SECURED TRANSACTIONS: UCC ARTICLE 9
Table of Contents
SECURED TRANSACTIONS: UCC ARTICLE 9 ..................................................................................................1
1: COVERAGE OF ARTICLE 9 ...............................................................................................................................5
1.1 Scope of Article 9 ................................................................................................................................................5
1.2 Collecting Debts ..................................................................................................................................................5
1.3 Terminology ........................................................................................................................................................5
1.4 Types of Collateral ..............................................................................................................................................6
1.4.1 Tangible Collateral—Goods ........................................................................................................................6
1.4.2 Quasi-Tangible Collateral ............................................................................................................................7
1.4.3 Intangible Collateral .....................................................................................................................................8
1.5 Types of Transactions .........................................................................................................................................9
1.5.1 Leases...........................................................................................................................................................9
1.5.2 Consignments ............................................................................................................................................. 10
2: ATTACHMENT .................................................................................................................................................... 11
2.1 Introduction ....................................................................................................................................................... 11
2.2 Attachment of a Security Interest ...................................................................................................................... 12
2.2.1 Attachment—In General ............................................................................................................................ 12
2.2.2 Requirements for Attachment 9-203(b) ..................................................................................................... 12
2.3 Security Agreement ........................................................................................................................................... 13
2.3.1 The Requirement of a Record .................................................................................................................... 13
2.3.2 Description of the Collateral in a Security Agreement .............................................................................. 14
2.3.3 Dragnet clause ............................................................................................................................................ 16
2.4 Value ................................................................................................................................................................. 16
2.4.1 Value Must Be Given................................................................................................................................. 16
2.5 Debtor’s Rights in the Collateral ....................................................................................................................... 16
2.5.1 Rights in Collateral – In General ............................................................................................................... 16
2.5.2 Transferring Property Rights ..................................................................................................................... 16
2.6 Automatic Attachment ...................................................................................................................................... 17
2.6.1 Categories of Collateral that are Eligible to be Included Automatically .................................................... 17
2.6.2 Two-Tier transaction: ................................................................................................................................. 18
2.6.3 Supporting obligations (including letters of credit, letter of credit rights) ................................................. 18
2.6.4 Two Restrictions on Automatic Attachment .............................................................................................. 18
2.6.5 After-Acquired Property ............................................................................................................................ 19
2.6.4 Future Advances ........................................................................................................................................ 20
3: PERFECTION ....................................................................................................................................................... 21
3.1 Perfection Defined............................................................................................................................................. 21
3.2 Filing a Financing Statement ............................................................................................................................. 21
3.3 Possession of the Collateral ............................................................................................................................... 21
3.3.1 Possession Overview ................................................................................................................................. 21
3.3.2 Types of Property Covered ........................................................................................................................ 22
3.3.3 Means of Taking Possession ...................................................................................................................... 22
3.3.4 Duration of Perfection ................................................................................................................................ 22
3.3.5 Rights and Duties of Secured Party in Possession ..................................................................................... 22
3.4 Control over Collateral ...................................................................................................................................... 23
3.4.1 Control Overview....................................................................................................................................... 23
3.4.2 Control over Investment Property .............................................................................................................. 23
3.4.3 Control over Deposit Accounts .................................................................................................................. 24
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3.4.4 Control over Letters of Credit Rights ......................................................................................................... 24
3.4.5 Control over Electronic Chattel Paper ....................................................................................................... 24
3.4.6 Rights and Duties of Secured Party in Control .......................................................................................... 24
3.4.7 Length of Perfection by Control – 9-314(c):.............................................................................................. 24
3.5 Automatic Perfection......................................................................................................................................... 25
3.5.1 Roadmap: Perfected by Attachment Alone (9-309) ................................................................................... 25
3.5.2 Purchase Money Security Interest (PMSI) in Consumer Goods ................................................................ 25
3.5.3 PMSI Status Lost in Certain Circumstances 9-103(e)-(h).......................................................................... 26
3.6 Temporary (& Other Forms of) Automatic Perfection 9-312(e)-(h) ................................................................. 26
3.6.1 Temporary Automatic Perfection Overview .............................................................................................. 26
3.6.2 Assignment of Beneficial Interest in Decedent’s Estate ............................................................................ 26
3.6.3 Sale of Promissory Notes and Payment Intangibles ................................................................................... 26
3.6.4 Supporting Obligations .............................................................................................................................. 26
3.7 Time of Perfection ............................................................................................................................................. 26
3.7.1 Completion of Filing or Other Requirements ............................................................................................ 26
3.7.2 Secondary Perfections ................................................................................................................................ 27
3.7.3 Why Time of Perfection is Important ........................................................................................................ 27
3.8 Place of Perfection—Multistate Transactions ................................................................................................... 27
3.8.1 General Rule—Debtor’s Location Governs Perfection .............................................................................. 27
3.8.2 Exceptions .................................................................................................................................................. 27
3.9 Reperfection ...................................................................................................................................................... 28
3.9.1 General Reperfection 9-316 ....................................................................................................................... 28
3.9.2 Amendments 9-512 .................................................................................................................................... 28
3.9.3 Relocation of Debtor .................................................................................................................................. 28
3.9.4 Change in Debtor’s Name .......................................................................................................................... 29
3.9.5 Transfer of Collateral to a Person Who Thereby Becomes a Debtor, Transferee ...................................... 29
3.9.6 Transfer of Collateral to a “New Debtor” .................................................................................................. 29
3.9.7 Movement of collateral .............................................................................................................................. 29
3.9.8 Change in Characterization of Collateral (use of collateral) ...................................................................... 29
3.9.9 Conversion of collateral into: other collateral (barter) / proceeds .............................................................. 29
3.9.10 Interstate Transfer of Motor Vehicles: ..................................................................................................... 30
4: FILING................................................................................................................................................................... 30
4.1 The Financing Statement ................................................................................................................................... 30
4.1.1 General Rule .............................................................................................................................................. 30
4.2 What to File ....................................................................................................................................................... 31
4.2.1 The Debtor’s Name and Address ............................................................................................................... 31
4.2.2 The SP’s Name and Address ...................................................................................................................... 32
4.2.3 Description of the Collateral 9-504(a) ....................................................................................................... 33
4.3 Where to File ..................................................................................................................................................... 33
4.3.1 What Filing Office? ................................................................................................................................... 33
4.3.2. Which State? ............................................................................................................................................. 33
4.4 Mechanics of Filing ........................................................................................................................................... 34
4.4.1 Acceptance & Rejection from Filing Office .............................................................................................. 34
4.4.2 Duration and Effectiveness of Financing Statement (9-515) ..................................................................... 35
4.4.3 Authorization to file a financing statement............................................................................................ 36
5: PRIORITIES ......................................................................................................................................................... 36
5.1 Competing Interest in Collateral—the Claimants ............................................................................................. 36
5.2 Priority—Unperfected Creditors ....................................................................................................................... 37
5.3 Priority Among Perfected Creditors—General Rule ......................................................................................... 37
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5.3.1 General Rule .............................................................................................................................................. 37
5.3.2 Collateral Perfected by Financing Statement with Incorrect Information – 9-338 .................................... 37
5.3.3 Holders of Perfected SI have Priority Over Judicial Lien Creditors 9-317(a) ........................................... 37
5.4 Priority Special Rules for Purchase Money Security Interests .......................................................................... 37
5.4.1 PMSI in Goods (Non-Inventory, Non-Livestock PMSIs) .......................................................................... 37
5.4.2 PMSIs in Inventory .................................................................................................................................... 38
5.4.4 Double Debtor Problem ............................................................................................................................. 39
5.5 Priority Special Rules for Certain Type of Collateral ....................................................................................... 39
5.5.1 Deposit Accounts – 9-327 .......................................................................................................................... 39
5.5.2 Commingled Goods – 9-336 ...................................................................................................................... 39
5.5.3 Proceeds ..................................................................................................................................................... 39
5.6 Priority Among Perfected Creditors and Other Claimants, lien creditors ......................................................... 39
5.6.1 Statutory, Possessory Lien Holders: .......................................................................................................... 39
5.6.2 Buyer of goods – 9-320(a)-(c) & (g) .......................................................................................................... 39
5.6.3 Exception: “Buyer in the Ordinary Course of Business” – 9-320(a) ......................................................... 40
5.6.4 Exception: Buyer of Consumer Goods from Other Consumer – 9-320(b)................................................. 40
5.6.5 Exception: Buyer not in the OCB, Future Advances, non-advances: ........................................................ 40
5.6.6 Exception: Future Advances, non-advances: ............................................................................................. 41
5.6.7 Exception: Buyer of Goods Covered by Certificate of Title ...................................................................... 41
5.6.8 Transfer of Money; Transfer of Funds from Deposit Account – 9-332 ..................................................... 41
5.6.9 Priority amongst Lien Creditors ................................................................................................................. 42
5.6.10 Priority amongst Lien Creditors, and Lien Creditors vs. SC and PMSI .......................................... 42
5.6.11 Sellers against Secured Creditors ......................................................................................................... 42
6: ENFORCEMENT ................................................................................................................................................. 43
6.1 Default ............................................................................................................................................................... 43
6.1.1 Acceleration Clause ................................................................................................................................... 44
6.1.2 Insecurity Clauses ...................................................................................................................................... 45
6.2 Right of Possession Upon Default ..................................................................................................................... 45
6.2.1 Judicial Process – 9-609(b)(1) ................................................................................................................... 45
6.2.2 Self-help 9-609(b)(2) and self help against accounts as collateral ............................................................. 46
6.2.3 Non-judicial foreclosure (power of sale / deed oft rust in context of real property) separate yet part of 9906(b)(2) ............................................................................................................................................................. 46
6.3 Retention of Collateral Remedy (SP side) 9-620 .............................................................................................. 47
6.3.1 Notice ......................................................................................................................................................... 47
6.3.2 Objection [by debtor or other creditors] ..................................................................................................... 47
6.3.3 Consumer goods exception – mandatory disposition ................................................................................. 47
6.3.4 Effect of Acceptance 9-622(a) ................................................................................................................... 48
6.3.5 Partial satisfaction ...................................................................................................................................... 48
6.4 Sale or Other Disposition of Collateral ............................................................................................................. 48
6.4.1 Commercial Reasonableness Standard ...................................................................................................... 48
6.4.2 Warranties .................................................................................................................................................. 49
6.4.3 Notice Requirement 9-611(b) .................................................................................................................... 49
6.4.4 SP’s Right to Bid for Collateral 9-610(c)................................................................................................... 51
6.4.5 Proceeds are Applied in the following order [9-608 and 9-615(a)(1)-(4)]: ................................................ 51
6.4.6 Surplus and Deficiency: ............................................................................................................................. 51
6.4.7 Rights of Purchaser of Collateral 9-617 ..................................................................................................... 52
6.5 Action for the Debt by SC ................................................................................................................................. 52
6.6 Debtor’s Rights and SP’s Failure to Comply with Art. 9 .................................................................................. 52
6.6.1 Debtor’s Right to Redemption ................................................................................................................... 52
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6.6.2 Effect of Failure to Comply with Default Provisions of article 9. 9-625 ................................................... 52
6.6.3 SP’s defenses to liability 9-628 .................................................................................................................. 53
6.6.4 Nonwaivable Rights Under the Security Agreement 9-602 ....................................................................... 53
6.6.5 Cure by Debtor of Default ......................................................................................................................... 53
6.7 Marshaling [applies to bankruptcy] ................................................................................................................... 53
6.7.1 Secured Creditor’s Option to Foreclose ..................................................................................................... 53
6.7.2 Purchase Money Collateral ........................................................................................................................ 54
7: Bankruptcy ............................................................................................................................................................ 55
7.1 General Rules of Bankruptcy ............................................................................................................................ 55
7.1.1 Basics ......................................................................................................................................................... 55
7.1.2 Key terms .................................................................................................................................................. 55
7.1.3 Three types of BR..................................................................................................................................... 55
7.1.4 What happens when Bankruptcy is filed? ............................................................................................. 56
7.1.5 4 Step Analysis for Stay Problems .......................................................................................................... 56
7.2 Secured creditors in Bankruptcy ....................................................................................................................... 56
7.2.1 SC payment process ................................................................................................................................. 56
7.2.2 How is Secured Creditor Paid? ............................................................................................................... 56
7.2.3 SC claim calculation and bifurcation ..................................................................................................... 57
7.3 Other rules during Bankruptcy .......................................................................................................................... 58
7.3.1 Value Tracing in Bankruptcy ................................................................................................................. 58
7.3.2 Modification vs. Reinstatement & Cure ................................................................................................. 59
7.3.3 Reinstatement and Cure Under Chapter 11 – 1124(2) ......................................................................... 60
7.3.4 Reinstatement and Cure Under Chapter 13 – 1322(b)(5)..................................................................... 60
7.3.5 Marshaling during bankruptcy .............................................................................................................. 61
7.4 Priorities in Bankruptcy .................................................................................................................................... 61
7.4.1 Trustees or DIP [who they are and in different chapters] .................................................................... 61
7.4.2 Power of trustees or DIP [debtor in possession] .................................................................................... 61
7.4.4 Strong arm provision ............................................................................................................................... 62
7.4.5 §363 Sales free and clear of all interests ................................................................................................. 63
7.4.6 Seven Preference Elements – § 547(b) – all have to satisfied to be voidable ....................................... 63
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- SPRING 2016 - SECURED TRANSACTIONS
1: COVERAGE OF ARTICLE 9
1.1 SCOPE OF ARTICLE 9


9-109(a) Article 9 applies to:

“any transaction (regardless of its form) which is intended to create a
SI in personal property or fixtures,”

any sale of accounts, chattel paper, payment intangibles, or
promissory notes,

consignments,

agricultural liens, and

SI arising under other U.C.C. articles.
Does not cover interests in real property.
1.2 COLLECTING DEBTS

Many types of liens are not created by Art. 9, but their priority over Article 9 SIs
in the same property is often governed by Article 9.
Judicial Liens
 Liens acquired in judicial proceedings, created when the winning party in a lawsuit
has the sheriff levy (seize) the property.
Statutory Liens
 Liens created by statute in favor of certain unsecured creditors (e.g., landlords,
attorneys, artisans such as TV repairers and mechanics).
Consensual Liens
 Liens arise by agreement between a debtor and creditor. (e.g., Art. 9 SI.)
1.3 TERMINOLOGY
Security Interest (SI)
 1-201(b)(35) every interest “in personal property or fixtures that secures payment
or performance of an obligation.”
Security Agreement (SA)
 9-102(a)(73) an agreement that creates or provides for a security interest, no
matter what it calls itself (e.g., “conditional sale”) and regardless of its form.
Secured Party (SP)
 9-102(a)(72)(A) A lender, seller, or person in whose favor there is a security
interest is called a “secured party.” In the case of a sale of accounts, chattel paper,
payment intangibles, or promissory notes, the purchaser is the secured party.
5
Debtor
 9-102(a)(28) the owner, lessee, etc., of the goods being used as collateral.
Obligor
 9-102(a)(59) the person who owes the debt to the creditor.
Connecting the Terms
 A debtor grants a security interest in collateral to a secured party by
executing a security agreement. The obligor owes the debt secured by the
security interest. The debtor and obligor are usually the same person, but not
always.
Lien Creditor
 9-102(a)(52) creditors who has acquired a lien on the property involved by
attachment, levy or the like

Usually: unsecured creditor who won a judgment against the debtor,
obtained a writ of execution and then obtained a lien by levying on specific
property of the debtor
1.4 TYPES OF COLLATERAL

3 general categories
1.4.1 Tangible Collateral—Goods
 Collateral having a tangible physical form. Included in the term are “all things
that are movable when a SI attaches.” The term also includes unborn animals,
crops, timber to be cut under a K or conveyance, and fixtures. 9-102(a)(44)

Computer Software is a “general intangible,” but if the software is embedded in
goods, it is included in the definition of goods. 9-102(a)(44)

There are four types of goods, dependent on the principal use to which the debtor
puts the property. 9-102 (Comment 4a).

Consumer Goods: used or bought primarily for “personal, family, or
household purposes.” 9-102(a)(23).

Inventory: held for sale or lease to others in the ordinary course of
business. This includes raw materials and materials used up or consumed
in business. 9-102(a)(48).

Farm Products: goods produced in farming operations and are in the
possession of the farmer/debtor. 9-102(a)(34). All these goods must be in an
unmanufactured state; if they are manufactured or held out for sale, they
become inventory. 9-102 (Comment 4a).

Crops grown, growing, to be grown
6


Livestock, born and unborn

Products of crops and livestock in an unmanufactured state (e.g.,
milk, eggs, manure)

Supplies used or produced in farming operations (e.g., cattle feed)
Equipment: If goods do not fit into the above categories, they are
equipment. 9-102(a)(33). This is a catchall category. 9-102 (Comment
4a).
1.4.2 Quasi-Tangible Collateral
 Quasi-Tangible assets are legal rights usually represented by pieces of paper
(determined by their nature).


Instruments: piece of writing that evidences a right to the payment of
money and is of a type that is transferred by delivery with any necessary
endorsement/assignment in the ordinary course of business. 9-102(a)(47).

negotiable and non-negotiable

examples: checks, promissory notes, drafts, and certificates
Documents: document that indicates that person in possession of it is
entitled to receive, hold, and dispose of the document and the goods it
covers. 9-102(a)(30); 1-201(16).

Documents of title: such as bills of lading (1-201(6)); warehouse
receipts (1-201(42)); order for delivery of goods.

Negotiable: by its terms the goods are to be delivered to
bearer/order of a named person. 7-104(a).
Non-negotiable: if document has a conspicuous legend at the time
it’s issued. 7-104(c).
Business documents—research reports or corporate papers—do not
fall under this definition.



Chattel Paper: a record (written or electronically stored information) that
evidences both a monetary obligation and a security interest in or a lease of
specific goods. 9-102(a)(11). A group of records evidencing those two
essential also constitutes chattel paper. There is electronic chattel paper
and tangible chattel paper. 9-102(a)(31), 9-102(a)(78).

Investment Property: Stocks and bonds, whether represented by a
physical piece of paper (a “certificated security”) or merely listed on the
records of the issuing corporation (an “uncertificated security”), commodity
contracts, and accounts in which such investments are held (“securities
accounts” or “commodity accounts”) are given special treatment in Article 9,
and thus are all dealt with under the designation of “investment property.”
9-102(a)(49).
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1.4.3 Intangible Collateral
 Collateral with no physical form (determined by their nature).

Accounts: The term “accounts,” commonly called “accounts receivable,”
refers to a right of payment for goods or services sold or leased that
is not evidenced by an instrument or chattel paper. 9-102(a)(2).

Certain rights to payment, such as rights to payment arising out of
the use of a credit card or for lottery winnings, are also considered
to be accounts.

Health Care Insurance Receivables: when hospitals treat a patient
and receive a right to payment from the insurance company.

Letter of Credit Rights: A payment device used to finance various
transactions. Typically, a seller of goods requires buyer to get a letter of
credit from a bank in favor of the seller, so that the bank makes the
payment to the seller (the beneficiary of the letter of credit). 9-102(a)(51).

Deposit Accounts: Accounts maintained with a bank, such as checking,
savings, or passbook accounts. 9-102(a)(29).

Does not include consumer deposit accounts (those used for
personal, family, or household purposes), except to the extent they
include proceeds.

Commercial Tort Claims: Claims filed by organizations or filed by
individuals that arose out of the individual’s business and do not involve
personal injury. 9-102(a)(13).

General Intangibles: Vaguely defined to include any personal property
other than that fitting in any of the above categories. The purpose of this
catchall provision is to allow for commercial usage to make use of new
forms of personal property as collateral. Some examples are goodwill,
literary rights, and rights of performance. 9-102(a)(42).
8

A liquor license would be considered a general intangible unless the
state says it is not property. If it is not property, it is outside the
scope of the UCC.

Payment Intangibles: any general intangible under which
account debtor’s principal obligation is payment of money. 9102(a)(61). Example: borrow money from parents and give them an
oral promise to repay. But, if written, it is instrument.
1.5 TYPES OF TRANSACTIONS

Any financing transaction, regardless of its name or form, may be held subject to
Art. 9. If the purpose of the transaction was to create a SI in collateral, Art. 9
applies.
1.5.1 Leases
 A true lease is clearly not a secured transaction and is not subject to Article 9. 1203.

If the “lease” is actually a financing arrangement designed to protect the seller by
maintaining title in the seller as security for payments from the “lessee” (buyer),
the “lease” is subject to the filing requirements of Art. 9.

1-203(b) transaction in the form of a lease creates a security interest if the
lessee has to pay consideration for the right of possession, has an obligation
for the term of the lease, these rights are not subject to termination, and
the lessee has the power to buy goods for no or nominal additional
consideration


A transaction is a sale on credit (a secured transaction) rather than
a lease if:

the lessee has no right to terminate the lease, and

either the goods have no economic value at the end of the
lease or the lessee can purchase the goods for little or
nothing.
A lessor who is unsure whether a transaction will be deemed by the courts to be a
true lease or a disguised security interest may file a financing statement to
guarantee priority in any event. Such a filing is not an admission that Article 9
applies to the transaction. 9-505.
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1.5.2 Consignments
 In a typical consignment, the manufacturer or wholesaler of goods (the “consignor”)
turns them over to a retailer (the “consignee”), who acts as the selling agent of the
goods at the retail level. The consignor retains title to the consigned goods, and if
they are not sold by the consignee at retail, the consignor expects to get the goods
back free from any claims of the consignee’s creditors.

If the “consignee” has no option to return the goods if they are unsold but must pay
for them in any event, this is not a true consignment—it is a secured transaction
called a consignment, and the usual rules of Art. 9 would apply. In that case the
“consignee” is really a buyer of the goods, and the “consignor” is an Art. 9 SP.

Some true consignments are also covered by the rules of Article 9. A true consignor
must comply with the requirements of Art. 9 to protect its interests in the
consigned goods if the consignment has the following attributes:


the goods are worth at least $1,000 and are NOT consumer goods;

Consignee is a merchant not generally known by its creditors to be
substantially engaged in the selling of goods of others, and

the consignee’s professional name is different than that of the consignor. 9102(a)(20).
If a true consignment does not meet the definition of an Article 9 consignment, the
consignor does not have to comply with the rules of Article 9 to protect its interest
in the consigned goods. The consignment now falls under the common law, which
usually allows the consignor to retrieve its goods from the consignee’s inventory,
10
even over the objections of the consignee’s other creditors or a trustee in
bankruptcy.

Protective Filing: A consignor who is unsure whether Article 9 applies to the
transaction or whether the transaction is a true consignment may make a
protective filing of a financing statement, calling itself a “consignor” without this in
any way being an admission that Article 9 does apply. The same thing may be done
by a lessor who worries that his so-called lease is really a disguised secured
transaction. 9-505.
2: ATTACHMENT
2.1 INTRODUCTION

If a secured party follows the code, its interest will be protected: “Except as
otherwise provided in the Uniform Commercial Code, a security agreement is
11
effective according to its terms between the parties, against purchasers of the
collateral, and against creditors.” 9-201.
2.2 ATTACHMENT OF A SECURITY INTEREST
2.2.1 Attachment—In General
 Attachment: The process by which the debtor and creditor create a security
interest in the debtor’s collateral effective between these two parties.

Security Agreement: a K between debtor and creditor that lays out rights and
duties of the parties regarding the collateral.

Effective according to its terms between parties, against purchasers of
collateral, and against creditors. 9-201(a).

Required for attachment.

Perfection: The process by which this security interest is then made good against
most of the rest of the world. This can be done at any point during the timeline, but
perfection will not occur until attachment has occurred.

The three events may occur in any order, but they must coexist before the interest
attaches. 9-203(a).

SI attaches to collateral when it becomes enforceable against the debtor with
respect to the collateral, unless an agreement expressly postpones the time of
attachment (e.g., accounting and tax purposes). 9-203(a).
2.2.2 Requirements for Attachment 9-203(b)
 All of the following information can be in more than one single document:

(1) Value must be given by the SP (the actual loan has to be given by SP)

(2) The debtor must have rights in the collateral. (debtors owns at least part of
collateral)

(3)(A) The parties must have an authenticated agreement describes the collateral

(B) or the creditor has possession of the property according to 9-313



or “control” the types of property listed in 9-203(b)(3)(c-d))
Also has to contain (From White & Summers quoted in Giaimo):

(1) a signed agreement evincing an intent to create a security interest AND

(2) actual intent to create a security interest
“Fill in the blank” issue (when one of the parties adds a document after agreement
was already initiated [might only apply to description of collateral]) has split
courts.

Majority view is that order of events does not matter, as long end up with
an authenticated security agreement that contains a collateral description.
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2.3 SECURITY AGREEMENT
2.3.1 The Requirement of a Record
 Art. 9 now requires that in most cases the debtor “authenticate” (i.e., sign in
writing or by electronic means) (1-201(37)) a “record” (i.e., written or electronically
stored information) (1-201(35)) of the security agreement in lieu of merely signing
a written security agreement.

A SA should contain: description of the collateral, authentication by the debtor,
writing or a record (oral is sufficient in some circumstances), designation of the
obligation (e.g., I owe you two loans, and I am granting you a SI in loan B),
granting language (e.g., X hereby grants Y property rights in the following
collateral), and default provisions.

Exception: If secured party is in possession OR control of the collateral, an oral
agreement suffices. 9-203
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Is the Security Agreement adequate for attachment?
 One of the following must accompany the debtor and creditor’s agreement; if these
requirements are not met, the security interest cannot attach:

The creditor’s possession of the collateral;

The creditor’s control of the collateral; or

A record authenticated by the debtor that describes the collateral.
Oral Agreement Sufficient
 If the secured party has possession of the collateral to which the security
agreement attaches (a “pledge” transaction), an authenticated record of a security
agreement is not required. 9-203(b)(3)(B).

For certain kinds of collateral (i.e., investment property, letter of credit rights,
deposit accounts, electronic chattel paper) the secured party need only obtain
“control” over the property to prevail against other parties. No authenticated
record of the transaction is required for attachment. 9-203(b)(3)(D).
Oral Agreement Insufficient—Authenticated Record of Security Agreement
Required
 If the secured party is not in possession or control of the collateral, the security
interest will be valid only if there is a security agreement “authenticated” by the
debtor and containing a description of the collateral. 9-203(b)(3)(A).

Record—information in a tangible form (e.g., on paper) or electronically stored
and retrievable (e.g., in a computer file); and

Authentication—a signature or other symbol or encryption intended to identify
the authenticating party and accept the record. 9-102(a)(7).
Composite Document Doctrine:
 If none of the loans documents is dominated as a security agreement

For the composite document doctrine, it is important to look at the
contemporaneous activities to determine if they are meant to be read together.

Whether parties intended to create a security interest; there is 2 step process:

written document that contains language that objectively indicates that
parties intended to create security interest (law)

whether parties actually intended to create interest (fact)
2.3.2 Description of the Collateral in a Security Agreement
 The security agreement must always contain a description of the collateral
involved. 9-203(b)(3)(A).( non-party should be able to read it and know what you are talking
about)

The description is sufficient if it reasonably identifies what is described.
9-108(a). The description must be such that it can be determined there from
what collateral the parties intended the security interest to cover. Any
method of identifying the collateral is allowed as long as it is not confusing.
9-108(b). [full list of 9-108(b) see extra 3]
14


9-108(b)(3) – allows the description to be by type defined in the
UCC, 9-102 [full list of 9-102 on extra 4]

“Goods” is a defined term in § 9-102(a)(44)

9-108(c) – not all assets

You cannot get a security interest in household goods – FTC rules
Some collateral cannot be described by type alone; instead, it must be described
more specifically to be covered by the security agreement 9-108(e):

Commercial tort claims

Consumer goods, consumer securities account, and consumer commodity
accounts

All of the debtor’s consumer goods.”– INSUFFICIENT

9-108(e)(2) disallows a description by type for consumer
goods

Super-generic descriptions are not sufficient to describe the collateral. 9-108(e).
Super-generic descriptions, however, are sufficient in the financing statement. 9504.

9-204: validates after-acquired property and dragnet clauses (future advances
of money to be secured by same collateral)

Will “all equipment and inventory” reach after-acquired equipment and
inventory? Maybe inventory (Stoumbos), but not equipment. Thus you have
to specifically say that you are going for after acquired equipment.

An error in the description is not fatal as long as there is other proof that the
parties intended the collateral in question to be covered. See 9-108 (Comment 2).

Bank account is a “deposit account,” 9-102(a)(29), not an “account,” § 9102(a)(2).

“All items purchased with the card” depends on jurisdiction

Majority hold that language such as “the goods purchased on your Account”
sufficient. Murphy

– Minority hold that language such as “all purchase” not sufficient. Shirel
15
2.3.3 Dragnet clause
 SA provides that the collateral will be security not only for repayment of the loan,
but also for any other debts owed by the debtor to the creditor now or in the future


In essence future money advances
Not enforced if other debt is completely unrelated to original transaction
2.4 VALUE
2.4.1 Value Must Be Given
 9-203(b)(1) requires the creditor to give value.

Value: any extension of credit, a commitment to lend, and any consideration
sufficient to support a simple contract given by SP to debtor – 1-204

A person may give value by an advance of money or delivery of goods, but may also
give “value” for rights in collateral by acquiring the rights:

In return for any consideration sufficient to support a simple contract;

As security for a preexisting claim or in partial or total satisfaction thereof;

By accepting delivery under a preexisting contract for purchase; or

In return for a commitment to give future value (even though no money has
yet been lent).
2.5 DEBTOR’S RIGHTS IN THE COLLATERAL
2.5.1 Rights in Collateral – In General
 Before a security interest can attach, the debtor must have “rights in the
collateral.” 9-203(b)(2)

The concept of title can be ignored in considering whether the debtor has “rights in
the collateral.” 9-202
Effect of restriction on Debtor’s Right to Transfer the Collateral
 Any provision in the security agreement that purports to prohibit transfer of the
debtor’s rights in the collateral is void and unenforceable 9-401(b).
2.5.2 Transferring Property Rights
Person May Transfer Rights Property Rights He Has, but No More
 §§ 9-201, 9-315(a), 9-401(a): debtor may transfer ownership of collateral, but
security interest may continue in that collateral (though buyer not bound by the
security agreement).

A thief can never have rights in the property that he has stolen, nor does he have
any power to transfer rights in it.

Purchaser of goods acquires all title which his transferor had/had power to
transfer. 2-403(1).

Purchase: taking by sale, lease, discount, negotiation, lien, SI, issue, or any
other voluntary transaction creating an interest in property. 1-201(29).
16


Person with voidable title has power to transfer “good title” to good faith purchaser
for value in 4 situations 2-403(1):

(a) deceived as to identity of purchaser

(b) delivery was in exchange for check which was later dishonored

(c) transaction was to be a cash sale

(d) delivery was procured through fraud punishable as larcenous
Merchant is in the business of selling a particular kind of good is allowed to
transfer to a buyer the rights of a person who entrusted that kind of good to the
merchant. 2-403(2).


Buyer must be a “buyer in the ordinary course of business”: buys good in
good faith without the knowledge that the sale violates another person’s
rights in the goods. 1-201(b)(9).
Bailee: person that by a warehouse receipt, bill of lading, or other document of
title acknowledges possession of goods/Ks to deliver them. 7-102(1).

Right to possession, not right to sell it
2.6 AUTOMATIC ATTACHMENT
2.6.1 Categories of Collateral that are Eligible to be Included Automatically
Certain investment property
 if a commercial entity uses the word “investment property” it’s okay, it grabs the
account and everything that is in the account even though it’s not articulated
individually
Rights in a Secured Obligation
 classic example: I am a buyer of land, seller/lender transaction yields a note (Art.
9 might call this an instrument) and a mortgage

instruments are personal property even though the land is not personal property

one stage away from the land when the seller/lender has a new secured party and
they want interested in these two things as their collateral:

note and mortgage
Proceeds
 SA does not need to state proceeds because the SI automatically attaches. 9-203(f)

Includes whatever is received upon the sale, lease, license, exchange, or collection
of collateral. 9-102(a)(64).ALL OR NOTHING CONCEPT

However you can reach after acquired property with this provision if SC can trace
the proceeds of the sale of collateral, that was secured, to buy new colleteral

Products, offspring, substitutions, additions, or replacements: not provided for by
security agreement; § 9-315(a)(2) recognizes a continuing security interest only in
proceeds.
17

But security agreement may cover these items as literal descriptions of the
collateral, § 9-204(a), though must inquire whether security agreement
covers after-acquired property.
2.6.2 Two-Tier transaction:
 Rights in an obligation (get rights and use those right to secure another
transaction)


Mortgage is security instrument in its own

Real estate transactions are not subject to Art. 9 – Transaction one creating
interest in land doesn’t fall under Article 9

Transaction two creating interest in two pieces of paper that represent
interest in land falls under Article 9 – need to have security agreement
Chattel paper is always a 2 tier transaction:

Person 1 buys/leases goods

Person 1 gives the seller a promise to pay accompanied either by a security
interest or lease

Chattel paper grabs both from tier 1 and allows personal property
represented to serve as personal property in the second transaction
2.6.3 Supporting obligations (including letters of credit, letter of credit rights)
 If you have a security interest in a transaction that has a guarantee associated
with it, you get guarantee as part of your collateral (as part of your package)

Note – Mortgage – Guarantee
2.6.4 Two Restrictions on Automatic Attachment
 Cannot extend to proceeds outside of the realm of Article 9

Proceeds have to be identifiable. 9-315(a)(2).

If a creditor cannot trace the proceeds, then the interest is lost.

Commingled Goods: Goods that are physically united with other goods so
that their identity is lost in a product (goods united so as to lose the
original identities) or mass (fungible property is combined with more of the
same) 9-336(a).


no interest in original goods after they are commingled – 9-336(b)

any interest attached to the commingled goods before commingling
automatically attaches to the products or mass the results from
commingling – 9-336(c)
Proceeds that are commingled identifiable if: 9-315(b)

If proceeds are goods and


§ 9-102(a)(64): defines proceeds; note that proceeds are
collateral, so proceeds of proceeds are collateral.
If they’re not goods, but they’re identifiable via a tracing method
18

§ 9-315(b): creditor (bears burden of proof) can identify
proceeds through tracing rules, such as lowest intermediate
balance rule.

Tracing rules: perfection continues in cash proceeds of the
collateral as long as the proceeds are still identifiable

Lowest Intermediate Balance Rule (9-315(b)(2)[3]):
traces money into bank accounts by presuming that
withdrawals from that account are of money in which no
one claims an interest

Example: Debtor has bank account with $2,000 in it.
Debtor deposits $3,000 cash proceeds. Debtor withdraws
$1,000;Rule presumes that debtor withdrew money that no
in
the bank account and may be traced there by the secured
party claiming the $3,000 proceeds
o
However if money leaves an account according to 9332(b) the receiver takes the money free and clear
o
If money is used to buy new collateral as long as you
can trace it you take SI in that collateral and then
apply the remainder of the account for the deficency
2.6.5 After-Acquired Property
 A SI may be created in “after-acquired property”—i.e., collateral that the debtor
does not now own, but that the debtor may or will acquire in the future. 9-204(a).

Most courts hold that the agreement itself must expressly use that term or
otherwise clearly refer to collateral to be acquired in the future.

However, SP can use proceeds to trace sale of old collateral to the new collateral,
look at procced for more!

Consumer Goods Exceptions:


No security interest attaches to consumer goods given as additional
security under an after-acquired property clause unless the debtor acquires
rights in the consumer goods within 10 days after the secured party gives
value. 9-204(b)(1).

“Credit Practices Rule” prohibits the creation of non-purchase money, nonpossessory security interests in household goods. (16 C.F.R. 444; 12 C.F.R.
227). The policy here is to prevent over-reaching creditors from seizing
property having value only to the consumer.
Commercial Tort Claims Exceptions:


An after-acquired property clause in a security agreement will not reach
commercial tort claims that were not in existence when the security
agreement was authenticated. To be covered, later arising commercial tort
claims would need a new attachment process. 9-204(b)(2).
Inventory (and other things that change frequently—daily)
19


“Inventory,” implies that it covers not only present inventory, but also
inventory to be acquired in the future. But only if the agreement is in a
Filtercorp Jurisdiction. If you are not in a Filtercorp Jurisdiction, you
need an after-acquired property clause.

Accounts and Farm Equipment: there is no need to use the words “now
owned and after-acquired” since is the usual case the parties would
contemplate that after-acquired collateral of this type would automatically
be covered by the SA.
Floating Lien

Attaches to a debtor’s accounts, stock, inventory of goods, or other
aggregation of items of collateral. The actual identity of the collateral may
always be changing, but the inventory or aggregation as a whole continues
to be subject to the lien; i.e., the lien “floats” over the collateral, attaching
to an item when it comes into the debtor’s possession and terminating
when the item is sold or the account is paid. 9-204; 9-205.
2.6.4 Future Advances
 Agreement may provide that the collateral secures future advances or other value,
whether or not the advances or value are given pursuant to commitment. 9-204(c).

Need a future advance clause, otherwise you’re making a new deal every
time. Thus new perfection is need every time, thus the new contract doesn’t
relate back to original agreements.
20
23: PERFECTION
3.1 PERFECTION DEFINED

Process by which parties go through to make sure that the creditor’s security
interest in the collateral is good against most of the rest of the world.

Does not occur until interest has attached – 9-308(a)

Perfection may occur more than once (Secondary Perfection). If so, the later
perfection by another means relates back to the date of the original perfection,
provided that there has been no intervening unperfected period – 9-308(c)

Your goal should be a continuously perfected SI.
O = Optional / P = preferred / E = exclusive
*** Normal: Perfected by filling 9-310a / by possestion 9-312a / by control 9-314(a)
***If good is in two categories or in questionable categories, then do both file and take possesion
***Promisory note (without security interest) is insturment 9-102(a)(47)
***Promisory note and security interest is chattel paper (usually in consumer goods) 9-102(a)(11)
***More in extra 2
3.2 FILING A FINANCING STATEMENT

(See section 4. Filling)
3.3 POSSESSION OF THE COLLATERAL
3.3.1 Possession Overview
 Possession gives notice theory

9-313 (a and b[b is subject to 9-316(d)]) If the creditor takes physical possession of
the collateral (a pledge), the security interest is perfected.
21

A method of obtaining both attachment [9-310(b)(6)] and perfection
simultaneously, as long as the other requirements for attachment have
been met (i.e., secured party gave value and debtor has rights in collateral).
3.3.2 Types of Property Covered
 9-313(a)-(b) Goods, money, negotiable documents, certificated securities,
instruments, or tangible chattel paper.

Goods that do not fit into these categories cannot be pledged.

Money may be perfected only by SP’s taking possession – 9-312(b)(3)
3.3.3 Means of Taking Possession
 Inventory: creditor places inventory in a warehouse and then takes possession of
the negotiable warehouse receipt (a document) issued by the warehouser. Since no
one can get the warehoused goods without surrendering the warehouse receipt 7403(3), possession of the document constitutes possession of the goods 9-312(c).

Goods in Possession of Bailee: If goods are being held by a bailee, a secured
party cannot directly take possession of them.

Goods covered by negotiable document of title: Since a negotiable document
of title (e.g., a warehouse receipt or bill of lading) represents the goods
being held by the bailee, possession of the document perfects a security
interest in both the document and the goods covered thereby. 9-312(c) and
(Comment 7)

Bailment with no document of title: If the goods are in the hands of a bailee
who has not issued any kind of a document of title covering the goods, the
secured party can perfect by getting the bailee to authenticate a record
acknowledging that the bailee holds the goods for the benefit of the secured
party. 9-313(c).
3.3.4 Duration of Perfection
 9-313(d) From the time possession is taken and continues only so long as
possession continues.
3.3.5 Rights and Duties of Secured Party in Possession
 Duty of Reasonable Care: 9-207(a) requires storing and preserving the
collateral. In the case of instruments or chattel paper, the secured party is required
to take all steps necessary to preserve the rights of the debtor in the paper.

Right to reimbursement for expenses: 9-207(b)(1) secured party may charge
the debtor for any reasonable expenses.

Accounting for Rents, Issues, and Profits: 9-207(c) secured party may keep
any increase in profits on the collateral as additional security; however, any money
received from the collateral must either be returned to the debtor or applied
against the secured obligation.

Risk of Loss: 9-207(b)(2) The risk of accidental loss or damage to the collateral is
borne by the debtor to the extent that the secured party’s insurance is insufficient.
22

Right to use Collateral: The secured party may operate or use the collateral only
for the following reasons: (i) for purposes of preserving the collateral or its value
(e.g., cows have to be milked, or they will dry up); (ii) pursuant to court order; or
(iii) except for consumer goods (for which this is not allowed), as agreed to by the
debtor. 9-207(b)(4).
3.4 CONTROL OVER COLLATERAL
3.4.1 Control Overview
Creditor with control prevails – 9-328(1)
 if two have control, first creditor prevails – 9-328
Perfected by control when SP gets control and remains perfected only while SP retains
control – 9-314(b)
For some forms of collateral (i.e., deposit accounts, letter of credit rights, investment
property, and electronic chattel paper) the secured party perfects by going through
the various steps required to give the creditor control over the collateral.
3.4.2 Control over Investment Property
 For investment property[9-102(a)(49)] (stocks, bonds, commodity contracts, and
rights in securities held with a broker), there are two methods of perfection: filing a
financing statement [9-312(a)] and getting “control” over the investment property
[9-312(b)(1)].

Creditor with control prevails over a creditor who perfected by filing. 9328(1)

A party gains control by:

Certificated Securities: taking delivery of the certificates with any
necessary indorsements 8-106(a)-(b)

Note: only form of investment property that may be
perfected by possession – 9-310(b)(7)

Note: filing is a permissible method as well – 9-312(a)

Uncertificated Securities: becoming the registered owner in the
records of the issuer or by having the issuer agree to comply with
instructions by the creditor without further consent by the
registered owner (the debtor). 8-106(c)(1) and (2)

Securities or commodity accounts or rights to particular investments
in such accounts: changing the name of the account to that of the
creditor, or by obtaining the agreement of the broker/clearing
corporation that it will act according to the instructions of the
creditor without any further consent of the debtor. 8-108(d)

Securities Intermediary as Creditor: If the securities intermediary
(i.e., the broker or clearing corporation) itself becomes the creditor,
the securities intermediary will have control because the securities
will be in its possession. In this situation, the securities
intermediary gets super-priority over all other creditors, even those
having prior control. 9-328(3)
23
3.4.3 Control over Deposit Accounts
 Deposit account is the type of property generally referred to as a bank account 9102(a)(29)
 Getting “control” over a bank account is the only way to perfect an interest in it.
9-312(b)(1). There are three ways to gain control:


Is the creditor a bank? The bank in which the deposit account is maintained
automatically has control over the deposit account when it makes a loan to
a customer using that deposit account as collateral.

Is the creditor not a bank? Change the account name to the name of the
creditor (which is the safest method of getting control);

Or, if this is not done, have the bank agree in an authenticated record that
the bank will follow the instructions of the creditor without further consent
of the debtor. 9-104(a)
SP still has control even if debtor has right to disposition of funds – 9-104(b), but
debtor can use the account to write checks, withdraw or deposit
3.4.4 Control over Letters of Credit Rights
Getting “control” over the letter of credit rights is the only way to perfect a direct
interest in such collateral. 9-312(b)(2).

To gain control, have the issuer of the letter of credit consent to an
assignment to the creditor of the proceeds of the letter of credit. 9-107.

The issuer of the letter of credit is not obligated to consent to the
assignment, and if the issuer refuses to give consent, the seller’s creditor
will not have achieved control and will be unperfected. 5-114(c).

The creditor could still achieve perfection by perfecting its security
interest in the account that the buyer owes to the creditor, and this
would automatically perfect a security interest in the letter of credit
supporting this account.
3.4.5 Control over Electronic Chattel Paper
Electronic chattel paper (i.e., chattel paper that has no physical form) may be perfected
by filing or taking control.

9-105 provides for such control if the creditor can figure out a way to have a
single authoritative copy of the electronic chattel paper marked so that the
creditor is the assignee of record, and the copy is maintained by the creditor
in such a way that it can be changed only with the agreement of the
creditor.
3.4.6 Rights and Duties of Secured Party in Control
A secured party has the same duty to account for rents, issues, and profits of collateral
and the same right to repledge the collateral as a secured party in possession of
collateral.
3.4.7 Length of Perfection by Control – 9-314(c):
Perfected from time control is obtained by SP and until:

(1) SP loses control; and one of the following occurs:
24

(2)(A) Certificated security: debtor acquires possession

(2)(B) Uncertificated security: issuer registers debtor as registered
owner

(2)(C) Security entitlement: debtor becomes holder
3.5 AUTOMATIC PERFECTION

Some security interests can be perfected by attachment alone. If an interest has
been perfected, the protection may be lost if instruments, goods, or negotiable
documents are released to the debtor to effect a sale or refinancing. In this
situation, be sure to consider the rules regarding temporary perfection.
3.5.1 Roadmap: Perfected by Attachment Alone (9-309)
 (1) PMSI in consumer goods

(2) assignment of insignificant portion of debtor’s accounts and payment
intangibles

(3)-(4) sale of promissory notes and payment intangibles

(5) assignment of rights under health insurance policy

(6)-(14) the remaining automatic perfection rules

Also include Temporary Automatic Perfection – 9-310; 9-312
3.5.2 Purchase Money Security Interest (PMSI) in Consumer Goods
 9-309(1) Security interest in consumer goods that arises in connection with the
purchase of the goods is perfected automatically upon attachment—no filing is
required.

An authenticated SA is still necessary.


9-103(a)(2) A PMSI arises when the secured party advances money or
credit to enable the debtor to purchase the collateral if the value is in fact
so used.
9-103(a)(2) A purchase money secured party may be either the seller who has
advanced credit for all or part of the price or any other person (e.g., finance
company, lender) who gives value or incurs an obligation to enable the debtor to
acquire the collateral or rights in it, but only if the value is actually used in the
transaction by the debtor.



SP can make sure that the money/credit is used for the purported collateral
by making the check directly out to the merchant or jointly to the merchant
and debtor.
9-203 Even though the creditor is not required to file notice of his interest in a
purchase money transaction involving consumer goods, the creditor must still
have an authenticated SA with the debtor to obtain a valid security interest in
the first place.
Exception – Motor Vehicles: Certificates of title are issued evidencing the ownership
of certain motor vehicles (e.g., cars, trucks, mobile homes). Security interests in
such vehicles must be perfected by notation of the interest on the face of the
25
certificate; neither automatic perfection nor the filing of a financing statement
would work. This exception does not apply to a car dealer. 9-309(1), 9-311(a), (d)


Title becomes effective when a valid application and payment of the fee is
made to the right office. 9-303(b)

9-309(1): automatic perfection does not apply to consumer goods
that are subject to a statute or treaty described in 9-311(a)

The local law of the jurisdiction under whose certificate of title the goods
are covered governs perfection – 9-303(c)
Exception-Fixtures: Consumer goods that are to become fixtures require special
steps for perfection.
3.5.3 PMSI Status Lost in Certain Circumstances 9-103(e)-(h)
 Dual Status Rule: If a debt is refinanced or consolidated with other loans, some
courts will retain PMSI status if the creditor can prove how much of the debt
remained unpaid.
3.6 TEMPORARY (& OTHER FORMS OF) AUTOMATIC PERFECTION 9-312(E)-(H)
3.6.1 Temporary Automatic Perfection Overview
 If certificated securities, documents, goods, or instruments – see 9-310(b)(5)

There is temporary perfection of a security interest in certain situations. 9-312. If
the creditor does not perfect by some other means within the 20 days, the
creditor becomes unperfected and loses any priority it has over competing creditors.
3.6.2 Assignment of Beneficial Interest in Decedent’s Estate
 9-309(13) Perfection of a security interest created by an assignment of a beneficial
interest in a decedent’s estate is automatic.
3.6.3 Sale of Promissory Notes and Payment Intangibles
 The buyer of promissory notes and payment intangibles are automatically perfect
on attachment. 9-309(a)-(4)
3.6.4 Supporting Obligations
 Rights against sureties and issuers of letters of credit are called “supporting
obligations” in the Code, and, as long as the creditor is perfected in the underlying
obligation, the supporting obligations are automatically perfected without the
creditor having to take any special steps to preserve these secondary rights. 9102(a)(77), 9-308(d) and Comment 5.
3.7 TIME OF PERFECTION
3.7.1 Completion of Filing or Other Requirements
 Attachment + Perfection Method = Perfection. 9-308(a).

It does not matter what order attachment and perfection method occur.
26
3.7.2 Secondary Perfections
 A security interest may be perfected more than once; the later perfection by
another means is deemed to relate back to the date of the original perfection,
provided that there has been no intervening unperfected period. 9-308(c)

9-312(f) lists reasons that goods can be released and remain perfected for 20 days.
3.7.3 Why Time of Perfection is Important
 Determining the time of perfection often is very important when determining
which creditor has priority over the debtor’s collateral. For example, in a contest
between two perfected secured parties, the first secured party to file a financing
statement or perfect generally prevails. Thus, the exact moment of filing or
perfection is crucial in the determination of which party will have priority.
3.8 PLACE OF PERFECTION—MULTISTATE TRANSACTIONS

The question of which state’s law governs perfection arises when collateral is
moved from one state to another and in multistate transactions. This question is
particularly important when perfection has been accomplished by filing. If a filing
is not made in the proper state, a party will not be perfected. Therefore, the Code
provides special rules to determine which state’s law governs. 9-301.
3.8.1 General Rule—Debtor’s Location Governs Perfection
 9-301(1) Debtor’s location governs perfection. 9-307 contains rules for establishing
where a debtor is located.

Corporations and registered organizations: located in the state of its
corporation. 9-307(e)

Organizations other than Corporations: Noncorporate organizations (e.g.,
partnerships, trusts, and societies) are located at their place of business if
they have only one place of business, and at their chief executive office if
they have more than one place of business. 9-307(b)(2) - (3)

Place of business is where the debtor conducts its affairs. 9-307(a)

Individuals: primary residence. 9-307(b)(1)

Federal Government: US is based in D.C. 9-307(h)

Foreign Debtors: If the foreign country has laws similar to Art. 9, those
laws govern. If not, the debtor is located in D.C. 9-307(c)
3.8.2 Exceptions
 Possessory security interests and security interests in fixtures and timber to be cut: if
taking possession of collateral, or if the collateral is a fixture, or timber to be cut,
the location of the collateral determines perfection. 9-301(2)-(3)

Goods covered by certificate of title: the law of the state issuing the certificate
governs perfection. 9-303

Deposit Accounts: The law of the depositary bank’s jurisdiction governs perfection
of a security interest in a deposit account. If no jurisdiction has been designated by
the parties, the law of the state in which the bank has its chief executive office
governs perfection. 9-304.
27

International organization: File either at place of business or place of chief
executive office. § 9-307(b). Here, both New York.

Collateral is airplane. File application in (1) the Federal Aviation Administration
aircraft filing system in Oklahoma City, Oklahoma, and (2) in the International
Registry of Mobile Assets

Collateral is motor vehicle. File application with the Department of Motor Vehicles
of the state that issued the certificate of title
3.9 REPERFECTION
3.9.1 General Reperfection 9-316
 new perfection relates back –(b)

If SP fails to reperfect within 4 months, then he’s considered unperfected – (b)

If 5 year duration lapses before 4 month grace period, reperfection time in new
state ends when it does in state 1 – (a)(1)

Continuous perfection ONLY IF there has been no intermediate period – 9-308(c)
3.9.2 Amendments 9-512
 May add/delete collateral; continue/terminate effectiveness of statement if the
amendment identifies the file number and the initial financing statement to which
it relates. [Alternative A(a)]

Does not extend period of interest’s effectiveness – (b)

If it adds collateral, then it’s effective from the filing date of the amendment – (c)

If it adds debtor, then it’s only effective from date adding debtor – (d)

CANNOT delete all debtors/SPs without replacing them – (e)(1)+(2)
3.9.3 Relocation of Debtor
 Reperfection is required in the new location within 4 months after the change – 9316(a)(2)

If [the] security interest . . . becomes perfected . . . before [the end of four
months] it remains perfected thereafter. 9-316(b)


Otherwise deemed always unperfected against all but lien
creditors
Deemed unperfected against everyone after 4 month period expires. 9316(h)

Deposit accounts, letter of credit rights, uncertificated securities, securities
accounts, and commodity accounts: If the jurisdiction of any [bank, issuer of the
letter of credit, issuer of the uncertificated security, securities intermediary, or
commodity intermediary] changes, the secured party must perfect within four
months of the change (even if the secured party does not know of the change). 9316(f)

As long as the secured party reperfects the security interest in the new state within
the four-month period, the interest is deemed perfected from the date of the
original perfection (“relation back”). 9-308(e), 9-316(b)
28

If the location change is because there is a “new debtor” (such as by corporate
merger), secured creditor has 1 year after transfer of the collateral to perfect a new
security interest. § 9-316(a)(3)
3.9.4 Change in Debtor’s Name
 If change has the effect of rending the financing statement seriously misleading,
then SP has to file an amendment giving the new name within 4 months of change
to protect interest in collateral acquired by debtor more than 4 months after the
change – 9-507(c)(1)-(2)
3.9.5 Transfer of Collateral to a Person Who Thereby Becomes a Debtor, Transferee
 When transferee takes collateral still subject to SP’s interest, the transferee
becomes the debtors

If same state: don’t need to refile – 9-507(a)

If different state: have 1 year to refile – 9-316(a)(3)
3.9.6 Transfer of Collateral to a “New Debtor”
 “New Debtor”: transferee who agrees to be bound by the security agreement – 9102(a)(56) and 9-203(d)


Requirements of transfer and possible transfers are covered by subsection

Note: a person can become the new debtor without signing SA
The transfer to new debtor located in the same state is treated as a name change;
therefore, SP has to refile in 4 months to avoid a seriously misleading error – 9508(b)
3.9.7 Movement of collateral
 Remains perfected without further action as long as the interest is also perfected
by possession under the new state’s laws – 9-316(c)
3.9.8 Change in Characterization of Collateral (use of collateral)
 Do not need to refile, say from inventory to something else, excused under 9-507(b)

But if the change requires that the collateral be perfected in a different office or by
a different method the secured creditor become unperfected
3.9.9 Conversion of collateral into: other collateral (barter) / proceeds
 Barter (no cash is exchanged):

Type 0: financing statement description still indicates collateral; financing
statement effective. § 9-315(d)(1)

Type 1: financing statement description no longer describes collateral, but
the filing office is the correct office for new collateral; financing statement
still effective. § 9-315(d)(1)

Type 2: financing statement description no longer describes collateral, and
the filing office is the wrong office; secured party must refile in correct
office within 20 days to maintain perfection. § 9-315(d)(3)

New authorization to file F/S not needed. § 9-509(b)(2)
29

This is about identity of the collateral. Collateral exchanged for cash and then
for non-cash collateral:

Type 0: financing statement description includes new collateral; financing
statement still effective.

Type 1 and 2: financing statement description does not include new
collateral; secured party must file financing statement (in correct office) to
cover new collateral within 20 days of receipt of new collateral to maintain
perfection. § 9-315(d)(3)


New authorization not needed. § 9-509(b)(2)
This is about identity of the collateral. Conversion of Collateral into Proceeds

Collateral exchanged for cash: secured party has continuous, perpetual
perfection in identifiable cash proceeds. § 9-315(d)(2)
3.9.10 Interstate Transfer of Motor Vehicles:
 General rule: no action needed because governed by law of the state that issued
the certificate – 9-303(c); 9-316(d)

If new certificated is obtained 4 month grace period to reperfect – 9-316(e)

4 month grace period does not apply to judicial lien creditors –9-316

Not applicable if sold to innocent buyer/new creditor original creditor loses to these
later parties –9-337
4: FILING
4.1 THE FINANCING STATEMENT
4.1.1 General Rule
 Financing statement must be filed to perfect 9-301(a)

Exception Examples 9-310(b)(1)-(10); 9-311 [refer to section 3]

Financing statements are typically written documents prepared on pre-printed
forms or electronic records entered on electronic forms. 9-521 has examples,
though SC can use their own financing statements

Only method of perfection for accounts and general intangibles; NOT
applicable to deposit accounts and letter of credit of rights

Filing is effective when SP presents a communication of a record to a filing office
and tenders the filing fee/acceptance of the record by the filing office. 9-516(a)


SP is protected even if the filing officer messes up and misfiles record. 9517
May pre-file to hold your place via 9-502(d), protects against debtor getting
another secured creditor on same collateral while the paper work is going through
on original secured creditor

subsequent lenders can protect themselves from pre-filing by checking the
filing system
30
4.2 WHAT TO FILE

Start with 4.4 Mechanism of filling!

The totality of information included must not be seriously misleading 9506(a)
4.2.1 The Debtor’s Name and Address
 Records are indexed by debtor’s name. 9-503(a)(1)




Obligation to Index a filling 9-519(a)(4) and 9-519(c)

Filling has to occur within two business days of receiving the filling
– 9-519(h)
Information from Filling Office or Indexing office is governed by 9-523

9-523(c)(1) required the filling office to communicate search results
as of no earlier than three business days before the office receive
the request

9-523(e) says searches should be returned within two business
days
9-102(a)(28) – a debtor is a person


Indexing by the indexing or filling agency is governed by 9-519
1-201(b)(27) – Person is an individual, corporation or any other legal or
commercial entity.
UCC 9-503 – “This section provides that a financing statement sufficiently
provides the name of a registered entity only if it provides the name of the debtor
indicated on the public record of the debtor’s jurisdiction of origin.


Individual: debtor’s “exact full name” - § 9-503(a)(4)

Alt A: driver’s license name is “exact full name”

Alt B: driver’s license name OR correct legal first name and
surname is “exact full name”
Corporate entity: any organization registered with the state, bringing it
into existence - § 9-503(a)(1)

Name on registration certificate [looks at 9-102(a)(71), 9-102(a)(68)]

[In some jurisdictions look for 9-526] Has to have a correct
designator as in “Corp” “Company” “Co” “L.L.C” “Inc”
“Incorporated” and other dependent on state law

No two Corporations can have the same name in the same state,
this if the names are the same then the companies were
incorporated in two different states.

Trade name: do not use - § 9-503(c)

Partnership and “un-register-able” organization: Name by which
generally known in community -§ 9-503(a)(5) or (6) (depending on Alt A or
B)

If doesn’t have a name file under partner names
31

Search Logic Test: If there is an error in the debtor’s name that prevents a filing
office’s computer search logic from finding the financing statement, then there is a
seriously misleading error.


UCC 9-526: International Association of Commercial Administrators
(IACA) adopted by most states for the search logic test. Disregards:

1. upper and lower case letters,

2. punctuation marks an accents,

3. endings words like “LLC” or “an Iowa Corporation”, [if say
corporation or any other word is not an ending word then can’t be
disregarded]

4. ignores “the” at beginning of the name,

5. ignores spaces,

6. treats initial as equivalent of a first or middle name, [thus initial
for first or middle name is fine]

7. treats no middle name as equivalent of all middle names [so
omission of middle name is fine],

8. ignores suffixes [aka Mr. IV Ms.]

Hyphenated name counts as one name
Seriously verse not seriously misleading names

9-506(b)- Financial statement is seriously misleading if it fails to comply
with Section 9-503(a) or fails the search logic test

§ 9-506(c): “If a search of the records of the filing office under the debtor’s
correct name, using the filing office’s standard search logic, if any, would
disclose a financing statement that fails sufficiently to provide the name of
the debtor in accordance with § 9-503(a), the name provided does not make
the financing statement seriously misleading.” [SAFE HARBOR]
4.2.2 The SP’s Name and Address
 Sufficiency of secured party’s name/address description:

If name is wrong then fatal

Trade name for a SC is OK

Address has to be one that is reasonable under the circumstances. 9-516
32


Financing statement that names representative is sufficient, even if it
doesn’t indicate representative capacity. 9-503 (d)
Amendments: 9-511

Naming SPs: assignee named in amendment is SP of record. (b)

Deleting SPs: remains SP until an amendment is filed to delete them. (c)
4.2.3 Description of the Collateral 9-504(a)
 (1) “objectively determinable” pursuant to 9-108; OR,

(2) A supergeneric description is sufficient (indication that financing statement
covers all assets or all personal property)


However cannot have a wrong address of where the collateral is located
Less specificity is required in financing statement than in the security agreement

after-acquired property does NOT have to be in financing statement as
long as the types of collateral subject to after-acquired property provision
are sufficiently described

must expressly state fixtures, timber to be cut, and minerals. 9-502(b)
4.3 WHERE TO FILE
4.3.1 What Filing Office?
 If the local law of this state governs perfection of SI, then file. 9-501(a)

In the Office of the Secretary of State (central filing office)

Exception: Transmitting utilities – office is to be determined by state. 9501(b)

LOOK AT THE EXTRA 1
4.3.2. Which State?
 Law of jurisdiction in which debtor is located governs perfection. 9-301(1)

General rules for determining debtor’s location. 9-307

(b)(1) individual: principal residence

applicable to sole proprietorships

Questions to ask: Where is he registered to vote? What state
issues him a license? Where does he file for taxpaying purposes?

When in doubt, filed in any state that may be claimed.

(b)(2) organization with one place of business: where debtor conducts
its affairs (see 9-307(a))

(b)(3) organization with more than one place of business: chief
executive office (where debtor manages the main parts of business
operations and affairs)

(c) Foreign debtor: country in which debtor is located; otherwise, D.C.

(e) Corporations/”registered organizations” under State law: state of
incorporation.
33


“Registered organization”: organization organized solely under law
of a single state or U.S. 9-102(a)(70).
(h) federal government: D.C.
Exceptions to general rule:
 Security interests obtained via possession; timber to be cut;
fixture: location of collateral governs. 9-301(2)-(3)

Agricultural liens: where farm product covered by lien. 9-302

Goods covered by certificate of title: state issuing the certificate 9-303

Deposit accounts: depository bank’s jurisdiction. 9-304

Investment property: perfected by control. 9-305
4.4 MECHANICS OF FILING
4.4.1 Acceptance & Rejection from Filing Office
 Per 9-502(a), for financing statement to be effective three conditions need to be
met:


1. Name of the debtor

2. The name of the secured creditor

3. An indication of the collateral covered [does not need to qualify for
filing, however needed for financial statement to be effective]
UCC 9-520(a) requires the filling officer to refuse to accept a financing statement
unless it contains items 1 and 2 and these 3 additional items:

4. The mailing address of the secured creditor. 9-516(b)(4)

Erroneous address cannot be basis of subordination of SC under 9338

5. The mailing address of the debtor. 9-516(b)(5)(A)

6. An indication of whether the debtor is an individual or an organization.
9-516(b)(5)(b)

Missing debtor information effective as against lien creditors. 9-338
LOOK DOWN!!!
34

Under both 9-520(a) and 9-521(a) filling office may only refuse to accept a record
because of the reasons stated in 9-516(b)

Filing is ineffective when office refuses to accept a record because – 9-516(b)

(1)- improper medium; (2) fee is not tendered; (3) unable to index record; (a)
name of debtor is insufficient, (b) more on amendments, (4) no address or
name for SP; (5) mailing address of the debtor



9-516(c) clarifies rules applicable to 9-516(b)
The filling office after refusal has to communicate to the filer both the
reason for refusal and the date and time the record would have been filed.
9-520(b)
Filing is effective when office refuses to accept a record, other than for those
reasons listed in 9-516(b) – 9-516(d) Basically (5) and/or (6) from the list is
wrong [thus the filling is recorded and is effective against lien creditors but not
SC or purchasers – 9-338]

Comment 3 UCC 9-516- UCC does not authorize the filling office to
determine or even consider the accuracy of information provided in record

If the office accepts a statement it should have rejected according
to these terms, it is deemed effective. 9-520(c) and comment 3
4.4.2 Duration and Effectiveness of Financing Statement (9-515)
Duration
 Filed financing statement is effective for 5 years after the date of filing – 9-515(a)

Under 9-522(a) filling office can, after a financing record lapses for more
than one year, remove it and destroy it

Real state Recording system never remove documents only add them

If the debtor has paid the secured obligation and the SP is not required by K to
lend more money, the debtor can demand that the SP filed a termination statement
within 20 days. 9-513(c)(1)

If the SC doesn’t comply SC becomes liable for damages. 9-625

A document that states that a security obligation was satisfied, satisfaction
statement or release is added to the file

Upon filing of a termination statement, the financing statement to which it
relates cases to be effective. 9-513(d)

Termination statement must id the initial financing statement to
which it relates and it must indicate that the ided financing
statement is no longer effective. 9-102(a)(80)

Termination statement is bound to rule of 9-506 on seriously vs
not seriously misleading.

Termination statement is only effective if filed by a person that
may file it under 9-509. 9-510

Under 9-509(d)(1) SC can authorize debtor to file
themselves
35
Lapse


The financing statement lapses unless a continuation statement is filed; if it lapses,
the interest ceases to be perfected and it is deemed ineffective, read provision
below!– 9-510(c), 9-515(c)

It is deemed never to have been perfected as against a purchaser of
collateral for value – 9-515(c)

Once lapsed you would need authorization from debtor to file new f/s
The next 5 year period of effect financial statement tracks from the
effectiveness period of the original fin statement
Continuation Statement:
 filed within 6 months before expiration of 5 year period – 9-515(d)


However if continuation statement is filed to early, say 7 month, it
is also deemed ineffective
If filed on time, the effectiveness of the initial statement continues for a period of 5
years from the day on which the statement would have lapsed without the filing. –
9-515(e)
4.4.3 Authorization to file a financing statement
 If a person filing a financing statement is not authorized the financing statement
is ineffective. 9-510(a)

Before filling a financing statement the secured creditor must obtain
authorization from the debtor in an authenticated record. 9-509(a)(1)

By authenticating a security agreement a debtor authorizes the filing of a
financial statement covering the collateral described in the security
agreement. 9-509(b)
5: PRIORITIES
General Rules
 9-317(a) and 9-322(a)
Steps

First, identify the collateral

Second, identify potential claimants by type of interest

Notice requirements to other credits, check section 9.6.3
5.1 COMPETING INTEREST IN COLLATERAL—THE CLAIMANTS

Obligor/Debtor

Unsecured Creditor

Judicial Lien Creditor: interest arises at the time of “levy” – the moment a judicial
officer physically seizes the property

Secured Creditor
36

Perfected and Secured Creditor: secured creditor who have taken the steps to
protect the security interest from other claimants

Statutory Lien Creditor: lien interest arises automatically by statute/CL

Buyers of Property: law tends to favor good faith buyer over such creditors
5.2 PRIORITY—UNPERFECTED CREDITORS

Disputes with other unperfected creditors: goes to the person whose interest
attached first. 9-322(a)(3).

Unperfected creditors are junior to:

Perfected Creditors 9-322(a)(2)

Judicial Lien Creditors 9-317(a)(2)

Statutory Lien Creditors 9-333(b)
5.3 PRIORITY AMONG PERFECTED CREDITORS—GENERAL RULE
5.3.1 General Rule
 First-to-file-or-perfect, whichever is first, has priority over competing claim. 9322(a)(1).


Thus SC file f/s > SC perfected or filed F/S laser

SC perfects > SC then perfected or filed F/S laser
Implicit Rule

All future advances made under a security agreement and accompanying
documents that provide for such advances have priority as of the filing of
the financing statement.

Same with after-acquired property

However: to stop future advances, junior security interest
can have a Subordination agreement, 9-339

Senior SI subordinate all future loans to junior
5.3.2 Collateral Perfected by Financing Statement with Incorrect Information – 9-338
 subordinate to conflicting perfected SI if holder of conflicting SI gives value in
reliance based on this misinformation AND purchaser of collateral takes free and
clear of SI if purchaser gave value in reasonable reliance on the misinformation –
(1) & (2)
5.3.3 Holders of Perfected SI have Priority Over Judicial Lien Creditors 9-317(a)
5.4 PRIORITY SPECIAL RULES FOR PURCHASE MONEY SECURITY INTERESTS

There are some departures from the first-to-file-or-perfect rule. There are some SI
having “super-priority.”
5.4.1 PMSI in Goods (Non-Inventory, Non-Livestock PMSIs)
 PMSI (in collateral other than inventory or livestock) takes priority over conflicting
security interests in the same collateral and its identifiable proceeds [9-324(a)]
37
if the interest is perfected when the debtor takes possession of the collateral or
within 20 days thereafter. 9-324(a).

The priority of the PMSI is limited to the extent of the purchase money used in
acquisition of the collateral.
5.4.2 PMSIs in Inventory
 PMSI vs. Non SC: If one files a financing statement with respect to PMSI within
20 days of delivery of the collateral, the SI takes priority over rights of a buyer,
lessee, or lien creditor which arise between the time of delivery and time of filing –
9-317(e)



A PMSI can prime a lien creditor’s interest only if the PMSI attached to the
collateral before the creditor’s obtains its lien against the collateral
 Thus as long as you signed a security agreement before
delivery you are fine if not then screwed
PMSI vs. SC: The holder of a perfected PMSI in inventory has super-priority over
a conflicting interest in the same inventory and identifiable cash proceeds that are
received on/before the delivery of inventory to buyer,
if: – 9-324(b)

PMSI in inventory has priority if the PMSI is perfected by the time
the debtor receives possession– (1) AND

SP sends notification to holder of conflicting interest – (2)


filed a financing statement covering the same inventory – (c)
holder of conflicting interest gets notification within 5 years before debtor
gets the inventory; and – (3)

But PMSI status in inventory that becomes proceeds only flows into
chattel paper, instruments, and cash proceeds. 9-324(b)

Two PMSIs creditors have interest in the same collateral– 9-324(g)

(1) top priority goes to the seller over the lender

(2) if two lenders, they have to compete under 9-322(a)’s first-to-file-orperfect rule
38
5.4.4 Double Debtor Problem
 9-325(a): transferor’s (“seller”) security interest has priority over a transferee’s
(“buyer”) security interest if 325(a) conditions are met


A SI created by a debtor is subject to the SI in the same collateral created by
another person if: – 9-325(a)

(1) debtor got collateral subject to SI created by the other person

(2) SI created by the other person was perfected when debtor acquired
collateral; AND

(3) there is not period where the SI was unperfected
Effect: A financing statement reserves priority against other lenders on the same
collateral.
5.5 PRIORITY SPECIAL RULES FOR CERTAIN TYPE OF COLLATERAL
5.5.1 Deposit Accounts – 9-327
 SP with control over account has priority – (1)


If multiple have control, rank accounting to time of obtaining control – (2)
Bank holding account has priority over other SP – (3)

SP with control prevails over bank holding account – (4)
5.5.2 Commingled Goods – 9-336
 If goods are perfected before they become commingled, the SI that attaches to the
commingled goods is perfected – (d)

If more than one SI attaches to the product/mass:

SI that perfected under (d) has priority over unperfected interest – (f)(1)

If more than one perfected SI, interests rank equally in proportion to the
value of the collateral at the time is became commingled goods. – (f)(2)
5.5.3 Proceeds
 time of filing/perfection for collateral is the same for proceeds – 9-322(b)(1)
5.6 PRIORITY AMONG PERFECTED CREDITORS AND OTHER CLAIMANTS, LIEN CREDITORS
5.6.1 Statutory, Possessory Lien Holders:
 person who acquires a lien on goods in that person’s possession as a result of
services/materials furnished prevails over prior perfected SI in the goods – 9-333(b)

Example: A gives B a loan for a car. Car breaks down. B brings car to C.
B doesn’t pay C f or repairs. C holds onto the car. B doesn’t make
payments to A. A tries to repossess the car. C has priority over A as long
as C maintains possession of the car.
5.6.2 Buyer of goods – 9-320(a)-(c) & (g)
 A security interest continues in collateral notwithstanding its disposition unless
the SP authorizes the disposition free of its SI – 9-315(a)(1)
39

If gives value and receives collateral before a SI in the collateral is perfected,
buyer takers free and clear of SI – 9-317(b)

Does not apply to charitable donations because value is not given

Generally, a buyer who gives value for a perfected security interest takes the
collateral subject to the security interest.

Exception: § 9-315(a)(1): A security interest . . . continues in collateral
notwithstanding sale . . . unless the secured party (explicitly or implicitly)
authorizes the disposition free of the security interest
5.6.3 Exception: “Buyer in the Ordinary Course of Business” – 9-320(a)
 BIOCB Takes free of a SI created by the buyer’s seller, even if the SI is perfected
and the buyer knows of it


Unless

buyer knows violates terms of security agreement (and
accompanying documents). § 1-201(b)(9)

SP in possession prevails – 9-313, 9-320(e)

The SI was not create by the seller, meaning a third party that
used to own the collateral -> see exception to exception
Who is a BIOCB – 1-201(a)(9)?

(1) purchases goods in the ordinary course of business from dealer’s
inventory (seller’s OCB, not buyer’s life)

(2) buyer purchases goods for value

(3) good faith – no knowledge that the sale violated another’s rights (getting
a good deal is irrelevant)



“honesty in fact and the observance of reasonable commercial
standards of faith dealing” – 1-201(20)
(4) Seller created the SI in the collateral
Exception to exception: What does it mean to be “created by the buyer’s seller”?

The seller was the debtor that gave the security interest to the secured
creditor.

Result: buyer does not take free of security interests created by previous
owners of the collateral.
5.6.4 Exception: Buyer of Consumer Goods from Other Consumer – 9-320(b)
 Takes free of perfected SI if buys

Without knowledge of SI

For value

For personal/household/family purposes, AND

Before financing statement is filed
5.6.5 Exception: Buyer not in the OCB, Future Advances, non-advances:
 Exception: § 9-317(b): Buyer takes free of an unperfected security interest if gives
value and receives delivery without knowledge of the security interest.
40

Exception: § 9-323(d): takes free of a security interest to the extent that it secures
[future] advances made after the earlier of:

(1) the secured party acquires knowledge of the buyer’s purchase, or

(2) 45 days after the purchase.

BUT, § 9-323(d) does not apply if advance made pursuant to
commitment entered into without knowledge of buyer’s purchase
within 45 days of purchase.
5.6.6 Exception: Future Advances, non-advances:
 Buyer takes free of increases in a SI due to future advances 9-323(d)(1)&(2)


Unless there is a security agreement that secures future advance, 9-203(b)
9-204(c) AND PROVISION OF 9-323(b) ARE MET

Future advance is made within 45 days of the creation of the lien

(1) Future advance is made without knowledge (actual knowledge, §
1-202) of the lien. OR

(2) Future advance is made pursuant to a commitment (contractual
obligation to lend, § 9-102(a)(68)).
Unless – real estate, also SA has to have future adv provis [more in 5.7.6]

Without knowledge of the lien or

Pursuant to commitment made without knowledge of the lien


Commitment means: Majority - obligation vs. minority –
option
Non-advances have the priority of the advance to which they relate.

an amount that was not advanced to the borrower, but that the borrower is
obligated to pay—interest, attorneys’ fees incurred in collection, other
expenses of the loan paid to third parties
5.6.7 Exception: Buyer of Goods Covered by Certificate of Title
 If certificate of title does not show that goods are subject to SI, the buyer of the
goods (who is NOT in the business of selling said goods), takes free of SI if he gives
value, receives delivery after issuance of certificate, doesn’t know of SI – 9-337(1)

Subordinate to SI that is attached and perfected w/out SP’s knowledge of
the SI after the issuance of certificate – (2)
5.6.8 Transfer of Money; Transfer of Funds from Deposit Account – 9-332
 transferee takes free of SI unless acting in collusion with debtor – (a)
41

transferee of funds from deposit account takes free and clear of SI unless acts in
collusion with debtor – (b)
5.6.9 Priority amongst Lien Creditors
 Prototypical lien creditor is “judgment lien creditor”


How become “judgment lien creditor”?

Real estate: become judgment lien creditor by filing judgment where land
records are recorded.

Personal property: become judgment lien creditor by causing sheriff to levy
(physically seize or otherwise constructively control) against the personal
property.

A variation of “constructively control” is serving a writ of
garnishment on a third party.

In a small minority of states, become judgment ` against personal
property by filing the judgment with the secretary of state.
Lien Creditors Perfection:

System of priority: “first in time, first in right.”

Precisely what must a lien creditor do to be first?

The act specified by the governing priority rule. 9-317(a)(2)

For lien creditors against real property: first to record is first.

For lien creditors against personal property:

Majority rule: first to have sheriff levy based on creditor’s
writ is first.
o


But questions arise when C1 delivers a writ to the
sheriff and then C2 delivers a writ, and sheriff
levies on C2’s writ first and then on C1’s writ.
Minority rules: first to deliver writ to sheriff is first / file
judgment in UCC system.
Garnishment: when writ served on third party, party that holds the
collateral
5.6.10 Priority amongst Lien Creditors, and Lien Creditors vs. SC and PMSI
 System of priority: “first in time, first in right”

Lien creditor: when becomes lien creditor

Secured creditor: earlier of perfection, § 9-308(a), OR filing and meeting one
of § 9-203(b)(3)’s conditions. § 9-317(a)(2)

PMSI secured creditor: upon attachment, provided that file financing
statement “within 20 days after” delivery of collateral. § 9-317(e)

However a signed security agreement is still needed!
5.6.11 Sellers against Secured Creditors
 Overview:
42



Major way this conflict arises: seller of collateral comes into conflict with an
existing SC with interest in the collateral (like an inventory lender)

In general, an existing creditor who has an interest that includes an afteracquired property clause
Void Title Rule 2-403

Someone who actually steals property does not obtain title to it, and thus
cannot pass title on to anyone else

However voidable title can be transferred 2-403(2-3)
Possible devices that seller can use to protect themselves:


(1) Retain title in the goods until payment has been made

Refuse to sell on credit; do lay-away plan

This won’t work b/c anything that is intended to work as a SI is a SI
(2) Take a PMSI




Technically, seller can do this –but inventory lenders will never go
for this, so not viable
(3) Consignment

Don’t actually sell the goods, but let the retailer put the speakers
on its shelves. When retailer finds a buyer for the speakers, SC will
sell it directly

This won’t work b/c § 9-109(a)(4) treats this as a SI - Art. 9 focuses
on substance over form
(4) Equitable subordination & unjust enrichment

Fairness based idea to say that the inventory lender is unjustly
enriched if all equipment supplier sends feeds the lien of the
inventory lender

Courts don’t buy this (inventory lender has every right to do this
under their SA)
(5) Right of reclamation

§ 2-702: if the D is already insolvent when it acquires the goods, the
seller has a right to get them back

The problem is that this section makes the right of reclamation
subject to any competing SIs

So you have a right to possession of your item, but it is now
subject to a SI (so not helpful)
6: ENFORCEMENT
6.1 DEFAULT

Clauses within the security agreement that lay out conditions for default – allowed
in 9-603

If there is a default, a SP can use the remedies provided in:
43

UCC (Primarily 9-601)

(a) Rights of secured party after default: Stuff in contract AND
(a)(1) may reduce a claim to judgment, foreclose, or otherwise
enforce the claim, SI by any available judicial procedure + AND



(a)(2) if the collateral is documents, may proceed either as to the
documents or as to the good they cover

(b) Right and duties of secured party in possession or control: A SP
in possession of collateral or control of collateral has right and
duties provided in Section 9-207 [more in 3.3.5]

(c) – (a) and (b) are cumulative and may be carried out
simultaneously
Stuff in SA – 9-201 states that security agreement effective between parties
(also 9-601(a) entities SP after default to use provisions from the K)


Personal property can be sold through judicial sale
Thus SP should provide in K:

that debtor gives consent to entry to land or buildings to
effect repossession.

Include provision requiring the debtor to assemble the
collateral. § 9-609(c)
Judicial Process
6.1.1 Acceleration Clause
 SP has the option of declaring the entire unpaid balance of the obligation
immediately due upon occurrence of some default. Notice requirement of
acceleration is split:

Bank must make a clear and unequivocal decision to accelerate.

Bank “must take affirmative action to put the debtor on notice that it
intends to accelerate” even where the contract allowed acceleration
“without demand or notice.” Crystal Properties


In these jurisdiction the debtors is then responsible for bank’s
foreclosure fees and expenses

When the debtor pays off the outstanding balance that put him in default
the default is cured

HOWEVER if K provides that no notice needs to be given of acceleration
then no notice needs to be given
Possible defenses to acceleration clause by Debtor

Waiver- If SC accepts payments after default or does not use the
acceleration clause the SC may have waived the acceleration clause

Bad faith under 1-304

Waiver by estoppel- ask Foohey
44
6.1.2 Insecurity Clauses
 SP has the right to declare the entire obligation due at will/in the event the secured
party deems himself insecure

Must do so based on good faith belief that payment prospects are
impaired 1-304
6.2 RIGHT OF POSSESSION UPON DEFAULT

SP may take possession of collateral; render equipment unusable without
removing it from debtor’s premises; and dispose of collateral on debtor’s
premises. 9-609(a)(1)&(2).

In some jurisdictions there is a statutory right to redeem especially in realestate, but upon redemption entire loan has to be given to SC. (6.6.1)

Most courts require junior creditor to surrender possession to senior
6.2.1 Judicial Process – 9-609(b)(1)
 At best there is 30 days (by default) from default on payments to Money Judgment
against debtor


If debtor resists then a year or more
Finding the debtor’s assets and “executing the judgment”:

identify/locate one or more assets of the debtor (not easy; allow postjudgment discovery)


Check: public record and credit reports to find more property
Judgment liens and the execution process

lien = property right (makes property liable for judgment debt)

Process:

1. Clerk of court issues the “writ of execution”: directs sheriff to
levy on debtor’s property

2. Sheriff levies on property (sheriff follow creditor’s “instructions’)


3. Sheriff sells the property

4. Sheriff applies proceeds to pay down the debt

5. Sheriff files a “return,” which reduces judgment

6. Sheriff repeats until judgment satisfied or no property left to
seize


Levy - The state's acting of seizing and selling property to
satisfy a tax or other liability.
Sheriff has liability for amercement (not following his duty
to levy CB example) and conversion (levying property that
sheriff couldn’t levy)
Exemptions from execution: sheriff cannot seize “necessities of life” set by
state statute and often limited by use or dollar amount; debtor usually
claims at levy. (aka usually a house, personal automobile, However the
value of such property that cannot be seized usually has a max, some
equity amount is only exempted)
45



“writ of garnishment” is used to acquire a lien on intangible assets (i.e.
bank account, etc.); directs 3rd party to turn over what debtor owes to
creditor
Time limits on execution: regulated by statute,


Does not apply to Secured Credits - Text of rule prohibits a
waiver of exemptions, not a security interest
usually must wait 10 days from issuance, and must levy within 90-180
days
Fraudulent Transfers: fraudulent conveyance if debtor transfers property to
another person in order to delay or hinder creditors/avoid paying a justly due debt,
the transfer can be rescinded

“Constructive fraud”: when an insolvent debtor makes a gift of their assets
while leaving their creditors with no recourse
6.2.2 Self-help 9-609(b)(2) and self help against accounts as collateral
 Self-help is allowed if there is no breach of peace – fact-based determination 9609(b)(2) and only for SC or judgement creditors, if not then self-help =
convergence

Debtor can’t waive breach of peace requirement. 9-206(6) and 9-603

If sheriff assists repossession, during self-help, then it is illegal


However, sheriff can be there just not assisting
any protest by debtor/anyone present = breach of peace

doesn’t prohibit later attempts at repossession

constructive force = breach of peace (weapon = implied threat)

breaking and entering

simple trespass – going onto property without breaking and
entering usually does NOT constitute a breach of the peace

Trickery is allowed

9-607 and 9-406 provide self-help remedy to the party holding SI in
accounts

Under 9-607 the secured creditor who knows the identity of the
account debtors, entities owning money to the debtor, can simply
send them written noticed to pay directly to the SC

The account debtor who receives such notice can discharge
its obligation only by paying the SP. 9-406(a)

Under 9-406(c) account debtor can sent a notice of inquiry of
whether the SP is actually entitled to the money request
6.2.3 Non-judicial foreclosure (power of sale / deed oft rust in context of real property)
separate yet part of 9-906(b)(2)
 Process set by state law that does not involve courts.
46

25 states permit mortgage lender and borrower to opt for a quicker simpler method
of foreclosure against real properly. The lender and borrower do so by including in
the SA a power of sale.

In some of these states the SA will be in the traditional form of a mortgage,
in other it will be in the form of a deed of trust.


Deed of trust states the collateral will be held in trust by the
creditor or a third party such as a bank or title company. The
borrower agrees that in the event of default, the trustee can sell the
property and pay the loan from the proceeds.

Law regards this as a security interest

Deeds of trust can be created at a later time say like
example in book borrower is falling behind and wants more
time, thus by signing such agreement the SP gets better
foreclosure remedies, since it can acquire deed a lot faster,
while the debtor gets more time to “cure”
For power of sale and deed of trust foreclosure is necessary but no suit or
court is involved.
6.3 RETENTION OF COLLATERAL REMEDY (SP SIDE) 9-620


SP and debtor may agree to the SP’s retaining the collateral in full or partial
satisfaction of the obligation it secures (strict foreclosure); this option is available
to the SP except in the instance of (e) – 9-620.

The usual type of such acceptance is acceptance of the collateral after
default 9-620(c)(1)

Foreclosure is about not just declaring default, but foreclosing the debtor’s
interest in the property. Upon foreclosure, debtor loses right to redeem.
SP may accept the collateral in full/partial satisfaction of the debt [9620(a)] if:

(1) Debtor consents

(2) No one else objects

(3) If consumer goods are not in debtor’s possession

(4) if (e) doesn’t require mandatory disposition
6.3.1 Notice
 SP sends authenticated notice to debtor and other creditors of creditor’s intention
to keep collateral in satisfaction of debt – 9-621
6.3.2 Objection [by debtor or other creditors]
 if done within 20 days after notice is sent, then secured party must dispose of
collateral by sale – 9-620(d)
6.3.3 Consumer goods exception – mandatory disposition
 If debtor has repaid 60% of value, creditor must resell collateral – 9-620(e)
47

Must be sold within 90 days of repossession and turn over excess to
consumer – 9-620(f)(1)-(2)

Debtor may waive right to mandatory disposition after default – 9-624(b)
6.3.4 Effect of Acceptance 9-622(a)
 (1) discharges obligation to the extent agreed to by debtor

(2) gives SP debtor’s rights in the collateral

(3) discharges subordinate interests

(4) terminates subordinate interests – discharged even if SP doesn’t comply with
UCC – 9-622(b)
6.3.5 Partial satisfaction
 Surrender collateral with the rest of the debt still owing – 9-620(e)


There can be no partial satisfaction in consumer transaction, so no
deficiency. 9-620(g)
Occurs if: gives notice, debtor consents, no objection from other secured parties,
not consumer goods
6.4 SALE OR OTHER DISPOSITION OF COLLATERAL

Secured party may sell, lease, license, or otherwise dispose of collateral – 9-610(a)

Has to be following any commercially reasonable preparation


Sale is most common method of disposition (public or private sale is permitted)


Comment 4 to 9-610: decision whether it is necessary to attempt
preparation to sell is within court’s discretion
Under public sale you get the property as is, thus with cloud of title and
so on.

Remember all the issues with the judicial sale (lack of people, low
price, low advertising, stupid procedure, sheriff doesn’t give a shit)

Remember anti-deficiency statutes
Senior lien’s right to prevent sale–Wrap-around mortgage: set up such
that borrower sends second all mortgage payments and then second sends
first its portion.
6.4.1 Commercial Reasonableness Standard
 Applies to every aspect of the disposition – 9-610(b) and 9-627, 9-627(b)

Determination of whether conduct was commercially reasonable (If the auction
or the sale was reasonable) 9-627

(a)- The fact that a greater amount could have been obtained from the
sale of collateral in another way does not mean that the sale was
commercial unreasonable

(b)- Disposition is reasonable if:

(1) in usual manner on any recognized market

(2) at any price current in any recognize market
48

(3) otherwise in conformity with reasonable commercial practices
among dealer in the type of property that was the subject of
disposition

(c) reasonable if approved by [look at section]

Time: must be sold within commercially reasonable time after repossession

Preparation: secured party must advertise/solicit purchasers for the sale

3 Court-created rules for SP’s failure to give notice as required or to
dispose of collateral in a commercially reasonable manner: [violation of 9626]

Rebuttable Presumption / Commercial transaction– most widely followed –
collateral was worth an amount equal to the outstanding debt owed by the
debtor at the time of default; sec party must meet the burden of
proving that the collateral was worth less than the debt and by
what measure if it is to collect any deficiency

adopted in 9-626 for any transaction other than a consumer
transaction

IF SC fails to prove: 9-623(a)(3) – majority of courts apply
rules for commercial transaction: deficiency reduced to the
amount it would have been had the creditor complies

Absolute Bar (Downing) – SP which failed to follow Art 9 default provisions
absolutely barred from recovering any deficiency judgment whatsoever

Allows also to minimum statutory damages under 9-625(c)

Set off – SP entitled to deficiency for any amts that the debtor could prove
resulted from the improper sale; the misbehaving sec party is not otherwise
penalized or caused to forfeit any part of its deficiency

This section goes hand in hand with 6.6.2
6.4.2 Warranties
 Warranties to title, possession, quiet enjoyment may be included – 9-610(d)

SP may disclaim/modify warranties – 9-610(e)

The record may be sufficient to disclaim if it says “no warranties” – 9-610(f)

There are no warranties in judicial sale
6.4.3 Notice Requirement 9-611(b)
 given to debtor, sureties (co-signors, guarantors), and other creditors of record (all
who have filed a financing statement) – 9-611(c)

unless collateral is perishable or of a type sold in a recognized market – 9611(d) – thus if good (any good) is sold on a recognized market
doesn’t need to give notification

Comment 9 to 9-610 suggests that dealer auction is not a
recognized market

Recognized market exception: auction markets where goods are
fungible (interchangeable)
49

Notice must be sent within a reasonable time – 9-612(a) – which may be after
default and 10 days before earliest time of disposition – 9-612(b)

“Notification date”: date that secured party sends that notice. § 9-611(a)(1)

9-603(a) allows for parties to determine by agreement when SP must
send the noticed, as long as not manifestly unreasonable

Secured party must send notice to other lien holders perfected as of the
record date by filing or notation.




Party searches systems 20-30 days before the “notification date”—
date party will send the notice of sale—and sends notice to those
lienholders who appear on search results. § 9-611(e)
BUT notice not required to these other lienholders if collateral is
consumer goods, § 9-611(c)(3), or “melting ice cube,” § 9-611(d).
If provision met, all subordinate liens are discharged by
sale, however non-subordinate liens are not discharged. § 9611(c)
SP must take reasonable steps to make sure notice is received

Debtor may waive this right only after default – 9-624(a)

Notice to dispose of collateral by throwing it away falls under this provision
Contents of Notice 9-613
 description of debtor/secured party

description of collateral

method of sale

time and place of public sale/time after which private sale will be made

statement that debtor is entitled to an accounting for the unpaid indebtedness and
the charge for performing the accounting
Contents of Notice Regarding Consumer Goods 9-614
 Everything from 9-613, plus:

description of liability for a deficiency

number to find out amount needed to be paid to redeem collateral

number/address for addition information about disposition
Miscellaneous
 Safe harbor forms – protect creditor from arguments about noncompliance
50


Safe harbor steps:

Send search request 20-30 days before notification date

If no search report returned by notification date, notify only the
debtor and requesters

If search report returned, notify the creditors listed on it. §9611(e)(2)(B)

Record date doesn’t matter in the end
Notice must be sent after default and a reasonable time before date of disposition of
collateral
6.4.4 SP’s Right to Bid for Collateral 9-610(c)
 Public sale: right to purchase – (c)(1)

Private sale: right only if collateral is of the type sold in a customarily recognized
market or subject to standard price quotations – (c)(2)

Creditor holding a lien under which sale is conducted can credit bid, so the party
that foreclosed and ordered the sale, not other SC even if in default and etc.

Credit bidding is limited to amount of SI

Subordinate SC can only bid after they bid real cash to cover senior
SC’s interests

However, creditor holding a lien under which sale is
conducted gets to credit bid FIRST.
6.4.5 Proceeds are Applied in the following order [9-608 and 9-615(a)(1)-(4)]:
 1. expenses sustained by secured party due to default – 9-608(a)(1)(A)? & 9615(a)(1)

2. debt owed to secured party – 9-608(a)(1)(B)? and 9-615(a)(2)

3. indebtedness owed to junior creditors – must send an authenticated demand for
payment to repossessing creditor – 9-608(a)(1)(C)? and 9-615(a)(3)


Junior creditor has to respond to SP’s request for proof of interest within a
reasonable time – 9-608(a)(2)? and 9-615(3)(a) and (b)

Proceed do not go to unsecured creditors 9-615(a)(3), does not say
explicitly, but unsecured creditors are not on the list of 9-615(a)
4. a secured party that is consignor of the collateral if the secured party receives
from the consignor an authenticated demand for proceeds before distribution of the
proceeds is completed 9-615(a)(4)
6.4.6 Surplus and Deficiency:
 Secured party must give debtor surplus proceeds that are left after the above
disbursements – 9-608(a)(4)? and 9-615(d)(1)

Debtor is liable for any deficiency (the amount of the debt that the proceeds of the
disposition failed to cover) – 9-608(a)(4)? and 9-615(d)(2)

Unless statute bars deficency
51

Debtor is neither entitled to any surplus, nor liable for any deficiency in the sale of
accounts, chattel paper, payment intangibles, and promissory notes – 9-608(b) and
9-615(e)
6.4.7 Rights of Purchaser of Collateral 9-617
 Purchaser takes all rights the debtor had in the collateral (a)(1), the interest of the
secured party (a)(2), and all interest subordinate to those of the secured party (a)(3)

A good faith purchaser takes free of (a)’s interests even if SP doesn’t comply – (b)

Otherwise, take subject to interests in (a), (c)(1)-(3)


Thus purchaser take the property with the ex-owner’s
creditors still have liens or SI of non-subordinate liens.

The purchaser is however not obligated for the loan, the
original debtor is

Thus unless the new purchase pays the non-subordinate
debt, that SC may foreclose on the property
SP may transfer SI to secondary obligor, if obligor agrees to take subject to the
interest – this is not a disposition in accord to 9-610, but SP isn’t bound by duties –
9-618
6.5 ACTION FOR THE DEBT BY SC

SP may allow collateral to remain with debtor and sue on the debt

Lien relates back to the date of perfection of the original security interest

SP may purchase at a judicial sale – party takes free from any U.C.C. provisions
6.6 DEBTOR’S RIGHTS AND SP’S FAILURE TO COMPLY WITH ART. 9
6.6.1 Debtor’s Right to Redemption
 Debtor, secondary obligor, other SPs, or lien holders – 9-623(a) – may exercise right
at any time prior to the time the secured party has disposed of the collateral or
entered into a K for its disposition – 9-623(c)(1)-(3)

Must: tender debt owed at time of redemption + expenses incurred – 9623(b)(1)-(2)


must be prepared to tender the entire debt if there is an
acceleration clause
Cannot waive the right of redemption prior to default – 9-624(c)
6.6.2 Effect of Failure to Comply with Default Provisions of article 9. 9-625
 If secured party does not comply with default provisions, debtor may seek judicial
direction as to the type of disposition or proceed against secured party for damages

(a) court restrains sale

Creditor liable for damages sustained to creditor from the unreasonable
sale

(d) creditor liable for surplus that would have been realized in
commercially reasonable sale
52
Types of damages:
 Actual damages:


Consumer goods: finance charge + 10% of loan amount; OR, time-price
differential + 10% of cash price – 9-625(c)(2)
Punitive damages:

of $500 if improperly retained control, improperly accepted payments from
account debtors, did not properly file, failed to notify of deficiency/waiver of
deficiency – 9-625(e)

NOT attorney’s fees

If it’s established that the sec party is not proceeding in accordance with the
provisions of the article, a court may order disposition of the collateral on
appropriate terms and conditions – 9-625(a)
6.6.3 SP’s defenses to liability 9-628
 SP has no liability to a debtor or obligor unless it knows who that person is and
how to communicate with that person. 9-628(a),(b)

SP is insulated from liability if it acts under the reasonable belief that the
transaction was not a consumer transaction or consumer-goods transaction or that
the collateral is not consumer goods. 9-628(c)
6.6.4 Nonwaivable Rights Under the Security Agreement 9-602
 Accounting for surplus

Notice requirements before default [9-624(a) as well]

Discharge upon retention

Right of redemption before default

Liability for failure to comply

Waiver of rights by guarantor
6.6.5 Cure by Debtor of Default
 If debtor cures the default, ex: by mailing the check, and the bank accepts, the sp
screwed up or decided to accept, the default is cured
6.7 MARSHALING [APPLIES TO BANKRUPTCY]
6.7.1 Secured Creditor’s Option to Foreclose
 Secured creditor can choose when to foreclose against each item of collateral. § 9604(a)(1)


All collateral remains encumbered by security interest until debt paid in
full. § 9-513(c)
Limit: marshaling of assets

Equitable doctrine that provides: “A creditor having two funds (assets) to
satisfy [her] debt may not, by [her] application of them to [her] demand,
defeat another [lien] creditor, who may resort to only one of the [assets].”
53

1st has security interest in Asset 1 and 2.

2nd has security interest in Asset 1 only.

Marshaling applied: 1st cannot collect from Asset 1, provided 3 (or 4) elements
present:


1. Two creditors

2. Two funds (assets)

3.One creditor limited, one not

Majority 4th element: one debtor owns both assets.

Applied only if the senior creditor is not prejudiced.

Alternatively: allow the senior its choice of collateral, but “equitably
assign” the senior’s second lien to the junior.
A creditor can choose to foreclose against homestead property, but a creditor with a
junior lien cannot force the senior lien to foreclose against homestead property.

A specific statute passed by the state has to say “Exempt homestead”

Lien creditors cannot marshal against each other to one’s detriment.

Minority of bankruptcy courts will not allow marshaling, reasoning that
marshaling against the bankruptcy trustee as lien creditor would prejudice the
trustee’s rights.
6.7.2 Purchase Money Collateral
 Security interest may be part purchase money and part non-purchase money. § 9103(f)(1) and (2)

Secured party has the burden of showing the extent to which the security interest
is purchase money. § 9-103(g)


It does that by tracing payments and accruals according to the allocation
rules in § 9-103(e)
All inventory purchased with money from the secured creditor at any time is
treated as an “item” which is purchase money collateral for the entire loan. § 9103(b)(2)
54
7: Bankruptcy
7.1 GENERAL RULES OF BANKRUPTCY
7.1.1 Basics
 Secured credit is interested in categorizing leans

BR interested in SCs who hold liens versus unsecured creditors who have no right
to any of the debtors’ property
7.1.2 Key terms
 Petition: Document that commences a bankruptcy case

Schedules: Lists of assets and debts, filed with petition

Proof of claim: Creditor’s statement of debt owing (§ 501); claim calculation
according to §§ 502(a), 506)

Property of the estate: “All legal or equitable interests of the debtor in property
as of the commencement of the case,” except exempt property (§§ 522(d), 541)

Discharge: Injunction against future efforts to collect the debt from the debtor
(but not debtor’s property)

Reaffirmation: Debtor’s election not to discharge a debt, but to enter into deal
with secured creditor that requires debtor to pay off debt post-discharge (§ 524)

Redemption: Debtor’s election to pay off amount due or fair market value of
collateral, whichever is less, in exchange for property (§ 722)

Ride-through: Debtor keeps paying pre-petition debt post-discharge and hopes
that secured creditor does not foreclose on property

“Non-recourse” debt – discharged secured debt is essentially a nonrecourse claim
against the asset; secured creditor cannot pursue the debtor for unpaid portion of
debt

Discharged vs. undischarged debt – creditors can pursue undischarged debt
post-bankruptcy

Modification: proposes a new payment schedule on defaulted loan through
bankruptcy process

Reinstatement: restores (de-accelerates) the loan to its pre-bankruptcy, undefaulted stat
7.1.3 Three types of BR
 Ch. 7- Individuals (IND) and Business


BUS - Surrender assets; get discharged

(Can’t try to collect debt from debtor again, (except possibly debtor’s
property)
Ch 11- Business (BUS);

retain assets; create plan that will be approved by creditors to repay
(typically partially) out of future rev.;

discharge when plan approved
55

Ch. 13- INDs only; retain assets; create plan that pays disposable income over 3-5
years;

discharge upon plan completion
7.1.4 What happens when Bankruptcy is filed?
 Automatic stay: An “injunction” that takes effect on the filing of a bankruptcy case
(§ 362)



§ 362(a)(6) stops acts to collect, assess, or recover a claim against the debtor
Motion to lift automatic stay: Secured creditor remedy; show

(1) lack of adequate protection (§ 362(d)(1)) OR

(2) debtor has no equity in property AND property not necessary for an
effective reorganization (§ 362(d)(2))
Adequate protection: Protection against decline in the value of the secured
creditor’s collateral (§§ 361, 362)
7.1.5 4 Step Analysis for Stay Problems
 (1) Is the stay in effect?


(2) Does anything in § 362(a) prohibit the act?



Usually an easy question, if Bankruptcy is file then YES
Automatic stay is very broad, so likely yes.
(3) If so, is there an exception in § 362(b)?

(1) Criminal act

(2) Child and family related crap
(4) If not, are there grounds for lifting the stay under § 362(d)?

(1) failure to maintain value of collateral or rapidly declining value of
collateral

(2) debtor has no equity in property AND property not necessary for an
effective reorganization ~ Equity cushion

This will require court action
7.2 SECURED CREDITORS IN BANKRUPTCY
7.2.1 SC payment process
 Creditors file proofs of claim.

Allowance process varies by chapter; generally, unless there is an objection,
claims that are filed or scheduled are allowed. § 502(a)
7.2.2 How is Secured Creditor Paid?
 Secured creditors look to collateral for payment.

Unsecured portion of claim paid through bankruptcy case.


Undischarged, creditors can pursue it post-bankruptcy
If trustee sells collateral (typically in chapter 7), secured creditor:

(1) receives its claim amount from sale proceeds, § 363(f), OR
56

(2) collateral is sold subject to its lien and it requests payment from buyer
(or it forecloses on collateral).

Whether sale expenses will be deducted from secured creditors’
recovery depends on whether creditor over- or under-secured.

If trustee abandons collateral (chapter 7), § 554(a), secured creditor forecloses
on collateral.

If debtor confirms plan (chapter 11 or 13), secured creditor entitled to have the
value of its secured claim paid over the course of the plan.

To receive value of secured claim, the present value of all future payments
under the plan must equal the amount of the secured claim.

Payments must be discounted by an appropriate interest rate (called the
discount rate).

Till sets that interest rate in chapter 13 (and, for most courts, chapter 11),
at the prime rate plus a risk adjustment (typically 1% – 3%).

Result is that the sum of payments made under the plan will be greater
than secured claim amount.
7.2.3 SC claim calculation and bifurcation
 Step 1: for secured and unsecured creditors, determine pre-petition amount owing.
§ 502(b)



Pursuant to contract, include interest/fees and attorneys’ fees.

Based on jurisdiction, add post-petition and attorneys’ fees.
Step 2: for secured creditors, determine value of collateral; compare to § 502(b)
claim. Thus the SI to that specific collateral and not other not secured collateral

If value of collateral greater, over-secured.

If value of collateral lesser, under-secured.
Step 3: if over-secured, add post-petition interest/ fees and attorneys’ fees
(pursuant to contract) until total claim equals value of collateral. § 506(b)


Step 4: If under secured, but still have collateral, then you’re bifurcated under 506,
so split secured and unsecured claim


If over secured process stops here
Take secured up to the value of collateral, the rest become unsecured claim
Step 5: Add the value of not secured claim to value of all other unsecured claims

And attorney fees and interest if allowed

Step 6: Divide the value of all not secured assets by the sum from step 5

Step 7: Multiply the percentage from step 6 by the amount of the unsecured claim
from the secured creditor

Step 8: If needed add step 7 amount to the secured part of the SP’s claim
57
7.3 OTHER RULES DURING BANKRUPTCY
7.3.1 Value Tracing in Bankruptcy
 Five important rules

(1) After-acquired property clauses are ineffective as to property
acquired after bankruptcy. § 552(a)

does not cut off security interests in proceeds, § 552(a)

Insurance payments is proceeds

judge-made “de minimus” rule holds that not proceeds where item’s
value only comprised of small portion of collateral.

“equities of the case” exception in § 552(b) – same as above,
basically courts can reduce what is proceeds

(2) If agreement or applicable non-bankruptcy law provides, security
interests continue in proceeds, product, offspring, or profits, §
552(b)(1), or rents, § 552(b)(2).

(3) Based on the “equities of the case,” judges can modify the creditor’s
rights in proceeds and other value-tracing concepts. § 552(b)

(4) Debtors may use collateral during bankruptcy, but must provide
adequate protection to creditors. §§ 363(c) and (e)

(5) Before debtors can use cash collateral, they must get court permission. §
363(c)


Cash collateral includes cash proceeds of other collateral. § 363(a)
Three equitable way to trace value, proceeds

Cafeteria Operators: cost of collateral is reimbursed; what remains
is not proceeds


Thus usually just whatever was used up from inventory
Delbridge: contributors to proceeds share in proportion to their
contributions.


CC = D
xP
D+E+L

Cash collateral = what is given to SP

D = average depreciation of the capital
o
Using up inventory is depreciation

E = average direct expenses going into product aka
inventory

L = average market value of debtor’s and his employees
labor going into the product

P = The average dollar proceeds from sale of the good
o

Can be taken in aggregate
Alternative formula:
58


Ask what portion of revenue comes from collateral
depreciation
o
Then multiply that number by the revenue and the
value you get goes to the Secured Party
Gunnison: labor and expenses are reimbursed; what is left is
proceeds.


o
Lander gets net rents after paying normal operating
expenses
Strict reading: Everything that is revenue, not even pure, is cash
proceeds
Lowest intermediate balance rule applies to bankruptcy See 2.6.4
7.3.2 Modification vs. Reinstatement & Cure
 Modification: proposes a new payment schedule on defaulted loan through
bankruptcy process

Modification is prohibited for principle residence – 1123(b)(5) /
1322(b)(2)


Ch11: The period can be any periods that is fair and equitable – 1129(b)(1)

Ch13: payments under the plan can extend only over the period of the plan.
1325(b)(4)


A small out in CH13 1322(c)(2), that underwater exception to
Nobelman
Ch13 plans only last 3 to 5 years –
Reinstatement: restores (de-accelerates) the loan to its pre-bankruptcy, undefaulted state.

Cure: debtor must “fix” defaults by payment, which may include missed
interest payments.

Why cure?
59

Code prohibits modification of mortgages on primary residential
real property, §§ 1123(b)(5), 1322(b)(2), but reinstatement and cure
available, §§ 1124(2), 1322(c)(1)
7.3.3 Reinstatement and Cure Under Chapter 11 – 1124(2)
 Four requirements: 1142(2)

The debtor must cure any default that occurred before or after the
commencement of the bankruptcy case. This provision does not state when
the cure must be made, but the courts have general held that cure be in a
lump sum at the effective date of the plan. The amount necessary to cure is
determined in accord with the SA and other applicable law. – 1123(d)

The plan must reinstate the maturity of that part of the claim that remains
outstanding after cure, as such maturity existed before such default. That
is, future payments remain due at the time specified in the original
contract

The debtor must compensate the holder of the security claim for particular
kinds of damage and actual pecuniary losses

The plan must not otherwise alter the least, equitable or contractual rights
to which the claims entitle its holder.


For example if the original contract between the parties provided
that the debtor would pay the creditor’s reasonable attorney fees for
collection in the event of default, that term must continue to be
applicable to the debtor’s post reinstatement obligations.
Plain can be instated even if SP objects – 1129(a)(8)
7.3.4 Reinstatement and Cure Under Chapter 13 – 1322(b)(5)
 Four requirements: 1142(2)

The debtor must cure any default that occurred before or after the
commencement of the bankruptcy case. But under 1322(b)(5), the debtor
needs only “cure with a reasonable time.” The courts have given a flexible
meaning of this phrase and approved cures over period of months or years.
All seem to agree that the cure need not be in a lump sum at the
effective date of the plan. But all seem also to agree that cure cannot
extend beyond the period of the plan. Within that range, the court
considers the size of the arrearage and the debtor’s ability to pay in
determining whether a particular proposal is reasonable.

The plan must reinstate the maturity of that part of the claim that remains
outstanding after cure, as such maturity existed before such default. That
is, future payments remain due at the time specified in the original
contract

Ch13 does not expressly require compensation for damage incurred by the
creditor as a result of the breach, but directs the courts to look to applicable
non bankruptcy law to determine the amount necessary to cure. 1322(e)
60


In some states the law requires payment of interest on the overdue
arrearage; in others it does not
The plan must not otherwise alter the least, equitable or contractual rights
to which the claims entitle its holder. [look at Ch11 for explanation]
7.3.5 Marshaling during bankruptcy
Minority of bankruptcy courts will not allow marshaling, reasoning that marshaling
against the bankruptcy trustee as lien creditor would prejudice the trustee’s rights.
7.4 PRIORITIES IN BANKRUPTCY
7.4.1 Trustees or DIP [who they are and in different chapters]
 If In chapter 7 and 13, the bankruptcy trustee is appointed by the court.


Chapter 7: trustee liquidates assets of the estate and pays creditors in the
correct order.

Chapter 13: trustee oversees case and make sure that creditors are paid as
much as possible and in the correct order.
Chapter 11: trustee is the “debtor in possession” (DIP) (the pre-petition debtor).

The DIP has the same duty to oversee the case and make sure that
creditors paid as much as possible and in the correct order as the chapter 7
and 13 trustees.
7.4.2 Power of trustees or DIP [debtor in possession]
 DIP can grant Senior liens under Bankr 364 – Acquiring additional credit
after bankruptcy – the new credit or liens become senior to others

(d)(1) The court . . . may authorize the obtaining of credit or the incurring of
debt secured by a senior . . . lien on property of the estate that is subject to
a lien only if –

(A) The trustee is unable to obtain such credit otherwise; and

(B) There is adequate protection of the interest of the holder of the
[already existing] lien

DIP may use the collateral

Sale at leisure of trustee. § 363(b) –Trustee may sell, use or lease.

Abandonment - If the lien against collateral exceeds its value, no one may be
willing to buy it. The collateral is then considered burdensome to the estate and the
debtor or trustee can abandon it. Bankr. Code 554

Abandonment like sale removes prosperity from estates.- Provisions of the
automatic stay no longer apply

SC who wished to foreclose after an abandonment may still need to obtain a
stay lift before doing so
61
7.4.4 Strong arm provision
 “Strong arm provision” gives the trustee in bankruptcy the power to avoid a SI
that isn’t perfect, or liens, as of the moment of the bankruptcy filing. Bankruptcy
Code § 544(a)

How is this done?

544(a)(1) - Trustee has the rights of a creditor that obtains a
judicial lien on all property on which a creditor could have obtained
such a lien.

These rights are dates as of the petition date

Thus in essence the trustee become first in priority and
thus supersedes all unperfected claims.
o

Strong arm provision in Real Property – 544(a)(3)


However perfect claims are still left cause they still
would have priority
Allows trustee to become a Bona Fide Purchase of Real property

Thus allow trustee to prevail if:

1. The competing creditor was supposed to do something to
perfect its lien AND

2. The competing creditors failed to do it
Strong arm provision in transfer

Allows trustee to avoid “any transfer” – 533(a)(2)

Avoid grants of security interests and lien, focus on fraudulent
transfers

Limitations of Strong arm provision: Code § 546(b): makes trustee’s
strong arm powers subject to state law that permits perfection to relate
back to date of attachment.

SC strong arm rights: Code § 362(b)(3): allows perfection by creditor that
obtains interest in property before petition date, provided that perfection
will allow it to “beat” hypothetical lien creditor.

Specific things that win over strong arm provision


Lapsed financing statement – only beat Liens not SC

Missing debtors info on F/S, though filed, effect against Liens not
SCs though

Filling F/S a day before bankruptcy goes into effect
Specific things that loose to strong arm:

Description of collateral in F/S missing

F/S never filed

Levies that were never executed by sheriff

In minority would lose look at levies 5.7.9
62
7.4.5 §363 Sales free and clear of all interests
 § 363 Sales free and clear of all interests, authorized by DIP or trustee

Has five alternatives, one of which must be met for the “free and clear” sale
to occur: (f)(1-5)

Applicable non-bankruptcy law allows it

Junior interest consents

Interest is a lien, and sales price is greater than aggregate value of
all liens

Oneida – courts have interpreted it to mean the economic
value of the lien as determined by the fair market value of
the property at the time

Other courts - 'face amount' of the claim secured by the lien,
i.e., the amount owed to the lienholder,

Interest is in bona fide dispute OR

Junior interest holder could be compelled, in a legal or equitable
proceeding, to accept a monetary satisfaction of the claim.
7.4.6 Seven Preference Elements – § 547(b) – all have to satisfied to be voidable
 (1) Transfer [not just taking new credit, also transferring money to third parties,
think that class action law suit from 31.4]

Security creditor has 30 days to perfect after attachment; otherwise,
security interest “transfers” upon “perfection” (§§ 9-317(a)(2), 9-323(b)). §
547(e) – THIS IS ALSO AN EXCEPTION

(2) Of interest of debtor in property, taking a security interest in property

(3) To or for the benefit of a creditor – § 547(b)(1)

(4) For or on account of an existing debt owed by the debtor before transfer was
made, – § 547(b)(2) [on already existing debt]

(5) Made while debtor insolvent – § 547(b)(3)


Debtor presumed to be insolvent if in bankruptcy. § 547(f)
(6) Made on or within 90 days before petition date (one year if insider) 547(b)(4)

Insider is a family member or someone part of a company … etc..

(7) That enables the creditor to receive more than it would in Chapter 7
[547(b)(5)]

Preferences – Exceptions – § 547(c)

Perfection of PMSI within 30 days of debtor receiving possession of
property. § 547(c)(3)

Floating lien, Inventory and Account Receivables. § 547(c)(5)

Improvement in position” formula: secured creditor remains
protected when inventory and accounts receivable turn over in
preference period, but cannot enhance the dollar value of collateral
63
that entitled to reach through security interest in relation to
amount of debt outstanding.



Need to determine how much security has changed from
90th day before petition to petition date.
Application of 547(c)(5) - formula

Within the 90th Day Insufficiency (N1) = Debt – Collateral Value

Petition Date Insufficiency (N2) = Debt – Collateral Value

If N1 > N2, voidable preference

If N1 = N2, no voidable preference

If N1 < N2, no voidable preference
Ways to think about the effect of Formula

If more undersecured (less secured) on petition date, no “improvement in
position” and entire voidable preference saved (no voidable preference).

If less undersecured (more secured) on petition date, “improvement in
position” and voidable preference avoidable in amount of improvement.

If fully secured on 90th day, no “improvement in position” and entire
voidable preference saved.
64