SECURED TRANSACTIONS OUTLINE SPRING 2009 PROF. JAMES L. MUSSELMAN LYNN M. LOPUCKI & ELIZABETH WARREN, SECURED CREDIT: A SYSTEMS APPROACH (6th ed. 2009) SELECTED COMMERCIAL STATUTES (Carol L. Chomsky et al. eds., 2008 ed. 2008) JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE (5th ed. 2000) PART ONE: THE CREDITOR-DEBTOR RELATIONSHIP .....................................................................................................2 CHAPTER 1. CREDITOR’S REMEDIES UNDER STATE LAW .........................................................................................2 Assignment 1: Remedies of Unsecured Creditors under State Law.....................................................................2 Assignment 2: Security and Foreclosure ..............................................................................................................3 Assignment 3: Repossession of Collateral............................................................................................................4 Assignment 5: Article 9 Sale and Deficiency ........................................................................................................6 CHAPTER 2. CREDITORS’ REMEDIES IN BANKRUPTCY ............................................................................................13 Assignment 6: Bankruptcy and the Automatic Stay ...........................................................................................13 Assignment 7: The Treatment of Secured Creditors in Bankruptcy ...................................................................14 CHAPTER 3. CREATION OF SECURITY INTERESTS ....................................................................................................18 Assignment 8: Formalities for Attachment ........................................................................................................18 Assignment 9: What Collateral and Obligations Are Covered? ..........................................................................19 Assignment 10: Proceeds, Products and Other Value-Tracing Concepts ...........................................................21 PART TWO: THE CREDITOR-THIRD PARTY RELATIONSHIP ..........................................................................................24 CHAPTER 6. PERFECTION ........................................................................................................................................24 Assignment 16: The Personal Property Filing Systems ......................................................................................24 Assignment 17: Article 9 Financing Statements: The Debtor’s Name...............................................................27 Assignment 18: Article 9 Financing Statements: Other Information ................................................................31 Assignment 19: Exceptions to the Article 9 Filing Requirement ........................................................................35 Assignment 20: The Land and Fixtures Recording Systems ...............................................................................42 Assignment 21: Characterizing Collateral and Transactions ..............................................................................44 CHAPTER 7. MAINTAINING PERFECTION ................................................................................................................49 Assignment 22: Maintaining Perfection Through Lapse and Bankruptcy ..........................................................49 Assignment 23: Maintaining Perfection Through Changes of Name, Identity, and Use ....................................51 Assignment 24: Maintaining Perfection Through Relocation of Debtor or Collateral .......................................56 Assignment 25: Maintaining Perfection in Certificate of Title Systems .............................................................60 CHAPTER 8. PRIORITY .............................................................................................................................................63 Assignment 26: The Concept of Priority: State Law ..........................................................................................63 Assignment 28: Lien Creditors Against Secured Creditors: The Basics .............................................................66 Assignment 29: Lien Creditors Against Secured Creditors: Future Advances ...................................................69 Assignment 30: Trustees in Bankruptcy Against Secured Creditors: The Strong Arm Clause ...........................71 Assignment 31: Trustees in Bankruptcy Against Secured Creditors: Preferences ............................................73 Assignment 32: Secured Creditors Against Secured Creditors: The Basics .......................................................85 Assignment 33: Priority in Land and Fixtures.....................................................................................................93 Assignment 36: Buyers Against Secured Creditors ............................................................................................97 1 PART ONE: THE CREDITOR-DEBTOR RELATIONSHIP CHAPTER 1. CREDITOR’S REMEDIES UNDER STATE LAW I. Assignment 1: Remedies of Unsecured Creditors under State Law a. Unsecured Creditor. Anyone who is owed a legal obligation that can be reduced to a money judgment is a creditor of the party owing the obligation. Unless a creditor contracts w/ the debtor for secured status or is granted it by statute, the creditor will be unsecured. b. Rights Baseline. The rights of an unsecured creditor are the baseline; that is, all creditors have the rights available to unsecured creditors. Secured creditors have additional rights (e.g., foreclosure and repossession). c. No Self-Help Seizure. An unsecured creditor is prohibited from self-help seizure of the debtor’s property. i. Civil Liability: Conversion. Usually, a prohibited seizure of a debtor’s property will constitute the tort of conversion. Conversion is the wrongful exercise of dominion and control over another’s property in denial of or inconsistent with his rights. Damages for conversion liability is the value of the property seized (i.e., a “forced sale”). ii. Criminal Liability: Larceny. A creditor that wrongfully takes possession of property of the debtor may be charged with larceny, even if the value of the property taken is less than the amount owed. d. Debt Collection Process. The creditor must sue the debtor and get a judgment. Then she must execute by getting a writ of execution. After she finds non-exempt property, she can have the sheriff levy (i.e., physically seize) the property and auction it. Money from the foreclosure sale goes to the creditor. i. Wrongful Collection Practices. If the creditor demands payment from the debtor in an unreasonable manner, she may incur liability for wrongful collection practices. ii. Exempt Property. Exemption statutes provide for certain property to be exempt from execution. See WIS. STAT. ANN. §§ 8.15.18, 815.20(1), 990.01(14) (West 2008) (pp. 14– 16). Texas has a $60k exemption on certain personal property, an unlimited exemption on retirement income, and a 10-acre urban homestead exemption (no dollar limit). e. Problem 1.1. J lent $1k to L, so she could buy lawn furniture. L hasn’t repaid J. The furniture is in L’s backyard and is worth less than the amount owed. Can J go over and take the lawn furniture? No; as an unsecured creditor, J cannot resort to self-help seizure of L’s furniture. If J does take the furniture, he may be liable for conversion (i.e., the value of the furniture) and possibly punitive damages. He also may be criminally liable (trespass, larceny). To recover the debt, J must employ the debt-collection process outlined above. f. Problem 1.3. B lent $10k to K, a day care center owner. The center has not missed a payment, but B is unsure whether it will survive (and pay her). The center sold the best of its computers and exercise equipment to move to an “upscale” location, losing 1/3 of its customers, increasing employee turnover and replacing the old manager with one who scares the children. What do you advise? Has K has defaulted on the loan? Usually, the debtor is in default if he misses payments or has some property repossessed. Sometimes, the debtor is in default if the lender feels insecure b/c of certain actions. An acceleration clause would make all payments due immediately upon default. If K has defaulted, B would have to go through the process above. g. Problem 1.4. The day care folded and B obtained a $12k judgment against K. What do you need to know to answer her question? What are the possible sources of that information? How is the day care center organized? The loan was made to K, but the day care (entity) may own the equipment. See Vitale v. Hotel California, Inc. (where sheriff seized property of landlord, not tenant-debtor). Assuming K owns the equipment, find out what non-exempt property he has by discovery. Note: ask the right questions (remember deponent w/ $10k in his pocket). h. Problem 1.5. If K lives in Wisconsin and owns the following property, what can the sheriff seize to satisfy B’s judgment? 2 II. i. $6k car. WIS. STAT. ANN. §§ 815.18(3)(d), (g): the sheriff can sell the car and apply $1,200 of the proceeds and up to $4,800 in unused consumer goods exemptions to satisfy the judgment ii. $35k house. WIS. STAT. ANN. §§ 815.20(1); 990.01(14): the house is fully exempt ($40k exemption) iii. $10k day care equipment. WIS. STAT. ANN. § 815.18(3)(b): the equipment is exempt up to $7,500 iv. $2,265.92 bank account. WIS. STAT. ANN. § 815.18(3)(k): the bank account is exempt up to $1k Assignment 2: Security and Foreclosure a. Foreclosure. If a secured debt is not paid when due, the creditor can compel the application of the value of the collateral to payment of the debt. The process by which the creditor compels application is called foreclosure. b. Scope of Article 9. If Article 9 applies to a transaction, the secured creditor must comply with Article 9. That is, she must comply with the rules regarding creation and attachment of a security interest, perfecting a security interest, and repossessing and foreclosing on secured property. c. Transactions Intended as Security. Since Article 9 procedure is technical, time-consuming and expensive, creditors may enter into contracts that don’t create a security interest in form, but do create one in effect. But, Article 9 will apply to any transaction, regardless of its form, that creates a security interest in personal property by contract. U.C.C. § 9-109(a). i. Conditional Sales. Owners who intend to sell goods on credit sometimes seek to retain title to the goods until the buyer has finished paying for the goods. But, “the retention or reservation of title by a seller of goods . . . is limited in effect to a reservation of a ‘security interest.’” U.C.C. § 1-201(35). ii. Leases Intended as Security Interests. If the term of the lease extends for the entire remaining economic life of the collateral, the economic effect of the lease on the parties (taxes aside) may be identical to the economic effect of a sale with a security interest back for the purchase price. The lease will be a “true” lease if the contract transfers only part of the anticipated economic life of the property. See II.e. Problem 2.2, infra. d. Problem 2.1. Same facts as Problem 1.5, except B and K agreed to list a car, house, equipment and bank account as security. Which items can B reach through foreclosure of her security interest? i. Since B has a security interest in all the listed property, upon default, B has the right to repossess and foreclose on all the listed property. ii. B’s security interest is not void as a waiver of exemptions 1. WIS. STAT. ANN. §§ 815.18(12), 815.20: exemption statute doesn’t apply to Article 9 security interests or real estate mortgages e. Problem 2.2. Instead of selling cars (at $180.77 monthly), B plans to lease them (at $180.77/mo.) with an option to buy at the end of the lease period for $10. The lease provides that on default, B has the right to terminate the lease and the option to buy. B retains ownership of the car and will simply repossess it if the lessee defaults. What advice do you give B? Under the “intended as security doctrine,” Article 9 applies to this transaction. i. U.C.C. § 9-109(a): Article 9 applies to a transaction, regardless of its form, that creates a security interest in personal property by contract ii. U.C.C. § 1-201(35) : “security interest” means an interest in personal property which secures payment or performance of an obligation. Whether a transaction in the form of a lease creates a “security interest” is determined pursuant to Section 1-203 1. U.C.C. § 1-203(b)(4): a lease creates a security interest if the lease pmts are not subject to termination by the lessee and the lessee has an option to become the owner of the goods for nominal additional consideration upon compliance w/ the lease agreement 2. Here, the lessee does not have the right to terminate and has an option to buy for $10 (nominal consideration) 3 iii. See also, II.c.i. Conditional Sales, supra. III. Assignment 3: Repossession of Collateral a. Secured Party’s Right to Take Possession After Default. After default, a secured party (1) may take possession of the collateral; and (2) without removal, may render equipment unusable. U.C.C. § 9-609(a). i. Judicial Process. A secured party may proceed under subsection (a) pursuant to judicial process. U.C.C. § 9-609(b)(1). A creditor can obtain a writ of replevin, directing the sheriff to take possession of the property from the defendant and give it to the plaintiff. The creditor completes the foreclosure by selling the collateral in a commercially reasonable manner. See U.C.C. § 9-610. ii. Nonjudicial Process w/o Breach of the Peace. A secured party may proceed under subsection (a) w/o judicial process, if it proceeds without breach of the peace. U.C.C. § 9-609(b). b. Assembly of Collateral. If so agreed, and in any event after default, a S/P may require the D to assemble the collateral and make it available to the S/P at a place to be designated by the S/P which is reasonably convenient to both parties. U.C.C. § 9-609(c). c. Breach of the Peace Generally i. Nondelegable Duty. Courts generally hold that the duty to refrain from breach of the peace during repossession is nondelegable, making the secured creditor liable for the consequences of illegal repossessions by their independent contractors. ii. Liability for Trespass. A creditor ordinarily will not be subject to liability for trespass if she repossesses w/o a breach of the peace. But, the creditor can never enter the debtor’s residence (incl. attached garages) to repossess property. 1. Entry onto Premises of a Third Party. In Salisbury Livestock Co. v. Colorado Central Credit Union, the issue of trespass was sent to the jury where Repossessor entered onto a non-debtor’s land to recover debtor’s property. iii. Security Agreements 1. General Effectiveness. Except as otherwise provided in the U.C.C., a security agreement is effective according to its terms btwn the parties, against purchasers of the collateral, and against creditors. U.C.C. § 9-201(a). 2. Cannot Waive Breach of Peace Requirement. Parties to a security agreement cannot waive a self-help repossessor’s duty not to breach the peace. U.C.C. § 9-602(6). 3. Reasonable Standards Measuring Fulfillment of Rights and Duties. Parties may agree to standards measuring the fulfillment of the rights of a debtor or duties of a secured party if they’re not manifestly unreasonable. U.C.C. § 9603(a). See Wombles Charters, Inc. v. Orix Credit Alliance, Inc. (p. 49) (cutting a lock to enter property was not a breach of the peace where security agreement permitted creditor to “enter any premises . . . w/o liability for trespass”). a. Inapplicable to Breach of Peace. Subsection (a) doesn’t apply to the duty under § 9-609 to refrain from breaching the peace. U.C.C. § 9603(b). d. Defining Breach of the Peace i. Using Police in Self-Help Repossession. Generally, getting police involved in self-help repossession will constitute a breach of the peace. See In re Walker v. Walthall (p. 47) (creditor taking uniformed police officer to debtor’s home on repossession attempt was a breach of the peace); Marcus v. McCollum (pp. 47-48) (breach of the peace occurred where repossessor beckoned a nearby police officer who told debtors to “keep [their] mouths shut [and] go back in the house”). ii. Must Withdraw After Confrontation. Where a creditor is physically confronted by the debtor, disregards his request to desist efforts at repossession and refuses to depart from private premises upon which the collateral is kept, they commit a breach of the peace. See Morris v. First Nat’l Bank & Trust Co. of Ravenna, Ohio (p. 47). 4 1. e. f. g. Separate Instances. Each repossession attempt is a separate instance for determining a breach of the peace. See Wade v. Ford Motor Credit Co. (p. 49) (where stealthy repossession was not a breach of the peace, despite threats by Debtor on prior occasions). 2. Stealthy Repossession. In Wallace v. Chrysler Credit Corp., there was no breach of the peace where the repossessor followed debtor to his daughter’s house and repossessed the truck at 2:00 a.m. See also Wade v. Ford Motor Credit Co. (p. 49). 3. Level of Confrontation. There was no breach of the peace in Williams v. Ford Motor Credit Corp. (p. 48) where Debtor hollered at Repossessors while they were driving away, Repossessors stepped between Debtor and the car (while retrieving personal items), and Repossessors were polite and didn’t threaten Debtor w/ physical harm. Note: this is probably a minority view. iii. Breaking Locks, Leaving Property Unprotected. In Laurel Coal Co. v. Walter E. Heller & Co., Inc. (p. 48), the creditor breached the peace when he cut a chain used to lock a fence, leaving $350k worth of plaintiff’s equipment unsecured and unprotected. iv. Lying to a Guard is Permissible. In most courts, a repossessor may trick or lie to a guard to gain entry onto the premises. See K.B. Oil Co. v. Ford Motor Credit Co., Inc. (p. 49) (where repossessor obtained possession of collateral by fraudulently misrepresenting to the truck equipment dealer that the debtor had given him permission to repossess). Accounts as Collateral i. Accounts Financing. If D sells products/services to Customers on credit (an unsecured obligation), D can use those obligations as collateral for a loan from Bank. 1. Account. An “account” is a right to pmt of a monetary obligation for property/services. See U.C.C. § 9-102(a)(2). 2. Account Debtor. An “account debtor” is a person obligated on an account. U.C.C. § 9-102(a)(3). ii. Self-Help Against Accounts 1. Notice of Assignment. After default, a secured party may notify an account debtor to make pmt to the secured party. See U.C.C. § 9-607(a)(1). 2. Discharge of Account Debtor. An account debtor may discharge its obligation by paying the assignor (D) until, but not after, the account debtor receives a notification . . . that the amount due has been assigned and that pmt is to be made to the assignee (S/P). After receipt of the notification, the account debtor may discharge its obligation by paying the assignee (not the assignor). See U.C.C. § 9-406(a). 3. “Steps into the Shoes.” The rights of the S/P are subject to all terms of the agreement btwn the account debtor and the D and any defense or claim in recoupment arising from the transaction that gave rise to the contract. See U.C.C. § 9-404(a)(1). Problem 3.1. On the facts of Problem 1.1, assume J went to an office supply store and picked up a form titled “Personal Property Security Agreement” and had L sign it. You decide it’s a perfectly enforceable security agreement designating the lawn furniture as collateral. Does your advice change? Yes; as a secured party, J may repossess the lawn furniture without breaching the peace. J should probably sneak over to L’s lawn in the middle of the night. Problem 3.2. Outline some guidelines for repossession of a bulldozer. If possible, repossess the equipment (or render it unusable) without confrontation with Debtor. Repossession w/o breach of the peace is more likely at night. If Debtor is there and objects to repossession, Repossessor must withdraw. If a guard is there, Repossessor can trick/lie to him to gain entry. See III.d. Defining Breach of the Peace, supra. i. e. As CF’s regular counsel, you should also consider whether there is anything that should be in CF’s security agreements that might make repossession easier. CF may consider having debtors agree to a security agreement like the one in Wombles (security 5 agreement permitted creditor to “enter any premises . . . w/o liability for trespass”). See III.c.iii.3. Reasonable Standards Measuring Fulfillment of Rights and Duties, supra. h. Problem 3.3. S (debtor) received a letter from ITT (creditor) declaring the loan in default and directing him (per the security agreement) to assemble the collateral and make it available to ITT for repossession. See III.b. Assembly of Collateral, supra. What can S do to resist repossession? What if they bring the sheriff with them? S should physically confront the repossessors and craft a situation where repossession would be a breach of the peace. i. If ITT is repossessing by judicial process, the sheriff can take the collateral. But, if ITT brings a sheriff to assist in self-help repossession, it is a per se breach of the peace. See III.d.i. Using Police in Self-Help Repossession, supra. ii. S should not hide the property 1. WIS. STAT. ANN. 943.25: it’s a Class E felony in WI 2. MODEL RULES OF PROF’L CONDUCT R. 1.2(d): as an attorney, it would be against the Model Rules to advise S to hide the collateral i. Problem 3.5. F lends an amount equal to 60% of D’s accounts receivable (A/R). When D makes a sale to the supply store, it sends a copy of the invoice to F. F deposits an amount equal to 60% of the invoice to D’s bank account. When the supply store pays the invoice, D is required to apply 60% of the proceeds to repay the loan immediately. D requested that F’s interest in the accounts not be made known to the account debtors “b/c it might make them nervous.” What are the risks of this arrangement? F runs the risk that (1) D will collect on the accounts and not pay, (2) D will make up invoices, (3) D will sell to insolvent customers, (4) D will sell defective equipment, or that (5) D will engage in “kiting” (i.e. paying off loans from old invoices with new cash flow). i. Note: under this arrangement, D is a “debtor” under § 9-102(a)(28), F is a “secured party” under § 9-102(a)(72), and D’s retail customers are “account debtors” under § 9102(a)(3). The A/R from the retail customers are “accounts” under § 9-102(a)(2). j. Problem 3.6. (Using facts of Problem 3.5) D defaulted and two months ago F notified the account debtors to pay F directly. i. a. H, one of D’s account debtors, claims that it paid D in full last month and refuses to pay F. Can F collect from H? Yes. 1. U.C.C. § 9-607(a): after default, a S/P may notify an account debtor to make pmt to the S/P 2. U.C.C. § 9-406(a): after notification, an account debtor can only discharge its obligation by paying the assignee, not the assignor ii. b. Another account debtor, W, has refused to pay anything, claiming that although they received $42k in equipment, they have untended warranty claims amounting to $19k. What can F collect from W? If W’s claims are valid, F can only collect $23k ($42k – $19k) 1. U.C.C. § 9-404(a)(1): unless otherwise agreed, an assignee’s (F) rights are subject to all terms of the agreement btwn the account debtor (W) and the assignor (D) and any defense/claim in recoupment arising from the transaction that gave rise to the contract k. Problem 3.8. Z sold a car to E and arranged financing w/ a separate financing company. E made the first two payments, then missed the next three. E complained about the quality of the car, the representations the salesperson made to her, and the financing Z obtained for her. What’s your advice? Has E defaulted? Default is defined in the security agreement. If E hasn’t defaulted (i.e. if her valid warranty claims justify her from not making pmts under the S/A) and Z repossesses the car, E may bring a wrongful repossession claim. IV. Assignment 5: Article 9 Sale and Deficiency a. Right to Redeem Collateral i. Persons that May Redeem. A debtor . . . may redeem collateral. U.C.C. § 9-623(a). ii. When Redemption May Occur. A redemption may occur before a S/P (1) has collected collateral under § 9-607, (2) has disposed of collateral under § 9-610, or (3) has accepted collateral in full/partial satisfaction under § 9-622. U.C.C. § 9-623(c). 6 b. c. d. iii. Requirements for Redemption. To redeem collateral, a debtor shall tender: (1) fulfillment of all obligations secured by the collateral, and (2) reasonable expenses and attorney’s fees. See U.C.C. § 9-623(b). Strict Foreclosure i. Effect of Strict Foreclosure. A S/P’s acceptance of collateral in full/partial satisfaction: (1) discharges the obligation to the extent consented to by the debtor, (2) transfers to the S/P all of a debtor’s rights in the collateral, and (3) discharges the S/I that is the subject of the debtor’s consent and any subordinate S/I. See U.C.C. § 9-622. ii. No Partial Satisfaction in Consumer Transactions. In a consumer transaction, a S/P may not accept collateral in partial satisfaction of the obligation it secures. U.C.C. § 9-620(g). iii. Debtor’s Consent. S/P may accept collateral in full or partial satisfaction of the obligation if, inter alia, the debtor consents to the acceptance. U.C.C. § 620(a). 1. Partial Satisfaction. A debtor consents to an acceptance of collateral in partial satisfaction if the debtor agrees to the acceptance in a record authenticated after default. See U.C.C. § 9-620(c)(1). 2. Full Satisfaction. A debtor consents to an acceptance of collateral in full satisfaction if the debtor agrees to the acceptance in a record authenticated after default OR the S/P sends a proposal to accept collateral in full satisfaction and does not receive a notification of objection w/in 20 days. See U.C.C. § 9620(c)(2). Notification of Disposition i. Notice Requirement. Except as provided in § 9-611(d), S/P that disposes of collateral under § 9-610 shall send to, inter alia, the debtor a reasonable authenticated notification of disposition. U.C.C. §§ 9-611(b), (c). 1. Exceptions. The notice requirement does not apply if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. U.C.C. § 9-611(d). A “recognized market” is where items sold are fungible and prices are not subject to individual negotiation (e.g., NYSE). U.C.C. § 9-610 cmt. 9. ii. Waiver. The notice requirement cannot be waived in a S/A. See U.C.C. § 9-602(7). But, a debtor may agree to waive notice after default. See U.C.C. § 9-624(a). iii. Timeliness of Notification. In a business transaction, a notification of disposition sent after default and ≥ 10 days before disposition is sent w/in a reasonable time before disposition. U.C.C. § 9-612(b). Otherwise, whether a notification is sent w/in a reasonable time is a question of fact. U.C.C. § 9-612(a). iv. Agreed Standards of Fulfillment. Parties may agree to the standards measuring the fulfillment of the parties’ rights/duties (including notice requirements) if not manifestly unreasonable. See U.C.C. § 9-603(a). Disposition of Collateral i. Purchase by Secured Party. A S/P may purchase collateral (1) at a public disposition, or (2) at a private disposition only if the collateral is customarily sold on a recognized market or the subject of widely distributed standard price quotations. U.C.C. § 9-610(c). ii. Commercially Reasonable Disposition. Every aspect of a disposition of collateral, including the method, manner, time, place and other terms, must be commercially reasonable. U.C.C. § 9-610(b). 1. Greater Amount Obtainable: Not Dispositive. The fact that a greater amount could have been obtained by a disposition is not itself sufficient to preclude S/P from establishing commercial reasonableness. See U.C.C. § 627(a). 2. Commercially Reasonable Dispositions. The following dispositions are commercially reasonable: (1) dispositions in the usual manner on any recognized market, (2) dispositions at the price current in any recognized market, or (3) dispositions otherwise in conformity w/ reasonable commercial 7 e. f. business practices among dealers in the type of property disposed of. See U.C.C. § 627(b). iii. Disposition After Default. After default, a S/P may dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing. U.C.C. § 9-610(a). 1. Duty to Prepare/Process? Some courts imposed an affirmative duty on the S/P to process or prepare the collateral prior to disposition. Although courts should not be quick to impose a duty of preparation/processing on the S/P, § 9610(a) does not grant the S/P the right to dispose of the collateral “in its then condition” in all circumstances. A S/P may not dispose of collateral “in its then condition” when, taking into account the costs and probable benefits of preparation or processing and the fact that the S/P would be advancing the costs at its risk, it would be commercially reasonable to dispose of the collateral in that condition. U.C.C. § 9-610 cmt. 4. iv. Effect of Disposition. A S/P’s disposition (1) transfers to the transferee all the debtor’s rights in the collateral, (2) discharges the S/I, and (3) discharges any subordinate S/I. U.C.C. § 9-617(a). v. Transfer Statement. A transfer stmt is a record authenticated by a S/P stating: (1) the debtor defaulted on an obligation secured by specified collateral; (2) the S/P exercised its post-default remedies; (3) a transferee has acquired the rights of the debtor; and (4) the name and mailing address of the S/P, debtor and transferee. U.C.C. § 9-619(a). 1. Effect of a Transfer Statement. A transfer stmt entitles the transferee to the transfer of record of all rights of the debtor in any official filing, recording registration, or certificate of title system covering the collateral. U.C.C. § 9619(b). Application of Proceeds i. Application of Proceeds. S/P shall apply the proceeds of disposition under § 9-610 in the following order: 1. S/P’s Expenses. (1) reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing, and to the extent provided for by agreement, reasonable attorney’s fees; 2. The Debt. (2) the satisfaction of obligations secured by the security interest; 3. Subordinate S/Ps Who Demand. (3) the satisfaction of obligations secured by any subordinate S/I if the S/P receives from the subordinate S/P an authenticated demand for proceeds before distribution of the proceeds is completed. See U.C.C. § 9-615(a). ii. Surplus/Deficiency. After making pmts under § 9-615(a), S/P shall account to and pay a debtor for any surplus, and the debtor is liable for any deficiency. U.C.C. § 9-615(d). Remedy for S/P’s Failure to Comply with Article 9 i. Denial/Reduction of Deficiency 1. STEP ONE: Consumer or Business Transaction? a. Consumer Transactions: Court Determines Rules. The Code leaves the determination of proper rules in consumer transactions. Some courts (including Texas) follow the “absolute bar” rule, which bars a creditor who violates Article 9 from any deficiency. Others follow the “rebuttable presumption” rule (described in U.C.C. § 9-626(a) for business transactions). A third approach subtracts actual damages the debtor could prove from the deficiency. i. “Consumer Transaction.” A “consumer transaction” is a transaction where an individual incurs an obligation primarily for personal, family, or household purposes, a security interest secures the obligation, and the collateral is held or 8 g. acquired primarily for personal, family, or household purposes. U.C.C. § 9-102(a)(26). b. Business Transactions. U.C.C. § 9-626(a) applies in business transactions, using a rebuttable presumption approach to remedy noncompliance with Article 9. 2. STEP TWO: Place S/P’s Compliance in Issue. The S/P sues the debtor after default. If the debtor does nothing, the court will enter a default judgment for S/P. If the debtor calls the S/P’s compliance with Article 9 in issue, move on. See U.C.C. § 9-626. 3. STEP THREE: S/P’s Compliance. S/P has the burden of establishing compliance with Article 9. U.C.C. § 9-626(a)(2). If the S/P proves compliance, it gets a judgment for the deficiency. 4. STEP FOUR: Rebutting the Presumption of No Deficiency. If S/P cannot prove compliance with Article 9, then there is a rebuttable presumption that the S/P is not entitled to a deficiency. See U.C.C. § 9-626(a)(3), (4). To get a deficiency, the S/P must prove that the proceeds it would’ve gotten by complying are less than the obligation + expenses. U.C.C. § 9-626(a)(4). ii. Damages for Noncompliance. A person is liable for damages in the amount of any loss caused by a failure to comply w/ Article 9. U.C.C. § 9-625(b). iii. Judicial Orders. If a S/P is not proceeding in accordance w/ Article 9, a court may order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions. U.C.C. § 9-625(a). Problem 5.1. Bank repossessed M’s car and sent him notification that it would sell it in a private sale “after ten days from this notice.” The balance owing on the loan, including principal, interest, attorneys’ fees and expenses is $100k. i. a. If FMV of the car is $80k, but it sells for $70k in a commercially reasonable sale, what is the proper amount for the court to award as a deficiency? 1. U.C.C. § 9-615(d): generally, after applying the proceeds from a disposition of the collateral, the debtor is liable for any deficiency a. Thus, M would ordinarily be liable for $30k ($100k – $70k). 2. U.C.C. § 9-626(b): if the transaction is a “consumer transaction,” the court determines the proper rules where the amount of deficiency/surplus is in issue a. U.C.C. § 9-102(a)(26): a “consumer transaction” is a transaction where a S/I secures an obligation for collateral held for personal, family, or household purposes 3. Assuming the car is used for business purposes, U.C.C. § 9-626(a) applies. If D places S/P’s compliance in issue and S/P cannot prove compliance, there’s a rebuttable presumption that there is no deficiency. See IV.f.i. Denial/Reduction of Deficiency, supra. ii. b. How much would M have to pay to redeem the car? 1. U.C.C. § 9-623(b): to redeem collateral, a debtor must tender a. (1) fulfillment of all obligations secured by the collateral; and b. (2) reasonable expenses and attorney’s fees 2. Thus, M would have to pay $100k iii. c. If M has enough money to redeem the car, would you recommend that he do so or that he purchase another car just like it for $80k? M should redeem the car for $100k. If M purchased another car for $80k, he would still have to pay the $30k deficiency for a total of $110k. iv. d. M’s friend offers $80k for the car. The bank refuses b/c they follow a policy of selling all the cars they repossess through auto auctions. The friend can’t go to the auction, b/c it is only open to dealers. At the auction, the car sells for $70k. Now how much should the deficiency be? 1. Was the sale commercially reasonable? 9 a. h. i. U.C.C. § 9-627(a): the fact that a greater amount could be obtained is not of itself sufficient to preclude a S/P from establishing commercial reasonableness b. U.C.C. § 9-627(b): a disposition is commercially reasonable if it’s made in conformity with reasonable commercial practices among car dealers Problem 5.2. W recently repossessed and sold the inventory and equipment of an auto parts store. The debt secured by the collateral was in the principal amount of $57,345, plus $3,541 interest. The S/A provides that D will pay attys fees in the event of default. It’s $3k for replevy of the collateral, $650 for preparing the sale, and $350 for a legal opinion on distributing proceeds. The bank spent $1.5k preserving the collateral and $750 advertising. Auto Parts Depot, a judgment creditor demands their $4.2k judgment be paid. i. a. The highest bid at auction was $47,136. To whom should W pay? How much is the deficiency? 1. U.C.C. § 9-615(a): a S/P shall apply proceeds of a disposition under § 9-610 in the following order: a. (1) reasonable expenses of retaking, holding, preparing for disposition, processing and disposing, and, to the extent provided for by agreement reasonable atty’s fees; b. (2) satisfaction of obligations secured by the security interest; c. (3) satisfaction of obligations secured by any subordinate security interest if the S/P receives an authenticated demand for proceeds before distribution of the proceeds is completed 2. $47,136 proceeds – $6,250 (expenses to S/P) = $40,886 3. $60,886 obligation – $40,886 = $20k deficiency ii. b. If the highest bid was $75k, to whom should W pay? Can W pay Auto Parts Depot? 1. $75k proceeds – $6,250 (expenses to S/P) = $68,750 2. $68,750 – $60,886 obligation = $7,864 surplus 3. W must pay the debtor the surplus a. U.C.C. § 9-615(d): after making the pmts required by §9-615(a), the S/P shall account to and pay a debtor for any surplus b. Note: W would have to pay Auto Parts Depot if it was a subordinate S/P. See U.C.C. § 9-615(a)(3)(A). Problem 5.3. E repossesses cars and sells them through “dealers-only” auctions. Some debtors complain about length (5 days notice, but tries to send it 10 days before the sale). None of the borrowers would object to a waiver contained in the S/A, even if it were specifically pointed out to them. i. a. Does E have to send these notices? 1. Yes a. U.C.C. § 9-611(b), (c): as a S/P that disposes of collateral under § 9610, E is required to send the debtor reasonable authenticated notice of disposition. i. The exceptions in U.C.C. § 9-611(d) do not apply b. U.C.C. § 9-602(7): this notice requirement cannot be waived in a S/A c. U.C.C. § 9-624(a): a debtor may agree to waive notice after default 2. Reasonable time a. U.C.C. § 9-612(a): whether notice is sent w/in a reasonable time is a fact question b. U.C.C. § 9-612(b): in business transactions, a notice sent after default and ≥ 10 days before disposition is sent w/in a reasonable time 3. S/A may reduce notice requirement to 2 days a. U.C.C. § 9-603(a): the parties may agree to the standards measuring the fulfillment of the parties’ rights/duties if they’re not manifestly unreasonable 10 j. k. l. ii. b. What if they don’t send them? 1. U.C.C. § 9-625(b): if the debtor suffers loss caused by the S/P’s failure to comply w/ Article 9, the S/P is liable for those damages 2. Note: a suit by the debtor for damages would occur where the S/P’s noncompliance reduces a surplus. iii. c. Can E dispense w/ selling a repossessed automobile if E and the debtor agree on a deficiency amount? 1. U.C.C. § 9-620(g): in a consumer transaction, a S/P may not accept collateral in partial satisfaction of the obligation it secures 2. U.C.C. §§ 9-620(a), (c)(1): for business transactions, a S/P may accept collateral in partial satisfaction if, inter alia, the debtor consents (agrees to an acceptance in a record authenticated after default). Problem 5.4. G repossessed what should have been a $345k helicopter, but D removed all the electronics, leaving a hull w/ no resale value. The debt is $345k. The debt is guaranteed by 4 wealthy individuals. i. a. Can G throw the hull away? 1. U.C.C. § 9-610(b): every aspect of a disposition of collateral, including the method, manner, time, place and other terms, must be commercially reasonable. Is throwing the hull away commercially reasonable? 2. U.C.C. § 9-610(a): a S/P may dispose of any or all collateral in its present condition or following any commercially reasonable preparation or processing 3. U.C.C. § 9-610 cmt. 4 a. Some courts have imposed an affirmative duty on the S/P to process/prepare the collateral prior to disposition b. Although courts should not be quick to impose a duty to prepare/process, § 9-610(a) does not grant the S/P the right to dispose of the collateral “in its then condition” when, balancing costs of probable benefits, it would be commercially unreasonable to dispose of the collateral in that condition ii. b. Assume G throws the hull away and the guarantors later prove that if G had spent $245k to install an engine and electronics it could’ve sold the helicopter for $345k. To what deficiency judgment is G entitled? 1. U.C.C. § 9-626: if throwing the hull away was commercially unreasonable, there is a rebuttable presumption that the proceeds that could’ve been obtained was $345k (leaving no deficiency) 2. A solution would be to give the hull back and restore the site where it was repossessed to the way it was found (e.g., replacing a cut lock). Then sue for non-pmt. Article 9 does not force a S/P to foreclose on a S/I when D defaults. Problem 5.5. P bought a retail store from L for $50k down and a promissory note in the amount of $277k. The note was secured by a S/I in the store. P couldn’t make pmts on the debt, so he gave L the keys. L resumed operation and sent P a bill for $131k, which L claims is what P owed after crediting him the value of the store. Can L sue for a deficiency w/o selling the store first? i. U.C.C. § 9-610: a S/P may dispose of collateral after default 1. U.C.C. § 9-620(a): instead of disposing of the collateral, a S/P may accept it partial satisfaction if, inter alia, the debtor consents 2. U.C.C. § 9-620(c)(1): such consent must be in a record authenticated after default ii. P could put L’s Article 9 compliance in issue (e.g., L didn’t follow the notice rules), which would give rise to a rebuttable presumption, forcing L to prove the value of the store. Problem 5.6. C repossessed a jet. In this case, the debtor is insolvent; any deficiency judgment will be uncollectible. C estimates the jet is worth $800k. The debt is about $850k. C would like to avoid the expenses of sale and just keep the jet for personal use. i. a. What should they do? 11 1. U.C.C. § 9-620(a): a S/P may accept collateral in full satisfaction of the obligation it secures if, inter alia, the debtor consents 2. U.C.C. § 9-620(c)(2): consent requires that either (1) the debtor sign an authenticated record after default, or (2) the S/P send debtor a proposal to accept the collateral in full satisfaction of the obligation and not receive a notification of objection w/in 20 days after the proposal is sent ii. b. What if debtor objects to the retention of the collateral and they simply ignore the objection? Will they have a title problem if they later decide to sell or encumber the plane? 1. The debtor cannot sue under § 9-625(b) b/c he suffered no damages (w/o retention of the collateral, he’d owe a $50k deficiency). 2. U.C.C. § 9-625(a): a court may restrain collection, enforcement or disposition of collateral on appropriate terms and conditions 3. C can sell the jet a. U.C.C. § 9-617(a): a S/P’s disposition (1) transfers to the transferee all the debtor’s rights in the collateral, (2) discharges the S/I, and (3) discharges any subordinate S/I b. U.C.C. § 9-619(b): a transfer stmt entitles the transferee to the transfer of record of all rights of the debtor in any official filing, recording registration, or certificate of title system covering the collateral iii. c. What if C simply announce that they have sold the jet to themselves for $800k? C cannot just “buy” the jet 1. U.C.C. § 9-610(c): a S/P may purchase collateral at a private disposition only if the collateral is of a kind customarily sold on a recognized market or subject to widely distributed standard price quotations 12 CHAPTER 2. CREDITORS’ REMEDIES IN BANKRUPTCY V. Assignment 6: Bankruptcy and the Automatic Stay a. The Automatic Stay. A bankruptcy petition imposes a stay, which precludes entities from taking action against the debtor, the debtor’s property, or the estate’s property. See 11 U.S.C. § 326(a). i. Entity. An “entity” includes a person, estate, trust, governmental unit, and U.S. Trustee. 11 U.S.C. § 101(15). ii. Remedy for Violation. Violations of the automatic stay may result in actual damages (incl. attorneys’ fees) and punitive damages. See 11 U.S.C. § 326(k). b. Lifting the Automatic Stay i. Effect of Lifting Automatic Stay. If a creditor succeeds under either test below, the automatic stay is lifted (i.e., it does not apply anymore) to that creditor and the creditor can exercise its rights under Article 9. ii. No Equity + Not Necessary for Effective Reorganization. On the creditor’s request after notice and a hearing, the ct shall lift the stay if the D has no equity in the property and the property is not necessary to an effective reorganization. See 11 U.S.C. § 362(d)(2). 1. Burden of Proof. The secured creditor bears the burden of proof that D has no equity (i.e., debt > FMV of property). See 11 U.S.C. 362(g)(1). The debtor has the burden to prove that the property is necessary for an effective reorganization. See 11 U.S.C. § 362(g)(2). iii. Adequate Protection. If a debtor files for bankruptcy, a S/P has a constitutionally protected right to her S/I (property). A debtor must furnish the secured creditor adequate protection against loss as a result of the delay in foreclosure caused by the stay. See 11 U.S.C. § 362(d)(1). 1. Equity Cushion. Where a creditor is oversecured (i.e., FMV of the collateral > debt), the creditor has an “equity cushion” that adequately protects his S/I. 2. Split of Authority. Courts are split on the issue of whether creditors are entitled to adequate protection where a dropping value of the collateral threatens to meet an increasing claim (b/c of pendency interest). 3. Providing Adequate Protection. When adequate protection is required, it may be provided by (1) requiring the trustee to make cash pmts, (2) providing the creditor replacement/additional liens, or (3) other relief. See 11 U.S.C. § 361. 4. Measure of Adequate Protection: Three Views a. In re Craddock-Terry Shoe Corp. Craddock-Terry held that adequate protection begins on the date the bankruptcy petition is filed. b. Majority Approach. Under the majority approach, adequate protection begins on the date when the motion to lift stay is filed. c. Minority Approach. Under the minority approach, adequate protection begins when the court hears the motion to lift stay. c. Problem 6.1. Twelve of CS’s clients are in bankruptcy and none are making pmts on outstanding accounts, even though CS has billed them each month. Can CS do some “serious collection efforts with these guys”? No i. 11 U.S.C. § 362(a): the automatic stay precludes creditors from taking action against a debtor (who filed for bankruptcy), the debtor’s property, or the property of the estate d. Problem 6.2. KS obtains a judgment against J to collect a $1.2M loan secured by equipment worth $1.5M. When KS arrives w/ the sheriff to seize the collateral, J says he filed for bankruptcy that morning. Can you go forward with the repo? Can the sheriff? No; neither KS nor the sheriff can go forward w/ the repo. Both are subject to the automatic stay. See 11.U.S.C. 101(15) (including governmental units in “entities” subject to the stay). e. Problem 6.3. P, owing Bank $250k, filed for Chapter 11. The collateral is one of P’s restaurants (worth less than $250k) that P closed before filing for bankruptcy. Can Bank foreclose? i. 11 U.S.C. § 326(a): usually, the automatic stay would preclude foreclosure 13 ii. 11 U.S.C. § 362(d)(2): Bank can argue to lift the stay b/c (1) P has no equity in the property and (2) the property is not necessary for an effective reorganization. 1. Here, the debt is greater than the property’s FMV 2. Here, the restaurant is not necessary for an effective reorganization b/c P closed the restaurant before filing for bankruptcy. f. Problem 6.4. S, owing Bank $210k, filed for Chapter 11. Bank began foreclosure proceedings on the mortgage it holds on a building w/ FMV of $600k. Loan Officer anticipates a long reorganization and wants Bank to get out ASAP. What’s your advice? i. 11 U.S.C. § 362(a): Bank cannot proceed in foreclosure b/c of the automatic stay ii. Bank likely cannot argue to lift the stay under 11 U.S.C. § 362(d)(2) b/c there is equity in the property (i.e. FMV > debt) iii. Bank probably cannot argue to lift the stay under 11 U.S.C. § 362(d)(1) b/c the large equity cushion provides adequate protection of the collateral. g. Problem 6.5. P owes Bank $350k secured by a $700k yacht. Before P filed for Chapter 11, the insurance was canceled. Under the S/A P’s failure to insure the yacht is a default. The S/A provides that in the event of default, Bank can purchase insurance and add the cost to the secured debt and/or take possession of the yacht. Bank can’t get another policy. What do you do? Despite the equity cushion, the ct will likely lift the stay under 11 U.S.C. § 362(d)(1) b/c the lack of insurance is too much of a risk for the creditor to bear. h. Problem 6.6. You represent Chapter 11 debtor H. How do you deal with these creditors? i. a. H owes W $126 unsecured. W is upset that H is 6 mo. behind on loan pmts. Don’t return this creditor’s call. As “amoebas of the bankruptcy court,” unsecured creditors can only file a proof of claim and hope for a distribution after secured creditors are paid. ii. b. M has a S/I in H’s sterilization equipment to secure a $50k debt. She is upset b/c at the beginning of the case, the equipment was worth $50k but now it’s worth $40k. 1. 11 U.S.C. § 362(d)(2): M probably can’t lift the stay under 11 U.S.C. § 362(d)(2) b/c the equipment is necessary for reorganization 2. 11 U.S.C. § 362(d)(1): since the equipment is declining in value, M could get the stay lifted for lack of adequate protection a. 11 U.S.C. § 361: the court would order the trustee to make cash pmts to M, or grant M replacement liens iii. c. If (1) the collateral declined in value to $35k by the time M moved to lift the stay, (2) the collateral declined to $30k by the time the court heard the motion and then ruled, and (3) the collateral was predicted to decline to $25k by the end of the bankruptcy case, how much must H pay to prevent a lifting of the stay? 1. In re Craddock-Terry Shoe Corp.: adequate protection begins on the date the bankruptcy petition is filed a. $50k FMV at filing the bankruptcy petition – $25k FMV at end of bankruptcy case = $25k. 2. Majority approach: adequate protection begins on the date when the motion to lift stay is filed a. $35k FMV at filing motion to lift stay – $25k FMV at end of bankruptcy case = $10k. 3. Minority approach: adequate protection begins when the court hears the motion to lift stay a. $30k FMV at hearing on motion to lift stay – $25k FMV at end of bankruptcy case = $5k. VI. Assignment 7: The Treatment of Secured Creditors in Bankruptcy a. Determining Secured Status. An allowed claim of a creditor secured by a lien on property is a secured claim to the extent of the FMV of the property, and is unsecured for any remaining value. 11 U.S.C. § 506(a)(1). b. Calculating a Secured Claim 14 c. d. e. f. g. h. i. As of Date of Filing Petition. The court shall determine the amount of an allowed claim as of the date the petition was filed. 11 U.S.C. § 502(b). ii. Debt. A claim includes the original debt. iii. Interest 1. Pre-Petition Interest. All creditors are entitled to pre-petition interest at the rates specified in their contracts. 2. Pendency Interest/Attorney’s Fees. To the extent a secured claim is secured by property w/ FMV > claim, interest and reasonable fees (incl. attorneys’ fees) provided for under the agreement are allowed. 11 U.S.C. § 506(b). The rate specified in the contract or (if no K rate) the prevailing market rate will apply. 3. Interest after Plan Confirmation. To get a Chapter 11 plan confirmed, the plan must provide that secured claims will be paid of a value as of the effective date of the plan. 11 U.S.C. § 1129(b)(2)(A)(i)(II). This means that a secured claim will get paid off over the course of a plan at the Till rate (i.e., the prime rate + an adjustment for risk). Calculating an Unsecured Claim in Chapter 7. Determine how much is available for distribution to general unsecured creditors. Then, divide that into the total unsecured claims to get a percentage. Multiply this percentage by a particular claim to calculate what will be collected. See 11 U.S.C. § 726(b). See also VI.f. Problem 7.2, infra. Abandonment of Property of the Estate i. By Trustee. After notice and a hearing, the trustee may abandon property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. 11 U.S.C. § 554(a). ii. On Request by Party. On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property that is burdensome to the estate or of inconsequential value. 11 U.S.C. § 554(b). Problem 7.1. A owes CS $30k for repair work. The contract provides for 18% interest. The market rate is 12%. The work was done Feb. 15 and the bill was sent March 15. A filed for bankruptcy on Sept. 15. The bankruptcy case is still pending on Dec. 15. Attorney billed CS $400, but the contract btwn A and CS says nothing about who will pay collection costs. How much is the claim? The claim is worth $32,700 i. 11 U.S.C. § 502(b): the court determines the amount of a claim as of the date of the filing of the bankruptcy petition ii. Debt = $30k iii. Interest = $2,700 1. Pre-petition Interest = $2,700 a. 18% interest per year = 1.5% interest per month b. [1.5% interest/mo.]*[$30k debt] = $450/mo. c. [$450/mo.]*[6 mo.] = $2,700 2. No pendency interest for unsecured creditors. See 11 U.S.C. 502(b)(2) (precluding “unmatured interest” from an allowed claim). 3. 11 U.S.C. § 506(b): no attorneys fees b/c the contract didn’t provide for them. Problem 7.2. After calculating the claim in Problem 7.1, the trustee’s Final Report and Account shows that there will be $59,575 available for distribution to general unsecured creditors. Unsecured claims (including CS’s) total $1,191,500. What does that mean for CS? CS will get $1,635. 11 U.S.C. § 726(b): determine what each class of creditors will be paid; divide the figure pro-rata i. [$59,575 available for unsecured creditors]/[$1,191,500 total unsecured claims] = 5% ii. 5% * $32,700 (CS’s claim) = $1,635. Problem 7.3. At filing, S owed CI $340k plus 6 mo. interest at 12%/yr. The loan was secured w/ S’s printing equipment appraised at $400k. i. a. Assuming that collateral value holds up in bankruptcy court, how much is CI’s claim? The claim is currently worth $371,212. 15 1. 2. i. j. k. Debt = $340k Pre-petition interest = $20,400 a. 12%/yr = 1%/mo. b. [1%/mo.]*[$340k debt] = $340/mo. c. [$340/mo.]*[6 mo.] = $20,400 3. Claim before pendency interest = $360,400 4. Pendency interest = $10,812 a. 11 U.S.C. § 506(b): to the extent a secured claim is secured by property w/ FMV > claim, interest is allowed b. 12%/yr = 1%/mo. c. [1%/mo.]*[$360,400 claim] = $3604/mo. d. [$3604/mo.]*[3 mo.] = $10,812 5. Claim = $371,212 ii. b. If the court also used a 12% interest rate for pending bankruptcy, how much should CI expect to be paid under a plan of reorganization that is confirmed today? CI should expect to be paid $371,212 plus interest at the Till rate. 1. 11 U.S.C. § 1129(b)(2)(A)(i)(II): the plan must provide that secured claims will be paid of a value as of the effective date of the plan iii. c. How much should CI expect to be paid if the reorganization plan is not confirmed for another year? CI should expect to be paid $400k at the Till rate. 1. Claim before pendency interest = $360,400 2. Pendency interest = $39,600 a. 12%/yr = 1%/mo. b. [1%/mo.]*[$360,400 claim] = $3604/mo. c. [$3604/mo.]*[12 mo.] = $43,248. d. But, pendency interest allowed only to the extent FMV > claim. Thus, the claim is capped at $400k. 3. Claim = $400,000 Problem 7.4. (From the facts of Problem 7.3) the property was reappraised and the FMV is more like $325k. Debtor estimates that there will be sufficient assets to pay the unsecured creditors about 10% of their outstanding claims. i. a. Describe CI’s claim now. CI’s claim is $325k secured and $35,400 unsecured 1. 11 U.S.C. § 506(a)(1): an allowed claim of a creditor secured by a lien on property is a secured claim to the extent of the FMV of the property, and is unsecured for any remaining value ii. b. What should CI expect to be paid under a plan of reorganization? CI should expect to get paid $328,400. 1. Secured debt collectible = $325k 2. Unsecured debt collectible = $3,540 a. $35,400 unsecured debt * 10% collectible iii. c. Does it matter to CI whether the plan is confirmed today or a year from today? Yes. CI wants the plan confirmed ASAP b/c he is not entitled to pendency interest. Problem 7.5. (From the facts of Problems 7.3 and 7.4) no security agreement was ever signed. i. a. Now what is the nature of CI’s claim? CI’s claim is unsecured. Generally, a S/A is required to create a S/I. See U.C.C. § 9-203. See also, VIII. Assignment 8: Formalities of Attachment, infra. ii. b. If the 10% payout for unsecured creditors persists, what should CI expect under a plan of reorganization? CI should expect $36,040. 1. [$360,400 claim]*[10% collectible] = $36,040 Problem 7.6. T’s summer house is in the Chapter 7 estate. T owes $850k on the mortgage (incl. 10%/yr interest). Broker can get $1M for the house and charges 6% commission. Estimated trustee costs = $10k. 16 i. a. If the house sells in 6 mo., how much money will the sale produce for the estate? The sale will produce $37,500 for the estate. 1. $930k available to distribute to creditors a. $1M sale price – $60k commission – $10k trustee costs = $930k 2. $892,500 secured claim a. Claim before pendency interest = $850k b. Pendency interest = $42,500 i. 10% interest/yr = 0.833%/mo. ii. [0.833%/mo.]*[850k claim] = $7,083/mo. iii. [$7,083/mo.]*[6 mo.] = $42,500 3. $930k – $892,500 = $37,500 ii. b. How does that amount vary if you sell at an earlier or later time? Is trying to sell the house the right thing to do? 1. If the house sells 6 mo. later, that adds $42,500 (in pendency interest) to the secured claim for a total claim of $935k. 2. Since the proceeds (after expenses) = $930k, the creditor is probably stuck with $930 rather than his claim of $935. 3. That extra $5k is from interest, which is probably not constitutionally protected. 17 CHAPTER 3. CREATION OF SECURITY INTERESTS VII. Assignment 8: Formalities for Attachment a. Attachment. A S/I attaches to collateral when it becomes enforceable against the debtor w/ respect to the collateral. U.C.C. § 9-203(a). b. Enforceability. A S/I is enforceable against the debtor and 3d parties w/ respect to the collateral only if (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a S/P; and (3) [either] (A) the debtor has authenticated a S/A that provides a description of the collateral; or (B) the collateral is in possession of the S/P. See U.C.C. § 9-203(b). i. Value Given. A person gives value for rights if the person acquires them: 1. Binding Commitment. In return for a binding commitment to extend credit; 2. Security. As security for, or in total or partial satisfaction of, a preexisting claim; 3. Pre-existing Contract. By accepting delivery under a preexisting contract for purchase; or 4. Consideration. In return for any consideration sufficient to support a simple contract. See U.C.C. § 1-204. ii. Debtor’s Rights in Collateral. A debtor usually acquires rights in collateral when title passes. iii. Authenticated Security Agreement 1. Composite Document Rule. When the parties neglect to sign a S/A, look at the transaction as a whole to determine if there are writings, signed by the debtor describing the collateral which demonstrates an intent to create S/I in the collateral. In re Ace Lumber Supply, Inc. a. Cf. White & Summers Test. First, determine whether the language objectively indicates that the parties may have intended to create or provide for a S/A. Second, determine whether the parties actually intended to create a S/I. Parol evidence is admissible to inform the latter, but not the former inquiry. b. Language Requirements. “While there are no magic words which create a S/I there must be language in the instrument which “leads to the logical conclusion that it was the intention of the parties that a S/I be created.” In re Ace Lumber Supply, Inc. c. Sufficiency of Documents Standing Alone i. P/note Sufficient. A p/note may qualify as a S/A. In re AmexProtein Development Corp. ii. Financing Stmt Insufficient. A financing stmt is insufficient to create a security interest in Debtor’s assets. In re Ace Lumber Supply, Inc. d. Inclusion of Non-Authenticated Documents i. Majority: Internal Connection. So long as the documents express some internal connection w/ one another, they may be read together for purposes of including the collateral described in the second document w/in the S/A’s umbrella. ii. Minority: Cross-References. Some courts demand that there be a reference w/in one document to the other. 2. Post-Signing Descriptions a. Majority: Sequence Immaterial. The majority view upholds agreements where descriptions are completed after the debtor signs the S/A. The sequence of events is immaterial so long as the resulting documents meet the statutory requirements. 18 b. Minority: Unenforceable. Under the minority view, a secured creditor cannot complete the S/A or F/S, whether authorized or not, after the debtor has signed the documents. c. Problem 8.1. Do the following exhibits meet the authenticated S/A requirement of U.C.C. § 9203(b)(3)(A)? A promissory note was signed by the debtor but not by the S/P and recites it is “secured by collateral described in a S/A bearing the same date.” A financing stmt describes the collateral as “all of the inventory and equipment of the debtor’s business,” was not signed, but was accompanied by an authorization for the S/P to file the financing stmt (signed by the debtor). A letter from debtor’s attorney states, “Enclosed are the promissory note and financing stmt which give you a S/I in my client’s inventory and equipment.” i. Standing by themselves, the documents do not meet the authenticated S/A requirement 1. U.C.C. § 9-102(a)(73): the promissory note and the letter are not S/As by themselves b/c they do not provide for a S/I 2. In re Ace Lumber Supply, Inc: the F/S is insufficient to create a S/I as a matter of law ii. Composite Document Rule: documents could probably be read together to create a S/I 1. The p/note is signed by the Debtor 2. The F/S and letter describe the property 3. According to the majority approach, the documents probably have some internal connection 4. As for the minority approach (requiring all documents be authenticated), the financing stmt may be included b/c of the separate authorization, and one may argue the letter was signed by the debtor’s agent. d. Problem 8.2. When did First National Bank’s S/I attach to Fisherman’s Pier restaurant in the story on pp. 131-33? The S/I attached when all three elements of U.C.C. § 9-203(b) are met (i.e., when (1) value has been given by creditor to debtor; (2) the debtor has rights in the collateral; and (3) the debtor has authenticated a S/A that provides a description of the collateral). i. The S/A was signed at the closing (element 3) ii. The debtor acquired rights in the collateral when he got the bill of sale (element 2) iii. The creditor gave the debtor value at the closing when it engaged in a binding commitment to extend credit. See U.C.C. 1-204(1). iv. Thus, the S/I attached at the closing. e. Problem 8.3. S/A read “equipment described on the attached list,” but no list was attached. Parties signed the S/A w/o the list attached. The closing was completed and the loan proceeds were disbursed. i. a. Did the bank, at that moment, have an enforceable S/I? No. The S/I probably did not attach b/c there was no description of the collateral. One may be able to argue that the forgotten list should be read w/ the S/A under the Composite Document Rule. ii. b. List of collateral was produced two weeks later and stapled to the S/A. Is the S/A enforceable? Yes. The majority rule provides that the sequence of events is immaterial as long as the statutory requirements are met. Under the minority approach, the S/A would not be enforceable. iii. c. Would it make a difference if the list was produced two years later? No. The S/I would attach when the list was produced. iv. d. What if the list of collateral was produced after debtor filed for bankruptcy and the list was stapled to the S/A? If you cannot argue that the S/I attached at closing b/c of the Composite Document Rule, then the S/I attached after the bankruptcy petition was filed. This violates the automatic stay. See 11 U.S.C. § 362(a)(4), (5). VIII. Assignment 9: What Collateral and Obligations Are Covered? a. Collateral Description Requirement. A S/I is enforceable against D and 3d parties only if, inter alia, the S/A provides a description of the collateral. U.C.C. § 9-203(b)(3)(A). b. Interpreting Security Agreements 19 c. d. e. i. Parties’ Intent. Generally the court will try to determine the intention of the parties as objectively expressed in the S/A. Where the agreement is ambiguous, parol evidence may be introduced. ii. Article 9 Meaning. Courts usually give terms (e.g., types of collateral) their Article 9 meaning. Sufficiency of Description i. Reasonably Identifies Collateral. A description is sufficient if it reasonably identifies the collateral. U.C.C. § 9-108(a). 1. Examples. A description reasonably identifies the collateral if it identifies the collateral by: (1) specific listing; (2) category; (3) a type of collateral defined in the U.C.C.; (4) quantity . . . . U.C.C. § 9-108(b). ii. Per Se Insufficient Descriptions 1. Supergeneric Descriptions. A description of collateral as “all the D’s assets” or “all the D’s personal property” or words of similar import does not reasonably identify the collateral. U.C.C. § 9-108(c). a. In re Shirel. “All merchandise” is vague, broad, and fails to sufficiently identify a refrigerator. 2. Certain Descriptions by Type. A description only by the type of collateral defined in the U.C.C. is an insufficient description of (1) a commercial tort claim; or (2) in a consumer transaction, consumer goods. U.C.C. § 9-108(e). Describing After-Acquired Collateral i. S/I in After-Acquired Collateral. Except as otherwise provided in subsection (b), a S/A may provide for a S/I in after-acquired collateral. U.C.C. § 9-204(a). ii. When Ineffective. A S/I does not attach under an after-acquired property clause to consumer goods, unless the debtor acquires rights in them w/in 10 days after the S/P gives value; or commercial tort claims. U.C.C. § 9-204(b). 1. “Additions.” A Nebraska case (citing Black’s Law Dictionary) held that “additions” did not sufficiently describe after-acquired property. iii. Implied. The majority rule implies an after-acquired property clause for collateral that is constantly sold or acquired. E.g., inventory and accounts. 1. Stoumbos v. Kilimnik. S/A provided a S/I in “all inventory [on hand at May 1, 1982] and equipment.” HELD: the S/A precluded an implied after-acquired collateral clause. Such a clause cannot be implied for equipment because it’s not normally subject to frequent turnover. What Obligations are Secured? i. Description Not Required. The S/A need not describe the obligation secured. ii. Interpretation. Like S/As, descriptions of obligations are subject to rules of contract interpretation. iii. How to Describe. Descriptions may be made: 1. Specifically (e.g., “S/I secures $50 loan made on 1/1/09”). 2. By reference (e.g., “S/I secures loan evidenced by promissory note”). iv. Future Advances 1. Allowed. A S/A may provide that collateral secures . . . future advances. U.C.C. § 9-204(c). 2. Defined. A future obligation that comes into existence as the result of an additional extension of credit by the secured creditor. E.g., “all debt D owes, or will ever owe, to the S/P.” v. Floating Liens. A “floating lien” is a future advance that secures all the D’s property including after-acquired property. E.g., “To secure payment of all D’s current and future debts to S/P, . . . D grants S/P a S/I in all D’s property, whether now owned or hereafter acquired.” 20 f. Problem 9.1. Gs borrowed $350k from FNB, granting a S/I in “crops growing on the D’s farm in Osprey County, about 14 miles from Tilanook” and most of their farm equipment. (The location info is correct and Gs only own one farm.) Gs paid down the loan to $190k. i. a. Does FNB have a S/I against the current crop? 1. U.C.C. § 9-108(a): A description of personal/real property is sufficient if it reasonably identifies what is described 2. Since “crop” isn’t defined in the U.C.C., resort to K interpretation. a. Since the document is ambiguous, look to parol evidence to determine the parties’ intent. 3. A Kansas case w/ similar facts to these held that S/P only held a S/I in the crops in existence at the time of the agreement. ii. b. What should Gs do? The ambiguous S/A makes it too risky for PCA (2d creditor). PCA could buy the debt and terminate the existing S/I. g. Problem 9.2. Gs also raise sheep on the property. Are sheep covered by FNB’s S/I? Maybe. The dictionary defines “crops” as “a plant or animal or plant or animal product that can be grown and harvested extensively for profit or subsistence.” MERRIAM WEBSTER’S COLLEGIATE DICTIONARY 276 (10th ed. 1994). The S/A should have defined “crops.” h. Problem 9.3. C lent $300k to AVMI four years ago and entered into a S/A that listed the collateral as “All of D’s equipment, including replacement parts, additions, repairs, and accessories incorporated therein or affixed thereto. Without limitation the term ‘equipment’ includes all items used in recording, processing, playing back, or broadcasting moving or still pictures, by whatever process.” AVMI has acquired new equipment since the S/A was signed. AVMI defaulted and FNB, another creditor, claims the after-acquired equipment. i. U.C.C. § 9-204(a): S/A may create or provide for a S/I in after-acquired collateral 1. The description would clearly indicate after-acquired collateral if it had language like “all property now owned or hereinafter acquired.” 2. A Nebraska case held that “additions” does not sufficiently describe afteracquired property. ii. There probably isn’t an implied after-acquired property clause b/c equipment is not constantly sold or acquired. i. Problem 9.4. Walter’s Department Store (W) takes S/Is in everything that a credit card holder purchases on his/her account. W only repossesses appliances and household goods. The application for a W credit card says “and cardholder grants W a S/I in all items purchased on the account.” Is there a way for W to take S/Is that are good under In re Shirel? i. Under Shirel, “all items” is too broad to be an effective description of collateral. ii. U.C.C. § 9-108(c): “all D’s assets” does not reasonably identify the collateral iii. U.C.C. § 9-108(e): “all consumer goods” is an insufficient description iv. W could list only the items he normally repossesses v. W could list categories of items under U.C.C. § 9-108(b)(2). vi. If the receipt contains language creating a S/I in the item listed on the receipt, it would probably meet the requirements under U.C.C. § 9-203. IX. Assignment 10: Proceeds, Products and Other Value-Tracing Concepts a. Proceeds Defined. “Proceeds” means the following property: i. (A) whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral; ii. (B) whatever is collected on, or distributed on account of, collateral; iii. (C) rights arising out of collateral; iv. (E) to the extent of the value of collateral and to the extent payable to D or S/P, insurance payable by reason of the loss to collateral. U.C.C. § 9-102(a)(64). b. Automatic Attachment. A S/I attaches to any identifiable proceeds of collateral. U.C.C. §§ 9203(f), 9-315(a)(2). c. Security Interest After Disposition 21 d. e. f. g. i. Continuation. Generally, a S/I continues in collateral notwithstanding sale. U.C.C. § 9315(a)(1). ii. Termination of Security Interest in Money. A transferee of money takes the money free of a S/I unless the transferee acts in collusion with the D in violating the rights of the S/P. U.C.C. § 9-332(a). Lowest Intermediate Balance Rule. The amount of a S/P’s collateral remaining in a bank account after the deposit of proceeds and subsequent transactions is the lowest balance of all funds in the account from the time of the deposit to the completion of the transactions. (Think the “community-out first” tracing aid from Marital Property.) Other Value-Tracing Concepts i. Product. A “product” is something the collateral produces. Note products may also be proceeds b/c they arise out of collateral. ii. Profit. A “profit” means (1) the excess of revenues of a business over the expenses where the business itself is the collateral, or (2) a right exercised by one man in the soil of another, accompanied with participation in the profits of the soil thereof. iii. Rents. Rents are money paid for the temporary use of collateral. iv. Offspring. Offspring means the descendants of animals. Problem 10.1. F has a perfected S/I in all of the “equipment, inventory, and accounts” of PA, who is d.b.a. PP. The contract makes no mention of proceeds, products, offspring, substitutions, additions, or replacements. Are they included? The S/A could include an implied after-acquired property clause in the inventory and accounts. The S/A would have to describe products, offspring, substitutions, additions, and replacements (as categories in the U.C.C.). The S/A does not have to describe proceeds. Under U.C.C. §§ 9-315(a)(2) and 9-203(f), a S/I in proceeds automatically attaches. Problem 10.2. Which of the following are collateral of F under the S/A in Problem 10.1? i. a. The money now in PA’s bank account. 1. Bank account ≠ “account” a. U.C.C. § 9-102(a)(2): “account” means a right to pmt of a monetary obligation . . . for property that has been or is to be . . . disposed of. b. A bank account may be a right to payment, but it isn’t for property disposed of. c. A bank account is probably a “deposit account” i. U.C.C. § 9-102(a)(29): “deposit account” is a demand, time, savings, passbook, or similar account maintained with a bank. 2. Bank account could be “proceeds” a. PA could have sold inventory or equipment, or collected on accounts. This money (proceeds) could have been deposited in the bank account. b. U.C.C. § 9-102(a)(64)(A): proceeds means whatever collected on collateral i. U.C.C. § 9-102(a)(12): “collateral” means property subject to a S/I. c. Note if funds in the bank account are “proceeds,” they must be identifiable to be sufficiently described. ii. b. A parrot that PA took in pmt of an overdue account. 1. U.C.C. § 9-102(a)(64)(B): “proceeds” means whatever is collected on collateral 2. The bird is probably not original collateral a. U.C.C. § 9-102(a)(44): the bird is goods 3. The bird is “proceeds” and the S/I in it automatically attaches (i.e., it is collateral). iii. c. A new computer that PA bought to replace the computer she owned at the time she granted the S/I to F. 1. The computer is not original collateral a. After-acquired property clauses are not implied for equipment 22 PART TWO: THE CREDITOR-THIRD PARTY RELATIONSHIP CHAPTER 6. PERFECTION X. Assignment 16: The Personal Property Filing Systems a. Effectiveness of S/A. Except as otherwise provided in the U.C.C., a S/A is effective according to the terms between the parties, against purchasers of the collateral, and against creditors. U.C.C. § 9-201. b. Continuation of S/I in Collateral. Generally, a S/I continues in the collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the S/P authorized the disposition free of the S/I. U.C.C. § 9-315(a)(1). c. Perfection i. Security Interest Subject to Other Law. Except as provided in (d), the filing of a F/S is not necessary or effective to perfect a S/I in property subject to: 1. Federal Law that Preempts. A statute, regulation, or treaty of the United States whose requirements for a security interest’s obtaining priority over the rights of a lien creditor with respect to the property preempt Section 9-310(a). 2. Certificate-of-Title Statute. Any certificate-of-title statute covering automobiles, trailers, mobile homes, boats, farm tractors, or the like, which provides for a S/I to be indicated on the certificate as a condition or result of perfection. U.C.C. § 9-311(a)(1)–(2). a. Exception for Inventory. During any period in which collateral subject to a statute specified in subsection (a)(2) is inventory held for sale or lease by a person or leased by that person as lessor and that person is in the business of selling goods of that kind, this section does not apply to a security interest in that collateral created by that person. U.C.C. § 9-311(d). ii. Filing Systems 1. State Law. If State law governs perfection of a S/I, the office in which to file a F/S to perfect the S/I is: a. Fixtures. The office designated for the filing or recording of a record of a mortgage on real property if the F/S if filed as a fixture filing and the collateral is goods that are or are to become fixtures. U.C.C. § 9501(a)(1)(B). b. Other Collateral. The Secretary of State’s office other cases. U.C.C. § 9-501(b). 2. Certain Intangible Property: NOT ON THE EXAM a. Patents. Article 9 “governs the method for perfecting a security interest in patents.” In re Pasteurized Eggs Corporation (Pasteurized Eggs Corporation v. Bon Dente Joint Venture). The issue isn’t settled. b. Copyrights. A S/P perfects an interest in copyrights and receivables of copyrights in the US Copyright Office. National Peregrine, inc. v. Capital Federal Savings and Loan Association of Denver (In re Peregrine Entertainment, Limited). The issue isn’t settled. iii. Filing Procedure 1. What Constitutes Filing. Communication of a record to a filing office and tender of the filing fee or acceptance of the record by the filing office constitutes filing. U.C.C. § 9-516(a) 2. Two Day Lag-Time. The filing office shall index the F/S in the record w/in 2 business days. U.C.C § 9-519 3. File First, then Search. Because of the lag time (and the possibility of missing a filed but not-indexed F/S), it’s recommended that one file a F/S first, then wait out the lag time to search for your own F/S to see if anyone’s ahead of you. 24 a. d. e. f. Filing F/S before S/A is allowed. A F/S may be filed before a S/A is made or a S/I otherwise attaches. U.C.C. § 9-502(d). Priority i. Article 9 S/P vs. Lien Creditor. A security interest is subordinate to the rights of a person who becomes a lien creditor before (A) the S/I is perfected; or (B) a condition in U.C.C. § 9-203(b)(3) is met and a F/S covering the collateral is filed. U.C.C. § 9-317(a)(2). ii. S/P vs. Buyer 1. Buyer Without Knowledge of S/I and Before Perfection. A buyer, other than a S/P, of tangible chattel paper, tangible documents, goods, instruments, or a security certificate takes free of a S/I if the buyer gives value and receives delivery of the collateral without knowledge of the S/I and before it is perfected. U.C.C. § 9-317(b). 2. Other Buyers. Buyers in the ordinary course of business and some buyers of consumer goods to take free of a S/I. See U.C.C. § 9-320. iii. Equitable Claims. Footnote 4 in Peerless Packing Co. v. Malone & Hyde, Inc. provides that equitable claims verging on actual fraud can change the priorities provided for in Article 9. Problem 16.1. L owns a $30k car. L owes about $30k to F, his ex-wife, for child support and owes B $36k for money borrowed. F obtained a judgment, but before the sheriff could seize the car, L granted B a S/I in the car to secure the $36k debt. L and B recorded notice of B’s lien on the certificate of title. i. a. Now where does F stand? F has no property interest in the car. To create and perfect her judgment lien, she needs to get a writ of execution and have the sheriff execute the writ and levy on any non-exempt property. 1. Priority Between Article 9 S/P and Lien Creditor a. U.C.C. § 9-317(a)(2): a S/I is subordinate to the rights of a person who becomes a lien creditor before (A) the S/I is perfected; or (B) a condition in U.C.C. § 9-203(b)(3) is met and a F/S covering the collateral is filed 2. How does B perfect his S/I? a. U.C.C. § 9-311(a)(2): F/S is not necessary or effective to perfect a S/I subject to a certificate-of-title statute that provides for a S/I to be indicated on the certificate as a condition or result of perfection. b. U.C.C. § 9-311(b): S/I may be perfected only by compliance with the certificate-of-title statute. 3. Note: absent fraud, there is generally no problem when a debtor “prefers” one creditor over another when he decides who gets a S/I ii. b. Can you go ahead with the execution levy? If you can, should you? Note that L may not be in default. But if the sheriff attempts to levy on the car, B will show the sheriff his perfected S/I and the sheriff will give the car back to B. F may be liable for conversion (i.e., interference with the right of possession). Problem 16.2. S paid W $1k in cash and signed a $1k p/note for a street vendor cart. S received (1) a notice that W filed for bankruptcy and (2) a letter from GFC demanding possession, w/ W’s p/note to GFC, a S/A signed by W granting GFC a S/I in the cart, and a F/S bearing the date/time stamp of the Secretary of State. GFC properly perfected its S/I before S bought the cart. i. a. What do you tell S? 1. U.C.C. § 9-201(a): generally, a S/A is effective according to its terms btwn the parties, against purchasers of the collateral, and against creditors. 2. U.C.C. § 9-315(a)(1): a S/I continues in the collateral notwithstanding the sale, lease, license, exchange, or other disposition thereof unless the S/P authorized the disposition free of the S/I a. Thus, GFC has a S/I in the cart, even though W sold it to S 25 3. g. U.C.C. § 9-317(b): a buyer, other than a S/P of . . . goods . . . takes free of a S/I if the buyer gives value and receives delivery of the collateral without knowledge of the S/I and before it is perfected a. Here, S received delivery of the cart after GFC perfected its S/I ii. b. If you discovered that GFC repossessed three vending carts in the past 12 months, each time from a defrauded buyer, would that help your case? Footnote 4 in Peerless Packing Co. v. Malone & Hyde, Inc. notes that in circumstances verging on actual fraud, equitable claims can change priorities explicitly provided in Article 9. But, even if there was fraud here, S’s claim is against W (the debtor), not GFC (the S/P). You should send a letter to GFC saying you’re going to put up a fight, so that you can try to get a more favorable settlement. Problem 16.4. In what filing system(s) will you make the filings and conduct the searches? i. a. P applied to ITT for a consumer loan to be secured by $10k worth of tools, which P bought to use at the service station that he and his wife own and operate. 1. U.C.C. § 9-102(a)(44): the tools are “goods” (all things that are movable when a S/I attaches). a. U.C.C. § 9-102(a)(33): the tools are “equipment” (a type of good) 2. U.C.C. § 9-310: S/I in goods may be perfected by filing a F/S 3. U.C.C. § 9-501(b): file the F/S in the central filing office ii. b. B, an inventor, has applied to your client bank for a $400k loan to be secured by a patent B obtained. 1. U.C.C. § 9-311(a)(1): filing a F/S is not necessary or effective to perfect a S/I in property subject to pre-empting federal law 2. U.C.C. § 9-311(b): where federal law pre-empts § 9-310(a), a S/I may be perfected only by compliance 3. In re Pasteurized Eggs Corporation (Pasteurized Eggs Corporation v. Bon Dente Joint Venture) held that Article 9 governs the method for perfecting a S/I in patents. a. But you would want to perfect the S/I with the USPTO if you were in a different jurisdiction. 4. U.C.C. § 9-102(a)(42): the patent is a “general intangible” a. U.C.C. § 9-501(b): file the F/S in the central filing office iii. c. Bank plans to lend $500k to N. The loan is to be secured by royalty pmts N receives from his publisher on books he has written. 1. National Peregrine, inc. v. Capital Federal Savings and Loan Association of Denver (In re Peregrine Entertainment, Limited) held that a S/P perfects an interest in copyrights and receivables of copyrights in the US Copyright Office. 2. But since the law is not settled, you should also comply with Article 9. a. U.C.C. § 9-102(a)(2): royalty pmts are “accounts” b. U.C.C. § 9-310: perfect S/I in accounts by filing F/S c. U.C.C. § 9-501(b): file the F/S in the central filing office iv. d. Bank plans to make a $600k working capital loan to a car dealer. The collateral includes (1) the dealer’s inventory, (2) cars that aren’t for sale, (3) A/R from the sale of cars, and (4) all of dealer’s rights to its trademark. 1. (1) U.C.C. § 9-311(d): where collateral subject to a statute in (a)(2) is inventory held for sale or lease by a person or leased by that person as lessor and that person is in the business of selling goods of that kind, this section does not apply to a S/I in that collateral created by that person. a. Inventory is a category of “goods.” So to perfect a S/I in inventory, file a F/S with the Secretary of State. 2. (2) For cars that aren’t inventory, U.C.C. § 9-311(a)(2) and (b) provide that you perfect by noting the S/I on the certificate of title. 3. Determining the Status of the Cars 26 a. b. New cars have manufacturer’s certificate of origin Used cars have certificates of title still in the original seller’s name; then the buyer puts it in his name 4. (3) U.C.C. § 9-102(a)(2): A/R from sale of cars = “accounts.” a. U.C.C. § 9-310: to perfect, file with the secretary of state. 5. (4) A S/I in trademarks need not be perfected by recording in the USPTO. Thus, you’d file the TM as a “general intangible” (U.C.C. § 9-102(a)(42)). h. Problem 16.4. Bank is concerned that debtor might encumber the prospective collateral to a competing creditor at any time, even as the debtor is negotiating with Bank. Should the U.C.C. searches or filings be done first? File first, then search. i. U.C.C. § 9-516(a): communication of a record to a filing office and tender of the filing fee or acceptance of the record by the filing office constitutes filing ii. U.C.C § 9-519: the filing office shall index the F/S in the record w/in 2 business days iii. If you search first and nothing turns up, you run the risk of missing an unsearchable F/S. That is, the effective date of the search was a point in time when the F/S was effective (filed and fee paid), but not indexed yet. iv. Thus, you should file first, then wait for the 2-day lag to do a search request so you can find your F/S and see if anyone’s ahead of you. 1. See U.C.C. § 9-502(d): a F/S may be filed before a S/A is made or a S/I otherwise attaches 2. See In re Ace Lumber Supply, Inc. (F/S alone is insufficient to create a S/I). XI. Assignment 17: Article 9 Financing Statements: The Debtor’s Name a. Content Requirements for F/S. A F/S is sufficient only if it: i. D’s Name. Provides the name of the debtor; ii. S/P’s Name. Provides the name of the secured party; and iii. Collateral Description. Indicates the collateral covered by the F/S. U.C.C. § 9-502(a). b. “Debtor.” A “debtor” is a person having an interest, other than a S/I or other lien, in the collateral, whether or not the person is an obligor. U.C.C. § 9-102(a)(28)(A). c. Sufficiency of Debtor’s Name i. Registered Organization. If D is a registered organization, the F/S must provide the name of the D indicated on the public record of the D’s jurisdiction of organization which shows the debtor to have been organized. U.C.C. § 9-503(a)(1). 1. Registered Organization. “Registered organization” means an organization organized solely under State or Federal law and as to which the State or US must maintain a public record showing the organization to have been organized. U.C.C. § 9-102(a)(70). ii. Individuals. In cases other than registered organizations, estates, or trusts: if D has a name, a F/S must provide the individual or organizational name of the D. U.C.C. § 9503(a)(4)(A). 1. Individual’s Legal Name. The Debtor’s legal name is the name by which the debtor is generally known, for nonfraudulent purposes, in the community. 2. Cf. Texas. In Texas’s version of the U.C.C., the correct legal name of an individual debtor is the name on her driver’s license. d. Error in Debtor’s Name i. General Rule. Except as provided in (c), a F/S that fails sufficiently to provide the name of the D in accordance with U.C.C. § 9-503(a) is seriously misleading (i.e., the F/S is ineffective). U.C.C. § 9-506(b). ii. Exception: Found in Search. If a search of the records under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a F/S that fails sufficiently to provide the name of the D in accordance with U.C.C. § 9-503(a), the name provided does not make the F/S seriously misleading. U.C.C. § 9-506(c). 1. IACA Model Administrative Rules: NOT ON THE EXAM. The search logic: a. Does not distinguish upper and lower case letters 27 b. c. e. f. Disregards punctuation marks and accents Ignores words such as corporation, corp, incorporated, LLC, or “a Georgia corporation” that indicate the existence or nature of an organization d. Ignores the word “the” at the beginning of the name e. Ignores spaces f. Treats an initial as the equivalent of a first or middle name beginning with that letter g. Treats no middle name as the equivalent of all middle names Filing and Searching Procedure i. Indexing Records. The filing office has a duty to index filed records. See U.C.C. § 9519(a)(4). 1. Two Days to Index. The filing office must file the indexed F/S no later than two business days after the filing office receives the F/S. See U.C.C. § 9-519(h). ii. Searching Procedure 1. Filing Office Can Backdate Search Three Days. When you make a search request, the filing office can make the effective date of the search up to three days before the request. U.C.C. § 9-523(c). 2. Two Days to Communicate Search Results. The filing office must communicate the search results to you within two business days after your request. U.C.C. § 9-523(e). iii. Rule of Thumb: Search Four Days After Filing. Four days after filing a F/S, you should request a search. This accounts for: 2 days to index, 3 day search backdate, 2 days to communicate search results, and 1 day in case the office backdates the search to a time before you filed. See XI.i. Problem 17.5, infra. iv. Filing Office Failure to Comply: No Effect. The filing office’s failure to comply w/ performance standards has no effect on private rights of persons affected by the filing of records. U.C.C. § 9-523 cmt. 8. Problem 17.2. Client plans to lend $2.5M against equipment, inventory, and A/R owned by Lee Leasing and Bob Lee, the owner of the company. i. a. How will you determine what names to search under? If Bob will be a source of information, what questions will you ask him? 1. U.C.C. § 9-502(a) sets forth minimum requirements for a F/S to be effective: a. (1) D’s name b. (2) S/P’s name c. (3) description of the collateral 2. Who is the debtor? a. U.C.C. § 9-102(a)(28)(A): “debtor” means a person having an interest, other than a S/I or other lien, in the collateral 3. If Lee Leasing is the debtor and is a corporation: a. Lee Leasing is a “registered organization” i. U.C.C. § 9-102(a)(70): “registered organization” means an organization organized solely under state or federal law and as to which the State/US maintains a public record showing the organization to have been organized ii. To incorporate under state law, Lee Leasing would have to file articles of incorporation w/ the Secretary of State b. The D’s name on the financing statement must be the one on the public record (w/ exact punctuation and capitalization). See U.C.C. § 9503(a)(1). i. This can be found on the Secretary of State’s website 28 c. g. Verify the corporation owns the collateral. For equipment, get invoices and other purchase documents. For accounts, get the invoices on the sales generating those accounts. 4. If Lee Leasing is a trade name and Bob runs the business as a sole proprietor: a. U.C.C. § 9-503(a)(4)(A): the F/S must have the individual D’s name b. What is Bob’s correct legal name? i. The name by which the debtor is generally known, for nonfraudulent purposes, in the community. ii. Note: in Texas’s version of the U.C.C., the correct legal name of an individual debtor is the name on her driver’s license c. U.C.C. § 9-506(c): an error in D’s name on a F/S makes it ineffective, unless it turns up on a search of the correct name. ii. b. If Client lends to Bob and takes Lee Leasing’s property as collateral, which does Client file against? 1. File the F/S against the debtor (i.e., whoever owns the collateral). Problem 17.1. In a filing system that uses IACA standard search logic, which of these errors would render a F/S ineffective? i. U.C.C. § 9-506(c): an error in D’s name on a F/S makes it ineffective, unless it turns up on a search of the correct name. Correct Name Name as shown on the F/S F/S Effective? a. Heartland Corporation of Heartland Corporation Ineffective Iowa b. Heartland Corporation of Heartland of Iowa, Inc. Effective; ignores “corp.” Iowa c. Heartland Corporation Heartland Corporation, an Effective; ignores “an Iowa Iowa corporation corporation” at the end d. HeartLand Corporation Heartland Corp. Effective; d/n distinguish upper and lower case letters e. The Heartland Corporation Heartland Corporation Effective; ignores “the” at the beginning of a name f. K.W.M. Electronics K W M Electronics Effective; disregards Corporation Corporation punctuation marks g. Heartland Inc. Hartland Inc. Ineffective Correct Name h. John Phillip Smith IV i. John Phillip Smith IV j. John Phillip Smith IV k. Robert Don McErny l. Robert Don McErny Name as shown on the F/S Last Name First Middle Name Name Smith John Smith John Smith J. Mc Erny R. Don McErny Robert Don 29 Philip Suffix IV IV Mr. Effective? Effective; No middle name = all middle names; Suffixes ignored Ineffective Effective; Initial = name beginning w/ that letter Effective; Ignores spaces Effective; Ignores suffixes m. Eduardo Sanchez-Garcia n. Eduardo Sanchez-Garcia o. Eduardo Sanchez-Garcia p. Eduardo Sanchez-Garcia h. i. Sanchez-Garcia Eduardo Garcia Eduardo Sanchez Eduardo Sanchez Garcia Eduardo Effective Sanchez Effective Ineffective Ineffective; Search logic will not recognize last name using two names (need hyphen) Problem 17.3. In response to a search request for “John Phillip Smith,” the secretary of state sent you a list of 112 F/Ss. One is against John P. Smith, three are against John Smith, one is against John Philip Smith, Jr., and the others are against persons w/ middle initials other than P. Which F/Ss could, as a legal matter, be effective against John Phillip Smith? All the F/Ss could be used against you. Under U.C.C. § 9-506(c), they are all effective b/c they turned up from a search of the correct legal name. Problem 17.5 i. a. If the filing office receives an original F/S on Wednesday, by what day must the filing office index it (and thereby render it searchable)? Friday. 1. U.C.C. § 9-519(h): the filing office has two business days to index a filing ii. b. If the filing office complies with these sections, the last search report that did not include reference to this F/S would go out on the following Wednesday. Can you see why? 1. U.C.C. § 9-523(c): when you make a search request, the filing office can make the effective date of the search up to three days before the request 2. U.C.C. § 9-523(e): the filing office must communicate the search results to you in two business days after your request 3. Rule of thumb: search 4 business days after you file a. Note: if you searched Monday of week 2, the filing office could backdate the effective date of the search to the day you filed (Week 1, Wed.), but at a time before you actually filed the F/S! Week 1 Week 2 M T W R F M T W R |----------|-----------|-----------|----------|-----------|----------|-----------|----------| File F/S--------->>index F/S @ 3 p.m. Backdate<<----------------------Search------------>>Results Search Request @ 9 a.m. j. iii. c. What happens to a filing office that does not comply with these sections? Nothing happens. Under U.C.C. § 9-523 cmt. 8, failure to comply w/ performance standards has no effect on private rights of persons affected by the filing of records. Problem 17.6. Your client’s (lender) closing is set for 16 days from today. i. a. Assuming the secretary of state is in compliance with U.C.C. § 9-523(e), what do you do, and in what order? Can you be ready by the scheduled closing date? Under the diagram above, it seems you have plenty of time to find out if there are filings ahead of yours. ii. b. Assuming that the filing office takes two weeks to index a F/S, that it does not backdate the search (see U.C.C. § 9-523(c)), that it takes up to 24 hours to run an 30 “expedited” search, and that the filing office faxes the search to the searcher immediately upon completion, what do you do, and in what order? Can you be ready by the scheduled closing date? If it takes 2 weeks to get a filing indexed, and 24 hours to get search results, that’s 15 days (probably too close to the 16 day deadline). The solution would be to insert a clause in the loan document that the lender withholds funding until it gets a search report that ensures its priority. 1. U.C.C. § 9-516(a): a properly filed F/S is effective on filing 2. U.C.C. § 9-517: failure of a filing office to index does not affect effectiveness XII. Assignment 18: Article 9 Financing Statements: Other Information a. Rejected Filings i. Mandatory Refusal to Accept Record. A filing office shall refuse to accept a record for filing for a reason set forth in § 9-516(b) and may refuse to accept a record for filing only for a reason set forth in § 9-615(b). U.C.C. § 9-520(a). 1. Cannot Consider Accuracy. Neither § 9-520 nor § 9-516 requires or authorizes the filing office to determine, or even consider the accuracy of information provided in a record. U.C.C. § 9-516 cmt. 3. ii. Filing Does Not Occur When Refused. A record is not “filed” if the filing office refuses to accept it b/c: 1. (3) the filing office is unable to index the record b/c: a. (A) the record does not provide a name for the debtor; b. (C) the F/S does not identify the debtor’s last name; 2. (4) the F/S does not provide a name and mailing address for the S/P; 3. (5) the F/S does not: a. (A) provide a mailing address for the debtor; b. (B) indicate whether the debtor is an individual or organization; or c. (C) if the F/S indicates that the debtor is an organization, provide: i. (i) a type of organization for the debtor; ii. (ii) a jurisdiction or organization for the debtor; iii. (iii) an organizational identification number for the debtor or indicate the debtor has none. U.C.C. § 9-516(b). iii. Wrongfully Rejected Filings. If the filing office refuses to accept for a reason other than one set forth in subsection (b), it is effective as a filed record except as against a purchaser of the collateral which gives value in reasonable reliance upon the absence of the record from the files. U.C.C. § 9-516(d). 1. Reasonable Reliance. Reasonable reliance means the purchaser does a search and does not find the F/S. 2. Purchaser. “Purchaser” means a person that takes by purchase. U.C.C. § 1201(30). “Purchase” means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property (i.e., anybody who D voluntarily gives an interest in the property to). U.C.C. § 1-201(29). 3. “Lien Perfected.” Wrongfully rejected filings are referred as “lien perfected,” as the S/P is perfected against lien creditors (including the bankruptcy trustee). Lien creditors are not purchasers. b. Accepted Filings i. F/S Effective. A filed F/S satisfying § 9-502(a) and (b) is effective, even if the filing office is req’d to refuse to accept it for filing under subsection (a). However, § 9-338 applies to a filed F/S providing information described in § 9-516(b)(5) which is incorrect at the time the F/S is filed. U.C.C. § 9-520(c). 1. Minimum F/S Requirements. A F/S is sufficient if it: a. (1) provides the D’s name b. (2) provides the S/P’s name c. (3) indicates the collateral covered by the F/S. U.C.C. § 9-502(a). 31 2. c. Priority of S/I Perfected by F/S Providing Incorrect Information. If a S/I is perfected by a filed F/S providing information described in § 9-516(b)(5) which is incorrect at the time the F/S is filed, the S/I is subordinate to a conflicting perfected S/I in the collateral to the extent the holder of the conflicting S/I gives value in reasonable reliance upon the incorrect information. U.C.C. § 9338(1). a. Reasonable Reliance. The question of whether a new S/P reasonably relied on the incorrect information really asks whether the F/S did not effectively give notice of the S/I. ii. Wrong S/P Name 1. Insufficient. Under U.C.C. § 9-502(a)(2), a F/S is insufficient if it does not provide the S/P’s legal name. 2. Still Effective. A F/S is effective unless it’s seriously misleading. U.C.C. § 9506(a). An error in the name of the S/P will not be seriously misleading. U.C.C. § 9-506 cmt. 2. 3. Estoppel. In an appropriate case, an error in the S/P’s name may give rise to an estoppel in favor of a particular holder of a conflicting claim to the collateral. U.C.C. § 9-506 cmt. 2. Problem 18.1 i. a. You know that the debtor is a Nevada corp., but you don’t know its organizational ID number. Would you be better of leaving the space for the number on the F/S blank, or filling in the license plate number of your car? You’re better off filling in your license plate number. 1. U.C.C. § 9-516(b)(5)(C)(iii): a record is not filed if the filing office refuses to accept it b/c the record does not provide an organizational identification number for the debtor (if the debtor is an organization). 2. U.C.C. § 9-516 cmt. 3: this section does not require or authorize the filing office to determine, or even consider the accuracy of information provided in a record ii. b. You filled in the license number of your car, and the filing office sent the F/S back to you w/ a notice of rejection and instructions for obtaining the correct number. If you don’t do anything, are you perfected? 1. U.C.C. § 9-516(d): if the filing office refuses to accept for a reason other than one set forth in subsection (b), it is effective as a filed record except as against a purchaser of the collateral which gives value in reasonable reliance upon the absence of the record from the files a. “Reasonable reliance” means the purchaser does a search and does not find the F/S b. U.C.C. § 1-201(30): “purchaser” means a person that takes by purchase c. U.C.C. § 1-201(29): “purchase” means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property (i.e., anybody who D voluntarily gives an interest in the property to) 2. You’re perfected, but the effectiveness is limited as against purchasers. You should file w/ the correct organizational number. iii. c. Contrary to the facts of b, the filing office accepted your F/S w/ the incorrect organization ID number. Are you perfected? Do you need to take any further action? 1. F/S is effective a. U.C.C. § 9-520(c): a filed F/S satisfying § 9-502(a) and (b) is effective, even if the filing office is req’d to refuse to accept it for filing under subsection (a). However, § 9-338 applies to a filed F/S providing information described in § 9-516(b)(5) which is incorrect at the time the F/S is filed 32 b. d. U.C.C. § 9-502(a): a F/S is sufficient if it: i. (1) provides the D’s name ii. (2) provides the S/P’s name iii. (3) indicates the collateral covered by the F/S c. The F/S complies with U.C.C. § 9-502(a), thus it is effective 2. U.C.C. § 9-338(1): if a S/I is perfected by a filed F/S providing information described in § 9-516(b)(5) which is incorrect at the time the F/S is filed, the S/I is subordinate to a conflicting perfected S/I in the collateral to the extent the holder of the conflicting S/I gives value in reasonable reliance upon the incorrect information a. If a new S/P does not search, there’s no reliance b. If a new S/P searches and turns up the F/S and made the loan: i. Did new S/P reasonably rely on the wrong organizational ID number? The only way that the new S/P reasonably relied on the wrong number is when the F/S didn’t effectively give notice of the S/I. ii. Here, the F/S provides D’s name and address, S/P’s name and address, whether D is an individual or organization, the type of organization, and the JRD of organization. Problem 18.2. Which of the following F/Ss are unperfected? i. a. Irregularity is the complete absence of any address for the S/P. 1. The filing office should have refused the F/S a. U.C.C. § 9-520(a): a filing office shall refuse to accept a record for filing for a reason set forth in § 9-516(b) and may refuse to accept a record for filing only for a reason set forth in § 9-516(b) b. U.C.C. § 9-516(b)(4): a record is not filed if the filing office refuses to accept b/c the F/S does not provide the S/P’s name or mailing address 2. F/S is effective a. U.C.C. § 9-520(c): a filed F/S satisfying § 9-502(a) and (b) is effective, even if the filing office is req’d to refuse to accept it for filing under subsection (a) b. U.C.C. § 9-502(a): a F/S is sufficient if it: i. (1) provides the D’s name ii. (2) provides the S/P’s name iii. (3) indicates the collateral covered by the F/S c. The F/S complies with U.C.C. § 9-502(a); thus it is effective 3. U.C.C. § 9-338(1) does not apply a. U.C.C. § 9-338 only applies to incorrect, not missing, information b. U.C.C. § 9-338 only applies to errors in information provided in § 9516(b)(5), not § 9-516(b)(4) ii. c. Irregularity is the use of the S/P’s trade name instead of its true name. 1. F/S not sufficient a. U.C.C. § 9-502(a)(2): F/S must provide the S/P’s legal name b. U.C.C. § 9-503(c): a F/S that provides only the debtor’s trade name does not sufficiently provide the name of the debtor i. This standard is presumably the same for the S/P 2. F/S is effective a. U.C.C. § 9-506(a): a F/S is effective, even if it has minor errors or omissions, unless the errors or omissions make the F/S seriously misleading b. U.C.C. § 9-506 cmt. 2: an error in the S/P’s name will not be seriously misleading 33 c. e. Note: it may be easier to locate S/P by its trade name rather than its legal name iii. d. Irregularity is that the S/P’s name is listed as “Elizabeth Warren” instead of the correct name, “Lynn M. LoPucki.” 1. Musselman: this is ineffective under U.C.C. § 9-502(a)(2) b/c there is no way to find out who’s the S/P without relying on the debtor 2. U.C.C. § 9-506 cmt. 2: in an appropriate case, an error in the S/P’s name may give rise to an estoppel in favor of a particular holder of a conflicting claim to the collateral a. If someone detrimentally relies, she can probably bring an estoppel claim to prevent them from claiming they’re the S/P b. Here, that probably won’t happen b/c a searcher is on inquiry duty to find out the S/P 3. U.C.C. § 9-338 doesn’t apply b/c it does not apply to errors in § 9-516(b)(4)— only errors in information provided in § 9-516(b)(5) iv. e. Irregularity is in the description of the collateral as “Pizza ovens, equipment, and fixtures located at 621 State Street, Madison, WI.” The collateral has been at 514 East Washington Ave, Madison, WI at all relevant times. 1. U.C.C. § 9-502(a)(3): a F/S must indicate the collateral covered by the F/S a. This description must put 3d parties on inquiry notice 2. The problem with restrictive descriptions: a. From the description, a 3d party could conclude that the S/I is in the items at State Street, not East Washington b. Property can be moved to a different location c. See In re Pickle Logging, Inc. (Deere Credit, Inc. v. Pickle Logging, Inc.) (where S/P’s description of a 548 G skidder excluded 648G skidders). 3. U.C.C. § 9-504: a F/S sufficiently indicates the collateral that it covers if the F/S provides an indication that the F/S covers all assets or all personal property 4. Here, the F/S provides the wrong address—an actual location of D’s store a. Compare Teel Construction, Inc. v. Lipper, Inc. (where F/S containing a non-existent address was effective) (p. 319) 5. End result: could go either way a. A court may impose a duty of inquiry to ask about which collateral is covered by the F/S, OR b. A court may hold that no duty exists b/c it looks like the F/S restricts the S/I to one location v. f. Irregularity is the complete absence of a description of the collateral. 1. U.C.C. § 9-502(a)(3): F/S is ineffective b/c it doesn’t indicate the collateral covered by the F/S Problem 18.6. Pablo (debtor) applied to SNB to borrow against his restaurant. SNB filed a F/S on 3/1 and conducted a search. The search was clean, and SNB closed the $320k loan on 3/15. At the closing, Pablo signed a S/A. Pablo disappeared. SNB discovered a F/S in favor of NB filed 3/10. Pablo had borrowed $330k from NB. NB asked to see the authenticated record authorizing the filing of SNB’s F/S. i. a. What record would that be? 1. U.C.C. § 9-509(a): a person may file a F/S if the debtor authorizes the filing in an authenticated record or pursuant to (b) 2. U.C.C. §9-509(b): by authenticating or becoming bound as debtor by a S/A, a debtor authorizes the filing of an initial F/S 3. U.C.C. § 9-510(a): a filed record is effective only to the extent that it was filed by a person that may file it under § 9-509 a. U.C.C. § 9-509 cmt. 3: a filed F/S is ineffective to perfect a S/I if the filing is not authorized 34 3/1 3/10 3/15 |-------------------------|--------------------------------------------| SNB NB files Debtor signs S/A w/ SNB Files F/S F/S F/S effective (after NB) ii. b. Should SNB change its procedures? If so, how? SNB should get an authorization when it files a F/S. XIII. Assignment 19: Exceptions to the Article 9 Filing Requirement a. Must File for Accounts, Payment Intangibles, and Commercial Tort Claims. A S/I in accounts and payment intangibles may be perfected only by filing. U.C.C. § 9-313 cmt. 2. b. Possession i. Collateral 1. Money. A S/I in money may be perfected only by the S/P’s taking possession under § 9-313. U.C.C. § 9-312(b)(3). 2. Goods, Instruments, Tangible Chattel Paper. A S/P may perfect a S/I in goods, instruments, money, or tangible chattel paper by taking possession of the collateral. U.C.C. § 9-313(a). a. Priority for Perfecting S/Is in Instruments i. Filing. A S/I in . . . instruments . . . may be perfected by filing. U.C.C. § 9-312(a). ii. Possession Wins over Filing. A purchaser of an instrument has priority over a S/I in the instrument perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the S/P. U.C.C. § 9-330(d). b. Priority for Perfecting S/Is in Chattel Paper i. Filing. A S/I in chattel paper . . . may be perfected by filing. U.C.C. § 9-312(a). ii. Possession Wins over Filing. A purchaser of chattel paper has priority over a S/I in chattel paper either claimed as proceeds of inventory or not, if the purchaser gives new value and takes possession of the chattel paper. U.C.C. § 9-330(a), (b). ii. Possession by Independent 3d Party. A S/P takes possession of collateral in the possession of a person other than the debtor, the S/P, or a lessee of the collateral from the debtor in the ordinary course of the debtor’s business, when: 1. (1) the person in possession authenticates a record acknowledging that it holds possession of the collateral for the S/P’s benefit; or 2. (2) the person takes possession of the collateral after having authenticated a record acknowledging that it will hold possession of collateral for the S/P’s benefit. U.C.C. § 9-313(c). 3. Not Required to Disclose. A person in possession of collateral is not required to acknowledge that it holds possession for a S/P’s benefit. U.C.C. § 9-313(f). iii. Possession by Secured Party’s Agent. If the collateral is in possession of an agent for the secured party for the purposes of possessing on behalf of the S/P, and if the agent is not also an agent of the debtor, the S/P has taken actual possession, and subsection (c) does not apply. . . . The debtor cannot qualify as an agent for the S/P for purposes of the S/P’s taking possession. U.C.C. § 9-313 cmt. 3. c. Control i. Deposit Accounts. “Deposit account” means a demand, time, savings, passbook, or similar account maintained with a bank. U.C.C. § 9-102(a)(29). 35 1. d. Certificates of Deposit. A negotiable CD is an instrument. A nonnegotiable CD could be an instrument; otherwise it’s a deposit account. U.C.C. § 9-102 cmt. 12. 2. Must Perfect by Control. A S/I in a deposit account may be perfected only by control under §9-314. U.C.C. § 9-312(b)(1). A S/I in . . . deposit accounts . . . may be perfected by control of the collateral under section . . . 9-104. U.C.C. § 9-314(a). 3. Control of Deposit Account. A S/P has control of a deposit account if: a. (1) the S/P is the bank with which the deposit account is maintained; b. (2) the debtor, S/P, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the S/P directing disposition of the funds in the deposit account without further consent by the debtor; or c. (3) the S/P’s name is on the bank account. U.C.C. § 9-104(a). ii. Investment Property (including stock). “Investment property” means a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account. U.C.C. § 9-102(a)(49). 1. Perfecting a S/I in Investment Property a. Filing. A S/I in . . . investment property may be perfected by filing. U.C.C. § 9-312(a). b. Control. A S/I in investment property . . . may be perfected by control of collateral under Section . . . 9-106. U.C.C. § 9-314(a). A person has control of a certificated security . . . as provided in Section 8-106. U.C.C. § 9-106(a). A purchaser has “control” of a certificated security in registered form if the certificated security is delivered to the purchaser, and: i. (1) the certificate is indorsed to the purchaser or in blank by an effective indorsement; or ii. (2) the certificate is registered in the name of the purchaser, upon original issue or registration of transfer by the issuer. U.C.C. § 8-106(b). c. Possession or Delivery. A S/P may perfect a S/I in certificated securities by taking delivery of the certificated securities under § 8301. 2. Priority: Control Wins. A S/I held by a S/P having control of investment property under § 9-106 has priority over a S/I held by a S/P that does not have control. U.C.C. § 9-328(1). Automatic Perfection of Purchase-Money Security Interests in Consumer Goods i. Automatic Perfection of PMSI in Consumer Goods. A PMSI in consumer goods is perfected on attachment, except as otherwise provided in § 9-311(b) with respect to consumer goods that are subject to a statute described in § 9-311(a). U.C.C. § 9-309(1). 1. Certificate of Title Property. Where a certificate of title statute controls, one can perfect only by complying with the statute. U.C.C. § 9-311(a), (b). ii. Consumer Goods. “Consumer goods” means goods that are used or bought for use primarily for personal, family, or household purposes. U.C.C. § 9-102(a)(23). iii. PMSI. A S/I in goods is a PMSI: 1. (1) to the extent that the goods are purchase-money collateral with respect to that S/I 2. (2) if the S/I is in inventory that is or was purchase-money collateral, also to the extent that the S/I secures a purchase-money obligation incurred with respect to the inventory in which the secured party holds or held a PMSI. U.C.C. § 9103(b). 36 3. 4. Purchase-Money Collateral. “Purchase-money collateral” means goods that secure a purchase-money obligation incurred w/ respect to that collateral. U.C.C. § 9-103(a)(1). Purchase-Money Obligation. “Purchase-money obligation” means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used. U.C.C. § 9-103(a)(2). Lender’s PMSI Loan Sell Consumer Good Lender Debtor S/I in Consumer Good Seller Loan Proceeds Seller’s PMSI Sell Consumer Good Debtor Seller Promissory Note + S/I in Consumer Good e. f. Security Interests Not Governed by Article 9 or Another Filing Statute i. Assignment of Deposit Accounts in Consumer Transactions. Art. 9 does not apply to an assignment of deposit accounts in consumer transactions. U.C.C. § 9-109(d)(13). ii. Non-Commercial Tort Claims. Article 9 does not apply to non-commercial tort claims. U.C.C. § 9-109(d)(12). 1. Commercial Tort Claim. “Commercial tort claim” means a claim arising in tort with respect to which the claimant is an individual and the claim (i) arose in the course of the claimant’s business or profession; and (ii) does not include damages arising out of personal injury to or the death of an individual. U.C.C. § 9-102(a)(13)(B). a. Perfecting Commercial Tort Claims. Commercial tort claims can only be perfected by filing. U.C.C. §§ 9-310, 9-313 cmt. 2. iii. State Law. When a S/P wants to perfect a S/I in something that Article 9 doesn’t apply to, look to local state law. See Bluxome Street Associates v. Fireman’s Fund Insurance Co. (looking to state statute to determine perfection requirements for a S/I in a legal malpractice claim). Problem 19.1. Explain the permissible ways to perfect in each of these items of collateral. i. a. The cash in the cash registers of a D that operates the food/drink concession in a football stadium. 1. U.C.C. § 9-312(b)(3): only way to perfect a S/I in money is possession a. U.C.C. § 1-201(b)(24): “money” means a medium of exchange currently authorized or adopted y a domestic or foreign government 2. Get possession through independent 3d party a. U.C.C. § 9-313(c): a S/P takes possession of collateral that’s in the possession of a person other than the debtor, the S/P, or a lessee of the collateral from the debtor when the person in possession agrees to hold the collateral for the S/P’s benefit 3. Get possession through S/P’s agent a. U.C.C. § 9-313 cmt. 3: if the collateral is in possession of an agent of the S/P for the purposes of possessing on behalf of the S/P, and if the agent is not also n agent of the debtor, the S/P has taken possession b. U.C.C. § 9-313 cmt. 3: a debtor cannot qualify as an agent for the S/P for purposes of the S/P’s taking possession ii. b. A negotiable promissory note. 37 1. The collateral is an instrument a. U.C.C. § 9-102(a)(47): “instrument” means a negotiable instrument or any other writing that evidences a right to pmt of a monetary obligation, is not itself a S/A or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment b. All p/notes (negotiable and non) are instruments 2. May perfect by filing a. U.C.C. § 9-312(a): a S/I in . . . instruments . . . may be perfected by filing 3. May perfect by possession a. U.C.C. § 9-313(a): a S/P may perfect a S/I in . . . instruments . . . by taking possession of the collateral 4. Priority: possession wins over filing a. U.C.C. § 9-330(d): a purchaser of an instrument has priority over a S/I in the instrument perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the S/P iii. c. Money the debtor is keeping in a bank account. 1. The collateral is a deposit account a. U.C.C. § 9-102(a)(29): “deposit account” means a demand, time, savings, passbook, or similar account maintained with a bank 2. Perfect by control a. U.C.C. § 9-312(b)(1): a S/I in a deposit account may be perfected only by control under §9-314 b. U.C.C. § 9-314(a): a S/I in . . . deposit accounts . . . may be perfected by control of the collateral under section . . . 9-104 c. U.C.C. § 9-104(a): a S/P has control of a deposit account if: i. (1) the S/P is the bank with which the deposit account is maintained; ii. (2) the debtor, S/P, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the S/P directing disposition of the funds in the deposit account without further consent by the debtor; or iii. (3) the S/P’s name is on the bank account 3. Certificates of deposit a. U.C.C. § 9-102 cmt. 12 i. A negotiable CD is an instrument ii. A nonnegotiable CD could be an instrument; otherwise it’s a deposit account iv. d. Shares of stock in General Motors, for which a certificate has been issued. 1. The collateral is investment property a. U.C.C. § 8-102(a)(4): “certificated security” means a security that is represented by a certificate b. U.C.C. § 9-102(a)(49): “investment property” means a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account 2. Perfection of investment property a. U.C.C. § 9-312(a): perfect by filing b. Perfect by control: i. U.C.C. §§ 9-314(a), 9-106(a), 8-106(b)(1): delivery to purchaser and indorsement to purchaser 38 g. h. ii. U.C.C. §§ 9-314(a), 9-106(a), 8-106(b)(2): delivery and registering in name of purchaser c. U.C.C. § 9-313(a): perfect by possession or delivery under § 8-301(a) 3. Priority: control wins a. U.C.C. § 9-328(1): a S/I held by a S/P having control of investment property under § 9-106 has priority over a S/I held by a S/P that does not have control v. e. The obligations of customers of a used car lot to pay for the cars they purchased. The obligations are evidenced by promissory notes and S/Is in the cars purchased. 1. The collateral is chattel paper a. U.C.C. § 9-102(a)(11): “chattel paper” means a record or records that evidence both a monetary obligation and a S/I in specific goods [or] a lease of specific goods. . . . If a transaction is evidenced by records that include an instrument or series of instruments, the group of records taken together constitutes chattel paper 2. May perfect by filing a. U.C.C. § 9-312(a): a S/I in chattel paper . . . may be perfected by filing 3. May perfect by possession a. U.C.C. § 9-313(a): a S/P may perfect a S/I in . . . tangible chattel paper by taking possession of the collateral 4. Priority: possession wins a. U.C.C. § 9-330(a): a purchaser of chattel paper has priority over a S/I in chattel paper as proceeds if the purchaser gives new value and takes possession of the chattel paper b. U.C.C. § 9-330(b): a purchaser of chattel paper has priority over a S/I in the chattel paper which is claimed other than merely as proceeds of inventory subject to a S/I if the purchaser gives new value and takes possession of the chattel paper Problem 19.2. Cs sold their franchise to W, receiving a “Contract for Pmt,” containing a promise to pay $500k in yearly installments. Client CG is about to lend $300k to Cs, secured by what they have from W. i. a. How should CG perfect? 1. The collateral is not chattel paper a. U.C.C. § 9-102(a)(11): the record does not evidence a S/I in specific goods 2. The collateral is probably not an instrument a. U.C.C. § 9-102(a)(47): the contract is probably not of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment 3. The collateral is probably an account a. U.C.C. § 9-102(a)(2): “account” means a right to pmt of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold . . . 4. Perfect S/I in an account by filing a. U.C.C. § 9-313 cmt. 2: a s/I in accounts and payment intangibles may be perfected only by filing 5. If you’re not sure whether it’s an account or an instrument, file and take possession of the contract ii. b. What if the document gives the Cs a S/I in the franchise and Cs perfected that S/I properly at the time of the sale? Here, it would not be chattel paper, but an account. Problem 19.3. Instead of the “Contract for Pmt,” Cs received only a negotiable promissory note that’s an “instrument.” Cs cannot give CG possession of the instrument b/c G is holding it. G has 39 i. a first S/I in the instrument, securing a $60k debt to them. CG is willing to make their loan as a second S/I, but they are not willing to risk being unsecured. What do you suggest? i. U.C.C. § 9-330(d): CG could file, but a new purchaser could loan the Cs money and perfect by possession, leaving CG with a S/I behind the new purchaser ii. CG could loan Cs enough to pay G off iii. U.C.C. § 9-313(c): CG could get G to authorize a record acknowledging they’re holding possession for CG too 1. U.C.C. § 9-313(g)(2): if a person acknowledges that it holds possession for the S/P’s benefit, the acknowledgement is effective, even if the person does not owe any duty to the S/P and is not req’d to confirm the acknowledgement to another person a. But, G could get paid off and give the instrument to Cs, then Cs gives possession to another S/P (without telling CG) 2. CG could include a provision that G is liable to CG if they give the instrument to Cs, but then G would not sign the agreement without additional consideration Problem 19.4. Is it possible there might be liens against the collateral that wouldn’t show up on a diligent search that included a viewing of the collateral? Are there other steps you might take to discover “automatically perfected” S/Is? i. a. A $40k mobile home, located in a remote corner of K’s (debtor) estate. State law does not allow for the issuance of a certificate of title for a mobile home. 1. Search the filing records 2. Determine who has possession of the collateral 3. The mobile home could be a purchase money security interest (PMSI) in consumer goods a. U.C.C. § 9-309(1): a PMSI in consumer goods is perfected on attachment i. U.C.C. § 9-102(a)(23): “consumer goods” means goods that are used or bought for use primarily for personal, family, or household purposes 1. If K lives in the mobile home, it’s used for personal purposes 2. If K uses it for his business, it’s not a consumer good ii. U.C.C. § 9-103(b): a S/I in goods is a PMSI: 1. (1) to the extent that the goods are purchase-money collateral with respect to that S/I 2. (2) if the S/I is in inventory that is or was purchasemoney collateral, also to the extent that the S/I secures a purchase-money obligation incurred with respect to the inventory in which the secured party holds or held a PMSI iii. U.C.C. § 9-103(a)(1): “purchase-money collateral” means goods that secure a purchase-money obligation incurred w/ respect to that collateral iv. U.C.C. § 9-103(a)(2): “purchase-money obligation” means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used b. Find out whether the mobile home is subject to a S/I by obtaining the purchase documents. The terms of sale will tell you to look for a lender’s PMSI (cash sale) or seller’s PMSI (sale on credit). 40 j. ii. b. A rare book collection currently on display at the Library of Congress. If the Library were holding possession for someone who claimed a S/I in the books, would it have to tell the searcher? 1. U.C.C. § 9-313(c): a S/P takes possession of collateral in the possession of a person other than the debtor or S/P when the person in possession authenticates a record acknowledging it holds possession of the collateral for the S/P’s benefit 2. The library would not have to tell the searcher if it held possession for a S/P a. U.C.C. § 9-313(f): a person in possession of collateral is not required to acknowledge that it holds possession for a S/P’s benefit iii. c. A Mercedes-Benz automobile. The certificate of title shows no liens. 1. No automatic perfection a. U.C.C. § 9-309(1): a PMSI in consumer goods is perfected on attachment, except as otherwise provided in § 9-311(b) with respect to consumer goods that are subject to a statute or treaty described in §9311(a) 2. U.C.C. § 9-311(a), (b): where a certificate of title statute applies, a S/P can only perfect by compliance with the statute iv. d. A solid gold ingot and 20 unset diamonds. 1. Does K have possession? 2. PMSI in consumer goods? a. These are likely consumer goods (used for personal purposes) v. e. Computer equipment in K’s office, where he uses it principally to review stock quotations. 1. How is K using the equipment? a. If he’s using it for business purposes, it’s equipment b. If he’s using for personal purposes, it’s consumer goods c. This is a fact question 2. What if the goods were bought for one purpose and then used for another? a. Nobody knows b. White & Summers: determine purpose when collateral is purchased c. The purchase documents may indicate how Debtor plans to use the collateral vi. f. A checking account at Bank of the West in K’s name. Bank stmts show no interest in favor of Bank of the West or anyone else. 1. U.C.C. § 9-102(a)(29): the collateral is a deposit account 2. U.C.C. § 9-312(b)(1): perfect only by control 3. U.C.C. § 9-104(a)(1): ask the bank if it has a S/I in the deposit account a. U.C.C. § 9-210(b)(1): a S/P shall comply with a request for accounting w/in 14 days 4. U.C.C. § 9-104(a)(2): has the bank authenticated a record that the bank will comply with S/P’s instructions? a. There’s nothing to indicate that the bank has to disclose b. U.C.C. § 9-342: a bank that has entered into this kind of agreement is not required to confirm the existence of the agreement to another person unless requested to do so by its customer (the debtor) 5. U.C.C. § 9-109(d)(13): Art. 9 does not apply to an assignment of deposit accounts in consumer transactions a. Look for other state law for requirements to perfect Problem 19.5. J wants to borrow $100k from her brother, W, using a professional malpractice lawsuit (going to trial next week) as collateral. What should W do to perfect? i. U.C.C. § 9-109(d)(12): Article 9 does not apply to non-commercial tort claims 41 1. U.C.C. § 9-102(a)(13)(B): “commercial tort claim” means a claim arising in tort with respect to which the claimant is an individual and the claim (i) arose in the course of the claimant’s business or profession; and (ii) does not include damages arising out of personal injury to or the death of an individual. a. Does the claim arise in the course of J’s business or profession? i. Probably not (probably had to do w/ private financial affairs) 2. See Bluxome Street Associates v. Fireman’s Fund Insurance Co. (looking to state statute to determine perfection requirements for a S/I in a legal malpractice claim). ii. If the collateral was a commercial tort claim, Article 9 applies 1. U.C.C. §§ 9-310, 9-313 cmt. 2: commercial tort claims can only be perfected by filing 2. U.C.C. § 9-108(e): F/S cannot describe a commercial tort claim by type iii. If the collateral was a breach of contract claim, it would be a general intangible under § 9-102(a)(42). XIV. Assignment 20: The Land and Fixtures Recording Systems a. Article 9 Inapplicability to Real Property Interests. Article 9 does not apply to the creation or transfer of an interest in or lien on real property, including lease or rents thereunder, except to the extent that provision is made for (A) liens on real property in Sections 9-203 and 9-308, [fixtures and fixture filings]. U.C.C. § 9-109(d)(11)(B)–(C). i. Lien Securing Right to Payment. See XIV.d. Problem 20.1.e, infra. 1. Attachment. The attachment of a S/I in a right to payment or performance secured by a S/I or other lien on personal or real property is also attachment of a S/I in the mortgage. U.C.C. § 9-203(g). 2. Perfection. Perfection of a S/I in a right to payment or performance also perfects a S/I in a S/I, mortgage, or other lien on personal or real property securing the right. U.C.C. § 9-308(e). b. Fixtures. “Fixtures” means goods that have become so related to particular real property that an interest in them arises under real property law. U.C.C. § 9-102(a)(41). i. Perfecting a S/I in a Fixture 1. File F/S. U.C.C. § 9-501(a)(2). 2. Automatically. A PMSI in consumer goods is automatically perfected. U.C.C. § 9-309(1). 3. Fixture Filing. U.C.C. § 9-501(a)(1)(B). ii. Fixture Filing 1. Defined. “Fixture filing” means the filing of F/S covering goods that are or are to become fixtures. U.C.C. § 9-102(a)(40). 2. Requirements a. Regular F/S Requirements. A F/S is sufficient only if it: i. (1) provides the name of the debtor; ii. (2) provides the name of the S/P; and iii. (3) indicates the collateral covered byt eh F/S. U.C.C. § 9502(a). b. Special Fixture Filing Requirements. A fixture filing must also: i. (1) indicate that it covers this type of collateral; ii. (2) indicate that it is to be filed in the real property records; iii. (3) provide a description of the real property to which the collateral is related; and iv. (4) if the debtor doesn’t have an interest of record in the real property, provide the name of a record owner. U.C.C. § 9502(b). 3. Priority Rules. See U.C.C. § 9-334 (fixture filers have priority over certain creditors [including lien creditors]). 42 c. d. e. Problem 20.1.a. How should SLP perfect in PI’s one-third interest in a 160 acre tract of land? Does the form in which title is held matter? i. Two ways to take title: 1. Co-ownership (e.g., tenants in common) a. Perfect by recording mortgage in real property records 2. Create an entity to take title to the land ii. How to perfect S/I 1. If co-owners, take a lien on the real estate itself (look to real prop. law) a. U.C.C. § 9-109(d)(11): Art. 9 doesn’t apply 2. If the property is owned by the entity, SLP would take a S/I in PI’s share of his interest in the entity a. U.C.C. § 9-102(a)(42): general intangible b. U.C.C. § 9-310: perfect by filing Problem 20.1.e. PI holds a mortgage and note from M to PI. The debt is for the purchase price of certain real property. The note that evidences the promise to pay is physically incorporated into the purchase money mortgage. How should SLP perfect a S/I in the note and mortgage? i. The p/note alone is an instrument under U.C.C. § 9-102(a)(47) ii. But a mortgage is a lien on real property (to which Art. 9 doesn’t apply) iii. U.C.C. § 9-109(d)(11)(A): Art. 9 doesn’t apply except in U.C.C. §§ 9-203 and 9-308. 1. U.C.C. §§ 9-203, 9-308: S/I in personal property attaches and perfects a S/I in a mortgage 2. Thus, perfecting a S/I in an obligation (p/note) also perfects a S/I in a mortgage interest iv. The interest is not an instrument under U.C.C. § 9-102(a)(47) 1. Not negotiable (p/note would have to be by itself) 2. Not transferred by delivery and indorsement 3. This is really an obligation secured by an interest in real estate v. This interest is an account under U.C.C. § 9-102(a)(2) (right to pmt of monetary obligation for property sold) vi. Perfect an account by filing vii. Practically, you should both file and take possession of the note, just in case a “goofball” judge thinks this is an instrument viii. Note: if the p/note had been secured by a S/I in equipment, the interest would be chattel paper (monetary obligation in specific goods) Problem 20.1.h. PI offers “store fixtures” (shelving, counters, cages, cash registers) as collateral. Some are bolted to the building; some are freestanding. i. U.C.C. § 9-102(a)(41): “fixtures” means goods that have become so related to particular real property that an interest in them arises under real property law 1. Go to real property law to determined what a fixture is 2. If it’s a fixture under real property law, it’s a fixture under Art. 9 3. One factor is whether one can objectively determine that the parties intended to create a permanent fixture ii. Options to Perfect a S/I in a Fixture 1. U.C.C. § 9-501(a)(2): file a F/S 2. Automatically: consumer goods + PMSI 3. U.C.C. § 9-501(a)(1)(B): fixture filing a. U.C.C. § 9-102(a)(40): F/S covering goods that are or are to become fixtures b. U.C.C. § 9-502(a): regular F/S requirements c. U.C.C. § 9-502(b): special fixture filing requirements iii. Priority Rules 43 1. U.C.C. § 9-334(c): generally, a S/I in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor a. U.C.C. § 9-334(d), (e)(1): fixture filer has priority in some circumstances 2. U.C.C. § 9-334(e)(3): a perfected S/I in fixtures has priority over a lien creditor 3. U.C.C. § 9-334(e)(2): for certain fixtures, a perfected S/I in fixtures has priority f. Problem 20.3. B bought a mobile home from F. B disappeared and F was served with a summons and complaint in a mortgage foreclosure brought by PSF. PSF financed B’s purchase of the lot and B defaulted on his mortgage to them. i. a, b. Is F’s interest unperfected? Does F win or lose against PSF? 1. If the mobile home is a good: a. Already perfected b/c F already filed b. May already be perfected b/c consumer good + PMSI c. PSF doesn’t have an interest in the mobile home just b/c it has a mortgage 2. If the mobile home is a fixture: a. F is perfected, but may not have priority. See U.C.C. § 9-334. b. Generally, PSF would win under U.C.C. § 9-334(c) c. No exceptions apply here ii. c. Would F win or lose if the challenger was a trustee in bankruptcy? 1. F would win if the challenger was a trustee in bankruptcy 2. U.C.C. § 9-334(e)(3): perfected S/I in fixtures has priority over conflicting interest if conflicting interest is a lien on real property obtained by legal or equitable means after S/I was perfected by any method. iii. d. How should F perfect its S/I in the mobile homes it sells in the future? 1. F should make a fixture filing to ensure priority XV. Assignment 21: Characterizing Collateral and Transactions a. Characterizing Collateral: Analysis Framework. See APPENDIX 1: PERFECTION. i. Tangible Collateral: Goods. All things that are movable when a security interest attaches are goods. U.C.C. § 9-102(a)(44). A good may fall into one of four categories, depending on its use (think hog example). 1. Consumer Goods. “Consumer goods” means goods that are used or bought for use primarily for personal family, or household purposes. U.C.C. § 9-102(a)(23). 2. Farm Products. “Farm products” means goods with respect to which the debtor is engaged in a farming operation which are: crops grown, growing or to be grown . . . livestock . . . supplies used or produced in a farming operation; or products of crops or livestock in their unmanufactured states. U.C.C. § 9102(a)(34). 3. Inventory. “Inventory” means goods, other than farm products, which: (A) are leased by a person as lessor; (B) are held by a person for sale or lease or to be furnished under a contract of service; (C) are furnished by a person under a contract of service; or (D) consist of raw materials, work in process, or materials used or consumed in a business. U.C.C. § 9-102(a)(48). 4. Equipment. “Equipment” means goods other than inventory, farm products, or consumer goods. U.C.C. § 9-102(a)(33). ii. Intangible Collateral 1. STEP ONE: Is the collateral chattel paper, a commercial tort claim or investment property? a. Chattel Paper. “Chattel paper” means a record or records that evidence both a monetary obligation and a S/I in specific goods [or] a lease of specific goods. . . . If a transaction is evidenced by records that 44 2. 3. 4. 5. b. c. include an instrument or series of instruments, the group of records taken together constitutes chattel paper. U.C.C. § 9-102(a)(11). b. Commercial Tort Claims. “Commercial tort claim” means a claim arising in tort with respect to which (A) the claimant is an organization; or (B) the claimant is an individual and the claim: (i) arose in the course of the claimant’s business or profession; and (ii) does not include damages arising out of personal injury to or the death of an individual. U.C.C. § 9-102(a)(13). c. Investment Property. “Investment property” means a [stock certificate]. U.C.C. § 9-102(a)(49). STEP TWO: Is the collateral an instrument? “Instrument” means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a S/A or lease, and is a type that in ordinary course of business is transferred by delivery with any necessary indorsement. U.C.C. § 9-102(a)(47). E.g., a promissory note by itself. STEP THREE: Is the collateral a deposit account? “Deposit account” means a [regular bank account]. U.C.C. § 9-102(a)(29). STEP FOUR: Is the collateral an account? “Account” means a right to payment of a monetary obligation for property that has been or is to be sold, leased, licensed, assigned or otherwise disposed of, [or] for services rendered or to be rendered. U.C.C. § 9-102(a)(2). STEP FIVE: The collateral is a general intangible. “General intangible” means any personal property other than accounts, chattel paper, commercial tort claims, deposit accounts, [] goods, instruments, [and] investment property. U.C.C. § 9-102(a)(42). a. Payment Intangible. “Payment intangible” means a general intangible under which the account debtor’s principal obligation is a monetary obligation. U.C.C. § 9-102(a)(59). Perfection i. Account: Filing. S/P can only perfect a S/I in an account by filing. U.C.C. §§ 9-310, 9313 cmt. 2. ii. Chattel Paper: Filing or Possession. Perfect a S/I in chattel paper by filing or possession. U.C.C. §§ 9-312(a), 9-313. iii. Commercial Tort Claim: Filing. Perfect a commercial tort claim by filing. U.C.C. § 9310. iv. Deposit Account: Control. Perfect a S/I in a deposit account by control. U.C.C. §§ 9312(b)(1), 9-314(a), 9-104(a). v. General Intangible: Filing. Perfect by filing. U.C.C. § 9-310. vi. Goods: Filing or Possession. Perfect goods by filing or possession. U.C.C. §§ 9-310, 9313(a). vii. Instrument: Filing or Possession. Perfect an instrument by filing or possession. U.C.C. §§ 9-312(a), 9-313(a). Possession wins over filing. U.C.C. § 9-330(d). viii. Investment Property: Filing, Control, Possession/Delivery. Perfect a S/I in investment property by one of three methods: 1. Filing. U.C.C. § 9-312(a). 2. Control. U.C.C. §§ 9-314(a); 9-106(a); 8-106(b)(1), (2). 3. Possession or delivery. U.C.C. § 8-301. True Lease vs. Security Interest i. Overriding Idea. Examine the terms of the lease to determine if the value of the property is being transferred to the lessee when the lease is executed, or if there is a reversionary interest left in the lessor after the lease period. 1. Significance. Besides tax considerations, if a lessee defaults, she can retrieve the leased property w/o complying with Art. 9. But, if the transaction is 45 d. governed by Art. 9, the lessor-S/P must make sure her S/I attaches (the lease agreement is likely a S/A) and is perfected. 2. F/S Language. If a lessor files a S/A, naming the parties “debtor” and “secured party,” there’s an argument that she intended to create a S/A. Thus, the U.C.C. allows a filer to use “lessor” and “lessee” in a protective F/S. U.C.C. § 9-505. ii. Security Interest Per Se. A lease creates a S/I if the consideration that the lessee is to pay to the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and: 1. (1) the original term of the lease is equal to or greater than the remaining economic life of the goods; 2. (2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods; 3. (3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or 4. (4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement. U.C.C. § 1-203(b). iii. Facts and Circumstances. Whether a transaction in the form of a lease creates a lease or S/I is determined by the facts of each case. U.C.C. § 1-203(a). Problem 21.1. How should the S/P perfect a S/I in each of the following? i. a. The money owing to the debtor from the purchaser of the debtor’s liquor license under an oral agreement. 1. Classify a. U.C.C. § 9-102(a)(11): not chattel paper i. U.C.C. § 9-102(a)(69): the oral agreement is not a “record” b. U.C.C. § 9-102(a)(47): not an instrument i. Not a negotiable instrument ii. Not a writing c. U.C.C. § 9-102(a)(2): the collateral is an account 2. Perfection a. U.C.C. § 9-310: perfect an account by filing ii. b. A mortgage the debtor bought for 80% of its face amount three months ago. 1. Option 1: the obligation to repay is encompassed in a p/note and a mortgage. Loan S/P $ D S/I P p/note + mortgage p/note loan mortgage or sold prop. on credit T a. 2. U.C.C. § 9-102(a)(11): not chattel paper i. Not a S/I in specific goods b. U.C.C. § 9-102(a)(47): the p/note is an instrument i. Perfect by filing or possession ii. U.C.C. § 9-330(d): possession is better Option 2: the obligation to repay is solely encompassed in the terms of the mortgage. 46 Loan S/P $ D P S/I mortgage p/note loan mortgage or sold prop. on credit T a. U.C.C. § 9-102(a)(11): not chattel paper i. Not a S/I in specific goods b. U.C.C. § 9-102(a)(47): not an instrument i. Mortgage is not a negotiable instrument ii. Mortgage is not transferred by delivery and indorsement c. If P acquired the mortgage by the sale of property on credit, then the mortgage is an account. d. If P acquired the mortgage from a loan, then the mortgage is a general intangible. 3. Perfect an account or general intangible by filing. iii. c. If the S/P in b. perfects by filing, against whom should it file? 1. File in the debtor’s name a. U.C.C. § 1-201(b)(35): “Security interest” includes any interest of a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9 b. U.C.C. § 9-109(a)(3): Article 9 applies to a sale of accounts, chattel paper, payment intangibles, or promissory notes c. Thus, Article 9 treats D’s purchase as a loan (not a sale) secured by a S/I. Loan S/P S/I $ / Loan D S/P mortgage S/I P D1 loan mortgage or sold prop. on credit T 2. D1 must figure out what kind of collateral the obligation is (i.e., an account or a general intangible) and perfect his S/I 3. S/P needs possession of the p/note from D1 4. U.C.C. § 9-309(3), (4): S/I from a sale of a payment intangible or promissory note is perfected when it attaches 5. If the collateral is a general intangible: a. Perfect by filing in the debtor’s name b. Auto perfected under U.C.C. § 9-309 6. If the collateral is an account: a. Make sure the F/S is in P’s name iv. d. The lessee’s interest under a lease of real property. 1. Lessee’s interest 47 a. e. U.C.C. § 9-109(d)(11): Art. 9 d/n apply to the creation or transfer of an interest in or lien on real prop., including a lease or rents thereunder 2. Lessor’s interest a. U.C.C. § 9-102(a)(2): account 3. Lessor’s interest in an equipment lease a. U.C.C. § 9-102(a)(11): chattel paper (lease of specific goods) v. e. Wheat growing in the farmer-debtor’s field. 1. U.C.C. § 9-102(a)(42): crops are goods 2. U.C.C. § 9-310: perfect by filing 3. Note: grape vines are fixtures b/c they permanently exist on the land (“perennial”) vi. f. The franchise to operate a Burger King restaurant. (The franchise agreement was signed yesterday. The franchise has not yet contracted to purchase the land where the restaurant will be located.) The franchise is issued to the debtor and specifically states that it is nontransferable. 1. U.C.C. § 9-102(a)(42): a franchise is a general intangible 2. U.C.C. § 9-310: perfect by filing Problem 21.3. SC owns a satellite that the parties expect will circle the earth for exactly five years and then enter the atmosphere and vaporize. i. a. SC leases the satellite to C for 60 monthly rental payments of $99k. Is that a true lease or a S/I? This is a S/I. 1. U.C.C. § 1-203(b) (flush language): obligation for the full term of the lease and lessee cannot terminate 2. U.C.C. § 1-203(b)(1): original term of the lease is equal to the remaining economic life of the goods ii. b. Same facts as a., except that the lease provides that C can terminate the lease at the end of 59 months. 1. Here, we do not meet the safe harbor under U.C.C. § 1-203(b) 2. But, the lessor does not retain any meaningful reversionary interest iii. c. Same facts as a., except that the lease is for 48 months. C has an option to rent for an additional 12 months at the same monthly rate. The parties expect C to renew b/c C has 60-month leases with several customers. 1. Here, we do not meet the safe harbor under U.C.C. § 1-203(b) 2. But does the lessor retain anything of meaningful value after the 48 mo. period? This depends on the facts/circumstances. U.C.C. § 1-203(a). 3. See U.C.C. § 9-505 (protective filing language). 48 CHAPTER 7. MAINTAINING PERFECTION XVI. Assignment 22: Maintaining Perfection Through Lapse and Bankruptcy a. Effective for 5 Years. A F/S is effective for 5 years. U.C.C. § 9-515(a). b. Continuation Statement (C/S). A C/S is an amendment of a F/S which identifies the initial F/S by filing number and indicates that it is a continuation statement. U.C.C. § 9-102(a)(27). i. Filing. A C/S must be filed within the last 6 months of expiration. U.C.C. § 9-515(d). ii. Effect. A C/S makes the F/S effective for 5 more years after it would have expired. U.C.C. § 9-515(e). 1. Lapse. If the S/P does not file a C/S within the time window, the F/S “lapses.” The F/S ceases to be effective and any S/I that was perfected becomes unperfected. The S/I is deemed never to have been perfected against a purchaser of the collateral for value. U.C.C. § 9-515(c). iii. Filing a New F/S After Initial F/S Lapses. If the F/S has already lapsed, the S/P can only file a new F/S and hope there are no new filings during the period of unperfection. Under U.C.C. § 9-515(c), if an intervening interest is filed between the F/S lapses and the new F/S is filed, the S/P loses priority as to the intervening S/P. See XVI.g. Problem 22.2, infra. iv. Does Not Violate Stay. A debtor’s filing bankruptcy does not stay the S/P to file a C/S. 11 U.S.C. §§ 362(b)(3), 546(b)(1)(B). c. Continuous Perfection. A S/I is perfected continuously if it is originally perfected by one method under this article and is later perfected by another method under this article, without an intermediate period when it was unperfected. U.C.C. § 9-308. i. Worthen Bank & Trust Co., N.A. v. Hilyard Drilling Co. (In re Hilyard Drilling Co.). HELD: NBC was not continuously perfected under U.C.C. § 9-308 b/c it did not perfect in a different way the second time. 4/26/79 6/18/83 7/8/83 4/26/84 1/25/85 |----------------------|----------------------|----------------------|----------------------| NBC Worthen NBC NBC D files F/S F/S #2 F/S #1 bankr. F/S #1 Lapsed 1. d. e. f. When NBC’s F/S lapsed, it was though the initial F/S was never filed as against purchasers. U.C.C. § 9-515(c). 2. Since NBC filed F/S #2, it was perfected as against the bankruptcy trustee (a lien creditor). Amending and Terminating the F/S i. Amendment. A S/P may amend the F/S. U.C.C. § 9-512. ii. Termination Statement. The debtor can force the S/P to record a termination statement if there is no obligation secured by the collateral. U.C.C. § 9-513(c)(1). Accounting i. Request Regarding a List of Collateral. “Request regarding a list of collateral” is a record authenticated by a D requesting that the recipient approve or correct a list of what the debtor believes to be the collateral securing an obligation and reasonably identifying the transaction or relationship that is the subject of the request. U.C.C. § 9210(a)(3) ii. S/P Shall Comply Within 14 Days. A S/P shall comply with a request within 14 days after receipt of a request regarding a list of collateral. U.C.C. § 9-210(b)(2). Problem 22.1. Bank perfected its S/I in equipment owned by HM by filing a F/S on 12/30/01. Bank filed a C/S on 6/7/06. i. a. Did Bank file its prior C/S at the proper time? Yes. A F/S is effective for 5 years. U.C.C. § 9-515(a). A C/S must be filed within the last 6 months of expiration. U.C.C. § 9515(d). 49 1. g. h. 12/30/01 + 5 years = 12/30/06. Bank had to file a C/S btwn 6/30/06 and 12/30/06. 2. Bank filed a C/S on 6/7/06 3. Thus, Bank filed its C/S on time. ii. b. When should Bank file the next C/S? A C/S makes the F/S effective for 5 more years after it would have expired. U.C.C. § 9-515(e). 1. 12/30/01 + 5 years = 12/30/06 + 5 years = 12/30/11. 2. Bank should file its next C/S btwn 6/30/11 and 12/30/11 iii. c. 3/29/10 HM filed for Chapter 11 bankruptcy. Does this change advice about the proper time for filing the bank’s next C/S? No. 1. 11 U.S.C. § 362(b)(3): filing bankruptcy does not operate as a stay to continue the perfection of an interest in property to the extent the trustee’s rights and powers are subject to such perfection under 546(b) 2. 11 U.S.C. § 546(b)(1)(B): rights and powers of a trustee are subject to any law that provides that the continuation of perfection of an interest in property is effective against an entity that acquires rights in such property before action is taken to continue the perfection Problem 22.2. You discover that a F/S was filed 5 years and 2 months ago. No C/S is on file for the F/S you filed. What do you do now? i. U.C.C. § 9-520: the filing office will not accept the C/S 1. U.C.C. § 9-516(b)(7): reject b/c outside the 6 mo. window 2. U.C.C. § 9-510(c): if it is wrongly filed, it’s still ineffective ii. Re-perfect the F/S with a new F/S 1. This new perfection is dated at time of filing the new F/S 2. Search for a new F/S to see if anyone filed before you in the two months after the F/S lapsed. 3. If there are no new filings, then there’s no harm done. iii. Do you have debtor’s authorization to file a new F/S? 1. U.C.C. § 9-509(b): by authenticating a S/A, a debtor authorizes the filing of an initial F/S and an amendment 2. But, does the new F/S become an “initial F/S”? A court may hold that U.C.C. § 9-509(b) only refers to one F/S and one amendment. 3. Solution: get D to sign a blanket authorization to file a F/S or C/S. See page 259 ¶ 11. iv. If there is an intervening interest filed before the second F/S, does it matter when it was filed? Yes. 1. U.C.C. § 9-515(c) (last sentence): if the S/I becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral 2. If the intervening interest was filed before the first F/S lapsed, the F/S is perfected against all creditors, but if the intervening interest was filed after the F/S lapsed, the F/S is unperfected as against purchasers (anyone w/ a voluntary interest from D). Problem 22.3. R filed a F/S for a S/I in goods. R filed before A on the same day. A claims she had possession of the collateral on the day the two filings were made. i. a. Would it matter if A was right about possession? 1. Goods can be perfected by possession or filing 2. U.C.C. § 9-322: if A had possession when R filed, A would have priority 3. But sooner or later, A had to relinquish the property (b/c the show must go on) 4. U.C.C. § 9-308(c): a S/I is perfected continuously if it is originally perfected by one method and is later perfected by another method, without an intermediate period when it was unperfected a. So if A is correct and there was no intermediate period btwn possession and filing where A was not perfected, A has priority 50 ii. b. How would you handle this matter if you had it to do over again from when R retained you? In addition to searching the U.C.C. records, determine who has possession before you file. i. Problem 22.5 i. a. F’s S/A covers forklifts. F’s F/S identifies the collateral as equipment. B, the debtor, is trying to borrow money against its drill presses. B wants F to put a release in the filing system for the drill presses. Does F have to file the amendment? No. 1. U.C.C. § 9-513(c)(1): the debtor can force the S/P to record a termination statement if there is no obligation secured by the collateral a. Here, B still owes money on the collateral b. Thus, B cannot force F to file a termination statement 2. U.C.C. § 9-512: A S/P may amend a F/S a. Thus, B cannot force F to file an amendment to the F/S ii. b. Will B be able to assure another lender, S, that it will have the first filed S/A against the drill presses? No. 1. Just showing the S/A that describes the collateral as “forklifts” will be insufficient to convince S to lend against the drill presses. Since the F/S description (“equipment”) is broad enough to cover drill presses, if F files a S/A against the drill presses, perfection will relate back to the date of the F/S (which is filed before S’s). 2. S and F may enter into agreement where F promises not to take a S/I in the drill presses, but this is unlikely. 3. B’s agreement not to give a S/I in the presses to F is not viable a. If D breaches the agreement and files bankruptcy, the transfer is unaffected by the agreement b. U.C.C. § 9-401(b): an agreement btwn debtor and S/P which prohibits a transfer of the debtor’s rights in collateral or makes the transfer a default does not prevent the transfer from taking effect iii. c. Could B solve its problem by demanding from F a written statement of collateral and showing it to S? No. 1. U.C.C. § 9-210(b)(2): a S/P shall comply with a request within 14 days after receipt of a request regarding a list of collateral a. U.C.C. § 9-210(a)(3): “request regarding a list of collateral” is a record authenticated by a D requesting that the recipient approve or correct a list of what the debtor believes to be the collateral securing an obligation and reasonably identifying the transaction or relationship that is the subject of the request 2. But the list just says that F doesn’t have a S/I in the drill presses now. If he takes a S/I in it later, he’s perfected as of the time of the F/S. XVII. Assignment 23: Maintaining Perfection Through Changes of Name, Identity, and Use a. Change in Debtor’s Name i. Information Becoming Seriously Misleading. Except as provided in subsection (c), a F/S is not rendered ineffective if, after the F/S is filed, the information provided in the F/S becomes seriously misleading under § 9-506. U.C.C. § 9-507(b). ii. Changes in Debtor’s Name: Effective for 4 Months. If a debtor so changes its name that a filed F/S becomes seriously misleading under § 9-506: 1. The F/S is effective to perfect a S/I in collateral acquired by the debtor before, or within 4 months after, the change; and 2. The F/S is not effective to perfect a S/I in collateral acquired more than 4 months after the change, unless an amendment to the F/S which renders the F/S not seriously misleading is filed within 4 months after the change. U.C.C. § 9-507(b), (c) 51 b. c. d. iii. Late Amendment. If an amendment that provides the new correct name is filed more than 4 months after the change, the F/S as amended would be effective with respect to collateral acquired more than 4 months after the change, but only from the time of the filing of the amendment. U.C.C. § 9-507 cmt. 4. Change in Use i. Certificate of Title Property 1. Noting S/I on Certificate of Title. Generally, the only to perfect a S/I in certificate-of-title property is by noting the S/I on the certificate of title. U.C.C. § 9-311(b). 2. Inventory. If certificate-of-title property is inventory, perfect by filing. U.C.C. § 9-311(d). Change in Identity i. Proceeds 1. Automatic Attachment. A S/I attaches to any identifiable proceeds of collateral. U.C.C. § 9-315(a)(2). The attachment of a S/I in collateral gives the S/P the rights to proceeds provided by § 9-315 and is also attachment of a S/I in a supporting obligation for the collateral. U.C.C. § 9-203(f). 2. Perfection of S/I in Proceeds. A S/I in proceeds is a perfected [for 20 days] S/I if the S/I in the original collateral was perfected. U.C.C. § 9-315(c). 3. Continuation of Perfection. A perfected S/I in proceeds becomes unperfected on the 21st day after the S/I attaches to the proceeds unless: a. (1) the following conditions are satisfied: i. (A) a filed F/S covers the original collateral; ii. (B) the proceeds are collateral in which a S/I may be perfected by filing in the office in which the F/S has been filed; and iii. (C) the proceeds are not acquired with cash proceeds; b. (2) the proceeds are identifiable cash proceeds; or i. Cash Proceeds. “Cash proceeds” means proceeds that are money, checks, deposit accounts, or the like. U.C.C. § 9102(a)(9). c. (3) the S/I in the proceeds is perfected other than under subsection (c) when the S/I attaches to the proceeds or within 20 days thereafter. U.C.C. § 9-315(d). 4. Authorization a. No Additional Authorization for Filing. By authenticating or becoming bound as debtor by a S/A, D authorizes the filing of an initial F/S, and an amendment covering property that becomes collateral under § 9315(a)(2), whether or not the S/A expressly covers proceeds. U.C.C. § 9-509(b)(2) b. Other Methods. See National Bank of Alaska v. Erickson (In re Seaway Express Corporation) (Bank-S/P’s S/I in accounts did not perfect continuously where the debtor sold an account for real property and would not give authorization to a deed of trust). Problem 23.1. GBT finances BBW’s inventory under a F/S that describes the collateral as “inventory, accounts, and chattel paper.” The agreement contains no restrictions on BBW’s ability to finance equipment or real estate elsewhere. Assume the JRD does not maintain a certificate of title system for boats. i. a. B (owner of BBW) kept one of the boats at her house and used it personally. Assuming no transfer of ownership to B personally, does this affect GBT’s perfected S/I? 1. The boat was covered by the F/S as inventory. Now that B uses it at home, it is equipment. Note: the boat is not consumer goods b/c BBW still owns it. 52 2. U.C.C. § 9-506: a F/S is effective, even if it has minor errors or omissions, unless the errors or omissions make the F/S seriously misleading a. Here, the change in character is not a “minor error” 3. F/S is still effective a. U.C.C. § 9-507(b): except as provided in subsection (c), a F/S is not rendered ineffective if, after the F/S is filed, the information provided in the F/S becomes seriously misleading under § 9-506 4. If this was a certificate of title JRD: a. U.C.C. § 9-311(d): when the boat was inventory, perfect by filing b. U.C.C. § 9-311(c): when the boat became equipment, the only way to perfect was by noting the S/I on the certificate of title ii. b. If B transferred ownership of the boat from BBW to herself, what evidence would exist of that fact? Is GBT still perfected? 1. S/I continues in the boat a. U.C.C. § 9-315(a)(1): S/I continues in the property notwithstanding disposition unless the S/P authorized the disposition free of the S/I 2. F/S still effective a. U.C.C. § 9-507(b): a F/S is not rendered ineffective if, after the F/S is filed, the information provided in the F/S becomes seriously misleading under § 9-506 iii. c. BBW traded one of the boats for a forklift. BBW now uses the forklift to move the boats in and out of storage. Does GBT need to do anything about perfection? 1. Forklift is proceeds a. S/I automatically attaches i. U.C.C. § 9-203(f): the attachment of a S/I in collateral gives the S/P the rights to proceeds provided by § 9-315 and is also attachment of a S/I in a supporting obligation of the collateral ii. U.C.C. § 9-315(a)(2): a S/I attaches to any identifiable proceeds of collateral b. Perfection in proceeds i. U.C.C. § 9-315(c): a S/I in proceeds is a perfected S/I if the S/I in the original collateral was perfected c. Continuous perfection i. U.C.C. § 9-315(d)(1): a perfected S/I in proceeds becomes unperfected on the 21st day after the S/I attaches to the proceeds unless: 1. (A) a filed F/S covers the original collateral; 2. (B) the proceeds are collateral in which a S/I may be perfected by filing in the office in which the F/S has been filed; and 3. (C) the proceeds are not acquired with cash proceeds ii. F/S covers the forklift iii. Inventory and proceeds are perfected by filing in Secretary of State’s office iv. The proceeds (forklift) is not acquired with cash proceeds v. Thus, the F/S is continuously perfected iv. d. What if BBW bought the forklift in subpart c using cash it received from a customer who bought a new boat? 1. The forklift was acquired with cash proceeds 2. Under U.C.C. § 9-315(d)(1), there’s no continuous perfection b/c the forklift was acquired with cash proceeds 3. Under U.C.C. § 9-315(d)(2), there’s no continuous perfection b/c the forklift (the current proceeds) is not cash proceeds 53 4. U.C.C. § 9-315(d)(3): the S/I in proceeds is perfected other than under subsection (c) when the S/I attaches to the proceeds or within 20 days thereafter 5. S/A as authorization a. U.C.C. § 9-509(b)(2): by authenticating or becoming bound as debtor by a S/A, D authorizes the filing of an initial F/S, and an amendment covering property that becomes collateral under § 9-315(a)(2), whether or not the S/A expressly covers proceeds v. e. Two of the boats in inventory suffered storm damage. S/A provided that BBW would insure the boats and req’d GBT be named as a loss payee on the policy. GBT was not named as a loss payee. Does GBT have a perfected S/I in the claim against the former insurer and, if not, what does GBT need to do to get one? 1. GBT does not have an interest in the claim as original collateral a. U.C.C. § 9-109(d)(8): Article 9 d/n apply to interests in insurance policies b. Figure out a way to create a non-Article 9 S/I in the local JRD 2. Insurance claim may be proceeds a. U.C.C. § 9-102(a)(64)(E): “proceeds” means insurance payable by reason of . . . damage to the collateral 3. S/I automatically attaches a. U.C.C. § 9-203(f): the attachment of a S/I in collateral gives the S/P the rights to proceeds provided by § 9-315 and is also attachment of a S/I in a supporting obligation of the collateral 4. Automatic S/I in proceeds a. U.C.C. § 9-315(a)(2): a S/I attaches to any identifiable proceeds of collateral 5. Perfection of proceeds a. U.C.C. § 9-315(c): since GBT filed on the boats, the F/S is effective to perfect a S/I in the proceeds for 20 days b. U.C.C. § 9-315(d)(1): failed b/c Art. 9 doesn’t apply c. U.C.C. § 9-315(d)(2): not cash proceeds d. U.C.C. § 9-315(d)(3): continuously perfected if get perfected S/I in the claim as if it was original collateral (according to state law) w/in 20 days U.C.C. § 9-315(d)(3) U.C.C. § 9-315(c): continuous perfection proceeds perfected if perfect S/I in claim |------------------------------|-------------------------------|---------------------------->> F/S Storm 20 days Inventory claim = proceeds 6. 7. Debtor authorization a. It’s the S/P’s tough luck if D won’t give authorization i. See National Bank of Alaska v. Erickson (In re Seaway Express Corporation) (Bank-S/P’s S/I in accounts did not perfect continuously where the debtor sold an account for real property and would not give authorization to a deed of trust). b. If U.C.C. § 9-315(d)(3) had required filing a F/S, the S/P would not need additional authorization under U.C.C. § 9-509(b)(2) What if GBT waits until the claim is paid (cash proceeds)? a. U.C.C. § 9-315(c): the “original collateral” of the check is the insurance claim b. Once you’ve lost the S/I in proceeds, you can’t get it back 54 e. f. Problem 23.2. GBT made an inventory loan to South West Appliance Corporation. Six months ago, D changed its corporate name to South West General, Inc. i. a. What does GBT need to do to remain perfected in its collateral? 1. U.C.C. § 9-502(a)(1): a F/S must provide the D’s name 2. U.C.C. § 9-503(a)(1): a F/S sufficiently provides the D’s name if the D is a registered organization, only if the F/S provides the name of the D indicated on the articles of incorporation 3. U.C.C. § 9-507(c): if D so changes its name that a filed F/S becomes seriously misleading under § 9-506, it’s effective until 4 months after the change unless an amendment was filed within that 4 months a. U.C.C. § 9-506(c): if a search of the records under the D’s correct name would disclose a F/S that fails sufficiently to provide the name of the D, the name provided does not make the F/S seriously misleading 4. The S/I in inventory has an implied after-acquired property clause 5. File an amendment now a. U.C.C. § 9-507 cmt. 4: if an amendment that provides the new correct name is filed more than 4 months after the change, the F/S as amended would be effective with respect to collateral acquired more than 4 months after the change, but only from the time of the filing of the amendment b. File the amendment, search and pray that nobody filed a F/S in the period between 4 months after the name change and when you file 6. U.C.C. § 9-509(b): don’t need new authority to amend ii. b. What if, instead of inventory, GBT had only a S/I in South West’s “construction crane”? Does GBT need to do anything to remain perfected? GBT doesn’t really care if D changes its name b/c there’s no S/I in after-acquired cranes. U.C.C. § 9-507(c) has to do with whether a F/S is effective to perfect a S/I in collateral acquired after D’s name change. iii. c. What if the crane was the only collateral, and South West sold it for $235k a year after the name change? Does knowing this change your answer to b? 1. Perfected in cash proceeds a. U.C.C. § 9-315(c), (d): the S/I in proceeds is perfected for 20 days b. U.C.C. § 9-315(d)(2): continuous perfection b/c proceeds are identifiable cash proceeds 2. If the cash proceeds were used to buy a new crane: a. U.C.C. § 9-315(d)(1): continuous perfection b/c: i. (A) a filed F/S that covers original collateral ii. (B) proceeds perfected by filing in the office in which the F/S has been filed iii. (C) proceeds were acquired with cash proceeds b. If the F/S described the collateral as “crane,” this would result in continuous perfection under U.C.C. § 9-315(d)(3) i. BUT, the problem is that D changed his name and GBT didn’t file an amendment within 4 months ii. U.C.C. § 9-507(c): the S/I in the new crane is rendered ineffective b/c GBT didn’t file an amendment after the name change Problem 23.4 i. a. ONB lent $1M to B. The S/A and F/S describe the collateral as “equipment, inventory, accounts, chattel paper, general intangibles, fixtures, money, and bank accounts.” Does ONB have a S/I in B’s bank account? Yes, ONB has a S/I in the bank account as original collateral. ii. b. If ONB has a S/I in the bank account, is it perfected? 55 1. The deposit account is not perfected as original collateral b/c there is no “control” over the bank account. See U.C.C. §§ 9-312(b)(1), 9-314, 9-104(a). 2. If the deposit account is proceeds: a. U.C.C. § 9-315(c): perfected for 20 days after the collateral becomes proceeds b. U.C.C. § 9-315(d)(2): continuous perfection if the proceeds are identifiable cash proceeds iii. c. Does it matter that some of the proceeds have been in the bank account for as long as 45 days? No, that doesn’t matter. iv. d. Does it matter if B commingled $100 of its own money into the bank account? U.C.C. § 9-315(b): if the proceeds are commingled, they are not identifiable; ONB loses its S/I g. Problem 23.5 i. a. How often would GBT have to check the corporate records to make sure she could amend GBT’s F/S in time to avoid loss of collateral? U.C.C. § 9-507(c): check every 3 months or so to give yourself enough time to file a new F/S within the 4 months after D’s name change. ii. b. Must a C/S include the new name of a debtor that changed its name since the original filing? No. 1. U.C.C. § 9-102(a)(27): “continuation statement” means an amendment of a F/S which (A) identifies, by its file number, the initial F/S to which it relates; and (B) indicates that it is a continuation stmt. 2. In the C/S form in U.C.C. § 9-521, there is a space for the D’s name, but this is b/c the form doubles up as a form for an amendment iii. c. In the investigation of a loan applicant, how old a change of name could be relevant? 1. How old is the collateral? 2. Inventory and accounts were probably acquired in the previous year 3. Equipment a. If D changed its name in the last 15 years, an old S/P is still perfected b. If it was acquired 5-10 years ago, look for name changes. If the F/S on file is under an old name, it’s still effective. You won’t find it under the new name. XVIII. Assignment 24: Maintaining Perfection Through Relocation of Debtor or Collateral a. Initial Filing i. File Where Debtor is Located. While a D is located in a JRD, the local law of that JRD governs perfection, the effect of perfection or nonperfection, and the priority of a S/I in collateral. U.C.C. § 9-301(1). 1. Who is the Debtor? The debtor is the individual/organization that owns the collateral (and not necessarily the obligor). U.C.C. § 9-102(a)(28). a. Sole Proprietorships. An organization means a person other than an individual. U.C.C. § 1-201(b)(25). Thus, a sole proprietorship is not an organization. 2. Individuals: Principal Residence. A debtor who is an individual is located at the individual’s principal residence. U.C.C. § 9-307(b)(1). a. Not Defined. The term “principal residence” is not defined. U.C.C. § 9-307 cmt. 2 (5th paragraph). But logically, a “principal residence” is where the debtor spends most of his time. b. When in Doubt. When doubt arises, prudence may dictate perfecting under the law of each JRD that might be the debtor’s “principal residence.” U.C.C. § 9-307 cmt. 2 (5th paragraph, last sentence). 3. Unincorporated Organizations a. Place of Business. A D that is an organization and has only one place of business is located at its place of business. U.C.C. § 9-307(b)(2). 56 b. b. c. Chief Executive Office. A D that is an organization and has more than one place of business is located at its chief executive office. U.C.C. § 9307(b)(3). i. Defined. “Chief executive office” means the place from which the debtor manages the main part of its business operations or other affairs. This is the place where persons dealing with the debtor would normally look for credit information, and is the appropriate place for filing. U.C.C. § 9-307 cmt. 2 (4th paragraph). ii. When in Doubt. A S/P may protect itself by perfecting under the law of each possible JRD. U.C.C. § 9-307 cmt. 2 (4th paragraph, last sentence). 4. Registered Organizations. A registered organization organized under state law of a State is located in that State. U.C.C. § 9-307(e). ii. Sufficiency of Debtor’s Name 1. Sole Proprietorships (Individuals) and Unincorporated Entities. A F/S sufficiently provides the name of the D if it provides the individual or organization name of the D. U.C.C. § 9-503(a)(4)(A). 2. Registered Organizations. A F/S sufficiently provides the same of the D if the D is a registered organization, if the F/S provides the name of the D indicated on its articles of incorporation. U.C.C. § 9-503(a)(1). Changes in Location of the Debtor i. Effect on Perfection of Change in Governing Law 1. Change in Location. A perfected S/I remains effective for 4 months after a change of the D’s location to another JRD. U.C.C. § 9-316(a)(2). 2. Transfer of Collateral. A perfected S/I remains effective for 1 year after a transfer of collateral to a person that thereby becomes a debtor and is located in another JRD. U.C.C. § 9-316(a)(3). ii. Security Interest Perfected or Unperfected Under Law of New Jurisdiction. If a S/I described in subsection (a) becomes perfected before the earliest time/event described, it remains perfected thereafter. If the S/I does not become perfected before the earliest time/event, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value. U.C.C. § 9-316(b). iii. Monitoring 1. Individual. If the debtor is an individual, monitor the debtor’s principal residence. 2. Registered Organization. If the debtor is a registered organization: a. Merger. D could merge with a corporation in another JRD by having the acquiring corporation acquire all assets and liabilities of D. Easy to monitor b/c the parties to the merger file articles of merger with the Secretary of State. b. Transfer Assets. D could form a corporation in another JRD and transfer all its assets to the new corporation. This is hard to monitor b/c this transfer is all internal. A creditor in the new JRD may be able to find out about the collateral by its transfer documents. 3. Unincorporated Organization. If the debtor is a partnership, monitor for change in the chief executive office. iv. Changes in Business Structure. A change in business structure would change the location of the debtor. E.g., if D (a partnership) becomes a sole proprietorship, D’s location changes from the chief executive office to D’s principal residence. Problem 24.1. Client F loaned $250k to Shatner, an inventor and professor. The collateral is equipment, accounts and inventory of Shatner Engineering, a business located in Arizona. Shatner is the sole owner of the business. Shatner’s ex-wife runs the business day-to-day, but 57 Shatner makes all the big decisions. Shatner is tenured at U of Missouri. Shatner lives in Kansas, but is looking for a house in Missouri. During the summers, Shatner returns to his Arizona home. Friend says Shatner intends to quit teaching and move to Hawaii. i. a. On the foregoing facts, in what states should you file? 1. Who is the debtor? a. U.C.C. § 9-102(a)(28): “debtor” means whoever owns the collateral (not necessarily the obligor) b. Look at invoices to determine who the debtor is 2. If the debtor is a sole proprietorship: a. U.C.C. § 9-301(1): while a D is located in a JRD, the local law of that JRD governs perfection, the effect of perfection or nonperfection, and the priority of a S/I in collateral i. Thus, you should file in the JRD where D is located b. The debtor is an individual, not an organization i. U.C.C. § 1-201(b)(25): “organization” means a person other than an individual c. U.C.C. § 9-307(b)(1): a D who is an individual is located at the individual’s principal residence i. U.C.C. § 9-307 cmt. 2 (5th paragraph): the term “principal residence” is not defined ii. Kansas is probably his principal place of residence b/c it’s where he spends most of his time iii. U.C.C. § 9-307 cmt. 2 (5th paragraph, last sentence): when in doubt, file in more than one JRD 1. You probably want to file in Arizona b/c he has a house there 2. May want to file in Missouri b/c he intends on moving there 3. It if was a really big loan, it may be worth the cost to file in Hawaii too 3. If the debtor is a partnership: a. U.C.C. § 9-301(1): while a D is located in a JRD, the local law of that JRD governs perfection, the effect of perfection or nonperfection, and the priority of a S/I in collateral i. Thus, you should file in the JRD where D is located b. U.C.C. § 1-201(b)(25): a partnership is an organization c. U.C.C. § 9-307(b)(2): a D that is an organization and has only one place of business is located at its place of business d. U.C.C. § 9-307(b)(3): a D that is an organization and has more than one place of business is located at its chief executive office i. The partnership probably has more than one place of business 1. There is a business location in Arizona 2. But, Shatner makes all the business decisions in Kansas, making Kansas a business location ii. U.C.C. § 9-307 cmt. 2 (4th paragraph): “chief executive office” is not defined. “Chief executive office” means the place from which the debtor manages the main part of its business operations or other affairs. . . . A S/P may protect itself by perfecting under the law of each possible JRD. 1. Here, you probably want to file in Kansas, Arizona, and Missouri (maybe Hawaii too). ii. b. What debtor names should be listed on each of the filings? 58 1. d. U.C.C. § 9-503(a)(4)(A): a F/S sufficiently provides the name of the D if it provides the individual or organization name of the D a. If D is a sole proprietorship, you should use the individual name of D (i.e., his legal name) b. If D is a partnership, use the name of the organization iii. c. Three years ago Shatner formed a Nevada corporation under the name Shatner Engineering Products, Inc. Now where do you file? 1. U.C.C. § 9-307(e): a registered organization organized under state law is located in that state 2. File a F/S in the state of incorporation (i.e., Nevada) iv. d. Contrary to the facts initially give you, the business is unincorporated and ex-wife owns a 1/3 interest as a T in C. In what states should you file? What names should be listed on each of the filings? 1. If unincorporated org, look to see if there is more than 1 place of business a. U.C.C. § 9-307(b)(3): a D-organization that has more than one place of business is located at its chief executive office 2. U.C.C. § 9-503(a)(4)(A): a F/S sufficiently provides the name of the D if it provides the individual or organization name of the D Problem 24.2 i. a. What, if anything, should F do to monitor the location of the debtors in Problem 24.1? 1. U.C.C. § 9-316(a)(2): a perfected S/I remains effective for 4 months after a change of the D’s location to another JRD 2. U.C.C. § 9-316(a)(3): a perfected S/I remains effective for 1 year after a transfer of collateral to a person that thereby becomes a debtor and is located in another JRD 3. U.C.C. § 9-316(b): If a S/I described in subsection (a) becomes perfected before the earliest time/event described, it remains perfected thereafter. If the S/I does not become perfected before the earliest time/even, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value. 4. If the debtor is an individual: a. Monitor Shatner’s principal residence in case he moves or starts spending more time in Arizona 5. If the debtor is a corporation a. D could merge with a corporation in another JRD by having the acquiring corporation acquire all assets and liabilities of D i. U.C.C. § 9-316(a)(3): S/I becomes unperfected 1 year after a transfer of collateral to a person that becomes a debtor located in another JRD ii. Easy to monitor b/c the parties to the merger file articles of merger with the Secretary of State b. D could form a corporation in another JRD and transfer all its assets to the new corp i. U.C.C. § 9-315(a)(1): S/I continues in the collateral ii. U.C.C. § 9-316(a)(3): S/I becomes unperfected 1 year after the transfer iii. Hard to monitor b/c this transfer is all internal. A creditor in the new JRD may be able to find out about the collateral by its transfer documents 6. If the debtor is a partnership a. Monitor for change in the chief executive office b. D could start making business decisions in another state c. D could change the structure of the business: 59 i. Ex-wife could drop out, changing the p’ship to a sole proprietorship ii. Then the place to file becomes D’s principal residence ii. b. How would your answer change if the loan were for $25M? F would engage in more monitoring. XIX. Assignment 25: Maintaining Perfection in Certificate of Title Systems a. Original Certificate of Title (COT) Ceases to Cover Goods. Goods cease to be covered by a COT [when] the goods become covered subsequently by a COT issued by another JRD. U.C.C. § 9303(b). i. Not Unperfection. The fact that the law of one State ceases to apply . . . does not mean that a S/I perfected under that law becomes unperfected automatically. U.C.C. § 9-303 cmt. 4. b. Perfection i. Continues Perfection Against Lien Creditors. Except as provided in subsection (e), a S/I in goods covered by a COT which is perfected by any method under the law of another JRD when the goods become covered by a COT from this State remains perfected. U.C.C. § 9-316(d) ii. Four Months to Re-Perfect Against Purchasers. A S/I described in subsection (d) becomes unperfected as against a purchaser of the goods for value and is deemed never to have been perfected as against a purchaser of the goods for value if the applicable requirements under § 9-311(b) are not satisfied before the expiration of four months after the goods have become so covered. U.C.C. § 9-316(e). c. Priority: Protection for Non-Dealer Buyers and New S/Ps Without Knowledge. If, while a S/I in goods is perfected by any method under the law of another JRD, this State issues a COT that does not show that the goods are subject to a S/I or contain a stmt that they may be subject to S/Is not on the certificate: i. (1) a non-dealer buyer takes free of the S/I if the buyer gives value and receives delivery of the goods after issuance of the certificate and w/o knowledge of the S/I; and ii. (2) the S/I is subordinate to a conflicting S/I in the goods that attaches, and is perfected under §9-311(b), after issuance of the certificate and without the conflicting S/P’s knowledge of the S/I. U.C.C. § 9-337. d. Problem 25.1.a. 1st Bank perfects by notation on K’s WI COT and takes possession of the certificate. K moves to AL and obtains a clean COT. One month after issuance of the new certificate, K borrows $50k from 2d Bank, which takes a S/I and perfects on the AL certificate. Six months after issuance of the AL certificate, K borrows $45k from 3d Bank, which perfects on the AL certificate. Seven months after issuance of the AL certificate, K filed bankruptcy. Is 1st Bank perfected? |--U.C.C. § 9-316(e): 4 month window--| 1 month 5 months 1 month ----|----------------------|-----------------------|----------------------------------|-------------------------| 1st Bank D moves 2d Bank 3d Bank D files $65k loan to AL $50k loan $45k loan bankruptcy WI COT clean COT S/I – COT S/I – COT Perfected i. Car ceases to be covered by WI COT 1. U.C.C. § 9-303(b): Goods cease to be covered by a COT [when] the goods become covered subsequently by a COT issued by another JRD ii. 1st Bank becomes unperfected 1. U.C.C. § 9-303 cmt. 4: The fact that the law of one State ceases to apply . . . does not mean that a S/I perfected under that law becomes unperfected automatically 60 2. 3. 4. e. f. U.C.C. § 9-316(d): except as provided in subsection (e), a S/I in goods covered by a COT which is perfected by any method under the law of another JRD when the goods become covered by a COT from this State remains perfected U.C.C. § 9-316(e): A S/I described in subsection (d) becomes unperfected as against a purchaser of the goods for value and is deemed never to have been perfected as against a purchaser of the goods for value if the applicable requirements under § 9-311(b) are not satisfied before the expiration of four months after the goods have become so covered Here, since 1st Bank did not get its S/I noted on the AL COT, it is deemed never to have been perfected against 2d Bank or 3d Bank a. Note: 1st Bank’s S/I has priority over lien creditors (e.g., bankruptcy trustee) iii. Priority 1. U.C.C. § 9-337: if, while a S/I in goods is perfected by any method under the law of another JRD, this State issues a COT that does not show that the goods are subject to a S/I or contain a stmt that they may be subject to S/Is not on the certificate: a. (1) a non-dealer buyer takes free of the S/I if the buyer gives value and receives delivery of the goods after issuance of the certificate and w/o knowledge of the S/I; and b. (2) the S/I is subordinate to a conflicting S/I in the goods that attaches, and is perfected under §9-311(b), after issuance of the certificate and without the conflicting S/P’s knowledge of the S/I. 2. Assume AL does not have a stmt that says the goods may be subject to S/Is not on the certificate 3. Under U.C.C. § 9-337(2), 2d Bank and 3d Bank have priority over 1st Bank, assuming they did not know about 1st Bank’s S/I a. Note: U.C.C. § 9-337 eliminates the 4 month window in U.C.C. § 9316(e) that allows S/Ps and non-dealer buyers to continue perfection Problem 25.1.b. Change one fact: 1st Bank learned of the issuance of the new certificate three months after issuance. 1st Bank demanded 2d Bank apply for notation of 1st Bank’s lien on the AL certificate. 2d Bank promptly complied, and 1st Bank’s lien was noted on the AL certificate. Who has priority btwn 1st Bank and 2d Bank? i. U.C.C. § 9-316(e): 1st Bank has priority b/c it complied with U.C.C. § 9-311(b) within 4 months of the COT’s issuance 1. 1st Bank’s priority dates back to when its S/I was noted on the WI COT ii. If there was no statement on the AL COT that the goods may be subject to S/Is not on the certificate, look to U.C.C. § 9-337(2): 1. 2d Bank probably did not know about 1st Bank’s S/I. Thus, 2d Bank has priority over 1st Bank. 2. 3d Bank knew about 1st Bank’s S/I b/c 1st Bank applied for notation on the AL certificate before 3d Bank noted its S/I on the certificate. Thus, 1st bank has priority over 3d Bank. Problem 25.2. B lives in MO and owns a car titled in MO. Bank financed her purchase, applied for the title, had its lien noted on it, and has possession of the certificate. B recently moved to NY w/o notifying Bank. i. a. B hasn’t obtained a COT or a certificate of registration from NY. Is Bank’s S/I still perfected? How long will Bank’s S/I remain perfected? 1. Yes. 2. U.C.C. § 9-303(b): goods cease to be covered by a COT [when] the goods become covered subsequently by a COT issued by another JRD a. Here, NY hasn’t issued a COT yet b. It doesn’t matter where the car ends up 61 ii. b. Suppose B registers the car in NY and gets NY license plates a week after she arrives. Bank still has the MO COT and NY d/n issue a COT. Is Bank still perfected? For how long? 1. Same result as part a 2. Registration doesn’t affect the answer under the current U.C.C. iii. c. Suppose B, rather than Bank, holds the MO COT. B applies for a NY COT. She surrenders the MO title to NY Department and tells them (falsely) that Bank’s lien has been satisfied. NY issues a clean COT. Is Bank still perfected? For how long? 1. U.C.C. § 9-303(b): goods cease to be covered by a COT [when] the goods become covered subsequently by a COT issued by another JRD a. Goods cease to be covered by the MO COT 2. Look to the MO COT statute to see the effect of surrendering a COT a. If surrendering a COT makes Bank’s S/I unperfected, Bank loses priority iv. d. Suppose B gave NY Department her affidavit stating she lost her MO COT and that it had no liens on it. NY issues a clean COT. Is Bank’s lien still perfected? For how long? 1. U.C.C. § 9-303(b): car ceases to be covered by WI COT 2. U.C.C. § 9-316(e): Bank becomes unperfected in 4 months if it does not reperfect 3. U.C.C. § 9-337: If the NY COT does not contain a stmt that goods may be subject to S/Is not on the certificate, non-dealer buyers and new S/Ps w/o knowledge take free of Bank’s S/I 62 CHAPTER 8. PRIORITY XX. Assignment 26: The Concept of Priority: State Law a. Priority in Foreclosure i. Two Basic Principles 1. Absent an agreement to the contrary, any lien holder may foreclose while the debtor is in default to that lien holder. 2. No lien holder is compelled to foreclose. ii. Discharge of Liens 1. Discharges Lien on Which Sale is Held. A S/P’s disposition of collateral after default discharges the S/I under which the disposition is made. U.C.C. § 9617(a)(2). 2. Discharges Subordinate S/Is and Liens. A S/P’s disposition of collateral after default discharges any subordinate S/I or other subordinate lien. U.C.C. § 9617(a)(3). 3. Senior Lien Holders Unaffected. A prior lien holder can enforce its lien against the purchaser. a. Calculating Asking Price. Since senior lien holders are unaffected by foreclosure sales of junior liens, a buyer’s asking price= [maximum price willing to pay] – [amount of senior liens] iii. Applying Proceeds 1. Proceeds first apply to expenses of sale, 2. Then, to payment of the lien under which the sale was held, 3. Then to payment of subordinate liens in order of their priority. 4. Any remaining surplus is paid to the debtor. 5. Deficiencies. Payment to a lien holder reduces the balance owing. The lien holder is then entitled to a judgment against the debtor for any deficiency. iv. Notice of Foreclosure Sale 1. Foreclosing Creditor is an Article 9 S/P. The S/P shall send an authenticated notification of disposition to: a. (A): any person who sends S/P an authenticated notification of a claim of an interest in the collateral b. (B): any other S/P or lien holder that, 10 days before the notification date, held a S/I in or other lien on the collateral perfected by filing a F/S. U.C.C. § 9-611(c)(3). c. Exception: Filing Office Does Not Respond. S/P complies with U.C.C. § 9-611(c)(3)(B) if: i. (1) S/P searches the filing records 20–30 days before the notification date; and ii. (2) before the notification date: 1. (A) did not receive a response to the search; or 2. (B) received a response and sent notification to each S/P named in the response whose F/S covered the collateral. U.C.C. § 9-611(e). b. Right to Possession Between Lien Holders i. S/P’s Right to Repossession. Most S/As define default as including foreclosure by a junior lien holder. If D defaults, a S/P has the right to repossession w/o breaching the peace. U.C.C. § 9-609(a). 1. Commercially Reasonable Disposition. Once S/P has possession, it has the option to sell in a commercially reasonable manner. See U.C.C. § 9-610(b). ii. S/P’s Motive in Exercising Repossession Right 63 1. c. d. Grocers Supply (MAJ): Motive Irrelevant. In Grocers Supply jurisdictions, a S/P has the right to repossess, even if its intentions are to keep the debtor in business and prevent a junior lien holder from foreclosing on the collateral. a. Conversion. If the junior lien holder already has control and refuses to give up the collateral, some courts hold that this constitutes conversion 2. Frierson (MIN): Motive Relevant. Under Frierson, a S/P cannot repossess and refuse to exercise its rights under the S/A, keeping the debtor in business, while impairing the status of other creidtors by preventing them from exercising valid liens. Problem 26.1. Sheriff is conducting a foreclosure sale under a final judgment on a mortgage securing $10k debt. The judgment forecloses a subordinate mortgage of $29k, but does not mention a senior mortgage of $17k. K is willing to pay up to $25k to own the property free and clear of all liens. Sheriff’s expenses are $200. How much should K bid at the sale? i. U.C.C. § 9-617(a): a S/P’s disposition of collateral after default: 1. (2) discharges the S/I under which the disposition is made a. Thus, the $10k mortgage is discharged 2. (3) discharges any subordinate S/I or other subordinate lien a. Thus, the $29k subordinate mortgage is discharged ii. Foreclosure does not affect senior liens iii. Since the senior lien holder can still foreclose on the property, K must take into account how much she would pay the senior mortgage holder to have the property free and clear of liens 1. $25k willing to pay – $17k senior mortgage = $8k 2. K should bid $8k iv. Note: the mortgage holder whose mortgage is being foreclosed on (here, the $10k mortgage holder) bears the brunt of the sheriff’s expenses v. Proceeds of the foreclosure sale 1. $8k proceeds – $200 sheriff’s expenses = $7,800 goes to the 2d mortgage holder 2. 2d mortgage holder can bring a deficiency action against the debtor for $2,200 a. $10k mortgage – $7,800 proceeds from foreclosure sale = $2,200 deficiency vi. What if the mortgage was for $5k instead of $10k? 1. $8k proceeds – $200 sheriff’s expenses = $7,800 2. $7,800 – $5k mortgage = $2,800 goes to the junior mortgage holder Problem 26.3. DH holds a first S/I against mobile equipment owned by W securing a debt of $27k. W is current on his payments. DH is confident the equipment would bring at least $40k. The holder of some kind of second lien is forcing a sale of the equipment. i. a. If the information is correct, is there any reason for DH to be concerned? 1. U.C.C. § 9-617: buyer takes subject to DH’s lien a. U.C.C. § 9-315(a)(1): S/I continues in the good 2. Is D in default? a. S/As usually have broad definitions of default b. It’s almost a certainty that DH’s S/A includes foreclosure of junior liens in the definition of default 3. Since this is mobile equipment (rather than real property), certain concerns arise: a. Who is the buyer? i. Will the buyer use it such that it loses value fast? ii. Buyer might fail to insure the equipment iii. Buyer might mistreat the equipment b. Where will the equipment be used? 64 i. Buyer might move the equipment out of state, making it hard to track it down when DH wants to foreclose on it Notice a. U.C.C. § 9-611(c)(3): the S/P shall send an authenticated notification of disposition to: i. (A): any person who sends S/P an authenticated notification of a claim of an interest in the collateral ii. (B): any other S/P or lien holder that, 10 days before the notification date, held a S/I in or other lien on the collateral perfected by filing a F/S b. U.C.C. § 9-611(e): S/P complies with U.C.C. § 9-611(c)(3)(B) if: i. (1) S/P searches the filing records 20–30 days before the notification date; and ii. (2) before the notification date: 1. (A) did not receive a response to the search; or 2. (B) received a response and sent notification to each S/P named in the response whose F/S covered the collateral c. Thus, if the junior lien holder is an Article 9 S/P, he must send notification to DH (unless the search d/n come back) d. But, if the junior lien holder is not an Article 9 S/P, he’s not subject to Article 9 and is probably not required to notify DH ii. b. Can DH protect its position by purchasing the equipment at the sale? 1. It can, but it probably doesn’t want to 2. It could bid $10 to save some trouble about finding information about the buyer 3. But, it would probably have to pay thousands of dollars. If DH bought the equipment for $5k, it would go to the second lien holder. iii. c. Can DH prevent the sale? 1. Yes. 2. U.C.C. § 9-609(a): if D defaults, DH has the right to repossession w/o breaching the peace a. Here, DH’s S/A certainly defined default as including a junior lien holder foreclosing b. Here, since the sheriff has the collateral, DH wouldn’t be breaching the peace when it repossesses 3. Once DH has possession, it has the option to sell in a commercial reasonable manner w/ proper notice 4. Could DH ask the sheriff for the property and give it back to the debtor? a. In a Frierson jurisdiction, no b. But, in a Grocers Supply jurisdiction, yes c. Note if the junior lien holder already has control and refuses to give up the collateral, some courts hold that this constitutes conversion iv. d. Assuming that the creditor forcing this sale was an Article 9 secured party, was DH entitled to receive notice of this sale? 1. Yes 2. U.C.C. § 9-611(c): junior lien holder (Art. 9 S/P) is obligated to notify DH b/c DH filed a F/S 4. 65 CHAPTER 9. COMPETITIONS FOR COLLATERAL XXI. Assignment 28: Lien Creditors Against Secured Creditors: The Basics a. How Creditors Become “Lien Creditors” i. Levying. Generally, Creditor wins a judgment against Debtor, obtains a writ of execution, and then obtains a lien by levying on specific property of the debtor. b. Priority Among Lien Creditors i. Date of Levy (MAJ). Generally, state law provides that the critical date for priority is the date on which the sheriff takes possession of the property. c. Priority Between Lien Creditors and Secured Creditors i. Priority Rule. A S/P has priority over a lien creditor if (A) the S/I is perfected; or (B) one of the conditions in 9-203(b)(3) is met and a F/S is filed, before the unsecured creditor levies on the property. U.C.C. § 9-317(a)(2). 1. Perfection. A S/I is perfected if it has attached and all applicable requirements for perfection are satisfied. U.C.C. § 9-308(a). a. Attachment. A S/I attaches to collateral when it becomes enforceable. U.C.C. § 9-203(a). b. Enforceability. A S/I is enforceable if: i. (1) value has been given; 1. Value Given. A person gives value for rights if the person acquires them: a. (1) in return for a binding commitment to extend credit b. (2) as security for, or in total or partial satisfaction of a pre-existing claim; c. (3) by accepting delivery under a preexisting contract for purchase; or d. (4) in return for any consideration sufficient to support a simple contract. U.C.C. § 1-204. ii. (2) the debtor has rights in the collateral; and iii. (3)(A): the debtor signed a S/A describing the collateral. U.C.C. § 9-203(b). d. Purchase-Money Priority. See XXI.h. Problem 28.5, infra. i. PMSI in Consumer Goods 1. Automatic Perfection. A PMSI in consumer goods is perfected on attachment. U.C.C. § 9-309(1). 2. Priority. If a PMSI in consumer goods attaches (and thus, is perfected) before a person becomes a lien creditor, the S/P has priority. See U.C.C. §§ 9-309(1), 9317(a)(2)(A). ii. Other PSMIs. If a person files a F/S w/ respect to [any] PMSI within 20 days after the debtor receives delivery of the collateral, the S/I takes priority over the rights of a lien creditor which arise between the time the S/I attaches and the time of filing. U.C.C. § 9317(e). e. Problem 28.2. P lends M $20k, secured by equipment. On 3/7, M signs a F/S, S/A and p/note, but P does not disburse the money. P files the F/S that same day and orders a search. On 3/10, the sheriff levies on the equipment pursuant to a writ of execution in favor of S. On 3/11 P receives the report of the search showing P’s interest is the first filed against the equipment. i. a. Is P perfected? 1. No. 2. U.C.C. § 9-308(a): a S/I is perfected if it has attached and all of the applicable requirements for perfection have been satisfied 3. Attachment a. U.C.C. § 9-203(a): a S/I attaches when it becomes enforceable 66 b. f. g. U.C.C. § 9-203(b): a S/I is enforceable if: i. (1) value has been given; ii. (2) D has rights in the collateral; and 1. Here, M owns the equipment iii. (3)(A): D has authenticated a S/A that describes the collateral 1. M has signed a S/A c. No Value Given i. U.C.C. § 1-204: a person gives value for rights if the person acquires them: 1. (1) in return for a binding commitment to extend credit a. Probably not a binding commitment b/c P didn’t want to lend if the search wasn’t clean 2. (2) as security for, or in total or partial satisfaction of a pre-existing claim; 3. (3) by accepting delivery under a preexisting contract for purchase; or 4. (4) in return for any consideration sufficient to support a simple contract 4. Since there was no attachment, there was no perfection ii. b. If P makes the $20k loan despite the levy, will she have priority over S in the equipment? 1. Priority battle between S/P and lien creditor 2. U.C.C. § 9-317(a)(2): a S/P has priority over a lien creditor if (A) the S/I is perfected; or (B) one of the conditions in 9-203(b)(3) is met and a F/S is filed, before the unsecured creditor levies on the property a. Here, the S/I was perfected (b/c value was given after S levied) after S levied b. Here, M signed a S/A (condition in U.C.C. § 9-203(b)(3)) and the F/S was filed before S levied 3. Thus, P has priority over S Problem 28.3. S got a $125k judgment against C. RFT is a $50k unsecured creditor of C. How can RFT get priority over S? i. Priority battle between unsecured creditors ii. If RFT brings a lawsuit, it will not get priority over S. S can’t get a judgment and levy quick enough before S levies. iii. RFT should become a secured creditor before S levies on the property 1. U.C.C. § 9-317(a)(2): a S/P has priority over a lien creditor if (A) the S/I is perfected; or (B) one of the conditions in 9-203(b)(3) is met and a F/S is filed, before the unsecured creditor levies on the property a. U.C.C. § 9-203(b): a S/I attaches and is enforceable if: i. (1) value has been given; 1. Here, this is the pre-existing debt under U.C.C. § 1204(2). ii. (2) D has rights in the collateral; and iii. (3)(A): D has authenticated a S/A that describes the collateral 2. If RFT perfects its S/I before S levies, it has priority iv. Why would the debtor agree to this? 1. If RFT has priority, the sheriff can’t repossess the collateral 2. In a Grocer’s Supply jurisdiction, RFT can keep C in business. Problem 28.4. N procedure is as follows. First, it files a F/S. Then it searches to make sure no one filed ahead of N and ensure the collateral is in the debtor’s possession. Within two weeks of 67 h. i. filing and within a few days after N receives the search report, N makes the loan. Is there any way an execution creditor could come out ahead of N? i. Yes ii. U.C.C. § 9-317(a)(2): a S/P has priority over a lien creditor if (A) the S/I is perfected; or (B) one of the conditions in 9-203(b)(3) is met and a F/S is filed, before the unsecured creditor levies on the property 1. Under (B), if a lien creditor levies before N satisfies a condition in U.C.C. § 9203(b)(3) (e.g., signing a S/A), a lien creditor would have priority Problem 28.5. BBW sold a boat to E. E made a down-pmt and signed a p/note for the balance. E signed a S/A and F/S. E took possession of the boat. O held an unrecorded judgment against E. After E left BBW, the sheriff levied on the boat and took possession of it. Can E get the boat back from the sheriff today? (The S/A provides that any levy is a default.) What should BBW do? i. S/I could be a PMSI in consumer goods 1. Requirements a. Consumer Goods i. U.C.C. § 9-102(a)(23): “consumer goods” means goods that are used or bought for use primarily for personal, family, or household purposes. b. PMSI i. U.C.C. § 9-103(a), (b): this is a seller’s PMSI: 1. The S/P sold the collateral to the D on credit 2. The S/P took a S/I in the goods to secure the purchase price 2. Perfection a. U.C.C. § 9-309(1): PMSI in consumer goods is perfected on attachment b. Requirements for Attachment i. U.C.C. § 9-203(a): a S/I attaches when it becomes enforceable ii. U.C.C. § 9-203(b): a S/I is enforceable when: 1. (1) value is given 2. (2) D has rights in the collateral 3. (3)(A): D signs a S/A describing the collateral iii. Application 1. Value is given when E drives the boat off the lot 2. D has rights in the collateral when title passes 3. D signed a S/A iv. The S/I attached when E drove the boat off the lot 3. Priority a. U.C.C. § 9-317(a)(2)(A): S/P has priority over lien creditor if the S/I is perfected before the person becomes a lien creditor b. Here, since the S/I perfected when it attached (before the sheriff levied on the boat), BBW has priority ii. If the boat is not consumer goods, then it’s equipment (9-102(a)(33)) 1. Priority a. U.C.C. § 9-317(e): if a person files a F/S w/ respect to a PMSI within 20 days after the debtor receives delivery of the collateral, the S/I takes priority over the rights of a lien creditor which arise between the time the S/I attaches and the time of filing 2. BBW has priority if it files a F/S w/in 20 days after E drove off w/ the boat 3. Then, under Grocer’s Supply, BBW can show the signed F/S to the sheriff and get the boat back Problem 28.6. E signed the F/S but not the S/A. E is sitting in BBW’s office, willing to sign the S/A. What do you tell BBW? i. Here, there was no attachment 68 1. 2. U.C.C. § 9-203(a): a S/I attaches when it becomes enforceable U.C.C. § 9-203(b): a S/I is enforceable when: a. (1) value is given b. (2) D has rights in the collateral c. (3)(A): D signs a S/A describing the collateral 3. Here, D did not sign the S/A ii. U.C.C. § 9-317(e) is no help 1. This section only applies when the person became a lien creditor between attachment and filing. In this case, the sheriff levied before the S/I even attached. iii. Have E sign the S/A and present the filed F/S to the sheriff. The sheriff probably won’t ask when the S/A was signed. iv. If the sheriff does ask when the S/A was signed, you’ll have to argue the S/I attached before the sheriff levied under the composite document rule. XXII.Assignment 29: Lien Creditors Against Secured Creditors: Future Advances a. Priority of Future Advances i. Secured Party vs. Lien Creditor. A S/P’s S/I in a future advance has priority over a lien creditor if: 1. The advance was made within 45 days of levy; 2. The S/P did not know of the lien when the advance was made; 3. The S/P did not know of the lien when the S/P made a binding commitment to make an advance. See U.C.C. § 9-323(b). ii. Secured Party vs. Buyer. A buyer takes free of a S/I securing a future advance if the advance (or commitment to make an advance) is made after the earlier of: 1. (1) the time the S/P acquires knowledge of the buyer’s purchase; or 2. (2) 45 days after the purchase. U.C.C. § 9-323(d), (e). b. Priority of Nonadvances. S/P’s nonadvances have the priority of the advances to which they relate, unrestrained by U.C.C. § 9-323(b). See Uni Imports, Inc. v. Exchange National Bank of Chicago. c. Problem 29.2. D borrows $50k from S/P and executes a note and S/A that state that the S/P may provide up to $25k in future advances. S/A secures interest at 10%/yr and S/P’s attorney’s fees in any collection action. S/P perfects. J obtains a judgment for $100k against D and becomes a lien creditor by levying on the collateral. S/P has actual knowledge of the lien. Sixty days after the levy, S/P lends D an additional $25k. D defaults, owing the full balance, interest and attorney’s fees. Who has priority btwn S/P and J? i. S/P has priority over the original $50k loan 1. U.C.C. § 9-317(a)(2)(A): S/P has priority over a lien creditor if the S/I is perfected before the person becomes a lien creditor 2. Here, S/P perfected his S/I in the $50k loan before J levied ii. S/P does not have priority over the $25k advance 1. Priority of Future Advances: S/P vs. Lien Creditor a. U.C.C. § 9-323(b): S/P has priority if: i. The advance is made within 45 days of levy ii. The S/P did not know of the lien when the advance was made iii. The S/P did not know of the lien when the S/P made a binding commitment to make an advance b. Application i. Here, the S/P made the advance 60 days after levy ii. Here, the S/P had knowledge of the lien when he made the advance iii. Here, the S/P was not obligated to make an advance c. Thus, S/P does not have priority over the $25k advance iii. Interest and Attorney’s Fees 69 1. d. e. Uni Imports, Inc. v. Exchange National Bank of Chicago: S/P’s nonadvances have the priority of the advances to which they relate, unrestrained by U.C.C. § 9-323(b) a. To the extent the S/I secures accrued interest that is attributable to the $50k original loan, it has priority b. To the extent the S/I secures accrued interest that is attributable to the $25k advance, it does not have priority 2. Attorney’s Fees a. Attorney’s fees aren’t really severable between the original loan and the advance b. A court would probably prorate the fees btwn the loans c. To the extent the S/I secures fees allocated toward the $50k original loan, it would have priority Problem 29.3. C lent $1k to B. B gave a S/I in his boat (FMV = $32k) and filed a F/S. BCA recovered a $45k judgment against B. BCA levied on the boat. B wants a $31k advance from C. i. a. If C doesn’t make the requested advance, what is likely to happen and how do BCA, B, and C come out? 1. A judicial sale will be held a. U.C.C. § 9-617(a)(2): BCA’s lien would be foreclosed b. C’s S/P remains b/c her interest is senior to BCA’s ii. b. If C makes this advance, will the advance be secured? 1. No 2. It would’ve been secured if the original S/A had a future advance (“dragnet”) clause 3. To make the future advance secured by the boat, execute a new S/A that provides for a $31k loan secured by a S/I in the boat iii. c. If C makes this advance and the sale is later held, how do BCA, B and C come out? 1. U.C.C. § 9-323(b): C’s S/I in the future advance has priority if she makes the advance w/in 45 days of BCA’s levy 2. If the sale is held, C’s (senior) lien is increased to $32k 3. Because the boat is worth $32k, nobody will bid at the judicial sale 4. Since C has priority, under Grocer’s Supply, she can get the boat from the sheriff 5. Did C and B commit fraud? a. Under the Uniform Fraudulent Transfer Act, a court has the power to avoid fraudulent transfers b. To prove actual fraud, BCA would have to prove that B and C conspired to create a fraudulent transaction i. This is very hard to prove c. To prove constructive fraud, BCA would have to prove that there was a transfer of an interest in property where the transferor did not get reasonably equivalent value i. Here, C got value (a S/I) for the $31k loan ii. Thus, there is no constructive fraud here Problem 29.4. Instead of representing C, you represent BCA in its attempt to collect the $45k judgment. You assess the boat at $32k. The sheriff’s sale is set for 3/29. You discovered C’s F/S. You don’t want to bid more than B’s equity and you need to know the amount of C’s S/I. i. a. How do you get the information? 1. U.C.C. § 9-210(b)(1): a S/P must comply with the debtor’s request for an accounting 2. Here, B probably will not cooperate with BCA 3. BCA, as a creditor, has rights of discovery to find out how much B owes C a. But, this information isn’t that helpful b/c C can make future advances up to 45 days after levy 70 ii. b. If you can’t get the information, what will be your bidding strategy at the sale? 1. Priority of Future Advances: S/P vs. Buyer a. U.C.C. § 9-323(d): a buyer takes free of a S/I to the extent it secures advances made after the earlier of: i. (1) the time the S/P acquires knowledge of the buyer’s purchase; or ii. (2) 45 days after the purchase b. Buyer’s strategy will be to make sure C knows about the sale 2. If the sheriff sells the boat for $10k, C has priority over this amount under U.C.C. § 9-323(b). XXIII. Assignment 30: Trustees in Bankruptcy Against Secured Creditors: The Strong Arm Clause a. Power to Avoid. A bankruptcy trustee has the power to avoid S/Is that remain unperfected as of the time of filing of the bankruptcy case. i. Effect: Becomes Unsecured. If the trustee is successful in avoiding a S/I, the interest is treated as unsecured. See 11 U.S.C. § 551. b. Judicial Lien Creditor. The bankruptcy trustee steps into the shoes of a hypothetical creditor that: i. Extends credit to the debtor at the time of the commencement of the case, and that ii. Obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien. 11 U.S.C. § 544(a)(1). c. Priority: Secured Party vs. Lien Creditor (Bankruptcy Trustee). A S/P has priority if, before the bankruptcy petition is filed, the S/I is perfected. See U.C.C. § 9-317(a)(2)(A). d. Problem 30.1. G filed bankruptcy on 4/15. Which of the following can the bankruptcy trustee avoid under 11 U.S.C. §544(a)? i. a. Bank d/n file a F/S until 4/22. 1. U.C.C. § 9-317(a)(2)(A): the trustee has priority b/c no F/S was filed when the bankruptcy petition was filed 2. 11 U.S.C. § 362(a)(4): filing the F/S violates the automatic stay ii. b. Same facts as above, but the bank discovered its error and filed the F/S on 4/14. 1. U.C.C. § 9-317(a)(2)(A): S/P has priority b/c filed before bankruptcy petition was filed 2. Note: this is an avoidable preference. See XXIV. Assignment 31: Trustees in Bankruptcy Against Secured Creditors: Preferences, infra. iii. c. S/P listed D as “Gargantuan Industries” on the F/S, but omitted info req’d by U.C.C. § 9-516(b)(5). The filing shows up on a search under the correct name of G, but it’s impossible to tell whether the filing is against G or a bus. using a trade name. 1. The filing office should have rejected the F/S a. U.C.C. § 9-520(a): filing office shall refuse to accept a record for filing for a reason set forth in U.C.C. § 9-615(b) b. Here, the F/S did not contain information req’d by U.C.C. § 9-516(b)(5) 2. F/S is still effective a. U.C.C. § 9-520(c): a filed F/S satisfying U.C.C. § 9-502(a) and (b) is effective, even if the filing office is req’d to refuse to accept it under (a) b. Satisfaction of U.C.C. § 9-502(a) i. U.C.C. § 9-502(a): a F/S is sufficient only if it: 1. (1) provides the D’s name 2. (2) provides the S/P’s name 3. (3) indicates the collateral covered by the F/S ii. Here, the F/S does not provide D’s legal name iii. U.C.C. § 9-506(c): if a search under D’s correct name discloses a F/S that fails sufficiently to provide D’s name, the name provided does not make the F/S seriously misleading 71 iv. Since the F/S turns up on a search under D’s correct name, the F/S is not seriously misleading c. U.C.C. § 9-338 does not apply i. The information here is missing, not incorrect ii. This section only applies to S/Ps and purchasers, not bankruptcy trustees iv. d. S/P filed a F/S 5 years prior to 7/15. S/P has not filed a C/S. 1. F/S has lapsed a. U.C.C. § 9-515(a): F/S lasts for 5 years b. U.C.C. § 9-515(c), (d): F/S lapses on the expiration of its effectiveness unless a C/S is filed within 6 mo. before expiration c. Here, S/P has not filed a C/S 2. Note: filing a C/S does not violate the automatic stay a. 11 U.S.C. § 362(b)(3): bankruptcy petition does not operate as a stay to maintain perfection to the extent the trustee’s rights and powers are subject to such perfection under § 546(b) b. 11 U.S.C. § 546(b)(1)(B): the trustee’s rights and powers are subject to any law that provides for maintenance/continuation of perfection of an interest in property to be effective against an entity that acquires rights in such property before the bankruptcy action 3. Still perfected against the bankruptcy trustee a. U.C.C. § 9-515(c): if the S/I becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value b. The bankruptcy trustee is not a purchaser c. Thus, under U.C.C. § 9-317(a)(2)(A), the S/P has priority if it was perfected when the bankruptcy petition was filed d. Here, S/P filed a F/S which was effective when the bankruptcy petition was filed e. Thus, S/P has priority over the trustee 4. Note: S/Ps still need to file C/Ss to protect their priority as to other S/Ps v. e. The description of the collateral in the S/A was left blank. Associate filled in the blank. 1. U.C.C. § 9-308(a): a S/I is perfected if it has attached and all applicable requirements for perfection have been satisfied 2. U.C.C. § 9-203(b)(3)(A): attachment requires D sign a S/A that describes the collateral a. Here, there was no description when the bankruptcy petition was filed b. Thus, there was no attachment (and no perfection) when the petition was filed c. The trustee can avoid this S/I 3. 11 U.S.C. § 362(a)(4): filling in the bland violated the automatic stay (creating a lien) 4. S/P will argue that the S/I attached under the composite document rule vi. f. On 4/6, G bought a car. G signed a S/A in favor of Bank, but when G filed bankruptcy, Bank’s application for COT showing its lien wasn’t filed. On 4/25, Bank delivered the application. Did Bank violate the automatic stay? 1. Bank was unperfected when the bankruptcy was filed a. U.C.C. § 9-311(b): a S/I in COT property can only be perfected by compliance with a COT statute (i.e., noting a S/I on a COT) b. Here, when the bankruptcy petition was filed, the bank had not noted its S/I on the car’s COT 2. The S/I is probably a PMSI 72 3. Purchase-Money Priority a. U.C.C. § 9-317(e): if a person files a F/S for a PMSI before or within 20 days after the debtor receives delivery, the S/I takes priority over the rights of a lien creditor, which arise between the time the S/I attaches and the time of filing b. Bank filed within 20 days after delivery i. G got delivery on 4/6 ii. Bank delivered the application for COT on 4/25 1. U.C.C. § 9-317 cmt. 8: compliance with a COT statute is equivalent to the filing of a F/S c. Thus, Bank has priority over the bankruptcy trustee 4. Bank did not violate the automatic stay a. 11 U.S.C. § 362(b)(3): bankruptcy petition does not operate as a stay to maintain perfection to the extent the trustee’s rights and powers are subject to such perfection under § 546(b) b. 11 U.S.C. § 546(b)(1)(A): the trustee’s rights and powers are subject to any law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection XXIV. Assignment 31: Trustees in Bankruptcy Against Secured Creditors: Preferences a. General Priority. Generally, a S/P has priority over a bankruptcy trustee if the S/P perfected her S/I before the bankruptcy petition was filed. See U.C.C. § 9-317(a)(2)(A); 11 U.S.C. § 544(a)(1). b. Voidable Preference Analysis Framework i. STEP 1: When was the transfer made? 1. Transfer Occurs on Attachment if Perfected in 30 Days. A transfer is made on attachment if the transfer is perfected within 30 days of attachment. 11 U.S.C. § 547(e)(2)(A). a. Attachment. A S/I is enforceable (i.e., attaches) if: i. (1) value has been given; ii. (2) D has rights in the collateral; and iii. (3)(A) D has authenticated a S/I describing the collateral. U.C.C. § 9-203(b). b. When Last Requirement Met. Attachment occurs when the last of these requirements is met. c. Perfection. A S/I is perfected if it has attached and all of the applicable requirements for perfection . . . have been satisfied. U.C.C. § 9-308(a). 2. Transfer Occurs on Perfection if Perfected After 30 Days. A transfer is made on perfection if the transfer is perfected after 30 days after attachment. 11 U.S.C. § 547(e)(2)(B). ii. STEP 2: Is this a voidable preference? The elements of a voidable preference are the following. See 11 U.S.C. § 547(b). 1. Transfer. 11 U.S.C. § 547(b). “Transfer” means . . . the retention of title as a security interest. 11 U.S.C. § 101(54)(B). 2. To or for the benefit of a creditor. 11 U.S.C. § 547(b)(1). A S/I is always for the benefit of a S/P (a creditor). 3. For or on account of a pre-existing debt. 11 U.S.C. § 547(b)(2). 4. Made while D was insolvent. 11 U.S.C. § 547(b)(3). a. Insolvent Defined. “Insolvent” means . . . the sum of [the debtor’s] debts is greater than all of [the debtor’s] property.” 11 U.S.C. § 101(32)(A). 73 b. 5. 6. iii. STEP 3: 1. 2. 3. Presumption of Insolvency. The debtor is presumed . . . insolvent on and during the 90 days immediately preceding the date of the filing of the petition. 11 U.S.C. § 547(f). Made within the preference period a. 90 days. By default, the preference period is the 90 days before the bankruptcy petition is filed. 11 U.S.C. § 547(b)(4)(A). b. 1 year. If the creditor was an insider, the preference period is the year before the bankruptcy petition is filed. 11 U.S.C. § 547(b)(4)(B). i. Insider. If the debtor is a corporation, [“insider” includes a] relative of a general partner, director, officer, or person in control of the debtor. 11 U.S.C. § 101(31)(B)(vi). Enables S/P to receive more than she would receive if the case were under Chapter 7 and the transfer was not made. 11 U.S.C. § 547(b)(5). Since S/Ps get their claim paid and unsecured creditors share any residual amount prorata, a S/P will always be better off w/ the S/I (transfer). Does the transfer fall into an exception? Contemporaneous Exchange. The trustee may not avoid a transfer that was a. (A) intended by D and S/P to be a contemporaneous exchange for new value give to the D; and i. Secured Loans—Always Met. Secured loans are always intended to be a contemporaneous exchange. b. (B) in fact a substantially contemporaneous exchange. 11 U.S.C. § 547(c)(1). i. Delayed Perfection Not Substantially Contemporaneous. Some courts hold that a transfer is never substantially contemporaneous if perfection is delayed by more than 30 days. See 11 U.S.C. § 547(e)(2)(A), (B) (effect of delayed perfection on the date of transfer). PMSI Exception. The trustee may not avoid a transfer that creates a S/I in property acquired by the debtor a. (A) to the extent such S/I secures new value that was i. (i) given at or after the signing of a S/A describing the collateral; ii. (ii) given by or on behalf of the S/P; iii. (iii) given to enable the D to acquire such property; iv. (iv) in fact so used by the D to acquire such property; and b. (B) that is perfected on or before 30 days after D receives possession of such property. 11 U.S.C. § 547(c)(3). After-Acquired Inventory and Accounts a. General Non-Avoidance. Generally, a trustee may not avoid a transfer that creates a perfected S/I in inventory or a receivable or the proceeds of either. 11 U.S.C. § 547(c)(5). b. Avoidable Transfer. A trustee can avoid the amount of a transfer in this formula: X – Y i. X = [loan balance 90 days before bankruptcy] – [inventory value 90 days before bankruptcy] 1. If negative. If this variable is negative, the trustee cannot avoid any S/I in the property acq’d w/in 90 days of bankruptcy. ii. Y = [loan balance on the date of bankruptcy filing] – [inventory value on the date of bankruptcy filing] 1. If negative. If this variable is negative, use zero in the formula. 74 c. Problem 31.1. W filed bankruptcy on 9/1. Which of the following are avoidable preferences? i. a. On 8/15, W borrowed from FB. W executed a S/A and F/S covering equipment. On 8/16, FB filed the F/S. 1. STEP 1: When was the transfer made? a. 11 U.S.C. § 547(e)(2)(A): a transfer is made on attachment if the transfer is perfected within 30 days of attachment b. Attachment i. U.C.C. § 9-203(b): S/I attaches when: 1. (1) value has been given a. Here, the loan was made on 8/15 2. (2) D has rights in the collateral a. Here, D already owned the equipment 3. (3)(A): D signed a S/A describing the collateral a. Here, D signed the S/A on 8/15 ii. Thus, attachment occurred on 8/15 c. Perfection i. Here, W filed a F/S on 8/16 ii. Thus, perfection occurred on 8/16 d. W perfected within 30 days of attachment e. Thus, the transfer occurred on 8/15 2. STEP 2: Is this a voidable preference? a. The “transfer,” “to or for the benefit of a creditor,” and “enables S/P to receive more than she would have if the transfer wasn’t made” elements are always met b. 11 U.S.C. § 547(b)(2): for or on account of a pre-existing debt i. Here, the transfer occurred on the same day the loan was made ii. Thus, the debt was not pre-existing and the transfer is not avoidable c. 11 U.S.C. § 547(b)(3): made while D was insolvent i. 11 U.S.C. § 547(f): D is presumed insolvent w/in 90 days before the bankruptcy petition is filed ii. Thus, W is presumed insolvent when the transfer occurred d. 11 U.S.C. § 547(b)(4): made during the preference period i. 11 U.S.C. § 547(b)(4)(A): the preference period = 90 days ii. Here, the transfer was made within 90 days of the bankruptcy petition 3. What if W signed the S/A on 8/16? a. STEP 1: When was the transfer made? i. W signing the S/A would be the last element in U.C.C. § 9203(b) to be satisfied for attachment ii. 11 U.S.C. § 9-547(e)(2)(A): W filed the F/S w/in 90 days of attachment iii. Thus, the transfer occurred on 8/16 b. STEP 2: Is this a voidable preference? i. 11 U.S.C. § 547(b)(2): here, the transfer is on account of a pre-existing debt 1. The loan was made 8/15 2. The transfer occurred on 8/16 c. STEP 3: Does the transfer fall into an exception? i. 11 U.S.C. § 547(c)(1): the trustee may not avoid a transfer that was 75 1. (A) intended by D and S/P to be a contemporaneous exchange for new value give to the D; and a. Here, a secured loan is always intended to be contemporaneous 2. (B) in fact a substantially contemporaneous exchange a. Here, the loan and the transfer occurred within 1 day b. Thus, this is probably substantially contemporaneous ii. This exception is met iii. The transfer is not avoidable ii. b. On 2/7, W borrowed from SB on an unsecured one-year note. On 7/11, W signed a S/A granting SB a S/I in equipment. SB immediately filed a F/S. 1. STEP 1: When was the transfer made? a. 11 U.S.C. § 547(e)(2)(A): a transfer is made on attachment if the transfer is perfected within 30 days of attachment b. Attachment i. U.C.C. § 9-203(b): S/I attaches when: 1. (1) value has been given a. Here, the loan was made on 2/7 2. (2) D has rights in the collateral a. Here, D already owned the equipment 3. (3)(A): D signed a S/A describing the collateral a. Here, D signed the S/A on 7/11 ii. Thus, attachment occurred on 7/11 c. Perfection i. Here, W filed a F/S on 7/11 ii. Thus, perfection occurred on 7/11 d. W perfected within 30 days of attachment e. Thus, the transfer occurred on 7/11 2. STEP 2: Is this a voidable preference? a. The “transfer,” “to or for the benefit of a creditor,” and “enables S/P to receive more than she would have if the transfer wasn’t made” elements are always met b. 11 U.S.C. § 547(b)(2): for or on account of a pre-existing debt i. Here, the loan was made on 2/7 ii. Here, the transfer occurred on 7/11 iii. Thus, the debt was for a pre-existing debt c. 11 U.S.C. § 547(b)(3): made while D was insolvent i. 11 U.S.C. § 547(f): D is presumed insolvent w/in 90 days before the bankruptcy petition is filed ii. Thus, W is presumed insolvent when the transfer occurred d. 11 U.S.C. § 547(b)(4): made during the preference period i. 11 U.S.C. § 547(b)(4)(A): the preference period = 90 days ii. Here, the transfer was made within 90 days of the bankruptcy petition e. Since the transfer meets all the elements, the transfer is avoidable 3. STEP 3: Does the transfer fall into an exception? a. 11 U.S.C. § 547(c)(1): the trustee may not avoid a transfer that was i. (A) intended by D and S/P to be a contemporaneous exchange for new value give to the D; and 1. Here, the loan was originally unsecured 76 2. The transfer was probably not intended to be a contemporaneous exchange for value ii. (B) in fact a substantially contemporaneous exchange 1. Here, the loan and the transfer occurred 5 months apart 2. Thus, this is probably not substantially contemporaneous iii. This exception does not apply b. Thus, the transfer is avoidable iii. c. On 2/7, W borrowed from TB on a secured one-year note. W singed a F/S, but was lost. On 7/11, the U.C.C. filing office received the F/S and accepted the filing. 1. STEP 1: When was the transfer made? a. 11 U.S.C. § 547(e)(2)(B): a transfer is made on perfection if the transfer is perfected after 30 days after attachment b. Attachment i. U.C.C. § 9-203(b): S/I attaches when: 1. (1) value has been given a. Here, the loan was made on 2/7 2. (2) D has rights in the collateral a. Here, D already owned the equipment 3. (3)(A): D signed a S/A describing the collateral a. Here, D signed the S/A on 2/7 ii. Thus, attachment occurred on 2/7 c. Perfection i. Here, W filed a F/S on 7/11 ii. Thus, perfection occurred on 7/11 d. W did not perfect within 30 days of attachment e. Thus, the transfer occurred on 7/11 2. STEP 2: Is this a voidable preference? a. The “transfer,” “to or for the benefit of a creditor,” and “enables S/P to receive more than she would have if the transfer wasn’t made” elements are always met b. 11 U.S.C. § 547(b)(2): for or on account of a pre-existing debt i. Here, the loan was made on 2/7 ii. Here, the transfer occurred on 7/11 iii. Thus, the debt was for a pre-existing debt c. 11 U.S.C. § 547(b)(3): made while D was insolvent i. 11 U.S.C. § 547(f): D is presumed insolvent w/in 90 days before the bankruptcy petition is filed ii. Thus, W is presumed insolvent when the transfer occurred d. 11 U.S.C. § 547(b)(4): made during the preference period i. 11 U.S.C. § 547(b)(4)(A): the preference period = 90 days ii. Here, the transfer was made within 90 days of the bankruptcy petition e. Since the transfer meets all the elements, the transfer is avoidable 3. STEP 3: Does the transfer fall into an exception? a. 11 U.S.C. § 547(c)(1): the trustee may not avoid a transfer that was i. (A) intended by D and S/P to be a contemporaneous exchange for new value give to the D; and 1. Here, a secured loan is always intended to be contemporaneous ii. (B) in fact a substantially contemporaneous exchange 77 1. Here, the loan and the transfer occurred 5 months apart 2. Thus, this is probably not substantially contemporaneous b. The exception is not met 4. The transfer is avoidable iv. d. On 7/21, W purchased equipment from EMS. W financed the purchase w/ a loan from FB. W signed a p/note, a S/A and a F/S. FB issued the check on 7/21. EMS delivered the equipment to W the following day. FB filed the F/S on 8/4. 1. STEP 1: When was the transfer made? a. 11 U.S.C. § 547(e)(2)(A): a transfer is made on attachment if the transfer is perfected within 30 days of attachment b. Attachment and Perfection i. U.C.C. § 9-203(b): S/I attaches when: 1. (1) value has been given a. Here, the loan was made on 2/7 2. (3)(A): D signed a S/A describing the collateral a. Here, D signed the S/A on 2/7 3. (2) D has rights in the collateral a. When did title pass? See U.C.C. Article 2 b. Title passes no later than delivery c. Title may have passed on 7/21 or 7/22 ii. Scenario 1: if title passed on 7/21: 1. Attachment occurred on 7/21 2. F/S was filed on 7/21 3. W perfected w/in 30 days of attachment 4. Thus, the transfer occurred on 7/21 iii. Scenario 2: if title passed on 7/22 1. Attachment occurred on 7/22 2. F/S was filed on 7/21 3. W perfected w/in 30 days of attachment 4. Thus, the transfer occurred on 7/22 2. STEP 2: Is this a voidable preference? a. Scenario 1 i. The “transfer,” “to or for the benefit of a creditor,” and “enables S/P to receive more than she would have if the transfer wasn’t made” elements are always met ii. 11 U.S.C. § 547(b)(2): for or on account of a pre-existing debt 1. Here, the loan was made on 7/21 2. Here, the transfer occurred on 7/21 3. Thus, the debt was not for a pre-existing debt iii. 11 U.S.C. § 547(b)(3): made while D was insolvent 1. 11 U.S.C. § 547(f): D is presumed insolvent w/in 90 days before the bankruptcy petition is filed 2. Thus, W is presumed insolvent when the transfer occurred iv. 11 U.S.C. § 547(b)(4): made during the preference period 1. 11 U.S.C. § 547(b)(4)(A): the preference period = 90 days 2. Here, the transfer was made within 90 days of the bankruptcy petition v. The transfer is not avoidable b. Scenario 2 78 i. The “transfer,” “to or for the benefit of a creditor,” and “enables S/P to receive more than she would have if the transfer wasn’t made” elements are always met ii. 11 U.S.C. § 547(b)(2): for or on account of a pre-existing debt 1. Here, the loan was made on 7/21 2. Here, the transfer occurred on 7/22 3. Thus, the debt was for a pre-existing debt iii. 11 U.S.C. § 547(b)(3): made while D was insolvent 1. 11 U.S.C. § 547(f): D is presumed insolvent w/in 90 days before the bankruptcy petition is filed 2. Thus, W is presumed insolvent when the transfer occurred iv. 11 U.S.C. § 547(b)(4): made during the preference period 1. 11 U.S.C. § 547(b)(4)(A): the preference period = 90 days 2. Here, the transfer was made within 90 days of the bankruptcy petition v. All the elements are met vi. The transfer is avoidable 3. STEP 3: Does the transfer fall into an exception? a. 11 U.S.C. § 547(c)(1): the trustee may not avoid a transfer that was i. (A) intended by D and S/P to be a contemporaneous exchange for new value give to the D; and 1. Here, a secured loan is always intended to be contemporaneous ii. (B) in fact a substantially contemporaneous exchange 1. Here, the loan and the transfer occurred within 1 day 2. Thus, this is probably substantially contemporaneous b. This exception is met v. What result if you change the delivery date to 8/25 and change the F/S filing date to 8/30? 1. Scenario 1: attachment occurs on 7/21 a. STEP 1: When was the transfer made? i. 11 U.S.C. § 547(e)(2)(B): a transfer is made on perfection if the transfer is perfected after 30 days after attachment ii. S/I attached on 7/21 iii. F/S was filed on 8/30 iv. W perfected w/in 30 days of attachment v. Thus, the transfer occurred on 8/30 b. STEP 2: Is this a voidable preference? i. The “transfer,” “to or for the benefit of a creditor,” and “enables S/P to receive more than she would have if the transfer wasn’t made” elements are always met ii. 11 U.S.C. § 547(b)(2): for or on account of a pre-existing debt 1. Here, the loan was made on 7/21 2. Here, the transfer occurred on 8/30 3. Thus, the debt was for a pre-existing debt iii. 11 U.S.C. § 547(b)(3): made while D was insolvent 1. 11 U.S.C. § 547(f): D is presumed insolvent w/in 90 days before the bankruptcy petition is filed 2. Thus, W is presumed insolvent when the transfer occurred iv. 11 U.S.C. § 547(b)(4): made during the preference period 79 1. 2. 11 U.S.C. § 547(b)(4)(A): the preference period = 90 days 2. Here, the transfer was made within 90 days of the bankruptcy petition v. All the elements are met vi. The transfer is avoidable c. STEP 3: Does the transfer fall into an exception? i. 11 U.S.C. § 547(c)(1): the trustee may not avoid a transfer that was 1. (A) intended by D and S/P to be a contemporaneous exchange for new value give to the D; and a. Here, a secured loan is always intended to be contemporaneous 2. (B) in fact a substantially contemporaneous exchange a. Here, there was a 39 delay in perfection b. Some courts hold that a transfer is never substantially contemporaneous if there’s a delay in perfection of more than 30 days 3. The exception is not met ii. 11 U.S.C. § 547(c)(3): the trustee may not avoid a transfer that creates a S/I in property acquired by the debtor 1. (A) to the extent such S/I secures new value that was a. (i) given at or after the signing of a S/A describing the collateral; i. Here, the loan was made on 7/21 ii. Here, the S/A was signed on 7/21 b. (ii) given by or on behalf of the S/P; i. Always the case w/ S/Is c. (iii) given to enable the D to acquire such property; i. Here, the loan was made to finance the purchase of equipment d. (iv) in fact so used by the D to acquire such property; and i. Here, D used the money to buy the equipment 2. (B) that is perfected on or before 30 days after D receives possession of such property a. Here, F/S was filed on 8/30 b. Here, W received delivery on 8/25 3. This exception is met d. The transfer is not avoidable Scenario 2: attachment occurs on 8/25 a. STEP 1: When was the transfer made? i. 11 U.S.C. § 547(e)(2)(A): a transfer is made on attachment if the transfer is perfected within 30 days of attachment ii. S/I attached on 8/25 iii. F/S was filed on 7/21 iv. W perfected w/in 30 days of attachment v. Thus, the transfer occurred on 8/25 b. STEP 2: Is this a voidable preference? 80 c. i. The “transfer,” “to or for the benefit of a creditor,” and “enables S/P to receive more than she would have if the transfer wasn’t made” elements are always met ii. 11 U.S.C. § 547(b)(2): for or on account of a pre-existing debt 1. Here, the loan was made on 7/21 2. Here, the transfer occurred on 8/25 3. Thus, the debt was for a pre-existing debt iii. 11 U.S.C. § 547(b)(3): made while D was insolvent 1. 11 U.S.C. § 547(f): D is presumed insolvent w/in 90 days before the bankruptcy petition is filed 2. Thus, W is presumed insolvent when the transfer occurred iv. 11 U.S.C. § 547(b)(4): made during the preference period 1. 11 U.S.C. § 547(b)(4)(A): the preference period = 90 days 2. Here, the transfer was made within 90 days of the bankruptcy petition v. All the elements are met vi. The transfer is avoidable STEP 3: Does the transfer fall into an exception? i. 11 U.S.C. § 547(c)(1): the trustee may not avoid a transfer that was 1. (A) intended by D and S/P to be a contemporaneous exchange for new value give to the D; and a. Here, a secured loan is always intended to be contemporaneous 2. (B) in fact a substantially contemporaneous exchange a. Here, there was a 34 delay in perfection b. Some courts hold that a transfer is never substantially contemporaneous if there’s a delay in perfection of more than 30 days ii. 11 U.S.C. § 547(c)(3): the trustee may not avoid a transfer that creates a S/I in property acquired by the debtor 1. (A) to the extent such S/I secures new value that was a. (i) given at or after the signing of a S/A describing the collateral; i. Here, the loan was made on 7/21 ii. Here, the S/A was signed on 7/21 b. (ii) given by or on behalf of the S/P; i. Always the case w/ S/Is c. (iii) given to enable the D to acquire such property; i. Here, the loan was made to finance the purchase of equipment d. (iv) in fact so used by the D to acquire such property; and i. Here, D used the money to buy the equipment 2. (B) that is perfected on or before 30 days after D receives possession of such property a. Here, F/S was filed on 8/30 b. Here, W received delivery on 8/25 81 3. This exception is met d. The transfer is not avoidable vi. e. Would the result be different if, on the facts of d, FB had issued the check to W and W used other funds to purchase the equipment? 1. Yes 2. 11 U.S.C. § 547(c)(3): the trustee may not avoid a transfer that creates a S/I in property acquired by the debtor a. (A) to the extent such S/I secures new value that was i. (i) given at or after the signing of a S/A describing the collateral; ii. (ii) given by or on behalf of the S/P; iii. (iii) given to enable the D to acquire such property; iv. (iv) in fact so used by the D to acquire such property; and b. (B) that is perfected on or before 30 days after D receives possession of such property 3. Since the check was not “in fact so used,” the exception does not apply 4. W’s only hope is to argue a contemporaneous exchange under 11 U.S.C. § 547(c)(1) vii. f. On 3/9 W borrowed from E, the wife of W CEO, M. The F/S was filed 4/12. What do you advise? 1. STEP 1: When was the transfer made? a. 11 U.S.C. § 547(e)(2)(A): a transfer is made on attachment if the transfer is perfected within 30 days of attachment b. Attachment i. U.C.C. § 9-203(b): S/I attaches when: 1. (1) value has been given a. Here, the loan was made on 3/9 2. (2) D has rights in the collateral a. Here, this is assumed 3. (3)(A): D signed a S/A describing the collateral a. Here, D signed the S/A on 4/12 ii. Thus, attachment occurred on 4/12 c. Perfection i. Here, W filed a F/S on 4/12 ii. Thus, perfection occurred on 4/12 d. E perfected within 30 days of attachment e. Thus, the transfer occurred on 4/12 2. STEP 2: Is this a voidable preference? a. The “transfer,” “to or for the benefit of a creditor,” and “enables S/P to receive more than she would have if the transfer wasn’t made” elements are always met b. 11 U.S.C. § 547(b)(2): for or on account of a pre-existing debt i. Here, the loan was made on 3/9 ii. Here, the transfer occurred on 4/12 iii. Thus, the debt was for a pre-existing debt c. 11 U.S.C. § 547(b)(3): made while D was insolvent i. The transfer was made more than 90 days before the bankruptcy petition was filed ii. Thus, there is no presumption of insolvency under 11 U.S.C. § 547(f) iii. The trustee would have to prove insolvency on 4/12 d. 11 U.S.C. § 547(b)(4): made during the preference period 82 d. e. i. 11 U.S.C. § 547(b)(4)(B): If S/P is an insider, the preference period is the year before the bankruptcy petition is filed 1. 11 U.S.C. § 101(31)(B)(vi): If the debtor is a corporation, [“insider” includes a] relative of a . . . officer . . . of the debtor 2. Here, E is the wife of the debtor’s CEO 3. Thus, the S/P is an “insider ii. Thus, the preference period is 1 year iii. Here, the transfer was made within 1 year of the bankruptcy petition e. Since the transfer meets all the elements, the transfer is avoidable 3. STEP 3: Does the transfer fall into an exception? a. 11 U.S.C. § 547(c)(1): the trustee may not avoid a transfer that was i. (A) intended by D and S/P to be a contemporaneous exchange for new value give to the D; and 1. Here, a secured loan is always intended to be contemporaneous ii. (B) in fact a substantially contemporaneous exchange 1. Here, there was a 34 delay in perfection 2. Some courts hold that a transfer is never substantially contemporaneous if there’s a delay in perfection of more than 30 days iii. The exception is not met b. The transfer is avoidable Problem 31.2. You won a verdict against M. The next day, four creditors of M filed F/S. The court entered judgment and you are entitled to a writ of execution. What’s your next move? i. 11 U.S.C. § 303: the creditors may force M into an involuntary bankruptcy ii. Then, you can ask the trustee to avoid those four S/Is as avoidable preferences iii. Does this do you any good? 1. Not really 2. After the trustee avoids the S/Is, the S/Ps are unsecured creditors 3. As an unsecured creditor, you share any residual proceeds pro rata with other unsecured creditors iv. Threaten the creditors for an assignment of their S/Is 1. Tell them if they don’t “give you a share in the deal,” you’ll force an involuntary bankruptcy and have the trustee avoid their S/Is Problem 31.3. S holds a perfected S/I in the inventory of GL. On 6/1, the outstanding balance on the loan was $2,500,000 and the value of the inventory was $1,200,000. When GL filed bankruptcy, the loan balance was $1,500,000 and the inventory was $700,000. Every item in inventory at the tie of bankruptcy was acquired by GL on unsecured credit after 6/1. Does the trustee have any rights against S? i. The trustee cannot avoid the original S/I b/c it was perfected before the preference period ii. Can the trustee avoid S/Is in inventory acquired between 6/1 and 8/29 (i.e., within 90 days of the filing of the bankruptcy petition)? 6/1 8/29 ------|----------------------------------------|-------------------------------------------------------|-------S/I granted Loan balance = $2.5M Bankruptcy Loan made Inventory value = $1.2M Loan balance = $1.5M S/A in inventory Inventory value = $700k After acq’d prop. clause F/S filed 83 1. f. STEP 1: When was the transfer made? a. 11 U.S.C. § 547(e)(2)(A): a transfer is made on attachment if the transfer is perfected within 30 days of attachment b. Attachment i. U.C.C. § 9-203(b): S/I attaches when: 1. (1) value has been given a. Here, the loan was made before 6/1 2. (3)(A): D signed a S/A describing the collateral a. Here, GL signed the S/A before 6/1 3. (2) D has rights in the collateral a. Here, GL acquired rights in the inventory (acquired btwn 6/1 and 8/29) every time he acquired new inventory ii. Thus, attachment occurred as he acquired new inventory c. Perfection i. Here, GL filed a F/S before 6/1 ii. Thus, perfection occurred immediately when the S/I attached d. E perfected within 30 days of attachment e. Thus, the transfer occurred when GL received the inventory (btwn 6/1 and 8/29) f. 11 U.S.C. § 547(e)(3): to be sure, a transfer is not made until D acquires rights in the property transferred 2. STEP 2: Is this a voidable preference? a. Yes b. See analysis outlined above 3. STEP 3: Does the transfer fall into an exception? a. 11 U.S.C. § 547(c)(5): a trustee can avoid the amount of: X – Y i. X = [loan balance 90 days before bankruptcy] – [inventory value 90 days before bankruptcy] 1. X = $2.5M – $1.2M = $1.3M ii. Y = [loan balance on the date of bankruptcy filing] – [inventory value on the date of bankruptcy filing] 1. Y = $1.5M – $700k = $800k iii. $1.3M – $800k = $500k iv. The trustee can avoid $500k of the $1.5M claim b. 11 U.S.C. § 506(a)(1): an allowed claim of a S/P is a secured claim to the extent of the FMV of the property, and is unsecured for any remaining value c. The $500k avoided amount becomes unsecured i. $700k secured claim – $500k avoided = $200k secured claim ii. $800k unsecured claim + $500k avoided = $1.3M unsecured claim Problem 31.4. Your firm has been lead counsel in a class action against a large, public company for race and gender discrimination. You settled for $247 million to the class and $33 million to the firm in fees. Defendant’s checks were deposited and cleared. Is it time to celebrate? i. If the defendant files bankruptcy: 1. Cash payment is a transfer 2. The payment is for the benefit of creditors (your firm and your client) 3. The payment is on account of a pre-existing debt (the judgment) 4. There is a presumption of insolvency when the transfer was made 5. The transfer is made w/in the preference period 6. The transfer enabled creditors to receive more than they would have without the transfer 84 ii. Thus, the transfer is avoidable iii. Bye bye $33 million in fees! XXV. Assignment 32: Secured Creditors Against Secured Creditors: The Basics a. First to File or Perfect. As between conflicting S/Is, the first to file or perfect has priority. U.C.C. § 9-322(a)(1). i. Subordination Allowed. Parties can privately agree to subordinate their interests. U.C.C. § 9-339. b. Priority in Deposit Accounts. A S/I held by a S/P having control of the deposit account has priority over a conflicting S/I held by a S/P that does not have control. U.C.C. § 9-327(1). c. Priority in After-Acquired Property i. Priority in the Double-Debtor Problem. A S/I created by a debtor is subordinate to a S/I in the same collateral created by other person if: 1. (1) D acquired the collateral subject to S/I created by the other person; 2. (2) the S/I created by the other person was perfected when the D acquired the collateral; and 3. (3) there is no period thereafter when the S/I is unperfected. U.C.C. § 9-325(a). d. Priority of Future Advances i. General Rule: First to File or Perfect. U.C.C. § 9-322(a). ii. Rare Exception: NOT ON THE EXAM. Perfection of the S/I dates from the time an advance is made if the S/I secures an advance that 1. (1)(A) is made while the S/I is perfected under § 9-309 when it attaches (referring to PMSI in consumer goods), and 2. (2) is not made pursuant to a commitment entered into before or while the S/I is perfected by a method other than § 9-309. U.C.C. § 9-323(a). e. PMSI: “Superpriority” i. PMSI in Inventory. U.C.C. § 9-324(b). 1. Priority over Certain S/Is. [If certain requirements are met,] a perfected PMSI in inventory has priority over a conflicting S/I in: a. The same inventory, b. Chattel paper or an instrument constituting proceeds of the inventory, c. Proceeds of the chattel paper, if so provided in § 9-330, and d. Except as otherwise provided in § 9-327, identifiable cash proceeds of the inventory to the extent the identifiable cash proceeds are received on or before the delivery of the inventory to the buyer. 2. Requirements for Priority. A perfected PMSI in inventory has priority . . . if: a. (1) the PMSI is perfected when the D receives possession of the inventory; b. (2) the purchase-money S/P sends an authenticated notification to the holder of the conflicting S/I; c. (3) the holder of the conflicting S/I receives the notification w/in 5 years before the D receives possession of the inventory; and d. (4) the notification states that the person sending the notification has or expects to acquire a PMSI in inventory of the D and describes the inventory. ii. PMSI in Proceeds. A PMSI in identifiable proceeds has priority, if the PMSI is perfected when the D receives possession of the collateral or w/in 20 days thereafter. U.C.C. § 9324(a). iii. PMSI in Non-Inventory Goods. A PMSI in goods other than inventory has priority over a conflicting S/I in the same goods. U.C.C. § 9-324(a). f. Problem 32.1. The facts are illustrated below. Who has priority? 85 8/1 8/5 8/7 8/10 --|----------------------|----------------------------------|-----------------------------------| Bank 1 Bank 2 Lien Creditor Bank 1 F/S in equip. Makes loan Levies Makes loan S/A; F/S in equip. S/A – equip. i. Bank 1 vs. Lien Creditor 1. Priority Battle: S/P vs. Lien Creditor 2. U.C.C. § 9-317(a)(2)(A): a S/P has priority over a lien creditor if the S/I is perfected before the unsecured creditor levies on the property 3. Here, Lien Creditor levied on 8/7 4. Here, Bank 1 perfected on 8/10 a. U.C.C. § 9-308(a): a S/I is perfected if it has attached and all requirements for perfection have been satisfied b. Requirements for Perfection i. U.C.C. § 9-310: perfect goods by filing ii. Bank 1 filed F/S on 8/1 c. Requirements for Attachment i. U.C.C. § 9-203(b): a S/I attaches if: 1. (1) value is given, 2. (2) D has rights in the collateral, and 3. (3)(A) D signed a S/A describing the collateral ii. Under (2), D already owned the equipment iii. (1) and (3) occurred on 8/10 iv. Thus, Bank 1’s S/I attached on 8/10 d. Thus, Bank 1’s S/I perfected on 8/10 5. Thus, Lien Creditor has priority ii. Bank 2 vs. Lien Creditor 1. Priority Battle: S/P vs. Lien Creditor 2. U.C.C. § 9-317(a)(2)(A): a S/P has priority over a lien creditor if the S/I is perfected before the unsecured creditor levies on the property 3. Here, Lien Creditor levied on 8/7 4. Here, Bank 2 perfected on 8/5 a. U.C.C. § 9-308(a): a S/I is perfected if it has attached and all requirements for perfection have been satisfied b. Requirements for Perfection i. U.C.C. § 9-310: perfect goods by filing ii. Bank 2 filed F/S on 8/5 c. Requirements for Attachment i. U.C.C. § 9-203(b): a S/I attaches if: 1. (1) value is given, 2. (2) D has rights in the collateral, and 3. (3)(A) D signed a S/A describing the collateral ii. Under (2), D already owned the equipment iii. (1) and (3) occurred on 8/5 iv. Thus, Bank 2’s S/I attached on 8/5 d. Thus, Bank 2’s S/I perfected on 8/5 5. Bank 2 has priority iii. Bank 1 vs. Bank 2 1. Priority Battle: S/P vs. S/P 2. U.C.C. § 9-322(a)(1): 1st to file or perfect wins 3. Here, Bank 1 filed 8/1 4. Here, Bank 2 filed 8/5 86 5. Thus, Bank 1 has priority iv. This is a circular priority problem Bank 1 priority priority Lien Creditor Bank 2 priority g. 1. 2. Problem 32.2 No clear answer who wins NO CIRCULAR PRIORITY QUESTIONS WILL BE ON THE EXAM 3/21 7/21 8/21 11/4 --|----------------------|----------------------|-----------------------------------|--------CNB loans FNB loans CNB loans FA sells equip. to PU for $750k $1M to PU $1.5M to FA $2.5M to FA FA deposits the $750k proceeds S/I in equip. S/I in equip. S/I in equip. in a CNB bank account S/A, a/a/p/c S/A, a/a/p/c S/A, a/a/p/c F/S F/S F/S i. a. The facts are illustrated above. Between CNB and FNB who has priority? 1. When FA sells the equipment to PU: a. U.C.C. § 9-315(a)(1): a S/I continues in collateral notwithstanding sale unless the S/P authorized the disposition free of the S/I i. Thus, FNB and CNB’s S/I follows the collateral in PU’s hands b. U.C.C. § 9-507(a): a filed F/S remains effective w/ respect to collateral that is sold i. Thus, FNB and CNB’s F/S remain effective c. S/Ps’ SI i. FNB: original collateral 1. S/I in FA’s equipment, sold to PU ii. CNB: original collateral 1. S/I in FA’s equipment, sold to PU iii. CNB: after-acquired collateral 1. S/I in PU’s after-acquired equipment 2. Priority a. U.C.C. § 9-325(a): a S/I created by a debtor is subordinate to a S/I in the same collateral created by other person if: i. (1) D acquired the collateral subject to S/I created by the other person; ii. (2) the S/I created by the other person was perfected when the D acquired the collateral; and iii. (3) there is no period thereafter when the S/I is unperfected b. Application: Here, i. (1) PU acquired the equipment subject to FNB’s S/I ii. (2) FNB’s S/I was perfected when PU acquired the equipment iii. (3) there was no period after PU’s acquisition of the property when FNB’s S/I was unperfected c. Thus, FNB has priority over CNB ii. b. When FA opened the CNB bank account, FA granted a S/I to CNB. Between CNB and FNB, who has priority? 1. When FA sold the equipment to PU for $750k (cash proceeds): 87 a. 2. Attachment i. U.C.C. §§ 9-203(f); 9-315(a)(2): a S/I attaches to any identifiable proceeds of collateral ii. Thus, FNB and CNB have an attached S/I in the $750 cash proceeds b. Perfection i. U.C.C. § 9-315(c): a S/I in proceeds is a perfected S/I [for 20 days] if the S/I in the original collateral was perfected ii. U.C.C. § 9-315(d)(2): a S/I in proceeds remains perfected after 20 days if the proceeds are identifiable cash proceeds iii. Assuming the proceeds are identifiable, FNB and CNB have a perfected S/I in the $750k cash proceeds c. Priority i. U.C.C. § 9-322(a)(1): first to file wins ii. Thus, FNB has priority over CNB in the $750k cash proceeds When PU deposited the $750k into its bank account with CNB (deposit account): a. FNB i. Attachment 1. U.C.C. §§ 9-203(f); 9-315(a)(2): a S/I attaches to any identifiable proceeds of collateral 2. Thus, FNB has an attached S/I in the deposit account ii. Perfection 1. U.C.C. § 9-315(c): a S/I in proceeds is a perfected S/I [for 20 days] if the S/I in the original collateral was perfected 2. U.C.C. § 9-315(d)(2): a S/I in proceeds remains perfected after 20 days if the proceeds are identifiable cash proceeds a. U.C.C. § 9-102(a)(9): “cash proceeds” means proceeds that are . . . deposit accounts . . . 3. Thus, FNB has a perfected S/I in the deposit account as cash proceeds b. CNB i. Attachment 1. U.C.C. § 9-203(b): a S/I attaches to collateral if: a. (1) value is given, b. (2) D has rights in the collateral, and c. (3)(A) D authenticated a S/A describing the collateral 2. Here: a. (1) CNB made the loan to PU on 3/21 b. (2) PU has rights in the deposit account c. (3) PU signed a S/A describing the deposit account 3. Thus, CNB has an attached S/I in the deposit account as original collateral ii. Perfection 1. U.C.C. §§ 9-312(b)(1), 9-314(a), 9-104: perfect a S/I in deposit accounts by control 2. U.C.C. § 9-104(a)(1): a S/P has control of a deposit account if the S/P is the bank with which the deposit account is maintained 88 3. 4. Here, CNB is the bank where the deposit account is maintained Thus, CNB has a perfected S/I in the deposit account as original collateral Priority i. U.C.C. § 9-327(1): S/P w/ control has priority over S/P without control ii. Thus, CNB has priority over FNB Problem 32.3. The facts of the original problem are illustrated below in black. c. h. --|-------------------------------------|------------------------------------|--------S/P #2 loans ONB loans ONB loans $ to George $400k to George $75k to George S/A: “dry cleaning (for dry-cleaning S/A: “computer” F/S: equipment equipment” equipment) F/S: equipment S/A i. Does ONB have to file a new F/S? 1. ONB’s S/A must describe the collateral (dry cleaning equipment) 2. U.C.C. § 9-502(a)(3): a F/S is sufficient only if it indicates the collateral covered by the F/S 3. ONB does not need a new F/S b/c the old one sufficiently describes the collateral ii. What if S/P #2 loans money to George, takes a S/I in the dry cleaning equipment, and files a F/S, as illustrated in red above? 1. Dry Cleaning Equipment a. Priority Battle: S/P vs. S/P b. U.C.C. § 9-322(a): first to file or perfect has priority c. ONB filed first i. ONB’s F/S describes the collateral as “equipment” ii. This is sufficient to describe dry cleaning equipment d. Thus, ONB has priority 2. $400k Advance a. Attachment i. ONB’s 1st S/A probably does not have a future advance clause ii. ONB’s New S/A: describe the future advance 1. “D grants a S/I in the dry cleaning equipment and the computer to secure the earlier $75k loan and the $400k loan” 2. “D grants a S/I in the dry cleaning equipment and the computer to secure all current and future debts owed to ONB” b. Perfection i. ONB doesn’t need to file another F/S b/c it is broad enough to cover the collateral c. Priority i. U.C.C. § 9-322(a): first to file or perfect has priority 1. U.C.C. § 9-323(a): perfection of the S/I dates from the time an advance is made if the S/I secures an advance that a. (1)(A) is made while the S/I is perfected under § 9-309 when it attaches (referring to PMSI in consumer goods), and 89 b. 3. i. j. k. (2) is not made pursuant to a commitment entered into before or while the S/I is perfected by a method other than § 9-309 2. This exception does not apply ii. Note: U.C.C. § 9-323 cmt. 3. Example 1 (last sentence) S/P #2’s options a. Loan enough to pay off ONB b. Ask ONB to subordinate future advances Problem 32.4 i. a. C loaned $1k to M, took a S/I in a boat, and filed a F/S. A month later, BCA loaned M $45k, took a S/I in the boat, and filed a F/S. M defaulted and BCA repossessed the boat. Will a $31k advance from C protect the boat from sale by BCA and prevent BCA from collecting? 1. Priority over the boat a. U.C.C. § 9-322(a): first to file or perfect has priority b. C filed before BCA c. Thus, C has priority over BCA 2. Priority over the $31k advance a. If there is no future advance clause in the original S/A, file a new S/A b. The S/A should provide that the $31k advance is secured by the boat c. U.C.C. § 9-323 cmt. 3. Example 1: “A would have priority if A’s April 1 advance was not made under the original agreement with the debtor, but was under a new agreement.” ii. b. Assume that C filed a F/S before BCA repossessed, but M had not authorized a S/A and C had not lent any money. Would the scheme work under these circumstances? 1. Yes 2. C would have priority b/c she filed first 3. Except for the rare exception in § 9-323(a) which does not apply here, once a S/P has priority, future advances also have priority 4. See U.C.C. § 9-323 cmt. 3. Example 1. Problem 32.5. How should BCA change the way it does business? i. U.C.C. § 9-339: parties can privately agree to subordinate their interests ii. E.g., “C will not give future advances against the boat and if she does, her interest in any such future advance will be subordinated to BCA” Problem 32.6. S currently operates as illustrated below. sell speakers S loan Dealers unsecured credit S/I in inventory S/A, F/S Inventory Lender i. a. How does S get a first S/I in the speakers? 1. Attachment a. U.C.C. § 9-203(b): a S/I attaches to collateral if: i. (1) value is given, ii. (2) D has rights in the collateral, and iii. (3)(A) D authenticated a S/A describing the collateral b. Here, S needs Dealers to sign a S/A i. (1) and (2) are already satisfied b/c she’s selling the speakers on credit 2. Perfection a. U.C.C. § 9-310: perfect S/I in inventory (goods) by filing a F/S 3. Priority 90 a. l. U.C.C. § 9-322(a): first to file or perfect has priority i. Here, the inventory lender already filed a F/S against Dealers’ inventory (including the speakers) ii. Thus, under this rule Inventory Lender has priority b. U.C.C. §9-324(b): a perfected PMSI in inventory has priority over a conflicting S/I in the same inventory . . . if: i. (1) the PMSI is perfected when the D receives possession of the inventory; ii. (2) the purchase-money S/P sends an authenticated notification to the holder of the conflicting S/I; iii. (3) the holder of the conflicting S/I receives the notification w/in 5 years before the D receives possession of the inventory; and iv. (4) the notification states that the person sending the notification has or expects to acquire a PMSI in inventory of the D and describes the inventory. c. Application i. S has a “seller’s PMSI” 1. S sold speakers on credit 2. S acquired a S/I in the speakers ii. U.C.C. § 9-324(b)(1): PMSI perfected on delivery 1. U.C.C. § 9-308(a): a S/I is perfected if it has attached and all perfection req’s are satisfied a. Since S will have already filed a F/S, she perfects on attachment 2. U.C.C. § 9-203(b): a S/I attaches to collateral if: a. (1) value is given, b. (2) D has rights in the collateral, and c. (3)(A) D authenticated a S/A describing the collateral 3. Have Dealer sign a S/A before delivery 4. On delivery, Dealer has rights in the collateral (i.e., title passes) and value is given (credit sale is made) 5. Note: unlike non-inventory PMSIs, there is no grace period iii. U.C.C. § 9-324(b)(2): notice to Inventory Lender 1. Search the U.C.C. records for a F/S in inventory 2. See U.C.C. § 9-324(c) (which S/Ps must be notified) iv. U.C.C. § 9-324(b)(3): Inventory Lender receives notice w/in 5 years before D receives possession 1. Send Inventory Lender a notification before the first delivery 2. S need not send another notification until 5 years later 3. Periodically check for new lenders v. U.C.C. § 9-324(b)(4): comply with content requirements ii. b. What problems do you foresee? 1. Inventory Lender’s S/A may provide that if Dealer grants a S/I in inventory to another, he is in default. S would give notice to Inventory Lender under U.C.C. § 9-324(b). Inventory Lender would declare Dealer in default, accelerate the obligation and repossess and sell the property. Problem 32.7. CNB is a $1M unsecured creditor of G. FNB holds a $5M S/I in all of G’s assets. A search report shows no filings against G. 91 i. a. Is there any way that FNB could have an effective F/S that doesn’t show up on an official search in the state in which G’s business is located? 1. Yes 2. CNB could be searching in the wrong state a. U.C.C. § 9-307(b)(1): if G is an individual, he is located at his principal residence b. G could have changed its location i. U.C.C. § 9-316(a)(2): S/I remains perfected until 4 months after a change in D’s location ii. CNB may be looking prematurely (w/in the 4 month window) 3. FNB may have filed under the wrong name a. What is the debtor’s correct legal name? b. Is the debtor an individual or organization? c. See U.C.C. § 9-503(a) (sufficiency of debtor’s name) 4. The Secretary of State may have wrongfully rejected FNB’s F/S (with the correct name) a. U.C.C. § 9-516(d): a wrongfully rejected F/S is effective, except against purchasers of the collateral who give value and reasonably rely upon the absence of the F/S b. Here, reliance by CNB is probably not reasonable considering that CNB has always considered FNB’s $5M loan as perfected 5. The Secretary of State may have improperly indexed the F/S a. U.C.C. § 9-517: an improperly indexed F/S is still effective ii. b. How can you find out if such a F/S exists, w/o shooting yourself in the foot? 1. Get G to authorize a F/S in all of G’s property, then file a F/S a. This gives you priority under the first-to-file rule 2. Call FNB and suggest there’s something wrong with their filing a. They will let you know if they filed a F/S 3. If FNB hasn’t filed, go ahead and make the loan 4. If you want to be extra-sure, withhold funding upon a finding that you have priority m. Hypothetical 3/1 4/1 5/1 --|----------------------------------|----------------------------------------|------------------------------| A’s S/I B’s S/I D sells inventory G owes D $100k Accounts, a/a/p/c Inventory, a/a/p/c to G on credit D defaults S/P, F/S S/A, F/S i. Between A and B, who has priority? 1. G’s obligation to pay D is an account a. U.C.C. § 9-102(a)(2): “account” means a right to payment of a monetary obligation for property that has been sold 2. A has a S/I in the account as original collateral a. Attachment i. U.C.C. § 9-203(b): a S/I attaches if: 1. (1) value is given, a. Here, A made a loan for the S/I 2. (2) D has rights in the collateral, a. Here, D has rights in the account 3. (3)(A) D authenticates a S/A describing the collateral a. Here, D signed a S/A b. Perfection i. U.C.C. § 9-313 cmt. 2: perfect a S/I in accounts by filing 92 ii. Here, A filed a F/S in accounts c. Thus, A has a perfected S/I in accounts as original collateral 3. B has a S/I in the account as proceeds a. U.C.C. § 9-102(a)(64)(C): “proceeds” means rights arising out of collateral b. Attachment i. U.C.C. § 9-315(a)(2): a S/I attaches to any identifiable proceeds of collateral c. Perfection i. U.C.C. § 9-315(c): a S/I in proceeds is a perfected S/I [for 20 days] if the S/I in the original collateral was perfected 1. Here, B’s S/I in inventory was perfected by filing a F/S ii. U.C.C. § 9-315(d)(1): a S/I in proceeds continues to be perfected after 20 days if: 1. (A) a filed F/S covers the original collateral a. Here, a filed F/S covered inventory 2. (B) the proceeds are collateral in which a S/I may be perfected by filing in the office where the F/S was filed a. Here, the F/S in inventory was filed in the Secretary of State’s office b. Here, the proceeds is an account, which can be perfected by filing in the same office 3. (C) the proceeds are not acquired with cash proceeds a. Here, the proceeds were acquired with inventory iii. Thus, B has a perfected interest in the account as proceeds 4. Priority a. Priority Battle: S/P vs. S/P b. U.C.C. § 9-322(a): first to file or perfect wins c. A filed first d. Thus, A has priority over B ii. What if instead, B takes a PMSI in inventory and meets the requirements in U.C.C. § 9324(b)? 1. B cannot take “superpriority” over A in the account 2. U.C.C. § 9-324(b): [if certain requirements are met,] a perfected PMSI in inventory has priority over a conflicting S/I in: a. The same inventory, b. Chattel paper or an instrument constituting proceeds of the inventory, c. Proceeds of the chattel paper, if so provided in § 9-330, and d. Except as otherwise provided in § 9-327, identifiable cash proceeds of the inventory to the extent the identifiable cash proceeds are received on or before the delivery of the inventory to the buyer XXVI. Assignment 33: Priority in Land and Fixtures a. General Rule: Lienholder on Real Property has Priority. Where no exception applies, an encumbrancer or owner of the underlying real property has priority over a S/I in fixtures. U.C.C. § 9-334(c). b. Exceptions i. First to File Fixture Filing. A perfected S/I in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if D has an interest of record in the real property or is in possession of the property and the S/I is perfected by a fixture filing before the encumbrancer/owner is of record. U.C.C. § 9-334(e)(1)(A). 93 c. d. e. f. ii. Certain Fixtures. A S/I in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if, before the goods become fixtures, the S/I is perfected by any method and the fixtures are readily removable: 1. (A) factory or office machines; 2. (B) equipment that is not primarily used or leased for use in the operation of the real property; or 3. (C) replacements of domestic appliances that are consumer goods. U.C.C. § 9334(e)(2). iii. S/P Priority over Lien Creditor. A S/I in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the conflicting interest is a person who became lien creditor (including a bankruptcy trustee) after the S/I was perfected by any method. U.C.C. § 9-334(e)(3). iv. Notation of S/I on COT of Manufactured Home. A S/I in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the S/I is created in a manufactured home and is perfected pursuant to a COT statute. U.C.C. § 9334(e)(4). v. PMSI Priority. A perfected S/I in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property and: 1. (1) the S/I is a PMSI; 2. (2) the interest of the encumbrancer/owner arises before the goods become fixtures; and 3. (3) the S/I is perfected by a fixture filing before the goods become fixtures or w/in 20 days thereafter. U.C.C. § 9-334(d). Lienholder’s Consent. A S/I in fixtures, whether or not perfected, has priority over a conflicting interest of an encumbrancer or owner of the real property if: i. (1) the encumbrancer/owner has, in an authenticated record, consented to the S/I or disclaimed an interest in the goods as fixtures; or ii. (2) the D has a right to remove the goods as against the encumbrancer or owner. U.C.C. § 9-334(f). Remedy for S/P Holding a S/I in Fixtures. If a S/P holding a S/I in fixtures has priority over all owners and encumbrancers of the real property, the S/P, after default, may remove the collateral from the real property. U.C.C. § 9-604(c). i. Reimbursement. A S/P that removes collateral shall promptly reimburse any encumbrancer or owner of the real property for the cost of repair of any physical injury caused by the removal. U.C.C. § 9-604(d). Priority of Construction Mortgages i. Construction Mortgage. A “construction mortgage” secures an obligation incurred for the construction of an improvement on land, including the acquisition cost of the land, if a recorded record of the mortgage so indicates. U.C.C. § 9-334(h). ii. Priority. Except as provided in (e) and (f), a S/I in fixtures is subordinate to a construction mortgage if the mortgage is recorded before the goods become fixtures and the goods become fixtures before the completion of the construction. U.C.C. § 9334(h). Problem 33.3 i. a. M bought a mobile home on credit from F. F took a S/I in the mobile home and filed a nonfixture F/S. The state does not issue COT for mobile homes. Under its law, the mobile home is a fixture. Does Bankruptcy Trustee have priority over F? 1. Perfection a. How do you perfect a S/I in a fixture? i. U.C.C. § 9-509(a)(1)(B): file a fixture filing ii. U.C.C. § 9-501(a)(2): file a F/S 94 iii. U.C.C. § 9-509: automatic perfection for a PMSI in consumer goods Here, F filed a non-fixture filing b. Priority a. U.C.C. § 9-334(c): generally, the encumbrancer/owner of the real property has priority over a S/I in fixtures b. U.C.C. § 9-334(e)(3): a perfected S/I has priority against a person who became a lien creditor after the S/I was perfected by any method c. Bankruptcy Trustee became a lien creditor upon the filing of the bankruptcy petition d. F perfected (i.e., filed a F/S) before the bankruptcy petition was filed e. Thus, F has priority ii. b. After M affixed the mobile home to the property, CF extended credit to M, took a S/I in the mobile home, and made a fixture filing in the real estate records. Who has priority between F and CF? 1. U.C.C. § 9-334(c): generally, the encumbrancer/owner of the underlying real property has priority over a S/I in fixtures 2. Here, CF does not have an interest in the underlying real property; CF only has an interest in the mobile home 3. Priority Battle: S/P vs. S/P 4. U.C.C. § 9-322(a)(1): first to file or perfect has priority a. Note: does not distinguish between fixture and non-fixture filings 5. F filed first 6. Thus, F has priority Problem 33.4 i. a. SC sold a sound system to J and installed it, making it highly integrated in the building. Instead of paying for the sound system, he stalls for time. What do you recommend? 1. Construction Lien a. Note: CONSTRUCTIONS LIENS WILL NOT BE ON THE EXAM b. Threaten to file notice of a claim of lien i. Actually bringing a claim of lien would probably halt construction c. New York Lien Law § 3: [a listed person] who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner . . . shall have a lien . . . upon the [entire] real property . . . 2. Can M bargain for a S/I in the sound system? a. U.C.C. § 9-604(c): if a S/P holding a S/I in fixtures has priority over all owners and encumbrancers of the real property, the S/P, after default, may remove the collateral from the real property b. U.C.C. § 9-604(d): a S/P that removes collateral shall promptly reimburse any encumbrancer or owner of the real property for the cost of repair of any physical injury caused by the removal c. This is problematic b/c the sound system is integrated into the property ii. b. MB recorded their mortgage. Assuming the bank acted in good faith and w/o knowledge that SC installed the sound system, where does this leave you? 1. Priority a. U.C.C. § 9-334(c): generally, the encumbrancer/owner of the underlying real property has priority over a S/I in fixtures b. U.C.C. § 9-334(d): a perfected S/I in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property and: 2. g. 95 h. i. (1) the S/I is a PMSI; ii. (2) the interest of the encumbrancer/owner arises before the goods become fixtures; and iii. (3) the S/I is perfected by a fixture filing before the goods become fixtures or w/in 20 days thereafter iv. Application 1. Here, J is in possession of the real property 2. (1) here, SC has a PMSI a. SC sold the sound system on credit b. SC took a S/I to secure the purchase price 3. (2) here, MB recorded its mortgage after the goods became fixtures 4. (3) here, it’s already been >20 days after the goods became fixtures, and a fixture filing has not been filed yet v. Thus, SC does not meet this exception c. Thus, MB has priority over SC 2. Remedy for S/P a. U.C.C. § 9-604(c): if a S/P holding a S/I in fixtures has priority over all owners and encumbrancers of the real property, the S/P, after default, may remove the collateral from the real property b. SC does not have priority over all interests in the real property c. Thus, SC cannot remove the fixtures Problem 33.5. SC contracted for installation for DL. SC wants the right to “rip everything back out if they don’t pay.” i. b. If SC makes a fixture filing, whose authorization does SC need? 1. U.C.C. § 9-509(a)(1): a person may file a F/S if the debtor authorizes the filing a. U.C.C. § 9-102(a)(28): “debtor” means the person who owns the collateral b. DL owns the collateral (speakers) c. Thus, SC needs DL’s authorization d. If DL rents the building, SC does not need the land owner’s authorization 2. U.C.C. § 9-502(b)(4): in fixture filings, if the debtor does not have an interest of record in the real property, the fixture filing must provide the name of the record owner a. If DL rents the building, SC needs the name (but not the consent) of the land owner 3. If there are mortgages against the property: a. Priority i. U.C.C. § 9-334(c): generally, the encumbrancer/owner of the underlying real property has priority over a S/I in fixtures ii. U.C.C. § 9-334(d): a perfected S/I in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property and: 1. (1) the S/I is a PMSI; 2. (2) the interest of the encumbrancer/owner arises before the goods become fixtures; and 3. (3) the S/I is perfected by a fixture filing before the goods become fixtures or w/in 20 days thereafter iii. Here, (1) is met 96 iv. Here, (2) is met if there are mortgages on the property already v. Here, (3) is met if SC files a fixture filing before or w/in 20 days after the sound system becomes a fixture b. S/P’s Remedy i. U.C.C. § 9-604(c): if a S/P holding a S/I in fixtures has priority over all owners and encumbrancers of the real property, the S/P, after default, may remove the collateral from the real property ii. If the requirements in U.C.C. § 9-334(d) are met, SC could remove the fixtures as a remedy for default iii. U.C.C. § 9-604(d): BUT, this might be a problem b/c of the reimbursement requirement ii. c. Does your answer to question b change if SC is installing sound system in a new building that is under construction? In the construction scenario, would DL’s consent be of help? 1. There is probably a construction mortgage on the property a. U.C.C. § 9-334(h): except as provided in (e) and (f), a S/I in fixtures is subordinate to a construction mortgage if the mortgage is recorded before the goods become fixtures and the goods become fixtures before the completion of the construction i. Here, the construction mortgage was probably recorded before the goods become fixtures ii. Here, the goods became fixtures before the completion of construction iii. Thus, the construction mortgage has priority b. U.C.C. § 9-604 does not apply b/c SC does not have priority over all interests in the underlying property c. Here, SC should ask the construction mortgage lender for subordination 2. DL’s consent would not help a. U.C.C. § 9-334(f): a S/I in fixtures, whether or not perfected, has priority over a conflicting interest of an encumbrancer or owner of the real property if: i. (1) the encumbrancer/owner has, in an authenticated record, consented to the S/I or disclaimed an interest in the goods as fixtures; or ii. (2) the D has a right to remove the goods as against the encumbrancer or owner b. Under (1), SC would need the construction mortgage lender’s consent c. SC should ask the construction mortgage lender to subordinate XXVII. Assignment 36: Buyers Against Secured Creditors a. General Rule: S/I Attaches Unless S/P Authorized Disposition Free of S/I. A S/I continues in collateral notwithstanding sale, lease . . . or other disposition thereof unless the S/P authorized the disposition free of the S/I. U.C.C. § 9-315(a)(1). b. Exceptions i. Buyer in the Ordinary Course of Business. A buyer in the ordinary course of business takes free of a S/I created by the buyer’s seller. U.C.C. § 9-320(a). 1. “Buyer in the Ordinary Course of Business” a. Elements. “Buyer in the ordinary course of business” means a person who buys goods i. In good faith, 97 c. d. ii. Without knowledge that the sale violates the rights of another person in the goods, iii. In the ordinary course [i.e., comports with the usual or customary practices in the kind of business] iv. From a person . . . in the business of selling goods of that kind. U.C.C. § 1-201(b)(9). b. Not Bulk Buyer or Buyer for Satisfaction of Debt. “Buyer in the ordinary course of business” does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt. U.C.C. § 1-201(b)(9). ii. Consumer-to-Consumer. A buyer of goods from a person who used or bought the goods for use primarily for personal, family or household purposes takes free of a S/I, even if perfected, if the buyer buys: 1. (1) w/o knowledge of the S/I; 2. (2) for value; 3. (3) primarily for the buyer’s personal, family, or household purposes; and 4. (4) before the filing of a F/S covering the goods. U.C.C. § 9-320(b). iii. Buyer Buys w/o Knowledge Before Perfection. A buyer of chattel paper, goods, or instruments takes free of a S/I if the buyer gives value and receives delivery of the collateral without knowledge of the S/I before it is perfected. U.C.C. § 9-317(b). Multiple Transfers i. Examine Each Transfer Individually. Where there’s more than one transfer, examine each transfer individually to determine if a buyer took free of a S/I. ii. Shelter Doctrine. The “shelter doctrine” provides that if a buyer takes free of a S/I, future transferees are “sheltered” from the prior lien. Problem 36.5. S/P sold a TV to D and D signed a S/A and F/S. The S/A provided that D “agrees not to sell the collateral” and that any purported sale is void. S/P filed the F/S. Six months later, D sold the TV to Buyer (paying $960 by check), who did not know about the S/A. Is S/P entitled to repossess the TV? Does S/P have to refund Buyer’s $960? i. U.C.C. § 9-315(a)(1): a S/I continues in collateral notwithstanding disposition unless the S/P authorized the disposition free of the S/I 1. Here, the S/A provided that D may not sell the collateral 2. Thus, S/P did not authorize the disposition free of the S/I 3. Thus, the S/I continues in the TV unless an exception applies ii. U.C.C. § 9-320(a): a buyer in the ordinary course of business takes free of a S/I created by the buyer’s seller 1. U.C.C. § 1-201(b)(9): “buyer in the ordinary course of business” means a person who buys goods a. In good faith, b. Without knowledge that the sale violates the rights of another person in the goods, c. In the ordinary course [i.e., comports with the usual or customary practices in the kind of business] d. From a person . . . in the business of selling goods of that kind 2. Application a. Buyer in the ordinary course of business i. Buyer bought the TV in good faith ii. Buyer did not know about the S/A iii. It isn’t clear whether selling a TV by check is the customary way in the business of selling TVs iv. Here, D is not in the business of selling TVs v. Thus, Buyer is not a buyer in the ordinary course of business b. S/I created by the buyer’s seller 98 e. i. Here, the S/I was created by the buyer’s seller—D 3. This exception is not met iii. U.C.C. § 9-320(b): a buyer of goods from a person who used or bought the goods for use primarily for personal, family or household purposes takes free of a S/I, even if perfected, if the buyer buys: 1. (1) w/o knowledge of the S/I; 2. (2) for value; 3. (3) primarily for the buyer’s personal, family, or household purposes; and 4. (4) before the filing of a F/S covering the goods 5. Application a. The Seller, D, probably used the TV for personal/family/household purposes b. Buyer did not have knowledge of the S/A c. Buyer bought for value—$960 d. Buyer bought the TV for personal/family/household purposes e. Here, S/P filed a F/S before Buyer bought the TV 6. This exception is not met iv. U.C.C. § 9-317(b): a buyer of goods takes free of a S/I if the buyer gives value and receives delivery of the collateral without knowledge of the S/I before it is perfected 1. Application a. Buyer gave $960 in value b. Buyer received delivery without knowledge of the S/A c. These events did not occur before S/P filed a F/S 2. This exception is not met v. Thus, Buyer takes subject to S/P’s S/I vi. S/P can repossess the TV from Buyer vii. S/P does not have to refund Buyer the $960. It’s his fault for not running a U.C.C. search. Problem 36.6. Your client, Bank, has a S/I in the inventory of SC. S/A authorizes only sales in the ordinary course of business, prohibits credit sales, and requires D to deposit all proceeds of sales of collateral to D’s account at Bank. Bank perfected by filing. On 10/20, SC filed bankruptcy. The following transactions took place before the filing of the bankruptcy petition: i. a. SC sold a sound system to R partially on credit. R did not know of the S/A. Is Bank entitled to repossess the sound system from R? 1. U.C.C. § 9-315(a)(1): a S/I continues in collateral notwithstanding disposition unless the S/P authorized the disposition free of the S/I a. Here, the S/A provided that D cannot make credit sales b. Thus, S/P did not authorize the disposition free of the S/I c. Thus, the S/I continues in the sound system unless an exception applies 2. U.C.C. § 9-320(a): a buyer in the ordinary course of business takes free of a S/I created by the buyer’s seller a. U.C.C. § 1-201(b)(9): “buyer in the ordinary course of business” means a person who buys goods i. In good faith, ii. Without knowledge that the sale violates the rights of another person in the goods, iii. In the ordinary course [i.e., comports with the usual or customary practices in the kind of business] iv. From a person . . . in the business of selling goods of that kind b. Application i. Buyer in the ordinary course of business 1. R bought in good faith 2. R did not know of the S/A 3. The sale was probably in the ordinary course 99 f. 4. SC is in the business of selling sound systems 5. Thus, R is a buyer in the ordinary course of business ii. S/I created by the buyer’s seller 1. Here, the S/I was created by R’s seller, SC c. This exception is met d. Thus, R takes free of Bank’s S/I ii. b. G is a lawyer who has been representing SC. As of 7/17, SC owed G $16,458 for legal services. G agreed to accept a sound system as partial pmt. Is Bank entitled to repossess the sound system from G? 1. U.C.C. § 1-201(b)(9): “buyer in the ordinary course of business” does not include a person that acquires goods in total or partial satisfaction of a money debt 2. Thus, G is not a buyer in the ordinary course of business 3. The exception under § 9-320(a) is not met Problem 36.1. The facts are illustrated below. All Seasons (S/P) Sold RV S/I RV Eddy (D) RV #2 RV Sunrise $23k Alecia i. a. Alecia wants to sue to remove All Seasons’ lien from the title. How good is her case? 1. Where there’s more than one transfer, examine each transfer individually to determine if a buyer took free of a S/I 2. Shelter doctrine: if a buyer takes free of a S/I, future transferees are “sheltered” from the prior lien 3. Transfer #1: Eddy to Sunrise a. U.C.C. § 9-315(a)(1): a S/I continues in collateral notwithstanding disposition unless the S/P authorized the disposition free of the S/I i. Here, the S/A provided that D may not transfer any interest in the collateral ii. Thus, S/P did not authorize the disposition free of the S/I iii. Thus, the S/I continues in the TV unless an exception applies b. U.C.C. § 9-320(a): a buyer in the ordinary course of business takes free of a S/I created by the buyer’s seller i. U.C.C. § 1-201(b)(9): “buyer in the ordinary course of business” means a person who buys goods 1. In good faith, 2. Without knowledge that the sale violates the rights of another person in the goods, 3. In the ordinary course [i.e., comports with the usual or customary practices in the kind of business] 4. From a person . . . in the business of selling goods of that kind ii. Application 1. Buyer in the ordinary course of business a. Sunrise bought the TV in good faith b. Sunrise did not know about the S/A c. It isn’t clear whether this is the customary way to sell RVs d. Here, Eddy is not in the business of selling RVs e. Thus, Sunrise is not a buyer in the ordinary course of business 2. S/I created by the buyer’s seller 100 a. 4. Here, the S/I was created by Sunrise’s seller—Eddy iii. This exception is not met c. U.C.C. § 9-320(b): a buyer of goods from a person who used or bought the goods for use primarily for personal, family or household purposes takes free of a S/I, even if perfected, if the buyer buys: i. (1) w/o knowledge of the S/I; ii. (2) for value; iii. (3) primarily for the buyer’s personal, family, or household purposes; and iv. (4) before the filing of a F/S covering the goods v. Application 1. The Seller, Eddy, probably used the RV for personal/family/household purposes 2. Here, Eddy had knowledge of the S/I 3. Sunrise bought for value in exchanging RV for RV #2 4. Sunrise did not buy the RV for personal/family/household purposes 5. All Seasons did not file a F/S vi. This exception is not met d. U.C.C. § 9-317(b): a buyer of goods takes free of a S/I if the buyer gives value and receives delivery of the collateral without knowledge of the S/I before it is perfected i. Application 1. Sunrise gave value—RV #2 2. Sunrise received delivery without knowledge of the S/A 3. These events did not occur before All Seasons noted its S/I on the COT ii. This exception is not met e. Thus, Sunrise took subject to All Seasons’s S/I Transfer #2: Sunrise to Alecia a. U.C.C. § 9-315(a)(1): a S/I continues in collateral notwithstanding disposition unless the S/P authorized the disposition free of the S/I i. Here, the S/A provided that D may not transfer any interest in the collateral ii. Thus, S/P did not authorize the disposition free of the S/I iii. Thus, the S/I continues in the TV unless an exception applies b. U.C.C. § 9-320(a): a buyer in the ordinary course of business takes free of a S/I created by the buyer’s seller i. U.C.C. § 1-201(b)(9): “buyer in the ordinary course of business” means a person who buys goods 1. In good faith, 2. Without knowledge that the sale violates the rights of another person in the goods, 3. In the ordinary course [i.e., comports with the usual or customary practices in the kind of business] 4. From a person . . . in the business of selling goods of that kind ii. Application 1. Buyer in the ordinary course of business a. Alecia bought the TV in good faith b. Alecia did not know about the S/A 101 c. g. This is probably the customary way to sell RVs d. Sunrise is in the business of selling RVs e. Thus, Alecia is a buyer in the ordinary course of business 2. S/I created by the buyer’s seller a. Here, the S/I was not created by Alecia’s seller—Sunrise iii. This exception is not met c. U.C.C. § 9-320(b): a buyer of goods from a person who used or bought the goods for use primarily for personal, family or household purposes takes free of a S/I, even if perfected, if the buyer buys: i. (1) w/o knowledge of the S/I; ii. (2) for value; iii. (3) primarily for the buyer’s personal, family, or household purposes; and iv. (4) before the filing of a F/S covering the goods v. Application 1. The Seller, Sunrise used the RV for inventory, not personal/family/household purposes 2. Sunrise had knowledge of the S/I 3. Alecia bought for value—$23k 4. Alecia probably bought the RV for personal/family/household purposes 5. All Seasons did not file a F/S vi. This exception is not met d. U.C.C. § 9-317(b): a buyer of goods takes free of a S/I if the buyer gives value and receives delivery of the collateral without knowledge of the S/I before it is perfected i. Application 1. Alecia gave value—$23k 2. Alecia received delivery without knowledge of the S/A 3. These events did not occur before All Seasons noted its S/I on the COT ii. This exception is not met e. Thus, Alecia took subject to All Seasons’s S/I f. She must pay All Seasons the $23k or give the RV back (but she is not personally liable on the debt) ii. b. If Alecia insisted on seeing the COT for the RV, what would she have learned? 1. When car dealers buy used cars, they don’t actually get the COT from the seller. Instead, the seller signs a power of attorney to allow the dealer to apply for a new COT for when the sells the car. 2. The COT will show Eddie’s name and All Season’s lien (noted on COT under U.C.C. § 9-311(a), (b)). 3. Alecia should ask if the lien has been released a. Alecia should ask to see a “lien release” b. But, Alecia does not have any recourse if the dealer makes up a story about where the lien release is Problem 36.2. Alecia found a piano she likes for $10,000 at American Piano Company. Alecia wants you to represent her “at the closing.” i. a. Is there anything to her fears? 1. Here, the same problems presented in Problem 36.1 arise 102 2. 3. 4. Where did American Piano Company get the piano? a. Ask for an invoice b. Contact the seller Search the U.C.C. records under the seller’s name for a F/S covering the piano (whether it’s inventory or consumer goods in the seller’s hands) Practical Solution: Alecia should pay cash and not give her name or address. That way, a S/P wouldn’t be able to track her down to repossess the piano. 103