SECURED TRANSACTIONS—OUTLINE
Code in blue
Cases in red
SI = Security interest
SA = Security Agreement
AL = Agricultural Lien
FS = Financing Statement
***CREDITOR’S REMEDIES UNDER STATE LAW***
I.
General Stuff
a. Article 9 governs secured transactions.
b. Definitions are usually found in 9-101, 102, or 1-101 and 102.
c. Why have secured transactions??? Policy reasons:
i. Ways for a bank to make money back if debtors don’t pay back loans:
1. Sue and get a judgment.
2. Increase interest rates.
ii. Secured transactions exist to keep interest rates down. They do this by making sure there is collateral.
iii. Secured credit law also makes a cheaper way of getting that collateral (i.e., allows a bank t get away with
11% on loans instead of 15%). Makes it cheaper to lend, helps the economy grow.
iv. Makes sure that the people who borrow the money are the ones paying it back, and the loss is not
distributed to those who are paying.
II.
Creditors’ Remedies of Unsecured Creditors Under State Law (Assignment 1):
a. Who is an unsecured creditor?
i. Anyone owed a legal obligation that can be reduced to a money judgment is a creditor of the party owing
the obligation.
ii. I.e., company with a valid patent infringement claim, the consumer with a defective product still covered
by a warranty, and the child who is the beneficiary of a non-custodial parent’s court-imposed support
obligation.
b. Most debtor-creditor relationships are entered into voluntarily.
c. Unless a creditor contracts with the debtor for secured status or is granted it by statute, the creditor will be
unsecured. Unsecured creditors are the general creditors or ordinary creditors.
d. If the unsecured creditor has already obtained a court judgment to establish liability, the creditor is a judgment
creditor, but the mere grant of judgment does not alter the creditor’s unsecured status.
e. How do unsecured creditors compel payment?
i. The law provides procedures for the collection of unsecured debts and regulates or bars many alternatives.
ii. Self-help seizure of the debtor’s property is PROHIBITED.
iii. If the creditor has the right to demand payment from the debtor, and does so in an unreasonable manner, it
may incur liability for wrongful collection practices.
f. Vitale v. Hotel California
i. Sheriff and bodyguards case.
ii. P sued D and got a judgment.
iii. P then has to get the sheriff to execute the writ. Sheriff went to bar to try to execute but was turned away
by bouncer.
iv. Debtor was the corporation Hotel California. They were renting the place and furniture where the bar was,
so sheriff couldn’t take the property.
v. Sheriff finally gets in and levies $714 from D’s registers.
vi. Issue: Whether multiple levies can be executed under the same writ and is the request to levy several times
under one writ unreasonable?
vii. Multiple levies are possible until the return date, and as long as early levies are not returned.
viii. Multiple levies are only unreasonable after no more assets could possibly be levied.
ix. After the first writ is satisfied, P must file for an alias writ if he wants more.
g.
h.
i.
Exemptions to levies: Under state law, some things are exempt  See the Wisconsin statutes in the book on page
15.
Writ of garnishment is another possible levy. This would require the 3 rd party to pay the judgment creditor rather
than the debtor if 3rd party is in possessions of property of the debtor or owes money to the debtor.
Limitations on compelling payment:
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j.
III.
i. Obtaining information about the debtor’s assets through discovery can take a long time. You also have to
ask the right questions
ii. The creditor must establish the judgment in the destination state before invoking the enforcement
procedures of that state.
iii. It is not fraudulent for a debtor to pay one of its creditors, even if the effect is to leave nothing for others, so
long as the debtor does not make the payment for the purpose of defrauding the others.
iv. Exemption statutes can be an impediment to the collection of judgment debt. These statutes prevent the
sheriff from seizing certain property under a writ of execution.
Is the Law Serious About Collecting Unsecured Debts?
i. Courts can order those subject to their jurisdiction to meet their legal obligations and imprison them if they
refuse to comply. This does NOT include judgments for personal injuries, the wages of working people, or
the breaches of most kinds of contracts.
ii. The availability of effective remedies to enforce particular rights reflects to some degree the relative values
society places on those rights.
Security and Foreclosure (Assignment 2)
a. Nature of Security
i. More effective set of collection rights is known as a lien: A charge against or an interest in property to
secure payment of a debt or performance of an obligation. If the debt is not paid when due, the creditor can
compel the application of the value of the collateral to payment of the debt. The creditor does this by
foreclosure.
b. Most common form of lien is SECURITY INTEREST. There are also other liens (nonconsensual liens): Liens
granted by statute (statutory liens) and liens obtained by unsecured creditors through judicial process (judicial liens).
c. Virtually anything recognized as property can serve as collateral. Usefulness of certain property as collateral
depends on:
i. The value of the property.
ii. The leverage the creditor can derive from the ability to deprive debtor of that property.
d. The rights of the holder of a SI are rights that take effect upon default. So a SI is a right in property that is
contingent on nonpayment of a debt.
e. Why would someone ever be an unsecured creditor since secured creditors get preference?
i. Can charge higher interest rates in exchange.
ii. Some don’t choose to be unsecured.
iii. Business custom.
f. In real estate law, no matter if the parties intend to create a security interest, the law will recast it as a mortgage.
ALL ABOUT SUBSTANCE, NOT FORM.
g. Equity of Redemption: Until the equity is foreclosed, the debtor has the right to get the property by performing the
obligation.
h. Basile v. Erhal Holding Company (pg. 27)
i. In 1982, P mortgaged his property to D. P instituted action to find mortgage null and void based on usury.
P argued that D didn’t foreclose her equity of redemption. P defaulted on loan and fire insurance.
ii. RULE: A deed conveying real property, although absolute on its face, will be considered to be a mortgage
when the instrument is executed as a security for a debt.
iii. Equity of Redemption: It is inseparably connected with mortgage, and cannot be waived or abandoned by
any stipulation of the parties made at the time, even if embodied in the mortgage. General rule is that if
there is an equity of redemption, you need to foreclose, unless there is an immediate deed in lieu of default.
i. 9-109(a)(1) provides that Article 9 applies to any transaction regardless of its form that creates a security interest in
personal property.
j. Ways to foreclose:
i. Judicial: Everything  Primarily used for real property. It is court ordered. File a complaint, prove the
obligation hasn’t been met, prove the existence of the security, and ask judge to foreclose.
ii. Power of Sale: Appoint a 3rd party and give deed to them to hold (often an attorney) and if debtor pays, the
deed is given to the debtor. If the debtor fails to fulfill the obligation, then the creditor gets the deed to
foreclose on it and sell after a certain number of days. If debtor disagrees that there is a breech, go to litigation
to determine if there was a breech of contract. At the moment the creditor takes possession of the deed, it is
foreclosed.
iii. U.C.C. Statutory: For foreclosure on personal property. Use other state means of foreclosure. Repossession.
U.C.C. foreclosure is taking possession of the collateral and selling it. Creditor can basically foreclose on the
property immediately when breach occurs. Equity of redemption is gone.
k. Cost of the statutory foreclosure: Taking the judicial process away from the debtor.
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***CREATION OF SECURITY INTERESTS***
IV.
Formalities for Attachment (Assignment 8)
a. U.C.C. 9-203(b) lists three formalities required for the creation of a security interest enforceable against the debtor:
i. Value must have been given. Value defined in 1-204 (Value is given when there is a contract to extend
credit). Value is defined in 1-201(44) very broadly.
1. 1-201(44) encompasses all forms of consideration that would support an ordinary contract
(including past consideration).
2. It is easy for an unsecured debt to become secured at any time in the debtor-creditor relationship.
ii. The debtor must have rights in the collateral. The debtor must have some right in what he is pledging as
collateral. The courts have read 3 significant subtexts into this rule:
1. They read it to mean that if the debtor owns a limited interest in property and grants a security
interest in the property, the security interest will generally attach to only that limited interest.
2. Some “owners” who acquired their rights in property by fraud have the power to transfer to bona
fide purchasers ownership rights they themselves do not have.
3. The last relates to the time at which the security interest becomes enforceable. Debtor may grant a
SI to creditor in collateral he doesn’t currently own, but may later acquire that collateral, and then
the SI becomes enforceable.
iii. One of the following conditions must be met:
1. The debtor has authenticated (signed) a security agreement that provides a description of the
collateral and, if the security interest covers timber to be cut, a description of the land concerned;
2. The collateral is not a certificated security and is in the possession of the secured party under
Section 9-313 pursuant to the debtor’s security agreement;
3. The collateral is a certificated security in registered form and the security certificate has been
delivered to the secured party under Section 8-301 pursuant to the debtor’s security agreement; or
4. The collateral is deposit accounts, electronic paper, investment property, or letter-of-credit rights,
and the secured party has control under Section 9-104, 105, 106, or 107 pursuant to the debtor’s
security agreement
iv. Agreement and security interest defined in 1-201.
v. Must start at 9-203 and go through the code defining basic terms.
vi. Article 9 ratifies 2 types of security agreements:
1. Authenticated Records: Contract
2. Security Agreement Made Effective By Possession: Most uncommon.
3. An agreement inscribed on some tangible medium in which it can be stored and from which it can
be retrieved. Information so inscribed is referred to as a “record”. The record must be
authenticated by processing it with the intention to identify the authenticator and “adopt or accept”
the record.
vii. Security Agreement: Contains a description of the collateral, a description of the obligations secured, and
provisions, defining default, specifying the rights of the secured creditor on default, re-imposing other
obligations on the debtor.
b. In re Ace Lumber
i. Ace was indebted to Minot for quite a bit of money. Minot and Ace both signed a financing statement and
phone notes in order to try and get the debt paid off. They filed the financing statement with the Secretary
of State.
ii. Trustee of Ace, after it went bankrupt and Minot tried to collect collateral, said that the above did not create
a security interest.
iii. The Ninth Circuit said that all that is needed is the financing statement.
iv. The 3rd Circuit adopted the composite document rule, looking at all documents and the intent of the parties.
v. Must look to the language of 9-203 to see if the telephone conversation notes could count as an
authentication of security agreement.
vi. The court used the composite document rule here, but decided that the financing statement alone is not
enough to assume a security agreement. Any document that the parties wish to make up security agreement
MUST be signed.
vii. This court said that you must show a meeting of the minds. Therefore, there must be a description of the
collateral, authentication, and if no authentication, language that there is intent to make a security
agreement.
viii. Court says, language missing is “I debtor, grant x collateral, to creditor to insure performance of the
obligation.”
ix. This case illustrates the consequence of failing to obtain an authenticated security agreement: The creditor
has no security interest and is therefore and unsecured creditor.
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c.
d.
e.
f.
V.
2 parts to the Composite Document Rule:
i. What documents make up the agreement under 9-203 (financing statement and security
agreement/contract)
ii. Is there a meeting of the minds? Must be subjective intent. May have to be objective intent  language
that shows intent (one argument—argument from Ace). A signature insures a meeting of the mind.
Justifications for Requiring Security Agreements to be Authenticated:
i. Preventing Fraud: Comment 3 to U.C.C. 9-203 explains that the requirement of a writing in Article 9 is “in
the nature of a Statute of Frauds.” The modern theory is that courts should be skeptical about agreements
that are not in writing.
ii. Minimizing Litigation: If the security agreement and the description of collateral are in writing, there will
be less chance that the debtor and the creditor will differ as to whether a security interest was granted and,
if so, what property was to serve as collateral.
iii. Cautioning Debtors: Requiring that the promise of security be in writing to be enforceable will result in
debtors making better decisions about whether security agreements are in their interest.
iv. Channeling Transactions: By refusing to enforce oral security agreements the law encourages the parties to
put them in writing.
v. Discouraging Secured Credit: Secured creditors are typically banks and insurance companies and they
invoke a legal device that gives them collection advantages not universally shared. When they do so
imperfectly (by failing to authenticate) observers believe it is fair to pull them down to the level of the
unsecured folks they were trying to best.
The competing policy is the doctrine of equitable mortgages: Under that doctrine, the courts can enforce oral
security agreements where to do so would be “equitable”. The doctrine is impliedly repudiated in the text of 9203(b)(3).
SI’s in real estate (mortgage) require more formality.
What Collateral and Obligations are Covered (Assignment 9):
a. What can we use to interpret the language of the statutes?
i. Notes/comments to the code
ii. Policy
b. Section9-108 tells us when a description of collateral is sufficient. Sufficient description may be met by noting one
of the following:
i. Specific listing;
ii. Category;
iii. Except as otherwise provide in subsection (e), a type of collateral defined in the UCC;
iv. Quantity (if something—quantity alone is not enough)
v. Computational or allocational formula or procedure; or
vi. Except as otherwise provided in subsection (c), any other method, if the identity of the collateral is
objectively determinable.
c. Functional Test: If you go over to a debtor’s property and can read its description in the security agreement, and
know that it is the collateral described—the functional test has been met.
d. Although a security agreement is a contract between the debtor and the creditor, in most circumstances, it binds 3rd
parties as well (often secured party takes collateral other creditors were counting on for collection).
e. Descriptions of Collateral 9-102:
i. Account: Except as used in “account for” means a right to payment of a monetary obligation, whether or
not, earned by performance…..(see rest of 9-102(a)(2)).
ii. Consumer Goods: Goods that are used or bought for use primarily for personal, family, or household
purposes. 9-102(a)(23)
iii. Equipment: Goods other than inventory, farm products, or consumer goods. 9-102(a)(33). (i.e.,
Racehorses could be included).
iv. General Intangible: Any personal property, including things in action, other than accounts, chattel paper,
commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-ofcredit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes
payment intangibles and software. 9-102(a)(42) (i.e. Owner of restaurant, when granting SI in “general
intangibles,” is including in that collateral his liquor license.)
v. Inventory: Goods other than farm products, which:
1. (A) Are leased by a person as lessor;
2. (B) Are held by a person for sale or lease or to be furnished under a contract of service;
3. (C) Are furnished by a person under a contract of service; or
4. (D) Consist of raw materials, work in process, or materials used or consumed in a business. 9102(a)(48)
f. ****In re Shirel*** (important case!)
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i.
ii.
iii.
iv.
9-108(a) did not exist when this case was decided.
Now, saying “everything charged to your sears card” is not supergeneric.
Court was asking, was “merchandise” a reasonable description under 9-108.
Court said that you must use a graphic or detailed account/description, such as the type or class of
collateral. “Refrigerator” would have been sufficient.
v. Now, under 9-108(b)(6), “all merchandise” would be a sufficient description b/c it is objectionably
determinable.
vi. In deciphering code, use objective meaning.
g.
h.
i.
“Import” does not mean effect.
After-Acquired Property
i. Term used to refer to property that a debtor acquires after the security interest is created (accounts
receivable often after-acquired collateral).
ii. There is a hitch in using the accounts as collateral: The accounts that exist on any given day will disappear
as they are paid off. The collateral existing on the day of the loan transaction may shrink considerably in
30 days and nearly disappear in 60 or 90.
iii. The accounts that are generated after the security agreement is signed are “after-acquired property.”
Having them as collateral is crucial to the position of the accounts-secured lender.
iv. 9-204(a): Except as otherwise proved in subsection (b), a security agreement may create or provide for a
security interest in after-acquired collateral.
v. 9-204(b): A security interest does not attach under a term constituting an after-acquired property clause to:
1. Consumer goods, other than an accession when given as additional security, unless the debtor
acquires rights in them w/in 10 days after the secured party gives value; or
2. A commercial tort claim.
vi. After-acquired property clauses declining, b/c of the use of computers. Some department stores include a
security agreement on the receipt for each credit purpose.
Stoumbous v. Kilimnik
Language is “inventory on hand at May 1, 1982,” “equipment,” and “accounts”.
i. Language is “inventory on hand at May 1, 1982,” “equipment,”” and “accounts”.
ii. P sold business to AAM retaining SI in inventory and equipment and used after-acquired property language
in regards to accounts receivable.
iii. Account is any right to payment upon sale of inventory.
iv. What counts as after-acquired property? Depends on the context.
v. After-acquired property clauses normal when creditors take SI in broad categories of collateral (floating
liens).
vi. P argues that where a creditor acquires a SI in equipment and inventory, the court should find that this
interest automatically extends to the after-acquired inventory and equipment.
vii. There is support for the proposition that, where a financing statement or security agreement provides for a
security interest in “all inventory,” the document incorporates after-acquired inventory. The rationale is
that the inventory is constantly turning over, and no creditor could reasonably agree to be secured by an
asset that would vanish in a short time in the normal course of business.
viii. Where the word/description does not connote that it is constantly turning over, then more specific language
is needed than for inventory.
j.
After-acquired property can be used with inventory and accounts, anything else you want to cover under this
language you must specifically state.
k. After-acquired property clauses become ineffective upon the filing of bankruptcy.
l. Virtually any obligation can be secured if the parties make their intention clear.
m. A security interest can also secure a debt that does not yet exist but which the parties contemplate will come into
existence in the future. If the future obligation will come into existence as the result of an additional extension of
credit by the secured creditor, it is referred to as a future advance.
VI.
Proceeds, Products, and Other Value-Tracing Concepts (Assignment 10)
a. In order for something to be attached, debtor has to have rights in the collateral.
b. If a debtor knows that the debtor sold, rented, transferred collateral, but does nothing about it, it waives its rights.
c. Collateral can change in form that puts them outside of the description of collateral in the security agreement. The
creditor usually has the security interest attach to whatever the debtor receives in return.
d. One way to assure that a security interest will follow the value is to include express language in the description of
the collateral in the security agreement that covers all forms the value is likely to take.
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e.
f.
g.
h.
i.
j.
k.
l.
The express language included in security agreements to follow the value of the collateral is called “value tracing
concepts.” These include proceeds, products, rents, profits and offspring.
Proceeds: 9-102(a)(64)(A) Whatever is acquired upon the sale, lease, license, exchange, or other disposition of
collateral; (B) Whatever is collected on, or distributed on account of, collateral (i.e., proceeds of a slot
machine); (C) Rights arising out of collateral; (D) To the extent of the value of collateral , claims arising out
of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to,
the collateral, or; (E) To the extent of the value of collateral and to the extent payable to the debtor or the
secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights
in, or damage to, the collateral.
i. When proceeds are disposed of or rights to arise out of them, whatever is received is “proceeds.”
Thus the proceeds of proceeds are proceeds.
ii. Concepts of proceeds and after-acquired property frequently overlap, but the former is a valuetracing concept, while the latter is not.
iii. Even if the security agreement makes no mention of proceeds, a security interest automatically
covers them. The rule derives from 9-203(f) and 9-315(a):
1. 9-203(f): The attachment of a security interest in collateral gives the secured party the
rights to proceeds provided by 9-315 and is also attachment of a security interest in a
supporting obligation for the collateral.
2. 9-315(a): Except as otherwise provided in this article and in 2-403(2): (1) A security
interest or agricultural lien continues in collateral notwithstanding sale, lease, license,
exchange, or other disposition thereof unless the secured party authorized the
disposition free of the security interest or agricultural lien; and (2) A security interest
attaches to any identifiable proceeds of collateral.
Commingling proceeds: If the proceeds of a piece of collateral are put into a bank account with unrelated money in
it, the proceeds have lost identifiability (ability to be traced). We can still look to records of the bank and the
account to identify. This test is called the “lowest intermediate balance test.” This rule provides that the amount
of the secured creditor’s collateral remaining in a bank account is equal to the lowest balance of all funds in the
account between the time the collateral was deposited to the account and the time the rule is applied.
9-322(b) provides that a transferee of funds from a deposit account takes the funds free of a SI in the deposit
account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
Even though the cash proceeds that the debtor transfers from the bank account are free of the SI, anything the debtor
purchased with that cash may nevertheless still be proceeds.
Secured creditors sometimes authorize their debtors to dispose of the collateral free of the security interest. When
this occurs, 9-315(a)(1) gives a effect to the authorization: The buyer takes free of the security interest and the
secured creditor can look only to the debtor and the proceeds.
The language of may SA’s prohibits the sale of the collateral. The debtor must pay in full in order to have the right
to sell the collateral. Even if the security agreement expressly prohibits sale of the collateral the debtor has the
power under 9-401 to transfer ownership to a buyer.
i. 9-401(b) An agreement between the debtor and secured party which prohibits a transfer of the
debtor’s rights in collateral or makes the transfer a default does not prevent the transfer from taking
effect.
ii. The result is that after a sale that the secured party has not authorized to be free of the security interest the
buyer will own the collateral subject to the security interest. The buyer may not know of that interest.
iii. If a debtor sells the collateral w/out authorization, the SI continues in the original collateral and also in the
proceeds. This is no mere tracing of the value of the collateral; it is potentially a multiplication of the value
in favor of the creditor. (see 9-102(a)(12) and (64) and 9-315(a)).
A security interest continues to encumber proceeds only so long as they remain “identifiable.” 9-315(a)(2)
In re Oriental Rug Warehouse Club
i. Yasher rugs consigned rugs to D in a consignment agreement for a total of $106,073.
ii. Yasher filed a UCC-1 financing statement w/ the Secretary of State.
iii. D sold some of the rugs, but didn’t give Yasher the proceeds, instead bought other rugs, after he had put the
money into the account.
iv. This question comes down to the lowest intermediate balance.
v. For the proceeds, and new rugs to be considered “proceeds” under the code, they must have come from the
collateral, and be identifiable.
vi. Court held against P, b/c it cannot be ascertained what in the account was proceed and what was not
proceed.
m. Other Value Tracing Concepts:
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n.
i. Product: Something the collateral produces. The term is most commonly used in the context of
agriculture. These products may also be proceeds of the collateral named because they arise out of
collateral.
ii. Profit: Can be used to describe the excess of revenues of a business over the expenses where the business
itself is the collateral.
iii. Rent: Money paid for the temporary use of collateral.
iv. Products, profits, rents, and offspring of collateral are all arguably rights arising out of collateral, thus they
are arguably all proceeds.
Non-Value Tracing Concepts: After-acquired property, replacements, additions and substitutions in a description of
collateral are non-value tracing in that they can pick up property acquired by the debtor with value not derived from
the previously existing collateral.
***DEFAULT***
VII.
Default, Acceleration, and Cure Under State Law (Assignment 13)
a. Default
i. Default is the debtor’s failure to pay the debt when due or otherwise perform the agreement between debtor
and creditor.
ii. Creditors can’t exercise their remedies under state law until the debtor defaults.
iii. Security agreements nearly always define default expansively.
b. When is Payment Due?
i. Installment Loans: When the parties contemplate that the debtor will repay in a series of payments.
Payment is due on an interval basis (monthly, quarterly, or annually).
ii. Single Payment Loans: Many secured loans are made payable on a particular day.
iii. Lines of Credit: The bank contracts to lend up to a fixed amount of money as the debtor needs it. Under
most line arrangements, the debtor borrows the money simply by writing a check on its bank account.
c. Acceleration and Cure
i. Acceleration Clauses: Provisions in installment loan agreements that opt out of the common law rule.
ii. The practical effect of acceleration is often to eliminate the debtor’s ability to cure its default.
iii. Limits on the Enforceability of Acceleration Clauses: A secured creditor can exercise its right to accelerate
for even a tiny or fleeting default in payment, as the following case makes clear. But if the grounds for
acceleration are merely that the secured creditor deems itself insecure, the creditor has the right to
accelerate only if it in good faith believes the prospect of payment or performance is impaired.
iv. The debtor’s right to cure: A debtor has the right to cure a default by paying the amounts then due.
d. Remedies: (1) Judicial remedies such as foreclosure and replevin, which are administered by the courts, and (2) Selfhelp remedies such as repossession w/out judicial process, the notification of account debtors, or the refusal to make
further advances to the debtor under a line of credit.
***PERFECTION***
VIII. Article 9 Financing Statements: The Debtor’s Name (Assignment 17)
a. The Components of a Filing System
i. A filing system consists not only of the filed records but also of subsystems for adding new records
searching among the records, and removing obsolete records.
ii. Financing Statements: Can be filed in paper or electronically.
iii. Index: When a financing statement is filed, the filing officer assigns it is a unique number, usually referred
to as the file number or in some local systems, the book and page number.
1. A few kinds of filing systems index by a description of the collateral.
2. Real estate and motor vehicle filing systems can index by collateral.
3. 9-519(c) requires that the filing office index financing statements according to the name of the
debtor.
iv. Search Systems: Some computer systems sort the index entries alphabetically and print hard copies of the
index
1. Problems: A misspelling early in a name can throw a name to a distant part of the directory. The
position of even a correctly spelled name can be affected by arbitrary, difficult to discover rules
for alphabetizing.
2. Search Logic: Rules that determine what the program will consider equivalent.
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3.
b.
The Basket: Unindexed, undiscoverable documents, not-yet processed kept in a basket on
someone’s desk.
Correct Names for Use on Financing Statements
i. 9-506(a): A financing statement substantially complying with the requirements of part 5 of Article 9
is effective, even if it includes minor errors or omissions, unless the errors or omissions make the
financing statement seriously misleading.
ii. 9-503: 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.
iii. 9-503(a)(4): As to an individual or partnership, the financing statement must provide the individual
or organizational name of the debtor.
iv. 9-503(b): A financing statement that provides the name of the debtor in accordance with subsection
(a) is not rendered ineffective by the absence of:
1. A trade name or other name of the debtor, or
2. Unless required under subsection (a)(4)(B), names of partners, members, associates, or other
persons comprising the debtor.
v. 9-503(c): A financing statement that provides only the debtor’s trade name does not sufficiently
provide the name of the debtor.
vi. Individual Names
1. The correct name of an individual is the name he/she is generally known by in the community.
2. Courts have consistently favored the longer or more formal version of a name.
vii. Corporate Names:
1. The corporation can change that name only by filing an amendment with the secretary of state.
2. In the large majority of states, the name must show that the entity is a corporation. (Does this by
including L.L.C., Inc., Co., etc.)
3. No state will permit the formation of 2 corporations with the same name or confusingly similar
names.
viii. Partnership Names
1. The secretary of state will not permit use of a name that is the same as, or confusingly similar to,
that of a limited partnership already chartered by the state.
2. The legal name of a general partnership is the name by which it is generally know in the
community.
3. 9-507 contains rules dealing with the effects of partnership name changes on filing and searching.
4. 9-507(c): If a debtor so changes its name that a filed financing statement becomes seriously
misleading under Section 9-506:
a. The financing statement is effective to perfect a security interest in collateral
acquired by the debtor before, or within 4 months after, the change; and
b. The financing statement is not effective to perfect a security interest in collateral
acquired by the debtor more than 4 months after the change, unless an amendment
to the financing statement which renders the financing statement not seriously
misleading is filed w/in 4 months after the change.
ix. Trade Names
1. A trade name is a name under which a person or entity conducts business that is not its legal name.
2. Most states have a fictitious name statute requiring that every person or entity doing business in a
name other than its own file notice in a public record system provided for that purpose.
3. 9-503(b) and (c) make clear that trade names are neither necessary nor sufficient to identify a
debtor on a financing statement.
x. The Entity Problem
1. The difficulty of determining the correct name of a legal entity is easily confused with a much
more basic question: Who, or what, can have a name?
2. U.C.C. says in 9-102(a)(28): A debtor means (A) a person having an interest, other than a
security interest or other lien, in the collateral, whether or not the person is an obligor; (B) A
seller of accounts, chattel paper, payment intangibles, or promissory notes; or (C) a
consignee.
3. A person is defined in 1-201(27): Person means an individual, corporation, business trust,
estate, trust, partnership, limited liability company, association, joint venture, government,
governmental subdivision agency, or instrumentality, public corporation, or any other legal
or commercial entity.
4. 1-201(25): Organization means a person other than an individual.
8
5.
c.
An entity might be a debtor under Article 9 and its name might show up on financing statements,
even though it is not recognized as a legal entity for any other purpose.
Errors in the Debtors’ Names on Financing Statements
i. If the searcher searches under the correct name of the debtor, but does not find the prior filing b/c the prior
secured party listed an incorrect name for the debtor on its financing statement, the prior filing is
ineffective.
ii. 9-503(a): [Sufficiency of Debtor’s Name] A financing statement sufficiently provides the name of the
debtor:
1. If the debtor is a registered organization, only if the financing statement provides the name
of the debtor indicated on the public record of the debtor’s jurisdiction of organization
which shows the debtor to have been organized;
2. If the debtor is a decedent’s estate, only if the financing statement provides the name of the
decedent and indicates that the debtor is an estate;
3. If the debtor is a trust or a trustee acting w/ respect to property held in trust, only if the
financing statement;
a. Provides the name specified for the trust in its organic documents or, if no name is
specified, provides the name of the settlor and additional information sufficient to
distinguish the debtor from other trusts having one or more of the same settlors;
b. Indicates, in the debtor’s name or otherwise, that the debtor is a trust or is a trustee
acting w/ respect to property held in trust; and
4. In other cases:
a. If the debtor has a name, only if it provides the individual or organizational name of
the debtor; and
b. If the debtor does not have a name only if it provides the names of the partners,
members, associates, or other person comprising the debtor.
iii. 9-506(a): [Minor Errors and Omissions] a financing statement substantially satisfying the
requirements of this part is effective, even if it has minor errors or omissions, unless the errors or
omissions make the financing statement seriously misleading.
iv. 9-506(c): [Financing Statement not Seriously Misleading] 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
section 9-503(a), the name provided does not make the financing statement seriously misleading.
v. 9-517: If the search is made under the correct name of the debtor, but does not find prior filings
made in the correct name of the debtor b/c the filing officer indexed the prior filings incorrectly, the
prior filings are nonetheless effective.
vi. Test for Sufficiency: When the sufficiently of the debtor’s name as provided in the financing statement is
challenged, the test is not whether the trustee or later lender actually found the financing statement, but
whether a hypothetical search by the trustee or later lender under the correct name of the debtor would have
found the financing statement.
vii. Transamerica Commercial Finance Corp. v. General Electric Capital Corp.: An error in the debtor’s
name is seriously misleading if it would prevent the reasonably diligent searcher from discovering the
financing statement.
IX.
Article 9 Financing Statements: Other Information (Assignment 18)
a. 9-521 contains a standard form for filing and amending the financing statement in a hard copy, but Article 9 does
not require its use. The secured party can use its own form or even file a copy of the security agreement as a
financing statement.
b. 9-516(b): [Refusal to accept record; filing does not occur] Filing does not occur w/ respect to a record that a
filing office refuses to accept b/c:
i. (1) The record is not communicated by a method or medium of communication authorized by the
filing office,
ii. (2) An amount equal to or greater than the applicable filing fee is not tendered;
iii. (3) The filing office is unable to index the record b/c:
1. (A) In the case of an initial financing statement, the record does not provide a name for the
debtor;
2. (B) In the case of an amendment or correction statement, the record:
a. (i) Does not identify the initial financing statement as required by 9-512 or 9-518 as
applicable; or
b. (ii) Identifies an initial financing statement whose effectiveness has lapsed under 9515.
9
3.
iv.
v.
vi.
vii.
c.
d.
e.
f.
g.
h.
i.
j.
(C) In the case of an initial financing statement that provides the name of a debtor identified
as an individual or an amendment that provides a name of a debtor identified as an
individual which was not previously provided in the financing statement to which the record
relates, the record does not identify the debtor’s last name; or
4. (D) In the case of a record filed (or recorded) in the filing office described in 9-501(a)(1), the
record does not provide a sufficient description of the real property to which it relates;
(4) In the case of an initial financing statement or an amendment that adds a secured party of record,
the record does not provide a name and mailing address for the secured party of record;
(5) In the case of an initial financing statement or an amendment that provides a name of a debtor
which was not previously provided in the financing statement to which the amendment relates, the
record does not;
1. (A) Provide a mailing address for the debtor;
2. (B) Indicate whether the debtor is an individual or an organization; or
3. (C) If the financing statement indicates the debtor is an organization, provide:
a. (i) A type of organization for the debtor;
b. (ii) A jurisdiction of organization for the debtor; or
c. (iii) An organizational identification number for the debtor or indicate that the
debtor has none.
(6) In the case of an assignment reflected in an initial financing statement under 9-514(a) or an
amendment filed under section 9-514(b), the record does not provide the name and mailing address
for the assignee; or
(7) In the case of a continuation statement, the record is not filed w/in the 6-month period prescribed
by 9-515(d).
Financing Statement  What does it need to be valid?
i. The name of the debtor.
ii. The name of the secured creditor
iii. An indication of the collateral covered.
iv. The mailing address of the secured creditor  Section 9-516(b)(4)
v. The mailing address of the debtor.
vi. An indication of whether the debtor is an individual or a corporation. If the debtor is an organization 9516(b)(5)(C) also requires rejection of the financing statement unless it contains 3 additional items of
information.
vii. The type of organization (corp., LLC, etc).
viii. The debtor’s jurisdiction of organization.
ix. The debtor’s organizational identification number.
Improper Acceptance: If the information in 1-3 is correct, then it is effective even if wrongly accepted; however, if
the information in 4-9 is incorrect, then 9-338 applies.
9-520(b): If a financing statement lacks any of these 9 pieces of info., other than an indication of the collateral
covered, the filing officer should refuse to accept it and communicate to the filer the reason for refusal and
the date and time the record would have been filed. The attempt at filing has accomplished nothing, but, notified
of its failure, the filer has the opportunity to try again.
Financing party is meant to give notice to 3rd parties that certain property might be encumbered, and additional
investigation is needed by searcher.
Security agreement is meant to limit the collateral that the creditor has interest in.
The financing statement does not need to describe the collateral in the same way that the security agreement does, it
just needs to put 3rd parties on inquiry notice. There is no need for after-acquired language.
Wrongly Accepted Filings
i. 9-520(c): [When filed financing statement effective] A filed financing statement satisfying 9-502(a)
and (b) is effective, even if the filing office is required to refuse to accept it for filing under subsection
(a). However, 9-338 applies to a filed financing statement providing information described in 9516(b)(5) which is incorrect at the time the financing statement is filed.
ii. The reasons why they are effective are that the omission necessitates further inquiry, therefore misleading
no one, and if the filing officer would have rejected the filing, that would have given the filer the
opportunity to correct its error.
Wrongly Rejected Filings:
i. If the filing officer should accept an initial financing statement, either b/c it is correct or b/c the manner in
which it is incorrect does not warrant rejection under 9-516, but the filing officer rejects it instead, the
financing statement will not appear on the public record. Instead, the filing officer will stamp it with the
date and time of the attempt to file and return it to the filer. (9-520(b))
10
k.
ii. 9-516(d): [Refusal to accept record; record effective as filed record] A record that is communicated
to the filing office w/ tender of the filing fee, but which the filing office refuses to accept for a reason
other than one set forth in subsection (b), is effective as a filed record except as against a purchaser
of the collateral which gives value in reasonable reliance upon the absence of the record from the
files.
iii. So, the attempt to file nevertheless perfects the underlying SI sufficiently to defeat lien creditors.
Grabowski v. John Deere & Co.
i. BOA and SP both had security interests in farming equipment of P’s.
ii. BOA filed first and gave a general description of the collateral and filed the P’s business address.
iii. SP filed second and noted the collateral very specifically and gave the P’s home address, where the
equipment was kept for their home farming business.
iv. SP says that BOA’s financing statement is invalid b/c it is too general and lists the business address, so 3 rd
parties would believe that the John Deere business equipment was collateral, not the home business
equipment.
v. Court said that BOA’s financing statement was not too broad for a financing statement under 9-108.
vi. The court says, regarding the address, that the purpose of it was not to give the location of the collateral,
but was given to contact the debtor if necessary to further investigate.
l.
If a filer entirely omits from the financing statement a piece of information required in 9-516(b), the filing officer
can and should reject the filing. 9-520(a).
m. If the required piece of info. is merely incorrect, however, that is insufficient reason for rejection.
n. 9-338: If a SI or agricultural lien is perfected by a filed financing statement providing information described
in 9-516(b)(5) which is incorrect at the time the financing statement is filed: (1) the SI or AL is subordinate to
a conflicting perfected SI in the collateral to the extent that the holder of the conflict SI gives value in
reasonable reliance upon the incorrect info.; and (2) a purchaser, other than a secured party, of the collateral
takes free of the SI or AL to the extent that, in reasonable reliance upon the incorrect info., the purchaser
gives value and, in the case of chattel paper, documents, goods, instrument, or a security certificate, receives
delivery of the collateral.
o. 9-338 says that the wrongly accepted SI is perfected if it satisfies 9-520. The security interest to the judgment
creditor is subordinate to a purchaser’s interest if the purchaser gives value
p. Why certain information is included in financing statements and the effect of omission:
i. Name of Secured Party: Searchers may need the name of the secured party for 2 reasons:
1. If terminations statements, released of collateral, or subordination agreements are needed to
modify or eliminate prior filings to pave the way for the new loan, the name of the secured party
on the financing statement tells the searcher who can or must authenticate them.
2. The searcher may need info. from the secured party; the secured party’s name on the financing
statement assures the searcher that it is inquiring of the right person.
*Function of secured party’s name on financing statement is to unambiguously identify the holder of
the SI
ii. Description of Collateral:
1. The description of collateral in a financing statement is often identical to that in the SA, but that is
not always so.
2. There are differences in the legal standards for the description of the collateral in SA and financing
statements:
a. “Super-generic” descriptions are valid in financing statements but not in SA’s.
b. The function of the financing statement is to put searchers on notice of the identity of the
collateral. We give words in the financing statement their common meanings. In
contrast, words in descriptions of SA’s are given the meaning that the parties’ intended.
iii. Authorization to File a Financing Statement
1. The purpose of a financing statement is to advise later lenders of the existence of a prior security
interest.
2. In some states it is illegal to file or refuse to release a “fraudulent lien”.
3. Before filing a financing statement, the secured creditor must obtain authorization from the debtor
in an authenticated record. 9-509(a)(1).
4. So, all the creditor needs to do to obtain the right to file a financing statement is what it already
had to do to become a secured creditor  get the debtor to authenticate a security agreement.
5. 9-102(a)(7): Authenticate means:
a. (A) To sign; or
11
b.
(B) To execute or otherwise adopt a symbol or encrypt or similarly process a record
in whole or in part, with the present intent of the authenticating person to identify
the person and adopt or accept a record.
6. 9-510(a): [Filed record effective if authorized] A filed record is effective only to the extent
that it was filed by a person that may file it under 9-509.
7. 9-509 Persons Entitled to File a Record:
a. [Person entitled to file record] A person may file an initial financing statement,
amendment that adds collateral covered by a financing statement, or amendment
that adds a debtor to a financing statement only if:
i. (1) The debtor authorizes the filing in an authenticated record or pursuant
to subsection (b) or (c); or
ii. (2) The person holds an agricultural lien that has become effective at the
time of filing and the financing statement covers only collateral in which the
person holds an agricultural lien.
b. [Security agreement as authorization] By authenticating or becoming bound as
debtor by a security agreement, a debtor or new debtor authorizes the filing of an
initial financing statement, and an amendment, covering:
i. (1) The collateral described in the SA; and
ii. (2) Property that becomes collateral under 9-315(a)(2), whether or not the
SA expressly covers proceeds.
c. [Acquisition of collateral as authorization] By acquiring collateral in which a SI or
agricultural lien continues under 9-315(a)(1), a debtor authorizes the filing of an
initial financing statement, and an amendment, covering the collateral and property
that becomes collateral under 9-315(a)(2).
d. [Person entitled to file certain amendments] A person may file an amendment other
than an amendment that adds collateral covered by a financing statement or an
amendment that adds a debtor to a financing statement only if:
i. (1) The secured party of record authorizes the filing; or
ii. (2) The amendment is a termination statement for a financing statement as
to which the secured party of record has failed to file or send a termination
statement as required by 9-513(a) or (c), the debtor authorizes the filing,
and the termination statement indicates that the debtor authorizes it to be
filed.
e. [Multiple secured parties of record] If there is more than one secured party of
record for a financing statement, each secured party of record may authorize the
filing of an n amendment under subsection (d).
q. Section 516 requires that a filer provide information.
r. “Effective as a filed record” = filed (perfected)
s. Purchase  defined in 1-201: It has been interpreted that involuntary liens are not purchases. (1-201(29): Purchase
means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue,
gift, or any other voluntary transaction creating an interest in property.)
t. 9-515(d): A record that is communicated to the filing office with tender of the filing fee, but which the filing
office refuses to accept for a reason other than one set forth in subsection (b), is effective as a filed record
except against a purchaser (defined in 1-201) of the collateral which gives value in reasonable reliance (must
have looked and found nothing) upon the absence of the record from the files.
u. Code is meant to protect lenders. That is why 516(d) made a distinction between purchasers and judgment creditors.
v. If you leave information that falls under 9-516(b)(5) and it is not rejected by the officer, then it is valid, b/c the
information is not incorrect, just missing. This is b/c no one is misled.
w. If the financing statement is not filed, then it is seriously misleading b/c it does not give notice.
x. 520 is saying that the financing statement is effective only if it satisfies 502(a) and (b).
X.
Exceptions to the Article 9 Filing Requirement (Assignment 19)
a. 3 Ways to Perfect Other than Filing:
i. Possession
ii. Automatic Perfection by operation of law.
iii. Secured creditor may give notice to or through some person or organization that controls the collateral.
b. Possession-Gives-Notice Theory
i. 9-310(b)(6): (The filing of a financing statement is not necessary to perfect a SI): In collateral in the
secured party’s possession under 9-313. (SEE 9-313 IN CODE BOOK)
12
c.
d.
ii. ***(9-310 also provides other situations in which the filing of a financing statement is not necessary to
perfect a SI.)***
iii. Exception to filing requirement is grounded on 2 assumptions: A person who buys or lends against certain
kinds of collateral will look at the collateral before disbursing its money. Looking at collateral in the
“possession” of a secured party will alert the searcher to the possible existence of a SI. These 2
assumptions called “possession-gives-notice”.
iv. Problem: Possession doesn’t always give notice, especially to unsophisticated lenders. It favors the
relatively sophisticated parties who engage in these transactions repeatedly, at the expense of people who
stumble occasionally into a system in which “everybody” knows things that they do not.
What is Possession?
i. The legal right to control is determinative of possession.
ii. A secured party can possess collateral through an agency.
iii. 9-313(a) [Perfection by possession or delivery] Except as otherwise provided in subsection (b), a
secured party may perfect a SI in negotiable documents, goods, instruments, money, or tangible
chattel paper by taking possession of the collateral. A secured party may perfect a security interest
in certificated securities by taking delivery of the certificated securities under 8-301.
Possession as a means of Perfection:
i. Depending on the type of collateral, possession may play any of 3 roles in the perfection of SI’s:
1. Possession is an alternative form of perfection for some types of collateral.
2. Possession is an ineffective form for other types of collateral.
3. Possession is the sole means of perfecting a SI in money.
ii. Possession is an alternative to filing with goods, instruments, tangible chattel paper, negotiable documents,
and certificated securities.
1. 9-312(a): A security interest in chattel paper, negotiable documents, instruments, or
investment property may be perfected by filing.
2. 9-312(c): [Goods covered by negotiable document] While goods are in the possession of a
bailee that has issued a negotiable document covering the goods:
a. (1) A security interest in the goods may be perfected by perfecting a SI in the
document; and
b. (2) A SI perfected in the document has priority over and SI that becomes perfected
in the goods by another method during that time.
3. 9-310 says you must file to perfect except…., and 9-313 says you may possess goods to perfect
the SI. You don’t HAVE to possess, but you can.
4. Instruments: File or possess to perfect SI (look at 310 and 313). Possession trumps filing.
5. ***Perfection by possession is superior to perfection for goods, instruments, tangible chattel
paper, negotiable documents, and certificated securities*** Purchasers who subsequently take
possession of these kinds of collateral generally take priority over secured creditors who perfected
by filing.
6. Perfection by possession trumps perfection by filing.
7. 9-330(d): [Instrument purchaser’s priority] Except as otherwise provided in 9-331(a), a
purchaser of an instrument has priority over a method other than possession if the
purchaser gives value and takes possession of the instrument in good faith and w/out
knowledge that the purchase violate the rights of the secured party.
8. 9-331(a): [Rights under Articles 3, 7, and 8 not limited] This article does not limit the rights
of a holder in due course of a negotiable instrument, a holder to which a negotiable
document of title has been duly negotiated, or a protected purchaser of a security. These
holders or purchasers take priority over an earlier SI, even if perfected, to the extent
provided in Articles 3, 7, and 8.
9. The effect of such liberalization of the perfection requirement is to impose an additional burden on
the searcher. Searcher must check both the system and the collateral itself.
iii. Perfection by possession is impossible for SI in accounts and general intangibles.
iv. The secured party who takes possession of a negotiable promissory note is regarded as having perfected in
the right to payment it represents.
v. To be suited to perfection by possession collateral must have a physical embodiment recognizable as
exclusively representing the right.
vi. The reason that money can only be perfected by possession is to encourage free negotiability of money,
unhampered by the need to conduct searches in the system.
vii. 9-312(a) permits the perfection of SI’s in both instruments and chattel paper by filing.
viii. 9-330 protects the purchasers who take possession of chattel paper or instruments from SI’s perfected in
them by filing. B/c purchaser is defined to include those who take a SI in the chattel paper or instruments
13
e.
f.
g.
h.
i.
XI.
as well as those who buy them, the effect is to give priority to those who perfect by taking possession over
those who perfect by filing.
Collateral in the Control of the Secured Party
i. Usually control things you can’t possess.
ii. Article 9 recognizes control of some kinds of collateral as a substitute for filing. They include:
1. Deposit accounts: Type of property generally referred to as a bank account. 9-102(a)(29). This
definition excludes instruments. 9-104 indicates 3 ways to take control of deposit accounts:
a. Secured party can be the bank in which the account is maintained.
b. The debtor, the secured party, and the bank can authenticate a record instructing the bank
to comply with the secured party’s instructions with regard to the account.
c. The secured party can become the bank’s customer by putting the account in the name of
the secured party.
2. Electronic chattel paper
3. Investment property
4. Letter of credit rights
iii. The secured party is in control of the account even though the debtor can write checks on the account and
perhaps withdraw the entire amount. The control specified 9-104 is potential control, not actual control.
iv. Parties who wish to encumber a deposit account w/out putting other creditors on notice could do so by
agreement.
v. If anybody is controlling the collateral other than the debtor (band and debtor can control together), you
must ask why they have that control. B/c if they’ve taken control to put you on notice, you have to find
that out.
Purchase-Money Security Interests in Consumer Goods
i. 9-309(1) creates an exception to the filing requirement for most PMSI’s in consumer goods. The following
SI’s are perfected when they attach: (1) A PMSI in consumer goods, except as otherwise provided in
9-311(b) w/ respect to consumer goods that are subject to a statute or treaty described in 9-311(a).
ii. SI’s that met the terms of this exception are considered “automatically” perfected.
iii. Purchase-money is giving you the money to purchase the collateral. Purchase-money can also exist when
for instance, you get a Best Buy credit card to buy a plasma T.V.
iv. 9-103(b)(1): A security interest in goods is a purchase-money security interest to the extent that the
goods are purchase-money collateral w/ respect to that security interest.
v. PMSI’s arise in 2 situations:
1. Ex: Pauline buys a piano from Sweigert’s for $2,000. She pays $100 down and signs a note
promising to pay the remaining $1,900 to Sweigert’s. If the note is secured by a SI, it is PMSI.
2. Ex. Pauline makes application to Friendly Finance for a loan that will enable her to buy the piano.
She signs a promissory note for $1,900 and SA listing the piano she is about to purchase as
collateral. Friendly lends her the $1,900 and she uses the money, together with her $100 to buy
the piano from Swiegert’s. The difference from the first situation is that a 3 rd party provided the
financing for the purchase and became a secured.
vi. A secured party can easily lose the purchase-money status of its interest. Ex: Pauline deposits the $1,900
loan proceeds into her bank account, and then writes a check for $2,000. A question may arise as to
whether the loan proceeds were in fact used to buy the piano.
Consumer Goods
i. ***A PMSI is automatically perfected only in consumer goods.***
ii. A PMSI in any other kind of goods must be perfected by the ordinary means required in Code for the type
of collateral.
iii. 9-102(a)(23): Consumer goods means goods that are used or bought for use primarily for personal,
family, or household purposes.
***General Intangibles and Accounts: Not mentioned in 9-310, you must file.***
SI’s Not Governed by Article 9 or Another Filing Statute: Interests in wage claims, insurance policies and claims,
real estate interests, and non-commercial tort claims.
The Land and Fixtures Recording System (Assignment 20)
a. Real Property Recording System
i. Different from personal property filing system in 4 ways:
1. Contains documents evidencing liens against real estate, and documents evidencing transfers of
ownership (deeds). The personal property equivalent of deeds (bills of sale), are not filed in
Article filing system.
2. Costs more than filing in personal property system.
3. Real estate recording systems aren’t self-purging.
4. Debtor’s name problem relatively insignificant.
14
b.
ii. Can search by names of parties and by the description of property.
Perfecting in fixtures
i. Nothing in Article 9 prevents the creation of perfection of SI in fixtures under real estate law of the state.
9-334(b): [SI in fixtures under real-property law] This article does not prevent creation of an
encumbrance upon fixtures under real property law.
ii. In re Cliff’s Ridge Skiing Corp.
1. Court puts forth a 3 part test to tell whether something is a good or a fixture:
a. Is the property annexed or attached to the realty,
b. Is the attached property adapted or applied the use of the realty, and
c. Is it intended that the property will be permanently attached to the realty.
2. The book gives us another test: Integrated Industrial Plant test  Goods can be a fixture if it is
integral to a business or industry whether or not it is attached.
3. A mortgage does not cover a fixture until it is a part of the real property, but a fixture filing
does.
4. A fixture filing is nothing further from a regular financing statement other than where you file it.
iii. By filing an ordinary financing statement in the personal property filing system, a secured creditor can
perfect a SI in goods that are fixtures. Such a filing is not a “fixture filing,” but there is nothing in Article 9
that says one must make a fixture filing to perfect in fixtures. 9-501(a).
iv. 9-501 does not require filing in the real estate records to perfect in fixtures; it merely requires filing in the
real estate records to perfect by means of a fixture filing.
***MAINTAINING PERFECTION***
XII.
Maintaining Perfection Through Changes of Name, Identity and Use (Assgn. 23)
a. Changes in the Debtor’s Name
i. When dealing with a corporation, there are ways that searcher prior interests/loans:
1. Insisting that debtor prove its incorporation under the laws of some state or country.
2. Searching the records of that state or country for changes of the debtor’s name.
3. Having discovered that the debtor was previously named something else, conducting its search in
that name as well as the new one.
ii. When there is a name change for corp. or individual, FS needs to be amended to reflect that change.
iii. If a 2nd bank files a FS under debtor’s new name on collateral that the 1 st bank already had a SI, a merger is
created.
iv. 9-507(a): [Disposition] A filed FS remains effective w/ respect to collateral that is sold, exchanged,
leased, licensed, or otherwise disposed of and in which a SI or agricultural lien continues, even if the
secured party knows of or consents the disposition. (Ex: Teresa borrowed money against her equipment,
later incorporates her business and names it Williams Electronics and transfers ownership in collateral to
corp. The FS is still effective as against that collateral).
v. 9-507(b): [Information becoming seriously misleading] Except as otherwise provided in subsection (c)
and 9-508, a financing statement is not rendered ineffective if, after the financing statement is filed,
the information provided in the financing statement becomes seriously misleading under 9-506.
vi. 9-507(c): [Change in debtor’s name] If a debtor so changes its name that a filed financing statement
becomes seriously misleading under 9-506:
1. The FS is effective to perfect a security interest in collateral acquired by the debtor before or
w/in 4 months after, the change; and,
2. The FS is not effective to perfect a security interest in collateral acquired by the debtor more
than 4 months after the change, unless an amendment to the FS which renders the FS not
seriously misleading is filed w/in 4 months after the change.
vii. Purpose of 4 month rule is for the merger to occur.
viii. If Bank 2 finds out that debtor changed her name, they need to wait out the 4 months to see if Bank 1 refiles. Banks usually won’t make loan until 4-month period has elapsed.
15
b.
Changes Affecting Description of Collateral
i. Type I changes: Change in use. Bank 1 lends against debtor’s inventory. Debtor starts using inventory as
equipment and seeks to borrow against it. Bank 2 will discover Bank 1’s FS, but it will say inventory, so
they may not suspect the equipment they are about to lend against was once that inventory. 9-507(b) says
FS still effective.
ii. Type II changes: Change in type. Lumber Co. takes SI in wood it sells to M. M then builds hot tub and
attaches it to real property so that it is a fixture. 9-507(b) forgives the change in description, but not the
failure to file a fixture filing.
c.
Exchange of the collateral
i. Barter Transactions:
1. 9-315(d)(1): [A perfected SI in proceeds becomes unperfected on the 21 st day after the SI
attaches to the proceeds unless:] the following conditions are satisfied:
a. A filed FS covers the original collateral;
b. The proceeds are identifiable cash proceeds; or
c. The proceeds are not acquired w/ cash proceeds.
2. 3 types:
a. Type 0: The proceeds received by debtor fall w/in the description of collateral of alreadyfiled FS. (Ex: Bank lends against Coyote loader—description in FS is “loader”. Debtor
exchanges for Caterpillar loader. This is ok).
b. Type 1: Exchange of collateral for noncash proceeds where those proceeds are property
not covered by the description in the FS but are property in which a SI could be perfected
by filing in the office where the secured creditor’s FS is already on file. (Ex: Exchange
of inventory for equipment—still covered/perfected).
c. Type 2: Exchange of collateral for non-cash proceeds of a type in which filing is required
in a filing office other than the one in which the original collateral was perfected by
filing. (Ex: Exchange coyote loader for aircraft—no longer perfected—does not invoke
9-315(d)(1) exception). To be continuously perfected in the 2 items so that it has one
perfection dating from the time of the filing of the original collateral, the secured party
must make these filings w/in 20 days from the time the debtor receives the
proceeds/exchange.
ii. Collateral to Cash Proceeds to Non-Cash Proceeds
1. If debtor sells collateral for cash and then buys something else with that cash, the creditor must file
w/in 20 days of the receipt of new property to be continuously perfected. If 2nd filing occurs after
the end of the 20-day period, it dates only from the time it was made  not continuous.
2. This type of transaction governed by 9-315(d)(3).
iii. Collateral to Cash Proceeds
1. 9-315(d)(2) grants secured parties continuous, perpetual perfection in identifiable cash proceeds.
2. Bank account can be “cash proceeds”. As long as the account is identifiable, it attaches
automatically.
3. Creditor needs to take control of the deposit account to perfect.
XIII. Maintaining Perfection Through Relocation of Debtor or Collateral (Assgn. 24)
a. 9-301 through 9-307 tells where to file and search.
b. Initial Perfection
i. At the Location of the Debtor:
1. 9-301(1): Except as otherwise provided in this section, while a debtor is located in a
jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or
non-perfection, and the priority of a SI in collateral.
2. 9-307(a)-(b):
a. In this section, “place of business” means a place where a debtor conducts its affairs.
b. Except as otherwise provided in this section, the following rules determine a
debtor’s location:
i. (1) A debtor who is an individual is located at the individual’s principal
residence.
ii. (2) A debtor that is an organization and has only one place of business is
located at the place of business.
iii. (3) A debtor that is an organization and has more than one place of business
is located at its chief executive office.
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3.
4.
5.
6.
One need not live in the building currently for it to qualify as one’s principal residence. Do not
need to intend to stay there permanently either.
9-307(e): A registered organization that is organized under the law of a state is located in
that state.
For an unregistered organization, they must file where their principal place of business is. The
only time we care about place of business is when there is just one.
“Nerve Center Test”: The organization is located in the place from which it is managed—
regardless of the location of its operations. The place from which it is managed is its nerve center,
the place from which commands originate.
ii. At the location of the Collateral: Fixture filing must be made in the office designated for the filing or
recording of a mortgage on the real property to which the fixture is attached—9-501(a)(1).
iii. Relocation of Debtor
1. 9-316(a): [General Rule: Effect on perfection of change in governing law] A SI perfected
pursuant to the law of the jurisdiction designated in 9-301(1) or 9-305(c) remains perfected
until the earliest of:
a. The time perfection would have ceased under the law of that jurisdiction;
b. The expiration of 4 months after a change of the debtor’s location to another
jurisdiction; or
c. The expiration of 1 year after a transfer of collateral to a person that thereby
becomes a debtor and is located in another jurisdiction.
2. If a debtor reincorporates by merger or sale of assets, 9-316(a)(3) will apply, giving the secured
creditor 1 year to discover the merger and perfect in the destination state.
***PRIORITY***
XIV. The Concept of Priority
a. 2 basic principles govern the timing of the enforcement of competing liens against the same collateral:
i. Absent an agreement to the contrary, any lien holder may foreclose while the debtor is in default to that lien
holder. The existence of a prior lien generally doesn’t block the rights under a subordinate one.
ii. No lien holder is compelled to foreclose.
b. General rules of Foreclosure (9-615 and 9-617):
i. The sale discharges from the collateral the lien under which the sale is held and all subordinate liens.
ii. The sale transfers the debtor’s interest in the collateral to the purchaser, subject to all prior liens.
iii. The proceeds of sale are applied first to expenses of sale, then to payment of lien under which sale was
held, the to payment of subordinate liens in the order of priority.
iv. The debt underlying each lien is reduced by amount paid to lien holder from sale, but balance remains
owing. The lien holder is then entitled to a judgment against the debtor for deficiency (deficiency
judgment) unless a statute provides otherwise.
c. 9-617(a): [Effects of disposition] A secured party’s disposition of collateral after default:
i. (1) Transfers to a transferee for value of the debtor’s rights in the collateral;
ii. (2) Discharges the SI under which disposition (sale) is made; and
iii. (3) Discharges any subordinate SI or other subordinate lien.
d. If 1st mortgagor forces sale:
i. Mortgage sale will discharge 1st and 2nd mortgage/liens so that the purchaser will own the vacation home
free and clear of them.
ii. Sheriff will use the 1st proceeds of sale to pay the expenses of sale.
iii. Sheriff will pay the next amount to 1st mortgagor.
iv. Sheriff will pay next amount (if any) to 2nd mortgagor.
v. Sheriff will pay any remaining balance to debtor (ignoring claims of unsecured creditors).
e. If 2nd mortgagor forces sale:
i. Mortgage sale discharges only the 2nd mortgage and subordinate liens; the purchaser will take subject to
first mortgage.
ii. Sheriff will use first proceeds of sale to pay the expenses of sale.
iii. Sheriff will not pay anything to 1st mortgagor, but will pay next amount to 2nd mortgage holder.
iv. Sheriff will pay any remaining balance to debtor (unless there are other subordinate secured claims).
f. At foreclosure we’re just getting rid of security, not the contract that secured that interest.
g. Mortgages usually have priority over judgment liens for the simple reason that when a debtor has judgment liens
against his property, no on will make a mortgage loan to debtor.
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h.
Grocer’s Supply Co. v. Intercity Investment Properties (Right to Possession Between Lien Holders)
i. Grocers Supply lent money to The Grocery Store and Cedric Wise.
ii. Intercity foreclosed on a judgment lien, knowing that P had an interest in the inventory of the Grocery
Store. Intercity took possession of the inventory and did not notify P of the foreclosure.
iii. P had to pay $24,000 to re-acquire the inventory.
iv. The security agreement between P and The Grocery Store provided that a judgment against the debtor, or
the levy, seizure, or attachment of the collateral constituted a default and upon the occurrence of any of
those events, the entire obligation becomes immediately due and payable at secured party’s option w/out
notice to debtor.
v. Court held that P’s right to take possession of the collateral was superior to the right of Intercity.
vi. This case says that senior creditor has an absolute right to possession. So the senior creditor can keep a
junior creditor from collecting by taking possession of the collateral whenever they want. The junior
creditor is subjected to the whimsy of the senior creditor.
i.
Frierson v. United Farm Agency
i. This case says that if the senior lien holder has the right to foreclose (like in Grocers Supply) but chooses
not to, and this frustrates the ability of junior creditors to foreclose, then the senior lender must foreclose.
Senior lien creditor can assert its right to possess if collateral would be wasted upon sale.
Collusion: This case says that if the senior lien holder has the right to foreclose (like in Grocers Supply) but chooses
not to, and this frustrates the ability of junior creditors to foreclose, then the senior lender must foreclose.
j.
k.
***COMPETITIONS FOR COLLATERAL***
XV.
Lien Creditors Against Secured Creditors (Assignment 28)
a. How Creditors Become “Lien Creditors”
i. 9-102(a)(52) defines lien creditor broadly as including any “creditor who has acquired a lien on the
property involved by attachment, levy or the like.”
ii. Attachment is when a plaintiff in litigation receives judgment, gives writ to sheriff, and levies on it.
Virtually synonymous with execution, but attachment occurs before judgment is entered, execution occurs
after.
iii. Garnishment: Unsecured creditor may obtain lien creditor status by reaching debts owing from a 3 rd party
to debtor or property of debtor is in 3 rd parties hands.
iv. Recordation of a Judgment for Money Damages: Recordation of judgment in real property recording
system creates and perfects a lien against all real property owned by debtor w/in county.
b.
Priority Among Lien Creditors
i. First creditor to take the legally designated crucial step has 1 st lien, the 2nd to take step has 2nd lien and so
forth.
ii. Laws generally award a lien priority as of one of four dates:
1. Date of Levy: Date on which sheriff or other officer took possession of particular property.
2. Date of Delivery of Writ: A writ of execution, attachment, or garnishment typically is issued by
clerk of court on request of creditor who is entitled to it. Creditor then delivers writ to sheriff.
3. Date of Service of Writ of Garnishment: Service is delivery of writ by sheriff to garnishee,
typically bank or employer.
4. Date of Recordation of Judgment: Date judgment is delivered to filing or recording officer.
iii. Priority Between Lien Creditor and Secured Creditor
1. Priority between lien creditor and non-purchase money secured creditor depends on whether the
lien creditor becomes a lien creditor before secured creditor does either of 2 things:
a. Perfects its SI or
b. Files a financing statement and complies with 9-203(b)(3).
2. 9-308(a): [Perfection of SI] Except as otherwise provided in this section and 9-309, a SI is
perfected if it has attached an all of the applicable requirements for perfection in 9-310
through 9-316 have been satisfied. A SI is perfected when it attaches if the applicable
requirements are satisfied before the SI attaches.
3. In most states, lien creditors become lien creditors on the date of levy.
4. 9-317(a): [Conflicting SI’s and rights of lien creditors] A SI or AL is subordinate to the
rights of:
a. A person entitled to priority under 9-322; and
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b.
Except as otherwise provided in (e), a person that becomes a lien creditor before the
earlier of the time:
i. The SI or AL is perfected; or
ii. One of the conditions specified in9-203(b)(3) is met and a FS covering the
collateral is filed.
5.
Priority Between Lien Creditors and Mortgage Creditors
a. Priority b/w lien creditors and mortgage creditors is governed by real estate law.
b. RE law generally gives priority to fist lien created and then reverses the result only if the
failure to perfect offends the state’s recording statute.
c. A mortgage granted before the judgment creditor became lien creditor by recording its
judgment has priority over judgment lien even though judgment lien was 1 st lien
perfected.
6.
Purchase-Money Priority
a. When a 2nd in time interest takes precedence over an earlier interest, the cognoscenti
describe the 2nd secured creditor as “priming” the 1st. Frequently occurs with PMSI’s,
which may be granted and perfected long after the competing liens they prime.
b. PMSI’s exception to first in time is first in right rule.
c. 9-317(e): [PMSI] Except as otherwise provided in 9-320 and 9-321, if a person files a
FS w/ respect to a PMSI before or w/in 20 days after debtor receives delivery of the
collateral, the SI take priority over the rights of a buyer, lessee, or lien creditor
which arise between the time the SI attaches and the time of filing.
XVI. Secured Creditors Against Secured Creditors (Assignment 32)
a. The Basic Rule: First to File or Perfect
i. 9-322(a): [General Priority Rules] Except as otherwise provided in this section, priority among
conflicting SI’s and AL’s in the same collateral is determined according to the following rules:
1. Conflicting perfected SI’s and AL’s rank according to priority in time of filing or perfection.
Priority dates from the earlier of the time a filing covering the collateral is 1 st made or the SI
or AL is first perfected, if there is no period thereafter when there is neither filing nor
perfection.
2. A perfected SI or AL has priority over a conflicting unperfected SI or AL.
3. The first SI or AL to attach or become effective has priority if conflicting SI’s and
Agricultural liens are unperfected.
ii. ***Note, the rule is the first to file or perfect***
iii. 9-325 Priority of SI’s in Transferred Collateral:
1. (a) [Subordination of SI in transferred collateral] Except as otherwise provided in (b), a SI
created by a debtor is subordinate to a SI in the same collateral created by another person if:
a. (1) The debtor acquired the collateral subject to the SI created by the other person;
b. The SI created by the other person was perfected when the debtor acquired the
collateral; and
c. There is no period thereafter when the SI is unperfected.
2. (b) [Limitation of Subsection (a) subordination] Subsection (a) subordinates a SI only if the
SI:
a. Otherwise would have priority solely under 9-322(a) or 9-324; or
b. Arose solely under 2-711(3) or 2A-508(5).
iv. Priority of Future Advances
1. Rule regarding future advances is essentially the rule applied between a mortgage holder and lien
creditor.
2. Provided only that the secured creditor’s financing statement “covers the collateral,” all advances
made by the secured creditor to the debtor have priority as of the foiling of the FS.
3. Future advances are a type of collusion.
4. If there is an agreement saying that the secured creditor will give money w/in a certain amount of
time, and it is made before the SC knows about a lien creditor, the SC can lend that money at any
time in the future. If there is no agreement, and the SC doesn’t lend w/in 45 days of levy, then the
lien creditor takes priority.
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5.
6.
7.
A SC cannot lend more than the amount set forth in the original agreement, unless it makes a new
security agreement (which it must do before knowledge of the lien in order to attach to original SA
and get priority).
The general rule for attachment: If the documents at the time of the creation of the SA says we
will lend x amount of dollars and x more whenever we deem necessary, then any future advance
will attach and will have priority. If there is no such agreement, any future advance will not be
attached.
9-323 [Future Advances]
a. [When priority based on time of advance] Except as otherwise provided in (c), for
purposes of determining the priority of a perfected SI under 9-322(a)(1), perfection
of the SI dates from the time an advance is made to the extent that the SI secures
and advance that:
i. (1) Is made while the SI is perfected only:
1. Under 9-309 when it attaches; or
2. Temporarily under 9-312(e), (f), or (g); and
ii. (2) Is not made pursuant to a commitment entered into before or while the
SI is perfected by a method other than under 9-309 or 9-312(e), (f) or (g).
b. [Lien Creditor] Except as otherwise provided in (c), a SI is subordinate to the rights
of a person that becomes a lien creditor to the extent that the SI secures an advance
made more than 45 days after the person becomes a lien creditor unless the advance
is made:
i. (1) W/out knowledge of the lien; or
ii. Pursuant to a commitment entered into w/out knowledge of the lien.
c. [Buyer of Receivables] Subsections (a) and (b) don’t apply to a SI held by a secured
party that is a buyer of accounts, chattel paper, payment intangibles, or promissory
notes or a consignor.
d. [Buyer of Goods] Except as otherwise provided in (e), a buyer of goods other than a
buyer in ordinary course of business takes free of a SI to the extent that it secures
advances made after the earlier of:
i. (1) The time the secured party acquires knowledge of the buyer’s purchase;
or
ii. 45 days after the purchase.
e. Subsection (d) does not apply if the advance is made pursuant to a commitment
entered into w/out knowledge of the buyer’s purchase and before the expiration of
the 45 day period.
f. Except as otherwise provided in subsection (g), a lesee of goods, other than a lessee
in ordinary course of business, takes the leasehold interest free of a SI to the extent
that it secures advances made after the earlier of:
i. (1) Te time the secured party acquires knowledge of the lease; or
ii. 45 days after the lease contract becomes enforceable.
g. Subsection (f) does not apply if the advance is made pursuant to a commitment
entered into w/out knowledge of the lease and before the expiration of the 45-day
period.
v. Priority in After-Acquired Property
1. If a debtor later acquires property that fits the description in the SA, the SI attaches under 9203(b).
2. As against other secured creditors of the debtor, the after-acquired lender’s priority dates from the
time of its filing. A SI has the same priority w/ respect to after-acquired property that it has w/
respect to the original collateral.
vi. PMSI’s Generally
1. 9-324(a): [General Rule: PMSI priority] Except as otherwise provided in (g), a perfected
PMSI in goods other than inventory or livestock has priority over a conflicting SI in the
same goods, and, except as otherwise provided in 9-327, a perfected SI in its identifiable
proceeds also has priority, if the PMSI is perfected when the debtor receives possession of
the collateral or w/in 20 days thereafter.
2. Ex: Bank 1 files a FS against the equipment of Davis Industries on Feb. 1. Only July 1, Preferred
Micro Sales, Inc (PMSI) sells a computer to Davis, delivers possession, and retains a PMSI. On
July 20, PMSI perfects by filing a FS. PMSI has priority over Bank 1 w/ regard to the computer
under 9-324(a).
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3.
4.
5.
6.
This violates first in time rule. It is b/c the PM lender is “first in another important sense: It either
supplied the collateral or made advances to enable the debtor to acquire the collateral.
PM lender has a relationship w/ collateral before after-acquired lender does.
Rule enables companies to sell and deliver immediately w/out having to check public records.
9-324(g)(1): [Conflicting PMSI’s] If more than one SI qualifies for priority in the same
collateral under (a), (b), (d), or (f) A SI securing an obligation incurred as all or part of the
price of the collateral has priority over a SI securing an obligation incurred for value given
to enable the debtor to acquire rights in or the use of collateral.
vii. PMSI’s in Inventory
1. The 20-day grace period for the filing of a PMSI in 9-324(a) does not apply when the property
sold will be inventory in the hands of the buyer.
2. The inventory lender must learn of the financing before disbursing against the collateral.
3. 9-324(b): [Inventory purchase-money priority] Subject to subsection (c) and except as
otherwise provided in (g), a perfected PMSI in inventory has priority over a conflicting SI in
the same inventory, has priority over a conflicting SI in chattel paper or an instrument
constituting proceeds of the inventory and in proceeds of the chattel paper, if so provided in
0-330 and except as otherwise provided in 9-327, also has priority in identifiable cash
proceeds are received on or before the deliver of the inventory to a buyer, if:
a. (1) The PMSI is perfected when the debtor receives possession of the inventory.
b. (2) The purchase-money secured party sends an authenticated notification to the
holder of the conflicting SI;
c. (3) The holder of the conflicting SI receives the notification w/in 5 years before the
debtor receives possession of the inventory; and
d. (4) The notification states that the person sending the notification has or expects to
acquire a PMSI in inventory of the debtor and describes the inventory.
4. Protection comes w/out necessity for the inventory lender to search the filing system before
making each advance.
viii. Purchase-Money Priority in Proceeds
1. Purchase-money priority under 9-324(a) extends to the collateral or its proceeds.
2. There is an exception to the above rule: Purchase-money status in inventory flows only into chattel
paper, instruments, and cash proceeds. This prevents purchase-money status flowing into other
kinds of proceeds, most notably accounts.
ix. Priority in Commingled Collateral
1. Collateral is commingled when it is mixed w/ other property.
2. When the identity of collateral is lost by commingling (as the collateral becomes part of a product
or mass), the SI continues in the product or mass.
3. When identity is not lost, but is instead used as a replacement part in a machine (accession), then
the secured party’s interest will continue to be perfected, and it will have priority over laterperfected interests in the whole.
4. If more than one SI attaches to a product or mass as a result of commingling, the interests rank
equally and share in the proportion that the cost of each party’s contribution bears to the total cost
of the product or mass.
b.
XVII.
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