Choice of Law
Assignment 17
Maintaining Perfection and Priority
III: Multi-State Transactions,
Choice of Law, and Changes in
Governing Law
Choice of Law: Example
• Debtor (MO resident) and Bank (organized
under IL law) could agree that their transaction
would be governed by IL law
• But perfection of Bank’s SI in Debtor’s
collateral is governed by MO law [§ 9-301, 9307], PERIOD
– Thus, a UCC-1 filing in Illinois would NOT be
sufficient to perfect Bank’s SI
• Debtor and secured party can choose what
state’s law they wish to have govern their
agreement, as long as that state has a
“reasonable relationship” to the transaction [§
1-301(a)]
• BUT, a choice of law agreement cannot
control what state’s law governs perfection [§
1-301(c)(8)]
Problem 1
• BIC is extending a line of credit to Cranky Oil, Inc.
(a corporation organized under Oklahoma law, w/
its wells located in Texas). Collateral includes:
– All of Cranky Oil’s equipment
– The oil being extracted from its wells
– Accounts arising from sales of oil to ExxonMobil
• Where would BIC need to file to perfect its SI in
this collateral?
1
• General rule: perfection is governed by law of
state where debtor is located [§ 9-301(1)]
– Cranky Oil, Inc. located in OK, state of incorporation
[§ 9-307(e)], so BIC would file as to equipment and
accounts in OK central filing office [§ 9-501(a)(2)]
• Exception: perfection as to “as-extracted
collateral” (oil) is governed by the law of state
where wellhead is located [§ 9-301(4)]
– Thus, BIC would file as to oil by filing UCC-1 in TX,
in the local county recorder of deeds office [§ 9501(a)(1)] (real estate-related collateral)
• General rule: perfection is governed by law of
state where debtor is located [§ 9-301(1)]
• Exception: perfection as to goods that are
“timber to be cut” is governed by law of state
where the timber is located [§ 9-301(3)(B)]
– Thus, BIC would file as to timber by filing a UCC1 in Oregon and Idaho, in the office of each county
recorder of deeds where timber is growing [§ 9501(a)(1)] (real estate-related collateral)
Problem 1
• BIC making loan to Cranky Lumber, a
partnership of Stan and Bob Cranky, with its
main office in Columbia, MO. Collateral
includes:
– Timber cut and to be cut from Oregon and Idaho
timberland on which it holds timber rights, and
– Accounts arising from timber sales
• Where would BIC need to file to perfect its SI
in this collateral?
• As to Debtor’s accounts, BIC must file in
state where Debtor is located
– Debtor here is a general partnership (not a
registered organization)
– A nonregistered organization is located:
• At its place of business, if it has only one
• At its chief executive office, if it has more than one
[§ 9-307(b)(2), (3)]
• Most likely result: Cranky Lumber is
located in Missouri
2
Review: Law Controlling Perfection
• Titled goods: perfection is governed by law of state
under whose certificate of title the goods are
presently covered [§ 9-303(c)]
• Regular goods: perfection is governed by law of
state where debtor is located [§ 9-301(1)]
– Debtor location rules in § 9-307
• Ag liens: perfection is governed by law of state
where crop is growing [§ 9-302]
• Real-estate related collateral (fixtures, standing
timber, as-extracted collateral): perfection is
governed by law of state where land is located [§ 9301(3)(a), (b), 9-301(4)]
Ostensible Ownership and the
“Multiple State” Problem
• Bank has SI in Debtor’s stamp collection, perfected
by a UCC-1 filing in MO (where Debtor lives)
• Debtor moves from MO to GA
• 3d parties dealing with Debtor in GA are not likely
to discover UCC-1 filing in MO
• How to solve this problem, w/out having one
national filing system?
§ 9-316. Continued Perfection of Security Interest
Following Change in Governing Law
(a) [General rule: effect on perfection of change
in governing law.] A security interest perfected pursuant
to the law of the jurisdiction designated in Section 9-301(1)
... remains perfected until the earlier of:
(1) the time perfection would have ceased under the
law of that jurisdiction;
(2) the expiration of four months after a change of
the debtor’s location to another jurisdiction; or
(3) the expiration of one year after a transfer of
collateral to a person that thereby becomes a debtor and is
located in another jurisdiction.
§ 9-316(b) [Security interest perfected or
unperfected under law of new jurisdiction.] If a
security interest described in subsection (a) becomes
perfected under the law of the other jurisdiction before
the earliest time or event described in that subsection, it
remains perfected thereafter. If the security interest
does not become perfected under the law of the other
jurisdiction before the earliest time or event, it becomes
unperfected and is deemed never to have been perfected
as against a purchaser of the collateral for value.
3
• Perfection of SI is governed by law of state of
debtor’s location [§ 9-301(1)] (originally, MO)
– Bank was perfected by UCC-1 filed in MO
• As soon as Debtor relocated to GA, GA law began to
govern perfection of Bank’s SI, immediately
• But, Bank’s perfection doesn’t lapse immediately
– Bank has 4-month grace period of temporary perfection
[§ 9-316(a)(2)] under GA law (b/c it was perfected under
MO law)
– This gives Bank 4 months to file in GA to maintain
continuous perfection of its SI [§ 9-316(b)]
§ 9-301(1). Except as otherwise provided in this section,
while a debtor is located in a jurisdiction, the local law of that
jurisdiction governs perfection, the effect of perfection or
nonperfection, and the priority of a security interest in
collateral.
§ 9-307(b)(1). A debtor who is an individual is located at the
individual’s principal residence.
§ 9-307(b)(2). A debtor that is an organization and has only
one place of business is located at its place of business.
§ 9-307(b)(3). A debtor that is an organization and has more
than one place of business is located at its chief executive
office.
§ 9-307(e). A registered organization that is organized under
the law of a State is located in that State.
• Dana Green moves her
consulting practice, Green
Consulting LLC, from St.
Louis, MO to Chicago, IL
Problem 2
– Bank has a perfected SI in all
of the equipment and accounts
of Green Consulting LLC
(filed in MO)
• Does Bank have to file a new
UCC-1 in IL to maintain
perfection of its SI?
• Green Consulting LLC may have relocated
its actual business operations, but Green
Consulting LLC is a registered organization
(LLC) and thus has not actually “relocated”
– If Green Consulting LLC remains an LLC
organized under MO law, it remains located in
MO (and MO law still applies, so no new filing
needed!)
– If Green had formed a new LLC in IL, that new
LLC would be an entirely different legal entity!
4
§ 9-316. Continued Perfection of Security Interest
Following Change in Governing Law
• Bank loaned $200K to Gray;
secured by collateral:
Problem 3
– Bike (perfected by UCC-1
filing in MO)
– Bentley (perfected by notation
on COT issued by MO)
• July: Gray moved to NY
• It’s November; does Bank
still have a perfected SI in
the bike and the car?
• When Gray moved her primary residence to NY in
July, NY law immediately began to govern whether
Bank’s SI was perfected [§ 9-301(1)]
• Bank’s SI was temporarily perfected for 4 months,
because Bank’s SI was properly perfected under MO
law by UCC-1 filing in MO [§ 9-316(a)(2)]
• If Bank filed a new UCC-1 in NY during that 4 month
period, Bank’s SI remains continuously perfected
thereafter [§ 9-316(b)]
• If not, Bank’s perfection lapses [§ 9-316(b)], and
Bank’s security interest would no longer be perfected
(a) [General rule: effect on perfection of change
in governing law.] A security interest perfected pursuant
to the law of the jurisdiction designated in Section 9-301(1)
... remains perfected until the earlier of:
(1) the time perfection would have ceased under the
law of that jurisdiction;
(2) the expiration of four months after a change of
the debtor’s location to another jurisdiction; or
(3) the expiration of one year after a transfer of
collateral to a person that thereby becomes a debtor and is
located in another jurisdiction.
Problem 3: Bank’s SI in Bicycle
• If Gray moved on July 1, 4 month period grace
period of temporary perfection [§ 9-316(b)]
expired on November 1
• If Bank didn’t file in NY by that date, Bank’s
perfected status lapsed
– By contrast, if Gray moved to NY after July 4, 4
month period has not lapsed yet; Bank remains
temporarily perfected (and can obtain continuous
perfection by filing in NY)
5
• Suppose you are advising a New York bank
• Gray has approached the bank seeking a loan, and
offering the bicycle as collateral for the loan
• You conduct a search for filings in NY, and it
comes up clean (no UCC-1 filings in NY covering
bike against the debtor “Gray”)
• What do you have to do to account for the effect of
§ 9-316(a)?
– Confirm Gray has lived in NY for >> 4 mos.
– If not, you must identify Gray’s previous location,
and search for filings in that state
§ 9-316(b) [Security interest perfected or unperfected
under law of new jurisdiction.] If a security interest
described in subsection (a) becomes perfected under the
law of the other jurisdiction before the earliest time or
event described in that subsection, it remains perfected
thereafter. If the security interest does not become
perfected under the law of the other jurisdiction before
the earliest time or event, it becomes unperfected and is
deemed never to have been perfected as against a
purchaser of the collateral for value.
Bank takes SI in
Gray’s bike, files
UCC-1 in MO
Gray moves
to NY
6/1
2012
Problem 4:
Facts
Citi loans Gray
$25K, takes SI in
bike, files UCC-1
covering bike in
NY
Creditor
levies on bike
7/1 8/1 9/1
2015 2015 2015
As of Nov. 3, what
are the respective
priorities of PCB,
CitiBank, and
Creditor in Gray’s
bike?
11/1/2015: End
of Grace Period
§ 9-316(b) [Security interest perfected or
unperfected under law of new jurisdiction.] If a
security interest perfected in the debtor’s old state
becomes perfected in the debtor’s new state before the
applicable grace period in subsection (a) expires, it
remains perfected thereafter. If the security interest
does not become perfected in the debtor’s new state
before the grace period expires, it becomes
unperfected and is deemed never to have been perfected
as against a purchaser of the collateral for value.
6
• Citi would have priority over Bank
– 11/1/2015: 4 month temporary perfection lapsed,
Bank never filed UCC-1 in NY
– Bank’s SI deemed never to have been perfected vs.
Citi (a purchaser for value) [§ 9-316(b)]
• Bank still has priority over Creditor [§ 9317(a)(2)]
– When Creditor became lien creditor (9/1/15), Bank’s
SI was perfected [§§ 9-316(a)(2)]; no “retroactive
loss of perfection” vs. lien creditor [§ 9-316(b)]
Problem 4
• If Creditor had not levied on the bike until Nov. 2,
Creditor would have had priority over Bank
– Nov. 1, 2015: Bank’s perfection lapses when fourmonth period expires, Bank’s SI in bike is
prospectively unperfected [§ 9-316(b)]
– Creditor would thus obtain his judgment lien
before Bank had re-perfected its SI under NY law,
and would get priority under § 9-317(a)(2)(A)
Problem 3: The Car
Problem 3: The Bentley
• Bank loaned $200K to Gray,
secured by Gray’s Bentley
• Perfection of SI in titled vehicle is governed by the
state whose certificate of title covers the vehicle; in
this case, that’s MO [§ 9-303(b), (c)]
• Even if Gray moves to NY, MO law continues to
govern perfection, until the Bentley becomes
“covered” by a title certificate issued by another state
– SI perfected by notation on
COT (issued by MO)
• July 1: Gray moved to NY
• It’s November 3; is Bank’s SI
in Bentley still perfected?
– If Bentley has not become “covered” by another state’s
certificate of title, MO law still governs, and Bank’s SI
thus remains perfected!
7
Titled Vehicles
• If proper application is made in New York for
a title certificate covering the Bentley, then:
– MO law immediately ceases to govern perfection
of Bank’s SI in the Bentley [§ 9-303(b)]
– NY title certificate immediately covers the Bentley
[§ 9-303(b)]
– NY law immediately begins to govern whether
Bank’s SI in the Bentley is perfected [§ 9-303(c)]
• First Bank took PMSI in
Trucker’s truck
– Perfected by notation on COT,
issued by MO
• Trucker moved to Alaska, got
a “clean” COT from Alaska
• Trucker then got a loan from
Bank of Fairbanks, which took
a SI in the truck and noted it
on the Alaska title certificate
• Priority: First Bank vs. Bank
of Fairbanks?
Problem 5
Titled Vehicles
• Absent fraud, Gray should not be able to get NY to
issue a new certificate of title, unless Gray
surrenders the existing MO title certificate
– Most state titling agencies require surrender of old title
certificate before issuing a new one
– B/c Bank has old certificate, Gray couldn’t get new NY
title w/out Bank’s cooperation (unless by fraud)
– Bank could apply for new NY title for the Bentley (to
be issued with Bank’s lien noted on it), and thereby
maintain continuous perfection under NY law
Problem 5
• Once the truck becomes covered by the Alaska
certificate of title, then:
– MO certificate of title ceases to cover the truck [§ 9303(b)]
– AK law begins to control perfection of First Bank’s
SI in the truck [§ 9-303(c)]
– First Bank’s SI is not noted on the AK certificate of
title, but, First Bank’s SI in the truck remains
temporarily perfected anyway [§ 9-316(d)]
8
§ 9-316. Continued Perfection of Security Interest
Following Change in Governing Law
§ 9-316. Continued Perfection of Security Interest
Following Change in Governing Law
(d) [Goods covered by certificate of title from this
state.] Except as otherwise provided in subsection (e), a
security interest in goods covered by a certificate of title
which is perfected by any method under the law of another
jurisdiction when the goods become covered by a
certificate of title from this State remains perfected until
the security interest would have become unperfected under
the law of the other jurisdiction had the goods not become
so covered.
(d) [Goods covered by certificate of title from this
state.] Except as otherwise provided in subsection (e), a
security interest in goods covered by a certificate of title
which was perfected on the old State’s title certificate at
the time the new State issued its title certificate remains
perfected until perfection would have lapsed under the
law of the old State if the new State had not issued a
title certificate.
Rationale: First Bank should not lose its perfected status
just b/c Trucker wrongly obtained a new certificate of
title from another state (Alaska).
Rationale: First Bank should not lose its perfected status
just b/c Trucker wrongly obtained a new certificate of
title from another state (Alaska).
§ 9-316. Continued Perfection of Security Interest
Following Change in Governing Law
(e) [When subsection (d) security interest becomes
unperfected against purchasers.] A security interest
described in subsection (d) becomes unperfected as against a
purchaser of the goods for value and is deemed never to have
been perfected as against a purchaser of the goods for value
unless [the secured party re-perfects in this state] before the
earlier of:
(1) the time the security interest would have become
unperfected under the law of the other jurisdiction had the
goods not become covered by a certificate of title from this
State; or
(2) the expiration of four months after the goods had
become so covered.
First Bank takes SI
in Trucker’s truck,
notes lien on MO
title certificate
Bank of Fairbanks
loans Trucker $5K,
takes SI in truck,
has it noted on AK
title certificate
Trucker
moves to AK
Trucker gets
clean AK title
1/1
6/1
7/1
2011 2015 2015
7/2
2015
Problem 5
Trucker in 4 months
AK 4 months since new
AK title
issued
10/1
2015
11/1
2015
9
• Until Nov. 1, First Bank had priority over Bank of
Fairbanks (prior SI remained temporarily perfected)
– To remain continuously perfected, First Bank had to
perfect under AK law before Nov. 1
– When it didn’t, First Bank’s perfection lapsed on Nov. 1
and First Bank’s SI is deemed never to have been
perfected vs. Bank of Fairbanks (which would then
take priority) [§ 9-316(e)]
• How could First Bank have perfected under AK
law prior to November 1?
• How can First Bank protect against this risk?
• How can First Bank monitor? State title
systems index vehicles by VIN (vehicle ID
number), which is unique to each vehicle
– First Bank could search each state’s certificate of
title system, periodically, to see if a certificate has
been issued vs. the vehicle’s VIN
– First Bank could check NMVTIS (federal database)
– (more likely) First Bank could retain a VIN
monitoring service to alert it if another state issues a
new certificate covering vehicle with same VIN
Perfection as to Vehicle in New State
• First Bank can maintain continuous perfection
of its SI in the truck in one of two ways
– It can somehow have its lien noted on the AK title
certificate for the truck (but not possible if First
Bank doesn’t have the title certificate!)
– It can take possession of the truck [§ 9-313(b)]
• This is the ONLY situation where a secured party can
perfect a SI in a titled vehicle by possession
Titled Vehicles and Change in
Governing Law
• If State B issues a title certificate for a
vehicle previously covered by State A,
perfection of any SI in that vehicle becomes
governed by State B law [§ 9-303(b), (c)]
– Usually, issuance of new certificate in State B
would require surrender of State A certificate
10
• If State B issues “clean” certificate as a result
of fraud, what effect does that have on a SI that
had been perfected by a notation of the SI on
prior certificate issued by State A?
– At first blush, Article 9 creates a similar rule as for
change of governing law for regular goods
– Secured party that had perfected on State A
certificate remains temporarily perfected after State
B issues certificate [§ 9-316(d)]
– Temporary perfection lapses if secured party does
not reperfect in State B w/in 4 mos. [§ 9-316(e)]
§ 9-337. [Priority of Security Interests in Goods Covered by
Certificate of Title.] If, while a security interest in goods is
perfected by any method under the law of another jurisdiction, this
State issues a certificate of title that does not show that the goods
are subject to the security interest or contain a statement that they
may be subject to security interests not shown on the certificate:
(1) a buyer of the goods, other than a person in the business of
selling goods of that kind, takes free of the security interest if the
buyer gives value and receives delivery of the goods after issuance
of the certificate and without knowledge of the security interest;
and
(2) the security interest is subordinate to a conflicting security
interest in the goods that attaches, and is perfected under § 9311(b), after issuance of the certificate and without the conflicting
secured party’s knowledge of the security interest.
• In Problem 5, § 9-316(d), (e)
would appear to give First
Bank 4 mos. to reperfect, but
they may not even have that!
• Suppose after Trucker gets
clean AK ertificate, he sells
the truck one week later
§ 9-337
– Hypo 1: He sells it to his
neighbor Stan for $75,000
– Hypo 2: He sells it to Ted’s
Used Trucks for $75,000
• Would Stan take free of First
Bank’s SI? Would Ted’s?
§ 9-337
• First Bank’s SI remains temporarily perfected under
§ 9-316(d)
• But, Stan gave value and took delivery after AK
issued “clean” title certificate, and w/out knowledge
of First Bank’s SI
• Thus, Stan takes free of that SI [§ 9-337(1)]
• Note: Ted’s Used Trucks (a dealer in cars), would
not be entitled to protection of § 9-337(1)
• Would Ted’s Used Trucks ever be protected?
11
• At first, Ted’s Used Trucks would take the car
subject to First Bank’s SI [§ 9-337(1)]
• But, if First Bank does not take steps to
“reperfect” its SI in the vehicle w/in 4-month
grace period after AK issues the new certificate,
First Bank’s perfection will lapse [§ 9-316(e)]
• Upon lapse, First Bank would be deemed never to
have been perfected vs. Ted’s Used Trucks [§ 9316(e)]
– At that point, Ted’s would then hold the vehicle free
of First Bank’s SI
Problem 6
• BIC previously extended a $5 million line of
credit to ABC, Inc. (a Texas corporation)
– BIC holds a perfected SI in all of the present and
after-acquired equipment of ABC, Inc.
• XYZ, Inc. (Delaware corporation) plans to buy
all of the assets of ABC, Inc. in a merger
• If this transaction occurs, what impact does it
have on BIC’s SI in ABC’s equipment?
§ 9-316. Continued Perfection of Security Interest
Following Change in Governing Law
• If there was no change in governing law, BIC
wouldn’t have to do anything to maintain its
perfected status in its collateral
– Initial UCC-1 remains effective to perfect SI after
transfer of the collateral to XYZ [§ 9-507(1)]
• But, in this case, XYZ is organized in
Delaware (after the acquisition, 3d parties will
be looking to Delaware’s UCC system for
information about liens against XYZ’s
property)
(a) [General rule: effect on perfection of change
in governing law.] A security interest perfected pursuant
to the law of the jurisdiction designated in Section 9-301(1)
... remains perfected until the earlier of:
(1) the time perfection would have ceased under the
law of that jurisdiction;
(2) the expiration of four months after a change of
the debtor’s location to another jurisdiction; or
(3) the expiration of one year after a transfer of
collateral to a person that thereby becomes a debtor and is
located in another jurisdiction.
12
Transfer of Collateral to Debtor
Located in Another State
• Article 9 gives secured party 1-year grace period
of temporary perfection, rather than just 4 months
– Rationale: it may take longer for the secured party to
discover sale has occurred and to track down the
collateral [§ 9-316 cmt. 2]
• Problem 6: to remain continuously perfected, BIC
would have to file in Delaware (location of XYZ)
w/in 1 year after XYZ acquires the assets of ABC
§ 9-316(a)(1)
• Note: If BIC’s initial UCC-1 filing in TX
would have lapsed during the ensuing year,
BIC would not get a full 1-year grace period
– Example: If transfer occurs on Nov. 1, but
BIC’s UCC-1 in TX would lapse on Dec. 1,
then BIC becomes unperfected in DE after Dec.
1 (unless it files in DE before that date)
13