recorded and under real property law there is no way to force the D to make the deed

*SCs can NEVER protect themselves against dishonest Ds…best SC can do is have K that minimizes risks…fraud on part of D

throws Art 9 out the window

4. Collateral Cash Proceeds Non-Cash Proceeds a) so long as the cash proceeds are identifiable by tracing, the security interest of the SC

in the collateral continuesb) Type 0: original filing remains effective to cover goods of the same description

*e.g., security agreement described collateral as “Coyote Loader, serial #8203G45” and the financing statement, properly filed only in the

office of secretary of state, described the type of collateral as “Loader”…D sold the Coyote Loader for cash and took the cash and purchased a Caterpillar Loader

c) Type 1: exchange results in collateral that is no longer covered by the original description in the financing statement…SC has to file a new financing

statement w/in 20 days of the D’s receiving the new collateral or the SC will not have a continuously perfected security interest…if filed after 20 days, the new financing statement is only effective from day of filing rather than date of original filing

*notice that SC has to re-file here unlike w/ type 1 bartersd) Type 2: exchange results in collateral that is of a type that requires a filing in a

different office than original collateral…same rules as Type 1 (discussed supra)

5. Collateral Cash Proceedsa) SC has continuous perfection in all identifiable proceedsb) See 3 Ways by which SC can take “control” of deposit account p.25-26

6. Practical Advice to Bank Thinking About Lendinga) draft a security agreement whereby the D has to notify the SC if any name changes

take placeb) since not all Ds will comply w/ this rule, the banks as SC should check the collateral

every 3 months or so, at least, NO longer than 4 months*this is so b/c financing statement becomes seriously misleading after

name change except as to collateral which D owned or acquired w/in 4 months of name change…by checking every

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3-4 months, SC can tell if D acquired new collateral and thus SC may need to refile

*possibly need to shorten this time to 19 days due to Type 2 Bartersc) ask D of all names the D has ever done business under…allows bank as SC to research

all names and find out if another SC has a security interest in any collateral of Dd) if SC is lending money against a specific piece of collateral, SC should ask the D if D

has ever granted a previous security interest in the collateral to anyone else…however, SC does not have to worry about general classes of

collateral i.e. inventory b/c it turns over*as SC you are trying to make sure that D didn’t own the collateral, grant

security interest in collateral to another SC, change names and now attempt to grant a second security interest in it to you as SC, b/c as the second SC in line, you are second in priority on the collateral

e) draft security agreement whereby the SC has to disclose any change whatsoever in the form of the business

f) as SC, inform D that you want to be informed of ANY changes in the use of the collateral

III. Maintaining Perfection Through Relocation of D or Collateral (p.403-15)1. State-Based Filings in a National Economy

a) it is important to realize that Art 9 is state law which presents problems when D’s or collateral cross state lines…these problems would not exist if Art 9 was

federal law…functions of these provisions in Art 9 is to let SC know what state to file in and searcher know which state to search in

2. Location of the Da) §9-301:

(1) Except as otherwise provided, the location of the D determines where a filing will take place*this is true regardless of where collateral is located…the filing is

to give notice to subsequent Cs and since the subsequent Cs will at least know what state the D is located in the subsequent Cs know where to search…this provision addresses the perfection of a non-possessory security interest

b) §9-307 specifies the location of specific types of Ds(a) place of business means a place where a D conducts its affairs(b) except as otherwise provided in this section, the following rules determine a

D’s location(1) D who is an individual is located at the individual’s principal

residence(2) D that is an organization and has only one place of business is

located at its place of business-organization: 2 or more persons having a joint or

common interest

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(3) D that is an organization and has more than one place of business is located at its chief executive office.

(c) if D is located in foreign country and that foreign country does not have a filing system available to the public, then for purpose of Art 9,

residence of D is Washington, D.C.(e) registered organization that is organized under the law of a State is located in

that State*corporations, LLPs, LPs, etc.

c) HYPO: *San Antonio Hotel in TX. Jose owns the hotel. He lives in TN and manages the

100 room Hotel from there. Jose keeps the books and records on a personal computer in his home. Jose makes all major

decisions for the business, including the hiring and firing or employees. He is in touch daily w/ Hector the on-site manager. Where is Hotel’s place of business?

-based on facts…TN-what if Hotel was incorporated in TX…TX

3. Location of the Collaterala) §9-301: (2) Where security interest is perfected by possession, the law where the

collateral is located governs*there is no filing when security interest is perfected through

possession…another reason why SC should insist on seeing collateral so SC knows which law applies…this provision addresses the perfection of a possessory security interest

b) this section is beyond the scope of the course…just keep in mind that fixture filings are done where land is located so the other provisions we covered don’t apply

4. Relocation of Da) §9-316:

(a) A properly perfected security interest remains perfected in the original jurisdiction until:

(1) security interest lapses;(2) the expiration of 4 months after D moves to another state(3) the expiration of 1 year after a transfer of collateral to a person that

thereafter becomes a D and is located in another jurisdiction

(4) Have 1 yr to discover the transfer of assets to a newly incorporated entity in another jurisdiction rather than the 4 months normally required to the change of a personal principal residence.

b) most important thing to learn from all of these rules is that:(1) SCs must monitor their Ds and their collateral and if anything changes, then

very likely it will have some affect on the validity of the filing

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(2) shortest grace period SC have is 20 days so SCs should check the collateral pretty frequently

(3) level of investigation required of SCs really depends on the economics of the situation

5. Brandon’s Question About Carsa) SC perfects security interest in a mobile car by noting it on the title, but also,

the SC holds the title and theoretically there is only one title to a car…when D moves to new state the state will require that the D get a new title and in order to do that, D is going to have to tell the state who has the old title…thus, the state will deal directly w/ the SC…SC will be sent new certificate of title by new state so there should be continuous perfection of title

Chapter 9: Competitions for CollateralI. Lien Cs Against SCs (p.463-72)1. How C Becomes a Lien C

a) prototypical lien creditor is a C who has obtained a judgment against the D and had clerk’s office issue a writ to the sheriff to enforce the judgment

b) if two lien creditors both claim rights to the D’s property, the first to perfect their interest wins

c) when is a lien creditor’s interest perfected:(1) majority says when sheriff actually physically seizes the property(2) minority says at time sheriff is issued the writ by the clerk’s office(3) two states say when judge enters judgment against D

d) also, keep in mind that a BT has the official status as a perfected lien holder that levied the lien at the moment the bankruptcy petition is filed

2. Priority b/t Lien C and SCa) priority b/t a lien C and a non-purchase money SC depends on whether the lien creditor

“becomes a lien creditor” before the SC does either of two things:(1) perfects its security interest, or(2) files a financing statement and complies w/ §9-203(b)(3)

b) §9-203(b)(3) defines the formalities for attachment of a security interest…security interest attaches when:a) value is given,b) for property the D has an interest in, andc) either the SC takes possession of collateral, or

there is a security agreement b/t the partiesc) general rule: first to perfect wins

3. Purchase-Money Priority (PMSIs)a) PMSIs are an exception to the notion of first in time, first in right…a PMSI can prime

a lien C’s interest only if the PMSI comes into existence and attaches to the collateral before the C obtains its lien against the collateral

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b) if the PMSI attaches first, the holder of the PMSI has a 20 day grace period in which it can perfect and thereby defeat a lien that came into existence b/t the dates

of attachment and perfectionc) this means that if a D buys property on C and the lien creditor levies before the SC

perfects its interest, the lien creditor will prevail UNLESS the SC perfects its interest w/in 20 days of the time the D received delivery of the property…the effect is that a purchase-money SC that went public later can defeat a lien creditor who went public up to 20 days earlier

d) reason for allowing the 20 day grace period is to facilitate sales of personal property on secured credit…the grace period makes it possible for the seller to give immediate delivery to the buyer, w/out first filing its financing statement…not allowing the

grace period would result in delays in sales transactionse) although the grace period might upset a lien creditor who ran a check on the D and

found no security interests, the actual injury is very small…no UC actually decides to lend more money based on a clear title…moreover, lien

creditors who are concerned about the possibility of secret liens might choose to delay their levies for 20 days after the D acquires the new property to see if a PMSI shows up on the public record

f) this applies to ALL PMSIs, not just PMSIs in consumer goods

II. BTs Against SCs (p.486-518)1. Strong-Arm Clause

a) as soon as the bankruptcy petition is filed, the BT has the power of a perfected lien creditor which defeats a SC where the SC has not yet perfected the

security interest…BT then takes all property including that which was encumbered by the unperfected security interest

b) BT is obligated to sell this property and give the proceeds to the UCc) why is this called the strong-arm clause?

*b/c it strong-arms individual UCs as well as individuals who think they are SCs but are not due to some defect…basically, just by filing the petition

for bankruptcy, the only claim that defeats the BTs is a SC’s previously perfected security interest and possibly a PMSI which is perfected w/in 20 days of the D taking possession of the property

2. Preferencesa) BT as representative of UCs has the power to avoid certain transactions – called

preferences – that occurred during the filing of bankruptcyb) as individuals approach bankruptcy, they typically pay off family and friends first

before other Cs…where Czar has $100 in assets and owes Mom $100 and AmEx $100…Czar is much more likely to give Mom the $100 then declare bankruptcy, thus AmEx gets screwed b/c Czar preferred his Mom over them

*everything other than a pro rata split is a preference for one side or the other

c) theory is that at time when D is insolvent, the D has obligation to be fair to all of his Cs and not show a preference…historically, all states have “preference

laws”…bankruptcy code now gives BT the power to sue “Mom” for

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transactions that occurred prior to filing of bankruptcy that had the effect of preferring Mom over other Cs

d) if D grants Mom a security interest in the amount she is owed, Mom is able to get more than she would have gotten had D just filed bankruptcy or if he

would have given her a preference over other Cs…however, again the bankruptcy code allows the BT to avoid security interests granted on account of a pre-existing debt…BT can file a lawsuit to avoid such a transaction

*even if secured interest is granted on day 0, money is loaned, on day 30 SC perfects security interest and on day 35 D files

bankruptcy, BT can still avoid the transaction...intent does not matter

e) Get Two Questions from E. Mills that Czar said would be two good exam questions

III. SCs Against SCs (p.519-35)1. General Rule

a) basic rule is that, in a competition b/t two SCs, the first to file or perfect their security interest wins…compare this to a competition b/t a SC and a lien holder

where the “first to perfect wins”b) in other words, the priority date of a security interest is the date of filed financing

statement or perfected by possession, whichever date is earlier*on 12/1, B1 files financing statement against the collateral of D, but B1

does not lend any money nor enter into any security agreement (this means the security interest has not attached)

*on 12/5, B2 files financing statement against the same collateral and perfects by entering into a security agreement w/ the D and

lending money*on 12/10, B1 perfects by entering into a security agreement w/ the D and

lending money*B1 has priority b/c rule is first to perfect OR file

c) b/c of the possibility that a SC has taken possession of collateral before subsequent SC takes security interest in the collateral, subsequent SC should ALWAYS

go look at the collateral…remember, SC can perfect security interest by taking possession of collateral which will not show up on Art 9 filings…in addition to looking at collateral, SC should also ask D if anyone else has a security interest in the collateral (remember, perfecting by possession does not necessarily mean physical possession, it may just be control)

2. Priority in PMSIs (all collateral except inventory)a) PMSIs in collateral other than inventory has priority over a conflicting security

interest in the same collateral if the PMSI is perfected not later than 20 days after the D receives possession of the collateral

*PMSIs give the holder priming liens*DO NOT get this rule confused w/ PMSI Rule that applies to consumer

goodsb) HYPO:

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*B1 files financing statement against all after-acquired equipment of D on 2/1…on 7/1 PMS sells computer to D, delivers possession, and

retains a PMSI…on 7/20 PMS perfects by filing a financing statement…PMS has priority over B1 in regards to this computer

c) this rule seems to violate principle of “first in time, first in right”…but the PMSI is “first” in another sense, it either supplied the collateral or made advances

to enable the D to acquire the collateral…PMSI priority can be understood as recognizing that the purchase-money lender has a relationship w/ the

collateral before the “after-acquired” SC doesd) this exception merely excuses the purchase-money lender from going through a straw-

man transaction whereby the purchase-money lender insists that a straw man take title to the collateral and grant a perfected PMSI, before transferring the collateral to the D…the D then would have taken title subject to an already perfected PMSI and the after-acquired SC’s interest would not have been though to be first in time

e) what about when two PMSIs are in competition?*purchase money security interest that is selling the collateral wins (p.526-27)

3. PMSIs in Inventorya) SC who is a PMSI in inventory can obtain priority but SC must jump through several

hoops to get there, basically to prove that the pre-existing inventory financer knows and approves of the PMSI transaction

b) it is not enough to simply perfect w/in 20 days…p.528, comply with special timing and notice provisions: 1. The purchase-money financier must perfect before the

debtor receives possession of the collateral, and2. The purchase-money financier must give advanced notice to the

inventory lender that it expects to acquire a PMSI in inventory. To give this notice the purchase-money lender first searches the filing

system for the names and addresses of all secured parties w/ a filing against inventory of the type it plans to sell. The lender then sends the notice, typically by certified mail, to each of the inventory lenders. Like a financing statement, the notice expires at the end of 5 years. The purchase-money supplier can avoid expiration by repeating the notice at intervals of less than 5 years.

*no way to do this w/out having inventory lender involved

4. Purchase money priority flows through to proceeds. a) subject to exception with regard to inventory: PM priority in inventory flow through

only to chattel paper and instruments; does not flow through to accounts.

See problem 32-1

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IV. Sellers Against SCs (p.574-92)1. Limits of the After-Acquired Property Clause

a) Art 9 does not require that D be the owner of the collateral to grant a valid security interest in it, only that the D have “rights in the collateral”

b) competition b/t seller of goods (OU Press) and SC who has an interest in the goods (Bank)…Square Books buys a load of books from OU Press, check to OU

Press bounces…books are placed on shelves before check bounces…Bank financed Square Books w/ inventory serving as collateral

*Bank will be able to take the books OU Press sold to Square Books and was never paid for and sell them…if there is anything left

over when Bank gets done then OU Press will get that…price OU Press pays for being in the position of an UC

2. Rules Governing Title to Personal Propertya) “nemo dat”: one can not give what they do not have…D can only give an interest in

collateral which D has right inb) Czar parks his car on street…car is stolen and thief sells car to innocent widow…Czar

then sues innocent widow for possession of car*Czar wins b/c thief had “void” title

c) Czar sells to Meyers…Meyers check bounces…prior to check bouncing, Meyers sells to innocent widow…Czar sues innocent widow for possession of car*innocent widow wins b/c law recognizes that Meyers had “voidable title”

which is sufficient to convey title…Czar’s remedy here is to sue Meyers

*innocent widow is bona fide purchaser…this is the same relationship as b/t Square Books, OU Press, and Bank

*person with voidable title can pass good title to a good faith purchaser for value

d) this is the rule b/c Czar voluntarily chose to deal w/ Meyers and Czar is in a better position to monitor Meyers than innocent widow is

3. Rules Governing Security Interests in Personal Propertya) a good faith purchaser for value defeats the claim of an unpaid seller…UCC defines a

SC as a “good faith purchaser for value” by molding together several definitions

-purchaser: person who takes by purchase…when a SC acquires a security interest in collateral, the C is a purchaser of the

collateral and is eligible for whatever protections purchasers have under the law

-purchase: taking by mortgage, pledge, or any other voluntary transaction creating an interest in property

-good faith: honesty in fact (does not have to comport w/ reasonable commercial standards of fair dealing in the trade; this is the

revision, but only a few states have adopted it)-value: any consideration sufficient to support a K

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b) a SC can be a good faith purchaser of collateral for value even though the SC does not purchase the collateral in the ordinary sense of the word, has bad

intentions, and pays nothing for itc) SI holder who is honest in fact and gives value has an enforceable SI in the title of

collateral even though he only has voidable title in the debtor’s collateral.d) In re Samuels (p.577): CIT (SC) financed the inventory of Samuels (D)

slaughterhouse…Samuels bought cattle from Stowers (seller) over an 11-day period and paid for the purchases by check…on the 12th day, Samuels filed for bankruptcy…the check bounced and Stowers wanted his cattle back…CIT claimed the cattle under the after-acquired property clause in the security agreement

*Ct held that CIT was a good faith purchaser for value and defeated Stowers UC claim

*Congress subsequently passed a law allowing sellers of cattle to defeat the claim of a SC “good faith purchaser”

4. Suppliers/Sellers Against Inventory Secured Lendersa) p.578-79

5. Seller’s Weapons Against the After-Acquired Property Clausea) sellers have typically attempted to use one of 7 different methods to defeat SCsb) ultimately all of these techniques either fail or are extremely limited

1) PMSI -but in order to grant a PMSI in inventory, the D must have approval from

their lender (SC)2) Retention of Title

-however, unless seller files financing statement, then this secured credit will not be perfected and seller will again lose to SC

3) Consignment-Art 9 treats consignment as a PMSI in inventory

4) Right of Reclamation-even though seller has right of reclamation under Art 2, this will not

defeat the claim of a SC under Art 95) Express/Implied Agreement b/t Seller and SC

-typically Ds do not want to do this and if the seller requires this then D will take his business elsewhere

6) Equitable Subordination-there is nothing inequitable about feeding a lien

7) Unjust Enrichment-as long as SC is not encouraging transactions b/t the parties then claim

will not defeat SC’s claim

V. Buyers Against SCs (p.592-609)1. Authorized Disposition Exception

a) general rule is that a security interest continues in collateral

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b) however, if SC gives authorization for the D to sell the collateral then security interest does NOT continue in the collateral…the course of dealing b/t the D and

SC can affect whether SC is said to authorize the salec) Gretna State Bank (p.595): SC can be found to have authorized the sell even if the

security agreement specifically prohibits such a sell…Bank had security interest in D’s hogs and cows which were farm products…security agreement prohibited the sale of the collateral w/out the prior written consent…D sold some cattle w/out consent and the bank sued the buyer

*Ct held that the bank’s security interest did not continue in the cattle after the sale b/c the sale was authorized…Ct relied on the fact that the

D previously had sold cattle and hogs w/out bank’s written consent, bank knew about many of these sales, and

the bank had not objected t o them or rebuked the D for making them…thus the bank had thereby waived the security agreement provision requiring written consent

2. Buyer in the Ordinary Course of Business (BIOC)a) the law favors SCs in almost every transaction, however, the law favors buyers in the

ordinary course of business even moreb) think of this as grocery store…SC has security interest in inventory of grocery store,

however, you as the BIOC are not going to demand to see the store’s security agreement when you buy cereal in order to determine if the sale was authorized…you are not worried that the SC is actually going to come to your home and seize your Frosted Flakes

c) BIOC: a person that buys goodsa) in good faith w/out knowledge that the sale violates the rights of another person

in the goods, andb) from a person (seller) in the ordinary course of business

d) BIOC defeats the claim of a SC if:1) BIOC takes free of 2) perfected security interest created by the buyer’s seller

*big deal, security interest must stem from seller (see supra (g))3) even if the security interest is known by buyer

e) although it appears that the knowledge of the buyer is vital here, actually all we are concerned w/ is that the buyer does not know that the sale violates another

person’s security interest…the buyer can know that there is a pre-existing security interest but what buyer can’t do is know of a condition in the D’s security agreement that restricts some activity and then engage in that activity w/ D

f) make no mistake, the SC is free to and will go after the proceeds of the sale of the collateral that the D has…this rule does not affect the rights of SC to do so

g) HYPO:*Bank holds security interest in all personal property owned by DW,

including its single traffic light, to secure a loan for $90M…DW sells the traffic light to Linda in a sale that is not in the ordinary course of DW’s business…as previously noted, Linda takes subject to Bank’s security interest…

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not realizing the traffic light is encumbered, Linda sells to Neiman Marcus in a sale that is in the ordinary course of business…although Neiman Marcus is a BIOC, the security interest in the traffic light was not created by the buyer’s seller (Linda) rather the security interest was created by DW so NM takes subject to Bank’s security interest

f) farm-products exception: Art 9 affords no protection to those who buy farm products, however, Congress passed a law which protects them

g) Daniel (p598): when do purchasers who have made payment on a car but not taken title become protected from security interest created by the seller...Ct held

that buyer can become good faith purchaser prior to title passing, either:(1) date of initial K(2) date the goods are identified(3) date title passes to purchaser(4) date the purchaser gets delivery(5) date the purchaser accepts the goods

*after this decision, UCC defined this such that “only a buyer that takes possession of the goods or has a right to recover the goods from

the seller under Art 2 may be a BIOC’

3. Consumer to Consumer Sale Exception (Garage Sale Exception)a) does not only apply to garage sales, but this is what the drafters had in mind…the

BIOC exception does not apply b/c seller here is not in the ordinary business of selling such property

b) Steve offers to sell his riding lawn mower to Tom for $600…if Sears holds a security interest in the lawn mower that is perfected by filing and Sears has not

authorized the sale, Tom will get the lawn mower subject to Sears’ security interest…this is b/c Steve does not deal in lawn mowers

c) however, a buyer of goods from a person who used or bought the goods for use primarily for personal, family or household purposes takes free of a

security interest, even if perfected, if the buyer buys:(1) w/out knowledge of the security interest;(2) for value;(3) primarily for the buyer’s personal, family, or household purpose; and(4) before the filing of a financing statement covering the goods

d) this exception does not affect transactions where there is a financing statement on file but if there is no financing statement on file, buyer takes free of any

security interests…this is weird but this is the rule

VI. Statutory Lien Cs Against SCs (p.609-30)1. Statutory Liens in Personal Property

a) statutory liens arise purely by operation of statute-although consensual liens and judicial liens also arise by statute, both of these

type liens can also arise by judgment, whereas a statutory lien can not arise by judgment

b) statutory liens arise automatically by statute due to the relationship b/t the parties

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-state legislatures have determined that due to either political reasons or the special nature of the work that certain individual’s are involved in

and the position that such work places them in relation to SCs, they deserve more protection than the normal UC

c) types of statutory liens are:-artisan liens -mechanic’s liens -garage keeper’s liens -inn keeper’s liens, etc.-mechanic’s liens include liens that arise due to any work done by any person on

any property (real or personal)d) situations lends itself to D complaining about bill or refusing to pay it

2. Priority of Statutory Lien Holdersa) what this means in regards to Art 9 is that…*priority as b/t a statutory lien and other liens depends first on the statute that

creates the lien…after all, the state legislature is the same body that passes Art 9 so they have the authority to say this particular lien trumps any other type of lien (p.619)

b) default rule: possessory statutory lien holder has priority over SC*Art 9 §333 addresses the issue of priority where the statute creating the

statutory lien does NOT address priorityc) agricultural liens (farmer purchases seed from co-op and says he will pay when crop

comes in…state legislature grants seller a lien in the cotton crop…assume also that farmer has granted a security interest in the crops to a local bank as well…if crop comes in and is not enough to satisfy the debt to the co-op or bank, there will be a competition for the collateral)

*state legislatures grant statutory liens to seed sellers or anyone else extending credit to farmers

*Revised Art 9 changes rule a bit…requires in order for statutory lien to be perfected, an agricultural lien holder must file a financing

statement and in competition w/ a consensual SC, the first to file wins

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