Hillinger SecuredTransactions Fall 2017

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SECURED TRANSACTIONS OUTLINE
OVERVIEW OF SECURED FINANCING
 OVERVIEW OF CODE
o Goal of UCC: to create a single, integrated statutory scheme stating predictable rules for common commercial activities & the
rights of the parties involved that do not change mid-transaction
o Article 1: overarching rules & principles
o Definitional methodology for article 9
 §9-102(a)
 §9-102(b)
 §1-201
 Sometimes another specific provisions applies
 Look to case law if not defined in Code
o Code Policy: simplicity, clarification, uniformity & modernization of commercial law
 §1-103(a) This act shall be liberally construed and applied to promote its underlying purposes and policies → apply
provisions consistently with policy; do not apply a plain meaning that derogates the policy
 Note that we are reading the Model Code; nonuniform state amendments threaten uniformity
 Comments: explain Code and attempt to ensure uniformity in case law interpreting Code
 Permanent Editorial Board (PEB) Commentaries: reports that identify ambiguity in the Code and interprets it to ensure
uniformity across jurisdictions; serve as amendments to Comments
o Section Captions
 §1-107 general rule: section captions are law; determines scope of provisions
 Exception: sub-captions in article 9 are NOT law; they only make the Code user-friendly
o Scope of Code: §1-103(b) if UCC is silent, CL controls
 Three choices of law: RE law, UCC, CL
 Revised article 9 is the law in all 50 states & DC; it significant expands article 9’s scope
 Biggest changes to Revised Article 9: choice-of-law rules and filing rules
o Lawyer’s Role in Credit Transactions
 The transactional lawyer's job is to identify and minimize the risks in a client's proposed undertaking
 Warn client about risks and recommend strategies to avoid or minimize them
 Must identify obstacles and issues the client has ignored
 Must devise the best strategy fo rthe client and create a properly crafted set of documents to implement it
 OVERVIEW OF ARTICLE 9
o Secured Transaction: credit transaction in which the obligor, in addition to obligating itself to pay (promise to pay), gives a
property interest to secure payment
 Creditor gives something now ↔ obligor promises to pay in future + gives personal PI to secure payment obligation
 Credit is an agreed upon term → default is simultaneous exchange
o Advantages of Secured Transaction (tied to risk level of creditors)
 For Creditors:
 Self-help Right of Repossession: right to repossess collateral without assistance from state/court if repossession will not
breach the peace or involve trespassing on debtor’s property (§9-609)
 Significance: saves SP time and transaction costs
 No violation of due process because no state action
 No equivalent self-help remedy for RE; suggested provision has not been adopted by states
 Exemptions: obligor’s agreement to grant security interest waives exemption rights
 Some states limit kind of security interest that may be taken in exempted property
 Priority: right to collateral above all other creditors (unsecureds)
 Secured creditor still has same right to proceed against debtor’s assets as an unsecured creditor → security interest does
not supplant or eliminate a secured creditor’s right to take action against debtors assets generally
 For Debtor/Obligors:
 Lower interest rate, because less risk to lender
 Higher loan amount
 Reasonable payment terms: length of term, balloon payments
 Nature of the terms: more favorable re: default
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o Leverage
 Security interest creates leverage → threat of repossession encourages payments
 Leverage value depends upon:
 Value of collateral to debtor
 Debtor’s ability to pay
 Other sources of leverage (unsecured creditors can use too)
 Commercial Lenders
 Withhold goods: business needs goods to operate
 Increase the interest rate, adjust the terms
 Reputation: can’t operate with a reputation for not paying bills; force D to pay cash
 Sue debtor
 Other means to minimize risk: small deliveries & time for payment; monitor debt
 Consumer Lenders
 Finance charges + default rate of interest
 Report to consumer rating agency
 Increase interest rate
 Withhold future goods/services: not utilities in winter and phone services for 911 if there is a child in the home
 Assign debt to a debt collector: Fair Debt Collection Practices Act limits actions of debt collectors, including attys
that try to collect debts.
- Deals with creditors having gotten out of control with their debt collection practices.
- Limits times when collectors may call, where they can call, etc.
- Under MA ch, 93(a) any violation of federal consumer law is a violation of 93(a) and allows for attorney’s fees
and treble damages (prevents bad activity by collectors)
 Right to garnishment: proceeding in execution of a judgment against a third party that has property belonging to the
debtor
- Two types
 Wage garnishment: notice to employer requiring a portion of wages to be sent to creditor
 Bank account garnishment: notice to bank requiring account frozen & funds to go to creditor
- Effects
 Employer cannot terminate an employee for 1st garnishment
 Employees are less productive when not working for themselves
 Consumer can evade garnishment through bankruptcy
o Debtor’s Options
 §9-623(b): debtor has the right to redemption if debtor fulfills all obligations secured by the collateral and reasonable
expenses and attorney's fees
 What is debtor obligated to pay to fulfill the obligations?
 Common Law: creditor may only collect the payments currently due
 Contractual Response: acceleration clause
 Debtor could refinance the loan
 Result: higher rate, longer repayment period
 Lenders often happy to refinance because they want to be repaid
 SCOPE OF ARTICLE 9
o §9-109(a) General Scope
 Article 9 generally applies to:
 Nature of property: only personal property or fixtures; NOT real estate
 Consensual liens: consensual security interests created by agreement/K
 So do NOT go to article 9 if:
 non-consentual
 real estate or
 interest is not in property/fixtures
 §9-109(c) preemption or (d) exclusion applies other law
 Article 9 specifically applies to:
 Transaction creating a security interest in personal property or fixtures by K
 §1-201(b)(35) Security interest: interest in personal property or fixtures to secure payment or performance of an
obligation (THIS IS LIMITED BY 9-109 (a) to conentual agreements created by contract NOT real estate)
 The right of a lesser of goods to obtain or acquire goods is NOT a security interest; must comply with article 9
requirements to obtain interest
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§2-401 reservation of title creates a security interest; includes conditional sales K
Direct v. indirect financing
- Direct: lender loans directly to account debtor and takes security interest directly; no intermediary
- Indirect: account debtor enters credit transaction with debtor, who enters second transaction with lender
Agricultural lien
Sale of accounts, chattel paper, payment intangibles, or promissory notes
 Rationale: because of the nature of recourse/nonrecourse financing, frequently impossible to tell whether a
transaction involving chattel paper is a sale or a secured transaction, so drafters made article 9 applicable to both
 Recourse v. nonrecourse financing for car dealer transactions
- Nonrecoures: if account debtor defaults, bank has no recourse against debtor
- Recourse: debtor/dealer agrees that if account debtor defaults, dealer will buy back the account from the bank for
the outstanding amount due (better position to repossess and sell car)
- Question of money: would dealer rather get more money up front and take risk of nonpayment in the back end?
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o §9-109(c) Preemption: Article 9 does not apply to the extent that a separate fed or state law preempts Code
o §9-109(d) Exclusion: Article 9 does not apply to landlord lien; statutory lien; assignment of wages; sale of collateral as part of
sale of business; assignment of collateral for collection only, required by K, or for satisfaction of preexisting indebtedness;
transfer of interest under insurance policy or judgment; right to recoupment or setoff; RE liens; assignment of tort claim;
assignment of deposit account in consumer transaction
 REPOSSESSION Rights
o Default
 Remember: No right to repossess until debtor defaults; creditor’s knowledge of debtor’s financial problems alone is not
enough. Repossession without default is conversion (wrongful exercise of dominion & control over the property of
another); debtor can sue in tort for actual & punitive damages
 Insecurity Clause: if creditor deems itself insecure, then it can declare debtor in default and repossess
 This allows creditor to reposess even wherethe debtor didn’t do anything.
 UCC solves this problem with §1-304 Obligation of Good Faith which attaches a general duty of good faith to
contracts/code obligationsif the debtor uses the insecurity clause inconsistant with good faith then their action is
deemed a breech of contract;
 creditor must have an objective reason for feeling insecure
 Lack of Agreement: If agreement is silent on issue of default, CL controls → failure to pay when payment is due is the only
event of default
 §9-601: After default, a debtor and an obligor have the rights provided in this part (but most provision apply to debtor, not
obligor)
o §9-609 Right to Repossess
 After default, SP may take possession of the collateral pursuant to judicial process or without judicial process if it proceeds
without breach of the peace
 Breach of peace: defined by case law; courts should hold SP responsible for actions of others taken on SP’s behalf,
including independent contractors engaged by SP to take possession of collateral
 In most jurisdictions, D need only object to the reposession because once they have there is a breach of the peace and
SP’s actions must be put on hold
 Best way is to get a writ of replevin and have sheriff repossess the property
 Can’t use law-enforcement officer to repossess without judicial procedure
 If multiple SPs, priority rules govern who has right to repossess; junior creditor liable for conversion for repossessing
and refusing to relinquish collateral to senior creditor
 After default, SP may require D to assemble collateral and make it available to SP (agreement may require this before
default)
o Creditor’s Choice at Default: If debtor has defaulted, it may not be in creditor’s best interest to repossess
 If temporary problem, e.g. cyclical market, and creditor repossesses, it may hinder future business because it will get a rep
as a business killer
 When pushed, debtor will file bankruptcy to get auto stay protection; lender doesn’t want that so it may give lend more
money to prevent bankruptcy instead of repossessing
o Preventing Repossession
 Don’t open the door to a creditor: §9-609 allows repossession only without breach of the peace or threatened breach of the
peace; creditor cannot break in because that’s a tort subject to damages. This forces the creditor to get a court order & have
sheriff collect collateral.
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 Object to the reposession: this inquiry will be fact and jurisdiction specific, don’t rely heavily on it
 §9-623 Right to redeem collateral
 Debtor may redeem property by fulfilling the obligation secured by that particular collateral → outstanding loan amount
+ atty fees + reasonable expenses (repossession expenses, storage, etc.). No use to debtors that can’t afford to make loan
payments.
 Time for redemption: any time before SP has collected collateral under §9-607; has disposed of collateral or entered into
K for disposal under §9-610; or has accepted collateral in full or partial satisfaction of obligation under §9-622
 Recut the deal: negotiate with creditor for extension of time to pay, higher interest rate, etc. Creditors want the money, not
the collateral, so they may be open to it.
 Security interest gives creditor two important rights:
 Right to repossess
 Right to threaten to repossess → if creditor chose collateral well, this is a valuable right because a debtor will find the
money if the collateral is meaningful to him
 Acceleration clause: in the event of default, either the entire indebtedness is automatically accelerated, or it is
accelerated at lender’s option
o Deficiency Rights
 §9-615: Application of Proceeds of Disposition
 proceeds first go to the costs of the reposession (repossession, holding, costs to prepare dor disposition, costs of
disposition, attorney fees) and then the proceeds go to the C with top poriority and so on
 So cosumer debtors end up owing more than they did AND they have lost the asset
 Result: a minority of states have enacted Anti-Deficienty Statutes (below)
 General rule: creditor may sue for deficiency after repossession and sale of the goods; in some cases, that might be more
than the original loan because resale market is bad and repossession/sale costs money, but creditor is now unsecured
 Anti-Deficiency Statute (minority, ex. CA): for consumer goods, if creditor repossesses, it forfeits deficiency claim. It may
choose instead to let the debtor keep the collateral and pursue the full value of the loan as an unsecured claim.
 Exemption laws: Essential consumer household goods are exempt from seizure. Granting a security interest forfeits
exemption laws.
o FTC Reg: Unfair Credit Practices Regulations
 §444.2(a)(4): It is an unfair practice for a lender/seller to take or receive from a consumer an obligation that…constitutes or
contains a nonpossessory security interest in household goods other than a PMSI.
 Lender = person (including legal entities) engaged in lending money
 Consumer = natural person who acquires goods, services, or money for personal, family, or household use
 Natural person = NOT corporation, partnership, business organization
 Personal use = must be purchased for consumer purposes, not for business purposes
 Nonpossessory security interest = debtor, not creditor, retains possession of collateral
- A posessory security interest would be where the creditor has posession of the collateral (ex. pawn shopphysical
possession of goods in exchange for a loan)
 Not PMSI (defined in former §9-107)
- Seller PMSI = seller keeps security interest in what it sells to secure purchase price
- Lender PMSI = loan is given for specific purpose of purchasing an item & security is taken in that item
 Three conjunctive requirements:
1. Lender must give value (§1-204 value = any consiteration sufficient to support a simple contract)
2. To enable D to acquire collateral
3. D must use the value to acquire the collateral
4. Note: one easy way to make it clear that you have aPMSI is to make the check jointly payable
- Burden is on lender to prove PMSI & obtain special rights. This is done by cutting check payable to both debtor
& seller, and by keeping deposited check in records
 Does not apply to a retail assignment lender (who sells on credit and in exchange gets the buyer’s promise to pay back in
installments)
 Rationale: prevents creditors from obtaining excessive leverage by taking a security interest in everything debtor owns;
protects exemption rights (exemption laws generally cover household goods)
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CREATING SECURITY
**BEFORE CLASSIFYING THE COLLATERAL, YOU MUST DETERMINE WHETHER ARTICLE 9 CONTROLS!!
 CHOOSING COLLATERAL TO ENCUMBER
o Net profit: no good because unlikely to be there when debtor defaults; taking a security interest presupposes that the asset will+
be there when debtor defaults
o Inventory:
 Upsides:
 High value if D has a lot on hand
 Rollover collateral
 Downsides
 May not be there at default because debtor is supposed to be selling inventory
 Future value of inventory is uncertain
 Resale market is questionable; if debtor defaults because no one is buying, then creditor is unlikely to sell inventory
 Lenders build in protections with inventory based lending: spot checking, periodic payments required, higher interest
rates, requiring debtor to maintain inventory equal to 150% of outstanding loan at all times
o Equipment:
 Upsides: sedentary, stays put and isn’t replaced
 Downsides: depreciates and resale market has historically been bad (getting better now because online auctions alleviate
geographic restrictions on auctions & drive up prices)
o Rights to receive payment from account debtors: beneficial because it’s a liquid asset, but three risks:
 Upsides:
 Highly liquid
 No depreciation; no need to resell
 Convenient for lenders
 Downsides:
 Account debtor can’t pay: minimize by requiring debtor to only sell to creditworthy account debtors
 Account debtor has paid: collateral no longer exists; minimize by taking an interest in after-acquires accounts
 Account debtor won’t pay: security is worthless if debtor produces defective goods/services and account debtors aren’t
obligated to pay; minimize by investigating company for prior complaints, etc.
o Leases: available, but not governed by Article 9 because leases are property interests
o Blanket lien: allowed under Article 9 (except no interest in human beings), but limits debtor’s ability to borrow from other
lenders – that may not be in creditor’s best interest
o Installment K: must read! If it grants a SI in what the good is buting then it is CP, if not then it is likely an account (it could
be an instrument if treated as such in the industry, but it pretty much won’t be so it wull likely drop down to an account)
o Conditional sales contract: contract where the seller delivers possession of the goods to the buyer, but reserves title to the
goods until the buyer completes the payment obligations. A conditional sales contract says the passing of title is conditional on
the buyer completing the payment obligations.
 2-401(1): we don’t care what the contract says. The buyer gets title. The seller can’t prevent the passage of title. Instead, the
seller gets a security interest.
 It’s chattel paper because there is a record listing a monetary obligation and by operation of law (2-401), there’s a security
interest.
o 1-201(b)(35): except as otherwise provided in section 2-505, the right of a seller or lessor of goods to retain or acquire
possession of the goods is not a security interest.
 COLLATERAL CLASSIFICATION
Step 1: Draw the transaction & determine what the collateral offered is in the real world
Step 2: Identify collateral type → article 9 collateral types are mutually exclusive; personal property in debtor’s hand at one
moment in time can only be one type of collateral. Classification is generally based on the function of the collateral for the debtor.
If article 9 governs the transaction then the collateral must be one of the following types:
o Sui Generis
 Commercial tort claim: claimant must be a corporation; OR an individual with a claim that arose out of business AND does
not involve personal injury or the death of an individual
 Arising in tort = if claim would not have arisen but for the K, it does not arise in tort (but in K)
 Deposit account: demand, time, savings, passbook, or similar account maintained with a bank
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NOT investment property or certificate of deposit.
Requires a bank (the definition of bank is found in 1-201 (4))
Electronic chattel paper: doesn’t exist yet
Fixtures: goods that are so related to real property that an interest in them arises under real property law; partakes of both
personal and realty characteristics
 Removal would cause damage to real estate/freehold
 e.g. mantel piece, septic system, central air conditioning, in-ground swinning pool
Investment property: stocks & bonds
 Stock = an ownership interest in a piece of property
 Bond = debt instrument issued by a corporation to raise money
Letter of credit (LOC) rights: piece of paper that embodies rights to payment or performance issued by a bank in favor of a
third party (the beneficiary of the letter of credit), which state bank’s promise to pay beneficiary under certain specified
conditions. Term does not include beneficiary’s right to demand payment or performance.
 Basically says that creditor is lending to the beneficiary of the LOC (buyer) and has an interest in the proceeds of the
LOC
 Two kinds (both ensure payment to the beneficiary if the terms are met):
1. Standard letter of credit (payment instrument)
2. Standby letter of credit (guarantee instrument)
 Involves three Ks: buyer-seller, buyer-bank, bank-seller (beneficiary)
 Lenders generally charge a fee & take a security interest in the goods to ensure ability to be repaid. Buyer may give
bank money up front before letter is issued. LOC protects buyer from prepaying for goods.
Money: medium of exchange currently authorized or adopted by a domestic or foreign gov
 Used as collateral for a bank, where principal of company wants to lend to company but avoid recharacterization of loan
as equity in bankruptcy
Oil, gas & minerals
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o Goods: all things that are movable when a security interest attaches; tangibles things that you can touch;
 classification depends upon specific use of goods by debtor → if more than one type is possible if debtor changes uses,
then creditor must follow rules for both types
 Examples of goods: a chair, unborn young of animals, fixtures, crops grown or to be grown, software in a good that
makes the good operate
 Inventory: goods other than farm products that are leased by a person as lessor; held by a person for sale or lease or to be
furnished under a K of service; furnished by a person under K of service; or consist of raw materials, work in process, or
materials used or consumed in business.
 Matter of Ripley Oil Co.: OH bankruptcy court held that bank did not have an enforceable security interest in oil tanks
where it obtained a security interest in “all accounts receivable and inventory” because tanks were equipment, not
inventory.
1. Test for inventory: held for immediate or ultimate sale in the ordinary course of business, or used up or consumed in
a short period of time in the production of some end product
2. Test for equipment: fixed assets, or identifiable unit has a relatively long period of use
 Farm Products: goods other than standing timber, with respect to which debtor is engaged in farming operations and which
are crops, livestock, supplied used/produced in farming operation, or products of crops/livestock in unmanufactured state
 D must be a farmer
 Consumer goods: goods used or bought for use primarily for personal, family, or household purposes
 Equipment: catchall category of goods; goods other than inventory, farm products, or consumer goods
o Semi-Intangibles: record is indispensable to the right; right is embodied in the record
 Document of Title (DOT): right to goods; record evidencing that the person in control of the record (bailee) can control,
receive, or dispose of the goods; bailee must be a warehouse or a carrier
 Three prongs:
1. goods
2. bailed with a bailee
3. bailee must issue a record saying that they have the goods ad are bailing them
 Types:
 Negotiable DOT: permits DOT holder to transfer it and give possession away (frequent used with farm products)
 Non-negotiable DOT: holder may not transfer DOT
 Bill of Lading: carrier gives to shipper/mover to prove the goods are received and title passes to the receiver
 Warehouse Receipt: used often in farming/SI lending because if the bank holds a negtiable DOT then the warehouse
is liable if they give the goods to someone else
 If the right in question is a right to goods and it is not a DOT it is a GI
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 Chattel Paper: record that evidences both a monetary obligation & security interest in specific goods or lease in specific
goods
 A group of records that include an instrument or series of instruments taken together = chattel paper
 Lump collateral only when there is a note evidencing an underlying right to payment
 PN + installment K w/SI
 PN + CSK (implicit SI in CSK)
 Negative prongs:
1. Not a charter or other K for hire of vessels
2. Not a credit card receiveable
 Instrument: negotiable instrument or other writing that evidences a right to payment of a monetary obligation, is not chattel
paper, and is a type transferred in the ordinary course of business
 Must be a writing
 Writing must be a negotiable instrument or treated as such in the industry
 Negotiable instrument = freely transferable paper evidencing right to receive payment; must include magic words of
negotiability (to the order of or bearer), state a specific amount due, and give time for payment (on demand or
particular time)
 Three types as defined in 3-104 (There must be an unconditonal promise or order)
1. Check
2. Promissory note
 Anytime a problem says PN or Note, assume it meets all of the requirements of a negotiable instrument (but
not necessarily an instrument for A9 purposes, in order for it to be an instrument for A9 purposes, it must be
offered for purposes of collateral)
3. Certificate of Deposit
 Rationale: negotiable instruments are safer & easier than using cash
 Treating as such in the industry: if physical delivery + any necessary endorsements transfers the rights to transferee,
then its treated as a negotiable instrument
- Generally installment Ks are not treated as negotiable instruments; must be either chattel paper or accounts,
depending upon whether K grants a security interest in goods
 Grant of negotiable instrument suspends the underlying obligation; if instrument is presented and dishonored, then
underlying K comes back into play
 Negative prong: not chattel paper, investment paper, LOC, credit card use
 When a party gives a negotiable instrument to satisfy an underlying obligation, it suspends the underlying obligation
 Knostman v. West Loop Savings Ass’n: Fifth Circuit held that an annuity K is a general intangible that requires perfection
by filing, not an instrument perfected upon delivery, because not of a type which is transferred by delivery in the
ordinary course of business & transfer alone does not confer rights in K on transferee (must give notice to insurance co).
o Pure-Intangibles: rights that have no physical embodiment, no corporeal existence that is legally siginficant
 Account: 9-102(a)(2) right to payment of monetary obligation, whether or not earned, that falls into one of eight specified
categories
 Property that has been (or will be) sold, leased or disposed of
 Services rendered
 Policy of insurance issued or to be issed
 Insurance company’s right to payment; what it would offer as collateral
 Insured party’s right to payment is a general intangible
 Arising from use of a credit card; includes right of card issuer to payment from card holder
 State operated lottery
 Negative prong: not chattel paper, commercial tort claims, deposit accounts, investment property, LOC rights, or rights
to payment for money/funds advanced or sold
 K rights: 1968 Code included K rights as a collateral type encompassing accounts that had not yet been earned; 1978
drafters folded K rights into accounts. Do NOT use the term “K rights” to describe collateral because it creates
ambiguity regarding whether the intent was to reference unearned accounts or to use the term generically.
 Includes healthcare recievables
 Does not require record or writing (can be oral)
 General intangible: catchall; anything that is not any other type of collateral
 Right to other = copyright, trademark, patent, good will, software, data reports, client lists
 Includes right to tax return; frequently used source of collateral because it may be the only valuable asset the debtor has
in bankruptcy → if no refund is granted, it’s simply valueless collateral.
 Subbcategory of payment intangible where the primary obligation is to pay money
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 ATTACHMENT
§9-203(a) attachment = process by which a security interest in debtor’s assets is created & becomes legally effective against the
debtor, thus establishing the right to repossess upon debtor’s default; security interest attaches when it becomes enforceable against
the debtor
o 1-301 – general UCC choice of law rules govern attachment
o Existence of Security Interest: §9-203(b) 3 Conjunctive Requirements for Attachment
 Value has be given
 Value = anything that would constitute consideration at CL, e.g. exchange of Ks, promise by creditor to extend credit
 No requirement for amount
 No requirement that creditor give value to debtor
 Broader than CL: includes preexisting obligations that would be precluded by preexisting duty rule
 A promise to pay can count as value, but practically it wouldn’t come up because no creditor is going ao argue about
wherhter there is a SI in the promise to pay when there has been no payment yet
 §1-204 Value: person gives value for rights if the person acquires them:
 In return for binding commitment to extend credit
 As security for, or in total or partial satisfaction of a preexisting claim
 By accepting delivery under a preexisting contract for purchase (generally buyers, not creditors)
 In return for consideration sufficient to support a simple K
 Revised Article 9 distinguishes between value and new value. New value is money or money’s worth of services and goods.
9-203’s requirement doesn’t say new value.
 Debtor has rights in collateral or power to transfer rights in collateral to SP
 Embodiment of CL: debtor can’t give an interest in collateral that it doesn’t have an interest in, but title is not
dispositive & debtor does not need full ownership rights to have rights in collateral but you can only give rights that you
have
 §9-203, Comment 6: Whatever interest debtor has is the maximum that the creditor can take as a security interest
 Possible interests:
 Right to receive goods
 Right to receive damages for breach
 Right to specific performance
 All rights under K with a third party supplier
 Rights in Goods
 §2-105(2) goods must be both existing and identified before any interest in them can pass
 §2-501 Manner of identification of goods
- Identification ≠ transfer of title
 Identification gives buyer a special property & insurable interest in goods
 Title stays with seller until delivery (unless K says otherwise)
 Risk issue: if buyer prepays, he wants an insurable interest to protect investment
- Identification may be made in any manner explicitly agreed to by the parties. In the absence of agreement,
identification occurs:
 When K is made for sale of goods already existing & identified
 For sale of future goods, when goods are shipped, marked or otherwise designated by seller as good to which
K refers
 When crops are planted or young are conceived
- General Rule: K must identify the goods. If K says “sofa,” no interest vests before sofa is constructed. If goods do
not exist or exist but are not
- Possible Exception: If goods exist and seller marks them as goods to which K refers, then buyer obtains a special
property and insurable interest in goods. S/A regarding whether “special interest” is a “right in collateral.”
 §2-401 Passing of title
- By agreement of parties: so long as goods are existing and identified, title can pass whenever K says it does
- Absent agreement: title passes when seller completes delivery obligations (depends on K terms)
- Once title passes, the buyer definitely has right in the collateral
- parties can stipulate when title passes but if the K doesn’t say anything title passes upon delivery
 Certainties
- Where goods do not exist are not identified, buyer does NOT have an interest in goods
- Where buyer has title to goods, full ownership passes.
- In between is 350 cases of mush
8
Revised §2-502 (1)(a): consumer buyer obtains right to collateral upon some payment, even if goods have not been
shipped
 Litwiller Machine & Manufacturing, Inc. v. NBD Alpena Bank (Michigan):  purchased parts for debtor to produce
boom assemblies for . Debtor filed bankruptcy before completing project. Court held that  inventory lender had
sufficient rights in parts to enforce its security agreement in debtor’s inventory. Parts fell within article 9 definition of
debtor’s inventory even though purchased by . Requirement that debtor have rights in the collateral is satisfied where a
debtor gains possession of collateral pursuant to an agreement endowing him with any interest other than naked
possession.  could have protected itself with a PMSI and did not.
 Power to transfer rights: refers to debtor with voidable title to goods; debtor has the power to transfer goods to a good
faith purchaser (i.e. article 9 SP)
 Evidentiary requirement → means to identify property as collateral
 Purpose of requirement: Staute of Frauds function; to prevent fabricated claims of K
 Writing provides objective proof the parties’ agreement to a security interest
 Writing is objective evidence of the property subject to creditor’s interest
 Four alternatives to satisfy requirement
 Debtor authenticates security agreement that describes property taken as collateral
- Requires some objective documentary evidence that the debtor created or provided for a security interest.
 Debtor = individual granting property interest as security; contrast with obligor, who must execute the note &
makes the promise to pay
 For planning purposes, always use a security agreement. Case law is unclear in other situations, where
incompetent people botch transactions.
 Composite document theory: courts will review all documents in a transaction together to determine whether
debtor intended to create a security interest (whether all of the documents together satisfy §9-203(b)(A))
 Delivery of bill of sale is not enough
 When there is a gross diffeence ebtween the bill of sale and the valie of the goods, there is a red flag that
there is a veiled secured transaction
 If there is a gross differene between a bill of sale
 “authenticate” (9-102 (7))= to sign, execute or otherwise adopt a symbol
- Security agreement = K between debtor & creditor; functions:
 Memorializes the debtor’s grant of security interest to creditor
 States parties expectations and ground rules for transaction
 Defines default → specific events/nonevents that trigger creditor’s rights and remedies under §9-600s
 If not defined, then CL governs → failure to pay when payment is due is the only event of default
 Other creditor concerns: covenant to insure the property adequately, restrictions on debtor’s use of
property, payment of taxes to prevent gov lien from trumping security interest

Two drafting styles
1. The following constitute events of default… (list everything in default clause)
2. List representations, covenants, warranties. Breach of any of them constitutes a default. This
is the more popular style, but it must link warranties to default or §9-600 remedies will not
attach.
 Acceleration clause: in the event of default, either the entire indebtedness is automatically accelerated, or it is
accelerated at lender’s option
 Insecurity clause: if I creditor at any point during the loan term deem myself insecure, I have a right to declare
a default. (but don’t rely on this, courts evaluate it from an objective standpoint)
- Absent a signed security agreement, S/A regarding what suffices to satisfy requirement
 Financing statement does NOT satisfy the requirement because §9-502(d) allows filing before security
agreement or attachment
 Comment 3 to §9-203: Bill of sale, though absolute in form, may be shown in fact to have given a security
interest. Where there is a disparity between value of collateral and sale price, debtor may use parol evidence to
show that grant of bill of sale was really a secured transaction.
 In re New Merit Corp (1st Cir).: Court held that directors’ passage of a resolution authorizing grant of security
interest for a loan was sufficient to satisfy requirement.
 In re Bollinger Corp. (3rd Cir): Court held that creditor had a secured claim when no formal agreement was
signed, but parties signed a promissory note, a financing statement containing a detailed list of collateral, and
course of dealing evidenced intent to enter security agreement (letters between parties discussion collateral to
use for full collateralization).
 In re Amex-Protein Dev. Corp. (9th Cir): financing statement containing description of collateral may serve as
security agreement if signed by debtor
 Promissory note + financing statement = not ususally sufficient to satisfy requirement

9
Possession of security interest: creditor has possession of collateral subject to agreement of parties
- Different from (A): no need for authenticated security agreement describing collateral (no record required)
- Problem: if agreement is oral/implied, debtor will claim creditor stole collateral
- DO NOT RELY ON TO MEET THE EVIDENTIARY REQUIREMENT! You can have (B) but only in addition
to (A)
 Delivery of certificated security (investment property): collateral delivered to creditor subject to agreement of
parties
- Different from (A): no need for authenticated security agreement describing collateral
- DO NOT RELY ON TO MEET THE EVIDENTIARY REQUIREMENT! You can have (C) but only in addition
to (A)
 Control of certain security interests: creditor has control of collateral pursuant to agreement of parties
- Different from (A): no need for authenticated security agreement describing collateral
- DO NOT RELY ON TO MEET THE EVIDENTIARY REQUIREMENT! You can have (D) but only in addition
to (A)
 Applies to deposit accounts, electronic chattel paper, investment paper, or LOC rights
 Unstated Intent Requirement: parties must have intent to create security agreement
 §9-203 does not include a requirement for debtor to intend to create a security interest, but this is universally required
because article 9 transactions are consensual agreements
 American Cart (RI SC): Creditor had promissory note and financing statement; no security agreement created. Court
held that there was no attachment because no objective evidence of debtor’s intent to create a security interest. Absent
that, there’s no attachment. Case has been criticized as being overly formulistic, which is a great insult given that the
Code must be interpreted functionally.
 Expeditors International v. Official Creditors Committee (9th Cir): Court held that creditor’s preprinted invoice terms
that purportedly created a lien on all debtor’s property did not create a security agreement in debtor’s property because
the transactions lacked the intent to create a security agreement. Failure to object was insufficient to demonstrate intent
where invoices were not signed & terms were not negotiated. Course of dealing may be used to “fill the void” for
generic K terms, but may not be used to add a term that the parties never discussed.

o Scope of Interest Taken: part inquiry
 Legal sufficiency of description: must comply with §9-108
 Sufficiency of Description
 §9-108(a) Sufficiency = description reasonably identify what is described
- Err on the side of excessive details: Must describe richly, e.g. size, height, color, weight, material, etc. May refer
to an attached insurance/appraisal report but NEVER rely solely on an attachment for description
 §9-108(b) Illustrative list of sufficient descriptions (from case law)
- Specific listing
- Category
- Quantity: applies to fungible property only; e.g. stock, bushels of wheat, where each is the same (cars are not
fungible different VIN #s)
- Article 9 collateral type → type need not be an article 9 collateral type; “receivable” may encompass chattel
paper, accounts
 Always assume there is one more
- Computational or allocational formula or procedure
 Comment 2: Test of sufficient is that the language used reasonably identifies what in the real world is described.
Code rejects the serial number test because it is a trap for the unwary. If you can ignore serial number and still
identify the collateral, then not necessary. If serial number is necessary to identify which item is encumbered, then
mistake is fatal.
 Omnibus Clause: description of “all ________” (insert collateral type)try to use when possible
 General rule: omnibus clause is valid
 Exceptions:
- §9-108(c) invalidates supergeneric description, e.g. “all debtor’s assets”
- §9-108(e) prohibits omnibus clauses for:
 Commerical tort claims
 Consumer transactions, consumer goods, security entitlement, security accounts, or community account
 Difference between consumer goods transaction and comsumer transaction? With consumer goods
transaction the collateral must be consumer goods, with a consumer transaction the callateral can be more
than just consumer goods, it can also be an investment (stocks, bonds, 401k, etc.)—consumer transaction is
broader
10
-
FTC Reg prohibits security interest in Non-PMSI’s in household goods (BUT THIS AND FOR ABOVE YOU
CAN SAY “ALL CONSUMER GOODS ALLOWED BY LAW” AND BE OKAY)
- Case law prohibits collateral description of “all general intangibles” because overly broad/vague due to the fact
that general intangible is defined in the negative; debtor will always argue that there wasn’t an intent to include
specific item at drafting of security agreement.
 Fix: include omnibus clause for general intangibles as defined in the UCC, followed by a laundry list of every
imaginable type of general intangible (type, not specific items)
 Security agreements often define collateral separate from description to ensure clarity. E.g. define equipment to
include machinery, furnishings, etc. to expressly clarify that equipment is used in the article 9 sense, not the business
sense.
 Enumeration: standard practice is to rely solely on an omnibus clause unless exceptions apply because enumerations
raise questions of parties’ intent to include items not specifically enumerated
 Aside from GI try not to do the “including but not limited to” thing unless the debtor makes you and in that case say
“including but not limited to”
 After-acquired property (NOTE: If a Q comes up on perfection/priority (like does C have an interest in X”) and
there is not an AA property clause or it is badly placed (what does the clause modify problem) then:
 in the SA then say “Most courts would imply an AA property clause because it doen’t make sense, based on
intent, that the C would not enter into the loan without intending it. BUT if the court does not imply then this
C has no interest”
 Majority: “all inventory” includes after-acquired inventory because inventory is rollover collateral, and parties intend
to create a security interest that is valid until the loan is paid; thus, the parties must reasonably expect to include afteracquired inventory. Necessity of an after-acquired property clause is a matter of K interpretation not susceptible to a
statutory rule.
- Rollover collateral: inventory, accounts, farm products (maybe), chattel paper
- Contrast equipment: sedentary; not held for sale. Thus, after-acquired property clause is required.
- In re Filtercorp, Inc. (9th Cir): Court held that a security agreement in inventory or accounts receivable
presumptively includes after-acquired property, subject to rebuttal by evidence that the parties intended otherwise,
because the cyclical nature of the collateral makes it unrealistic that a creditor would take a security interest in an
asset that would vanish in a short time. Collateral is viewed in aggregate as a shifting body of assets. But
reference in note to “attached inventory list” sufficed to rebut presumption.
 Minority: Express after-acquired property clause required because it is not unreasonable to require a security
agreement to make clear its intended collateral & requiring such simplifies the interpretation of the security
agreement and provides more precise notice to third parties.
 Proceeds
 §9-203(f): attachment of security interest in collateral gives secured party the right to proceeds
 §9-102(64)(A) proceeds = whatever is acquired upon the sale, lease, license, exchange or other disposition of
collateral; can have generations of proceeds
 Note: Case law suggests that the principal beneficiaries of this rule are the potential creditors. This is wrong. The
financing statement is for planning; the security agreement is for the existing creditor.
 Parties’ intention to encumber the property
 Citizens Bank & Trust v. Gibson Lumber Co. (KY): Legal sufficiency of description alone does not make it adequate;
must prove intent of parties also. Court held that description of “all equipment” was legally sufficient, but remanded to
determine whether the parties intended to encumber items that were not specifically enumerated in the list following the
omnibus clause because addition of list created ambiguity regarding parties’ intent. Ambiguity in intent construed
against creditor – must have clear & convincing evidence of intent to encumber.
11
PERFECTION & NOTICE
§9-308(a) Definition of perfection: attachment + applicable steps
 REQUIREMENT OF PERFECTION & NOTICE
o Purpose: makes security interest enforceable against third parties (including trustee in bankruptcy) by providing constructive
notice to them; creates certainty and predictability for creditors by making secret liens ineffective
o Policy: creditors cannot properly evaluate the risk of a transaction without full information
o Two critical functions of notice requirement:
 Reading forward: permit secured creditor to establish its position long term with a reasonable degree of certainty
 Reading backward: permit prospective creditors/buyers to evaluate risks before entering agreement
 Note: in RE law, notice serves to validate the claim against the other party; not so for article 9
 PART 1: CHOICE-OF-LAW → determine which state law to follow
o §1-301 General UCC Choice-of-Law Rules:
 Law by Agreement: parties may agree to any state law, so long as it bears a reasonable relationship to the transaction
 Limitations:
 If consumer is party to K, K cannot circumvent consumer protection laws
 N/A if article 9 choice of law applies
 Revised §1-301 (enacted by 20 states, but all have amended to reiterate §1-105 language): parties can agree to any state
bearing a reasonable relationship to the transaction
 Default UCC: if no agreement between parties, state UCC applies if the state has an appropriate relationship to the
transaction
 Comment 2 says this governs: attachment validity, characterization, and enforcement
 Non-UCC issues: CL choice of law rules apply to all non-Code issues
o Article 9 Choice-of-Law Rules: applies to perfection & priority only (priority = claim ranking + cutoff rules)
 SPECIAL CHOICE-OF-LAW RULE?
 §9-301(3) Negotiable Documents, Instruments, Money, or Intangible Chattel Paper
 Fixture filings: collateral location controls perfection (general rule doesn’t work because fixture filings are local
filings); debtor location controls priority
 Timber to be cut: the state where the tree is growing controls perfection (can’t possess trees); debtor location controls
priority
 §9-302 Agricultural Liens
 Rule: collateral location controls perfection & priority
 §9-303 Goods Covered by COT Statute
 Rule: state where COT was filed controls perfection & priority
 Application: no relation between debtor/goods necessary; state COT statute governs from time valid application &
fee are delivered until COT ceases to be effective or a new one is filed in another state
 Note: since state COT statutes vary, SP may fail to perfect because it filed according to it’s state law & goods are
titled in another state
 §9-304 Deposit Accounts
 Rule: location of bank maintaining account controls perfection & priority
 Options for bank’s jx (in order): (1) as stated in agreement between bank & customer; (2) jx of office that account
statement says is serving customer; or (3) jx of chief executive office
 §9-305 Investment Property
 Collateral location controls security certificate
 Issuer’s location controls uncertificated security
 Debtor location controls if investment property was perfected by filing or by auto perfection
 §9-306 LOC Rights
 Rule: Issuer’s location or jx of nominated person controls perfection & priority
 §9-301 RESIDUAL CHOICE-OF-LAW RULE
 Collateral type: intangible v. semi-intangible/tangible?
 Intangible: debtor’s location controls perfection & priority
- §9-301(1) general rule: debtor’s location controls both perfection & priority
12
Tangible/semi-intangible (+ money): did creditor possess to perfect?
- Yes: collateral’s location controls perfection & priority
 §9-301(2) exception: when creditor possesses to perfect, collateral location controls both perfection & priority
- No: debtor’s location controls perfection; collateral’s location controls priority
 §9-301(3) exception: for negotiable documents, goods, instruments, money, or tangible chattel paper, where
collateral is capable of perfection by possession & creditor did not possess to perfect, collateral location
controls priority only
 if you’re making a fixture filing TO PERFECT ONLY, the law of the jurisdiction there the fixtures are
located controls
 §9-301(a) general rule: applies to perfection
- Yes + Filed: if creditor perfects by both possession & filing, it is perfected in two states; priority is governed by
the state where collateral is located regardless of perfection type
 DEBTOR LOCATION?
 §9-307(b)(1): Individual: located at principal residence (not defined in code; If split, take the fork and file in both
locations)
 §9-307(b)(2): Organization with one place of business: located at place of business (where debtor conducts its affairs)
 §9-307(b)(3) Organization with multiple places of business: located at chief executive office (place from which debtor
manages the main part of its business operations or other affairs)
 §9-307(e)Registered organization: located in state of organization
 §9-102(a) (71) registered organization = organization organized solely under the laws of a single state and as to
which the state maintains a public record showing that the organization has been organized
 Comment 11: Corporations, limited liability companies, and limited partnerships are registered organizations.
Partnerships are not, even if filed.
 9-307 (c) - says that that the rules in 9-307(b) only apply if the country has a good public notice system regarding
security interests. If it does not, the debtor is located in D.C.

 PART 2: PERFECTION RULES → determine available means of perfection
For CP and instruments, you want to file and possess because if a 2 nd creditor comes along and posesses then they will beat you
o §9-311 Public Law Supplants Article 9 Notice System
 State certificate of title statute: requires creditor to note lien on the face of the certificate of title; lender keeps the certificate
of title to prevent sale of collateral without creditor’s knowledge.
Applies for motor vehicles, cars & trucks; look to statute for anything else. (READ THE STATUTE!! THESE TYPES OF
COLLATERAL SHOULD BE A RED FLAG)
 Federal statutes
 Federal Aviation Act: security interests in airplanes and aircraft parts require filing in Oklahoma City with FAA to
perfect
 Ship mortgage/vessels
 Copyrights: case law requires filing in DC copyright office to perfect security interests in registered copyrights; article 9
applies for unregistered copyrights, patents, and trademarks. For copyrights
 9registered or not) file in BOTH the DC copyright office and under Article 9!!
 Exception: Article 9 rules apply for inventory or motor vehicles held for sale or lease by a person in the business of selling
goods of that kind (business of selling, NOT leasing/renting because primary businedd of leasing trumps secondary sale
when the car has too many miles on it).
 Rationale: easier for car dealers to file one financing statement; easier for lender to check
 9-311(b): Whenever an Article 9 requires the creditor to file a financing statement, complying with a state or federal rule
instead is the functional, legal equivalent. Complying with the Article 9 rules will do nothing for you if you are required to
use a separate notice system.
 Fitzgerald v. American General Finance, Inc. (ID Bankruptcy): Court held that creditor was unsecured because it filed a
financing statement to perfect its lien in a snowmobile rather than noting it on a COT. Court rejected claim that no COT
was issued (because purchased in state where snowmobiles did not fall under COT statute) because the ID UCC places the
burden of securing issuance of the COT on the creditor.
o §9-310 Perfection by Filing Financing Statement
 §9-310(a) Basic rule: must file a financing statement to perfect
 §9-312(a) security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected
by filing (prior law required possession)
 Unclear whether this applies to sales of these collateral types
13
 §9-310(b) Exceptions: when filing is not necessary
 Property subject to statute, regulation, or treaty
 Property capable of perfection by possession
 Property capable of perfection by control
 Proceeds perfected under §9-315
 §9-312(b) Exceptions: collateral for which creditor cannot file financing statement
 Deposit accounts as original collateral (must control in accordance with 9-104)
 Letter of credit rights (must control in accordance with 9-107)
 Money: must possess money to have a security interest; filing system doesn’t make sense
 Where to File
 §9-501(a)(1) Realty associated collateral: local filing; file where a mortgage on the RE would be recorded for timber to
be cut, minerals, fixtures, etc.
 §9-501(a)(2) Everything else: file in secretary of state’s office
 Note: With the exception of chattel paper and accounts, filing only gives notice of interest, not ownership. Creditor must
determine ownership through due diligence. Debtor can’t give interest in leased property beyond leasehold interest.
 NOTE: only for sales of accounts (filing is the only option) and CP (you can only file or posess—so either they have it and
there is nothing in files then no one has si) can you rely SOLELY on the UCC Files
 People Bank & Trust Co. v. Applewhite (MI Bankruptcy): Article 2A does not require public notice of leaseholds generally.
Court held that a lease agreement that provides the lessee, upon compliance with the terms of the lease, with an option to
purchase the entire leased premises for nominal consideration makes the lease one intended for security (not a true lease).
Thus, compliance with article 9 is required to perfect & enforce the lien in bankruptcy (must file).
o §9-313 Perfection by Possession
 Applies to collateral capable of possession: goods, semi-intangibles (negotiable documents, instruments, tangible chattel
paper) & money
 Advantage over filing: party is possession has priority
 Reasons not to possess
 Not commercially feasible for secured interest in inventory & equipment
 Article 3 rules for discharge of negotiable instruments require payment to holder; lender may not require possession of
chattel paper so customers pay store owners
 How to “possess”
 Need to see state enacted law to determine how to perfect by possession; possession is not a defined term
 For collateral in possession of third party, SP takes possession when (1) person in possession authenticates a record
acknowledging that it holds the collateral for SP’s benefit; or (2) person takes possession of collateral after having
authenticated such a record
 Principles of agency apply: possession by SP’s agent counts as actual possession, even if also debtor’s agent, e.g.
escrow agent. But debtor cannot be SP’s agent & no agency if person in possession is so closely related to debtor or
under debtor’s control that debtor has possession.
 Perfection occurs when SP takes possession and continues while SP retains perfection
o §9-314 Perfection by Control
 Applies to investment property, deposit accounts, LOC rights, electronic chattel paper
 SP perfects when it obtains control & remains perfected while SP retains control
 §9-104 Deposit account: SP has control if SP is bank maintaining the account; debtor, SP & bank have authenticated
record giving SP right of disposition of funds; or SP becomes bank’s customer with respect to deposit account
 §9-105 Electronic chattel paper: SP has control if record is assigned to SP
 §9-106 Investment property: SP has control if SP is commodity intermediary w/ K; or debtor, SP & commodity broker
have authenticated record giving SP right to value of K
 §9-107 LOC rights: SP has control to the extent that issuer consents to assignment of proceeds
 Note: revision includes sale of promissory notes; creditors should file also because unclear whether filing would fix priority
before perfection
o §9-309 Automatic Perfection
 PMSI in consumer goods other than those covered under §9-311
 Rationale: limited resale value of consumer goods (except for those covered by COT statutes) makes security interests in
used goods unlikely, so no need to add costs of filing for PMSI
14

Problem: Many consumer goods have high resale value, e.g. jewels, antiques, musical instruments, art, expensive
electronics. Rule prevents creditors from taking security interests in consumer goods because they can never be sure that
they are unencumbered (limits borrowing base).
 Non-uniform amendments: CA never passed auto perfection rule. ME limited auto perfection to goods worth less than
$500. RI limits auto perfection to goods worth less than $1,000.
 Planning: file even where assumption is that collateral is consumer goods because may be for business; e.g. guitar used
for band that makes money, appliances for rental property, computers for office
 N/A for consumer goods that are subject to a statute or treaty, e.g. COT statute
 Note: if you rely on automatic perfection for a pmsi you are risking your perfection if the D sells the item and your SI
gets cut off. The higher the value of the goods the more incentive the C has to file
 Garage salw exception (9-320 (b)) poses risk of losing priority if SP doesn’t file (see later in outline (around 27)
 Assignment of accounts or payment intangibles that are not a significant part of assignor’s outstanding accounts or payment
intangibles
 Assignment = transfer; sale or secured transaction
 Significant party of outstanding accounts it totally unclear → in practice, file financing statement to avoid litigation
regarding the language (no matter how insignificant the assignment is)
 Comment: Purpose of provision is to prevent invalidation of casual or isolated assignments; those that no one would
think of filing. Creditors that regularly take assignments of account (institutional lenders) must file purpose n/a.
 Sale of payment intangible or promissory note
 Comment: Purpose is consistency with former article 9, which did not affect the rights of a buyer of payment intangibles
or promissory notes
 IS FILED FINANCING STATEMENT ADEQUATE?
o Minimum Requirements For Perfection
 §9-502(a) Filing statement is sufficient if it:
 PROVIDES NAME OF DEBTOR
 §9-503 Name of Debtor & Secured Party
- Registered organization: use name on articles of organization
 Check public records and transcribe name
 Includes limited partnerships
- Unregistered organization
 If organization has name: financing statement must provide the individual or organization name of the debtor
 If organization does not have a name: financing statement must provide the names of the partners, members,
associates, or other persons comprising the debtor
 Determining Name:
 Ask for partnership tax returns for prior five years to determine name
 Get opinion letter from debtor’s atty regarding name
 For big deals, condition of loan may be to incorporate
 Includes general or informal partnerships
- Sole proprietorship: individual is debtor; follow rules for individual
- Individual: check license, passport, social security card, recent tax returns & list all possible names
- Financing statement may provide the name of more than one debtor & more than one SP
- Valid financing statement is not rendered ineffective if it provides additional information, e.g. trade name, names
of partners/members, or if it fails to indicate the representative capacity of SP
 §9-506(b) General Rule: Financing statement that fails sufficiently to provide the name of debtor is seriously
misleading
 §9-506(c) Exception: If search of debtor’s correct name, using filing office’s search logic, would find the incorrect
statement, then financing statement is effective (i.e. not seriously misleading).
- Search logic depends on state, but generally exact match only. Noise words will be disregarded, e.g. a, an, the,
etc.
- Rationale: Placement of burden. Exact match places burden on searcher; reasonably diligent search places burden
on filer. Four reasons to put burden on filer:
 Sets clear test that simplifies the drafting of financing statements
 Sets clear test that simplifies the parameters for the searcher
 Requiring legal name avoids litigation regarding how common a nickname is & reasonableness of searching
for it
 Obtaining debtor’s legal name is not difficult or burdensome for filing because filer is doing due diligence &
must search under the same name for prior financing statements
15
-
Problem with rationale: individuals do not have legal names
Remedies to problem:
 Nonuniform amendment: TX states that individual’s correct name is name on driver’s license.
 List all possible names on financing statement; form gives you 3 chances
 Note discrepancy between code & form: code requires correct full name; form lists organization’s name and
individual’s first, middle & last name
 Federal Law: Financing statement is effective if a reasonably diligence search would uncover it (old article 9 rule);
applies for fed tax liens
 PROVIDES NAME OF SECURED PARTY
 INDICATES COLLATERAL COVERED BY FINANCING STATEMENT
 §9-504 Safe Harbors: Financing statement sufficiently indicates the collateral if it provides
- A description of the collateral pursuant to §9-108; or
- An indication that the financing statement covers all assets or all personal property
 Validates super-generic description for financing statements: complete reversal of case law that invalidated
such descriptions because of reduction on debtor’s bargaining power
 Rationale: Different functions for security agreement & financing statement. When prefiling, creditor may not
know the details of the deal; security agreement must properly delineate the scope of interest taken, but
financing statement must only give notice to the world of property that may be subject to creditor’s claim.
 Comment: Following former article 9 rule is sufficient to satisfy new rule. Satisfied in two ways:
- Indicate collateral by type (i.e. “inventory”); or
 §9-502, Comment 2: Financing statement is effective to cover after-acquired property of type indicated, even if
not indicated & not contemplated by the parties at time of filing. Looks like description if added – court will
likely find it to be an ambiguous description.
 Common practice to list all article 9 collateral types that can be perfected by filing (except consumer goods
because FTC issues)
 Type may be article 9 types or real world types: inventory, payment rights, Calvin Klein jeans
 If FS indicates by type then you do not need an after aquired property clause, but this means for subsequent
searchers that they must assume that all of D’s ______ is incumbered
- Indicate by description
 Must follow description rules; need after-acquired property clause
 If description lists specific thing, e.g. certain serial number, then assume there are more than one; if taking an
interest in less then all, must richly describe. Financing statement sets priority date, so it must be accurate;
creditor can amend the security agreement without consequence.
 If financing statement states a collateral type & includes a list of collateral, it is a description
 Err on the side of excessive details: Must describe richly, e.g. size, height, color, weight, material, etc. May
refer to an attached insurance/appraisal report but NEVER rely solely on an attachment for description
 Only use when debtor won’t let you describe by type, when the collateral will change types over it’s life and
when there is only one item of that type so you might as well describe
 CLC Equipment Co. v. Brewer (5th Cir): Court allowed trustee to avoid SP’s claim to debtor’s revenue earned from
inmates’ use of telephone equipment that was leased from SP because financing statement listed equipment and
proceeds of equipment, but revenue was not proceeds. Revenue was the product of the use of the telephone
equipment. Use is not a disposition of collateral within the definition of proceeds.
 §9-520(c): If financing statement is improperly accepted by filing office, financing statement is legally effective so long as it
satisfies §9-502(a) but subject to the priority rules of 9-338
o Minimum necessary to avoid rejection by filing office: §9-516(b)
 §9-521: Filing office may not refuse to accept UCC-1 (model form) except for reasons listed in §9-516(b)
 §9-516(b) Exclusive list of reasons filing office must reject financing statement
 Record not communicated by a method authorized by filing office
 Insufficient filing fee
 Filing office unable to index record because filing statement does not provide name of debtor, does not identify initial
filing statement or initial filing statement lapsed (for amendments), does not indicate first v. last name, or does not
provide sufficient description of RE to which it relates (for fixtures)
 Insufficient name or mailing address for financing statement adding an SP
 For filing statement adding debtor, record does not provide a mailing address, indicate whether individual or
organization, or provides insufficient organizational information
 For assignment, record does not provide assignee’s name and mailing address
 For continuation statement, record not filed within six-month period
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 §9-520(a) mandatory refusal to accept record: filing office shall refuse to accept a filing statement for reasons set forth in
§9-516(b), and may only refuse to accept filing for those reasons
 Wrongful rejection
 §9-516(d) statement is effective as a filed record except as against a purchaser of the collateral who gives value in
reasonable reliance upon the absence of the record from the files (i.e. non consentual lien holders, LC’s, bankruptcy
trustee, agricultural lien holders)
 Compromise rule: not fair to creditor whose financing statement was wrongfully rejected, but not fair to innocent parties
to make it effective if they were given no notice; so effective against bankruptcy trustee, but not against buyers
 Effect of indexing Errors 9-517 – The failure of the filing office to index a record correclty does not affect the effectiveness
of the filed record.
 9-520 (b) – filing office must communicate the rejection of a financing statement within 2 business days
o Minimum Necessary to Avoid Subordination to Another SP or Loss of Security Interest to a Buyer: correct info
required by §9-516(b)
 §9-338 Priority of secured interest perfected by filing
 If perfected by filing statement providing info in §9-516(b) that is incorrect at time of filing, then:
 Interest is subordinate to conflicting perfected security interest in collateral filed in reasonable reliance upon incorrect
information
 Purchaser (other than SP) of collateral takes free of security interest if it gives value in reasonable reliance on
incorrect information (and receives delivery of collateral for chattel paper, documents, goods, instruments, or security
certificate)
 §9-506(a) Substantial compliance rule: financing statement is effective, even if it has minor errors or omissions, unless
the errors or omissions make the financing statement seriously misleading
 Mailing address of debtor is never a minor error; may be the only way to identify the debtor
 §9-506(b) financing statement that fails to sufficiently provide the name of the debtor is seriously misleading as a
matter of law
 §9-506(c) if search of records under debtor’s correct name, using filing office’s standard search logic, would disclose
financing statement that fails to sufficiently provide debtor’s name, then it is not seriously misleading
 §9-520(c) a filed financing statement satisfying 9-502(a) & (b) is effective even if filing office was required to refuse to
accept it for filing under 9-520(a)
o Missing Requirements: no requirement for loan amount → amount due can change; searcher must assume collateral is fully
encumbered
 WAS ACT OF FILING ADEQUATE?
o General Filing Requirements
 Definition of Filing: §9-516(a) Filing = communication of a record to filing office & tender of filing fee or acceptance of
record by the filing office
 Location of Filing: §9-501 Filing Office
 Local filing: File in mortgage recording office for as-extracted collateral or timber to be cut; or fixture filing and goods
that are to become fixtures
 Note: SP can perfect an interest in fixtures by either filing a fixture filing or a UCC-I, but only a fixture filing will
give it priority against a RE claimant under §9-334. If it files a UCC-I, location of debtor governs filing.
 State filing: File in secretary of state’s office in all other cases
 SP of Record: §9-511 SP of record = person whose name is provided as SP or rep of SP in initial filed financing statement,
or assignee/SP on amendment if applicable
 Comment: Other law may affect SP of record, e.g. merger with SP
 Assignment of Powers of SP of Record
 Initial financing statement: §9-514(a) Initial financing statement may reflect an assignment of all SP’s power to
authorize an amendment to the financing statement by providing the name & address of assignee as name/address of
SP
 Amended financing statement: §9-514(b) SP of record may assign all or part of its power to authorize filing of an
amendment by filing an amendment that identifies initial financing statement, provides name of assignor, and
provides name & address of assignee
o Initial Finance Statements
 Time for Filing: §9-502(d) Financing statement may be filed before a security agreement is made or otherwise attaches
 Note unanswered problem (new to revised article 9): SP1 files a financing statement indicating equipment, but debtor
does not authorize filing. SP2 filed a financing statement indicating equipment & debtor authorizes filing. Then debtor
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authenticates security agreement for SP1 & authorizes filing of financing statement. Does authorization relate back &
validate retroactively such that it is effective against SP2?
 Authorization for Filing: §9-510(a) Financing statement is effective only to the extent that it was filed by someone
authorized to file it under §9-509 (new rule)
 Debtor Authorization: §9-509 When authorization occurs
 Person may file financing statement only if:
- Debtor authorizes the filing in an authenticated record
- Debtor authenticates or becomes bound as debtor by a security agreement encumbering collateral
- Debtor acquires collateral with a security agreement that continues to be valid
 Planning: If creditor prefiles, it can’t rely on authentication of security agreement. Must have debtor sign financing
statement with statement that debtor authorizes creditor to file financing statement. Always add manguage stating
that the debtor authorizes and have them sign because then SP doesn’t have to worry about waiting for SA and losing
priority over other C’s that might show up
 Problem: SP1 files financing statement. SP2 files authenticated financing statement. SP1 authenticates financing
statement. Who has priority? Authentication ratifies originally filed financing statement, but effect on intermediate
creditor is unclear.
 Person is authorized to file an amendment to financing statement (except adding collateral/debtor) if SP authorizes
filing
 SP Authorization: §9-510(b) Filing by one SP does not affect the financing statement with respect to another SP of
record → SP can file for another but cannot diminish the rights of another SP
 To avoid an issue just have debtor say in SA “I, debtor authorize SP to file a FS…”
o Continuation Statements
 Time for Filing: §9-515(d) may file continuation statement within 6 months of expiration of financing statement to maintain
perfection
 Start counting the day after the initial financing statement was filed
 Effect of Failure to File: §9-515(c) Continuation statement not filed within 6 month period is not effective and deemed to
have never been effective against a purchaser for value
 If creditor misses time period, must file initial financing statement → results in 2 priority dates
 No sympathy from court if continuation statement accidentally terminates interest
 NBD Bank v. Timberjack, Inc. (MN): Court held that creditor was unperfected because it filed a continuation statement six
months and five days before expiration of the term of the initial financing statement.
o Amendments to Financing Statement
 It is better for C to have a mistake in the SA than the FS
 General Rule: §9-512(a) SP may add/delete collateral, continue or terminate effectiveness, or otherwise amend info in
financing statement by filing an amendment that identifies file number of initial financing statement & if RE filing, includes
requirements of §9-501(a)(1).
 Comment: Filing of one amendment is legally sufficient to make multiple changes. Amendment may include only
amendment info, or take the form of an amended & restated financing statement
 Limitations:
 §9-509 Amendment that adds collateral or debtor requires authorization (if it doesn’t then SP of record may authorize the
filing unilaterally)
 §9-512(b) Filing of amendment does not change period of effectiveness
 §9-512(c) & (d): If amendment adds collateral or debtor, priority dates from filing of amendment
 Comment: may be better to file initial financing statement for additional debtor because requirements are the same
but effectiveness of amendment is shorter
 Required Information
 File number of initial financing statement
 SP of record (because must authorize filing)
 Changed information
 Requirements for Change in SP: §9-511(c) SP remains SP of record until filing of an amendment that deletes the person
 §9-512(e) amendment is ineffective if it deletes debtor/SP and fails to provide the name of a new debtor/SP
o Termination Statements
 Consumer Goods: §9-513(a)-(b)
 SP must file termination statement if financing statement covers consumer goods, and either there is no obligation
secured by the collateral covered by the financing statement or the debtor didn’t authorize the initial filing.
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




Time requirement for filing:
 Within 1 month after there is no obligation secured by collateral
 Within 20 days after SP receives an authenticated demand from debtor to file termination statement
Other Collateral: §9-513(c) Within 20 days of receiving an authenticated demand from debtor, SP shall send debtor
termination statement or file termination statement if:
 There is no obligation secured by collateral
 Financing statement covers accounts or chattel paper that was sold & obligation discharged
 Financing statement covers goods subject to consignment to debtor but are not in debtor’s possession
 Debtor did not authorize filing of initial financing statement
Effectiveness of Filing: §9-513(d) Financing statement ceases to be effective upon the filing of a termination statement with
filing office
Failure to File: Comment to §9-513 If debtor sends demand to address that debtor holds out in financing statement as the
place for receipt of communications, and termination statement is not forthcoming, creditor is deemed to have received a
notification to that address and person named as debtor is authorized to file termination statement that will be effective if it
indicates that the person authorized it to be filed.
Crestar Bank v. Neal (4th Cir): Court held that creditor was unperfected where it accidentally checked termination instead of
partial release of collateral on its filing. Mistake was not a minor error, and it was seriously misleading. Requirement that
searchers further inquire once on notice applies only to financing statements, not termination statements.
 MAINTAINING PERFECTION: Post-Filing Changes that Make Filed Financing Statement Seriously Misleading
o CHANGES IN DEBTOR’S NAME
 Question 1: Does name change make financing statement seriously misleading?
 No: financing statement remains effective
 Yes: apply §9-507
 Question 2: When was collateral acquired?
 Within four months after name change: financing statement is effective
 §9-507(c)(1) change in debtor’s name: financing statement remains effective for 4 months for collateral debtor has or
acquires within 4 months after name change
 After four months after name change: Did SP1 file an amendment within 4 months?
 Yes: financing statement effective
- §9-507(c)(2) Creditor must file UCC-3 within 4 months to maintain effectiveness of financing statement and
maintain priority date; if it does so, priority dates back to original filing.
- §9-509(d) secured party is authorized to file amendment for change in debtor’s name; prevents debtor from singlehandedly destroying creditor’s lien
- §9-521(b) UCC-3 Amendment: must give initial financing statement number to link back to original filing &
include all changed information
 No: financing statement not effective; subsequent creditor wins if perfected first
- After 4 four months, file an initial UCC AND amendment; code is unclear whether amendment would still be
effective. Priority for newly acquired collateral dates from filing of new financing statement.
 Planning Implications
 Searchers: Search is not enough if debtor changed name within prior four months. Must check for name changes.
Problem in practice is limited to interests in used equipment.
 Filers: Must monitor debtor name changes to prevent lapse in perfection. Particular problem for rollover collateral.
 Rule is a compromise between filer’s certainty of position and the integrity of a file search
 Add a clause to SA that says debtor will not change name without consent of SP
o TRANSFERS OF COLLATERAL (disposition rules)
 Question 1: Did disposition cut off the security interest?
 Yes: no interest left to perfect (consult cut off rules 9-320 (a), (b) “the garage sale rule” and 9-338 (2), 9-317
 (b), 9-315(a)(2))
 No: go to step 2
 Question 2: Does financing statement continue to be effective?
 §9-507(a) General rule: Financing statement remains effective with respect to collateral that is sold, exchanged, leased,
licensed, or otherwise disposed of and in which a security interest or ag lien continues, even if SP knows of or consents
to the disposition
 Disposition = sale, lease, license, exchange, any transfer of collateral
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Entity theory: change in business form always results in a transfer of assets from original entity to new entity
§9-316(a)(3) Limitation: Security interest remains perfected for one year after the transfer of collateral to a person that
thereby becomes a debtor and is located in another jx. Must file financing statement in new jx within a year.
 Note: Comments suggest original priority date remains, but filing is an initial financing statement, so there must be an
addendum referencing original financing statement to clarify. Should also file a continuation statement in jx 1.
Unclear under revised article 9 how to handle this situation.
 Under §9-509(c) by buying collateral subject to a SP’s SI, the transferee has authorized the filing of a new initial
filing statement in their jx ( i.e. you don’t need D auth. To refile)
 Prospective lapse (unperfection) after one yearif no new initial financing statement filed in new jx within one year;
retroactive lapse after one year ONLY if new creditor is a purchaser for value (i.e. a SP and NOT an LC because an
LC did not take a voluntary interest…no retrpactive lapse if there is a LC, still a prospective lapse rule)
 Planning Implications: Searcher must inquire into debtor’s source of title and search former owner. Problem for used
equipment. Remember that move may be interstate even if business location is across the street because location is
technical and debtor may be incorporated in DE.


o NEW DEBTOR
 Question 1: Was there a disposition of the collateral?
 Yes: apply disposition rules, not new debtor rules
 §9-508(c) if in the same jurisdiction, new debtor rules do not apply when financing statement remains effective
against new debtor according to §9-507(a) (disposition rule)
 If different juridiction apply the 9-316 (a) (3) which says that SP must file a new initial filing stament in the new state
within 1 year
 a new debtor situation will always include a disposition of collateral, once this is resolved then move to question 3
 No: next question
 Question 2: Is D2 a new debtor?
 §9-102(a)(56) new debtor = person that becomes bound as debtor under §9-203(d) by a security agreement previously
entered into by another person
 §9-203(d) D2 is bound by D1’s security interest if by operation of law or K:
- Security agreement becomes effective to create a security interest in D1’s property; or
- D2 becomes generally obligated for D1’s obligations (including security agreement), and D2 acquires or succeeds
to all or substantially all of D1’s assets
 State law: When partnership incorporates, corporation is a new debtor because it assumes all obligations of the
partnership. Case law must determine what happens when individual incorporates, since there isn’t a total
assumption of assets there.
 No: D2 is an unrelated entity; creditor has no relationship with D2 and claim to assets belonging to D2 is limited to the
assets transferred to D2 from D1. No claim to after-acquired property.
 Yes: Creditor has a security interest in D2’s assets, to the extent described in D1’s security agreement
 Question 3: If there is an interest, are D1 & D2 in the same jurisdiction?
 No: apply 9-316 (i)
 §9-316, Comment 2, Example 5: Section applies only to security interests that are perfected before debtor changes
location. N/A for security interests that do not attach before the location change. Since there is no attachment before
change in location when debtor reincorporates in a new jx, perfection ends upon incorporation. SP must refile
immediately.
 9-316 (i) provides 4 months of automatic perfection (you have to file within this 4 month window to maintain
unintrrupted perfection)
 Yes: apply 9-508 rules
 provides 4 months of automatic perfection (you have to file within this 4 month window to maintain unintrrupted
perfection)
 Question 4: Is interest perfected?
 General effectiveness: §9-508(a) filed financing statement under D1’s name is effective to perfect a security interest in
collateral that D2 has or acquires to the extent of D1’s security interest
 §9-203(e) Attachment: If D2 is a new debtor:
- D1’s agreement satisfies (b)(3) for attachment of D2’s property interests, but only to the extent of D1’s security
agreement; and
- No other agreement is necessary to make security agreement enforceable
 Limitation: §9-508(b) if name change from D1 to D2 causes financing statement to become seriously misleading, then:
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Financing statement remains effective in collateral acquired by new debtor within four months after new debtor
becomes bound;
 Financing statement is not effective in collateral acquired by new debtor after four months unless a new initial
financing statement is filed within four month period
 Question 5: Priority (Bifurcated Analysis)
 §9-325 Priority of security interest in transferred collateral: new debtor takes collateral as old debtor had it;
disposition rules govern priority
 §9-326 Priority of security interest created by a new debtor: If SP relies solely on §9-508 or 9-316 (i) to maintain
perfection in new debtor, it subordinates to creditors that perfect interest in new debtor’s collateral by means other than
§9-508 and 9-316 (i)
 §9-508 and 9-316 (i) grants SP four months to file a financing statement under new debtor’s name. If another SP
files during that time, it gets priority
 BIG POINT: THE RULES RE PERFECTION ARE DIFFERENT BECAUSE THE REVISORS WANTED TO STATE
DIFFERENT PRIORITY RULES FOR TRANSFERRED COLLATERAL (9-325) AND NEW COLLATERAL (9-326.)

o CHANGE IN DEBTOR’S LOCATION
 Interstate: §9-316 → change in law governing perfection
 §9-316(a) After change in debtor’s location to a new jx, perfection continues for the earlier of:
 Expiration of period of perfection in original jx (5 years after filing)
 4 months after change in debtor’s location
 Priority dates from the earlier time where the FS covering the colateral is first filed (or the SI is first perfected for
agricultural liens) IF there is uninterruptes filing or perfection (§3-322(a)(1))—refiling within requirements preserves
original filing date
 §9-316(b) If creditor does not refile in time, interest becomes unperfected and is deemed never perfected as against a
purchaser of the collateral for value.
 Prospectively unperfected: any new creditor (secured or unsecured) that would win unsecured battle wins
- Rule for unsecured creditors: first to attach takes priority
 Retroactively unperfected: deemed never perfected as against purchaser for value
- Purchaser = person that takes by purchase
- Purchase 1-201 (b)(29) = taking by sale, lease…or any other voluntary transaction creating an interest in property;
includes any article 9 transaction
 Planning: All security agreements prohibit debtor from relocating without informing creditor. But debtor’s breach
agreement regularly, so creditor must monitor debtor. Problem is particularly acute with individuals; registered
organizations rarely relocate. Creates problem of misleading file searches for new creditor in new state during 4
month window
 Intrastate: §9-507(b) → financing statement remains effective
 A financing statement is not rendered ineffective if, after it is filed, the info provided in it becomes seriously misleading.
o LAPSE IN PERFECTION
 Lapse: §9-515(c) perfection lapses if continuation statement is not filed before expiration of initial financing statement
 Prospective lapse rule: upon lapse, security interest becomes unperfected unless perfected another way; unperfected
against any new creditor
 Retroactive lapse rule: upon lapse, creditor is deemed never perfected as against a purchaser of collateral for value (rule
aimed at trustee)
 Purchaser includes article 9 creditor
 Lien creditor is not a purchaser because it does not get a lien through voluntary transaction
 Analysis of priority at default:
 When did SP2 perfect?
 After lapse (prospective lapse rule): SP2 has priority
 Before lapse (retro lapse rule): is SP2 a purchaser for value?
- Yes: SP2 has priority
- No: SP1 has priority
 Remember lien circularity: LC1 files before lapse, LC2 files after lapse. SP beats LC1; LC1 beats LC2, and LC2 beats
SP. No problem under former article 9 because no limit to retro lapse rule.
o OTHER CHANGES
 §9-507(b) other post-filing changes: financing statement is not rendered ineffective if after filing information becomes
seriously misleading under §9-506; Example: change in collateral classification
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PRIORITY ISSUES
Arise when two or more parties assert claims to a single asset or pool of assets; all rules are a product of an underlying policy decision.
 ANALYSIS
o Question 1: Who are the competing claimants? Translate into code names
 Do parties have an interest/claim?
 Are parties perfected?
o Does collateral type have a special rule?
o Is there a specific fact pattern that pulls in a rule?
o §9-201 residual priority clause
 §9-201(a) security agreement is effective according to its terms between the parties, against purchaser of collateral, and
against creditors → SP wins against non-SP, even if unperfected
 LIEN CREDITORS V. SP
o §9-102(a)(52) Lien creditor
 Creditor that acquires lien on property by attachment, levy, or the like
 Unsecured creditor that sues & gets lien in debtor’s assets in post-judgment collection proceeding
 Exemption laws: can’t get lien in property protected under exemption laws; exempt from seizure
 11 USC §101 (37) Lien = charge against or interest in property to secure payment of a debtor or performance of an
obligation
 11 USC 101 (36) Jucicial Lien = lien obtanined by judgement levy sequestration or other legal or equitable process or
proceeding
 No lien until attachment → sheriff must find property & constructively/actually seize property
 Priority may precede attachment → priority may date back to date of judgment or delivery of writ to sheriff upon
attachment (depends on jx)
 Assignment for the Benefit of Creditors
 Trustee in bankruptcy from date of filing of petition
 Receiver in equity from time of appointment
o §9-317(a)(2) Two Views
 LC wins over Article 9 SP if it gets lien before the earlier of two things:
 Before article 9 SP is perfected
 Before article 9 SP has filed financing statement and complied with 9-203(b)(3)
 Article 9 SP wins over lien creditor if:
 SP is perfected before lien creditor gets lien
 SP is not perfected, but filed a financing statement and satisfied §9-203(b)(3) (did everything but give value) before lien
creditor gets lien
 Rationale: consistent treatment for initial advances & subsequent advances
 Note: look at when lien creditor acquires lien, not when sheriff sells
 Creditor becomes an LC when his lien attaches to an asset but having the lien can date back to judgment/writ of
execution BUT distinguish having the lien from priority!!
o Ag lien holders (NOT an article 9 lien creditor)
 §9-102(a)(5) Ag lien = an interest in farm products:
 Which secures payment or performance of an obligation for goods or services furnished in connection with debtor’s
farming operations, or rent on real property for farming
 Which is created by statute in favor of a person that provides goods or services to farmer for farming purposes in
ordinary course, or leased real property to farmer for farming
 Whose effectiveness does not depend on the person’s possession of the personal property
 Basically: statutory lien that arises as a result of someone providing services or goods to a farmer to secure farmer’s
payment for those services or goods
 Creation v. Perfection: Creation/attachment of lien done by complying with statute, but perfection requires compliance with
article 9. Inclusion is inconsistent with article 9 because not consensual lien but farmers insisted on inclusion because prior
rule didn’t require notice. Problems may arise for service providers that do not know about change in rule.
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o Garageman’s Lien
 §9-333 = when an individual brings their car into a garage, the garage keeps it until they have been paid and has priority
over a previously perfected, serured creditor
 Why? The garage’s work on the collateral had perserved or increases the collateral’s value.
 Supre priority: second in time but first in line
o Federal Tax Lien Act (NOT an article 9 lien creditor)
 §6321 (i.e. attachment): If taxpayer doesn’t pay after demand (generally 90 days), gov has a tax lien in all debtor’s assets,
real and personal
 Exemptions: clothes, books, fuel, food, furniture, personal effects up to $1650, personal residence unless director says
otherwise
 §6323(a) (i.e. perfection): Lien imposed shall not be valid against purchaser, holder of security interest, judgment lien or
mechanic’s lien until notice is given
 RE property: gov must record at registry of deeds
 Personal property: each state IRS determines filing location, general separate filing in secretary of state’s office; in no
state decision, IRS perfects by filing in fed district court where debtor resides
 NOTE: searching for a FS will not turn up a TL
 §6323(h) Definition of security interest
 3 requirements to have a security interest:
1. Must be consensual security agreement (RE & article 9 transactions)
2. Property must exists (i.e. debtor has rights in property)
3. Interest must be protected under local law (i.e. perfected)
 Scope of interest: interest exists to the extent that holder parted with money or money’s worth (≈ value but more
specific, promise not enough)
- goods or credit, loan. services on credit, loan etc = $ or $’s worth
 Note difference: article 9 gives SP priority if perfected but for lack of value; not so against fed lien because that rule
(§9-317(a)(2)(b) does not apply to the FTLA
 Four possible priority contests
 Unperfected SP v. Perfected TL → TL wins because SP doesn’t have security interest under FTLA
 Unperfected SP v. Unperfected TL → TL wins because SP doesn’t have a security interest under FTLA; TL only
ineffective against creditors with security interests prior to notice
 Perfected SP v. Unperfected TL → SP wins because TL not effective without notice
 Perfected SP v. Perfected TL → first in time, first in right; prior perfected SP wins over subsequent TL
 Exception: RE tax lien trumps all because local gov provides services that directly benefit the property owner and
enhance the value of the lien; mortgagee subordinate
 Litton Industrial Automation Systems, Inc. v. Nationwide Power Corp. (11th Cir): Court held that fed tax lien had priority
over an unperfected security interest in interpleaded funds. A judgment lien creditor under the FTLA is a the equivalent of a
UCC lien creditor. If an SP would lose to a UCC lien creditor, then it loses to the fed tax lien.
 PRIORITY AMONG SECURED CREDITORS: SP V. SP
o §9-322(a) Residual clause for SP v. SP (subject to specific priority rules): Three Rules
 Perfected SP v. Perfected SP → first to file or perfect wins; priority dates from filing so long as there is no interruption in
filing or perfection
 Rationale: filing provides notice; subordination is fair
 Perfected SP v. Unperfected SP → perfected SP wins
 Unperfected SP v. Unperfected SP → first to attach wins
o §9-322(b) Proceeds: if (a) would control original collateral, then priority for proceeds follows
 NOTE: §9-322(a) is the residual priority rule, if the residual priority rule does not cover the original collateral (i.e. one of
the exceptions to the resudual priority rule covers the original collateral) then §9-322(b) does not apply!!
o Issue of Knowledge: §9-322 is a pure race statute; knowledge is irrelevant
 Court may alter pure race nature of statute when creditor’s actions border on bad faith
 General Ins. Co. v. Lowry: Debtor granted security interest in stock to creditor, but never delivered them. Debtor granted a
security interest in the stock to this atty, who had represented debtor in the first transaction, and delivered it to him. Court
held, despite article 9 rules, that good faith required a finding that creditor obtained an equitable lien in the stock when client
& atty signed the agreement.
o Potential Problems:
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 Is creditor an SP? Make sure security agreement & financing statement cover collateral, including after-acquired property
& future advances if applicable. Scope of security interest is governed by description in security agreement.
 Is SP perfected? Make sure there hasn’t been a lapse in perfection
o Ag Services, Inc. v. Empfield (NB): Ag Services perfected interest in debtor’s harvested crops by filing a financing statement.
Empfield leased land to debtor with lease that created a security interest in the crops. Empfield sold the crops when debtor
didn’t pay. Court held Ag Services had priority because perfected.
 PRIORITY REGARDING AFTER-ACQUIRED PROPERTY & FUTURE ADVANCES
o After-Acquired Property
 Analyze SP1: Does SP1 have a claim? Is SP1’s interest perfected? When did SP1 perfect?
 Analyze SP2: Does SP2 have a claim? Is SP2’s interest perfected? When did SP2 perfect?
 Did both parties have perfected security interests in the collateral?
 No: perfected party wins
 Yes: apply §9-322(a) → first to file or perfect wins
 Language from problem 4.7: “all additions, accessions and substitutes to it” – don’t use this language; S/A regarding
whether it suffices as an after-acquired property clause
 Searchers and potential creditors cannot rely on lack of AA property cluse in SA to determine whether AA property is
emcumbered because another creditor could always file a second SA, even after the aquired property comes into existance,
adding that property to its SI and priority will date back to their datr of initial filing or date that the SI attached.
 Basically, the relevant documebt for planning purposes is the FS not the SA—the failure to include an AA property
clause is not fatal, parties are free to rewrite it BUT as a planning matter always include AA property clause just to be
safe
o Future Advances
 Future advance = Money or other value that SP extends to debtor subsequent to initial transaction, e.g. value, services,
goods
 Future advance clause: Makes all subsequent advances of value secured by collateral in security agreement. Debtor
need only sign a new promissory note to complete the transaction; original security agreement & financing statement
cover subsequent advances.
 Anaconda clause: Clause that attempts to secure the largest amount of indebtedness owed, e.g. provides that security
agreement covers all other liabilities of debtor to SP; includes all liabilities, regardless of when incurred; larger than
future advance clause
 In re Kazmierczak (7th Cir): Farmer debtor executed security agreement annually with debtor to secure purchase of
fertilizer. In last year, debtor filed bankruptcy before executing agreement. Court held that clause in previous agreement
that stated that it covered “all crops now growing or hereinafter grown on debtor’s farm to secure all present and future
debts to SP” secured debt. Course of dealings has no weight.
 Relatedness doctrine: In the absence of clear evidence of a contrary intent, a dragnet clause will not cover future advances
unless they are of the same kind & quality or relate to the same transaction or series of transactions as the principle
obligation secured or unless the document evidencing the subsequent advance refers to the security agreement as providing
security therefore.
 Rationale: prevent abuse of dragnet clauses by creditors
 §9-204, Comment 5: intent to secure future advances is a matter of K interpretation. Article 9 rejects cases that apply
other tests, such as whether future advance is of the same or similar type. Comments are not law so couts are free to
invoke the doctrine
 The 7th and 1st circuts reject the relatedness doctrine
 §9-323 Future Advances
 Rule: if rule applies, priority for future advance is date SP makes advance, not date of filing
 Very narrow application: must have auto perfection §9-309 or temporary perfection under §9-312 (fact pattern woul say
this existed) and advance not made pursuant to a binding commitment; n/a if SP files to perfect, only when 2 PSP against
eachother
 Rationale: Attempt to ensure fairness where perfection doesn’t given notice; limit on hidden liens
 Comment 3: Everyone knows this rule doesn’t apply. §9-322 applies.
 When possible, file because filing keeps SP out of this rule
 §9-204(b) After-acquired property clause is not effective to create a security interest in:
 Consumer goods unless debtor acquires rights in goods within 10 days after SP gives value
 Future commercial tort claims that do not exist when debtor authenticates the security agreement
 §9-322(a) Priority: priority for subsequent advances is the same as priority for initial advance
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 Equitable Doctrine of Marshalling: if senior creditor has two sources of recourse, and junior creditor has only one, court as a
matter of equity may order senior creditor to pursue its other source of satisfaction. Court is likely to invoke doctrine at
state law to prevent unjust enrichment to debtor, but less likely to invoke the doctrine in bankruptcy so unsecured creditors
get pro rata share of equity.
o §9-204(a) validates after-acquired property clause & future advance clause: creditor can have an interest in future
collateral & current collateral in one document. Saves transactional costs.
 Comment 2: Financing statement is effective to encompass transactions under a security agreement not in existence and not
contemplated at time notice was filed, if the indication of collateral in financing statement is sufficient to cover the collateral
concerned.
 Cross-collateral clauses valid: collateral acquired at any time secures advances whenever made
o General Conclusions
 If no after-acquired property clause or future advance clause in initial financing statement, execute new security agreement;
financing statement still covers second agreement
 Financing statement is extremely broad → notice to the world that all of collateral, existing or after-acquired during the five
year period, it claimed.
 SUBSEQUENT FINANCING & PMSIS (PLANNING STRATEGIES FOR SUBSEQUENT LENDERS TO ENSURE PRIORITY)
o §9-103 PMSI
 PMSI CAN BE CREATED ONLY IN GOODS & SOFTWARE
 §9-103(a) Definitions
 PMSI requires a close nexus between the acquisition of collateral & secured obligation
 PMSI is in collateral SP got for interest extended. Anything else is not purchase money either because not purchase
money collateral (not property purchased with loan) or not purchase money obligation (loan given after purchase).
 §9-103(b) PMSI in Goods
 (b)(1) Security interest in goods is a PMSI to the extent that the goods are purchase money collateral with respect to that
security interest
 you can have both a PMSI and a nonPMSI in the same collateral (§9-103(h); PMSI in the goods exists to the extent
that the goods are PM collateral with respect to that collateral
 (b)(2) Inventory acquired subject to PMSI remains PMSI, even if agreement includes other collateral, an after-acquired
property clause and/or future advance clause (too difficult to differentiate)
 This means that SP has a PMSI in inventory if security interest is in inventory that SP financed AND the security
interest secures the price of inventory serving as collateral or the price of other inventory subject to SP’s PMSI.
 No need to keep track of which payments went were under §9-103(e)
 Rationale: Attempt to eliminate judge-made transformation rule, which held that if collateral secured both a purchase
money obligation and some other obligation, then security interest was transformed into nonpurchase money obligation.
Bad rule for lenders relying on super-priority.
 §9-103(e) Application of Payment in Non-Consumer Goods Transaction
 Reasonable agreement between the parties govern → look to K law
 If no agreement, intention of obligor manifested at or before time of payment governs
 If no agreement or intent manifested, allocate payments as follows:
 To unsecured obligations
 To PMSI in the order in which those obligations were incurred
 2 allocation forumlas
 First in first out (similar to accounting)
 Dual status rule
- One item of collateral can be subject to 2 kinds of security interest, MOST courts adopt this formula
 §9-103(f) No loss of PMSI Status in Non-Consumer Goods Transactions
 PMSI does not lose its status as such if:
 PM collateral also secures non-PM obligation
 Collateral that is not PM-collateral also secures the PM obligation
 PM obligation is renewed, refinanced, consolidated, or restructured
 §9-103(h) Non-Consumer Goods Transactions: no position taken on transformation rule in consumer goods transaction;
courts may still invoke transformation rule (compromise rule)
o §9-324 Priority of PMSI
 §9-324(a) PMSI Rule for Goods Other than Inventory/Livestock (second in time first in right)
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
In order to apply:
 Must have goods that are not inventory or livestock
 C must have PMSI in the goods
 Must perfect within 20 days of debtor taking possession of collateral
- Brodie Hotel Supply v. United States (9th Cir): Debtor took possession of restaurant filled with ’s furniture.
Debtor obtained a loan & secured it with furniture. Then debtor executed bill of sale & granted security interest in
furniture to .  had priority as PM creditor, even though statute requires perfection within 10 days of debtor
receiving possession of collateral & debtor held collateral for 5 months prior to filing, because debtor did not
become a debtor until security agreement was signed &  filed within 10 days after that.
- Revised §9-324, Comment 3: 20 days period does not commence until the goods become collateral, i.e. subject to
a security interest
 Rule: PMSI has priority over all other SPs
 Rationale: avoids situational monopoly on the part of SP1; gives debtor bargaining power to obtain subsequent loan to
purchase
 Practical consequence: it’s a come-see-me clause. Security agreements now include a negative covenant clause, which
requires debtor to get consent from lender before further encumbering collateral. Clause is designed to keep equipment
lenders abreast of fast-breaking events. Lender may either give approval, match terms of new lender to keep business, or
make requirements for new agreement.
 Purchase money equipment lender (9-324 (a)) does not have to worry about any post filing changes EXCEPT debtor
relocation and transfer of collateral (FOR BADR)
 §9-324(b) Super-Priority Inventory PMSI
 Rule: To have super-priority, PM inventory lender must have:
 PMSI
 In inventory
 PM creditor must perfect before/when debtor takes possession
 PM creditor must give notice to all prior filed inventory SPs at perfection → all those on file as of the time SP files or
when SP’s 20 day temporary perfection begins (if SP perfect by means other than filing)
- I have or expect to take an interest in the following described collateral
- PMSI lender has to send personalized notification (essentially a financing statement) to each earlier lender saying
what they are doing and describing the inventory)
 Those parties entitled to notice must receive notice before debtor takes possession of the purchase money inventory
(up to 5 years before)
- Effectively requires SP to send a personalized financing statement to all conflicting SPs
 Notice must state that the SP sending it has or expects to acquire a PMSI in inventory to the debtor, and describing
the inventory
 Purpose: protect inventory lender from making advancements on a false assumption that there is collateral that secures
the advancement
 Proceeds: two VERY LIMITED situations where super-priority extends to proceeds
 Cash proceeds: Super-priority extends to cash proceeds received from sale of PM inventory to the extent cash
proceeds are received on or before delivery of inventory to buyer
 Chattel paper: PM creditor has super-priority to chattel paper to the extent that §9-330 allows
 §9-324(g) PMSI Vs. PMSIs (two rules)
 Seller PMSI v. nonseller PMSI (aka lender PMSI)→ seller wins
 PMSI v. PMSI → first in time wins
 Does each C have a SI?
 If yes, is each C’s SI perfected?
 If yes, do any of the C’s have a PMSI?
 If yes, in what?
 If goods other than inventory/livestock, then did D perfect within 20 days?
- Yes: PMSI Creditor has super-piority
- No: under §9-324 the forst to file or perfect rule applues
 Rationale: encourage sellers to deal with debtors; seller would not relinquish property unless it could use it as collateral
to satisfy the obligation to pay the price
 CHATTEL PAPER PURCHASER
o §9-330: Priority of Purchaser of Chattel Paper or Instrument
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 Rule: A chattel paper purchaser will have priority over a prior chattel paper SP if it:
 Takes chattel paper in good faith
 Takes in the ordinary course of business
 Gives new value
 New value = PM inventory SP is deemed to give new value when chattel paper is generated by its PM inventory
(change in revised article 9)
 Takes possession of chattel paper
 Has no knowledge that the purchase violates the rights of the SP
 Knowledge of financing statement or security interest alone is not enough; must have knowledge that purchase
violates SP’s rights
 No requirement that chattel paper purchaser search records
 For prior SP with claim to chattel paper as proceeds, requirement is that chattel paper doesn’t indicate SP’s claim
(lack of knowledge not a requirement)
 Higher standard may result from validity of both parties claims – article 9 gives priority to chattel paper purchaser if
it meets the standards of a BOC of goods
 Rationale: Chattel paper purchaser is infusing debtor with cash; same as accounts debtor with different type of inventory
 Note: If there is an indication on chattel paper that it belongs to an SP, then that is notice that prevents anyone else from
taking priority; otherwise SP with paper has priority
 Distinction between (a) & (b): If prior lender relies on chattel paper in making its advances, it is claiming the chattel paper
as more than proceeds & (b) governs priority. A lender relies on chattel paper to make advances if it bases its advances on
the value of debtor’s inventory & chattel paper.
 SUBORDINATION AGREEMENTS
o Subordination Agreement: Agreement between creditors that one will subordinate rights to another
 Lien subordination: subordinated creditor agrees that its property interest in particular collateral will take behind the
property interest of the other claim
 Debt subordination: subordinated creditor’s right to payment and collection will be subordinate to superior claimant’s rights
 Article 9 does not dictate how to create an enforceable subordination agreement – follow CL
o Rationale: it may be in the best interest of senior lender to subordinate so that debtor can borrow more money and continue
business
o ITT Diversified Corp. v. First City Capital Corp. (TX): First lender subordinated interests in assets of the debtor to interests of
third lender. Third lender’s claim was paid first, but only to the extent of first lender’s original claim. Then second lender was
paid, then remainder of third lender’s claim, and finally first lender’s claim. If first lender’s claim had been larger than third
lender’s claim, then it would be paid to the extent it exceeded third lender’s claim, prior to payment of second lender’s claim.
o §9-339 Priority Subject to Subordination: This article does not preclude subordination by agreement by a person entitled to
priority
 Comment: Only the person entitled to priority may make a subordination agreement; a person’s rights cannot be adversely
affected by an agreement to which the person is not a party.
o BC §510(a): A subordination agreement is enforceable in a case under this title to the same extent that such agreement is
enforceable under applicable nonbankruptcy law
o Options for new lender participation:
 PMSI
 Subordination agreement with senior lenders
 Termination agreement: lend enough money for debtor to pay off original lender & obtain a termination statement
 Assignment transaction: SP3 can declare that it is paying off SP1 and taking over its position (to the extent of SP1’s
financing statement, which must be assigned); allows SP3 to supersede any other SPs
 SP3 can now bring its origional claim in with the outstanding portion of SP1’s lien and assume SP1’s priority
 Amendment financing statement: negotiate with senior lender to delete some collateral from financing statement
 Don’t lend
 BUYERS OF GOODS VS. SP
o Attitude toward buyers: inventory lenders love them; all other SPs are very hostile toward them
o Hypo: Debtor sells used equipment to dealer, who sells to buyer
 SP has a claim against dealer for conversion → wrongful exercise of control or dominion of the property of another
 Buyer has a claim against dealer for breach of warranty of good title
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o §9-320 Buyer of Goods (Applies to unauthorized sales of INVENTORY)
 §9-320(a) Buyer in ordinary course of business: Buyer in ordinary course takes free of security interest created by
buyer’s seller, even if security interest is perfected and buyer knows of its existence
 Buyer in ordinary course
 §1-201(b)(9) Buyer in Ordinary Course
- Buyer buys goods in good faith
 §9-102(a)(43) Good faith = honesty in fact and the observance of reasonable commercial standards of fair
dealing
 Objective standard, but fuzzy → former Article 9 was a subjective standard
 A minority of states also require that the buyer follow reasonable commercial standards of fair play as
objective standard
- Without knowledge that sale violates rights of a 3rd party in goods
 Buyer CAN have knowledge of security interest in goods
 Buyer CANNOT have knowledge that purchase violates third party’s rights
 NOTE: SP prohibiting D from selling goods without consent has no effect on the buyer’s knowledge
- Buys in ordinary course
 Not limited to consumer buyers → may include individuals and business entities
 Does NOT include:
 Buying from a masked man in the back of a truck
 Buyer in bulk → selling 50% or more of inventory is liquidation; certain rules apply
 Taking goods as security for a claim → article 9 creditors can never be buyers in ordinary course
 Pawn broker
- From person in business of selling goods
 This requirement effectively means that §9-320(a) applies only to the sale of INVENTORY
- Must take possession of goods or have right to recover goods from seller under article 2
 §2-502 Buyer’s right to goods on seller’s insolvency
 Buyer who has paid a part or all of the price of goods in which he has a special property interest has a right
to recover them under Article 2. Even if not in possession, buyer qualifies as buyer in ordinary course that
can cutoff security interest of seller (e.g. buyer of car that’s still on the lot).
 Special property interest = goods exist & are identified; identify in K
 Goods that are not farm products
 The SI that is cut off is limited to the SI that they buyer’s seller created
 Rationale: protect consumer buyers & reasonable expectations of lender – only an inventory lender wants it collateral sold,
so only its interest will be cut off
o §9-320(b) Garage Sale Exception (Applies to unauthorized sales of CONSUMER GOODS)
 Rule: Buyer takes free of security interest, even if perfected, if buyer buys without knowledge of security interest, for value,
buys for use as consumer goods, and takes possession before filing of financing statement covering goods
 Requirements
 Both buyer & seller must use goods for personal, family or household purposes (consumers)
 Buyer must pay without knowledge of security interest
 Different standard: if buyers knows of security interest, no cutoff
 Buyer must give value
 SP has not filed a financing statement
 This possess a risk to PM creditors of consumer goods that rely on auto perfection
o §9-315(a)(1) Disposition of Collateral (Applies to AUTHORIZED sale of collateral)
 Rule: Security interest continues in spite of disposition unless SP authorized disposition free of security interest
 Case law says implicit authorization is enough, it does not have to be explicitly stated in the SA
 Purpose: Designed to regulate relationship between inventory lender & debtor → SP will want to authorize disposition of
hard/durable goods (expensive) on an individual basis, but give implied authorization for disposition of soft goods
(inexpensive)
 Does NOT apply to a BOC’s buyer of farm products (farm products sold by a farmer)
 This rule defers to other SP v. Buyer rules when there is a conflict between them
 If this analysis conflicts with 9-320(a) above, the BOC wins!
o §9-317(b) Buyers That Receive Delivery (Applies to collateral capable of POSSESSION)
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 Rule: Except as provided in (e), a buyer other than an SP, of tangible chattel paper, documents, goods, instruments, or
security certificate takes free of security interest if buyer gives value and receives delivery of collateral without knowledge
of security interest and before it is perfected.
 N/A for (e): super-priority for PM creditor that files within 20 days to perfect
 Limited to collateral capable of possession → tangible, semi-intangible & certificated security
 Must determine if SP is perfected to determine whether interest is cut off
o §9-201 Residual Rule: Security interest is effective against purchaser
o Hypo: Debtor has an equipment SP & inventory SP. Debtor sells used equipment. Who has a claim?
 §9-102, Comment 4(a): Goods are inventory if they are leased by lessor or held by a person for sale or lease (in the ordinary
course). Machinery is equipment and not inventory, even though it is the policy of the business to sell it when it becomes
obsolete, e.g. Hertz.
 Three arguments that inventory lender does not have a claim:
 Equipment never became inventory, even though held for sale by the business
 Even though inventory, they were never included in inventory lender’s after-acquired property clause
 Even if inventory included in after-acquired property clause, §9-315(a)(1) cuts off interest because inventory lender
implicitly authorized sale of collateral
 If equipment becomes inventory, equipment lender’s interest is NOT cut off:
 Unilateral action on the part of the debtor should not defrock the creditor of its interest
 §9-507(b) financing statement is effective, even if seriously misleading; no reason for this rule if interest were cut off
 Interest attached under §9-203. Since no cutoff rule applies, the security interest remains.
 Case law: Security interest described collateral as a red car. Debtor painted it blue. Trustee claimed no security interest
because description was inaccurate. Court said debtor can’t cut off interest by painting the collateral.
 Solution: To prevent fight between inventory & equipment lender, equipment lender should obtain a subordination
agreement
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IMPACT OF BANKRUPTCY ON SECURITY
 INTRODUCTION TO BANKRUPTCY
o History
 Constitution grants Congress the right to pass bankruptcy laws → attempt to create uniformity; dispute whether it was an
attempt to protect creditors from pro-debtor states, e.g. states with unlimited homestead acts, limits on wage garnishment
 Codes: 1898 first stable bankruptcy code; 1978 the Code; 2005 Amendments
 Amendments designed to prevent bankruptcy abuse, mostly with changes to consumer laws, but most believe they used a
cannon to kill a gnat
 Three main causes of bankruptcy: divorce, medical problems, job loss
o Four types of bankruptcy cases
 Voluntary: initiated by debtor (person subject to bankruptcy proceeding)
 Involuntary: initiated by creditor or third party, e.g. partner
 Joint: voluntary case initiated by H&W
 Ancillary/cross-border: chapter 15; proceeding in the US that is ancillary to a main proceeding in another country; attempt
to create coordinated process for international business
o Case commences at filing of petition & triggers three consequences:
 Creates bankruptcy estate: §541
 Triggers auto stay: §362
 Divides debtor’s world into prepetition past & post-petition future
o Chapter 11 Overview
 Creditor = someone whose rights to payment arose at or before the commencement of the case; bankruptcy affect creditor
rights
 Goal is to continue business as a going concern; reorganization & plan confirmation
 Pension liability is causing many business bankruptcies today → under-funded pension funds
o Three possible claims
 Unsecured creditors
 Over-secured creditor → value of collateral exceeds value of claim
 Under-secured creditor → two claim; secured claim & unsecured deficiency claim
 BANKRUPTCY ESTATE: §541
o Estate = pool of potential value that will be distributed according to bankruptcy distribution scheme
 All legal & equitable interests of the debtor in property pass to the bankruptcy estate as filing of petition
 Creditors with property interests have a secured lien to the extent of the value of collateral; deficiency claim for the rest
 U.S. v. Whiting Pools: Proper seized by SP is property of the estate until asset is sold. Until then, debtor had rights to legal
title, right to redemption, right to notice of tax sale, right to surplus.
o Order of Payout
 POE disturbed to secured claims up to value of collateral (claims beyond value of secured collateral are unsecured)
 In individual bankruptcy only, debtors get exemptions (skip for companies)
 Some states have an “opt out provision” then only state law exemption schemes are available to creditors, if no opt out
provision then the individual can chose between state and federal schemes
 Priority unsecured creditors
 Include: doemstic support (even though it is not discharged), costs and expenses to make the case run (trustee, attorney,
accountant, etc.), employee wages
 Nonpriority unsecured creditors
 Get pro rata share of what is left (no priority, doen;t matter when unsecured claim began so long as it was prebankruptcy)
 Anything left (rare) goes to debtor
o 95% of consumer cases are no-asset cases → debtor gets discharge & creditors get nothing
o Bankruptcy trustee: Represents the unsecureds → attempts to maximize the estate so as to maximize relief to the unsecured &
force everyone to share pro rata
o Equality is equity: bankruptcy protects creditors from debtor & from each other by stopping the rush & creating a collective
proceeding where similarly situated debtors receive pro rata distribution
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 AUTOMATIC STAY: §362
o Automatic stay = automatic temporary federal injunction that stays all debt collection activity by creditors (pre OR postpetition) against debtor, POD & POE → preserves the status quo
 Automatic: arises by operation of lawat the moment the petition is filed—no need to go to court & prove general
requirements of irreparable harm, likelihood to win on the merits, harm outweighs prejudice, & in the public interest
o Sanctions for violating stay
 Any act/inaction taken in violation of the stay are at least voidable, maybe void (no operative legal effect)
 Any actor that willfully violates the stay is subject to compensatory damages for whatever loss was suffered, and punitives if
the violation was egregious
 Willfully:
 Pre-amendments: knowledge of the bankruptcy + intention to commit the act
 Amendments: suggests creditor must have received notice required by the Code
o Repossession of collateral
 Repossession after filing not allowed without relief from stay because collateral passes to estate through debtor’s ownership
interest; SP only has a lien. §362(a)(4) prohibits any attempt to enforce a lien in POE
 Repossession before filing can be avoided because debtor’s ownership interest passes to the estate & continuation of a
foreclosure would be an attempt to enforce a lien in violation of the stay
 U.S. v. Whiting Pools: once there is a sale to a bona fide third party, debtor no longer has a right to the property; anything
short of a sale, debtor still has an ownership interest.
 it is always faster for D to file than for C to sell the collateral because C must give D 10 days notice before doing so.
o Relief from stay
 Chapter 11: unlikely to get relief if debtor needs collateral to reorg
 Bankruptcy flips everything; debtor’s duty to pay becomes a right not 3to pay
 Two bases for relief:
 If debtor has no equity in the collateral AND property is not necessary for effective reorg
 For cause, including lack of adequate protection of creditor’s interest in the property
 Adequate protection = Protection from decline in the value of creditor’s lien, e.g. if collateral is depreciating; NOT
protection against opportunity costs or interest. Most courts hold that equity cushion is adequate protection.
 Value: not defined in bankruptcy code; SC held that it means replacement value. Determined as of the petition for
relief (so SPs petition immediately)
 TRUSTEE’S AVOIDANCE POWERS
o If trustee can avoid security interest, two things happen:
 Creditor holds an unsecured claim
 Value of avoided lien goes into the kitty for distribution to unsecureds
o If trustee avoids senior lien, §551 says that value is preserved for the benefit of the estate; junior lienholder does not benefit
from avoidance → all trustee actions go to help the unsecureds
 Ex. SP1 has $1000 SI in D’s collateral (priority), SP2 has $1000 SI in D’s collateral, collateral value is $15000. SP1 ges
$1000, SP2 gets $500 and rest of claim is now unsecured. If SP1’s claim gets avoided, SP2 still gets only $500 and the rest
is unsecured. What was SP1’s $1000 claim now goes into the pot.
o Trustee avoidance powers apply to events that occur prepetition only
 If SP perfects on the same date as filing of petition, time of filings controls
o BC §101(54) Transfer means:
 Creation of a lien
 Lien = charge against or interest in property to secure payment of debt or performance of an obligation;
nondenominational – doesn’t matter how creditor gets lien
 Creation of a lien includes creation of a security interest
 Retention of title as a security interest
 Conditional sales contract: §2-401 when seller keeps title but delivers goods to buyer, it is treated as a security interest
 Purpose: codify UCC into fed law; if seller kept title, then property wouldn’t become POE
 Seller PMSI
 Foreclosure of debtor’s equity of redemption
 Equity of redemption = right to redeem property by paying off debt owed
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 Foreclosure sale cuts off debtor’s right to redeem property & transfers property to third party buyer
 Each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or party with property or an
interest in property
 Article 9 security interest: direct (straight from debtor to creditor), conditional (only exercise rights at default), voluntary,
parting with (not disposition of) an interest in property
 IRS tax lien: direct, conditional (if taxpayer pays, lien goes away), involuntary (no taxpayer choice), parting with an
interest in property
 Foreclosure sale: direct (interest goes from debtor to buyer), absolute, involuntary, disposing of property
o §544(a) Strong Arm Clause
 Rule: Confers upon bankruptcy trustee as of the commencement of case certain rights, powers & status from state law:
 Rights & powers of judicial lien creditor
 Article 9 lien creditor → some states allow judicial liens in business debtor’s personal property (like UCC filing); all
allow judicial liens in RE
 Rights & powers of an execution lien creditor
 Article 9 lien creditor → sheriff seizure & sale of property
 Rights & powers of a bona fide purchaser of RE other than fixtures who has done what a BFP must do at state
law to have an interest in RE
 N/A for article 9 transactions
 Trustee gets BFP status (not just lien creditor status) because some state recording acts give unrecorded RE claimants
priority over lien creditors
- This means that in bankruptcy:
 If trustee was only given lien creditor status, it couldn’t avoid all unpublicized claims or interests
 Different results in different states; destroys bankruptcy uniformity
- BFP status not granted for personal property because a BFP takes free of inventory lender’s security interest even
though inventory lender is perfected; don’t want trustee to avoid inventory lenders
 Note: Confers hypothetical lien creditor status on trustee → need not be an actual lien creditor
 Powers of lien creditor
 §9-317(a)(2) Lien creditor wins if lien creditor gets lien before article 9 creditor perfects or perfects minus value req
 Bankruptcy application: where lien creditor would get priority, bankruptcy allows trustee to avoid entire lien (where
state law gives priority, fed law proscribes the consequences)
 If filing of finance statement & petition happen on the same date, look to time of filings: ALSO An Article 9 creditor,
even though it is not perfected, will have priority over a lien creditor if, at the time the lien creditor gets its lien, the
Article 9 creditor has filed a financing statement and complied with 9-203(b)(3).
 §9-317(e) If SP with PMSI files before or within 20 days after debtor receives delivery of collateral (note: not
attachment), SP takes priority over the rights of a buyer, lessee, or lien creditor which arises between the time the
security interest attaches and the time of filing (basically §9-324(a))
 General application: intervening bankruptcy; PMSP can perfect within 20 day period, even if debtor files bankruptcy
during that period
 §362(b)(3) permits creditors to protect state laws, either by giving notice to bankruptcy court or by doing what state
law permits; not a violation of the stay
 Policy: Equality is equity does not justify §544 because:
 If SP is perfected, it gets priority. If Congress intended full equality, it could have eliminated SPs in bankruptcy
 Attempts to create equilibrium with state law to prevent incentivizing bankruptcy filings. Since the race between
unperfected SP & unsecureds wasn’t finished at filing, bankruptcy places them on the same plane. But not totally true
because it at state law SP would still win because it has some property interest & bankruptcy eliminates that altogether.
 McCoid: There is no rationale for this section. It is a ceremonial hazing that SP must go through in bankruptcy.
o §544(b)
 Rule: Trustee can avoid prepetition transfer or prepetition obligation that the debtor incurred if an actual unsecured creditor
could avoid it
 Requires an actual unsecured creditor who can avoid the transfer as state law
 Generally n/a for article 9 because unsecureds cannot avoid an SP’s lien
 Principle Use: avoidance of fraudulent transfers at state law
 Uniform Fraudulent Transfer Act allows creditors to avoid defined transfers for up to four years
 BC §548 reach-back period it only two years
 §544(b) allows avoidance of fraudulent transfers for the additional two years (what state prescribes)
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 PREFERENCES: §547
o Two policy goals:
 Phase in bankruptcy’s equality is equity creed pre-bankruptcy
 Recapture estate depleting transfers & distribute according to bankruptcy distribution scheme
o B-90: Phase in Pre-Petition
 General Rule: To the extent that a creditor’s position improves during B-90, a trustee can avoid it unless one of the
exception shelters the creditor from a preference attack
 Insider Preference: Trustee can avoid transfers that improved creditor’s position within one year of filing, but presumption
of insolvency applies only for B-90
o Seven Conjunctive Elements of a §547 preference
 **for T to avoid the transfer, ALL of the conjunctive requirements of §547AND no exception or defence can apply; it is
important to figure out what the transfer that we are focusing on is
 TRANSFERER ALWAYS = D
 TRANSFEREE ALWAYS = C
 There must be a transfer under §101(54)
 Includes any parting of an interest in property → security interest, judicial or execution lien
 Very broad definition of transfer (see above)
 The transfer must be of an interest of the D in property
 SCOTUS has defined “interest of the D in poperty” as an interest that eould be property of the estate and available for
distribution BUT FOR the transfer
 §541 analysis: if someone else pays the creditor, then it’s not an estate depleting transfer
 Earmark doctrine: where creditor gives money to debtor to pay off another creditor, there is no preference because the
D’s estate has not been depleated (debtor is a conduit)
 The transfer must be to or for the benefit of the creditor
 Gifts don’t count → may be recovered as a fraudulent transfer under §548
 An employee is a creditor
 The transfer must be on account of an antecedent debt
 Step 1: Determine date debt was incurred → date that creditor extends value
 Step 2: Determine date of transfer: §547(e)
 No transfer until debtor has rights to the property → attachment
 Date of transfer = date of attachment if there is perfection within 30 days after attachment
- For a check this is the date that D’s bank honors the transfer
 Date of transfer = date of perfection if perfection occurs more than 30 days after attachment
 Step 3: Did transfer occur AFTER the debt was incurred?
 Example: SP gives money to buy a computer. Antecedent debt because no transfer until computer is constructed
because no attachment until then, which is after debt was incurred.
 Typical situations: SP delayed filing to perfect or SP gains acquired an additional property interest through an afteracquired property clause
 Services rendered by an employee are an anticedent debt
 The transfer must be made during B-90
 UNLESS there was an insider preference, in which sace the transfer can be within B-1 year
 Transfer must have been made while debtor was insolvent
 Presumption of insolvency during B-90 under §547(f)
 Transfer must have improved C’s position from what it would have been had there been no transfer and D filed for Ch. 7
 3 steps:
 Take away the transfer
- i.e. take away the SI if there is one because that is a common transfer
 Put the D in Ch. 7
- How much would C receive in Ch. 7? Pro rata share
 Compare that C would get with the transfer versus what C would get without it
- i.e. what SI would get v. what pro rata share would ger
 Generally moving from unsecured to secured will result C getting more
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NOTE: Fully secured creditors never receive an improvement in position from payment made B-90; if undersecured,
all payments are avoidable
Example: Debtor offers to pay 50% of outstanding debt. Take it but don’t spend it for 90 days because it’s an
avoidable preference.


o § 547(c) Exceptions to Preferences
NOTE: release of a SI constitutes new value
 §547(c)(1): Contemporaneous Exchange Exception
 3 requirements for C to fit within:
 Parties must intend a contemporaneous exchange
- Documentation/Proof is key: must be able to demonstrate that parties intended a contemporaneous exchange
- Like a check—both parties view it as being the same as cash
- SC Case: Bank lends $10 mil to debtor at 10 am. At lunch, bank hears that debtor is having financing problems.
At 2 pm, bank calls borrower & demands a security agreement, which debtor signs at 4 pm. Ten days later, debtor
files bankruptcy. Trustee avoided preferences.
 C gives new value
- New value = term of art = money or money’s worth
 The exchange is, in fact, substantially contemporaneous
- Article 9 substantially contemporaneous = perfection within 30 days of transfer/attachment
- Intended to protect transactions involvement payment by check because treated like a payment transaction, but
actually a credit transaction, so it will always be a preference & Congress did not intend for trustees to avoid them
- Minority: Courts allow exception to apply where creditor failed to file within 30 days of attachment because
avoiding claim doesn’t accomplish policy objectives of §547(e)(2)(A)
 §547(c)(2): Ordinary Course of Business Exception
 Requires that D’s payment was in the ordinary course of D’s business or finandial affairs,
- either according to a relationship between debtor & creditor, or according to ordinary industry practice, sheltered
- NOTE: if the D and C have a relationshop where the payment is late every month, then the payment is in the
ordinary course of business and it is not a preference
- While a SI is NOT payment, money OR return of inventory to a supplier can both constitute payments
 Debtor must incur debt in the ordinary course of business
 Transfer was made in the ordinary course of parties’ business
 Transfer was made according to ordinary business terms (consistent with industry norms)
 Purpose: Protect utilities & long term installment contracts
 Must be a transfer of payment → n/a for security agreements
 §547(c)(3): Enabling Loan Exception (PMSI Exception)
 Must give new value that was:
 Given at or after signing of security agreement with description of collateral
 Given by or on behalf of secured party
 Given to enable debtor to buy property
 And debtor did in fact buy the property
 Must be perfected on or before 30 days after debtor receives property
 §547(c)(4): Subsequent Reimbursement Exception
 Requires a specific chronology of events:
 First: preferential transfer from D to C
 Second: C gives new, unsecured value to D
 Basically, C gets the preference and then riemburses the estate for it to the extent that C has paid back the preference,
C is sheltered
 Ex. D pays C $40k and it is a preference, after that C sells $10k worth of goods on unsecured credit to D. It has just
given 10k of new, unsecured value and hasriembursed the estate to the estent of the $10k. To the extent that D
riembursed the estate $10k, that $10k is not recoverable by T. The preference is $30k
- Reasoning: C has already given $10k back to the estate, the estate has $10k in goods, so it only has to give back
$30k more to have given back the whole $40k
 Rule: To the extent of the new value, transfer is not avoidable
 Rationale: Creditor has effectively reimbursed the estate if new value is unsecured
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 §547(c)(5): Inventory and Recievables
 specially tailored to determine when an inventory lender has had an improvement in position during B-90 because the
regular way won’t work
 Rule: a reduction in the gap between C’s claim and the value of D’s inventory and recievables is the avoidable
improvement in position
 Ex: Entering B-90 C’s claim is $100k and D’s inventory + recievables is $75k; at Bankruptcy C’s claim is still $100k but
D’s inventory + recievables is now $90k = improvement in positionthat is avoidable
 §547(c)(6):Statutory Liens
 §547(c)(7):Domestic support
 §547(c)(8): Deminimus Consumer Debt
 Protects C’s of consumer goods
 If the aggregate amount of the transfers is $600 or less, then T cannot get it back
 §547(c)(9): Deminimus Business Debt
 If the aggregate amount of the transfer during B-90 is less than the $5,850, then T cannot get it back.
o Goal as SP’s attorney: Prevent SP’s position from deteriorating below SP’s position at B-90
 Addition-to Collateral: SP gave 100K loan with 70K collateral. Debtor acquires 30K of equipment during B-90, which is
encumbered by virtue of SP’s after-acquired property clause. 30K is avoidable as a preference.
 Substitution of Collateral:
 Improper structure of transaction: SP consents to sale of 30K equipment because debtor intends to purchase new
equipment. Debtor uses 30K from sale for payroll, then buys equipment with its own funds. 30K is avoidable transfer
because no exceptions apply. Atty is liable for malpractice.
 Proper structure of transaction:
 Consent: SP withholds consent to release E1 until debtor gives documentation that E3 has been purchased. Then SP
gives consent to sell E1 free of security interest. Still a preference, but contemporaneous exchange exception &
PMSI exception apply.
 Trade-in: SP agrees to release E1 only if debtor uses it to trade in for E3; exception applies to the extent of new value
(value of E1)
 PMSI: SP requires debtor to give SP proceeds of E1, which is will then give to debtor/equipment seller for PMSI
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PROCEEDS
 DEFINITION
o §9-102(a)(64) Proceeds means:
 Whatever is acquired upon disposition of collateral
 Whatever is collected on, or distributed on account of, collateral
 Includes leases or license of collateral
 Accounts: as payments come in from account debtors, those are proceeds of the account/collateral
 Rights arising out of collateral
 To the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects
or infringements of rights in, or damages to, the collateral
 To the extent of the value of collateral and to the extent payable to the debtor or the SP, insurance payable by reason of the
loss or nonconformity of, defects or infringements of rights in, or damages to, collateral
 Two limitations:
 Creditor or debtor must be the loss payee on the policy or it is NOT proceeds
 Proceeds limited the value of the collateral
 Planning: SP must require notice of debtor’s nonpayment; if debtor doesn’t pay, SP will do so and add that amount to
debt
o Includes proceeds of proceeds, etc. as long as they can be traced back to the original collateral
o Can’t have proceeds without collateral because proceeds are derived from collateral → security interest in proceeds gives SP
nothing
 Ex. where farmer D grows corn, C has SI in corn, D paid by government no to grow corn, C has NO SI in the the not grown
corn because C can’t have rights without collateral to have rights in
 FYI to get around this, put these type of payments in SA and FS as collateral
o Cash proceeds = money, checks, deposit accounts and the like (highly liquid assets)
 ANALYSIS FOR PRIORITY DISPUTES INVOLVING PROCEEDS
o Question 1: Do the conflicting claimants have a claim to the proceeds?
 §9-203(f): Attachment of a security interest in collateral gives the SP the rights to proceed provided by §9-315 and is also
attachment of a security interest in a supporting obligation for the collateral
 §9-315(a)(2): Except as otherwise provided, a security interest attaches to any identifiable proceeds of collateral
 Must be able to trace proceeds to original collateral
 If cutoff rule affects collateral, proceeds are cut off also
o Question 2: If so, are those claims perfected?
 §9-315(c): A security interest in proceeds is temporarily perfected if the security interest in the original collateral was
perfected.
 Perfection lapses after 20 days unless one of three requirements is met (NOTE: 20 day clock starts every time new
proceeds ar generated; §9-333(a)(1)’s first to file or perfect rule does not apply if there has been a disruption to filing or
perfection)
 §9-315(d)(1)
 Three conjunctive requirements for continued perfection
- Must have filed a financing statement on original collateral;
 §9-311(d) Compliance with separate notice system is the legal equivalent of filing
- Security interest in proceeds could be created by filing a financing statement in the same place that financing
statement for original collateral was filed (i.e. C must be able to file FS for the type of collateral that the proceeds
are in the same location—debtor or colalteral—as they would did with the original collateral); AND
- Proceeds not acquired w/ cash proceeds
 Rationale: no notice; can buy anything with cash
 N/A in three situations:
- SP can’t file on original collateral: LOC, money, deposit accounts as original collateral
 Lockbox: inventory lender insists on payment of all proceeds to a certain address, which is a lockbox
controlled by lender to prevent commingling of funds
- SP had to comply with separate notice system & proceeds generated from collateral are article 9 collateral (i.e. not
subject to notice system)
- Proceeds acquired with cash proceeds
 NOTE: you can still, however, be in §9-315(d)(2) [below] when the proceeds are cash proceeds
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Note application to barter activity: Exchanges are perfected under this section, but no notice is given to third parties.
Generally applies to car trade ins, where no hidden lien results because new goods are the same as the old ones.
 Limitation in §9-315(e): period of perfection in proceeds is coterminous with the life of the financing statement
covering the collateral or 21 days after attachment if the latter occurs later than the lapse of the filed financing
statement
 §9-315(d)(2) Auto perfection beyond 20 days if proceeds are identifiable cash proceeds
 §9-315(d)(3) Security interest in proceeds is perfected other than under (c):
 When the security interest attaches to proceeds (e.g. financing statement includes collateral); or
 Within 20 days after security interest attaches (e.g. by filing)
 Effect on Lenders
 Inventory lenders: gives SP an automatically perfected interest in cash, deposit accounts, money, checks, chattel paper
under (d)(d); gives continuously perfected interest in promissory notes, accounts & chattel paper generated by debtor’s
sale of inventory under (d)(1).
 Account lenders: article 9 seeks to protect them because money lent often goes to pay other SPs; account lender wins if it
files first

o Question 3: If all claimants hold perfected interests in the proceeds, who has priority?
 §9-324: Proceeds of PMSI
 §9-324(a) - PMSI of goods (not inventory/livestock): super-priority for both collateral & proceeds
 §9-324(b) - PMSI of inventory: super-priority for collateral; super-priority for proceeds only to the extent that (see (b)):
 must have PMSI and inventory to be in §9-324(b)
 4 conjunctive requirements for §9-324(b) “super prioirity:
- PM creditor MUST perfect it’s SI before or at the time the debtor recieves the invenroty
- PM creditor MUST send out an authenticaded notification to all prior fIled inventory lenders on file at the time it
perfects
- One such notice is good for five years BUT the prior filed inventory lenders must receive that notice before the
debtor recieves possession fo the PM inventory
- That notice has to describe the inventory that the lender is financing
 POLICY: Inventoy financing is periodic and based on what the lender sees so these requirements are designed to
make sure that prio inventory lenders know what is going on. That way, they don’t think new inventory is being
added to D’s inventory because business is good when it is really being added because D is just getting more credit
from another lender.
 super-priority for collateral; super-priority for proceeds only to the extent that:
- If cash proceeds, then cash proceeds are received on or before delivery of inventory to buyer
 If buyer pays ½ upfront & ½ later, PM creditor only gets super-priority to first half
 Structuring transaction: use buyer financing; for inventory lenders of large items, lender can offer to finance
buyer to enable it to pay cash
- If chattel paper, then SP doesn’t lose out to chattel paper purchaser under §9-330
 §9-330(a): Purchaser of chattel paper has priority over SP with interest in chattel paper as proceeds if it:
 Takes chattel paper in good faith (observance of reasonable commercial standards of fair dealing)
 Takes in the ordinary course of business
 Gives new value (PM inventory SP deemed to give new value when chattel paper is generated by PM
inventory)
 Takes possession of chattel paper
 Chattel paper doesn’t indicate SP’s claim (knowledge is irrelevant)
- If accounts, 1st to file or perfect rule applies so account lender has priority over PMSI lender if it files first
- Basically, if the buyer (from D) buys in any way other than by cash or check, the PM inventory lender doesn’t
have super priority an regular priority rules apply.
- PLANNING: the lender may protect itself by requiring the buyer to finance the proceeds so D will always have
cash or a check coming in as payment.
 §9-322 (b): Residual priority rule for proceeds
 Time of filing/perfection for collateral is time for filing/perfection of proceeds
 Rule: first to file or perfect wins; if neither does so, first to attach wins
 §9-315(b)(2) Priority as to comingled cash proceeds
 Application
 First, determine what the contest is.
- Convers the parties into article 9 terms
 Ex. SP V. Garnisher  SP v. LC
37
-
Apply appropriate prioity rule
 Ex. §9-317(a)(2)SP wins—to the extent that SP has a SI in the account, it has priority over LC
 Look at chart trasaction to determine the extent that SP has a SI in the account
- Ex. SP gets is claim and the remainder of the proceeds go to LC
 3 rules for application of §9-315(b)(2):
 it is presumed that funds withdrawn from a comingled account will first depleat proceeds;
 proceeds are deemed to be withdrawn only if non-proceeds remain in the account; AND
 subsequent deposits of non-proceeds do NOT replenish proceeds
 9-322(c):priority to non-filing collateral extends to certain proceeds of that non-filing collateral
 9-322 (d): SI is in Chattel Paper; deposit accounts; negotiable documents; instruments; investment property; or letter of
credit rights that is perfect by a method other than filing, conflicting perfected S.I.s in proceeds rank according to time of
filing on the proceeds
 Note: Bankruptcy invalidates after-acquired property clauses, but it does not invalidate claims to postpetition proceeds from
prepetition collateral
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§ 444.1 Definitions.
(a) Lender. A person who engages in the business of lending money to consumers within the jurisdiction of the Federal Trade
Commission.
(b) Retail installment seller. A person who sells goods or services to consumers on a deferred payment basis or pursuant to a leasepurchase arrangement within the jurisdiction of the Federal Trade Commission.
(c) Person. An individual, corporation, or other business organization.
(d) Consumer. A natural person who seeks or acquires goods, services, or money for personal, family, or household use.
(e) Obligation. An agreement between a consumer and a lender or retail installment seller.
(f) Creditor. A lender or a retail installment seller.
(g) Debt. Money that is due or alleged to be due from one to another.
(h) Earnings. Compensation paid or payable to an individual or for his or her account for personal services rendered or to be rendered
by him or her, whether denominated as wages, salary, commission, bonus, or otherwise, including periodic payments pursuant to a
pension, retirement, or disability program.
(i) Household goods. Clothing, furniture, appliances, one radio and one television, linens, china, crockery, kitchenware, and personal
effects (including wedding rings) of the consumer and his or her dependents, provided that the following are not included within the
scope of the term household goods:
(1) Works of art;
(2) Electronic entertainment equipment (except one television and one radio);
(3) Items acquired as antiques; and
(4) Jewelry (except wedding rings).
(j) Antique. Any item over one hundred years of age, including such items that have been repaired or renovated without changing their
original form or character.
(k) Cosigner. A natural person who renders himself or herself liable for the obligation of another person without compensation. The
term shall include any person whose signature is requested as a condition to granting credit to another person, or as a condition for
forbearance on collection of another person's obligation that is in default. The term shall not include a spouse whose signature is
required on a credit obligation to perfect a security interest pursuant to State law. A person who does not receive goods, services, or
money in return for a credit obligation does not receive compensation within the meaning of this definition. A person is a cosigner
within the meaning of this definition whether or not he or she is designated as such on a credit obligation.
§ 444.2 Unfair credit practices.
(a) In connection with the extension of credit to consumers in or affecting commerce, as commerce is defined in the Federal Trade
Commission Act, it is an unfair act or practice within the meaning of Section 5 of that Act for a lender or retail installment seller
directly or indirectly to take or receive from a consumer an obligation that:
(1) Constitutes or contains a cognovit or confession of judgment (for purposes other than executory process in the State of Louisiana),
warrant of attorney, or other waiver of the right to notice and the opportunity to be heard in the event of suit or process thereon.
(2) Constitutes or contains an executory waiver or a limitation of exemption from attachment, execution, or other process on real or
personal property held, owned by, or due to the consumer, unless the waiver applies solely to property subject to a security interest
executed in connection with the obligation.
(3) Constitutes or contains an assignment of wages or other earnings unless:
(i) The assignment by its terms is revocable at the will of the debtor, or
(ii) The assignment is a payroll deduction plan or preauthorized payment plan, commencing at the time of the transaction, in which the
consumer authorizes a series of wage deductions as a method of making each payment, or
(iii) The assignment applies only to wages or other earnings already earned at the time of the assignment.
(4) Constitutes or contains a nonpossessory security interest in household goods other than a purchase money security interest.
(b) [Reserved]
People:
1. Grant Gilmore - the principle architect of article 9. He and a friend wrote the entire first draft of article 9 over a long July 4 th
weekend in Chicago in their underwear. It was 1943, during WWII
39
Recap in Methodology Choice of Law
- The first step is to determine if the fact pattern poses a choice of law question.
- If it does, your next question is if this choice of law issue is one relating to the applicable steps of
perfection or priority as we defined it.
- If the answer is no, go to 1-301, the contract, etc.
- If it is an issue of perfection or priority, classify the collateral.
- Is it covered by a specialty rule? If so, follow that particular rule.
- If it’s none of those special things, go to 3-301.
Distinction between perfection and priority
- With respect to any type of perfection other than possession, the debtor’s location will control.
- With respect to possession by perfection, the location of the collateral controls.
- With respect to priority, the debtor’s location will control priority as to intangibles. The collateral’s
location will control priority for tangible/semi tangibles.
Distinction between debtor’s location vs. collateral’s location
- The debtor’s location controls perfection for everything but a possessory security interest.
- The collateral’s location controls perfection by possession.
- The collateral’s location controls priority for tangible/semi tangible collateral.
Distinguishing by types of collateral
- For intangible collateral, the debtor’s location controls everything.
- For tangible/semi tangible collateral, the debtor’s location controls perfection other than by possession.
- For tangible/semi tangible collateral, the collateral’s location governs perfection by possession.
- For tangible/semi tangible collateral, the collateral’s location controls priority.
Develop a series of questions you would ask in doing a post-filing analysis
- Determine if PFC; then pull out list of categories; then see which one(s) apply
- Let’s say it’s a debtor’s name change; what’s your next question?
o Is it seriously misleading?
 If not, don’t need to do anything
 9-507(c), and we have concluded it is seriously misleading; now what?
 Remember, under “Exact search” logic, most will be misleading
o Then: Was the collateral acquired w/in 4 months of the name change?
 If yes, the creditor is fine
o (Assume it was acquired after that window)
o Next question: Was there an amendment filed w/in 4 months of the name change?
 If so, SP1 will be perfected with a priority date based on initial FS; that priority date will
extend
o Next: When did SP1 file its UCC-3?
o Next: Did SP2 file before that?
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