Introduction to Secured Transactions

1. sIntroduction to Secured Transactions
a. Advantages of secured creditor
i. Asset-based versus overall credit
ii. Recover without litigation
iii. Control after default
iv. Priority in bankruptcy
b. Lien is an interest in the debtor’s property given by the law to protect a creditor
i. Consensual lien if voluntarily granted
ii. Mortgage if in debtor’s property
iii. Security interest – consensual lien in personal property or fixtures
1. Governed by Article 9 of UCC
iv. Judicial lien if lien arises from judicial proceedings
v. Statutory lien created by statute or common law in favor of creditors the law deems
worthy of protection
1. E.g. landlords, artisans repairing personal property (garage mechanic)
c. Pre-code security devices
i. Seeking to avoid the “secret lien” (Benedict v. Ratner): assignment of accounts kept
secret and would deceive other creditors
1. Lead to uncertainty of enforceability of security devices in:
a. Enforceability
b. Notice to others
c. Rights on default
d. Priority disputes
e. Proceeds
f. Protection for debtor
g. Priority in bankruptcy
2. Goal of UCC A9 – bring uniformity, predictability, and simplicity to commercial
a. UCC is a model statute adopted by all states
b. Not an exclusive area of law
ii. Types of security devices
1. Pledge – creditor has physical possession of collateral until debt is paid
a. Automatic perfection
b. Still exists within A9
2. Field warehousing – goods kept on buyer’s property but separate from other
goods until paid
a. Possession of negotiable document of title perfects the interest
b. Still exists within A9
3. Chattel mortgage – just like with real property; mortgage is recorded and debtor
retains the property
4. Conditional sale – seller agrees to deliver the goods and buyer agrees to pay;
creditor can repossess collateral on 3 conditions:
a. When §2-702 applies
b. Buyer specifically granted seller a security interest
c. Seller sues, recovers judgment and property seized
5. Trust receipt – bank financing
6. Factor’s lien – whole seller
2. Scope of Article 9
a. Security interest defined (§1-201-(35)): interest in personal property that secured payment
(usually) or performance of an obligation
i. §9-109: A9 applies to:
1. Transaction that creates “security interest” in personal property, regardless of
form, created by contract
2. Agricultural lien
3. Sale of accounts, chattel paper, payment intangibles, promissory notes
4. Consignment
5. A2 (sales) interests
b. Consignments – owner of goods (consignor) sends (consigns) goods to retailer (consignee) for
sale; retailer appears to own goods and no notice to potential creditors
i. A9 covers consignments as defined by §9-102-(20): delivery of goods, by nonconsumer,
1. to merchant, if:
a. deals in that good, but under different name than deliverer
b. Not Auctioneer, and
c. Not generally known by its creditors to deal in the goods of others (In re
i. No reason to believe goods not dealers (no sign, not in name, etc.)
2. for sale for $1000 or more per delivery
3. goods not consumer goods, immediately before delivery
4. transaction does not create security interest that secures an obligation
ii. Bailment – not consignment, if not for purposes of sale, but still may be security interest
iii. Exceptions in some circumstances because creditors may be on notice, or the transaction
is so small A9 need not be followed
c. Leases – can disguise secured sale as a lease;
i. “regardless of form” – doesn’t matter want you call it if security interest is created
(conditional sale, sale with option to repurchase, lease, trust, loan, bailment, license, etc.)
1. E.g. conditional sale – retention of title by seller is merely a security interest
ii. Lease vs. secured transaction
1. Factors to consider (Gibraltar Financial Corp. v. Prestige Equipment Corp.)
a. End of lease: lessee becomes owner for little or no consideration = ST
b. Lessee can terminate at any time = lease
c. Junk pile test: goods leased for entire economic value = ST
d. Risk of loss
e. Present value of payments versus price
2. No bright line test
d. Exclusions from A9 (§9-109(d))
i. Federal statutes – UCC (state law) does not trump federal (Philko Aviation, Inc. v.
1. State statutes are usually supplementary
2. Certain federal statutes may void some S.I.
a. E.g. selling plane requires filing with FAA, but state did not require
recording of sale—S.I. lost because federal law trumps
3. Confusion about IP – where to file notice (USPTO or state)
a. To be safe, file in both places
ii. Landlord’s lien and other statutory liens
1. Do not want A9 conflicting with state statutes; exclude from A9 to avoid
2. Landlord’s lien created by law – not Sis created by agreement that happen to
belong to landlords
iii. Wage assignments – some states make some agreements void
iv. Non-financing assignments §9-109(d)(4)-(9)
1. Chattel paper, payment intangibles, promissory notes as part of a sale of a
a. Doesn’t harm creditors because no one is being misled
2. An assignment of accounts, chattel paper, payment intangibles, or promissory
notes which is for the purpose of collection only
a. Account replaced with money
3. An assignment of a right to payment under a contract to an assignee that is also
obligated to perform under the contract (e.g. commissioned painting transferred)
a. No deception because debtor no longer has contract
4. An assignment of a single account, payment intangible, or promissory note to an
assignee in full or partial satisfaction of a preexisting indebtedness
a. Creditors already knew debtor had debt
5. Insurance policy – except healthcare insurance receivables
6. Judgments (like for tort claims)
v. Real estate – mortgage used as security; excludes fixtures
vi. Surety’s subrogation rights – created by operation of law, non-consensual and not
covered by A9
vii. Others
1. §9-109(d)(13): does not apply to consumer checking account
2. §9-109(d)(9): settlement is not a judgment; A9 applies to settlements
3. Creation of a Security Interest
a. Classifying the collateral – important because dictates the way to perfect the security interest;
rules for attachment in general apply across all categories;
i. Subcategories depend on debtor’s announced intended use
1. Goods: moveable things; not real estate or intangibles or mere software on disk
(includes embedded software in goods)
a. Consumer goods – personal, family, household
b. Farm products – crops, livestock, supplies
c. Inventory – to be leased, sold, raw materials or stuff used up
d. Equipment – catch-all
2. Quasi-tangible: pieces of paper used as collateral
a. Instruments – checks, notes
b. Investment property – stocks and bonds and rights to accounts containing
c. Documents – document of title, warehouse receipts and bills of lading
d. Chattel paper – writing(s) that evidence a monetary obligation and a
security interest in or lease of specific goods
i. E.g. a lease in goods; or a security agreement plus a promissory
note; or a sales contract that has the effect of a security agreement
1. E.g. Car lease contracts kept electronically
e. Letter of credit rights
3. Intangible: property having no significant physical form
a. Accounts – various right to payment for goods, services, insurance policy,
energy, use of vessel, use of credit card, lottery winnings, and HCIR
i. Not a right evidenced by instrument or chattel paper, commercial
tort claim, investment property, LC, or debt from loan of money
(other than credit card)
b. Deposit accounts
c. Commercial tort claims
d. General intangibles – catch-all; includes payment intangibles and software
ii. Classification determined at time of creation of security interest (In re Troupe)
1. Otherwise would need to monitor debtor’s use of collateral
2. Debtor’s representations are important; not hidden intended uses of collateral
iii. Principle use of property is determinative (Morgan County Feeders, Inc. v. McCormick)
1. Look at whether immediate or ultimate sale of goods; long or short period of use
in business
2. Equipment vs. inventory
a. Equipment when fixed assets or relatively long period of use
i. E.g. cattle used for recreational cattle drives = equipment
b. Inventory if used or consumed in short time in production of some end
b. Technical validity of the forms
i. Two pieces of paper: neither is always required – e.g. possession may be sufficient for
attachment and perfection
1. Security agreement (for attachment) - §9-102: an agreement that creates a security
interest; contract conveying rights between parties
a. §9-203: security agreement must
i. Be authenticated by debtor §9-102(a)(7)
ii. Describe the collateral
iii. Good SA will identify the parties, describe the collateral, contain a
grant by the debtor to the creditor of a security interest in the
collateral, and specify the contractual understandings of the parties
(i.e. what events will constitute default)
2. Financing statement (to be filed for perfection) – UCC1: document to be filed in
the appropriate public office by the creditor; notice to world
a. §9-502(a): financing statement must
i. Must identify the parties
ii. Indicate what collateral is covered
iii. May be amended
ii. Debtor’s identity – filed under debtor’s legal name so must be correct to put other
creditors on notice
1. §9-506: a financing statement that substantially complies is effective, even with
minor errors or omissions which are not seriously misleading (using office’s
usual search logic) (In re John’s Bean Farm of Homestead, Inc.)
a. If search under debtor’s correct name produces financing statement with
incorrect name
i. Maybe one previous or next (but not 60!)
b. Court has no discretion because statute is unambiguous
i. Also, not difficult to file under the correct name
2. Name change §9-507:
a. Where the debtor so changes name, that a filed financing statement
becomes seriously misleading, the filing is not effective to perfect a
security interest in collateral acquired by the debtor more than 4 months
after the change
i. UCC §9-507© is effective from filing to name change plus 4
1. Need to refile after name change
ii. Creditors should check for debtor name changes every 3-4 months
1. Or add covenant
iii. Creditor must file amendment to FS to continue perfection
iv. UCC §9-503 for individuals, goes by name on license
b. Need not refile for change of creditors
3. §9-102 defines debtor as person that owes debt or owns collateral, depending on
iii. Description of the collateral
1. Security agreement must reasonably describe (e.g. list); by category; formula or
procedure; otherwise make objectively determinable
a. Super generic description (e.g. “all personal property) not allowed in
security agreement but ok in financing statement
b. Look to what parties intended because security agreement is a contract
2. Floating lien §9-204 – attaches to new property not yet acquired without
additional paperwork
a. Security agreement may provide for security interest in after acquired
property, but not:
i. Consumer goods as additional collateral more than 10 days after
value, or
ii. Commercial tort claim
b. No floating lien in consumer goods as additional collateral acquired
greater than 10 days after value from lender
3. Financing statement must be sufficient to alert the searcher to the necessity for
further inquiry
a. Description need only inform, not educate
i. Super generic description ok
c. Attachment of the security interest – process by which the security interest in favor of the
creditor becomes effective against the debtor
i. §9-203 attachment of security interest steps:
1. Collateral in possession of secured party by agreement OR debtor has
authenticated (e.g. signed) a security agreement with description of collateral
(contract law concepts)
a. Evidence that the debtor intended to convey an interest to creditor
b. Need oral agreement and possession or signed agreement (similar to
statute of frauds)
2. Value given (contract law concepts)
a. Binding commitment to extend credit:
i. As security for or in total or partial satisfaction of a pre-exists
claim; or
ii. By accepting delivery pursuant to a pre-existing contract for
purchase; or
iii. Generally, in return for any consideration sufficient to support a
simple contract
3. Debtor has rights in collateral (property law concepts)
a. Do not need to have full ownership in collateral to secure interest (Border
State Bank of Greenbush Bank v. Bagley Livestock Exchange)
i. Can have sufficient interest in collateral even if doesn’t own
collateral outright
b. Nemo dat quod non habet - a person who does not own property,
especially a thief, cannot confer it on another except with the true owner's
i. No rights in an account from a buyer of goods to put up as
collateral where debtor sold goods to buyer under contract from a
third party supplier, debtor was intermediary acting as agent of
ii. Timing of attachment – attaches when all three requirements are met
1. Interest attaches once the goods are identified
4. Perfection of the Security Interest
a. Perfection generally
i. Must attach before can be perfected
1. Attachment is between creditor and debtor
2. Perfection is creditor against other creditors
ii. How to perfect §9-308: attach plus… (depends on type of collateral)
1. §9-310: Must file to perfect, unless
a. Automatic (permanent or temporary) §9-309
i. Purchase money security interest in consumer goods (PMSI)
ii. Assignment of insignificant part of accounts
iii. Sale of payment intangible or note
iv. Assignment of health care receivable to provider
b. Possession
c. Control (bank accounts)
d. Proceeds (20 days)
e. Minor assignment of accounts
f. Another statute governs §9-311
i. Federal statute (e.g. FAA, IP ?)
ii. Certificate of title statute – State Acts (n/a to merchant’s
iii. UCC 9-311(d) – any collateral is inventory if
b. Perfection by possession (pledge): collateral in physical possession of the creditor
i. The world is alerted to that creditor’s possible interest in the property and no other notice
is therefore required
ii. §9-313:
1. May perfect by possession (control exclusive of debtor) in goods, instruments,
money, negotiable documents, or tangible chattel paper
a. Not deposit accounts, accounts, general intangibles
b. Perfect in document for bailee’d goods
i. Perfection in negotiable document perfects in underlying goods
1. Filing or creditor’s possession of negotiable warehouse
receipt sufficient to perfect interest in field warehoused
ii. In non-negotiable document (person handing them off must come
back for them), notice to or document from bailee (or filing)
1. Issue document in favor of creditor, bailee’s receipt of
notice as to creditor’s interest OR file as to the goods
iii. If no document, notice to and acknowledgement by bailee
1. Diamond held by museum (not creditor or debtor) must be
perfected via filling or notice to museum plus museum’s
acknowledgement of creditor’s interest
c. Perfection by control §9-314:
i. May perfect by control for investment property, deposit accounts,
letter of credit rights, electronic chattel paper
2. 2Only perfected while possession continues
a. Can hand over temporarily for limited purposes and remain perfected §9312:
i. Security interest in instruments or negotiable documents perfected
for 20 days from attachment for new value
1. Allows for transit of documents
ii. Security interest remains perfected 20 days if:
1. Bailed goods surrendered to debtor for processing, etc.
a. Must be bailee in possession NOT creditor
2. Instrument surrendered for presentation, etc. by creditor to
a. If debtor still has after 20 days, creditor is not
3. Not applicable to certificate of title goods or holding the actual patent
c. Automatic perfection – secured party need only make sure that its security interest as attached
i. PMSI: Purchase money security interest in consumer goods (UCC §9-109-2(23)) perfects
automatically §9-309(a); automatic perfection because want to keep prices down
1. §9-103: debt is (1) all or part of price of collateral and (2) value given to enable
the debtor to acquire collateral
a. Broad definition: value given by creditor enabled debtor to purchase
collateral (GE v. Spartan Motors)
i. Purchase and loan “closely allied”
ii. Intention of parties, availability of loan was a factor in the
2. Courts split on whether “negative equity” constitutes a purchase-money
a. Use old car as collateral for loan for new car, but still owe more than car is
worth; bank loans amount for new car plus amount to cover that owed
previous creditor
i. New loan “enabled purchase” but not secured by new car
3. Refinance not subject to avoidance under bankruptcy (In re Short): reject all or
nothing approach and give PMSI “dual-status”
a. PMSI does not lose its status even if:
i. The purchase-money collateral also secures an obligation that is
not a purchase-money obligation
ii. Collateral that is not purchase-money collateral also secures the
purchase money obligation
iii. The purchase-money obligation has been renewed, refinanced,
consolidated, or restructured
b. Want to encourage creditors to lend to consumers for PMSI
ii. Certain accounts and other intangibles §9-302; exemption meant to protect assignees who
don’t normally take such assignments and are therefore unlikely to file
1. Not conveying a significant part of assignor’s outstanding accounts (In re Wood)
a. Two people not usually engaged in security transactions
i. Not commercial lender
ii. Casual and isolated transaction between people with personal and
professional relationship
1. Irrelevant that debtor attorney should know about UCC
b. Court split as to whether the major test is “significant part” or “causal or
isolated transaction” but meant to be a narrow exception
2. Sale of notes – similar to money, so should be able to rely on it
d. Perfection by filing – except for transactions listed in §9-310, the filling of a financing statement
is the exclusive method of perfection of the creditor’s security interest; distinct in U.S. law
i. Mechanics of filling
1. What is filing §9-516: communicate financing statement and tender fee (or office
accepts financing statement
2. Where to file §9-501: A9 has central filing – statewide favored
a. Local filing only for realty, minerals, timber, or fixtures §9-501
3. What to file §9-502: names of debtor and creditor (legal name), indicate collateral
(describe or super generic)
a. Financing statement still effective if minor error or omission that is not
seriously misleading
b. Authorization from debtor required either express or by signing security
i. Debtor’s signature no longer required on financing statement but
does provide authorization
4. Timing and duration
a. When to file §9-509: before closing, check that financing statement has
been accepted in recording office first (ensures first-filed priority)
b. Once filed, good for 5 years
i. May file continuation(s) in last 6 months to get 5 more years
1. If miss continuance window, can file new UCC1 but lose
priority; must go with new filing date for priority purposes
ii. Keep record of lapsed filing for 1 year
iii. Can file notice of assignment of security interest
iv. Compared to possession, which depends on keeping possession of
1. Can do both filing and possession
c. May file termination statement §9-513
i. Debtor can request creditor file, or debtor can file
1. Must state reasons
ii. Creditor must file termination
1. For consumer goods
a. Don’t expect consumer to know about UCC
2. If financing statement is not authorized §9-513
a. Damages for violations of A9 §9-625
iii. Debtor can file a correction
ii. Not effective for:
1. Money; deposit accounts; letter of credit rights; certificate of title goods
5. Multi-State Transactions
a. General choice of law rules
i. Use debtor’s location for perfection of non-possessory security interest §9-301; UCC
governs because adopted in all states
1. If debtor relocates, have 4 months to refile §9-316
a. If transfer assets to a new debtor in another jurisdiction (merger), creditor
has 1 year to file in new jurisdiction
2. File in location only if similar A9 filing system filing + priority or equivalent
a. Otherwise file in DC
3. Location of debtor §9-307
a. Individual at residents
b. Organization at single place of business or at main office
i. If registered organization, then file in place of registration
ii. Use location of collateral (if collateral has physical form) for perfection of possessory
security interest and for effect of perfection and priority
1. Law of the jurisdiction of the collateral as to the effect of perfection
b. Certificate of title goods – law of place that issued certificate of title will determine governing
i. Remains perfected even if changing jurisdictions but not over non-merchant purchaser
(after 4 months) §9-337 (Metzger v. Americredit Financial Services)
1. Allows good-faith purchasers for value (other than car dealers, who should know
of the risks and investigate title) to rely on a clean certificate of title
a. Even though DMV messed up and issued certificate of title without
security interest
i. No actual or constructive knowledge of security interest
b. Debt is enforceable but not against good-faith purchaser
2. If non-certificate to certificate state, must perfect within 4 months
ii. Rationale: generally, only one certificate of title per vehicle
6. Priority – determining who has senior interest in the property
a. Simple disputes – parties prevailing over an unperfected security interest §9-317
i. Unperfected/unfiled creditor loses to:
1. Prior lien creditor §9-102
a. Judgment creditor that has attached or levied
b. Bankruptcy trustee, as of date of bankruptcy
i. Establishes priority moment bankruptcy was filed
2. Prior buyer/licensee for value that took delivery without knowledge
a. Good-faith buyer
3. Special grace period for PMSI (another special rule!)
a. PMSI relates back if filed within 20 days of debtor getting collateral
ii. §9-322 Perfected vs. perfected
1. First to file or perfect (if no lapse) – encourages filing; NOT when you made the
loan or when collateral acquired
a. Must be an effective financing statement
b. Authorized, but may be ratified after the fact
c. No misleading error
d. Correct state
iii. §9-323 Future advances: still generally go by first to file or perfect
1. Security agreement: inventory is collateral for loan and “all future advances of
whatever kind”
a. Future advances are secured; not unfair because creditors know the rule
2. Dragnet clause: collateral secure a present loan and “any future indebtedness of
any kind” appears enforceable under §9-204(c)
3. If new loan and security agreement, new advances get priority of filing statement
b. Purchase money security interest vs. other secured parties
i. Basic rule
1. PMSI given priority even if other creditors filed or perfected first §9-324
a. If not in consumer goods (which perfect automatically), must file within
20 days from date of collateral delivery/buyer’s possession of goods in
order to take advantage of a relation-back of priority to that date (In re
Wild West World)
ii. Inventory and livestock
1. PMSI in inventory has priority over other secured creditor with SI in inventory if:
a. Before delivery: was perfected and gave actual notice less than 5 years ago
to other party (notice good for 5 years)
i. Don’t have to continually give notice
b. Competing creditor can call debtor’s loan or otherwise influence debtor
not to grant PMSI (maybe incorporated into default)
2. If purchase-money creditor perfects by possession and remains perfected, notice
to other creditors is not required because other creditors are not relying on the
collateral (Kunkel v. Sprague National Bank)
iii. Consignments (similar to PMSI in inventory) § 9-103(d)
1. Consignor has priority over consignee’s secured creditors if consignor
a. Filed before consignment and gave notice to creditor
iv. Vendor/seller with PMSI beats lender with PMSI
c. Control and priority
i. Generally, one has control over a certificated security by taking delivery of it along with
any necessary indorsements
ii. Perfected security interest in deposit accounts by a creditor obtaining control over the
1. Consumer accounts may not be used as collateral for consumer debts
d. Buyers
i. Buyer §9-315 (subject to other provisions):
1. security interest continues in collateral notwithstanding sale, exchange or other
disposition thereof unless the secured party authorized the disposition free of
security interest, and attaches to any identifiable proceeds
a. Secured party can authorize disposition free of security interest based on
waiver through custom and practice—implied consent (Clovis National
Bank v. Thomas)
i. Not always followed, may be special for farmers
b. Provide proper notice to buyer, security interest retained (Farm Credit
Bank of St. Paul v. F&A Dairy)
ii. BIOC §9-320(a): buyer in the ordinary course takes priority over perfected security
interest created by seller
1. Must be in good faith and without knowledge that sale violated security
agreement (International Harvester v. Glendenning)
2. Buys in ordinary course
a. Viewed from the perspective of the buyer rather than the creditor
b. E.g. excludes sale of all debtors inventory
3. Gives new value (i.e. not for old debt)
a. E.g. buyer took car from debtor to satisfy debt to buyer
4. Buys from merchant of such goods (but not farmer)
a. Encourages people to buy from merchant
b. BIOC where bought TV from TV store
c. Not BIOC where bought ice cream truck from merchant of ice cream not
ice cream equipment
5. Takes possession
a. Includes constructive possession because similar to bailee (In re Western
Iowa Limestone)
6. Security interest is created by the seller
iii. Garage sale buyer §9-320(b) takes free of security interest
1. Buyer of consumer goods for value as consumer goods without knowledge of
security interest
a. UNLESS creditor filed financing statement within 20 days of when debtor
receives collateral
b. Must be consumer goods with respect to both the debtor and the buyer
e. Article 2 claimants
i. §2-711(s): when A2 buyer rightfully revokes/rejects acceptance (e.g. because seller
breaches), become secured creditor
1. Buyer has possession of the goods – retains security interest in those goods
2. Buyer may hold and resell goods
ii. §9-110: priority for certain A2 security interests, A9 rules also apply except:
1. No security agreement necessary
2. No filing required for perfection
3. A2 governs creditor’s rights on default
4. Priority over A9 creditor
iii. Insolvency
1. Insolvent seller §2-502; buyer may claim goods if
a. Buyer has paid price (in advance of delivery)
b. Seller became insolvent less than 10 days from payment
c. Goods have been identified in the contract
2. Insolvent buyer §2-702: right of reclamation
a. Seller may reclaim goods delivered to insolvent buyer
b. If demand less than 10 days after receipt (n/a if written misrepresented
i. Demand establishes priority
1. E.g. subordinate to perfected security interest in inventory
c. Sellers right to reclaim subject to BIOC or good faith “purchaser”
iv. Equitable subordination for bad faith – must have clean hands
f. Statutory lien holders §9-333
i. Do not need A9 because statute takes care of issues for creation, remedy, etc.
ii. Need §9-109 for dealing with priority
1. Possessory lien for material or services has priority over a perfected security
interest in the goods
a. Unless relevant statute provides otherwise
g. Fixtures
i. Defined by state law (jurisdiction’s real estate law)
1. A9 doesn’t have a test to tell when something is a fixture
2. Court look to (George v. Commercial Credit Corp.)
a. Intent of parties
i. Intended mobile home as permanent
b. Whether fits purpose of real estate
i. Adapted to realty’s use
c. How firmly affixed and how hard to remove
i. Annexed to property
3. Goods are fixtures when they become so related to particular real estate, interest
arises under real estate law
ii. Fixture filing – financing statement that complies (recites it is for fixtures and is to be
filed in real estate records, and describes real estate) and is filed in real estate records
1. Fixtures can be filed under A9 and fixture filing
a. Ordinary building material not subject to A9
iii. Removal of fixtures
1. Senior creditor may remove collateral from the real estate upon default, but liable
to non-debtors for any physical damages other than diminution of value from loss
of fixtures
iv. Perfected fixture security interest has priority over mortgage if:
1. PMSI in fixtures and fixture filing less than 20 days after goods become fixtures
(n/a to construction mortgage) or
a. Construction mortgage – puts construction mortgage ahead of PMSI
i. Construction mortgage is a type of PMSI: mortgage for
construction including buying land
2. Fixture filing before mortgage filed or
3. Fixture are readily removable factory or office machines, or readily removable
replacements of domestic appliance consumer goods and perfected before become
fixtures or
v. Perfected fixture security interest has priority over subsequent lien creditor on real estate
h. Accessions and commingling: goods affixed to other goods (not realty) regulated by §9-335
i. Certificate of title – stuff added to car, title lender gets priority
i. Federal priorities for debts and taxes: pre-bankruptcy priority for all federal claims
i. Governed by federal law (trumps UCC)
1. Strong lien
7. Bankruptcy and Article 9
a. Basics
i. Voluntary/involuntary
ii. Reorganization/liquidation
1. Liquidation is sale of all debtor’s assets and a division of the proceeds among
debtor’s creditors
2. Reorganization happens when the debtor entity is worth more if kept intact
a. Debtor comes up with reorganization plan, under which certain
stakeholders are wiped out and remaining interests in the reorganized
company are parceled out to others – Stakeholders vote to approve this
b. If debtor stakeholders cannot agree, court must come up with a plan
iii. Automatic stay (debtor’s tool)
1. Injunction/court order doesn’t stop other proceedings, only creditors
iv. Estate, trustee/debtor-in-possession
v. Secured creditors get adequate protection of collateral
vi. Some property exempt
1. SI not subject to exemptions, expect for non-PMSI in consumer goods
vii. Priority claims get paid first
viii. Unsecured creditors split whatever’s left (usually nothing)
ix. Individual debtor gets discharge (new limits)
1. Debts get cancelled
2. Business only gets if part of reorganization plan
x. Over-secured and under-secured creditors
1. Over-secured (collateral worth more than the debt owed them) are entitled to
interest during bankruptcy and attorney’s fees
2. Under-secured (collateral worth less than the debt owed) can get stay lifted and
sell collateral; partially unsecured
b. The trustee’s status – trustee is advocate for unsecured creditor
i. Some available tools to increase estate for unsecured creditors
1. Strong-arm power to void unperfected security interests
a. As of commencement of case, trustee is lien creditor as to all debtor’s
i. §9-317: unperfected/unfiled creditor loses to:
1. Prior lien creditor
2. Prior buyer/licensee for value that took delivery without
ii. Special grace period for PMSI – 20 days from debtor receiving the
1. Perfection relates back to the date of the creation of the
PMSI (maybe before bankruptcy filed)
2. Recover preferential transfers §547 – transfer made or suffered by the bankrupt to
pay or secure a pre-existing debt within the 90-day period preceding filing
a. Idea is to create an orderly system of asset distribution; debtor ought not
be able to interfere with process
b. Trustee may recover transfer of debtor’s property
i. To or for benefit of creditor
1. E.g. granting security interest in collateral, paying money
ii. On account of antecedent debt
iii. Less than 90 days of filing (1 year for insiders) (presumed
insolvent during that time)
1. Transfer deemed to occur upon perfection, or if perfected
within 30-day grace period then on attachment
iv. Improves position over liquidation
1. Paid secured creditor before bankruptcy, other creditors
were not secured – secured will keep payment because
unsecured would not have rights to money anyway
c. Exceptions
i. Exchange is for new value
1. Substantially contemporaneous
ii. Ordinary course payment
1. E.g. electric bill
iii. PMSI 30-day grace period
1. Transfer usually counted at the time of perfection (usually
filing of the financing statement)
2. If perfected within the 30-day grace period, perfection date
relates back to the moment of attachment
iv. Followed by unsecured new value
v. Inventory if no improvement from pre-bankruptcy
1. Creditor with inventory as collateral that was never undersecured is not subject to recover via preferential transfers
even if change in position (In re Smith)
2. Floating lien in inventory: to the extent that debtor’s
inventory has increased in value within the 90 days before
bankruptcy the creditor loses the extra value
3. Recover fraudulent conveyances §548 – transfers made while insolvent made to
hinder other creditors
a. Trustee may recover transfers of debtor’s property if (less than 1 year
before bankruptcy and while insolvent)
i. Not made for reasonably equivalent value, if debtor was insolvent
afterwards, or
ii. Made with intent to defraud creditors
8. Proceeds
a. The meaning of proceeds
i. §9-102:
1. Insurance payable by reason of loss or damage to the collateral is proceeds
a. Insurance proceeds from claim for negligent failure to insure against loss
of business (instead of insurance on the collateral itself) is not A9
proceeds (Helms)
b. Insurance payment for not growing crops is not proceeds
2. Case proceeds: money, checks, deposit accounts
a. Cash from sale by transferee is proceeds
3. Non-cash: all other proceeds
a. An item received upon disposition of the collateral (Farmers Cooperative
Elevator Co. v. Union State Bank)
i. Cattle are not proceeds of collateral-feed – must be sold,
transferred, exchanged, etc.
b. Priority in proceeds
i. §9-315(a): (subject to other provisions) a security interest continues in collateral
notwithstanding sale, exchange or other disposition thereof unless the secured party
authorized the disposition free of the security interest, and attaches to any identifiable
1. Governs whether the creditor retains a perfected security interest in the proceeds
but does not address priority versus other parties claiming the proceeds – need to
go to the priority rules
a. BIOC, garage sale buyer, or creditor’s consent can all cut off security
i. If security interest is cutoff, security interest still attaches to the
proceeds, simply doesn’t continue in the actual collateral
b. First to file or perfect applies in priority disputes over proceeds
2. Identifiable proceeds: commingled cash and mixed deposit accounts, subject to
applicable tracing doctrine such as lowest intermediate balance rule
a. §9-332: transfer of money or funds from deposit account takes free of SI
unless colluding with debtor (fraud)
i. Need rule so people can trust payments without worrying about
security interest
ii. Banks can deal with this by holding funds in “lock box” account
ii. §9-315(d): security interest in proceeds becomes unperfected 20 days after receipt by
debtor, unless
1. Filed for collateral and could have filed for proceeds category (and not acquired
cash proceeds) EXCEPT where proceeds were acquired from cash proceeds
a. E.g. security interest and financing statement covers “all business
i. Debtor trades computer for computer (still perfected)
ii. Computer for painting (still perfected because “could have filed”
for painting)
iii. Copier for car (need to make notation on title within 20 days, filing
does not work)
iv. Calculator for cash for painting (could have does not cover
subsequent proceeds bought with cash proceeds)
1. Creditor must actually amend the financing statement to
cover new collateral
v. Adding machine for $500 into bank account (identifiable cash
vi. Sold coffee maker for $200 then gave to Salvation Army (no
longer identifiable cash proceeds)
2. Identifiable cash proceeds
a. A9 does not address this issue but leaves it up to the states
i. First in, first out – not as creditor friendly
ii. Lowest intermediate balance – proceeds are viewed to stay in the
account as long as possible
3. Security interest is perfected in less than 20 days
9. Default
a. Pre-default duties of the secured party
i. Creditor in possession is subject to §9-207 duties to take reasonable care of and §9-210
duties to account for collateral
1. Risk of no-fault loss is on debtor (unless debtor insured the collateral)
a. Different result if creditor is negligent
b. Default – code is silent
i. Definition
1. Judicial definition: failure to pay on time
2. Security agreement must fill in the blanks
a. Include specific definition of what “default” means
i. Typical default clauses:
1. Nonpayment, breach of security agreement, death,
insolvency, out of business, fraud in application, collateral
loss, bankruptcy, property attached, guarantor in default
b. Creditor must adhere to security agreement upon default; security
agreement is a contract (Klingbiel)
i. Contract specified right to demand full payment or debtor could
turn in car, creditor’s choice
ii. Instead, took the car without demand – creditor liable for
c. Default clause subject to contract doctrines like waiver, estoppel,
i. Good faith – A9: honesty in fact and observance of reasonable
commercial standards of fair dealing
1. Courts disagree on whether it is a general requirement
ii. Effects
1. Remedies – through A9, creditor can pursue its remedies against the collateral or
against the debtor
2. Acceleration – creditor can require entire debt due now
3. Interest rate – provide an increase in interest rate upon default
4. Shifts control to creditor – although cannot tell debtor what to do, creditor has a
lot of leverage so can likely influence the debtor
5. Cross defaults – non-payment of other debts
c. Remedies – A9 allows creditors to skip judicial process
i. Repossession – §9-609 unless otherwise agreed, creditor may take possession of or
disable (e.g. large machinery) collateral or §9-607 notify account debtors to pay creditor
1. No notice required
2. Cannot breach peace – endanger or disturbed local peace and security; arguments
on both sides
a. Can use court
b. Cannot disclaim breach of peace by agreement by contract
c. Cannot hide behind repossession man – creditor responsible for agents
3. Creditor can be shielded from conversion claim if readily returned goods that are
not collateral
ii. Selling collateral
1. §9-610 creditor may sell or otherwise dispose of the collateral BUT
a. Must send written notice (with exceptions e.g. perishable, recognized
market) §9-611
i. Ensures creditor acts in commercially reasonable way and allows
debtor opportunity to redeem
ii. Depends on type of sale:
1. Public sale: creditor must tell debtor time and place of sale
a. Creditor may buy collateral (i.e. sell to himself) at
public sale
2. Private sale: creditor must tell debtor the bar date (date by
which debtor must exercise its right to redemption)
a. Creditor may buy collateral only if there is an
established market
iii. Notice must be sent to:
1. Debtor, obligors, guarantors, creditor that file a financing
statement or notified or had statutory lien
iv. 10-day notice sufficient in non-consumer transactions
v. Describes:
1. Debtor, creditor, collateral, method of disposition, debtor’s
rights to accounts
2. UCC provides form for notice
b. Must do everything commercially reasonable §9-627
i. Safe harbor: recognized market price or in conformity with
reasonable commercial practices among dealer in the type of
2. Buyers at sale of collateral
a. Good faith buyers – bona fide purchases at a sale by creditor take free of
security interest even if the sale is commercially unreasonable
i. Debtor has no right to reclaim collateral, remedy is against the
ii. Buyer gets warranty of title, unless disclaimed in writing
b. Senior security interest – buyer at a sale by a junior creditor takes subject
to security interest of a senior creditor (reflected in the price)
i. Because senior creditor remains intact, junior creditor need not
share proceeds
3. Proceeds of sale §9-615
a. Creditor must account for proceeds and give surplus to debtor or other
creditors, and may get deficiency from debtor
i. Deficiency measure by what an arm’s length sale would have
gotten (e.g. if creditor bought collateral)
ii. Commercial transaction: compare to what creditor should have
gotten in sale
iii. Consumer transaction: left open
iii. Enforce debt – creditor may seek judgment against debtor and attach debtor’s other assets
1. Creditor can pursue this remedy in lieu of repossession even if the debtor wants to
turn over the collateral
iv. Imposed duties
1. Any violation of creditor’s duties subjects creditors to possible:
a. Liability for damages §9-625
b. Loss of right to sue for deficiency §9-626
c. Liability for conversion if creditor has interfered with another person’s
property rights
d. Breach of the security agreement or debt instrument
2. Exculpatory clauses §1-102: parties may not waive creditor’s liability for bad
faith or negligence but may agree to reasonable standards
a. Cannot waive duties assigned in §9-602
d. Redemption
i. Debtor may redeem collateral § 9-623
1. Must pay all obligations secured
a. Just principle, not interest
b. If acceleration of debt on default, owe everything
c. If no acceleration, debtor only owes what debt matured and not all of it
2. Must act before collateral sold or under contract
a. Quickly, 10 days or one month
ii. Strict foreclosure – bank can keep collateral as satisfaction of debt §9-620
1. Not a remedy so can’t do it unilaterally;
2. Can offer to keep and debtor (or others) must object within 20 days
a. If no objection within 20 days, it is effective
3. May not have acceptable of collateral in partial satisfaction of debt
4. Strict foreclosure followed by sale treated as sale of collateral (Reeves)
a. No implicit foreclosure, must follow procedure in A9 (i.e. commercially
reasonable sale, etc.)
iii. Consumer protections
1. If debtor has paid 60% of price/debt where collateral is consumer goods, creditor
must sell under within 90 days or liable in conversion or 9-626 (unless debtor
waives after default)
a. Cannot do strict foreclosure if debtor paid 60%
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