Assignment 9:
Temporary Perfection and
Perfection of Security Interests in
Proceeds
Reference: Understanding Secured
Transactions Ch. 6
Possible Approaches
• (1) Post-transaction change that renders a
UCC-1 misleading results in an immediate loss
of perfection (rejected by UCC drafters)
• (2) Temporary perfection period, with secured
party required to “cure” problem during grace
period to maintain continuous perfection
• (3) Secured party remains continuously
perfected despite change (searcher bears risk)
Post-Transaction Changes
• Post-transaction changes can
trigger a new “ostensible
ownership” problem
– E.g., Bank takes SI in the jewelry
of Chad Johnson, files UCC-1
covering jewelry
– Later, Johnson changes his name
to Chad Ochocinco
• 3d parties now dealing with
“Chad Ochocinco” may not
locate Bank’s filed UCC-1!
Temporary Perfection
• Article 9 provides the secured party with a
“grace period” of “temporary perfection” in
the event of certain post-transaction changes
– After the grace period expires, perfection “lapses,”
unless secured party has taken steps during the
grace period to maintain continuous perfection
• One such situation involves sale of collateral
that produces a security interest in proceeds
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Problem 2(a)
• Last year, First Bank made a loan to Dave’s
Appliance (DA)
– DA granted SI in “all of Debtor’s inventory, including
after-acquired”
– First Bank filed UCC-1 covering “Debtor’s inventory”
• DA later sold fridge to Wells, who signed
installment K (under which DA took SI in fridge)
• Installment K is “chattel paper” and is “proceeds” of
inventory, in which First Bank has SI [§ 9-315(a)].
But is it perfected?
§ 9-315. Secured Party’s Rights on Disposition of
Collateral and in Proceeds.
(a) Except as otherwise provided in this article and in
Section 2-403(2) . . . (2) a security interest attaches to any
identifiable proceeds of collateral....
(c) [Perfection of security interest in proceeds.] A
security interest in proceeds is a perfected security
interest if the security interest in the original collateral
was perfected. [BUT TEMPORARILY. See (d)]
(d) [Continuation of perfection.] A perfected security
interest in proceeds becomes unperfected on the 21st day
after the security interest attaches to the proceeds unless:
Perfection as to Proceeds
• Problem: First Bank’s UCC-1 doesn’t
cover DA’s “chattel paper”
– First Bank’s UCC-1 filing covered only
“inventory,” not “chattel paper”
• Should First Bank have to “fix” this
problem to maintain its perfected status as
to Wells contract (“chattel paper”)?
(1) the following conditions are satisfied:
(A) a filed financing statement covers the original
collateral;
(B) the proceeds are collateral in which a security
interest may be perfected by filing in the office in which
the financing statement has been filed; and
(C) the proceeds are not acquired with cash
proceeds;
(2) the proceeds are identifiable cash proceeds, or
(3) the security interest in proceeds is perfected other
than under subsection (c) when the security interest
attaches to the proceeds or within 20 days thereafter.
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Perfection as to Proceeds
• If SI in original collateral was perfected, SI in
proceeds remains temporarily perfected for 20 days
[§ 9-315(c), (d)]
• [§ 9-315(d)] For SI in proceeds to remain
continuously perfected after day 20, secured party
must:
– (1) Qualify for the “same office” rule, or
– (2) Proceeds must be “identifiable cash proceeds,” or
– (3) Have a filed UCC-1 covering the proceeds
Problem 2(a)
• B/c SI in inventory was perfected by filing, SI in
chattel paper (proceeds) is temporarily perfected
for 20 days after the sale [§§ 9-315(c), (d)]
• After that, First Bank’s SI remains continuously
perfected under “same office rule” [§ 9-315(d)(1)]
– Original UCC-1 was filed in Secretary of State’s office
– Filing vs. “chattel paper” would occur in same office
– Thus, no new filing is necessary (even though the
original filing didn’t cover “chattel paper”)
(1) the following conditions are satisfied:
(A) a filed financing statement covers the original
collateral;
(B) the proceeds are collateral in which a security
interest may be perfected by filing in the office in which
the financing statement has been filed; and
(C) the proceeds are not acquired with cash
proceeds; [THE “SAME OFFICE” RULE]
(2) the proceeds are identifiable cash proceeds, or
(3) the security interest in proceeds is perfected other
than under subsection (c) when the security interest
attaches to the proceeds or within 20 days thereafter.
“Same Office” Rule: Rationale
[Understanding, pp. 194-195]
• “The basic idea is that in certain common
financing transactions, a searcher should recognize
that a particular type of described collateral will
yield a particular type or types of undescribed
proceeds....”
– E.g., Debtor’s sale of “inventory” often produces
accounts, instruments, or chattel paper
– Thus, First Bank’s UCC-1 filing vs. “inventory”
should alert a searcher that First Bank might claim a
SI in accounts, instruments, or chattel paper
generated from Debtor’s sale of inventory
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Problem 2(b)
• First Bank has SI in all inventory of Dave’s
Appliance (DA)
– First Bank filed UCC-1 covering “Debtor’s inventory”
• DA later took a dishwasher from its inventory and
traded it to Farm Power Lawn & Leisure in
exchange for a riding lawn mower (to mow the lawn
around the store)
• Lawn mower is “equipment” and is “proceeds” of
inventory, in which First Bank has SI [§ 9-315(a)].
But is it perfected?
Problem 2(c)
• First Bank has SI in all inventory of Dave’s
Appliance (DA)
– First Bank filed UCC-1 covering “Debtor’s inventory”
• DA later took a walk-in freezer from its inventory
and traded it to Sue’s Auto in exchange for a used
delivery van (for customer deliveries)
• Van is “equipment” and is “proceeds” of inventory,
in which First Bank has SI [§ 9-315(a)]. But is it
perfected?
Problem 2(b): “Same Office” Rule
• Yes, under “same office” rule
– While a searcher could reasonably infer that
“inventory” might be sold to produce accounts,
instruments, or chattel paper, it is less intuitive for a
searcher to appreciate or infer that inventory might be
“swapped” for equipment
• Nevertheless, the “same office” rule applies
equally to both situations
• SI in van will be temporarily perfected for 20
days
• After that, it is not perfected under the “same
office rule”
– Perfection vs. inventory is by filing in UCC-1
filing office
– Perfection vs. van is by compliance with certificate
of title statute (different system)
• To maintain continuous perfection, Bank must
apply to have its lien noted on title certificate
within 20 day temporary perfection period
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Problem 2(d)
• First Bank has SI in all inventory of Dave’s
Appliance (DA)
– First Bank filed UCC-1 covering “Debtor’s inventory”
• DA sells new grill/oven/stove to Smith for $3,000
cash
• DA uses $3,000 in cash to buy new furniture for the
employee break room
• Furniture is “equipment” and is “proceeds” of
inventory, in which First Bank has SI [§ 9-315(a)].
But is it perfected?
• Bank’s SI attaches to the $3,000 cash proceeds of
the stove [§ 9-315(a)(2)]
• Bank’s SI in $3,000 cash was continuously
perfected [§ 9-315(d)(2)]
• In turn, Bank’s SI attaches to furniture as
identifiable proceeds of the $3,000 cash [§ 9315(a)(2)]. Is it perfected beyond 20 days of
temporary perfection?
– “Same office” rule doesn’t apply (b/c furniture was
acquired with cash proceeds
– Was original UCC-1 sufficient to perfect as to the
furniture? No, because it described only “inventory”
– Thus, to remain continuously perfected after 20 day
grace period, Bank must amend its UCC-1 to cover the
furniture! [§ 9-315(d)(3)] If not, its perfection will lapse!
The “Cash Phase” Rule: Rationale?
• When 3rd party searcher asks DA “where did you
get the furniture?,” if DA is honest, DA will
respond, “We paid cash.”
• Practically, it is too difficult for a 3rd party to trace
(a) which cash DA used to buy the furniture, and
(b) whether that specific cash was proceeds of the
grill that was covered by the prior filed UCC-1
– Thus, Bank should have to amend its prior filing to
remain perfected after 20 days
– Note: Bank wouldn’t have needed to amend its
initial UCC-1 if initial UCC-1 description had used
a broader collateral description (e.g., “consumer
goods” or “all of Debtor’s assets”)
• NF has SI in six Leroy Neiman
paintings owned by Abrams and
exhibited at Sports Museum
Problem 1
– Sports Museum is holding possession
as agent of NF, as per § 9-313(c)
• Smith proposes to buy painting for
$100,000, NF consented to sale,
painting was released to Abrams so
that he could deliver it to Smith
• Before delivery/sale was completed,
sheriff seized the painting on behalf
of Crouch (who had $100,000
judgment vs. Abrams)
• At time of levy, was NF perfected?
Leroy Neiman, Sandy Koufax
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• If SI is perfected only by possession, perfection
lapses if secured party gives up possession of
the collateral [§ 9-313(d)]
• At time of levy, NF’s SI was unperfected — and
would thus be subordinate to Crouch’s rights as
a lien creditor, § 9-317(a)(2) — unless NF could
claim perfection in some other way
– Filing of a UCC-1 would’ve been sufficient
– Temporary perfection for 20 days without filing [§ 9312(f)]; if levy occurred during that 20 days, NF’s SI
was still perfected (and still had priority over
Crouch’s rights as lien creditor)
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