Problem 1
• 2013: You applied to borrow $10K from First Bank
Assignment 6
– First Bank filed a UCC-1 covering your wine collection
(the expected collateral), but you did not borrow the
money and did not sign a security agreement
• Mar. 2015: You borrowed $25K from Boone Bank
Understanding the Relationship
Between Attachment and Perfection
(and the Difference Between Them);
The Composite Documents Rule
• Boone Bank’s SI was “first to attach” (First Bank
didn’t have a SI until Sept. 2015)
• Boone Bank’s SI was “first to be perfected” — First
Bank had already filed its UCC-1, but a SI cannot
be perfected until it has attached [§ 9-308(a)]
• BUT, First Bank’s SI has priority
– (a) First Bank now has a SI in the wine collection, and
– (b) First Bank was first to file a UCC-1 covering the
wine collection [§ 9-322(a)(1)]
• Priority between conflicting SIs in same collateral is
based on “first to file or perfect” rule [§ 9-322(a)(1)]
– You signed security agreement covering wine collection
– Boone Bank filed UCC-1 covering wine collection
• Sept. 2015: You borrowed $40K from First Bank to
buy a car
– You signed a security agreement covering the wine
collection and the car
• Who has first priority in the wine collection?
• Problem 1 demonstrates that
a secured party can “pre-file”
a UCC-1 financing statement
(before a SI attaches) [§ 9502(d)]. Why do this?
“Pre-filing”
– Convenience: there’s no
“gap” between attachment
and perfection
– Priority: stakes out priority
vs. other potential secured
creditors [§ 9-322(a)(1)]
1
§ 9-509(a) [Person entitled to file record.] A person may file
an initial financing statement, amendment that adds collateral
covered by a financing statement, or amendment that adds a
debtor to a financing statement only if:
Signature/Authentication
• Old Article 9: debtor had to sign a UCC-1 before
secured party could file it (“paper” system)
• New Article 9: UCC-1 is not “signed”; secured
party can file a UCC-1, but only if debtor has
authorized secured party to do so [§ 9-509(a)]
– If debtor’s authenticates a security agreement, that
authorizes the secured party to file a UCC-1 that
covers the collateral described in the security
agreement [§ 9-509(b)]
• Thus, in Problem 1 (where First Bank was “prefiling”), First Bank would have had the authority to
file the UCC-1 only if
– You had signed a security agreement covering the wine
collection (which you didn’t), or
– You had authenticated a record authorizing First Bank to
file a UCC-1 covering the wine collection
• If First Bank filed the UCC-1 without authority to do
so, that filing is not effective [§ 9-510(a)]
– Secured party that files unauthorized filing is liable for
any actual damages that result, and for a $500 penalty
even if there are no actual damages! [§ 9-625(e)(3)]
(1) the debtor authorizes the filing in an authenticated
record or pursuant to subsection (b) or (c) ….
§ 9-509(b) [Security agreement as authorization.] By
authenticating or becoming bound as debtor by a security
agreement, a debtor or new debtor authorizes the filing of an
initial financing statement, and an amendment, covering:
(1) the collateral described in the security agreement; and
(2) property that becomes collateral under Section 9315(a)(2), whether or not the security agreement expressly
covers proceeds.
• Suppose Bank is going to make a
loan to Debtor, secured by a SI in
all of Debtor’s inventory
– Bank asks Debtor to authorize
the filing of UCC-1 that
describes the collateral as “all of
Debtor’s inventory, accounts,
chattel paper, and instruments”
• Why would Bank want to
describe the collateral this way,
rather than just “all of Debtor’s
inventory”?
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• Here, an “overbroad” filing may be justified
– Bank knows Debtor will sell some inventory in
credit sales, which may produce proceeds in the
form of “accounts,” “instruments,” and “chattel
paper,” in which Bank will have a SI in those
proceeds [§ 9-315(a)(2)]
• If UCC-1 covers “accounts,” “instruments,”
and “chattel paper” too, Bank can be sure its
SI in proceeds will also be perfected
• Note: Debtor could refuse to authorize filing
of “overbroad” UCC-1
– Debtor’s concern: filing vs. “accounts” could
limit the Debtor’s ability to obtain future credit
using those types of property as collateral
• If Debtor does refuse, Bank must decide
whether to (1) go forward with loan with
UCC-1 containing “narrower” description, or
(2) refuse to make the loan
• But, before Bank can file this “overbroad” UCC-1,
Bank must have the Debtor authorize that UCC-1 to
be filed, in a separate authenticated record
– Problem: Debtor’s execution of security agreement would
only authorize filing covering “inventory” [§ 9-509(b)]
• If Bank files it without authorization, then
– Bank faces penalty for filing unauthorized UCC-1 [§ 9625(e)(3)], and
– UCC-1 is not effective to extent it is unauthorized (i.e.,
wouldn’t cover anything other than inventory) [§ 9-510(a)]
Laminated Veneers
• Security agreement description: “all chattels,
machinery, equipment … now at the plant of
[Debtor] … and all chattels, machinery, fixtures
or equipment that may hereafter be brought in
or installed on said premises” [fn. 1, p. 3]
• Court held: SI did not attach to two cars owned
by the Debtor and located at the plant
• The Court was WRONG. Why?
3
• In Laminated Veneers, the court is
confusing the significance of attachment (a
two-party issue) and perfection (which
involves the interests of third parties)
– It is not obvious why the interests of third
parties should be taken into account when
interpreting the intent of the debtor and the
secured party as manifested in the security
agreement (a two-party issue)
Laminated Veneers: The Proper View
• “All equipment” is not ambiguous
– As long as the cars were (1) owned by Debtor; (2)
located/used at the plant; and (3) not held for sale/lease,
the cars are reasonably identified by “all equipment”
• Financing statement, not the security agreement, is
the primary source of a potential creditor’s inquiry
– Remember Problem 1: could Boone Bank have relied
on the fact that at the time of Boone Bank’s loan, First
Bank had not yet taken a SI in wine collection? NO!
Problem 3
[The] automobiles would fall within [“equipment”] if
the definition … governed for purposes of the security
agreement. The classifications …, however, are intended
primarily for the purposes of determining which set of
filing requirements is proper.
We look rather to [UCC § 9-108] which requires that the
description of personal property “reasonably identif[y]”
what is described. The conclusion that greater specificity is
required finds additional support in UCC § 9-203 … which
provides that the security agreement must contain a
“description” of the collateral. Certainly the word
“equipment” does not constitute a description of the
Oldsmobiles. Unlike a financing statement which is
designed merely to put creditors on notice that further
inquiry is prudent, the security agreement embodies the
intentions of the parties. It is the primary source to which
a creditor’s or potential creditor’s inquiry is directed
and must be reasonably specific. [page 4]
Bubba Charles
Putnam County Bank
5 Broadway, Putnam, XX 21940
Holt
12 Main Street
Alice
Putnam
XX 21940
Putnam
XX 21940
Putnam County Bank
5 Broadway
All of the Debtor’s restaurant equipment
Alice Holt
Alice Holt
By itself, does this UCC1 constitute an effective
security agreement?
4
• By itself, this signed UCC-1 cannot constitute
a valid security agreement
– It is authenticated by Alice, and it does describe her
restaurant equipment sufficiently (“all of the
debtor’s restaurant equipment”)
– But the UCC-1 form doesn’t state that the form is
creating a SI in the equipment, or that Alice has
already granted a SI in it by some other document
– Plus, a UCC-1 can be “pre-filed,” so the fact the
Bank filed the UCC-1 doesn’t prove Bank and
Alice have already entered a security agreement!
The Purpose of the UCC-1
• The primary purpose of a UCC-1 is to notify
3d parties of the possibility that a secured party
(a) has taken a SI in the described collateral, or
(b) may take a SI in it in the future
– Message to 3rd parties: the debtor may have
granted a SI in the collateral already, or may do so
in the future, so deal w/debtor at your own risk
regarding the described collateral
“Best Practices”
• Deviations from best practices may include:
• Goal for secured lenders is to document
loan transactions by “best practices”
• “Best practice” is to have the debtor
manifest its intent to create a security
interest in a written, integrated “Security
Agreement” authenticated by the debtor
(and complying with § 9-203 requirements)
• When these deviations occur, to what extent
can the Secured Party resort to extrinsic
evidence to prove it has a valid security
interest?
– Otherwise complete and accurate “Security
Agreement” is prepared, but never signed by the
debtor
– “Security Agreement” is prepared and signed, but
omits some of the intended collateral
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Problem 4
• Diamond Furniture owed $258,000 to Atlantic
Commercial Finance (ACF), and was in default
• “Letter agreement” comprehended a security agreement
covering all of Debtor’s accounts, inventory, and
equipment
– ACF filed UCC-1 covering accounts, inventory, equipment
• ACF prepared note, security agreement for signature, but
it was never actually signed by Diamond Furniture,
which has now filed bankruptcy
• Does ACF have a valid SI
in the accounts, inventory,
and equipment of
Diamond Furniture?
• Or does ACF’s failure to
obtain execution of a
formal security agreement
mean that ACF does not
have a valid SI?
Problem 4
ACF (Creditor) and Diamond Furniture, Inc. (Debtor)
conceptually agree as follows: (1) Debtor
acknowledges its debt to Creditor of $258,000. (2)
This indebtedness shall be evidenced by an
installment note, secured by a lien on all of Diamond
Furniture’s accounts receivable, inventory, and
equipment, now-existing or after-acquired, which
shall be evidenced by a standard form security
agreement and shall be perfected by the filing of a
financing statement to be filed upon the signing of
this letter. (3) When signed by Debtor, this letter will
form the basis for Creditor to prepare an installment
note and security agreement, and to prepare and file a
financing statement. (4) Debtor acknowledges that
this agreement is in lieu of Creditor’s filing suit to
obtain a judgment against Debtor. [Signatures]
“Composite Documents” Rule
• Problem 4 is comparable to Bollinger, in
which the court found a security agreement in
a “set” of several different documents:
– A promissory note (signed by debtor, which recited
that the debt was intended to be secured by a
formal security agreement)
– A UCC-1 financing statement (signed by debtor)
which included a description of the collateral, and
– Correspondence from Debtor to lender, which
identified the intended collateral [p. 8]
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The “security agreement”
• § 9-203(b)(3): there must be an effective
“security agreement” covering the collateral
• Usually, this “agreement” is entirely contained
within the “4 corners” of an “integrated”
document entitled “Security Agreement”
– However, the “agreement” can be evidenced by a
combination of writings, supplemented by context of
the parties’ relationship and their course of dealing
(“composite documents” rule, as in Bollinger)
Martin Grinding & Machine Works
• Debtor got SBA loan for $350K from Bank
– Most of documents (including filed UCC-1) identified
collateral as: “all of debtor’s machinery, equipment,
furniture, fixtures, inventory, and accounts, incl. afteracquired”
– Due to clerical error, the “Security Agreement” used
description = all “machinery, equipment, furniture,
fixtures” (i.e., it omitted inventory and accounts)
• After bankruptcy, Debtor argued that Bank did not
have a valid SI in Debtor’s inventory or accounts
• In Problem 4, a court could say that a
sufficient “security agreement” exists:
– Signed letter agreement acknowledges the debt
(giving of value by secured party)
– Signed “letter agreement” indicates intent to
grant SI in all accounts, inventory, equipment
– Formal “Security Agreement” document was
prepared with that description
– Debtor authorized filing of UCC-1, and filed
UCC-1 described intended collateral
Martin Grinding & Machine Works
• Held: Bank had no SI in Debtor’s inventory and
accounts
– Court: Bank can’t introduce extrinsic evidence to
enlarge the collateral description in what is an
otherwise unambiguous security agreement
– Ostensible rationale: it’s good commercial policy
to facilitate certainty, and thus to protect reliance
interests of subsequent creditors
7
“[I]f parol evidence could enlarge an unambiguous
security agreement, then a subsequent creditor could
not rely upon the face of an unambiguous security
agreement to determine whether the property described
in the financing statement, but not the security
agreement, is subject to a prior security interest. . . .
The examination of additional documents, which the
admission of parol evidence would require, would
increase the cost of, and inject uncertainty as to the
scope of prior security interests into, secured
transactions. Therefore, although the rule excluding
parol evidence works results contrary to the parties’
intentions in particular cases, it reduces the cost and
uncertainty of secured transactions generally.” [p. 12]
Is Martin Grinding’s reasoning sound?
Martin Grinding
• Court suggests that 3rd party can “rely” upon
the contents of the Security Agreement in its
investigation, even though the collateral
description in UCC-1 is broader
• That’s WRONG (as in Laminated Veneers)
• 3rd parties must act based on the contents of
the financing statement, NOT the security
agreement (as Problem 1 demonstrates)
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