Contents
Chaper 1. CreditorS Remedies Under State Law ............................................................................................ 7
Assignment 1: Remedies of Unsecured Creditors Under State Law ............................................................ 7
A.
Who is an unsecured creditor? ........................................................................................................ 7
B.
How do Unsecured Creditors Compel Payment? (CR) ............................................................... 7
C.
Limitations on Compelling Payment (/) ......................................................................................... 8
D.
Voidable (Fraudulent) Transfers (DR/) .......................................................................................... 9
Assignment 2 Security and Foreclosure /DR ............................................................................................. 10
A.
Transactions Intended as Security................................................................................................. 13
B.
Intended as Security Doctrine Common Scenarios of Applicability IAS ................................ 14
Assignment 3 Repossession of Collateral /................................................................................................. 15
A.
Right to Possession Pending Foreclosure Personal Property ................................................... 15
B.
The A9 Right to Self-Help Repossession 1 ................................................................................... 16
C.
Self-help Against Accounts as Collateral .................................................................................... 17
D.
Right to Possession of Real Property Pending Foreclosure ....................................................... 17
Assignment 4 Judicial Sale and Deficiency ................................................................................................ 18
A.
Strict Foreclosure ............................................................................................................................. 19
B.
Foreclosure Sale Procedure ............................................................................................................ 19
C.
Problems with Foreclosure Sales Procedure ................................................................................ 20
D.
Aspects of Foreclosure Sale that Contribute to Failure to Bring Adequate Prices ................. 20
E.
Anti-deficiency statutes .................................................................................................................. 21
F.
Credit bidding at judicial sales ...................................................................................................... 22
Assignment 5 Article 9 Sale And Deficiency ............................................................................................. 22
A.
B.
C.
Acceptance of Collateral ................................................................................................................. 23
Sale Procedure Under Article 9 ..................................................................................................... 24
Problems with Article 9 Sales Procedure ..................................................................................... 25
Failure to sell the collateral ............................................................................................................................ 25
CREDITORS REMEDIES IN BANKRUPTCY ................................................................................................ 27
BANKRUPTCY AND THE AUTOMATIC STAY //.................................................................................. 27
A.
B.
C.
Filing a Bankruptcy Case ................................................................................................................ 28
The Automatic Stay ......................................................................................................................... 29
Lifting the Stay for Secured Creditors .......................................................................................... 29
Special timing provisions for stay lifting in 362(e) ....................................................................................... 30
D.
Stay litigation can be strategic ....................................................................................................... 30
TREATMENT OF SECURED CREDITORS IN BANKRUPTCY ............................................................. 31
A.
Vocabulary ........................................................................................................................................ 31
1
B.
The Claims Process .......................................................................................................................... 32
C.
Calculating Claim Amounts........................................................................................................... 32
D.
Payments on Unsecured Claims .................................................................................................... 33
E.
Bankruptcy Sales.............................................................................................................................. 33
F.
Secured Creditors Entitlements (Cram Down) ........................................................................... 34
CREATION OF SECURITY INTERESTS ........................................................................................................ 36
Assignment 8 Formalities for Attachment ................................................................................................. 36
A.
Prototypical Secured Transaction.................................................................................................. 36
B.
Formalities for article 9 security interests .................................................................................... 36
Assignment 9 Which Collateral and Obligations Are Covered? ............................................................ 39
A.
Interpreting Security Agreements ................................................................................................. 39
B.
Sufficiency of Description: Article 9 Security Agreements........................................................ 39
C.
Describing After-Acquired Property ............................................................................................ 40
D.
Which Obligations Are Secured? .................................................................................................. 41
E.
Real Estate Mortgages ..................................................................................................................... 42
Assignment 10 PROCEEDS, PRODUCTS AND VALUE-TRACING..................................................... 42
1. Proceeds ................................................................................................................................................ 43
1)
Definition......................................................................................................................................................... 43
2)
Termination of security interest in the collateral after authorized disposition .................................... 44
3)
Continuation of security interest in the collateral after unauthorized disposition .............................. 44
4)
Limitations on the secured creditors ability to trace collateral proceeds ................................................. 45
2. Other Value-Tracing Concepts ......................................................................................................... 46
3. Non-Value Tracing Concepts ............................................................................................................ 46
4. Liability of Buyers of Collateral ........................................................................................................ 46
Assignment 11 Tracing Collateral Value During Bankruptcy ................................................................ 47
A.
After-Acquired Property and the Proceeds Dilemma ................................................................ 47
B.
Equities of the Case Solution to the Proceeds Dilemma ............................................................ 48
C.
Net Proceeds Solution to the Proceeds Dilemma........................................................................ 49
D.
Cash Collateral in Bankruptcy ....................................................................................................... 49
DEFAULT: THE GATEWAY TO REMEDIES ................................................................................................ 50
Assignment 13 Default, Acceleration, and Cure Under State Law ........................................................ 50
A.
When is Payment Due? ................................................................................................................... 50
1)
Installment Loans ........................................................................................................................................... 50
2)
Single payment loans ..................................................................................................................................... 50
3)
Lines of credit ................................................................................................................................................ 51
B.
1)
Acceleration and Cure .................................................................................................................... 51
Acceleration .................................................................................................................................................... 51
2
2)
Debtors right to cure ...................................................................................................................................... 52
3)
Limits on the enforceability of acceleration clauses .................................................................................. 52
C.
The Enforceability of Payment Terms .......................................................................................... 53
D.
Procedures After Default ................................................................................................................ 53
Assignment 14 Default, Acceleration and Cure Under Bankruptcy Law ............................................. 53
A.
B.
Stage One: Protection of the Defaulting Debtor Pending Reorganization .............................. 55
Stage Two: Reinstatement and Cure ............................................................................................. 56
1)
Modification Distinguished from Reinstatement + Cure ......................................................................... 56
2)
Reinstatement and Cure Under Chapter 11 ............................................................................................... 56
3)
Reinstatement and Cure Under Chapter 13 ............................................................................................... 57
4)
When is it too late to file bankruptcy to reinstate and cure or to modify? ............................................ 57
Assignment 15 The Prototypical Secured Transaction ................................................................................. 58
PERFECTION ..................................................................................................................................................... 58
Assignment 16 The Personal Property Filing System............................................................................... 58
A.
What is Priority? .............................................................................................................................. 59
B.
How do Creditors Get Priority? .................................................................................................... 59
C.
Theory of the Filing System ........................................................................................................... 60
D.
The Multiplicity of Filing Systems ................................................................................................ 60
E.
Methods and Costs of Searching ................................................................................................... 62
Assignment 17 Article 9 Financing Statements: The Debtors Name ...................................................... 62
A.
Components of a Filing System file .............................................................................................. 62
B.
Correct Names for Use on Financing Statements ....................................................................... 63
C.
Errors in the Debtors Names on Financing Statements ............................................................. 64
D.
IACA Search Logic - 9-526 .............................................................................................................. 66
Assignment 18 Article 9 Financing Statements: Other Information ....................................................... 66
A.
Introduction ...................................................................................................................................... 66
B.
Filing Office Errors in Acceptance or Rejection .......................................................................... 67
C.
Filer Errors in Accepted Filings (Incorrect Information) ........................................................... 67
D.
Authorization to File a Financing Statement ............................................................................... 69
E.
UCC Insurance ................................................................................................................................. 69
F.
Formula ............................................................................................................................................. 69
Assignment 19 Exceptions to The Article 9 Filing System ....................................................................... 70
A.
B.
Collateral in the Possession of the Secured Party ....................................................................... 70
Collateral in the Control of the Secured Party............................................................................. 72
1)
Deposit Accounts ........................................................................................................................................... 72
2)
Investment Property ...................................................................................................................................... 72
C.
Automatic Perfection of Purchase-Money Security Interests in Consumer Goods ............... 74
3
1)
PMSI A purchase money security interest ................................................................................................. 74
2)
Consumer goods ............................................................................................................................................ 74
D.
Security Interests Not Governed by Article 9 or Another Filing Statute................................. 75
E.
What Became of the Notice Requirement? .................................................................................. 76
Assignment 21 Characterizing Collateral and Transactions ................................................................... 76
A.
B.
Determining the Proper Place of Filing ........................................................................................ 76
Determining the Proper Method of Perfection ............................................................................ 76
1)
Instruments Distinguished from General Intangibles .............................................................................. 76
2)
True Leases Distinguished from Leases Intended as Security................................................................. 77
3)
Realty Paper .................................................................................................................................................... 78
4)
Chattel Paper, Instruments, Accounts, and Payment Intangibles Distinguished ................................. 79
C.
Multiple Items of Collateral ........................................................................................................... 80
Maintaining Perfection ...................................................................................................................................... 81
Assignment 22 Maintaining Perfection Through Lapse and Bankruptcy ............................................. 81
A.
Removing Filings from the Public Record ................................................................................... 81
1)
Satisfaction (Real Estate) ............................................................................................................................... 81
2)
Release ............................................................................................................................................................ 82
3)
Article 9 termination and release ................................................................................................................. 82
B.
Self-Clearing and Continuation in the Article 9 Filing System ................................................. 83
C.
The Effect of Bankruptcy on Lapse and Continuation ............................................................... 84
MAINTAINING PERFECTION THROUGH CHANGES OF NAME, IDENTITY AND USE ........... 85
D.
E.
F.
G.
Changes in the Debtors Name ....................................................................................................... 85
Substitution of a New Debtor ........................................................................................................ 85
Changes Affecting the Description of Collateral ........................................................................ 86
Exchange of the Collateral .............................................................................................................. 86
Barter Transactions ........................................................................................................................................... 86
Collateral to Cash Proceeds to Noncash Proceeds ............................................................................................ 87
Collateral To Cash Proceeds (No New Property) ............................................................................................. 88
MAINTAINING PERFECTION THROUGH RELOCATION OF DEBTOR OR COLLATERAL ...... 89
H.
State-Based Filing in a National Economy ................................................................................... 89
I. Initial Perfection .................................................................................................................................. 89
J. Perfection Maintenance Through Debtor Relocation ..................................................................... 91
K.
Perfection Maintenance Through Transfer of Collateral ........................................................... 91
L.
Nation-Based Filing in a World Economy ................................................................................... 92
M. Summary ........................................................................................................................................... 92
PRIORITY ............................................................................................................................................................ 93
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THE CONCEPT OF PRIORITY: STATE LAW ........................................................................................... 93
N.
Priority in Foreclosure .................................................................................................................... 93
O.
Credit Bidding Revisited ................................................................................................................ 95
P.
Reconciling Inconsistent Priorities ................................................................................................ 96
Q.
The Right to Possession Between Lien Holders .......................................................................... 96
R.
U.C.C. Notice of Sale ....................................................................................................................... 97
THE CONCEPT OF PRIORITY: BANKRUPTCY LAW ........................................................................... 98
S. Bankruptcy Sale Procedure ................................................................................................................ 98
T.
The Power to Grant Senior Liens (Post-Petition Financing) .................................................... 100
COMPETITIONS FOR COLLATERAL......................................................................................................... 101
LIEN CREDITORS AGAINST SECURED CREDITORS: THE BASICS LCR VS SC .......................... 101
U.
How Creditors Become Lien Creditors LCR ............................................................................. 101
V.
Priority Among Lien Creditors .................................................................................................... 102
W. Priority Between Lien Creditors and Secured Creditors ......................................................... 102
X.
Priority Between Lien Creditors and Mortgage Creditors ...................................................... 102
Y.
Priority Between Lien Creditors and PMSIs .............................................................................. 102
LIEN CREDITORS AGAINST SECURED CREDITORS: FUTURE ADVANCES .............................. 103
Z.
Priority of Future Advances: Personal Property ......... Ошибка! Закладка не определена.
AA.
Priority of Non-advances: Personal Property ......... Ошибка! Закладка не определена.
BB. Priority of Future Advances and Nonadvances: Real Property ......... Ошибка! Закладка не
определена.
TRUSTEES IN BANKRUPTCY AGAINST SECURED CREDITORS: THE STRONG-ARM CLAUSE
......................................................................................................................................................................... 104
CC. The Purpose of Bankruptcy Code 544(a) .................................................................................... 104
DD.
The Text of Bankruptcy Code 544(a) ....................................................................................... 104
EE. The Implementation of Bankruptcy Code 544(a) 544 ............................................................... 105
FF. Recognition of Grace Periods ...................................................................................................... 106
TRUSTEES IN BANKRUPTCY AGAINST SECURED CREDITORS: PREFERENCES ..................... 106
GG.
HH.
Priority Among Unsecured Creditors (Review) .................................................................... 107
What Security Interests Can Be Avoided as Preferential? ................................................... 107
When Does the Transfer of a Security Interest Occur? ................................................................................... 108
The 547(c)(5) Exception for Accounts Receivable and Inventory.................................................................. 109
II.
Strategic Implications of Preference Avoidance ....................................................................... 111
SECURED CREDITORS AGAINST SECURED CREDITORS SC VS SC ............................................. 111
JJ.
Non-purchase Money Security Interests .................................................................................... 111
Basic Rule: First to File or Perfect .................................................................................................................. 111
Priority of future advances .............................................................................................................................. 112
Priority in after-acquired property .................................................................................................................. 112
5
KK. Purchase-Money Security Interests ............................................................................................. 112
PMSIs Generally ............................................................................................................................................. 112
Multiple PMSIs PMSIPMSI, PMSIfirst file or perfect ............................................................................... 113
PMSIs in Inventory ......................................................................................................................................... 113
Purchase-Money Priority in Proceeds ............................................................................................................. 113
LL. Priority in Commingled Collateral (Goods) (mixed with other property) .......................... 114
SELLERS AGAINST SECURED CREDITORS ......................................................................................... 114
MM.
NN.
OO.
Limits of the After-Acquired Property Clause ...................................................................... 114
Suppliers Against Inventory-Secured Lenders...................................................................... 115
Sellers Weapons Against the After-Acquired Property Clause .......................................... 116
PMSIs after-acquired property clause1PMSI ............................................................................................ 116
Retention of Titleafter-acquired property clause2: .................................................................................. 116
Consignmentafter-acquired property clause3: .......................................................................................... 116
Sellers Right of Reclamationafter-acquired property clause4: ................................................................ 116
Express or implied agreement with the SCafter-acquired property clause5 ............................................... 117
Equitable subordinationafter-acquired property clause6: .......................................................................... 117
Unjust enrichment claimsafter-acquired property clause7: ....................................................................... 118
BUYERS AGAINST SECURED CREDITORS .......................................................................................... 118
PP.
Buyers of Personal Property......................................................................................................... 118
Buyer-in-the-Ordinary-Course Exception - 9-320(a) 1: BIOCOB ................................................................ 118
Failure-to-Perfect Exception: 9-323(d), (e) and 9-317(b), (d) 2: perfect ...................................................... 120
Authorized Disposition Exception: 9-315(a)(1) 3: ........................................................................................ 120
Consumer-to-Consumer-Sale Exception: 9-320(b) 4: ................................................................................... 120
QQ.
Buyers of Real Property ............................................................................................................ 121
6
Chapter 1 CreditorS Remedies under State Law
Assignment 1: Remedies of Unsecured Creditors Under State Law
A. Who is an unsecured creditor?




Anyone who is owed a legal obligation that can be reduced to a money judgment is a creditor of the party
owing the obligation
Unless a CR contracts with DR for secured status OR is granted it by statute, CR is unsecured.
CR/DR relationships can be voluntary (consensual loan) or involuntary (tort judgment)
If the unsecured CR has already obtained a court judgment to establish liability, the creditor is a judgment
creditor, but the mere grant of a judgment does not alter the CRs unsecured status
B. How do Unsecured Creditors Compel Payment?

Difficult for unsecured creditors to collect on judgments/debts
o Judgement is just a piece of paper doesnt make them pay a whole separate judicial process must
follow to get actual payment
o No self-help seizures CR that wrongfully takes possession of property of a DR can be charged with
larceny (crime) or sued for conversion (tort)
o Setoff is permitted, but seizure for the purpose of setoff is not
o Although the CR has the right to demand payment, if the CR does so in an unreasonable manner, the
CR may incur liability for wrongful collection practices only entitled to coerce payment of the
debt through the judicial processes specified by state
 Cant threaten to take action (i.e., litigation) that you actually dont intend to take violates
FDCPA
o The need to work through government officials is substantial barrier to effective collection
o Sometimes cheaper for your client to write off the debt than to pursue a judgment and then collection
(both costly)

Unsecured CR debt collection process
o File a complaint with an appropriate court, and serve process on DR-defendant pre-answer motions
answer trial months in the future (or summary judgment)
 Typical length 6mo to a year
o Abbreviated process for small claims court

Vitale v. Hotel California: CR was owed money from a judgment, instructed sheriff to levy on DRs bar
during open hours late weekend (after some post-judgment discovery) after facing some obstacles in the
levy process (and successfully levying once), the sheriff refused to further levy at the bar to fully satisfy the
writ
o Issues: (1) are successive levies possible under one writ of execution; (2) when may a sheriff refuse
to levy as instructed by a plaintiff, on the basis that the request is unreasonable or onerous; and (3)
7
Can the sheriff be held responsible for the amount of creditors debt for failing to carry out his
ordered duties (amercement)?
o Holding:
Rule (multiple levies): multiple levies under one writ are authorized under the same writ before the
return day if the initial levy does not satisfy the judgment
 Rule (reasonable levy request): sheriff may refuse unreasonable or onerous levy requests
practical, operational considerations of a sheriffs office impose an obligation on a plaintiff
not to request inordinately frequent or numerous levies


Rule (timing of levy): levy under a writ of execution may be made at any hour of the day
there is no issue of privacy that might dictate otherwise sheriffs and their deputies may be
obliged to work at times of the day and week when the rest of the population sleeps or
recreates
 Rule (physical force in levying): an officer may force an entry into any enclosure except the
dwelling house of the judgment debtor in order to levy on the DRs goods and even in the
case of the DRs home, once the officer is inside, he may break open inner doors or trunks to
levy on the property the privilege of civil service occasionally demands risking bodily harm
to oneself
o Holding (2): levy request was not unreasonable
o Rule/Holding (3) (Amercement): Under super old and never used doctrine of amercement, sheriff
can be held personally liable for failing to properly execute against a judgment DR (where the levy
request was reasonable)
 Practically: sheriff will pay DR, go levy on DR to repay himself.
o Execution procedure on p. 8
o
If a 3P is in possession of property of the DR or owes money to the DR, the CR can cause the sheriff to
serve a writ of garnishment on the 3P requires the 3P to pay the judgment CR

o Ellerbee v. County of L.A.: judgment CR was owed money ordered sheriff to serve writ and
garnishment promptly b/c debtor was going to be paid a large sum Sheriff did not do so.
 Holding: Sheriff has discretion on how and when to effect service Sheriff not liable for not
levying to CRs specifications so long as levy occurs w/in return date of writ.
 According to the jurisdictions statute for imposition of govt liability the only mandatory
statutory duty is that the govt entity or employee act in accordance with the written
instructions provided by the judgment CR no reference to any duty to comply with deadlines
or timing requests contained in the judgment CRs instructions
C. Limitations on Compelling Payment

CR must do post-judgment discovery to identify property subject to seizure, and instruct sheriff on where
and what to seize CR
o First must find judgment DR and force them to sit for examination DR may be less than
forthcoming may not keep assets in predictable forms
8
o Another judicial process (every state court has PJD procedures) deposition, interrogatories pissed
off former employees might know something used to find out what kind of assets does DR have
whether they can be seized (are there senior secured liens, exemptions) PJD
 Can also look in public records - RE filing office; UCC filings or hire a PI
o If DR refuse to answer questions during discovery, they can be subject to contempt sanctions if they
lie, s/t being charged with perjury
o IL Discovery proceeding file/serve citation to discover assets (form) right to haul DR into court or
your law office for depositions or right to send interrogatories that DR must answer DR can be
arrested for failure to appear (body attachment)
 Body attachment was widely abused because DRs tend to be not well informed and CRs tend
to be sophisticated entities body attachment substantially curtailed in IL now must show
that DR was actually served and had notice







Judgment CR is liable for damages caused to a third person if their property is wrongfully seized tort of
conversion; crime of larceny 3P can refuse to accept return of the property and instead recover its value
from the judgment CR
o Can only judicially seize property of the individual or entity the judgment is against
DR
DRs can move, consumer, conceal, or transfer assets.
DRs can pay certain creditors, leaving no assets for other creditors
DR can continue to transact business until sheriff arrives to levy on DRs assets w/o violating the law, DR
may lose assets in business operations, exchange them for other assets of REV, or apply them to payment of
other bona fide debts preference payments are only reversible in bankruptcy, otherwise not reversible
unless also fraudulent
Money judgment can only be enforced in the state rendered to enforce in another state, the CR must
establish the judgment in the destination state before invoking the enforcement procedures of the state
Exemption Statutes: in all states, sheriff is statutorily prevented from seizing certain property under a writ
of execution property said to be exempt from remedies available to unsecured CRs
o Can include car, consumer goods, family home (homestead exemptions p. 17), a certain amount of
money/assets, etc.
o Federal statutes provide that a minimum of 75% of DRs earnings from personal services will
generally be exempt in all states some states exempt greater %
o State and federal laws exempt most pensions and retirement accounts
o In the first instance, the sheriff decides the threshold legal issues of whether the property can be
seized or is exempt (thorny questions havent been adjudicated by court yet)
o Affirmative requirement for DR to come forward and claim exemptions
o Policy: dont leave DR destitute burden on society
Sheriff doesnt seize bank accounts bank account is debt that bank owes the DR need writ of garnishment
send to bank sheriff doesnt execute CR executes
D. Voidable (Fraudulent) Transfers
9



All states have adopted laws authorizing the courts to void DRs fraudulent transfers in actions brought by
CRs allows them to recover property of the DR that was transferred DR
Elements
o (1) Any transfer made with actual intent to hinder, delay or defraud any creditor OR (2) without
receiving a reasonably equivalent value in exchange for the transfer if the debtor was insolvent at
the time of the transfer.
 (1) Although actual intent can be inferred from certain acts such as a transfer that is hidden or
made to insider, still tough to prove
 (2) no proof of fraudulent intent is required a transfer made in good faith with no wrongful
intent is voidable if the elements are present
 DR can continue to do business or transact its affairs DR can exchange its assets for
other assets, so long as the other assets have approximately the same value
 DR cannot make gifts or sell assets for less than REV
o UVTA 3(b) says the price at a judicial sale is presumed to be REV
 DR is insolvent if the sum of the DRs debts is greater than all of the DRs
unencumbered, non-exempt assets
o Can reach and reverse any transfer
o Law is largely impotent as transfers are difficult to discover and avoid and easy to make.
 If BFP for value purchases DRs property from transferee outside reach of CR only remedy
is against initial transferee and DR
A CR may be eligible for a provisional remedy even before obtaining a judgment if DR is fraudulent
disposing of its property during the lawsuit, the CR may have right to an immediate attachment of whatever
property the DR still has
o This remedy is sharply limited by constitutional DP requirements and statutory prerequisites to the
issuance of a writ of attachment in most states
Assignment 2 Security and Foreclosure


Security Agreement Covering Personal and Real Property: 9-604(a) recognizes that a S/A can cover
both personal and real property outlines procedure for dealing with that
Lien: Secured CRs have liens on some or all of the DRs property a lien is a charge against or an interest in
property to secure payment of a debt or performance of an obligation a lien is a relationship between
particular property (the collateral) and a particular debt obligation
o Types of liens41: Secured Interest (consensual) / 2: Nonconsensual liens 2/3/4
 Security interest: Lien created by contract/agreement between debtor/creditor
 Statutory lien: Lien granted by statute (ex. mechanics lien)
 Common law lien: Lien granted by common law
 Judicial lien: Obtained by unsecured creditor using judicial process
o Provides a set of collection rights considerably more effective than those available to unsecured CRs
enhanced collection rights of secured CRs diminish the effectiveness of unsecured CRs collection
rights they only get whats left after secured CRs debts are satisfied (often nothing)
o If the debt is not paid when due, the CR can compel the application of the value of the collateral to
payment of the debt
10
o The usefulness of property as collateral will depend on (1) how much value the CR can extract
from it after default; and (2) how much leverage can derive from its ability to deprive the DR
of the property




Security interest: an interest in property contingent on the nonpayment
o Encompasses any lien created by contract between DR and CR includes RE mortgages/deeds of
trust and security interests in personal property created under the UCC, Article 9
Default may be a failure to pay the debt or a failure to comply with some other provision of the S/A the
right to enforce the debt against the property that serves as collateral is contingent upon the occurrence of a
default
o Typically, methods of enforcement lead to sale of the collateral, with proceeds being applied to pay
down the debt if not enough proceeds to pay off debt, CR must bring deficiency action if more
than enough proceeds to pay off debt, DR gets surplus
Nonconsensual liens: (1) liens granted by statute, such as mechanics liens (statutory liens) or by common
law (common law liens); and (2) liens obtained by unsecured CRs through judicial process (judicial liens)
Priorities: relative rights of multiple creditors competing for the same collateral
A. Foreclosure: is the process by which the CR compels application of the value of
the collateral to payment of the debt
o Article 9 provides a non-judicial procedure for personal property foreclosure, but permits judicial
foreclosure as well
o Foreclosure is a process that operates on the ownership of collateral (not possession) it transfers
ownership from the DR to the purchaser at the foreclosure sale and cuts off the DRs right to
redeem the collateral typically accompanied by a transfer of possession, but not always change in
possession can occur before, during, or after foreclosure, or not at all
 Distinguish between foreclosure (ownership) and taking possession
o Foreclosure by any procedure is technical, time-consuming, and expensive lawyers and their clients
wish to avoid it whenever possible
1) Judicial Foreclosure
A foreclosure process is judicial if it is accomplished by the entry of a court order
(1) CR holding a mortgage or security interest typically files a civil action against DR
(2) In the complaint, CR details the terms of the loan and the nature of the default, and requests
that the equity of redemption be foreclosed
(3) The complaint is served on the DR and any subordinate lienholders, who then have a time period
(usually 20 days) in which to raise defenses
- Rare for DR to have defense that would preclude foreclosure altogether but often can find some
technical defect in the complaint to delay the proceeding
(4) Once any such issues have been resolved and the plaintiff has established that it is entitled to
foreclose, the court will enter a final judgment of foreclosure
- As part of the judgment, court usually sets date of foreclosure sale
11
-
Statutes in some states mandate delays or waiting periods after the order before the sale can
occur
(5) Sheriff sells the collateral, collects the proceeds, and holds them until the foreclosing CR
obtains order form court confirming the sale
- In most states, that order extinguished the equity of redemption and authorizes the sheriff to
disburse the proceeds
Ordinarily, DR will remain in possession of the collateral until the court confirms the sale
(6) After the sale, the purchaser is entitled to possession
If the DR will not surrender the premises, the purchaser is entitled to a writ of assistance (writ of
possession) directs the sheriff to put the purchaser in possession
2) Deed in Lieu of Foreclosure
if there are no other liens or interests in the collateral, the DR can simply transfer the property to the
CR in return for an immediate release of the debt (basically execute deed to bank) avoids the whole
foreclosure process
 Only DR can opt for this otherwise CR must go through foreclosure process
 Eliminates right of redemption
3) Real Property Power of Sale Foreclosure
lender and borrower include a power of sale in the S/A
 25 states permit the mortgage lender and borrower to opt for a quicker, simpler method of real property
foreclosure
o Avoids expense and delay of litigation, and longer redemption periods although could end up in
court, for example, if the DR refuses to surrender possession (see p. 36 for others)
o Still very formal s/t many requiremetns
 A deed of trust states in essence that the collateral will be held in trust by the CR or a 3P such as a bank or
title company
o The borrower agrees that in the event of default, the Trustee can sell the property and pay the loan
from the proceeds of sale
o Because the purpose of the arrangement is to secure payment of the loan treated as security interest,
not an actual trust
 Foreclosure is still necessary when the CR has a power of sale, but it can be accomplished through a
procedure that does not include filing a lawsuit
o Upon default under a mortgage or deed of trust containing a power of sale, the CR can file in the
public records a notice setting forth he nature of the DRs default and the CRs election to sell the
property after certain timing requirements are met (allowance for cure, advertising period), the CR
may sell the property at auction
o Pursuant to the power of sale contained in the deed of trust, the Trustee conveys title to the purchaser
at auction the sale forecloses the DRs right to redeem
o States are either power of sale or judicial foreclosure states
12
4) UCC Foreclosure by Sale:
Article 9 governs foreclosure of security interests in personal property
 After default, the secured party may sell, lease, license, or otherwise dispose of any or all of the
collateral - 9-610(a)
- that sale or disposition itself forecloses the DRs right to redeem the property - 9-623 it
extinguishes the CRs security interest in the collateral and transfers to the purchaser all of the
DRs rights in the collateral - 9-617(a)
o Alternatively, the CR may foreclose by any available judicial procedure - 9-601(a)

Illinois is a judicial foreclosure state- half of all states.
o For residential real estate, right of redemption for 7 months from the date of the service of the
complaint
o If debtor does not redeem in that period, redemption right is gone
o Formerly in Illinois and elsewhere, there was another right of redemption that ran after the judicial
sale. Statutory right of redemption
 Repealed in Illinois and pretty much everywhere else

Right of redemption: DRs right to pay the secured debt even after default and retain ownership of the
collateral effectively buy back the property before the sale
o GR: right is available from time of default and acceleration until the collateral is foreclosed upon
UCC governs security interests of personal property 9-623 gives debtor right to redeem collateral
up to the time of the creditors sale or other disposition of the collateral
o For RE, there might be statuary SOL for right of redemption (i.e., after the foreclosure sale)
o Foreclosure ends the right of redemption (in most cases)
Exemptions (N/A for Secured Claims): IF there is a security interest/mortgage, the exemptions do not apply
exempt means theyre exempt from judicial process, not exempt from agreement that the DR voluntarily
entered into regarding the collateral/lending
o When there is a voluntary S/A the DR is on notice that their property is s/t to seizure if the DR fails
to pay exemptions do not apply to consensual security interests and mortgages, they apply to
judicial liens

B. Transactions Intended as Security

A transaction is in the nature of security if the intent is to provide one party with an interest in the
property of another, which interest is contingent upon the nonpayment of a debt even if the only
document in existence labels the transaction as a sale, the relationship created may be a security interest
substance over form
o Regardless of the form in which the parties choose to cast their deal, if it is security, the law will
recast it as a security.

Basile v. Erhal Holding Corp. (IAS RE): P mortgaged property to D for a loan, later brought action to
declare mortgage invalid for usury in settlement, P agreed to execute mortgage to D for 101k and a deed in
lieu of lieu of foreclosure If P defaulted, D could record deed P defaulted, D recorded the deed and brought
motion for declaration that P waived her right of redemption.
13
o Rule (Intended as Security Doctrine): a deed conveying real property, although absolute on its
face, will be considered a mortgage when the instrument is executed as security for a debt substance
over form
o Rule (Redemption Rights Not Waivable): right of redemption is inseparably connected with a
mortgage so long as the instrument is one of a security, the borrower has the right to redeem the
property upon paying the loan cannot be waived or abandoned by any stipulation by the parties
o Holding: Deed was executed with the intent that it be a security P cannot waive her right of
redemption in a secured transaction
 Sole remedy is foreclosure attempted waiver of redemption is ineffective

Intended as Security Doctrine also applies to personal property transactions
o UCC 9-109(a)(1) provides that article 9 applies to any transaction, regardless of its form, that creates
a security interest in personal property
o Comment 2 says that when a security interest is created, Article 9 applies regardless of the form of
the transaction or the name that parties have given to it.
 The subjective intention of the parties with respect to the legal characterization of their
transaction is irrelevant as to whether Article 9 applies
o 1-201(b) (35) security interest definition: means an interest in personal property or fixtures which
secures payment or performance of an obligation (codification of IAS doctrine)
 An interest in property contingent on the nonpayment of a debt
o Smart to counsel clients to go through foreclosure process when its unclear how a court might
characterize a certain arrangement follow the UCC or RE rules
C. Intended as Security Doctrine Common Scenarios of Applicability

Conditional Sales owners who intend to sell goods on credit seek to retain title to the goods until the buyer
has finished paying for the goods (installment sales)
o UCC 2-401(1): Any retention or reservation by the seller of the title (property) in goods shipped or
delivered to the buyer is limited in effect to a reservation of a security interest consequence is that
buyer becomes the owner of the goods and the seller becomes a secured CR for the price of the
goods

Leases Intended as Security Interests a sale, combined with a security interest securing payment of the
purchase price, has precisely the same economic impact on the parties as a lease for the entire economic life
of the property
o The lessors interest in the collateral is entirely contingent on the nonpayment of debt (in which case
they can repossess) 1-203(b)
o If the contract transfers only part of the anticipated economic life of the collateral to the lessee, then
more properly characterized as a true lease
o Tax treatment for leases is favorable parties are often willing to distort the substantive economic
terms in order to obtain such treatment typically shorten the lease period to less than the economic
life of the property, and require or induce the lessee to buy the lessors reversion for its market value
at the end of the lease question becomes what minimum level of distortion is sufficient to qualify
the transaction as a lease

Sales of Accounts many businesses sell their products or services on unsecured credit Article 9 refers to
accounts receivable as accounts 9-102(a)(2) the person who owes an account is called an account debtor
14
9-102(a)(3) a business with substantial accounts may sell them to Factors (specialists in buying accounts) at
a discount
9-406: Account debtor has right to pay the original account holder up until they are notified that
account has been assigned. After that, must pay the assignee.
9-607(a): Upon default, secured party may notify account debtors
9-404(a): Rights of assignee are limited to the terms of the agreement between original account holder
and customer
o If the Factor will bear the loss if accounts will not be collected, the sale is a true sale
o If the business who sold the accounts agrees to pay any deficiency to Factor in the event that the
accounts become uncollectable i.e., so that Factor will receive the face value of the accounts the
sale of the accounts to Factor is merely a security interest disguised as a sale
o Some courts have held that a sale of accounts with recourse is not a security interest although in
substance it is (last paragraph p. 31)
o 9-109(a)(3) provides that the UCC applies to a sale of accounts as well as a security interest in
accounts Comment 4 explains that this approach has generally been successful in avoiding difficult
problems of distinguishing between transactions in which a receivable secures an obligation and
those in which the receivable has been sold outright

Asset Securitization see p. 32 for explanation
o If a securitization of accounts is with recourse in substance it is a security interest
Assignment 3 Repossession of Collateral





Look mostly to 9-609
Who has possession of collateral in the time between default until the equity of redemption is foreclosed?
Keep in mind the difference between possession and ownership
Importance of Possession Pending Foreclosure
o Party in possession will likely capture the use value of the collateral
o Only the party in possession may have access to the property to evaluate before sale for bidding
advantage possessor controls the information flow about the collateral (and potentially the pricing)
o CRs gain of possession may interrupt the DRs use (e.g.: equipment cannot be used in business
operation anymore) gives CR leverage
o May determine whether and how the collateral is preserved condition of the collateral CR likely
to maintain, DR more likely to destroy, diminish value
o Possession provides bargaining leverage
GR DR will possess collateral, even after default, until DR is dispossessed of the collateral
A. Right to Possession Pending Foreclosure Personal Property


UCC strongly favors the Secured Creditor
Self-Help Repo: 9-609 gives secured party the right to take possession immediately on default dont need
courts or public officials if they can get property without breaching the peace.
15

Replevin Repo (Judicial Repo): if cant get w/o breach of the peace (DR resists repossession), file a
replevin action (court order for possession judicial process) court orders sheriff to get property from DR
and deliver to CR
o Any party entitled to possession of tangible personal property may appropriately initiate a replevin
action
 Action of replevin
 A writ of temporary replevin
o In some states, D doesnt need to be present at replevin hearing or given prior notice 1st notice might
be when the sheriff shows up to transfer possession (Dels Big Saver Foods)
o In most states, the sheriff is authorized to use force to take possession (when they have writ of
replevin)
o Issuance of this writ is usually conditioned on the creditors posting a bond to protect the debtor if he
prevails.
o See p. 41 for detailed procedure
B. The A9 Right to Self-Help Repossession 1




9-609:
o (1): take possession;
o (2): render equipment unusable and dispose BY (1): judicial process; (2) without judicial
process, if it proceeds without breach of the peace
CR with Art. 9 security interest in tangible personal property can repossess himself after default.
o Saves time, effort, and money dont have to use judicial process yay
o S/As typically require that the DR surrender possession upon default (9-609(c)) some DRs will, most
wont CR must take the initiative
 Put upon default, you (the DR) must make the collateral reasonably accessible to me (CR) 9-609(c) allows this no practical effect through the damages for breach of contract is the
collateral, which CR is trying to get in first place no incentive for DR to comply
o Repo is harder than it sounds difficult to locate collateral, or may be in locked garage, or behind
fence the collateral itself may be locked and/or inoperable repo looks sketchy
 Solution use repo-men() specialists in this area. Courts generally hold that he duty to refrain
from breach of the peace during repossession is nondelegable, making secured CRs liable for
the consequences of illegal repos by their independent contractors (repo men)
Render Unusable: 9-609(a)(2) CR can leave equipment temporarily in possession of DR but render it
unusable counts as repossession
o i.e., large piece of equipment
o Remove key parts from machine (i.e., ignition switch) so it cant be used pending sale
Breach of Peace (the limitation of self-help repossession): Can only self-help repo if you can do it
without breaching the peace 9-609(b)(2)
o Non-Waivable: 9-602(6) prohibits waiver of the breach of peace limitation in S/A
 Lawless thinks that trespass alone doesnt constitute breaching the peace
 so may be able to waive by putting language in S/A: CR is permitted to enter any premises
without liability for trespass in S/A may or may not be effective probably not if 3Ps
property
o Duke v. Garcia what is a breach of peace?
 Rule: a breach of the peace occurs when a DR orally protests repossession
16

 Not applied if the repo has completed, the CRhas had dominion over the collateral
 Rule: actual physical violence means a breach of the peace has occurred, regardless of who
initiated it pushing is an act of physical violence
 Rule: a non-judicial repossession is automatically wrongful when a repossessor is assisted
by law enforcement officials in order to prevent a breach of the peace
 But see starred bar on p. 48
 If the police are merely there, its not a breach of the peace
 If the police assist with the repo, its a breach of the peace
o See pp. 47-50 for examples of breach v. non-breach outline
o Basically, DR should resist repo like hell most likely will be breach of peace, which means CR will
have to back off DR has no duty to not breach the peace
Concealment: usually a crime for DR to conceal/hide personal property in which DR knows another has a
security interest in
C. Self-help Against Accounts as Collateral



Account: right to payment or a monetary obligation for property sold or service rendered - 9-102(a)(2)
Self-Help Against Account DRs - 9-607: Secured CR who knows the identity of account DRs can send
them written notices to pay directly to the secured CR
o 9-406(a): Account DR who receives such notice can only discharge obligation by paying the secured
CR
 Account DR can request assignee to provide proof of the assignment. 9-406(c)
 Ultimately, the account DR, at their own risk, must determine who to pay after notice, if the
account DR pays the DR, they are still be liable for that amount to the secured CR (i.e., pay
more than they owe - double) the account DR would then be left to recover that
overpayment from the DR indemnification (good luck)
o Anti-Assignment Clauses Ineffective: 9-406(f) provides generally that anti-assignment provisions
in contracts between DR and account DRs will be ineffective in relation to these rules allows DR to
assign accounts to lenders
o Account DR Defenses: 9-404(a) says that whatever defenses (i.e., warranty claims) the account DR
has against DR (assignor) are good against the lender (assignee)
o 9-406(h) recognizes that the UCC gives way to provisions related to consumer (in contrast with
commercial) buyers There are often state law protections for consumer DRs that prevent them from
having to follow this rule.
Practical Issues with this otherwise powerful remedy for CRs
o Notice to account DRs signals financial struggles of the DR may stop doing business with DR (if
the DR fails, then account DR has serious service and warranty concerns) or may stop paying,
because a dissolved entity cant sue them on an unpaid account
 Secured CRs thus often leave DRs in control of the accounts
 Alternatively, can setup lockbox arrangement have account DRs send their money to a P.O.
box/anonymous account
D. Right to Possession of Real Property Pending Foreclosure

DRs right to possession
o Mortgage foreclosure is the means by which dispossession occurs
o Generally, lender/mortgagee never becomes entitled to possession of mortgaged real property in
their capacity as lender.
17


o DR remains owner and is entitled to possession until foreclosure and sale
o Only purchaser at foreclosure sale can dispossess DR (could be the lender though)
o When DR does not voluntarily give up possession after sale purchaser must use traditional real
property remedies to actually take possession
 In some states, purchaser must file an action for eviction or ejectment and obtain a court
order for removal
 In others, the court can issue a writ of possession or assistance on motion by the purchaser
 In any event, purchaser can probably have the sheriff on the scene with badge and gun in no
more than 10-20 days after the purchase
o If lessee is in possession after the sale, entitled to possession until expiration of lease
Appointment of a Receiver
o While foreclosure is pending, an interested party can apply for an appointment of a receiver to
preserve the value of the collateral.
o Receiver is officer of the court with fiduciary obligations to all who have interest in the property.
o Has right to collect rents, use money to maintain property, authority to rent retains rents received in
excess of maintenance costs pending the outcome of the foreclosure action
o Receiver typically takes possession of the collateral during the foreclosure case and delivers
possession directly to the purchaser at the foreclosure sale
o Courts rarely appoint receivers unless terms of the mortgage provide for such even if terms so
provide, court has discretion lender must show foreclosure alone is inadequate usually true only
when the value of the property is inadequate to satisfy the mortgage debt and the DR is insolvent so
that any deficiency judgment will be uncollectable
 Especially rare when the RE is residential + owner-occupied (i.e., family home)
Assignment of Rents
o If a rental property, mortgage will probably have provision where DR assigns rents from the
property to lender as additional security.
o Mortgagee can collect rents directly from tenants in event of default.
o Some courts reluctant to give effect to assignment of rents clause, too similar to taking possession
others say its chill
Assignment 4 Judicial Sale and Deficiency





After judgment is entered in judicial foreclosure, collateral is sold in a public sale.
o Purposes is to convert the value of property to cash, so that all or part of that value can be used to
pay the debt
o Generally, this requirement cannot be varied by contract even if the mortgage specifically provides
for the secured CR to become the owner of the collateral in the event of default and foreclosure, the
public sale still must be held
 Policy: CR gets too good a bargain DR suffers a forfeiture
Surplus (): Proceeds are first applied to expenses of sale, then to payment of secured debt surplus goes to
debtor.
Deficiency (): If the proceeds are insufficient, debtor may be liable for deficiency (common)
o Legal fiction that the price paid in auction foreclosure is the collaterals value collateral frequently
sells for much less than its value
9-601(a)(1), security interests can be foreclosed judicially but rarely are.
Rules for judicial sales tend to protect DR but the tradeoff is higher expense and delay
o UCC rules, contrarily leaves DR more vulnerable but less costly and more efficient procedures
18
A. Strict Foreclosure




Foreclosure that does not result in a sale.
Cuts off the DRs equity of redemption, and secured CR becomes the owner of the collateral.
The norm for real estate mortgages in a strong minority of states
Available for contracts for deed (installment land contracts) in large majority of states
o Contracts for deed are contracts for the sale of real property that provide for payment of the
purchase price in installments with delivery of the deed only after the last payment is made
 Used primarily in sales of relatively small value RE, with small down payments
o Sellers must foreclose through court process but no sale court forfeits DRs interest and title
remains with seller.
B. Foreclosure Sale Procedure

State statutes specify the manner in which foreclosure sale must be held
o Nearly always conducted by a public official (sheriff, court clerk or commissioner)
o Anyone can bid at the sale but CR bringing foreclosure action usually highest bidder

Court that orders a foreclosure sale may have discretion to determine some aspects of the manner in which
the sale is held
o i.e., period of advertising, how bidders ID themselves, minimum bidding increments
o When the last bid is made, the officer conducting the sale identifies the highest bidder that bidder
must immediately make a deposit of a portion of the purchase price the balance must be paid within
a few hours/days if doesnt pay balance, either 2nd highest bidder gets it or new sale to be held
highest bidder who did not perform forfeits deposit and may be liable in contract

Confirmation: In most foreclosures, court must review the circumstances of the sale and confirm it before
sale is consummated.
o DR, or other parties in interest, may object to the sale on the grounds that the officer did not
conduct the sale in accord with the law or the judgment of foreclosure, or that the sale price was
inadequate
o If not confirmed, court schedules resale
o If confirmed, officer who conducted sale will execute a deed or bill of sale conveying the property to
the purchaser
o Official disburses the sale proceeds first to the foreclosing CR up to the amount of the debt any
surplus goes to junior lienholders, and then to DR

Deficiency: If the proceeds of sale are insufficient to pay the full amount of the debt secured by the
foreclosed lien, the foreclosing CR may ask the court to enter a deficiency judgment if deficiency judgment
granted, the foreclosing CR can collect it in the same manner as any other judgment on an unsecured debt

Redemption: While the foreclosure is in progress, the mortgage DR has the right to redeem the property by
paying the full amount due under the mortgage, including interest and attorneys fees
o Statutory Redemption Right: Common law right of redemption is usually cut off at sale, but some
states give DR a statutory right to redeem the collateral from the buyer after the sale b/w 6 months
and 3 years, usually around 1 year redemption is accomplished by paying the purchaser the amount
the purchaser paid at the sale might include interest on the sale price and other expenses incurred by
the purchaser in connection with the sale but the redemption price typically does not include
19
purchasers costs of maintaining or improving the property during the period, if any, it was in
purchasers possession
 DR usually remains in possession during statutory redemption period
 Statutory rights of redemption are freely transferable more valuable when property was
sold at discount
 If redemption right exercised, purchaser is reimbursed money, but loses the property
 Courts are split on whether redeeming DR takes property free and clear or s/t unpaid lien
C. Problems with Foreclosure Sales Procedure

If the property brings very little at sale, DR may bring a lawsuit asking court to set aside sale for inadequate
sales price in some states, the court may just refuse confirmation difficult to shock the court though
o First Bank v. Fischer & Frichtel


Rule (Deficiency Measure): DR required to pay as a deficiency the full difference between
the debt and the foreclosure sale price DR not permitted to attack the sufficiency of the
foreclosure sale price as part of the deficiency proceeding even if DR believes that the
foreclosure sale price was inadequate
 Basically, if FMV is greater than sale price, DR cant use FMV to measure the
deficiency would lead to smaller deficiency
Rule (Inadequate Price Shock the Conscience): a DR who believes that the foreclosure
sale price was inadequate can bring an action to void the foreclosure sale itself must show
that the inadequacy of the sale price is so gross that it shocks the conscience and is in itself
evidence of fraud
 Vague standard courts look to sale price as % of FMV
 Bidding 50% FMV will almost never shock the conscience sometimes bidding as
low as 20% doesnt shock the conscience (p. 63)


Dissent: when fair market value (FMV) is much greater than sales price windfall to CR
(usually credit bids)
 Armstrong v. Curilla: Judicial sale will not be set aside unless it is so gross as to shock the
conscience, or there are additional circumstances that would make sale confirmation
inequitable
Judicial sales price is presumed to be REV in the context of fraudulent transfers not avoidable as a
fraudulent transfer by DRs other CRs (i.e., credit card companies) - UVTA 3(b)
D. Aspects of Foreclosure Sale that Contribute to Failure to Bring Adequate Prices


Advertising
o Foreclosure sales are poorly advertised
o The way a foreclosure sale is advertised may be fixed by statute or judgment of foreclosure.
o Often in the newspaper legal notices section not really seen rarely attract buyers, and to the extent
they do, the bidders are usually professional bargain hunters
 Officer conducting sale is not concerned with price it will bring more concerned with strict
compliance with statutory requirements out of fear that sale will otherwise be set aside
 Newspapers of limited circulation are often picked lower cost
Inspection
20
o Prospective buyers are given little opportunity to inspect the property before bidding they must
accept the property as is
o Remember, DR stays in possession until sale
o Mortgage contract usually grants foreclosing CR the right to inspect collateral in preparation for
bidding at the sale provision will usually be specifically enforced Other buyers can observe
property from adjacent public places, but have no right to inspect.

Title and condition
o Caveat emptor applies to foreclosure sales with regard to state of title
 buyers take subject to any defects in the title that they could have discovered through a
search of the public records or an inspection of the property
 finding out what liens survive foreclosure is the responsibility of the foreclosure sale bidder
 This includes liability from environmental contamination
o Marino v. United Bank of Illinois: M attends judicial sales, asks sheriff whether there were any
liens on property sheriff says yes, but attorney for bank says there probably wasnt but she didnt
know M never searched the public records or consulted his own attorney M purchases, attempts to
vacate sale for misrepresentation by banks attorney
 Holding: Sale stands it was incumbent on M to search for liens before purchasing Ds did
not make any false statement of material fact the uncertainty of the banks attorney statement
would have put a reasonable person on inquiry
 Rule: generally, the doctrine of caveat emptor applies to judicial sales and the risk of a
mistake or defect of title is to be borne by the purchaser unless there is fraud,
misrepresentation, or mistake of fact (specific rules on elements - p. 69-70)

Hostile Environment/Situation
o Nobody (including DR) has no motive or obligation to give buyers info about property
 DR often has incentive to withhold info part of strategy for retaining property
o Foreclosing CR often would rather withhold info it has as well CR usually buy property themselves
and then resell it after evaluation
 Price at first sale is of little consequence to them just resell closer to FMV
o Officer conducting sale has no obligation or incentive to furnish information, but may have liability
for furnishing incorrect information.
o Debtor can litigate small procedural issues to delay sale.
o Purchaser must always consider possibility of getting caught in litigation over validity of sale
o Debtor can destroy property between sale and possession of buyer.

Statutory Redemption
o DR who has the statutory right to redeem the property after sale usually also remains entitled to
possession buyer may be unable to possess/use the property until the statuary redemption period
expires Added risks reduce the amounts bidders are willing to pay
 Purchaser who does get possession also risks any money spent to improve or maintain the
property forfeited if later redeemed
E. Anti-deficiency statutes
o Statutes that prohibit the court from granting deficiency judgments in particular situations, give court
discretion to refuse to grant them, or limit the amount of the deficiency to be granted.
21

Purpose is to discourage inadequate foreclosure sale prices i.e., by encouraging foreclosing
CR to try to secure higher bids
o Most common type credits DR for the FMV of the property even if the property brings a lower
price at the foreclosure sale.
 Ex: $100K mortgage debt; FMV of $80K; Sale price of $45K
 W/o statute, deficiency of $55K
 W/ statute, deficiency of $20K
F. Credit bidding at judicial sales



Often CR is only one bidding at foreclosure sale
CR can bid on credit up to the amount payable to them (the amount of debt), without having to pay
anything
judgmentDRCR100collateral20CR100creditCR100creditCRbid20100collateralresale
collateral20bid100advantages
- CR basically buys collateral for all or part of the secured debt.
- the party holding the judgment can bid up to the full amount of the judgment without depositing
cash with the sheriff.
- CR has little reason not to bid the full amount of its debt although the price is far in excess of the
price of the collateral.
 CR who makes a high credit bid (i.e., the full amount of the debt) has several advantages.
- Minimizes likelihood that sale will be set aside, debtor will exercise statutory right of redemption.
- No need to incur expense of evaluating collateral prior to the sale if CR outbid, will recover full
amount of secured debt if not outbid, will have property to inspect, evaluate, improve, and resell at
its leisure
- CR free to seek profit on resale gets to keep it
- Plus, even if there would be a deficiency (i.e., CR bids below full amount of debt), the CR is not
likely to collect may be anti-deficiency statute, or DR is otherwise insolvent or in bankruptcy so
makes sense to just bid full amount
- Purchase by foreclosing CR and resale is very common
 buyer at foreclosure sale (usually foreclosing CR) gets the property for the amount of lien and
resells it for a price approaching FMV thereby capturing the DRs equity
If the DR has equityin the property, a judicial sale threatens to forfeit it but also incentivizes DR to get
other buyers at the sale
Assignment 5 Article 9 Sale and Deficiency
acceptance/notices/commercial reasonableness/possible remedies when creditor violates these
rules/difference between partial and full satisfaction/difference between consumer goods and
commercially transaction


Sales under UCC 9 serve essentially the same purpose as judicial sales.
Requirement that collateral be offered for sale as part of the personal property foreclosure process cannot be
waived or varied in the initial lending contract. 9-602(7) and (10); 9-620
22




Article 9 doesnt use judicial sales its possible to use judicial foreclosure process but given the expense and
delay, nobody would ever do that Article 9 allows a private sale in the sense that it doesnt have to be
conducted by the sheriff or the court CR itself can sell the property
o Concerned about the DR though lose value by giving up surplus (forfeiting equity), or larger
deficiencies both cause harm to DR both can occur when CR handles sale
UCC 3 Categories of Rules that Protect the DR
o 9-620-22 procedures CR must follow to retain the collateral (or in UCC parlance, to accept the
collateral)
o 9-611-14 rules for notice of how CR will dispose of the collateral
o 9-610(b) whatever the CR does must commercially reasonable
 Standard is intentionally vague courts must determine
o Consequences of not following the rules are laid out in 9-625 (remedies)
Obligor = person who owes the money 1-902
Debtor= the person who owes the collateral
A. Acceptance of Collateral



Acceptance of collateral under 9-620 is roughly analogous to acceptance of a deed in lieu of foreclosure.
o Type of strict foreclosure foreclosure without sale
Acceptance: After default, DR can consent to CR retaining collateral in full or partial satisfaction of the
obligation it secures
o Partial satisfaction means that the DR receives credit against the debt in some amount but continues
to owe the remainder
Implied Consent: In most cases consent will not be real, 9-620(c)(2) implies consent if CR sends DR a
proposal for retention of the collateral in full satisfaction of the debt AND does not receive a written
notification of objection within 20 days.
o An oral objection is insufficient
o Case analysis: Yarchenko
 doesnt matter that foreclosure in this manner might result in a windfall to the CR
 doesnt amount to bad faith or otherwise render the foreclosure improper under 9-620
 proposals and acceptances should not be second guessed on the basis of the FMV of the
collateral involved
 9-620 enabled CR in this case to accept DRs $407K collateral for a debt of $22K

9-620(c)(1) - If DR is agreeing to acceptance of collateral in partial satisfaction, only okay if DR agrees in
a record authenticated after default explicit consent in writing required from DR partial satisfaction only
available in commercial transactions
o

Right to consent is subject to 4 conditions:
(1) Must be no objections from others holding liens against the collateral. 9-620(a)(2)
(2) Acceptance in partial satisfaction is not permitted in a consumer transaction. 9-620(g)
This makes sale an absolute prerequisite to a deficiency judgment in consumer transactions
23
(3) If collateral is consumer goods, debtor can consent (in writing or by silence) to acceptance only
after repossession. 9-620(a)
(4) acceptance is not permitted if DR has paid 60% of the cash price of consumer goods purchased on
credit (PMSI) OR 60% of the loan for a non-PMSI in consumer goods 9-620(e)
 purchase money security interest (PMSI)
 (1) Must be sale; (2) DR can waive, but only in an agreement to that effect entered into and
authenticated after default 9-624(a)
 Summary
o In commercial transactions, have to distinguish between full v. partial satisfaction of the debt full
satisfaction, DR must object w/in 20 days or deemed consenting partial satisfaction, DR must
consent in writing
o In consumer cases can have no partial satisfaction after acceptance CR has to wipe out debt 9620(g) (If consumer has paid 60% of the principal, there must be a sale prevent forfeiture of
consumers substantial equity)
B. Sale Procedure Under Article 9



9-610 governs procedure for sale of collateral
GR Sale - 9-610(a): provides that a secured party may sell the collateral after default
o After default, the secured party may sell, lease, license, or otherwise dispose of any or all of the
collateral - 9-610(a)
Biggest difference from judicial sale is that secured CR conducts the sale, not a public official private sale
CR has wide discretion under 9-610 to determine method and timing of sale.
o CR may be able to sell the property (1) by auction, (2) by setting a fixed price and finding a buyer
who will pay that price, or (3) by negotiating with interested parties

Commercially Reasonable: CR has duty to DR to choose a procedure for sale that is commercially
reasonable every aspect must be commercially reasonable, 9-610(b), including method, manner, time,
place, and terms
o UCC sales procedure is more directed at getting a good price for collateral.
o Generally, should be in comformity with reasonable commercial practices

Notice - 9-611(c)(1): requires that CR give DR prior notice of the sale
o Enable DR to observe, participate, or otherwise protect its rights (i.e., find people to bid)

Redemption - 9-623: DR may redeem by paying full amount of the debt, including the secured CRs
attorneys fees and expenses of the sale right to redeem ends at the time collateral is sold or accepted

The sale set aside: Failure to comply with the requirements of Article 9 or even a court order governing a
sale is not grounds to set the sale aside the only ground on which an Article 9 sale can be set aside is lack
of good faith on the part of the buyer 9-617(b)
o If the collateral is consumer goods, the DR may be entitled to recover a statutory penalty from a
secured CR who violates the Article 9 procedures
o if the collateral is not consumer goods, the DR is limited to an action against the secured CR for
actual damages
24

Debt Extinguishment - 9-617(a): the sale discharges the security interests of the foreclosing CR and
subordinate CRs bidder adjusts bid to pay off priority liens, which are not discharged by the sale

Replevin: UCC sale procedures govern even if CR obtained possession through replevin rather than selfhelp.

Application of Sale Proceeds - 9-615(a) provides the order
(1) : applied to reasonable expenses related to sale retaking, holding, preparing for sale, processing, and
sale and reasonable attorneys fees IF provided for in the agreement
(2) CR: applied to the CRs debt
(3) : applied to subordinate debts secured by the collateral if those secured parties demand payment
(4) : cosignor provision
(5) : surplus goes to DR (d)(1)

Deficiency General Rule - 9-615(d)(2)
o obligor on a secured debt is liable for any deficiency remaining after application of the sales
proceeds
o in a commercially reasonable sale, the deficiency is the difference between the amount owed and
what the collateral sold for (not the market value)

o Anti-deficiency statutes limit this rule
 9-615(f) applies when SC buys the collateral at the sale in calculating deficiency, the amount
that would have been realized in a sale to a 3P is treated as the actual sales price.
 9-626(a)(3) applies when sale does not comply with Art. 9 requirements in calculating
deficiency, amount that would have been realized in complying sale is treated as actual sales
price implicates rebuttable presumption rule below
o 9-616(a)(1)(B), (b)(1) when the CR goes to recover the deficiency, must provide DR a statement of
deficiency (a calculation of how the deficiency was arrived at) in the case of a consumer transaction
Litigating over deficiencies is expensive for CRs if the DR resists
o DR can find any little thing to question the commercial reasonableness of the sale and subject CR to
substantial legal expenses
o plus DR usually judgment proof
o so often not worth continuing the fight when DR resists
C. Problems with Article 9 Sales Procedure

Failure to sell the collateral
o No specific provision in UCC stating that CR must sell the collateral after default no time fixed in
which sale must occur (except for consumer goods in 9-620(f)).
 9-610(a) says the secured CR may sell A9 sale
o CR may procrastinate, keep collateral temporarily, or not be able to legally sell collateral.

If this happens, first issue is whether CR was attempting to accept collateral without
complying with 9-620 if secured party was attempting an improper acceptance, court can
order a sale or award damages for noncompliance. 9-625(a)-(b).
25

If court concluded that secured party was proceeding to sale, the second issue would be
whether the SP was doing so at a commercially reasonably pace
o No remedy if collateral declines in value in possession of CR
 If delay is commercially unreasonable, deficiency will be limited to amount that would have
been left if sale had been commercially reasonable. 9-626(a).
Notice of sale
o 9-611 requires that CR send notice to DR, guarantors, and some lien holders 9-602(7) says notice
requirement cannot be waived 9-611
o Failure to notify does not invalidate the sale but can reduce the amount of the deficiency creditor
can recover or eliminate it. 9-617.
o 9-613 contents of a notification of sale are sufficient if the notification
 describes the DR and the secured party
 describes the collateral that is subject to the sale
 states the method of the intended sale
 states that the DR is entitled to an accounting of the unpaid indebtedness and states the
charge, if any, for such accounting
 states the time and place of a public sale or the time after which any other disposition is to be
made
o 9-614 adds additional requirements for consumer goods are being sold CR must provide a
description of any liability for a deficiency
o 9-625 provides penalties for failing to send required notice of sale
 CR liable for actual damages
 Difference between FMV and sales price
 for consumer goods, CR also liable for a statutory penalty in an amount not less than the
credit service charge plus 10% of the principal amount of the obligation OR the time-price
differential plus 10% of the cash price
 Credit service charge and the time price differential are ways of describing the
total amount of interest the CR is charging on the loan
 can lead to substantial penalties
Commercially Reasonable Sale
o 9-610(b) requires that every aspect of a sale must be commercially reasonable

intentionally vague
 what methods, manners, times, or places are reasonable will differ with the type of collateral
and other circumstances
 factual inquiry as to what constitute commercial reasonableness
o Generally, a commercially reasonable method of sale is one that reasonable owners of the particular
type of property would use if their own money were at stake
 we determine commercially reasonable based on industry standards consulting the
industry and individuals with industry expertise
o Higher Price Potential - 9-627(a): just because there couldve been a higher price if an aspect of the
sale was different doesnt make a sale commercially unreasonable
unreasonable
26
o Commercial Transactions Rebuttable Presumption




If SC fails to give notice of sale OR conduct sale in commercially reasonable manner,
rebuttable presumption that the value of the collateral equals the amount of debt (i.e., no
deficiency) 9-626(a)(4)
 SC has to prove (come forward with evidence) that collateral was worth less than the
debt in order to recover a deficiency
 in that event, SC is entitled to a deficiency in an amount by which the debt exceeds
the value of the collateral
Court must determine value of the collateral
Tough burden on CR and pain in ass as practical matter - hard to value stuff (need experts)
CR might not care about losing right to deficiency if DR is insolvent wont be able to collect
anyways
o Consumer Transactions - 9-626(b):
 Consumer transactions are excepted from the rebuttable presumption rule courts are left
to determine the proper rules in consumer transactions
Two Approaches
 Majority rebuttable presumption rule
 Strong Minority failure to comply with procedures of Article 9 forfeits any right the SC
may have to a deficiency judgment
Chapter 2 Creditors Remedies in Bankruptcy
Bankruptcy and The Automatic Stay //
Differences among the basic types of bankruptcy cases P98
 Chapter 7: pay the creditor with the exsiting property
 Chapter 11 and 13: pay the creditor with future income






A bankruptcy filing stays further collection action, except through the bankruptcy court
Once bankruptcy is filed, federal bankruptcy laws, rights and procedures supersede state collection laws,
rights and procedures (i.e., UCC)
o But bankruptcy law defers to state collection law in many respects and continues to recognize the
property rights that existed prior to bankruptcy
Property exempt from state remedies is probably also exempt from bankruptcy remedies
Only federal bankruptcy can discharge debt extinguish debt obligations state remedies cannot
Bankruptcy can affect the collection system because it looms in the background and may alter the parties
bargaining power and behavior
Framework for Stay Problems (BANKRUPTCY362)
o (1) Is stay in effect? For our purposes, if the bankruptcy petition is filed, the answer is yes
o (2) Does subsection (a) prohibit the action of the CR? Many times, yes broad scope of stay
o (3) Does subsection (b) except?
o (4) Are there grounds to lift the stay under subsection (d)?
27
 (a) Lack of adequate protection; OR
 (b) Lack of equity in property AND not necessary for effective reorganization
o NOTE: BANKRUPTCY S362 (a) and (b) are self-executing, while (d) requires court (and movant)
action need permission from court before the stay can be lifted
A. Filing a Bankruptcy Case


Bankruptcy can be initiated by either CRs or DR (involuntary or voluntary) over 99% are voluntary
At instant of bankruptcy filing, 2 things be created automatically and immediately by operation of law: ()
Filing
o (1) bankruptcy estate consisting of all DRs property is automatically created DR cant use its
property to pay prepetition debts
o (2) a stay against collection activities is automatically imposed CRs cant collect anything from the
estate until case is resolved.
 Pretty much bars any action that would be averse to DR especially by CRs
o From this point forward, payments and collections must be made according to bankruptcy
procedures

Chapter 7
Straight Liquidation
DR surrenders all nonexempt assets to a bankruptcy Trustee and in exchange receives a discharge of
dischargeable debt.
o Generally, DR can pick between state exemption law or fed exemption law 522D
o Non-dischargeable debts include domestic support obligations, most taxes, debts incurred via
fraud, student loans, etc.
o 3 ways DR can keep collateral
 Reaffirm all or part of the debt in written agreement with SC
 Redeem collateral by paying FMV in cash collateral must be tangible personal property
 Continue making payments w/o reaffirmation agreement hope CR wont try to foreclose after
bankruptcy or will be unsuccessful in doing so (ride-through)
o Corporate and partnership DRs cannot get a discharge in Chapter 7, therefore mostly used for
individual DRs

Chapter 11
(business) Reorganization
CR remains in possession of property during pendency of case (can run business and manage finances) DR
proposes a plan to restructure debt.
o Restructure debt = reduce amount owing, change the terms of repayment, or both
o If plan is confirmed, DRs obligations under the plan replace DRs prepetition obligations under state
law remainder of debt is discharged

Chapter 13
() Individual Reorganization
only available to individual DRs whose unsecured debts are less than $383,175 and secured less than
$1,149,525
DR proposes plan to pay all of his disposable income to unsecured creditors over period from 3-5 yrs.
o Value of proposed payments must be at least what CRs would get in chapter 7.
28
o If DR makes the required plan payments, receives a discharge of dischargeable debts and keeps all
property, not just exempt property.
B. The Automatic Stay

Once DR has filed bankruptcy, unsecured CRs can file their claims and have disputes regarding them
resolved in the bankruptcy case
other than this, bankruptcy is a collective and largely passive proceeding for unsecured CRs
o Largely stripped of any leverage they had pre-bankruptcy

CRs in general benefit from collective action
a single T liquidating DRs property in a single proceeding is more efficient (less costly) than individual
CRs competing to liquidate DRs property in multiple proceedings
more loot left for everybody the costs of the proceeding are paid for by the estate and distributed pro rata among the CRs


Most aggressive CRs are generally worse off in bankruptcy than they would be under state collection law.
Violators of the stay can be held in contempt of court, s/t fines sometimes individuals injured by stay
violations can sue for damages. 362(k).
Actions taken in violation of the stay are either void or voidable even innocent violators must return
property or correct public records


362(a) - Stay is applicable to all entities against any act to collect a prepetition debt broad applies both to
direct and indirect collection attempts
o 362(a)(6) is a catchall stays any act to collect
o Does not halt criminal proceedings against DR
o DRs still have to comply with regulatory requirements although governments ability to collect
fines/penalties for past violations may be temporarily stayed
o 362(b) lists things that are excepted from being stayed
Summary of the statute 362
1. Is stay in effect?
2. Is it prohibited? (a)
3. Is there an exception? (b)
4. Can the creditor lift stay? (d)
a) Lack of adequate protection (d)(1) OR
b) Lack of equity and not necessary (d)(2)


Remains in effect until conclusion of bankruptcy case.
USCs almost never get stay lifted along for the ride must wait on resolution of case to get loot
C. Lifting the Stay for Secured Creditors


Bankruptcy recognizes and generally gives effect to secured CRs priority rights still promises secured CRs
eventual access to their collateral or to property or money of equivalent value
Secured CR is assured of recovering the amount of its debt or the value of its collateral, whichever is less
29

Unsecured CRs only have the right to share pro rata (in proportion) in whatever is left after paying the
secured CRs and the expenses of the bankruptcy case.
Grounds for Lifting The Stay - 362(d)(1), (2)

To keep stay from being lifted, DR or Trustee must show at a minimum that the retention of collateral
serves a bankruptcy purpose (i.e., necessary to effective reorg) AND that DR can furnish adequate
protection of the collateral.
o (1) Court must lift stay if Trustee or DR does not provide the CR with adequate protection.
o (2) Court must lift stay if there is no equity in the collateral that the Trustee or DR might realize
for unsecured CRs AND the collateral is not necessary to an effective reorganization, if provide AP
Purposes for Commandeering CRs Collateral
o Collateral may be worth more than the debt secured by foreclosing through SCR, and the equity in it
may be available to other (unsecured) CRs.
o Enables the debtor to reorganize stay in business or keep a job, make money, and pay some of the
debts.
Adequate Protection
o Purpose protect the SC from loss as a result of a decline in the value of the SCs collateral during
the time the CR is immobilized by the automatic stay.
o Bankruptcy court decides what constitutes Adequate Protection
o AP may come in any of several forms (i.e., cash payments, replacement liens, etc.)
o Equity cushion
excess of collateral value of SCs debt
if equity cushion large enough, can constitute AP (without additional AP needing to be furnished)
 Size of equity cushion necessarily dependent on value court assigns to collateral
 20% equity cushion always constitutes AP
o No Protection for Time Value of Money: Not entitled to protection against other losses resulting
from imposition of automatic stay o Lack of Insurance
 Failure to keep insurance almost always constitutes lack of AP CR canfile a motion to the
court to get estate to obtain insurance

Special timing provisions for stay lifting in 362(e)
o Stay is automatically terminated unless, within 30 days after a SC moves to lift it, the court enters an
order continuing it in effect
o If DR is an individual, then the stay terminates 60 days after the SC moves to lift it unless the court
renders a final decision on the motion by that time or extends the 60-day period for good cause
o 362(e): Courts have 30 days to respond to motion to lift automatic stay. If consumer, must also have
final response in 60 days
D. Stay litigation can be strategic
o If SC can prove that are not adequately protected by existing collateral
force the DR to allow the stay to be lifted or provide additional protection (payments or additional
collateral)
30
o SCs can move to lift the stay at any time even if a prior motion in the same case was denied, the SC
can try again if the circumstances have changed
o A SCs ability to lift the stay can give them enormous leverage over the DR sometimes allowing
the SC to control the DR company

In re Craddock-Terry Shoe Corp

D filed for bankruptcy, SC filed to lift the automatic stay, stating that collateral had decreased from
8.7m to 5.7m D argued intrinsic value of the collateral had not been harmed, and that company could
revitalize collateral if allowed to keep it for reorganization.
o Holding: Automatic stay should not be lifted DR does not have equity in the property, but it is
necessary to an effective reorganization DR can provide adequate protection for their interest in the
collateral.
o Rule: a court should not precipitously sound the death knell for a DR by prematurely determining
that the DRs prospects for economic revival are poor
o Rule: the purpose of AP is to insure that the SC receives in value essentially what he bargained for
thus, AP for a SC means that the CR must receive the same measure of protection in bankruptcy that
he could have had outside of bankruptcy although the type of protection may differ from the bargain
initially struck between the parties
Treatment of Secured Creditors In Bankruptcy
A. Vocabulary




A debt is a sum of money owing
o amount owing typically fluctuates as interest accrues, attorneys fees and other collection expenses
are incurred, and payment are made
o When used in bankruptcy, the reference is nearly always same to the debt, in whatever amount, as it
exists under non-bankruptcy law
Debts can be discharged in bankruptcy
o a discharged debt still exists, but discharge permanently enjoins CR from attempting to collect it
o practically, once a debt is discharged, DR does not owe it
o both secured and unsecured debts can be discharged discharged debt would be described as
nonrecourse, meaning that it cannot be enforced against DR
 although no one owes the nonrecourse secured debt, if debt is not paid, CR can foreclose on
the property after bankruptcy
 foreclosure sale will transfer ownership of the collateral to purchaser, and proceeds of sale
will be applied to pay nonrecourse debt
 if those proceeds are sufficient to satisfy nonrecourse debt, debt will be paid in full and any
excess will be distributed to junior lienholders or the owner
 if they insufficient to satisfy discharged nonrecourse debt, SC cannot obtain a deficiency
judgment against DR because the DR no longer owes the debt
Under the UCC, the special collection rights of a personal property SC are referred to as a security interest
the special collection rights of a previously unsecured CR who has levied against the property of the DR are
referred to as a lien the special collection rights of a CR consensually secured by an interest in real estate
are typically referred to as a mortgage or deed of trust
The BANKRUPTCY Code groups Art. 9 security interests together with RE mortgages/deeds of trust
under the term security interest the bankruptcy code then lumps security interest together will other secured
31



statuses, including judicial and statutory lines, under the term lien thus, an Art. 9 security interest, a RE
mortgage, a deed of trust, and the rights of a lien CR are all liens within the contemplation of the code
BANKRUPTCYterms: security interest + mortgage/deed of trust = security interest
BANKRUPTCYterms: SI + liens = liens, BANKRUPTCYSI/mortgage/deed of trust/lien = liens
A CRs claim in bankruptcy is the amount of the debt owed to the CR under non-bankruptcy law at the
time bankruptcy is filed
Only claims that are allowed are eligible to share in the distributions made in the bankruptcy case
o In determining the CRs rights in the bankruptcy case, it is usually the amount of the claim that is
important
o in determining the CRs rights in a non-bankruptcy forum after the stays has been lifted or the case
dismissed, it is usually the amount of the debt that is important
If the debt is discharged, there is an injunction preventing you from collecting them.
B. The Claims Process

Absent bankruptcy, an unsecured CR would have to bring a lawsuit in state court to collect.

Once bankruptcy has been filed, CR files a proof of claim, describing debt and stating that it remains
outstanding
o any related documentation (i.e., loan agreement) must be attached
o if there is no objection, claim is deemed allowed (objections are uncommon)
o In Ch. 11, DR must file a list of its creditors with amounts owing
 if the DR schedules a debt in the right amount, and does not indicate that it is disputed,
contingent, or unliquidated, the CR need not file a proof of claim
o Court can find a bankruptcy reason not to allow a claim unlikely

In non-bankruptcy proceedings, DR has substantial interest to dispute collection claims (stall for time)
o in bankruptcy this incentive is eliminated because a determination that the debt is owed does not
lead to seizure of assets easier to resolve disputes in bankruptcy b/c CR knows theyre getting
pennies on the $ from estate
Claims against the estate are accelerated in bankruptcy payment of entire debt is due
o Whole debt gets resolved in bankruptcy case not just single payments
If a claim is disputed, bankruptcy law provides for a much quicker resolution of the dispute
o most resolved in single evidentiary hearing
o if ultimate resolution of claim threatens to delay the bankruptcy case or distribution, the bankruptcy
court can estimate the amount of the claim, allow it in the estimated amount, and proceed
o If DR outside bankruptcy had a legal defense to payment, the bankruptcy estate will have the same
defense
Unless the holders of claims obtained liens before bankruptcy or are secured, their claims will be unsecured



C. Calculating Claim Amounts

Unsecured Claim
o 502(b) - amount of an unsecured claim in bankruptcy is the amount owed on the debt under nonbankruptcy law as of the moment the bankruptcy petition is filed.
32

This can include attorneys fees if agreed upon in K and if they were incurred prior to the
bankruptcy case 502(b)(1)
 No Postpetition Interest: amount does not grow with accrual of interest during bankruptcy
case 502(b)(2) no post-petition interest BANKRUPTCY
o Trend towards courts allowing post-petition attorneys fees on unsecured claims
 would definitely need to be in contract
o Each unsecured CR is entitled to a pro rata share of whatever is left in the estate after secured and
priority claims are satisfied unsecured dividend

Secured Claims
o Bifurcation: First determine the amount owing under non-bankruptcy law
o then bifurcate into secured and unsecured claim
 claim can only be secured to the extent of the value of the collateral
 Remainder is unsecured 506(a)
 Secured claim in amount equal to value of collateral, unsecured claim for deficiency.
o Postpetition Interest: 506(b)- only for oversecured creditors entitles holder of a secured claim to
accrue postpetition interest, attorneys fees, and costs on a claim when 3 conditions are met:



(1) the attorneys fees and costs must be reasonable;
(2) the payment of the attorneys fees and costs by the DR must be provided for under the
agreement or state statute under which the claim arose;
(3) interest, attorneys fees, and costs can only be accrued to the extent that the value of the
collateral exceeds the amount of the claim secured by it
 Only allowed on over-secured claim not allowed on under-secured claim (even if
they accrue on unsecured basis)
D. Payments on Unsecured Claims



General USCs are entitled to pro rata share of whatever assets are left over for distribution after secured and
priority unsecured claims are paid unsecured dividend
In Ch. 7, unsecured CRs get nothing at all in 93% of cases, pennies on the dollar in remaining 7%.
Greater chance at repayment in Ch. 11 and 13.
E. Bankruptcy Sales

The sale processes
o Purpose of bankruptcy procedure is to maximize CRs recovery by maximizing the sale price of DRs
property
 in Ch. 7, under the supervision of the bankruptcy court, T sells the property in whatever
manner Trustee thinks will maximize the net proceeds multiple forms of sale permitted
363(b)(1)
o Regular Sale
 Trustee generally sells only the DRs equity in property subject to a security interest
 makes sale subject to SCs lien so value of DRs equity flows to the estate
 purchaser pays off the SC (ultimately ends up paying FMV)
33
o Sale terminates the automatic stay with regard to the property sold.
o 554(a) authorizes Trustee to abandon property of the estate that is burdensome or of
inconsequential value to the estate
 property ceases to be property of the estate and reverts to the DR
 SC must still move to lift stay before foreclosing (because automatic stay protects the DR as
well as the estate)
o 363(f) Trustee can sell collateral free and clear of liens
 then sale would transfer lien from the property to the proceeds of the sale. Only in certain
circumstances.

Who pays the sales expenses?
o Trustee will initially incur the expenses related to the sale 506(c) authorizes a Trustee who has
incurred reasonable, necessary costs and expenses of preserving, or disposing of property securing
an allowed secured claim to recover them from the property
o Benefit to CR: Absent benefit to the secured CR from the Trustees expenditures, T cannot deduct
anything from the proceeds of sale. TrusteeCR
 506(c) allows T to recover from sale of property any expenses incurred from selling property
allowed to charge CR up to the extent of the benefit of the CR
o How to Measure: one approach is to compare what actually happened (expenses incurred) with
what would have happened if the stay had been lifted and the secured CR had been permitted to
liquidate the collateral
 Trustees sale of an under-secured CRs collateral will ordinarily benefit that CR and be
deducted from its recovery
 but Ts sale of property when debt is over-secured will usually not (under state law, costs of
foreclosure are added secured debt amount when DR has equity
 So, CR still gets paid in full and doesnt end up paying for sale expenses DR gets any
surplus)
 See p. 123 for why problem 7.6
F. Secured Creditors Entitlements (Cram Down)


In reorganization cases, DR wants to keep collateral in order to continue using it
Plan: DRs plan may be to reduce the amount of the secured debt, to reschedule payment over longer period
of time, or both DR accomplishes this over SCs objection only through confirmation of plan
o Corporate DR (Ch. 11)
 plan discharges old secured debts and payment schedules and substitutes new ones
 plan must specify that the CR retain its lien, but after confirmation, the lien secures only the
new debt must comply with 1129(a)
o Individual DR (Ch. 11/13)
 DR receives discharge only after DR completes all the payments under the plan GR is that
once the individual DR completes plan payments to unsecured CRs, the secured debts will be
similarly stripped down to the value of the collateral by entry of the discharge
 Exceptions to the GR exist in Ch. 11/13 for the mortgage on the DRs principal residence and
in Ch.13 for any lien on an automobile the DR purchased in the 2 years prior to bankruptcy
34
Ch. 11/13 CRAM DOWN confirming plan over CRs objection unless the SC accepts the plan, the DR must
either 11
(1) surrender the collateral to the SC in satisfaction of the secured claim; OR
(2) distribute to the CR, on account of the secured claim, property with a value as of the effective date of the
plan that is not less than the amount of the allowed secured claim
o First step is to determine the amount of the allowed secured claim
o the second is to determine the value of the proposed distribution
o the final step is to determine that the latter is at least equal to the former

Although the secured claim must be paid in full, the payment promised under the plan need not be
immediate or in case. DR need only promise the CR property that has a value at least as great as the amount
of the secured claim almost always, that property is a promise of future payments (usually monthly for
Ch. 13, but Ch. 11 increments vary more widely)

Cram Down Payment/Interest
o The future payments must have a value as of the effective date of the plan of at least the amount of
the secured claim takes into account TVM
o need to have the PV of future plan payments be equal to or greater than the total amount of the
secured claim
o If DR agrees to make future payments, and parties cannot agree on a rate of interest, the court must
calculate market rate of interest.
o Till v. SCS Credit Corp.
 Rule: 1325(a)(5)(b) simply requires bankruptcy courts to ensure that the property to be
distributed to a particular SC over the life of a bankruptcy plan has a total value, as of the
effective date of the plan, that equals or exceeds the value of the CRs allowed secured claim
 Rule: court required to select a rate high enough to compensate the CR for tis risk but not so
high as to doom the plan [prime plus test]
 Holding: The proper rate was the 9.5 percent arrived at by modifying the average national
loan rate (prime rate) to make up for the increased risk of
 non-payment (prime plus) while this would not give the CRs the same amount of
money that they might have gotten had they seized the collateral for the loan, sold it
 reinvested the proceeds (market rate), or if they had used the contract rate, it
nevertheless met the statutory requirement that the repayments equal the "total
present value."
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Chapter 3 Creation of Security Interests
Assignment 8 Formalities for Attachment
attachment=enforceable
A. Prototypical Secured Transaction
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CR taking security interest under Art. 9 does so by contract with the DR.
o Art. 9 SC are by definition consensual CRs they have enhanced collection rights because at an
earlier time in the relationship, DR consented to those rights
Most security interests are created as part of transactions in which money is lent or property is sold.
A security interest that is enforceable is said to attach timing of attachment can be important for priority
disputes
o Enforceable (Attachment): Secured party can foreclose on collateral in event of default (DR)
o Perfected: If DR authorizes a F/S and files statement in public records, CR has perfected debt and
has priority over some other CRs. (CR)
 Perfection not required to have an enforceable security interest
Generally, more formality required for real estate mortgages
o Differs from state to state
o Most require that the mortgage be in writing and signed by the DR in the presence of witnesses
o RE practice is known for its obsessive adherence to the details of conveyancing
B. Formalities for article 9 security interests
UCC 9-203(b)
lists 3 Formalities Required for the creation of a security interest enforceable against the DR
(Attachment)
o (1) Either the collateral must be in possession of the SC OR the DR must have authenticated a S/A
which contains a description of the collateral
o (2) Value must have been given (consideration given by CR); AND
o (3) DR must have rights in the collateral.
 Only when all 3 of these requirements have been met does the security interest attach to the collateral
and become enforceable against the DR
o Could be done simultaneously at a closing
1. Creditor Possession over the Collater or Authenticated Security Agreement
o There is no security interest until SA is authenticated
 Can create S/A by taking possession of the goods pursuant to an oral agreement to create a security interest.
9-203(b)(3)(B)
o Like pawnshops! Rare otherwise.
 Most agreements are authenticated records 9-102(a)(7), (70)
o usually a signed writing
o but term is broad to incorporate other possible ways to document the agreement such as email
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(7) "Authenticate" means:
(A) to sign; or
(B) with present intent to adopt or accept a record, to attach to or logically associate with the
record an electronic sound, symbol, or process.
Typically, DR signs a document called a Security agreement
o need granting language (DR grants CR a security interest in) or some other evidence of intent
of DR to grant a security interest to CR, description of the collateral, and description of
obligations secured
o usually also contains provisions defining default, rights of CR upon default, and responsibilities
of DR, etc.
o 9-203(b)(3)(A) one of the following conditions is met:(A) the debtor has authenticated a security
agreement that provides a description of the collateral
o once DR signs this, the 9-203(b)(3)(A) requirement of an authenticated S/A is fulfilled
 DR generally going to need to have signed each document containing a bolded
requirement when composite doc rule used
o Alternatively, an agreement that is not oral or written must be inscribed on some medium on which it
can be stored and from which it can be retrieved (electronic)
 Information so inscribed is referred to as a record
 9-102(a) (70) the DR must, with present intention to adopt or accept the record, attach an
electronic sound, symbol or process to the record or logically associate it with the record 9102(a)(7)(B)
 (70) "Record", except as used in "for record", "of record", "record or legal title", and "record
owner", means information that is inscribed on a tangible medium or which is stored in an
electronic or other medium and is retrievable in perceivable form.
 UCC Drafters intention to validate wholly electronic S/As.
The consequence of failing to obtain an authenticated S/A is that the CR has no security interest unsecured
 In re Schwalb: S pawned vehicle to P S signed pawn ticket, indicating it was a security interest (in really
small font) S retained possession of the car.
o Issue: Did this constitute a valid S/A under 9-203(b)(3)? Is pawn ticket an authenticated S/A?
o Holding: Yes Pawn ticket included description of collateral, and stated it was giving a security
interest No antiquated formalism.
o Rule (Intent No Magic Words): no magic words are necessary to create a security interest & the
agreement itself need not contain the term security interest substance over form give effect to
parties intent
o Rule (Bound by Signed Document): signing a document authenticates and adopts the words it
contains, even if there was a lack of subjective understanding of the words or their legal effect
people are presumed to be bound by what they signed signing
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In re Giaimo: DR purchased car with funds loaned by grandma no formal agreement, but DR listed G on
the title of the car as the lien holder T in bankruptcy later argued that lien on title was unenforceable b/c
lack of an Art. 9 S/A.
o Holding: Title signed by DR + certification of title with lien satisfied requirement of S/A under A9.
 Certificate of tile showed Grandma as lienholder
 no reason DR would have signed the application for certificate of title identifying G as the
lienholder if she did not intend to grant G a security interest in the vehicle
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o Rule: no specific words or formalized documents are necessarily required to create a security
interest, but there must be some written documentation that indicates the parties intent to create
a security interest
o Rule (Composite Documents Approach):
 rather than requiring one single document evidencing intent to create a security interest,
courts typically review all the documents between the two parties to determine whether
a sufficient written foundation has been established for the creation of a security interest
 examine all documents executed between a DR and CR to determine, if taken together,
whether the writing or writings, regardless of label, adequately describe the collateral,
carry the signature of the DR, and establish that in fact a security interest was
agreed upon
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o Crucial Difference Between Financing Statement and Application for Certificate of Title
 The F/S is often filed in anticipation of a possible S/A, while the application for a certificate of
title is not completed unless there is an actual sale or transaction must understand the context in
which a document was created and the documents function before you can determine what a
court should properly infer from its creation
Composite Document Rule
o Provides that there need not be a separate document labeled S/A, but that all relevant loan
documents may be examined to determine whether a S/A exists
o Strong majority recognize its existence differ in application
 Most courts limit consideration to documents created as part of the original loan transaction
some courts are willing to consider all documents executed between a DR and CR a few courts
consider documents created after the initial loan transaction
 Some courts require the documents not be inconsistent with each other others go further and
require some internal connection with one another or that there be a reference in one document to
the other
 Most courts will consider documents not signed by the DR, provided that the DR did sign at least
one document
o Courts rarely consider a Financing Statement alone to satisfy the documentation requirement, but
frequently consider them along with other documents F/Ss are weak evidence of the intention to
enter into a S/A because
(1) they rarely contain grant language;
(2) they frequently describe the collateral more expansively than the accompanying S/As do;
(3) they are not signed by the DR;
And
(4) they are frequently authorized and filed before the parties have decided to enter into the
transaction DR may not even have known the F/S was filed
A majority of courts hold that the order in which the S/A is assembled does not matter a strong minority
hold that a secured CR that does not have a valid S/A cannot create one later, even if authorized to do so
2. Value Has Been Given (by CR)
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Basically, there has to be consideration
o Even past consideration is acceptable
o where the DR grants a security interest to secure an already outstanding debt and the CR neither
gives nor promises anything new in return CR has given value under codes definition
o means a credit relationship can start out unsecured and become secured later
Value defined in 1-204 very broadly
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Requirement is virtually always met in commercial transactions.
Who has to give value? the CR, presumably.
3. Debtor Has Rights in the Collateral
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DR cant grant security interest in someone elses property
o 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 - 2-403
o that is, such owners can grant security interests in the rights they do not have
If DR owns a limited interest in property, security interest can only attach to that limited interest Art. 9 is
written expansively to encompass the creation of security interests in nearly anything that has value
Security interests can arise (attach) at the instant their DRs acquire the collateral (if S/A entered into before
DR has rights in the collateral i.e., after acquired property clause)
Assignment 9 Which Collateral and Obligations Are Covered?
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Every S/A contains a description of the collateral AND a description of the obligations secured
2 descriptions of collateral: one in S/A that is the contract between the parties AND another in the
Financing Statement that will be filed in public records.
A. Interpreting Security Agreements
1. Debtor Against Creditor
o S/A is a contract between DR and CR rules that govern interpretation of contracts generally also
apply to S/As. 9-201
 Determine intention of parties as objectively expressed in written S/A
 If agreement is ambiguous, can introduce parol evidence
 If mutual mistake exists the S/A can be reformed
 Some courts have held that the filing of bankruptcy precludes reformation
2. Creditor Against Third Party
o S/A also binds 3Ps purchasers of the collateral and other CRs - 9-201(a)
o In disputes b/w CR and a 3P, courts are more likely to interpret agreements literally, rather than in
accord with the intention of the DR and the SC.
3. Interpreting Descriptions of Collateral
o Article 9 defines many types of collateral, including: accounts, equipment, inventory, instruments,
consumer goods, and general intangibles - 9-102.
o When parties use UCC-defined term in S/A, courts usually give the term its Art. 9 meaning rather
than its common meaning
 Could easily be contrary to intention of the parties
B. Sufficiency of Description: Article 9 Security Agreements
Governed by 9-108 (a) gives General Rule, (b) gives examples
1. 9-108(a)
o S/A must Reasonably Describe the Collateral
o low threshold but not completely non-existent
o Super generic descriptions are not valid i.e., all DRs assets 9-108(c)
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o Follow normal contract rules can use jargon if commonly understood in industry and by both
parties if those words have meaning they can capture the intent of the parties
2. Primary function of the description of collateral in a S/A is to enable interested parties to identify the
collateral.
o Parties include DR, CR, other CRs, Ts in bankruptcy, or courts deciding cases
o To identify collateral means to determine that a particular item of property is or isnt included
 Retailers: Often retailers try to take security interests in the goods they sell to consumers and describe
the collateral with some variant of: goods/merchandise purchased on your/the account
o Majority view that this is sufficient (Murphy) some courts say no though (Shirel)
o In re Shirel: description in S/A of all merchandize purchased with the credit card refrigerator
was bought with the credit card
 Holding: inadequate description because it did not sufficiently describe the collateral so that
a 3P could reasonably identify the items security interest invalid
 Rule: description must at least identify the type or class of collateral a sufficient
description might have been merely a refrigerator
 Courts routinely hold descriptions effective, even though a 3P looking at the S/A alone would have no
idea what was included Same is true of descriptions that use terms of art that would have no meaning
to most 3Ps
3. 9-108(b)(3) UCC Types
o Specifically authorizes descriptions that identify the collateral using UCC categories Courts
usually hold these descriptions effective.
o 9-108(e) A description only by type of collateral defined in [the Uniform Commercial Code] is an
insufficient description of
 (1) Commercial tort claim; OR
 (2) consumer goods
4. 9-108(c) Super generic Description
o A description of all debtors assets or personal property does not reasonably identify collateral
o Can just achieve the same thing by laundry listing all of the UCC types though clearly enforceable
super generic limitation easily circumvented
C. Describing After-Acquired Property
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After-acquired property is property that a DR acquires after the S/A is authenticated or the security interest
is otherwise created. SA
o Such descriptions commonly include the words after-acquired property or hereafter acquired
o inclusion of after-acquired property can even be implied in compelling circumstances (Stoumbos)
o Common for collateral that is turned over frequently i.e., inventory, accounts receivable
9-204(a) permits after-acquired property clauses (validates provisions that extend the description of
collateral to after-acquired property)
o Security interest attaches at moment DR owns the after-acquired property (acquires it)
o 9-204(b) - After-acquired property clauses ineffective as to two types of collateral (same w/ future
advance clauses):
 Consumer goods that the DR acquires more than 10 days after the secured party gives value.
 Commercial tort claims
 After acquired property clauses become ineffective upon the filing of a bankruptcy case.
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Stoumbos v. Kilimnik: K sold business to A, retaining security interest in inventory on hand as of no
express after-acquired property clause K seized all inventory and equipment upon default A sued for
return of all inventory and equipment acquired after date of purchase/S/A
o Issue: Whether the security interest in inventory and equipment should extend to such acquired after
the date of the purchase of the business when no explicit after acquired property clause in S/A?
o Rule (Maj.)
Automatic After-Acquired after-acquire
o when a F/S or S/A provides for a security interest in all inventory (or similar broad language), the
document incorporates after-acquired inventory
o inventory is constantly turning over, and no CR could reasonably agree to be secured by an asset
that would vanish in a short time in the normal course of business
NOTE:
o Not a true majority view ultimately, the intention of the parties, as objectively expressed, should
control see Comment 3, 9-108
o Rule (Min.): UCC contemplates that a S/A should clearly spell out any claims to after-acquired
collateral
 The rationale for automatic security interest in after-acquired inventory does not apply to
after-acquired equipment not s/t frequent turnover
 :inventoryequipment
o Holding: no security interest in after-acquired inventory or equipment
o When affirmative language not included
 equipment standing alone is usually not interpreted to include after-acquired property
 inventory in contrast, standing alone is usually interpreted to include after-acquired property
After-acquired property clauses enable security interests to float on collateral
o often referred to as a floating lien
o precise items that constitute the collateral constantly change as DR buys new items and sells the old
ones
o but the collateral, as a whole, remains relatively stable in identity and value
Lending contracts often link the total value of the collateral, including after-acquired collateral, to the total
amount of the loan pay down loan as DR sells collateral get more financing when DR buys collateral see
p. 157
When security interests have ambiguous descriptions of the collateral, the costs fall on the DR because DRs
rights in the collateral are clouded
D. Which Obligations Are Secured?
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Virtually any obligation can be secured via S/A if parties make their intentions clear
In indicating what obligations are secured, no particular form is required
Future Advances
o Can secure a debt that does not yet exist, but which the parties contemplate will come into
existence in the future
o If future obligation will come into existence as result of an additional extension of credit by SC, it
is referred to as a future advance 9-204(c) permits future advance clauses
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o (Future Advance) Dragnet clause
 Agreement that purports to secure every obligation to the SC of any kind that may come into
existence in the future i.e., if CR later lends additional money, subsequent loan is secured
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from its inception by the collateral in the initial loan as result of dragnet clause permissible
- see UCC 9-204 Comment
o Whether a future advance clause exists is a matter of contract interpretation
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Can provide that in the event of default, DR will pay CRs attorneys fees and other expenses of collection
o authorize DR to add these amount to the secured indebtedness
o considered effective in both personal property and Real Estate S/As, and in bankruptcy
o referred to as non-advance provisions because CR does not advance the amount secured by them
to the DR
o interest that accrues on a secured obligation is also included in this category
provisions securing non-advances are of equal validity and effect with those securing advances
E. Real Estate Mortgages
 Description in the mortgage must describe the land sufficiently to identify it may refer to separate
documents, such as maps or plats for that purpose
 A description may be so vague as to render the mortgage void
o but if the description is merely ambiguous, parol evidence may be used to explain its meaning
 Broad descriptions such as all grantors property in the county are generally good as between the mortgagor
and mortgagee
 Physical/immobile nature of RE make it easier to identify than many kinds of personal property reference
to monuments, maps, plats
 Permanent building become part of the Real Estate, as do other structures permanently affixed to the land
(fixtures)
o automatically included in a description that refers only to the land
o applies whether they are affixed to the RE before or after the mortgage is executed
o every RE mortgage automatically reaches after-affixed property
 Future-advance clauses can be included in Real Estate mortgages some limitations
(1) some states disfavor the use of dragnet clauses by demanding strict proof that the later advance is
one that was in the contemplation of the parties at the time they executed the Real Estate mortgage
(2) some states require that a recorded mortgage indicate a maximum amount of indebtedness to be
secured: the mortgage cannot effectively secure more than the amount indicated in it
(3) in some states Real Estate cannot secure obligations that cannot be reduced to money
Assignment 10 Proceeds, Products and Value-Tracing
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Items of collateral may go through transformations that take them outside the description of collateral in
the S/A.
o E.g. Inventory can be sold, livestock can die, accounts can be paid off etc.
When DR and CR anticipate such transformations, they usually choose to have security interest continue
in the collateral as it changes form or, if DR sells it to a 3P, have it attached to whatever DR receives in
return
o If security interests didnt follow value, a DR could unilaterally deprive the CR of that value merely
by transferring the collateral
o CR wants and expects security interest to follow value
o also, CRs are willing to give DR more freedom to make such transformations if security interest
follows value
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One way to ensure that a security interest will follow the value is to include express language in the
description of collateral in the S/A that covers all forms the value is likely to take.
o Could encumber all the DRs property all forms covered
o Can provide that any payment from insurance company for loss of collateral will serve as collateral
Instead, employ value-tracing concepts terms of art that indicate that security interest should follow in
certain kinds of transformation
o Proceeds, products, rents, profits and offspring
1. Proceeds
1) Definition
Defined by 9-102(a) (64) (Must fall into one of these categories to be proceeds)
(A) Whatever is acquired upon the sale, lease, license, exchange or other disposition of the collateral
(B) Whatever is collected on, or distributed on account of, collateral
(C) Rights arising out of collateral
(D) To the extent of the value of collateral, claim arising out of the loss, nonconformity, interference with the
use of, defects or infringement of rights in, or damage to, the collateral (litigation/settlement proceeds)
(E) Insurance payable by reason of the loss/damage to the collateral, to the extent of the value of the
collateral
 Subsection (C), rights arising out of collateral, new provision
o Could be used to argue that virtually any property linked to collateral is proceeds
o If the DR merely uses the collateral in its business, the revenues of the business are not proceeds
o 1st Source Bank: for rights to arise out of collateral, they must have been obtained as a result of
some loss or dispossession of the partys interest in that collateral, not simply by its use
o In re Wiersma; Cows as collateral Cows become sick and die from electric shocks Owners get
$2.5M settlement from negligent electrician SC claimed settlement as proceeds of collateral court
agrees
o Helms v. Certified Packaging: R failed to get insurance for DR DRs business and the collateral
damaged in fire DR sued R, SC claimed lawsuit as proceeds of collateral Court said no.
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All-or-nothing concept: Something is either entirely proceeds or not proceeds at all
o De Minimis Exception (Judicially Recognized Not Codified:)
o In cases where the value of the collateral disposed of is small in relation to what is received (i.e.,
much of the value contributed by DR), courts will more likely hold that none of the property
received is proceeds debtor
o de minimis value received for collateral mostly attributed to DR services
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McLemore v. Mid-South Agri-Chemical
o SC took secured interest in DRs crops, future crops and all proceeds DR later signed on with govt
program that paid not to grow crops Court stated that this was proceeds, because participation in the
govt program disposed of the future crops by precluding their cultivation payments were proceeds
of the crops never planted
o Court focused on the economic equivalence of the crops and the payments the existence of one
precluded the other value tracing illustrates some courts to translate proceeds into a concept of
economic equivalence
o Courts could go either way on this case
Proceeds (9-102(a) (64)) themselves are collateral 9-102(a) (12)
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o and proceeds of proceeds are collateral (9-315(a)
o a security interest continues in identifiable proceeds) proceeds of proceeds are proceeds
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Automatic Proceeds - 9-203(f) and 9-315(a): Even if the S/A makes no mention of proceeds, a security
interest automatically covers them
o Note that after-acquired property clauses must be included in S/A (generally inventory not
necessarily) to be enforceable
after-acquired property1) Proceeds issues, and after-acquired property issues can look similar
2) both deal with some item that DR didnt own at time S/A was signed and whether that item is
covered by the S/A
3) Important to keep after-acquired property concept distinct from proceeds concept often a S/A
will include both concepts though
o proceeds question is whether security interest continues as DR transforms property that is
secured
o after-acquired question is whether the security interest attaches to new property that DR acquires
o PROCEEDS ISSUES ARE NOT AFTER-ACQUIRED PROPERTY ISSUES
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Can get more collateral from S/A than got put into it CR can end up with added value to their collateral
might end up with more collateral than you started with because of the proceeds rules can continue to grow
w/o limit
continuance of proceeds,creditorcollateralvalue
2) Termination of security interest in the collateral after authorized disposition
o SCs sometimes authorize DRs to dispose of collateral free of the security interest might be
contained in S/A. I.e., Can sell inventory to customers free of security
o Authorization can be given later or implied from the circumstances or conduct of the parties 9315(a)(1)
3) Continuation of security interest in the collateral after unauthorized disposition
continuation
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Despite a S/As prohibition on selling the collateral without SCs consent, DRs often do so.
o Some DRs even sell collateral and then not pay off SC.
o Many states make this conduct criminal.
o See p. 167 for reasons why this arrangement/prohibition is utilized by CRs
Even if agreement expressly prohibits sale w/o SC consent, DR can transfer ownership to a buyer - 9-401
o Buyer then owns collateral subject to the security interest - 9-315(a)
o Obviously breach of S/A
Unless SC has authorized DR to sell the collateral free of the security interest, security interest continues
in the original collateral and also in the proceeds. 9-315(a).
o Multiplication of the value in favor of the SC SC needs additional protection when DR sells without
authorization Collateral is probably in danger.
o Unauthorized sales of collateral can cause it to multiply dramatically SCs collateral absorbs
everything for which it is exchanged and grows larger also
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SC who insist on agreement restricting sale of collateral will often only enforce such restrictions if
relationship with DR sours. If so, court sometimes will then not enforce, finding that SC waived
o Often in livestock sales which by DRs are continuous and buyers are not protected by 9-320(a)
4) Limitations on the secured creditors ability to trace collateral proceeds
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Sales of collateral in the ordinary course of business often strip liens from the collateral.
A security interest continues to encumber proceeds only so long as they remain identifiable. 9315(a)(2).
Commingling: to commingle collateral is to put it together in one mass with identical noncollateral so that
no one can tell which is actually collateral.
Some commingled collateral may be legally identifiable law may arbitrarily designate a particular part of
the mass as the collateral.
o Tracing is most often required when DR commingles cash proceed
o Problem with bank account is that you not only have to trace cash going in, but also cash going out
Equitable Tracing Principles: Once cash proceeds (or anything other than goods) go into commingled
account, we use equitable tracing principles
o 9-315(b) provides that a SC can prevail by identifying the funds remaining in the bank account as
its collateral be a method of tracing, including application of equitable principles that is permitted
under non-UCC law with respected to the type of the collateral
o Comment 3 refers to the most common of these equitable principles
o Lowest Intermediate Balance Rule: The amount of the SCs collateral remaining in a bank account
after the deposit of proceeds and subsequent transactions is the lowest balance of all funds in the
account from the time of the deposit to the completion of the transactions.
 Basically, DR is presumed to spend first from the DRs own funds, whatever remains is
proceeds.
 If bank account contains the proceeds of more than one SCs collateral, each is entitled to a
pro rata share based on the amount it contributed
In re Oriental Rug Warehouse Club: DR sells rugs, entered agreement with Y where DR took Ys rugs to
resell them DR agreed to use proceeds from sale to pay down outstanding debt DR took proceeds from
sales and either retained proceeds or used funds to purchase additional rugs didnt remit them to Y Y
repossessed the remaining rugs he had supplied to DR, but was still owed $65K DR filed for bankruptcy Y
filed proof of the secured claim. DRY, SI, DR
o Issue: Whether Ps current rug inventory constitutes proceeds from DRs sale of Ys original rugs?
o Holding: parties did not intend to create a true consignment (), but instead intended to grant Y a
security interest in the consigned rugs standard floor plan arrangement whereby Y agreed to
finance DRs inventory in exchange for a security interest in the consigned rugs
o Rule (SC Burden)
 where a CR wishes to claim a security interest in proceeds under 9-315, the burden is on the
party claiming the security interest to identify the proceeds SC has burden of establishing
that something constitutes identifiable proceeds from the sale or disposition of the SCs
collateral
 SC must trace the claimed proceeds back to the original collateral
 SC must establish that the alleged proceeds arose directly from the sale or other
disposition of the collateral and that these alleged proceeds cannot have arisen from any
other source
o Rule (Min.): cash proceeds are no longer identifiable when commingled with other funds
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o Holding: It was impossible to reconstruct what DR did with the earnings from the sale of Ys rugs
no security interest in other rugs (as proceeds)
 Y should have required that DR pay all rug proceeds into a segregated account, then could
be more easily traced.
A segregated bank account is a bank account that contains only the secured CRs collateral
o important protective mechanism for SC when proceeds/collateral will be cash
No Continuing Security Interest in Cash - 9-332(b): provides that a transferee of funds from a deposit
account takes the funds free of a security interest in the deposit account unless the transferee acts in
collusion with the DR in violating the rights of the SC
o Basically, a BFP rule for cash collateral dont want to hinder the free transferability of cash
2. Other Value-Tracing Concepts
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Product: Something the collateral produces.
o Usually used in agriculture wool is the product of sheep, milk of cows, maple syrup of trees, etc.
o Products could also possibly be proceeds (arise out of collateral) but unclear.
Profit: Describes the excess of revenues of a business over the expenses where the business itself is the
collateral.
o In the context of real property, could be short for profit a prendre: a right or privilege to go on
anothers land and take something of value from its soil or from the products of its soil
Rents: Money paid for the temporary use of the collateral.
Offspring: Most often used with regards to animals a calf is the offspring of a cow
o Offspring could possibly be characterized as products
As the products, profits, rents, or offspring come into existence, the value of the original collateral declines
the value shifts form the collateral and its potential to the products, profits, rents, or offspring produced
All these concepts could arguably be rights arising out of collateral and therefore proceeds.
Even if a description of collateral does not mention proceeds, their inclusion is implied. 9-203(f).
3. Non-Value Tracing Concepts
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Concepts such as 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 DR with value that is not
derived from the previously existing collateral
Difference from value tracing concepts is that they can come entirely from some other source (as opposed to
just the collateral), such as unencumbered property of the debtor, a new loan, etc.
4. Liability of Buyers of Collateral
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If security interest continues in collateral, buyer takes subject to the security interest
o SC has the right to foreclose against the collateral if the secured debt is not paid
o buyer is not liable for the secured debt unless the buyer assumes the debt. 9-401, 9-315(a)
Buyer is not bound by the S/A. 9-201 (Comment 2)
Some buyers may choose to assume DRs debt then becomes new DR, who becomes bound by S/A and its
provisions
o 9-102(a) (56), 9-203(d), 9-203(e)
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Assignment 11 Tracing Collateral Value During Bankruptcy
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In the absence of bankruptcy, relationship b/w SC and DR is governed almost entirely by contract.
Rules change in bankruptcy even if DR is in default, the automatic stay prevents the secured party from
foreclosing
5 major changes:
(1) after-acquired property clauses are not effective with respect to collateral the DR acquires during the
bankruptcy case 552(a) after-acquired property
(2) Secured parties continue to have the right to the proceeds of preexisting collateral 552(b)
proceedscollateral
The UCC does allow security interests to continue in proceeds even if not expressly provided for in
contracts 9-203(f) for everything other than proceeds, the contract must provide for such security post-petetion debtor
(3) Based on equities of the case bankruptcy courts can limit the SCs right to proceeds 552(b)
Generally applied to achieve strict value tracing with respect to property acquired by D during the case.
(4) DRs have the right to use collateral during bankruptcy, on the condition that they provide Adequate
Protection 363(e)
(5) If collateral is cash, DR must obtain consent of SC(s) OR court approval (order) before using.
363(c)(2) cash collateral:permission
Bankruptcy code doesnt create security interests in proceeds, rents, etc. but merely recognizes security
interests that exist before the case equities of the case exception to this
A. After-Acquired Property and the Proceeds Dilemma




After bankruptcy filed, SC is permitted to trace the value of its collateral (552(b)) but cant pick up
additional collateral by means of an after-acquired property clause (552(a))
o 552(b) limits value-tracing to: proceeds, products, offspring, rents or profits.
o 552 is only implicated if proceeds arise after filing
 proceeds issue before bankruptcy analyzed in normal way
o Essentially allows SC to keep the collateral value it has of the filing of the bankruptcy case, even if
collateral value is transformed, but cannot acquire additional collateral value during bankruptcy
o permits a SC to trace collateral value from one form to another, but does not permit the SC to
convert the unsecured portion of its claim to a secured portion by claiming additional assets
Courts generally hold the word proceeds to have that same meaning in 552(b) as it does in UCC
Problem is that proceeds are generally all-or-nothing an item of property is either entirely proceeds or not
proceeds at all so decision on whether something is proceeds could result in either the SC losing their
collateral or getting a windfall at the expense of the unsecured CRs.
Case analysis
o In re Cafeteria Operators:
revenues from operating the restaurants proceeds thus, cash collateral
proceeddebtor
 Rule
 revenues generated post-petition solely as a result of the DRs labor are not s/t a
pre-petition lenders security interest
47


Rule (Hotel/Restaurant Revenues)
 hotel revenues are derived primarily from the use of rooms (as opposed to services)
 any services a hotel provides are incidental to room occupancy distinct from
racetracks, restaurants, or retail stores, where the primary objective of the customer is
to receive a service citing cases where hotel revenues were considered proceeds and
restaurant revenues were not
 Unique nature of hotel financing: restaurant based on service
 Rule/Holding (Partial Proceeds to Extent of Inventory Sold)
 where the inventory is being disposed of on a daily basis, that portion of the revenues
acquired as a result of the disposition of the food and beverage inventory constitutes
proceeds of such inventory
 Other cash generated by the operation is dericed primarily from the time and energy
expended by employees who provide services.
 under 363(a), only that portion of the revenues constitutes cash collateral SC has
limited interest in post-petition revenues
 Note: court relies on incorrect assumption that proceeds are identified on strict value
tracing no authority to split the baby proceeds are all or nothing concept under 9102(a) (64)
 But, the equities of this case warrant a finding that SCs security interest does not flow
to all cash generated by DRs, since all the cash is not proceeds of SCs secured interest
in inventory, but instead largely represents the proceeds of DRs post-petition efforts
to grant SC a blanket lien on all DRs cash generated post-petition would be windfall
to SC and unfairly deplete funds for unsecured CRs
equities of this case
What is proceeds may depend on how willing the court is to unbundle the amount paid for the collateral
from the amounts paid by the DR to buy, store, market, and deliver the collateral
B. Equities of the Case Solution to the Proceeds Dilemma


There is an equity of the case exception in 552(b) that courts may use to limit extension of security interest
to proceeds after bankruptcy filing (i.e., proceeds no longer has to be all-or-nothing concept)
In re Delbridge: CR had a lien on DRs cows and milk DR contends that the lien is limited to the milk
existing at the time bankruptcy was filed.
o Issue: whether milk is produced by the cow or the farmer?
 Both the cow cant make milk without being fed, cared for, and milked the farmer alon
cannot turn feed into milk prime case to use equities of the case language in 552(b)
o Rule (Equities of Case)
 552(b) allows the court leeway to fashion an appropriate equitable remedy
 purpose of rule is to enable those who contribute to the production of proceeds during Ch.
11 to share jointly with prepetition CRs secured by proceeds
o Holding/Formula: Unfair to let SC talk the entire proceeds of milk produced largely as a result of
the DRs post-petition time and labor
o Thus, SC is entitled to the same % of the post-petition milk as its capital contribution to the
production of the milk bears to the total expenses incurred in producing the milk (see p. 189 for
formula)
 The larger the lenders capital contribution, the larger it shares of proceeds if the farmers
inputs are great, then his share of proceeds will be larger
 The what gets used up approach
48
C. Net Proceeds Solution to the Proceeds Dilemma


First, the DR is reimbursed for expenditures made to generate post-petition revenue, and then whatever
remains is collateral
In re Gunnison Ctr. Apts.: DR was an apt. building owner property was subject to a lien SC didnt want
cash collateral to be utilized by DR for operating and preservation expenses in bankruptcy
o Rule: interpret rents and proceeds as they are used in the 552(b) to mean net proceeds and net
rents (not how the UCC does)
o Holding: DR entitled to use, with supervision, certain income generated by the property to pay
expenses necessary to continue generating income
 All of the costs would come out of the rents received before monies would be paid over to
the lender hotel rentscash collateral
D. Cash Collateral in Bankruptcy






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363(c)(1), (b)(1) permit DRs to use their CRs cash collateral regardless of the type of collateral, DR must
provide adequate protection to the secured CR against its loss or decline in value
DRs use of cash collateral presents a more immediate threat to the SC super easy to dissipate cash
o why adequate protection is necessary: Typical use of cash collateral will be to pay expenses
incurred by the estate during the bankruptcy i.e., wages and salaries, utility bills, supplies once used
for these purposes, may be totally lost to SC
AP usually achieved in form of replacement lien often times on stuff that will come into existence as a
result of the cash expenditures
o not proceeds because the collateral value is transformed into services and then back into property
proceeds concepts dont follow this particular transformation
o nothing can be proceeds of services because the new stuff is not proceeds under UCC 9102(a)(64), SC is not entitled to it under 552
AP bridges this gap a order from the bankruptcy court gives replacement lien on stuff ensures preservation
of the SCs collateral as that value changes form
AP orders are not limited by value tracing court can approve substitute replacement lien against property
completely unrelated to the collateral that DR uses AP
Unauthorized Use of Cash Collateral
363(c) requires notice to the SC and the opportunity for a hearing before the DR can use cash collateral.
9-332(b) transferee takes cash free from security interest
 but only case about this says 549 would allow us to get the money back
 549 of the bankruptcy code trumps 9-332: needs to be hearing before DR used cash collateral
Nearly all assets of most DRs are fully encumbered by the time they file bankruptcy any expenditure of
funds by such a DR is an expenditure of cash collateral most DRs must obtain an order to use cash
collateral in the first couple of days of bankruptcy on an emergency basis
Special Rule for Hotels
o - 552(b)(2)
If the debtor and an entity entered into a security agreement before the commencement of the case and if
the security interest created by such security agreement extends to property of the debtor acquired before
the commencement of the case and to amounts paid as rents of such property or the fees, charges, accounts,
or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or
other lodging properties,
49
o for hotels, all of the room rental revenues are cash collateral doesnt apply to incidental service
revenues (i.e., food/drink revenues)
o still have to use competing approaches for those revenues
Chapter 4 Default: The Gateway to Remedies
Assignment 13 Default, Acceleration, and Cure Under State Law




CRs only have access to remedies if the DR is in default. 9-601(a)
Default not defined in UCC, but generally default is the failure to pay the debt when due or otherwise
perform the agreement b/w DR and CR
If SCs exercise remedies before DR goes into default, they act wrongfully and are liable for any damage
they inflict.
o Therefore, usually agreements specifically outline what acts or failures constitute default.
o SCs prefer they be expansively defined (so they can exercise remedies when they want to), DRs
prefer narrowly defined usually ends up in favor of the SC.
CRs also like to include provision saying they have the right waive certain defaults without such waiver
constituting a waiver of future defaults
A. When is Payment Due?

Most defaults actually acted upon by the SC include defaults in payment: DR failed to pay all or part of the
loan by the deadline specified in the contract between the parties
o These arrangements are fixed by contract at the time the loans are made
1) Installment Loans
o Parties contemplate that the DR will repay in a series of payments usually equal payments at regular
intervals typical for seller/lender who finances DRs purchase of a particular item of business
equipment
 Most common are real estate mortgages and car loans, usually equal monthly installments
over a number of years.
 Unsecured loans can be made on installment basis
o Provide DR with maximum legal protection against arbitrary action by the lender
 DR knows if they make each payment by the due date, and otherwise comply with loan
agreement, they will almost certainly not be in default. defaultcreditordefault
accelerate
o Also serve as form of enforced budgeting
2) Single payment loans
o Made payable on a specific date often b/c parties expect DR will have money to pay on that day
o Sometimes, loans are made payable on a particular day, and if DRs financial circumstances remain
satisfactory, SC will renew/rollover the note for an additional pay period, although they have no
obligation to do so.
50

No expectation that DR will have the money to pay on that date implicit understanding that
the loan will be renewed
o Loans payable on demand DR will pay the loan whenever the bank demands the money the
making of such demand is known as calling the loan
 Be careful of good faith
 If bank calls loan w/o warning almost certainly lead to default again, implicit understanding
that loan wont be called without warning
 1-309 prevents an acceleration at willaccelerate payment
 unless the prospect of payment is impaired
 a demand loan being called is not an acceleration at will (although they look similar)
 important to recognize the distinction between acceleration and calling a demand loan
1-309 would have no application in that scenario
o Illustrates willingness of DRs to take on obligations that both parties reasonably know cannot
actually be met
3) Lines of credit
o Bank contracts to lend up to a fixed amount (the line limit) as DR needs it
o Typically, DR borrows the money simply by writing a check on its bank account bank covers all
overdrafts up to the limit on the line of credit by drawing against the line, and charges the DR
interest on the money only from the time it pays the money out
o As DR receives revenues from its operations, it uses the money to pay down on the line of credit
obligation, thereby slowing the accrual of interest
o As a result, the DR with a line of credit may not even have cash of their own (all payments made
from line, all revenues applied to line) sometimes, DR doesnt even need bank account just sends
instruction to bank, which charges payments against DRs loan account DR remits payments from
customers to bank, which logs them as loan payments
o Banks will often set due date in the DRs off season, so they can get out of arrangement if they want
to Otherwise bank can rollover loan.
B. Acceleration and Cure
1) Acceleration
o At common law, SC could only sue for the payments the D had missed, or wait until the whole
contract was up and then sue for all the money due
o most CRs include acceleration clause to contract out of this common law rule
o Acceleration: Most SCs require provision in a loan that accelerates due date on default

states that in event of default of DR on any obligation, SC may declare all payments
immediately due and payable
 CR can then enforce the entire obligation in a single lawsuit
 acceleration requires an affirmative act on part of the SC
 1-309 prevents an acceleration at will
o If SC chooses to exercise option to accelerate, must do so in manner specified by contract
 Notice: Some courts will require that CR give notice even if contract says nothing about
notice general what constitutes notice provision in 1-202(f)
 Some cases suggest that acceleration does not occur until the DR receives notice
51
o Practical effect of acceleration is to eliminate the DRs ability to cure his default/retain the collateral
permits SC to get out of installment lending arrangement.
 Uncommon DR who cant cure by paying arrearage before acceleration, but can redeem by
paying entire balance after acceleration
2) Debtors right to cure
o Cure: DR has the right to cure a default by paying the amount then due
 if the DR cures before the CR accelerates, the necessary sum may be small
 once acceleration has occurred, D can only cure (redeem) by paying the entire amount of the
accelerated debt.
o Old Republic Insurance Co. v. Lee: applies to personal and real property
 GR: after default, a DR may tender the arrearage (i.e., perform their obligations under the
contract pay the CR)
 if the DR does that prior to the mortgagees election to accelerate, the effect is to
reinstate the payment schedule
 if the DR does not tender prior to CRs election to accelerate, the payment schedule is
accelerated and the DR has no further right to reinstate
 If DR cures first, DR wins if CR accelerates first, CR wins
o Statutes in some states permit cure by payment of arrearage even after SC has accelerated.
 Usually limit application to home mortgages, consumer borrowers, or some other specific
circumstances.
3) Limits on the enforceability of acceleration clauses
o If SC doesnt promptly assert rights to acceleration, may be met with a claim of waiver or contract
modification.
o J.R. Hale Contracting CO. v. United New Mexico Bank
 Bank issued 400k note to DR, who failed to make first payment
 Parties had had many other dealings and DR was often late, but Bank never took issue with
this
 Bank tried to accelerate in this case
 DR brought suit claiming waiver, modification of contract. see p. 226-227 for further
rules/application
 Rule (Actual Waiver Express/Implied): waiver is the intentional relinquishment or
abandonment of a known right
 intent to waive contractual obligations may be implied form a partys representations
that fall short of an express declaration of waiver, or from his conduct
 while not express, these types of implied in fact waivers still represent a voluntary act
whose effect is intended

Rule (Waiver by Estoppel): based upon the honest belief of the other party that a waiver
was intended, a waiver might be presumed or implied contrary to the intention of the party
waiving certain rights
 the party need only show that they were misled to their prejudice by the conduct of
the other party into the honest and reasonable belief that waiver was intended
 the estoppel is justified because the estopped party could reasonably expect that their
actions would induce reliance of the other party
 the effect of the conduct upon the opposite party may have been unintentional
(contrary from actual waiver)
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C. The Enforceability of Payment Terms



DRs and CRs often agree to payment terms that DRs have no real hopes of satisfying if the facts of a
particular case are capable of supporting a defense of waiver or estoppel, some courts may use these
doctrines to soften the harsh terms of the lending arrangement
Lender liability
o CRs must treat DRs fairly, and if they dont, they can be subject to borrower litigation and potential
liability implied obligation of good faith in every contract court may refuse to impose contract to
its literal terms CR must reasonably exercise discretion w/ regards to contract terms
o Only in some jurisdictions other courts are fine with unfair treatment of DR as long as treatment is
provided for in the contract (i.e., ability to call loan for whatever reason) no implied general duty of
kindness in performance, or of judicial oversight into whether a party had good cause to act as it did
 (7th Circuit p. 230-31) doctrines of good faith and inequitable conduct N/A here
o Lender liability imposed by court in KMC v. Irving note was payable on demand and bank called
note in because of a personality conflict.
Good faith: honesty in fact and the observance of reasonable commercial standards of fair dealing
o UCC provides that good faith can be used as a shield, but not a sword (1-304, Comment 1)
o 1-302(d) prohibits disclaimer of the obligation of good faith but allows the parties to determine the
standards by which the performance of those obligations is to be measured only if those standards
are not manifestly unreasonable
 essentially, obligation of good faith blocks terms that fail to observe reasonable
commercial standards of fair dealing if they are manifestly unreasonable
o 1-304 provides that every contract or duty within the UCC imposes on obligation of good faith in its
performance and enforcement
 1-309 also mentions good faith instructs the court how to interpret certain provisions in the
event parties choose to include them in the parties contracts (narrow application)
o Definition not adopted by many states still have old definition of honesty in fact
D. Procedures After Default


SC has a choice of remedies after default
o Judicial remedies: foreclosure, replevin administered by courts
 Slow, but more cautious
o Self-help remedies: repossession, notification of account DRs, refusal to make future advances on
line of credit administered w/o judicial process
 Might lead to a lender liability action if wrongly called the loan
Choice among remedies is often based on the SCs assessment of the likelihood that the DR will resist, SCs
appraisal of the strength of DRs defenses, if any, and the manner in which the sufficiency of those defenses
will be determined in each remedial procedure
Assignment 14 Default, Acceleration and Cure Under Bankruptcy Law


State law governs default, acceleration, and cure outside of bankruptcy generally defers to contract
o Once acceleration occurs, generally irreversible DRs usually cannot recover
If DR files bankruptcy, a DR who has the ability to cure a default and make the installment payments
generally will have the opportunity to do so even if acceleration has occurred
53
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

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If the debtor still wants to keep the collateral after bankrutcy:
In Ch. 7 Individual Debtors
DR has 3 options under 521
o (1) Reaffirm the debt enter into new contractual agreement to repay the debt in accordance with this
new contractual arrangement
o (2) Redeem the collateral
 There is thriving lending business for DRs to redeem their property in bankruptcy
 Collateral has to be personal tangible perperty
o (3) Surrender the collateral give collateral back to secured
o (4) Ride-through continue to pay the debt if CR is willing to accept the payments (they probably
will be) not listed in the bankrutcy code
Ch. 11 or 13
Reorganization: pay the creditor of your future income
o (1) modify the secured debt proposal of how DR will pay the debt through the Ch 11/13 plan will
be different than contract terms
,debtor
 Bankruptcy law prohibits modification of home mortgages on a DRs principal residence
 Bankruptcy law prohibits modification of a PMSI in an automobile purchased within 2 years
within the filing of bankruptcy
 Bankruptcy prohibits modification of a PMSI in anything purchased within a year of the
bankruptcy
 Legal prohibitions on what loans you can modify
 which is why cure & reinstatement is an advantageous tool
 When you modify, you have to fix the interest rate at an appropriate rate (market rate +
adjustment for risk given this individual DR - Till) sometimes called the cram down rate
 if the cram down rate is higher than the rate in K, advantageous to cure & reinstate
o (2) cure & reinstate restore k to pre-bankruptcy un-defaulted state bring the payments current
and pay any interest on arrearages
 Ch. 13 the arrearages can be cured over the life of the plan (3 to 5 years) reasonable time
 Ch. 11 arrearages usually must be cured in lump sum as of effective date of plan
 Cure also allows DR to deaccelerate the loan
In re Moffet
DR failed to make monthly payments on car loan CR repossessed (not yet sold)
o Issue: whether CR and repossessed vehicle are subject to the automatic stay and turnover provisions
o Rule - 362(a)(3)-(5) (Automatic Stay): bankruptcy filing automatically stays any act by parties to
exercise control over, or to enforce a pre- or post-petition lien against, property of the bankruptcy
estate
o Rule 542(a) (Ts Ability to Recover Property): any entity that possesses property that the
bankruptcy T may use, sell, or lease under the Code is required to turn over or account for the
property before such turnover, however, courts must ensure that the partys interest in the property is
adequately protected 362(d)(1), 363(e)
o Rule 541(a) (Estate): a DRs bankruptcy estate is automatically created at the time of filing broadly
includes all legal or equitable interests of the DR in property as of the commencement of the case
54
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
o Rule (Defer to State Law to Determine DRs Rights in Property): while federal law defines in
broad fashion what property interests are included within the bankruptcy estate, state law determines
the nature and existence of a DRs rights
o Rule (State Law Rights): 9-623, (b)(c)(2) granted DR the right to redeem the property at any time
before CR disposed of it by tendering fulfillment of all obligations secured by the collateral, as well
as reasonable expense from repossessing and holding the collateral
 9-611, 612 further protect DRs redemption right by a duty imposed on CR to notify DR of
any planned disposition, at least 10 days prior to disposing of the property CR required to
advise DR of their right of redemption - 9-614
 DR also entitled to any surplus amount that CR made in excess of its interest in the collateral
9-615(d)
 9-617 makes clear that DRs rights of redemption, notification, and surplus, among other
rights, are not extinguished until CR disposes of the repossessed collateral under 9-610 or
itself accepts the collateral under 9-620
o Holding:
 Since the CR had taken no steps to dispose of vehicle when bankruptcy was filed, DR still
possessed its state law rights when they filed for bankruptcy
 these rights, including the right to redemption, are included within the bankruptcy estate
 the DRs plan provided for paying the CR the full amount due under the contract
 CR must turnover the vehicle pursuant to the automatic stay and turnover provisions
even though right of redemption is not being exercised by payment of lump sum, but rather
by periodic payments over life of the plan
 Basically, allows DR to recover repossessed property that that has not yet been sold
o Rule: the bankruptcy code entitles DR to restructure the timing of the payments in order to facilitate
the exercise of the right of redemption 1322(b)(2) permits DRs to modify the rights of holders of
secured claims (b)(3) permits DRs to cure/waive defaults (thats what were doing when we deaccelerate) the Code permits DRs to restructure the timing of payments to secured creditors by deaccelerating debts, in order to allow DRs to regain collateral necessary for their financial
recuperation
First, automatic stay protects DR from foreclosure while DR attempts to formulate and confirm a plan
then, confirmation of DRs plan reverses the acceleration, DR cures default, and installment payment
contract is reinstated.
A. Stage One: Protection of the Defaulting Debtor Pending Reorganization



Unless stay is lifted, the stay of an act against property (i.e., foreclosure) continues until the property is no
longer in the bankruptcy estate the stay of any other act continues until the case is closed or dismissed, or
the DR is granted/denied discharge
o In a Ch. 11 case, stay must remain in effect until the plan is confirmed by the court in a Ch. 13
case, the stay may remain in effect for the three to five years period of the plan.
DR who provides AP to SC typically will be allowed to use collateral during pendency of case.
o Only protection against the decline in the value of the SCs interest in the collateral
Does DR have to make payments pending confirmation of the plan?
o In Ch. 13, if DRs plan proposes to reinstate schedule of installment payment, DR must commence
payments within 30 days after the filing of the petition 1326
o In Ch. 11, DRs dont have to make payments until the plan has been confirmed by the court gets to
use collateral w/o making payments usually around a year.
55

May have to make some interim payments to the SC if necessary to provide AP only if
collateral is declining in value and DR doesnt want to or cant furnish additional collateral.
B. Stage Two: Reinstatement and Cure

Reinstatement + cure is a process accomplished through a confirmation of a plan of reorganization in either
Ch. 11 or 13
1) Modification Distinguished from Reinstatement + Cure
o Modification or rewriting the loan Accomplished through confirmation of a plan that provides for
it accepted method is to offer payment of the amount of the allowed secured claim, along with
interest at the market rate, from the effective date of the plan, in equal monthly payments over the
period of the plan
 In Ch. 11, that period can be any period that is fair and equitable for RE, 20-30 years not
uncommon
 In Ch. 13, payments under the plan can extend only over the period of the plan 3-5 years
 The minimum amount DR must pay is determined in 2 steps (1) determine the amount of
allowed secured claim; and (2) formulate a schedule for payments that will have a value, as
of the effective date of the plan, not less than the amount of the allowed secured claim
 Same requirements as cram down effectively is cram down
 If a plan provision is confirmed over rejection by the SCs negative vote, confirmation
is a cram-down
o Ch. 11/13 DRs cannot modify mortgages against their principle residences 1322(b)(2), 1123(b)(5)
 If the last payment on the mortgage would happen during the plan, then modification is
permitte
o In contrast to modification, reinstatement and cure is always a return to the original repayment terms
agreed to between DR and CR when a default is cured and terms for payment are reinstated, the DR
takes on 2 obligations: (1) any payment (fixed by K) that was due on a date after the reinstatement
date remain payable on its original due date; and (2) any payment (fixed by K) that is overdue as of
the reinstatement date is part of the obligation to cure
MODIFICATION vs. CURE & REINSTATEMENT
Modification (rewrite loan)
Cure and Reinstatement
Debtor proposes new payment schedule
Debtor returns to original payment schedule
Arrearageis included in payments
Arrearage is paid separately
Interest at a market-based rate set by the
Interest at the contract rate on the reinstated
court
payments
Debtors pays the unsecured portion to the
Debtor pays the unsecured portion in full
same extent that debtor pays other
unsecured claims
2) Reinstatement and Cure Under Chapter 11
o 1124(2): a class of claims (usually a class of secured claim consists of a single secured claim) is
unimpaired if the DRs proposed treatment of the class under its plan complies with 4 requirements:
(1) DR must cure any default that occurred before or after commencement of bankruptcy
case
56

courts have generally held that cure must be in a lump sum at effective date of the
plan amount necessary to cure is determined in accord with the S/A and applicable
non-bankruptcy law 1123(d).
(2) Future payments remain due at the times specified in the original contract.
(3) DR must compensate holder of the secured claim for particular kinds of damages and
actual pecuniary losses
(4) Plan must not otherwise alter the legal, equitable or contractual rights to which claim
entitles the holder.
o If a class of claims is unimpaired under a Ch. 11 plan, the holder of the claim in the class is
conclusively presumed to have accepted the plan is not entitled to vote on it 1126(f) if the plan
meets the other requirements for confirmation, it can be imposed on the holder of the unimpaired
claim over the holders objection
o Why would D choose to cure and reinstate rather than modify repayment through cramdown
1129(b)(2)(A)(i)?
 If its a home mortgage, modification prohibited 1123(b)(5)
 Otherwise, DR likely wished to preserve some favorable term in the original contract that he
could not preserve in cramdown (i.e., favorable interest rate)
3) Reinstatement and Cure Under Chapter 13
o 1322(b)(5) a Ch. 13 plan may provide for the curing of any default within a reasonable time and
maintenance of payments while the case is pending on any secured claim on which the last payment
is due after the date on which the final payment under the plan is due imposes similar 4
requirements:
 (1) DR must cure any default that occurred before or after the commencement of the
bankruptcy case
 the DR need only cure within a reasonable time
 courts have given flexible meaning to this phrase and approved cures over periods of
months or years
 cure need not be in lump sum at the effective date of plan
 cure cannot extend beyond the period of the plan
 courts consider the size of the arrearage and the DRs ability to pay in determining
whether a particular proposal is reasonable
 (2) Future payments remain due at the times specified in the original contract.
 (3) Does not expressly require compensation for damages incurred by CR as result of breach
but directs courts to look to applicable non-bankruptcy law to determine amount necessary to
cure in some states, law requires payment of interest on arrearage, not in others.
 (4) Cannot otherwise alter legal, equitable or contractual right to which the holder is entitled.
o DRs under Ch. 13 are far more likely to use reinstatement and cure than modification to deal with
long-term secured obligations b/c Ch. 13 requires full payment of modified claims within the period
of the plan most DRs cannot pay their long-term obligations in such a short time
 If its a home mortgage, modification prohibited 1322(b)(2) only reinstatement available
 Nobelman SCOTUS case about this on p. 247
4) When is it too late to file bankruptcy to reinstate and cure or to modify?
o A DR can cure and reinstate if the DR files bankruptcy before the residence is sold at a
foreclosure sale that is conducted in accordance with applicable non-bankruptcy law 1322(c)(1)
 In some states, this is when Sheriff identifies winning bid at auction in others, only when
court enters an order confirming the foreclosure sale.
57


Rule probably the same for other type of collateral in Ch. 13 cases and all kinds of collateral
in Ch. 11 cases
o A mortgage or security interest cannot be modified in a bankruptcy case if it no longer exists at the
time the case is filed
 Secured partys disposition of collateral after default discharges the security interest and
any subordinate security interest 9-617(a).
 Disposition occurs and security interest ceases to exist when the SC sells, or
contracts to sell, the collateral
 Mortgage ceases to exist when it has been foreclosed
 Depending on jurisdiction, as early as entry of foreclosure judgment or as late as
confirmation of the sale
In the absence of a fixed schedule for repayment (lines of credit, demand notes) have no contract rights that
bankruptcy can restore no bankruptcy requirement to make future advances see p. 248
Chapter 5 The Prototypical Secured Transaction



Floor planning/floor plan = financing inventory on dealers showroom floor typical for borrowers that are
retailers of high-dollar value items.
o Floor checkers = employees of CR who go and check out the inventory on the DRs premises
Loan application seeks a variety of information about DR and their business: balance sheets, income
statements, tax returns for DR and their business entity (if separate)
Personal guaranty
o owners guaranty the loan against nonpayment
o guarantee gives the CR the right to obtain a judgment against the owners and proceed against their
assets which can be secured
o making owners personally liable gives CR leverage over owners induces them to cooperate in event
of making them personally liable incentivizes them to avoid or minimize any personal liability (i.e.,
by getting CRs paid)
Terms in a security agreement
（1）
（2）
（3）
（4）
（5）
（6）
（7）
Recitals
Parties
Deal
Representations & Warranties
Covenants & Condition
Default
Other boilerplate
Chapter 6 Perfection
Assignment 16 The Personal Property Filing System

What must the SC do to prevail over other third parties who may claim the same collateral?
58
A. What is Priority?





Review: a lien is a relationship between a debt and property that serves a collateral if the DR fails to pay
the debt, the SC can foreclose the lien, force a sale of the collateral, and have the proceeds of the sale
applied to payment of the debt this attribute of a lien is known as the SCs remedy
o A security interest is a type of lien
Priority is another attribute of a lien
o If there is more than one lien against collateral, each will have a priority a lien with priority higher
than another is referred to as the senior or prior lien, and the other is the subordinate or junior lien.
o If value of collateral is insufficient to pay all of the liens against an item of collateral, junior liens
yield to senior ones priority system is a way to resolve completion among CRs for the limited
assets of the DR
Each CRs lien is a relationship between an obligation and an item of collateral priority is the relationship
between these relationships
Priority can exist among creditors who do not have liens (unsecured CRs)
o Public company raises capital by issuing unsecured bonds (debentures) bond debt is subordinated to
bank debt (in almost all bond issuance contracts) even though both may be unsecured
o Contracts establishing priority among unsecured creditors are uncommon mostly because that DRs
frequently encumber all of their assets with liens.
Every kind of lien takes priority over all unsecured debt.
Peerless Packing Co v. Malone & Hyde
o Rule: Theory of unjust enrichment is inapplicable to cases governed under UCC Art. 9
B. How do Creditors Get Priority?

GR: liens rank in the chronological order in which they were created, no matter what kind of lien once
the priority of a lien is established, any lien created later will be subordinate
o Few exceptions for things like property taxes that secure relatively small, predictable obligations
o Policy: makes it possible for a creditor to know, at the time it makes a loan, how it will fare in later
competition that is, where it will rank in relation to liens created before and after it makes a loan
because the lines it will rank behind are already in existence, the prospective lender can obtain
information about them and, if necessary, contract with the holder regarding their disposition

To ensure that prospective lenders can discover liens that will have priority over its own, the laws under
which liens are created condition priority on the holder taking steps to make existence of the lien public
and easily discoverable. Usually includes acts in one of 4 Categories:
o Filing notice in a public records system established for that purpose
o Taking possession of collateral
o Taking control of collateral by means of the stakeholders agreement to hold for the SC
o Posting notice on the property or where it will be seen by persons dealing w/ the property.

Perfection: Taking such required steps is referred to as perfecting the lien 9-308(a)
o
a security interest is perfected if it has attached and all of the applicable requirements for perfection
in Sections 9-310 through 9-316 have been satisfied.
o A security interest is perfected when it attaches if the applicable requirements are satisfied before the
security interest attaches.
59

Perfection is an act that is legally deemed to give the world notice of your interest in the collateral



Priority: Legal conclusion one person claim for a collateral is better than the other persons claim
claim
SCs usually choose to perfect by public filing, but for particular kinds of property they might be required to
perfect by another method.
o i.e., sheriff levy generally both creates and perfects an execution lien
officers who receive notices for filing immediately record the date and times of receipt the sheriff similarly
does this at the time of seizure
o when disputes arise, these records can be used the dates and times although occasionally, if method
of perfection didnt create time/date stamp, SC may have to prove date and time by other evidence
o except for the time of perfection, one lien is often the same as another so in the majority of cases,
the dates and times of perfection will determine the priorities of the liens
C. Theory of the Filing System

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
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A filing system is a means for communicating the existence of a lien from the holder to a person who is
considering becoming a CR of the same DR
a filing system is needed to achieve communication because neither the existing lienholder nor the
prospective CR knows the others identity until the communication occurs
the prospective CRs need to know what liens were filed to know who will have priority over them if they
lend
o Lienholders participate because the law voids their liens if they do not
o prospective CRs participate because the law gives priority to filed liens
A CR who obtains an Article 9 security interest must file an initial financing statement (UCC-1) to perfect
o To whom it may concern message
The filing system gives constructive notice but also intended to give actual notice for that to work,
prospective CRs must know the system exists and actually search it
o for sophisticated lenders and borrowers, it probably achieves this end
o for unsophisticated lenders, borrowers, consumers, and small business people probably not
o Unsophisticated lenders often fail to claim their priority by filing and often fail to discover a lien that
is on the public record before they lend beat by future and prior lenders
Current filing systems are highly imprecise and difficult and expensive to use (search)
Bankruptcy Trustees have the power to avoid security interests not perfected prior to bankruptcy, even if
no one was injured by the secured partys failure to file - 544(a) makes the bankruptcy T a hypothetical ideal
lien CR who perfected at filing of bankruptcy prevail over unperfected SCs and can avoid unperfected
security interests
D. The Multiplicity of Filing Systems

Variety of filing systems
o Each county in the U.S. has its own real estate recording system, where mortgages and Art. 9
fixture filings are filed / Many counties also maintain separate systems for property tax liens, local
tax liens, and money judgments
o All states (except GA and LA) have state UCC filing systems LA and GA have county/parish UCC
filing offices
60



o All states maintain certificate of title systems in which CRs can file notices of security interests in
automobiles many states have separate certificate of title systems for boats and/or mobile homes
that CRfile SI
o Some states maintain specialized systems for filing against particular kinds of collateral
o The federal government maintains additional filing systems for patents, trademarks, copyrights,
aircraft, and ship mortgages IP
 US patent and trademarks office
o An international filing system exists for some aircrafts and parts
o The offices that keep the records have almost no communication with one another
Usually, the type of collateral is determinative of what system to file in
Unless there is another method provided, we perfect by filing a F/S 9-310(a)
o Goods, accounts, general intangibles
Motor Vehicle: Perfect a security interest in a motor vehicle by noting it on the title unless the automobile
is inventory 2(a) of UMVCTATA
o Exception: no certificate of title need be obtained for a vehicle owned by a dealer held for sale
general background rule is to use the UCC 9-310
 9-311(d) any secured lender to automobile dealer does not need to perfect on the title as long
as it remains inventory in hands of car dealer can file under UCC
 Good faith buyer of goods in ordinary course of sellers business can take free of a
security interest created by its seller even if security interest is perfected and the
buyer knows of its existence. 9-320(a).

Natl Peregrine v. Capitol Federal Savings:
- CR had a security interest in DRs copyrights, distribution rights and licenses to films
copyrightfiling
after filing bankruptcy, DR alleged that the interest was not perfected b/c CR had filed its F/Ss in 3
states UCC filing systems but not with the USCO.
o Issue: Does a UCC-1 F/S filed with the relevant state UCC filing office perfect a security interest in
a copyright?
o Holding: No. Filing with the copyright office perfects a security interest in a copyright.
o Rule: where a federal statute provides for a national system of recordation or specifies a place of
filling different from that in Art. 9, the Art. 9 methods of perfection are supplanted by that
national system.
o Rule (Registered Copyrights): must file in the USCO to perfect a security interest in registered
copyrights and related accounts receivable
o Broadcast Music v. Hirsch (Copyright Royalties Related A/R): an assignment of royalties was
not a document pertaining to a copyright and so was not recordable in the USCO must perfect in
UCC filing system
 Overturns Peregrines holding as it relates to related accounts receivable
o Recordation requirement in Peregrine applied only to copyrights formally registered with the USCO
most copyrights are not registered
o security interest in unregistered copyrights cannot be recorded in the USCO and the UCC filing system
remains the correct system in which to perfect World Aux. Power Co. (Unregistered Copyrights)

In re Pasteurized Eggs Corporation:
o Rule (Patents and Trademarks): to perfect a security interest in a patent or trademark, must file in
the UCC filing system general intangibles under the UCC
61


The USPTO is the correct place to file an assignment of patent or trademark ownership
but the UCC filing system is the correct place to file an assignment of a patent or trademark
as security for registered copyrights, the USCO is correct filing place for both kinds of
assignments (Cybernetic)
o Rule (Aircraft and Railroads): must file in federal filing systems to perfect liens on aircrafts and
railroad-related property
o Solution file everywhere if not sure
E. Methods and Costs of Searching




In some filing offices, only employees are permitted to access records CR must fill out a form/order
requesting the search in others, members of the public are permitted to search the records either at the
office or remotely
Most lenders hire a service company to order or conduct the search for them CR typically pays two fees: (1)
the filing officers fee; and (2) the service companys fee
A lawyer who is uncertain as to the filing office in which a particular search or filing should be made should
just search and file in more than one system
o Weigh costs and benefits of doing that
A search wont tell you about recently filed items gap period
o solution: file before making loan have DR authorize you in loan application when your filing
shows up in the search, then you know youll have priority and then you can make the loan
Assignment 17 Article 9 Financing Statements: The Debtors Name
UCC filing
A. Components of a Filing System file


Provisions of revised Art. 9 are media neutralthey apply to all forms of filing (electronic and paper)
o Record: information that is inscribed on a tangible medium or which is stored in an electronic or
other medium and is retrievable in perceivable from 9-102(a) (70)
o Statewide filing systems generally permit the electronic filing of F/Ss.
Filing officer assigns the file number to a F/S.
The clerk who receives a paper filing typically assigns a date and time of filing, makes a copy, and returns
the original to the filer with a receipt later somebody else in the clerks office will index the copy and add it
to the body of prior filings electronic filings are processed and indexed automatically
System consists not only of the filed records but also of subsystems for (1) adding new records, (2)
searching among the records, and (3) removing obsolete records.
o In many systems, there is no mechanism for removing obsolete records.
Financing Statements

o Statewide UCC systems digitally store F/S these days
o Searchers can locate them through the index, view them on the screen, and download them
o Online searches are limited to the index
The Index



62

o When a F/S is filed, the filing office assigns it a unique number (file number or book and page
number) system uses this number as a means of identifying, indexing, and retrieving the statement
o Typical searcher is a prospective SC looking for all prior encumbrances on DRs property
o Some indexes (i.e., tract indexes for RE) index by a description of collateral each tract of land in the
county is assigned a unique number, and these numbers are written on maps
 Same with the motor vehicle certificate of title system, which indexes by VIN #s and
registration #s all filed liens appear on the face of the certificate of title
 Only makes sense because vehicles and RE have a stable identity doesnt make sense to
index by collateral for most types of personal property
o Article 9 filing offices typically index F/S only by name of DR 9-519(c) requires filing offices to
index F/S by the name of the DR index typically includes the address of the DR (useful for
distinguishing DRs with same name) usually includes file # also may include name/address of CR,
date of filing, or a brief description of the collateral
UCC filingbusiness nameLCC/coporation
Search systems
o UCC searches run electronically on the index some states allow searchers to do it online others
make the searcher submit a request and only an employee of the filing office can execute a search
o Search methods differ widely from one filing system to another (largely for technological reasons)
o Searches return the index entries for exact DR name matches and whatever near matches the system
was specifically programmed to treat as matches
o Legal Sufficiency: The search logic of the program determines not only the results of searches but
also the legal sufficiency of the F/S
 Often published as part of the states administrative code
o Filing statements are effective as of the moment of the date/time assigned to the filing at any given
time there are some F/Ss that are in effect, but not searchable or public because not yet
processed/indexed known as the basket.
 9-523 authorizes filing offices to respond to search requests with search reports that extend
through only the period for which all filings have been indexed
B. Correct Names for Use on Financing Statements



Seriously Misleading - 9-506(a): A F/S substantially complying with the requirements of [art. 9 part 5] is
effective, even if it includes minor errors or omissions, unless the errors or omissions make the F/S
seriously misleading.
Registered Entity - 9-503: A F/S sufficiently provides the name of a registered entity only if it provides the
name of the debtor indicated on the public record of the debtors jurisdiction of origin.
o 9-503(a) (4): As to an individual or partnership, the F/S must provide the individual or
organizational name of the DR
o 9-503(b) (c): A F/S is not rendered ineffective by the absence of the DRs trade name, and use of a
trade name alone does not sufficiently provide the name of the DR
Individual names
o Names of human beings, as opposed to the names of artificial legal entities
o Name by which he is generally known, for non-fraudulent purposes, in the community.
 No single version of an individual debtors name that is correct.
 For ethnic name conventions - use surname - name common to the family - and not last
name see p. 299-300
o Alternatives from 2010 UCC Amendments
 Neither of these alternatives changes the correct or legal name of the DR
63

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


For DRs with in-state drivers licenses, Alternative A makes the correct legal name
irrelevant instead, filing and searching is to be in the name of the DRs drivers license
 Most states chose this alternative
 Without a license: to let him form a LLC[a legal entity]
 Alternative B makes the drivers license name merely a safe harbor filings are valid if made
in the DRs correct legal name, in the correct legal first name and surname (regardless of
middle name), or in the drivers license name
Corporate (Registered Organization) Names
o 9-102(a) (71): A registered organization is an entity formed or organized solely under the law of a
single state of the US by the filing of a public organic record with, the issuance of a public organic
record by, or the enactment of legislation by the State or the US
 Basically, an entity that the state brings into existence exists because of state law includes
corporations, LLCs, and LPs NOT LLPs
o 9-102(a) (68): correct name = a public organic record is the record initially filed with or issued by
a state or the US to form or organize an organization or which amends or restates the initial record
entityFS
 i.e., the public organic record for a corporation would ordinarily be the states copy of a
corporate charter or certificate of incorporation along with any amendments or restatements
o A corporation can only be formed by obtaining a charter or certificate of incorporation from the
secretary of state
 A corporation can have only a single correct name at any given time can only change its
name by filing an amendment with the secretary of 9-506(c)state
 A searcher can discover the precise spelling of a corporate name by examining the
documents on file with the secretary of state
 In a large majority of states, the name must show that the entity is a corporation (see p. 301)
 CA and DE are exceptions
 No state will permit the formation of 2 corporations with the same name or confusingly
similar names
 2 corporations can have the same name only if they incorporate in different states
(General) Partnership Names
o The legal name of a GP or LLP is the name by which it is generally known in the community
regardless of the partnership agreement
 A GP can become an LLP by filing an election with the state the filing of that election does
not form or organize the partnership merely limits the partners liability
Trade Names
o Trade names/DBAs are neither necessary nor sufficient to identify a DR on a F/S. 9-503(b)-(c).
The Entity Problem
o A division of an incorporated business is not a legal entity unless it is separately incorporated
o An entity might be a DR under Art. 9 and its name might be required on F/Ss, even though it is not
recognized as a legal entity for any other purpose.
 A DR is a person: includes an individual, corporation, or any other legal or commercial
entity. 9-102(a) (28); 201(b) (27). DR/entity
o Problem of Series LLCs see p. 303
C. Errors in the Debtors Names on Financing Statements

Getting the DrS Name Right Is Extremely Important
64





In re EDM Corporation: Legal corporate name of DR was EDM Corporation, but DR also operated under
trade name EDM Equipment F/S identified DR as EDM Corporation d/b/a EDM Equipment Search for
EDM Corporation in UCC records did not reveal F/Ss.
o Holding: Lien was not perfected the F/S did not provide the legal name of the DR and it was
seriously misleading under 9-506.
o Rule (Correct Name on F/S for Registered Organizations)
 9-503(a) requires that, as to registered organizations, the DRs name in the F/S must be the
name of the DR indicated on the public organic record of the DRs jurisdiction of
organization
o Rule (Trade Names on F/S): proper way to include trade name is to list it as other or additional
names on the F/S they may not be part of the organizations name itself
o Rule 9-506(c): if a search of the records of the filing office under the DRs correct name, using the
filing offices standard search logic, would disclose a F/S, then the erroneous name provided does
not make the F/S seriously misleading FS
o Rule (Burden on CR): burden is squarely on the CR filing the F/S to correctly identify the name of
the DR
o Policy: the purpose of filing a F/S is to put subsequent CRs on notice that the DRs property is
encumbered
Filer Error: If the search logic can overcome a particular error or omission (a search in the DRs correct
name would retrieve the CRs erroneous F/S), the error is not seriously misleading 9-506(c)
o if the error/omission would cause the F/Ss not to show up in a search using the DRs correct name,
then the F/S is seriously misleading 9-506(b)
o If the name error in a F/S is seriously misleading, the F/S is ineffective 9-506(a)
o Basically, filings are ineffective when a search in the DRs correct name does not retrieve the CRs
F/S under the search logic in effect
Filing Error: If the search is made under the correct name of the DR, but does not find prior filing made in
the correct name of the DR because the filing officer indexed the priori filings incorrectly, the prior filings
are nevertheless effective 9-517 officerrecord,
o If the state has waived sovereign immunity for this purpose probably have cause of action against
the filing officer
Priority Implications: A subsequent secured CR, lien CR, or T in bankruptcy can establish priority over
the prior filer by demonsstrating that the prior filing was insufficient because it did not provide the name
of the DR 9-502(a) and 9-503.
o Test is not whether the later party actually found the F/S, but whether a hypothetical search under the
correct name of the DR would have found the F/S
o the hypothetical search is conducted in the records of the filing office, under the DRs correct name,
using the filing offices standard search logic 9-506(c) whatever is found is effective whatever is
not is ineffective
o The only way for a searcher to know for certain what the official search logic would discover is to
conduct an official search in the filing office system
o The particular search logic employed in a system determines what filing errors the system can
overcome unforgiving search logic can make a tiny error render the F/S ineffective
Potential Problems Regarding Search Logic
o Explanations of search logic are not always comprehensive
o Search logic may not be in accord with announced search logic
65
D. IACA Search Logic - 9-526








(1) Does not distinguish between upper- and lower-case letters
(2) Disregards punctuation marks and accents
(3) Ignores noise words such as corporation, corp., incorporated, LLC, limited, that indicate the existence or
nature of an organization
(4) Ignores the word the at the beginning of a name
(5) Ignores spaces
(6) Treats an initial as the equivalent of a first or middle name beginning with that letter
(7) Treats no middle name as the equivalent of all middle names
(8) Ignores suffixes
Assignment 18 Article 9 Financing Statements: Other Information
A. Introduction





F/S are written documents prepared on pre-printed forms or electronic records entered on electronic forms
9-521 contains the standard forms for filing and amending F/Ss but their use is not required SC can use its
own form or even file a copy of the S/A as a F/S
o Filers generally prefer the official form because (1) it prompts them for all required information; (2)
filing fee is typically lower if the form is used; and (3) the filing office can refuse to accept a filing
on the official form only for the limited reasons in 9-516(b)
FilingFS effective
9-502(a) requires that 3 items of info on a F/S for it to be effective (Primary Information):
(1) The name of the DR
(2) The name of the SC
(3) An indication of the collateral secured
FS
9-520(a) requires the filing officer to refuse to accept a F/S unless it contains items (1) and (2) and these
additional items (Secondary Information)
(4) Mailing address of SC 9-516(b)(4)
(5) Mailing address of DR 9-516(b)(5)(A)
(6) An indication of whether the DR is an individual or an organization - 9-516(b)(5)(B)
Rejection: If a F/S lacks any of these 6 pieces of information (other than an indication of the collateral
covered) (9-516(b)), the filing officer should refuse to accept it and communicate to the filer both the reason
for refusal and the date and time the record would have been filed 9-520(b)
o Gives filer opportunity to try again otherwise the attempted filing accomplishes nothing
Incorrect Information:
o Filing officer should not refuse filings that contain incorrect information even if the information
is implausible
o if the SC fills in the key blanks on the F/S, the filing officer must accept the filing irrespective of its
content
o Nothing in 9-516 or 9-520 requires or authorizes the filing office to determine, or even consider, the
accuracy of information provided in a record 9-516, Comment 3
66
B. Filing Office Errors in Acceptance or Rejection


Wrongly Accepted Filings: If a filing officer mistakenly accepts a filing that contains items 1-3, but is
missing something else, filing is still effective - 9-520(c) and Comment 3
secondary infoFS
o Searcher has essential info, nobody can be misled by absence of information searcher can demand
information from DR or refuse to lend
o Also, DR was not apprised of the error, which they would have been if the F/S had been rejected no
opportunity to correct the error
Wrongly Rejected Filings: If filing officer mistakenly rejects a filing with the proper information, failed
attempt to file nevertheless perfects the underlying security interest sufficiently to defeat lien creditors.
o Even though other searchers have no access to it and no means of knowing it was made Drafters of
Art. 9 believe that lien CRs dont really search filing system anyways.
o Ineffective against purchasers (includes buyers and later SC, but not lien CRs or bankruptcy Ts)
who are prejudiced by the absence of the record from the filing system 1-201(b) (29), (30)
o Lien-perfected: effective against lien CRs and bankruptcy Ts, but not sufficient to give constructive
notice to purchasers not sufficient to confer priority over SCs and other purchasers who act in
reasonable reliance on the incorrect information. 9-338.
C. Filer Errors in Accepted Filings (Incorrect Information)

If a filer omits a piece of information that is required in 9-516(b), the filing officer should reject filing 9520(a)
o incorrect information is insufficient reason for rejection.

Information Necessary Only to Qualify for Filing (4)-(6)
o DR/CR mailing addresses and indication as individual/corporation are not necessary to the
sufficiency of F/S. 9-502(a) secondary info
o if the information furnished with regards to these items is merely erroneous (as opposed to omitted),
the F/S still qualifies for filing filing
o Will be lien-perfected, but not purchaser-perfected not effective against purchasers who act in
reasonable reliance on the incorrect information 9-338
o Failure to include address for SC does not render statement ineffective 9-502, and an erroneous
address cant be basis for subordination of the SC 9-338
 Only penalty is that SC is deemed to have received a notification delivered to that address.
Required Information
o DR/CR names and description of collateral are necessary to the effectiveness of the F/S if the F/S
substantially complies with requirement to specify these items, will be effective despite minor errors
or omissions unless they make the statement seriously misleading. 9-506(a) dependent on function
of these requirements
 Defects in these pieces of primary information that makes the F/S incorrect and seriously
misleading render the F/S ineffective primary info
 Error in DRs name considered in last section
o Name of Secured Party
 Name of SC tells searcher who can or must authenticate termination statements, releases of
collateral, or subordination agreements.

67

Searcher may need information from the SC their name on the F/S assures the searcher that
it is inquiring of the right person
- The UCC filing system is a notice filing system requires only the recording of a
notice of the possible existence of a S/A
- If searcher wants to know terms of the S/A, must inquire outside the system (i.e.,
inquire of the SC) searcher does that by requiring the DR to authorize the SC to
furnish information the searcher
- Unless otherwise agreed between DR and SC, the SC has right to respond to a request
for credit information from 3Ps, but no obligation the SP will usually do so if the DR
requests, either to maintain its ongoing business relationship with the DR or because
9-210 requires the SC to furnish certain information to the DR on request if the SC
refuses to furnish information to the searcher, the DR will make a formal request for
it and the SC will have to comply absent a name of the SC on the F/S, the searcher
would be dependent on the DR to tell the searcher of whom it should make inquiries
o Indication (Description) of Collateral






A S/A must contain a description of the collateral, but a F/S need only contain an
indication of collateral
the difference between the two seems to be only that all assets or similar language constitutes
an indication, but not a description 9-504.
- Super generic terms is not allowed in SA, but allowed in FS
F/S description must reasonably identify the collateral. 9-504, 9-108 9-108 approves a
description that renders the collateral objective determinable
- Same standard as for description in S/A but applied differently
What meaning should be assigned to words in the description?
- For F/S, it would make sense to give words their common meaning and to require
that they make sense to complete strangers
- For S/A: the meaning the parties intended
How much work should we burden the searcher with?
- Grabowski- traditional view that filers description can require a searcher to make
inquiry of the SC (see p. 316-17)
o CR may either describe its collateral by type as set forth in 9-108 or may
simply indicate its lien on all assets of the DR
o a F/S need not specify the property encumbered by a SCs line, but need
merely notify subsequent CRs that a lien may exist, and that further inquiry is
necessary
- Teel Construction: court held that F/S describing furniture and inventory at a
nonexistent address was effective duty on searcher to inquire further
o Pro think the case is wrong
- In some cases, the description may be so specific as to exclude the possibility that the
property in question could be collateral (Pickle Logging)
In re Pickle Logging, Inc.: SC financed 8 pieces of equipment for DR In F/S, the serial
number of one of the pieces was off by one digit and the model number was wrong.
- Holding: Description was seriously misleading if just model number or serial
number had been incorrect, may have been different additional information could
exist that provided a key to the collaterals identity but with both numbers reflecting a
different machine, there was nothing to indicate there was a mistake.
68
D. Authorization to File a Financing Statement





Before filing a F/S, SC must obtain authorization from the DR in an authenticated record. 9-509(a)(1).
By authenticating a S/A, a DR authorizes the SC to file a F/S covering that collateral described in the S/A.
9-509(b).
o DR need not sign the F/S DR
o 9-509, Comment 3 even if no authorization to file financing statement (i.e., not in loan application),
making of the loan is ratification of the authorization
If person filing a F/S is not authorized, its ineffective. 9-510(a).
o Victim of a bogus filing can file an information statement that will show up on searches. 9-518.
o Title still clouded though prospective CR still has no way of knowing the F/S was unauthorized
Compare Real estate
o DR has to sign mortgage, must be witnessed and acknowledged witnesses must also sign the
mortgages acknowledgement is before a notary public or other official licensed for that purpose
notary confirms the identity of person making the signature and places seal on the statement of
acknowledgement
The presence of an incorrect or unauthorized financing statement in the filing system can interfere with the
ability of the party named as DR to borrow money any filing that might encumber particular property
makes the property difficult to sell or use as collateral the uncertainty surrounding the collateral clouds its
title most lenders are reluctant to go forward until they are certain that title is clear
o Some states allow filing offices to reject obviously fraudulent F/Ss
o Other states provide expedited administrative/judicial procedures to expunge fraudulent F/Ss
o 16 states have criminalized the filing of fraudulent F/Ss
E. UCC Insurance


Like title insurance, covers the risk of most kinds of errors in the filing and search processes.
Does not insure against the possibility that the debtor does not own the collateral [title] but does cover
some aspects of attachment, perfection, and priority
F. Formula
Correct
secondary info
Missing
secondary info
Accepted
Fully Effective
Rejected
Rejection is in error considered filed, effective
except against reliance purchasers who rely on
missing record, 9-516(a), (d), not including
judicial lien holder/bankruptcy trustee
Rejection is correct. Ineffective, not filed (correct
decision of filing office)
, file
Rejection is in error considered filed, effective
except against a purchaser relying on missing
record, 9-516(a), (d)
F/S is effective
Incorrect 9Fully effective (9-338(1) only
516(b)(4) details applies to (b)(5))
(SCs address)
69
Incorrect 9516(b)(5) details
(DRs address &
org. status)
Effective except against
purchasers who rely on
incorrect info, 9-338(1)
(distinct from above)
Rejection is in error considered filed, effective
except against a purchaser relying on missing
record, 9-516(a), (d)
Assignment 19 Exceptions to The Article 9 Filing System
filing
Taking possession / Taking control / Automatic perfection by operation of law
Perfection Problem Algorithm
o (1) Categorize the collateral what type of collateral is it
 Collateral index in the table of content
o (2) What law governs most likely UCC in this class
 Not for automobiles title act perfect by indicating lien on title see 9-311(b)
9-311(a): Filing a financing statement not necessary nor effective if state law provides for
perfection.
9-311(b): Complying with state rules is the equivalent of filing a financing statement.
UMVCTA 20b: Security interest in vehicles perfected as of the time of creation if completed
within 10 days, otherwise as of time of delivery (delivery means to the DMV).
State rules perfectgrace period
 9-109(d) lists items excluded from Art. 9 coverage
o (3) How do we perfect
 Filing / Possession / Control / Automatic
9-312(a): Security interest may be perfected by filing for chattel paper, negotiable documents,
instrument, or investment property
9-313(a): Security interest may be perfected by possession/delivery for tangible negotiable
documents, goods, instruments, money, or tangible chattel paper
- General intangibles: only perfected by filing
 Bitcoin transfer: Security interests remain
A. Collateral in the Possession of the Secured Party

The possession-gives-notice theory
o UCC permits perfection by taking possession of the collateral if the collateral is negotiable
documents, goods, instruments, money, or tangible chattel paper. 9-310(b)(6); 9-313(a):
perfection, / / /
-
9-102(a)(11): Chattel paper is a record or records that evidences both a monetary obligation and
security interest in specific goods, etc., with exceptions.
70
-
9-102(a)(47) Instrument: Negotiable instrument or any other writing that evidences a right to
payment of a monetary obligation that is not itself a security agreement or lease, and is of a type that
is transferred in ordinary course of business.
o Assumption that person who buys or lends against this kind of collateral (searcher) will look at it
first, so looking at the collateral in possession of a SC will alert the searcher to the possibility of the
security interest.
o Possession constitutes constructive notice to the searcher and treats searcher essentially as if they
had actual notice of the interest.

What is possession?
o UCC looks to other law to determine what possession means
o Possession
(1) the fact of having or holding property in ones power;
(2) the right under which one may exercise control over something to the exclusion of all others

Possession is not merely an observable fact, but depends ultimately on the legal right of the
would-be possessor
 when the legal right is devoid of physical control, some courts refer to the possession as
constructive
o The law looks to legal right, not just physical fact, to determine who is in possession
 Laws definition is somewhat circular look to possession to see who has rights and we look to
rights to see who has possession
 The legal right to control is not determinative of possession
o SC can possess collateral through an agent.
 9-313, Comment 3: in determing whether a particular person has possession, the principles
of agency apply
 Agency might be invisible to the searcher
 Dual agency not necessarily problematic (i.e., agent of CR and DR)

Possession as a means of perfection
o Possession is the sole means of perfecting a security interest in cash/money. 9-312(b)(3).

Protects those who accept money from the possibility that a prior security interest was
perfected by filing encourage free negotiability of money
o Possession is an alternative to filing a F/S with regard to goods, instruments, tangible chattel
paper, negotiable documents, and certificated securities. 9-312(a), 9-313(a).
 Filing against any of these categories is always fully effective against lien CRs and Ts in
bankruptcy
 When the collateral includes goods, the searcher must check both the filing system and the
collateral
 Negotiable documents include negotiable warehouse receipts, negotiable bills of lading, and
similar documents
 Does not include negotiable promissory notes. 9-102(a) (30); 1-201
 a negotiable promissory note is an instrument 9-102(47)
: () / , (instrument)
71
o Perfection by possession is superior to perfection by filing for instruments, tangible chattel
paper, and certificated securities 9-330(b), (d)
 Filing only against trustee and creditors
 Possession can beat purchaser
 Control is an even more preferred method for certificated securities
Notes! possession superior to filingfiling lien creditortrustee
o Perfection by possession is impossible for security interests in accounts and general intangibles. 9313(a) may only be perfected by filing or automatically

Those who want to perfect by taking possession of their DRs account can require their DRs
to obtain negotiable promissory notes from the account DRs
o 9-330(b), (d) protects purchasers who take possession of chattel paper or instruments from
security interests perfected in them by filing.
 Purchasers include actual purchasers and later CRs who take a security interest
 Effect to give priority to those who perfect by possession over those who perfect by filing.
B. Collateral in the Control of the Secured Party

UCC recognizes control of some kinds of collateral as a substitute for filing, including deposit accounts,
electronic chattel paper, investment property, and letter of credit rights. 9-310(b)(8).
1) Deposit Accounts
o Type of property generally referred to as a bank account. 9-102(a) (29).
, ()
 Excludes instruments i.e., a bank account represented by a certificate of deposit that can be
transferred by endorsement and delivery to the transferee.
o 9-312(b)(1): a security interest in a deposit account may be perfected only by control
o 9-104 indicates 3 ways SC can take control of deposit account:
:
(1) SC can be the bank in which the account is maintained
(2) DR, SC and bank can authenticate record instructing bank to comply with SCs
instructions with regard to the account
(3) SC can become banks customer by putting account in the name of the SC.
o SC is in control of the account even though DR can write checks on account and perhaps withdraw
entire amount. 9-104(b).
 The control specified in 9-104 is potential control, not actual control
o Note that options (1) and (2) dont really give notice to searchers of a security interest the agreement
in (2) need not be made public 9-342
2) Investment Property
o 9-102(a) (49) defines investment property as a security, security entitlement, securities account,
commodity contract, or commodity account.
 Securities: investment mediums such as stock, bonds, and commodities contracts
72
:,,(
 To qualify as securities, the particular medium must be (1) transferable; (2) divisible (many
shares, bonds, Ks, w/ the same rights); and (3) a type of medium that is traded in securities
markets or securities exchanges. 8-102(a) (15).
: / /
o Ownership interests of a Corp are divided into shares of stock/partnership or LLC are divided into
shares of interest
 if the terms of those shares or interests so provide, they can be securities governed by Article
8, 8-103(c), and most of the rules below will apply
 if they are intended to be traded, the debt obligations of a Corp, partnership or LLC are
divided into bonds or notes
What is certificated?
o Investment property in Ariticle 9/Certificated security in Ariticle 8
o If the Corp issues a certificate showing the number of shares or bonds a holder owns, the securities
are certificated 8-102(a)(4) if the corporation merely records the name of the holder and the number
of shares or bonds on its own record, the security is uncertificated 8-102(a) (18)
/
o Security interest in a security (certificated or uncertificated) can be perfected by:
perfected: (1) file; (2) ; (3) control.
 Filing - 9-312(a)
 Taking delivery; OR (8-106(c)(1), 8-301, 9-313(a), 9-314)
 Taking control of the security 9-106(a)
o Way of perfection
 UCC 9UCC 8-106(b)
o Priority in control over filing
control
o For an uncertificated security, delivery and control occur when issuer registers the purchaser or
purchasers representative as the owner. 8-301(b).
 SC can take control of an uncertificated security by registering itself as the owner of the
security on the records of the corporation 8-106(c), 8-301(b)
o For a SC to have control of a certificated security, the certificate must be delivered to the SC with
any necessary indorsement (written signature of transferor on stock certificate) OR the certificate
must be delivered to the SC AND registered in the SCs name 8-106(b)
 Delivery may be by transfer of possession of the certificate to the SC OR by the certificate
holders acknowledgement that it holds for SC 8-301(a)
o Security interest of a SC having control of investment property has priority over the interest of a SC
that doesnt have control. 9-328(1)
purchaser
o A purchaser of securities that registers its ownership with the issuing corporation with or w/o
obtaining a certificate is referred to as directly holding the security
o most purchasers of securities do not hold them directly instead, a brokerage firm a securities
intermediary, 8-102(a)(14) buys the securities and acknowledges the investors ownership in a
monthly statement of account
 Art. 9 refers to such investors rights as a securities entitlement and a securities account /
73



such ownership is referred to as indirect holding of the securities
Brokerages generally hold certificated securities indirectly by having an account with the
DTCC the brokerages, like their customers, own securities entitlements, not securities
SC perfects interest an interest in a securities entitlement by becoming the entitlement holder
(a customer on the securities account) OR obtaining security intermediarys agreement that
latter will comply with SCs instructions regarding the entitlement/account. 8-106(d).
C. Automatic Perfection of Purchase-Money Security Interests in Consumer Goods

9-309(1) creates an exception to the filing requirement for most PMSIs in consumer goods considered
automatically perfected if requirements of exception are met
1) PMSI A purchase money security interest
propertyproperty
o
9-301(b)(1): Security interest is a PMSI to the extent that it is:
(1) an obligation to pay the purchase price of the collateral; OR
 Seller becomes SC (e.g.: DR buys piano for 20k Pays 1k down, signs note promising to
pay the remaining 19k to SC Note is secured by security interest in piano the note is a
PMSI if secured by a security interest in the piano)
 (2) an obligation to repay a loan, the proceeds of which were intended to be used and were
actually used to pay the purchase price of the collateral
 creditor becomes the SC
 DR makes application to finance co. for a loan to buy the piano signs promissory note for
19k w/ security interest listing piano as collateral F lends 19k, and she uses that to buy
piano (or F sends 19k directly to piano co) note is a PMSI.
 SC can lose the purchase-money status of its interest
 if DR deposits 19k loan, then writes 20k check for piano, might be a question as to
whether the loan was used to buy the piano
 depends on rules for tracing money through bank accounts accordingly, financiers
usually pay loan proceeds directly to seller.
2) Consumer goods
o PMSI is automatically perfected only in consumer goods PMSI in any other kind of goods must be
perfected by the ordinary means required in the UCC for the type of collateral
o Consumer goods are goods that are used or bought for use primarily for personal, family, or
household purposes. 9-102(a) (23).
 It is not the nature of the goods but rather the use to which they are put or purpose for which
they are bought that determines their classification
 Courts and commentators seem to agree that this exception from the filing requirement
makes sense only when applied to consumer goods of relatively small value
 but some courts will apply it for big ticket consumer goods items (Lockovich)
o Gallatin National Bank v. Lockovich
 Issue: Is a boat a consumer good under the UCC? Was perfection automatic?
 Holding: Yes, therefore CR was not required to file a F/S to perfect the security interest in
the boat boat was only used for personal use.
74

Rule: A consumer good is determined by use or intended use of the good as personal, family
or household purposes design, size, weight, shape, life expectancy and cost are irrelevant.
 Policy: CRs must be confident that when they enter into a commercial transaction, they will
play by the rules as written in the UCC up to legislature to make any changes
o Uncertain as to whether the actual use or the intended use should control
 Many courts would say that the intended use at the time of purchase should control allows
CRs to rely on representations made by DR
 Burden on searchers to discover secret liens by determining intended use of collateral
when purchase
 Alternative view that intended use should only control if owner has not put them to use
otherwise actual use should control
 Shifts burden from searchers to CRs


There are cases to support both views CR is wise to just file regardless
Lenders to Corp need not worry goods can only be consumer goods when owner is
individual
D. Security Interests Not Governed by Article 9 or Another Filing Statute



Security interests in a variety of collateral are excluded from Article 9 9-109(d)
o Includes wage claims (d) (3), insurance policies and claims (d)(8), real estate interests (d) (11),
and non-commercial tort claims (d) (12).
o Competing views on security interests in insurance polices
 Traditional view: first to notify insurance company has priority
 Some courts: first assignment has priority, regardless of notification
Just because UCC doesnt provide that a security interest can be granted in certain property doesnt mean that
the granting of a security interest isnt possible, just means the process for providing a security interest (i.e.,
lien) must be provided for from some other source of law
Bluxome Street Associates v. Firemans Fund Insurance Co.:
o DR owned a valuable lawsuit settlement (from legal malpractice claim) held in a trust several CRs
sought to perfect liens against it a law firm had valid and enforceable contractual lien via a security
agreement that granted the firm a lien on DRs interest in a cause of action based upon legal
malpractice (a tort claim) the firm had filed a F/S
o Holding: 9-109(d) (12) specifically provides that the law firms lien is not covered by the UCC
because the UCC did not apply to the law firms security agreement or lien created thereby, the filing
of the UCC F/S did not operate to provide notice or perfect the lien
 Security interest was not governed by UCC and no other law established requirements for
perfection
 but court held that
 CRs were perfected b/c there was no law requiring to do more than they had done
 Were unperfected b/c there was no law specifying any means to perfect
 Could have established reasonable requirements for perfection, such as placing a
notice of the lien in the court file.
 Other might choose any one of the 3 alternatives
75
E. What Became of the Notice Requirement?



In some cases, security interests will be effective even though the most diligent search would not lead to
their discovery.
UCC is justified in part by the fact that those who accepted later interests did so with knowledge of the
earlier interests or after choosing not to acquire such knowledge.
Better view UCC is principally set of rules that allocate losses that are thought to be smaller than the cost of
loss avoidance
o UCC isnt actually about notice; rather, about allocating losses to the people in the best
position to bear them
GO BACK AND READ 9-312-314, 9-310(b)(8) explains how things may be perfected
Assignment 21 Characterizing Collateral and Transactions


Sometimes the proper method of perfection depends both on the type of collateral and how the court
characterizes the transaction
o Granting a security interest in a patent perfect by filing in the UCC filing system
o Assigning patent ownership (sale) perfect by filing in the USPTO
2 Key Distinctions
o Distinctions related to place of filing
o Distinctions related to method of perfection
A. Determining the Proper Place of Filing



There are more than 4k filing systems in the U.S.
Some laws specify which filings are properly made in each system.
o Could be based on intrinsic nature of collateral, use to which collateral is put, or based on type of
lien to be perfected.
Therefore, to determine where to file, SCs must classify both collateral and transactions.
B. Determining the Proper Method of Perfection

5 ways a security interest in personal property can be perfected:
o Filing
o Possession
o Control
o Giving notice to the stakeholder (on non-UCC collateral such as insurance claims and tort actions)
o Doing nothing (automatic perfection)
1) Instruments Distinguished from General Intangibles
o Omega Environmental Inc. v. Valley Bank: bank had possession of certificate of depositthroughout
the relevant factual timeline
 Rule: A security interest in an instrument is perfected by possession 9-313(a)
 Issue: Is a CD (certificate of deposit) an instrument?
 Rule 9-102(47) see instrument definition
76
-



"Instrument" means a negotiable instrument or any other writing that evidences a right to
the payment of a monetary obligation, is not itself a security agreement or lease, and is
of a type that in ordinary course of business is transferred by delivery with any necessary
indorsement or assignment.
Rule: promissory notes and CDs bearing the terms nonnegotiable and nonassignable are
instruments even though they bear words limiting transferability
Rule:
- rather than looking narrowly to the form of the writing, a court should instead look to
the realities of the market place
- if there is evidence that the type of writing at issue is ordinarily transferred in the
marketplace by delivery with the necessary endorsement, the requirements under Art.
9 are met
Holding: CD is an instrument CD evidenced a right to the payment of money and was of a
type which was in the ordinary course of business (in Virginia) transferred by delivery with
any necessary indorsement or assignment.
- Here, the CD had actually been transferred previously, and it was ordinary
commercial practice in Virginia to treat nontransferable CDs as instruments
2) True Leases Distinguished from Leases Intended as Security
o Most litigated issue whether a transaction is a security interest or a lease.
leaseperfection
o In re Purdy: the owner of cattle leased them to a dairy farmer the farmer filed bankruptcy the
farmers bank lender claimed the cattle under an after-acquired property clause in the S/A
 Issue: whether it was a true lease or a sale with a S/A?
- Mattered because lessor didnt file a F/S
 Rule:
- if a transaction is a lease, the lessor is entitled to its property, with no need to prove
filing
- but if the transaction is a sale with the lessor retaining a security interest, the
security interest is unperfected, and the lessor may be out of luck
 (Lease): a lease involves a payment for the temporary possession, use, and enjoyment of
goods, with the expectation that the good will be returned to the owner with some expected
residual interest of value remaining at the end of the lease term
 (Sale): a sale involves an unconditional transfer of absolute title to goods, while a security
interest is only an inchoate interest contingent on default and limited to the remaining
secured debt
Analysis: 2 steps factual inquiry
- Burden: party challenging the lease bears the burden of proving it is a S/A
leaserebut
(1) Bright-Line Test: a transaction in the form of a lease creates a S/A if the consideration that the
lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the
term of the lease AND is not subject to termination by the lessee AND the original term of the lease
is equal to or greater than the remaining economic life of the goods
77
A.consideration, B.C.
o If the lease runs longer than the economic life of the goods, then the lease is a per se S/AS/A
o Rule (Economic Life): must look at agreement to determine what economic life is relevant
(2) Economics of the Transaction Test: If the goods retain meaningful value after the lease expires,
look at the specific facts of the case to determine whether the economics of the transaction suggest
that the arrangement is a lease or a S/A
CONSIDER:
o (1) whether the lease contains a purchase option price that is nominal;
o (2) whether the lessee develops equity in the property, such that the only economically
reasonable option for the lessee is to purchase the goods
o (3) whether the lessee kept a meaningful reversionary interest in the goods
(1)
(2) ,
(3)
o Irrelevant: whether the parties adhered to the terms of the lease in all facets 1-203(c) the
fact that the terms of the lease are unfavorable to the lessee, that the lessee assumes the risk
of loss of the goods, or that the lease requires the lessee to maintain insurance on the goods
are not alone grounds to find a lease to be a S/A
 Holding
- the economic life of the herd was far greater than the lease term bright-line test failed
- no purchase option and the lessee kept a meaningful reversionary interest (could easily release to competitor) economics of the transaction test failed (see p. 364)
- Focus on the economic life of the herd as required by the agreement not the individual cows
o 9-505 permits a precautionary filing, that characterizes the transaction as a lease, but nevertheless
will perfect the transaction if a court later holds it to be a security interest.
o Leases Treated as Security Interest - 1-203(b): a transaction in the form of a lease creates a
security interest if the consideration that the lessee is to pay the lessor for the right to possession and
use of the goods is an obligation for the term of the lease AND is not subject to termination by the
lessee AND: SI
 (1) original term of the lease is equal to or greater than the remaining economic life of goods
 (2) the lessee is bound to renew the lease for the remaining economic life of the goods OR is
bound to become the owner of the goods
 (3) the lessee has an option to renew the lease for the remaining economic life of the
goods for no additional consideration or for nominal additional consideration upon
compliance with the lease agreement; OR
 (4) the lessee has an option to become the owner of the goods for no additional
consideration or for nominal additional consideration upon compliance with the lease
agreement
3) Realty Paper
o Sometimes used to refer to a promissory note secured by a mortgage or deed of trust like chattel
paper, except the underlying collateral is realty, not chattel
o Proper method is to perfect in the right to payment (the note)
 9-308(e) says if you perfect against the note then you perfect against the mortgage 9-203(g)
regarding attachment
78
o In most instances, that note will be an instrument perfection can be accomplished by possession 9313(a) or filing 9-312(a), but possession is superior 9-330(d) (priority over later purchaser)
4) Chattel Paper, Instruments, Accounts, and Payment Intangibles Distinguished
o One debt can serve as collateral for another Debt that serves as collateral can be classified as chattel
paper, instrument, account, or a payment intangible.
, () (, )
o Nested definitions = chattel paper instrument account payment intangible
 Stop when you hit a definition that fits
 Is it chattel paper? 9-102(a) (11)
- Monetary obligation AND SI in specific goods
 If not, is it an instrument? 9-102(a) (47)
- Writing that evidences a monetary obligation in an ordinary course of business and is
not itself a SI
 If not, is it an account? 9-102(a)(2)
- Exclude definition of chattel paper and instrument from property sold
- Transferred in ordinary course of business in sale of property 9-203
 If not, is it a payment intangible? 9-102(a) (61), (42)
- Principla obligation is a monetary obligation
o Chattel paper: record that evidences both a monetary obligation and a security interest in goods or
a lease of goods In essence, a paper that evidences a secured debt.
XX/SI
 Perfect by filing or possession possession is superior to filing
 a purchaser of chattel paper who gives new value in the ordinary course of its business and
who acts without knowledge of a security interest perfected by filing has priority over the
security interest (a), (b) purchaser includes both buyers and later secured lenders
 Record is medium- netural can be written or electronic but cant be oral
o Instrument: negotiable instrument or any other writing that evidences a right to the payment of a
monetary obligation, is not itself a S/A or lease, and is of a type that in ordinary course of business it
is transferred by delivery with any necessary indorsement or assignment. 9-102(a)(47).
leaseS/A, /
(S/Alease, , ) ()
 If a writing that otherwise qualifies as an instrument contains a S/A or lease, it is chattel
paper, not an instrument
 Requires a writing (not medium netural)
o Account: a right to payment of a monetary obligation for property sold or services rendered.
9-102(a)(2)


If the right to payment is evidenced by chattel paper or an instrument, it does not qualify as
an account
Need to file to perfect in an account
o Payment intangible: a general intangible under which the account debtors principal obligation is a
monetary obligation. 9-102(a) (61).
79
o In re Commercial Money Center.: DR assigned its rights to lease payment streams to SC. (367-70)
Issue (1): are the payment streams chattel paper or payment intangibles?
 Holding(1):
- payment streams stripped from the underlying leases are not records that evidence
monetary obligations they are monetary obligations
recordevidence
- thus, the payment streams are not chattel paper most monetary obligations are
accounts, but the definition of account excludes rights to payment evidenced by
chattel paper
- therefore, the monetary obligations in this case fall within the payment intangible
subset of the catch-all definition of general intangibles
Issue (2): Is the assignment an outright sale or a loan (security interest sale securing an obligation)
of a payment intangible?
 Scope: the perfection rules of UCC apply not just to security interests for loans, but also to
sales of accounts, chattel paper, payment intangibles, and promissory notes 9-109(a)(3)
 Rule (Automatic Perfection for Payment Intangibles): sale of payment intangible or
promissory note (referred to as a security interest) is perfected automatically 9-309(3), (4)
perfected when it attaches
 Holding(2)
- SC (1) had none of the potential benefits of ownership; and (2) is contractually
allocated none of the risk of loss
-

these are strong indicia of a loan rather than a sale the absence of risk seems to result
in a finding of a DR-CR relationship in most cases since this was a loan and not a
sale, the SCs interest was not automatically perfected
Note: The court concluded that the parties stripped the payment streams from the leases,
thereby converting the collateral form chattel paper to payment intangibles
-
Comment 5.d to 9-102 disagrees if the lessors rights under a lease constitute chattel
paper, an assignment of the lessors right to payment under the lease also would be an
assignment of chattel paper, even if the assignment excludes other rights
C. Multiple Items of Collateral


Decide precisely what the collateral is and how that collateral is conceptualized and classified under the
scheme of property law then classify it under Article 9.
Ex: leases and property leased. Security interest requires to both perfect on the lease and on the
equipment leased.
80
Chapter 7 Maintaining Perfection
Assignment 22 Maintaining Perfection Through Lapse and Bankruptcy

What do SCs have to do to maintain perfection over time and how do they terminate perfection when it has
served its purpose?
A. Removing Filings from the Public Record


Once debt is paid, both DR and SC typically will want to remove filing from public record.
o DR wants to clear title to its property by getting the filling off the record
o SC will want to file off record, so it isnt bother by inquiries about property in which it no longer has
an interest.
Most systems dont allow actual removal of documents, all you can do is add another stating that the earlier
document is no longer in effect.
o All RE recording systems operate in this manner
1) Satisfaction (Real Estate)
o When a RE mortgage is paid, the mortgagee executes a document called a satisfaction of mortgage
for recording identifies the mortgage states that it has been satisfied both the mortgage and
satisfaction of mortgage remain permanently in the recording system

Even if DR pays the mortgage debt, the mortgage continues to cloud the DRs title until a
satisfaction is recorded
 The satisfaction assures persons who deal with the property in the future that the mortgagee
cannot make claims against it
o Stalemate occurs when a person contracts to sell their house free and clear of the mortgage on it the
sellers lender will not remove mortgage from title until its paid off, and buyers lender will insist that
title is clear before it disburses loan.
 Closing gathering of all parties to make simultaneous exchange of documents and money
-
The sellers mortgage is paid off with the loan proceeds from the buyers lender, and
the sellers lender will simultaneously deliver a satisfaction of the mortgage to the
seller
- seller will deed the property to buyer
- buyer will sign a new mortgage for the amount of the loan proceeds, and the parties
will record all 3 documents immediately
o Statutes in most states provide for imposition of a penalty on a SC who fails to give one to a DR who
has fully paid the mortgage debt
 Courts can order immediate satisfaction notwithstanding the existence of a statute to the
contrary (see p. 377)
81
2) Release
o Mortgages can encumber more than one parcel of real property. If mortgage has not been paid in
full, but SC is willing to release some of the property from the mortgage lien, SC can execute a
release for recording.
o Most SCs only release collateral to the extent they are required to do so by contract DR typically
bargains for the SCs contractual obligation to release the collateral before the loan is made
 Common in financing the development of real estate subdivisions individual parcels cant be
sold if theyre encumbered
- Lender usually will release a lot in return for a partial payment of its mortgage
(paydown)
- the mortgage will probably contain a provision requiring the SC to give the release,
contingent on the DR/developers payment of the release price the developer will use
proceeds of the sale of the lot to pay SC the release price will reduce the principal
outstanding on the loan
- in return, SC will sign a release of the particular lot that sold, reducing its collateral,
and record it
 Absent a release provision in a mortgage, the SC is under no obligation to release the
collateral on partial payment of the mortgage even if the DR offers a paydown that will
improve the lenders collateral-to-loan ratio
- the SCs only obligation is to execute a satisfaction when the DR pays the entire
balance owing on the mortgage debt
- Same rule applies to UCC security interests
3) Article 9 termination and release

Satisfaction in UCC
o If DR has paid obligation and SC is not required by contract to lend more money, DR can demand
that SC file a termination statement within 20 days. 9-513(c)(1) If SC fails to do so, liable for
actual damages and a $500 penalty. 9-625(b), (e)(4).
o Upon filing of T/S, F/S ceases to be effective. 9-513(d).

Release in UCC
o Release of collateral covered by the F/S is accomplished by amending the F/S. 9-512(a).
FS
 The SC is obligated to file a T/S upon full payment of the secured debt, but is not obligated
to file an amendment deleting collateral on partial payment unless the secured party has
contracted to do so like the RE system
o T/S or amendment must identify by file number the initial F/S to which it relates Also must indicate
that such F/S is no longer effective. 9-102(a)(80).
o A T/S or amendment becomes part of the F/S to which it relates. 9-102(a)(39)
 As such, minor errors or omissions in T/S subject to seriously misleading test of 9-506 such
errors would not render the financing statement including the T/S or amendment ineffective
unless errors make the financing statement seriously misleading
o Anyone can file a T/S but a filed record is effective only if it is filed by a person that may file it
under 9-509. 9-510(a) file
 Possibility that T/Ss that show up on a search are not effective (because SC didnt file them)
burden on searchers to determine effectiveness of T/S
82

o
o
o
o
o
o
9-509(d)(1) provides that a person may file a T/S if the SC of record authorized the filing. 9509(a)(1) when an agent mistakenly files a T/S, the SC may argue that it did not authorize
the filing of a T/S or, although it authorized the filing of a T/S, it did not authorize the filing
of that T/S
In re Motors Liquidation Co.:
GM entered a $300M synthetic lease financing arrangement headed by JP Morgan and secured by
12 pieces of RE
5 years later, GM entered into an unrelated $1.5B term loan financing arrangement headed by JPM
and secured by a large number of GMs assets
F/Ss were filed for both secured lending arrangements, both naming JPM as the secured party
as the synthetic lease reached maturity, GM had Mayer Brown prepare the documents necessary for
the lenders to be repaid and to release the related security interests
MB associate identified 3 F/Ss recorded against GM only the first 2 related to synthetic lease, the
last one related to the term loan
in its closing checklist, MB mistakenly included the term loan F/S for termination and a T/S for the
term loan F/S was prepared the checklist and draft documents went through multiple levels of
review by MB, GM, JPM, and Simpson Thacher (JPMs counsel) nobody recognized the mistake
and the T/S for the term loan F/S was filed file
 Rule: if the SP of record authorizes the filing of a T/S, then that filing is effective regardless
of whether the SP subjectively intends or understands the effect of that filing
 Issue: did JPM authorize the filing of the T/S that mistakenly identified for termination of
the term loan F/S?
 Holding: although JPM never intended to terminate the term loan F/S, it authorized the filing
of a T/S that had that effect
- JPM and participant lenders went from secured to unsecured
 Rule: actual authority is created by a principals manifestation to an agent that, as reasonably
understood by the agent, expresses the principals assent that the agent take action on the
principals behalf
 Application: JPM and Simpson Thachers repeated manifestations to MB show that JPM and
its counsel knew that, upon the closing of the synthetic lease transaction, MB was going to
file the T/S that identified the term loan F/S for termination and that JPM reviewed and
assented to the filing of that statement
B. Self-Clearing and Continuation in the Article 9 Filing System

Article 9 establishes a self-clearing system F/Ss are effective for only 5 years 9-515(a)
UCC filingperfection
o Unless SC files a continuation statement (amendment to F/S) during the last 6 months of the fiveyear period, the F/S lapses. 9-515(a), (c), (d) o C/S must also identify the original statement by file number and state that the original statement is
still effective 9-102(a)(27)
o Filing a new F/S will not maintain the date of priority of the original filing need C/S to do that 9515 distinguishes between C/S and later filed F/S
o Can keep F/S effective into perpetuity by filing C/Ss no limit
o Failure to file a necessary C/S timely is both a common error and a common source of legal
malpractice claims
83

o Only approx 30% of statements are terminated, 15% continued rest (55%) are cleared by lapse.
o 6 mo. window has disproportionately adverse effects on unsophisticated lenders who attempt to take
security
1 year after lapse, filing officer can remove it and destroy it. 9-522(a).
o Keeps potentially lapsed F/Ss in the system long enough to account for any delay in processing and
indexing timely C/Ss
 519(h) requires that the filing officer index records within 2 days of their receipt by the
officer practically never happens weeks or months behind no penalty for violation
o Art. 9 filing system may contain only the F/Ss filed or continued in the past 6 years
o Not all Art. 9 filing systems have this removal some are integrated with RE recording system where
deeds are never removed F/Ss lapse nonetheless.

Worthen Bank & Trust Co. v. Hilyard Drilling Co.
DR granted security interest in all accounts receivable to SC1 4 years later DR granted a secondary security
interest to SC2 SC1 failed to file a timely C/S
o Issue: Did SC1s perfected security interest lapse due to the failure to file a C/S?
o Holding: Yes. Filing is effective for only 5 years If the perfection lapses, all other perfected security
interests advance in priority Although SC1 refiled, it left SC1 in lower priority than SC2, because
SC2s was filed first.
o Rule: a F/S that does not refer to the original filing cannot suffice as a C/S
Courts uniformly hold the C/S ineffective when the CR files it after the F/S has lapsed even if nobody
prejudiced by the error file CS,priority
o Upon lapse, no longer a filing to be continued
C/S filed too early is still ineffective. 9-510(c).

Upon lapse, interest becomes unperfected.


o Deemed to have never been perfected as against a purchaser of the collateral for value. 9-515(c)
loses priority over purchaser (competing SCs, buyers)
o Doesnt lose priority over a similarly situated lien CR or Trustee in bankruptcy.
 Provided the security interest was perfected at the time the lien CR levied (or at the filing of
the bankruptcy petition), the SC retains priority over the lien CR or T 9-515, Comment 3
 The security interest will be subordinate to a lien CR that levies after lapse and to the T in a
bankruptcy filed after lapse
perfectionlien creditor levyperfectionSCbeat Trustee or lien creditor
C. The Effect of Bankruptcy on Lapse and Continuation



No exception to the C/S filing requirements (5yr C/S or lapse) just because DR filed bankruptcy. 9-515(c).
Exception of Automatic Stay:
o Filing of Continuation statement during bankruptcy does not violate the automatic stay 362(b)(3),
546(b)(1)(B)
A lapsed F/S is not deemed unperfected as against a lien CR or T in bankruptcy whose rights arose before
lapse
84
Assignment 23 Maintaining Perfection Through Changes of Name, Identity
and Use
A. Changes in the Debtors Name

9-507(c) provides that even though a change in the DRs name renders a filed F/S seriously misleading, F/S
remains effective with regard to (1) collateral owned by DR at the time of the name change; and (2)
collateral acquired by DR in the first 4 months after the change. not effective as to property acquired after
that. 9-507(c)
- A SC that financed the purchase of a specific item of collateral has little reason to concern itself with
later changes in the DRs name
- a SC that is financing the DRs inventory on a continuing basis does have to concern itself with
changes in the DRs name

Searchers beware even though a search in the current correct name of the DR discovers no filings against
the collateral, there may be a filing in DRs former name that remains effective against the collateral
- Searcher may want to investigate the possibility of changes in DRs name if worth it
Most S/As do require DR to notify SC of DRs change of name, but most DRs dont (p. 395-96)



If DR changes its name in period between entering into S/A and the SC filing the F/S F/S could be held to
be ineffective (Lazarus p. 396)
Important to distinguish changes of name (9-507(c) from the transfer of collateral to a new owner (507(a)
- i.e., DR incorporates the business that is a new owner, not a changed name
FSSAfileFS
B. Substitution of a New Debtor




Debtor refers to the person who owns the collateral and obligor refers to the person who owes payment
New debtor is a person who steps into the shoes of the original debtor by assuming, and agreeing to perform
under, the S/A. 9-102(a)(56) . Typically, a person who buys DRs business, assumes DRs loan obligations,
and agrees to be bound by the security agreement
Under 9-203(d)(2), a person can be bound as a new DR by a S/A without agreeing to it.
o If person assumes the debts and acquires the assets of the old DR
o Corporation acquires the original DR corporations assets by merger and by operation of law
becomes liable for the original DRs obligations, including the original DRs contractual obligations
under S/As
9-508(c) treats transfer of collateral to new DR same as transfer of collateral to anyone else F/S filed
against original DR remains effective against collateral under 9-507(a)
o If new DRs name is different, 9-508(b) applies rule contained in 9-507(c) the financing statement
remains effective with respect to collateral acquired by the new DR within 4 months after the
change, but is not effective with respect to collateral acquired by the new DR later
o 9-508(a) provides that these rules apply to the extent that the F/S would have been effective had the
original DR acquired the rights.
85

Financing statement remains effective even after disposition of collateral.
C. Changes Affecting the Description of Collateral


If collateral changes appearance, use or location b/w time filing is made and a search for that filing is
commenced changes might prevent searcher from finding filing or realizing its relevance.
Type 1 Changes (p. 397-98)
o Change in circumstances that did not control the place of filing but that does make the collateral
difficult for the searcher to identify as covered by the filing
collateralinventoryequipmentfileeffective

o Under 9-507(b), even if the change in circumstances has made the F/S seriously misleading, it
remains effective.
Type 2 Changes
o Change in circumstances that is sufficient to affect the method of perfect that would have been
appropriate for the initial filing.
9-507(b) excuses misdescription, and F/S remains effective with respect to the changed collateral
However, CR is unperfected b/c different method of perfection was required. 9-311(b).
 As a practical matter, the effectiveness of the F/S is meaningless
 See Blue Ridge Bank (p. 398)
FScollateralcollateralcollateralperfectioncollateral unperfected
o In RE, most courts would hold that a good faith buyer of fixtures would prevail over mortgage
holder even though severance of fixture from real estate violated the terms of the mortgage.
D. Exchange of the Collateral


When DR exchanges collateral for either property or cash
SC sometimes will want the security interest to be perfected in the proceeds and the perfection to be
continuous from the SCs initial filing.
1) Barter Transactions
o 9-315(d)(1) governs perfection in a barter exchange.
Type 0 Barter
- Proceeds received by DR fall within the description of collateral in the already-filed F/S.
- SC has a perfected interest in the new collateral on the basis of the description.
Collateralbroad
Type 1 Barter
- Exchange of collateral for noncash proceeds where those proceeds are property not covered by the
description in the F/S but are property in which an interest could be perfected by filing in the office
where the SCs F/S is already on file.
- Same office rule.
o SC remains perfected without a new filing. 9-315(d)(1).
descriptioncollateralfileperfection
86
-
Any time a DR has swapped collateral, the F/S may encumber property not described in it unless the
searcher knows that the DR did not acquire the collateral in question in a swap transaction, the
searcher cannot rely on the description of collateral in any F/S
Type 2 Barter
- Exchange of collateral for noncash 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.
office filefile
- To be perfected in these proceeds at all, the SC must refile in the appropriate filing office
 For automobile new filing in DMV
 For aircraft new filing in FAA in Oklahoma City
- To be continuously perfected, SC must make these filings within 20 days from the time the DR
receives the proceeds 9-315(d)(3) perfection then relates back to the time when the CR first became
perfected if filing made outside 20-day window, then SC is only perfected from date of subsequent
filing
- Require more vigilance on the part of the SC, and less on the part of the subsequent searcher SC
must discover the type 2 barter and prefect in the proceeds within 20 days of the DRs receipt of them
may not learn in of the barter in time to comply
- To the extent the UCC governs, SC does not need any additional authorization to file the F/S to
perfect in the proceeds. 9-509(b)(2).
In re Seaway Express Corporation
 SC provided line of credit in exchange for security interest in all of DRs inventory and accounts receivable
DR sold A/R in exchange for land, without authorization from SC SC sought to perfect interest in the
property by requesting that DR record a deed of trust DR refused.
- Issue: Whether As perfected security interest in the account extended to the parcel of land.
- Holding: No
o the terms of the UCC do not extend to real property 9-109(d)(11)
o To perfect an interest in real property, party must record a deed signed by the grantor.
o an unrecorded interest in property is not binding on a subsequent purchaser in good faith
- Note: while the UCC code gives SCs great protection by extending their security interests to
proceeds, they nonetheless must make sure that those security interests in proceeds are perfected
2) Collateral to Cash Proceeds to Noncash Proceeds
o The DR may exchange the original collateral for money, then use the money to buy collateral provided it
can trace its value through both transactions, SCs security interest will reach the new property as proceeds
of proceeds. 9-102(a)(12), (64).
Type 0 Change:
- The original filing remains effective to cover goods of the same description
- Rule remains the same as it did in barter
Type 1 Change:
- If DR sells collateral and uses cash from sale to buy collateral not covered by the description in the
F/S (but same office), then SC has to file a F/S within 20 days to be continuously perfected. 9315(d)(3) if F/S filed outside the 20-day window, perfection dates from time of subsequent filing
87
Type 2 Change:
- If DR sells collateral and uses cash from sale to buy collateral that requires filing in different office,
then SC must file a F/S within 20 days to be continuously perfected 9-315(d)(3) if F/S filed outside
the 20-day window, perfection dates from time of subsequent filing
- Treated like type 1 change.
3) Collateral to Cash Proceeds (No New Property)
o DR may simply sell the original collateral and keep the cash.
o 9-315(d)(2) grants SCs continuous, perpetual perfection in identifiable cash proceeds.
o If DR keeps cash proceeds for years, then makes a type 2 change, SC will have an interest in the new
property and will have 20 days to perfect it. 9-315(d)(3)
E. The Six Rules of Assignment 23
Maintaining Perfection Through Changes of Name, Identity, and Use
Protyperule
Rule 1: A financing statement remains effective even after disposition of the collateral. UCC 9507(a).
Rule 2: For the information in the financing statement except the debtors name, a change that makes
that information seriously misleading does not change the effectiveness of the financings statement.
UCC 9507(b). debtor name
Rule 3: If a change in the debtors name makes the financing statement seriously misleading, the
financing statement is effective only for collateral the debtor (i) had at the time of the name change or
(ii) the debtor acquired within four months after the name change. UCC 9507(c)(1).
Corollary: After a change in the debtors name that makes the financing statement seriously
misleading, the financing statement is not effective for collateral acquired more than four months
after the name change. UCC 9507(c)(2).
Debtor namecollateral
Rule 4: If there is a change in the debtor and the new debtor is bound by the security agreement, the
financing statement is effective against the new debtor, UCC 9508(a). This rule does not apply where
Rule 1 applies (i.e., where the original debtor transfers the collateral to a new debtor). UCC 9508(c) &
Official Comment 5.
rule 1disposition of collateral
Corollary: If the new debtors name makes the financing statement seriously misleading, we apply the
same result from Rule 32as to existing collateral and collateral acquired within the next four months,
UCC 9508(b).
88
Rule 5: Changes in use of the collateral that would make the financing statement seriously
misleading are an application of Rule 2 and therefore do not change the effectiveness of the financing
statement.
FSperfection
barterrule 6
Rule 6: A change in the identity of collateral means the collateral becomes proceeds. A security
interest in proceeds is perfected for 20 days, 9315(c), and becomes unperfected on the 21st day unless
one of the following is true, 9315(d):
Three elements
(1) (a) A financing statement is on file covering the original collateral,
(b) a security interest against the proceeds would be perfected in the same office as a security
against the original collateral, and
(c) the proceeds were not acquired with cash proceeds.
OR
(2) The proceeds are identifiable cash proceeds.
OR
(3) The security interest in the proceeds was perfected for a reason other than the general
proceeds rule in 9315(c)
Assignment 24 Maintaining Perfection Through Relocation of Debtor or
Collateral
A. State-Based Filing in a National Economy




How do searchers make determination among statewide filing systems of 50 states and foreign countries?
Rules that specify where to file and search are in 9-301 9-307 Conflicts Rules
Rules governing the effect of perfection or non-perfection, and priority, are the same in all 50 states.
o Usually an issue in perfection by filing, perfection by possession, and control arent likely to generate
interstate problems.
The principal impact of the rules in 9-301 to 9-307 is to tell filers and searchers the state of the secretary of
states office in which they should file or search deal with perfection by control, possession, and filing
interstate problems almost exclusively arise with perfection by filing
B. Initial Perfection
1) At the Location of the Debtor
o While a DR is located in a state, the local law of that state governs perfection of a non-possessory
security interest. 9-301(1).
89

If interest is possessory, more specific provision of 9-301(2) imposes the law of the
jurisdiction in which the collateral is located.
o If law of the state applies, 9-501(a)(2) requires filing in the statewide filing office of the state for
non-real estate estate-related collateral.
o Individual DR deemed to be located at the individuals principal residence. 9-307(b)(1)
 When doubt arises as to the location of a DRs principal residence, prudence may dictate
perfecting under the law of each jurisdiction that may be the DRs principal residence. 9-307,
Comment 2 (Residence v. Domicile (See p. 408))
o Registered organization that is organized under the law of a state is located in that state. 9-307(e).
 Place of incorporation is a matter of public record proper place to file and search can be
determined solely from the public record filer/searcher need not be concerned with the
location of the DRs collateral or operations
 9-102(a)(68), (71)
 Placing the UCC filings against a corporate DR in the same jurisdiction as the corporate
records could dramatically reduce filing errors (see p. 410)
 The location: the place where you file the public record
o Some organizations arent incorporated, like general partnerships and associations Such a DR is
located at its place of business if it only has one, 9-307(b)(2), and at its chief executive office if it
has more than one place of business, 9-307(b)(3).
 Place of business a place where a debtor conducts its affairs. 9-307(a).
 Chief Executive office use nerve center test organization is located in the place from which
it is managed (its nerve center), regardless of location of its operations.
o Foreign Jurisdictions - 9-307(c): subsection (b) applies only if a DRs residence, place of business,
or chief executive office is located in a jurisdiction whose law generally requires information
concerning the existence of a nonpossessory security interest to be made generally available in a
filing, recording, or registration system as a condition or result of the security interests obtaining
priority over the rights of a lien CR with respect to the collateral if subsection (b) does not apply,
the DR is deemed located in Washington DC and that is the property jurisdiction to file a F/S in
 Relevant Inquiry: whether priority is determined by US or foreign law depends on whether,
during the relevant time period, foreign law generally required such information to be made
generally available in a filing, recording, or registration system in order to obtain priority
 See Dayka & Hackett v. Del Monte Fresh Produce (p. 411-13)
2) At the Location of the Collateral
o 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).
 Keep all filings against a parcel of real property or the fixtures attached to it in the same set
of records all filings and searches regarding a particular parcel can be made in a single filing
system the real property records of the county in which the land is located
 One exception a fixture filing against the fixtures of a transmitting utility is made in
the UCC filing system, not the real property filing system 9-501(b)
o Choice of law rule for fixture filings specifies filing at location of collateral, not location of DR. 9301(3).
90
C. Perfection Maintenance
1) Through Debtor Relocation
debtorpublic recordincorporated.
Individuals
o Individual DR can change location to another state by changing his principal residence
o If DR is sometimes physically present in each of 2 or more states, the DRs intentions become
determinative
o When individual DR changes his state of principal residence, the SC who filed in the original state
has 4 months in which to file in the destination state. 9-316(a)(2)
o If SC does not do so, the security interest become unperfected, and is deemed never to have been
perfected as against a purchaser of the collateral for value. 9-316(b)
o Distinguish purchasers for value (secured parties) from lien creditors and bankruptcy trustees
 SC who fails to file in the destination state before the end of the 4-month period loses to a SC
who perfected before that date, but still prevails over a person who becomes a lien CR
before that date or a Trustee in a bankruptcy case filed before that date
 SC loses to a person who becomes a secured party or a lien CR after the 4-month period
expires and before the failing SC otherwise reperfects
 The 4-month grace period for filing in the destination state applies to security interests that
first attach after the DRs change in location, as well as to security interests that attached and
so were perfected prior to the DRs change. 9-316(h)
o S/As generally require DR to declare their jurisdictions of principal residence and notify the SC of
any changes DRs often fail to comply
Unregistered Organization
o Same as individuals: SC has 4 months to discover the change and file a new financing statement or
become unperfected under 9-316
o Unregistered org can move states be changing location of chief executive office.
Registered Organizations
o No legal procedure exists by which a registered organization can change the state in which it is
organized, and thus registered organizations cannot move
o DR corporations can engage in transactions that effectively switch their state of incorporation
reincorporations, mergers, asset sales
 these transactions technically constitute transfers in ownership (see next section and p. 416)
2) Transfer of Collateral

9-316(a)(3) addresses situation in which DR does not move, but instead transfers the collateral to a DR
located in another state when DR transfers collateral to a DR in another state, the SC who filed in the
original state has 1 year in which to file in the destination state.
o If SC does so, SC remains continuously perfected and defeats even competitor who was first to file
against the collateral in the destination state.
o If DR reincorporates by merger or sale of assets, 9-316(a)(3) gives SC 1 year to discover merger
and perfect in destination state.
 SCs task in discovering merger will be much easier than discovering sale of assets
91


merger will be matter of public record articles of merger must be filed in the states of
incorporation of each of the merging entities
SC need just monitor the record of its DRs incorporation in the original state in a sale of
assets, the corporate records may not reflect any change
D. Nation-Based Filing in a World Economy
 Choice of law rule in 9-301(1) applies among nations as well.
International Filing Systems
 The International Registry of Mobile Assets began operating on the internet in 2006 established pursuant to
the Cape Town Treaty ()
 Security interests, leases, and, in some countries, other kinds of liens on airframes, aircraft engines, and
helicopters can be filed in the International Registry does not apply to smaller, typically non-commercial
aircraft aircraft objects are identified by manufacturers serial number, the name of the manufacturer, and
the objects model designation
 A registered interest has priority over any other interest subsequently registered and over an unregistered
interest a SC or lessor with an interest in an aircraft object to which the convention applies must register its
interest or risk losing its collateral to the holder of a later competing interest
 The US has declared the FAA to be the point of entry for filing in the International Registry one first files
in the FAAs national filing system in Oklahoma City the FAA authorizes the International Registry filing,
and the SC or lessor then makes the second filing
 The US excepts non-consensual rights or interests from international registration mechanics liens and
similar interests continue to have the priority they enjoy under US law, even in competition with
internationally registered interests
E. Summary


Conflict of laws issues the UCC of the states are different in one big way that is, where you should file
(i.e., NY says file with secretary of state in NY)
You file principally where the debtor is located -9-301(1) the location of the debtor determines which
states laws apply
Exceptions

o Possessory security interests (where secured CR has collateral) are governed by where collateral is
located (i.e., pawn shop)
o Tangible negotiable documents, goods, instruments, money, tangible chattel paper
- 9-301(3) the law of jurisdiction where collateral is located governs the effect of perfection
(where it puts you in the priority line)
- where you perfect is still determined by location of the debtor
o 9-301(4) for deposit accounts, the law where the bank is located applies to both how to perfect and
the effect of perfection
- 9-304(b)(3) bank is located where the office that the parties are dealing with 9304(b) sets
forth cascading set of rules of how to determine location of interstate bank
4 Possibilities for Location of Debtor
92

o (1) if debtor is individual, the debtor is located at their principal residence (9-307)
o (2) registered organization (created by filing public organic record articles) deemed to be located
in state of organization
o (3) non-registered organization (i.e., partnership) with one place of business, located at that place of
business
o (4) non-registered organization with more than one place of business is deemed to be located at its
chief executive office
- Nerve center which may be ambiguous if so, file in both jurisdictions
Under 9-316
o if debtor moves, the secured party gets 4 months to perfect the security interest in the new
jurisdiction
o if the location changes because collateral is transferred to new debtor (PA corp. merges into IL
corp.), secured party gets a year to perfect the security interest in the new jurisdiction
o Perfection is deemed to be continuous from the time originally filed if made within required time
frame
Chapter 8 Priority
Assignment 26 The Concept of Priority: State Law




To say that one SC has priority over another is to say that if the value of the collateral is sufficient to pay
only one of them, the law requires that value be used to pay the one who has priority.
Comes into play whenever more than one interest exists in property.
Always put priorities disputes in context as between the claimants in this dispute, who wins somebody has
better rights than somebody else
What does it mean to come first?
o Do you have a right to possession?
o Do you have a right to sell the collateral?
A. Priority in Foreclosure




Absent an agreement to the contrary, any lien holder may foreclose while the DR is in default to that lien
holder.
- Existence of prior lien does not automatically block the exercise of rights under a subordinate one.
No lien holder is compelled to foreclose.
- Option to extend the Ds time for payment or to forbear from exercising its remedy.
- SC may see no advantage in foreclosing, may prefer to wait for others to expend the effort/money
Holders of liens against particular collateral might foreclose in any order some might choose to rely on their
security without foreclosing at all.
Procedure for foreclosing can vary with the type of lien
Principles governing most judicial or foreclosure sales:
93
(1) The sale discharges from the collateral the lien under which the sale is held and all subordinate liens. 9617(a) it does not discharge prior liens
saleliensubordinate liensprior lienpurchaserbidprior lien
(2) The sale transfers DRs interest in the collateral to the purchaser, subject to all prior liens. 9-617(a)
- Prior lien holder cannot enforce its debt against a foreclosure sale purchaser b/c purchaser doesnt
assume the debt or agree to pay it
- But prior lien holder can enforce its lien against purchaser by foreclosing on the collateral unless
someone pays off the lien 9-617(c)
 The DR is liable on the priority debt, not the purchaser (in context of second lienholder
foreclosure sale) but the DR is not likely to pay a debt to avoid foreclosure of a lien against
property that now belongs to the purchaser if nobody pays the debt, the lienholder will
foreclose on the purchasers property as such, sophisticated purchasers usually choose to adjust
their bidding prices so they can pay off the prior lien (i.e., whatever the think the collateral is
worth, pay that amount minus the amount of the debt)
 Unsophisticated purchasers can really get screwed if they dont adjust their bid amount to take
into account the priority lien Caveat emptor applies, even if purchaser doesnt realize the
priority lien, sale probably cant get set aside.
 Alternatively, the purchaser can always breach the peace when the priority lienholder tries to
repossess requiring the priority lienholder to go through the judicial process and use the
collateral in the meantime
 Always risk in junior lienholder foreclosure sale that the collaterals value will depreciate or be
diminished
 Sophisticated bidders at a second lien foreclosure sale sometime arrange with the priority lien
holder, before they bid, that if they buy the property they will assume the first debt (become
personally liable on it) the deal might call for the bidder to cure any default in the first debt and
then pay in accord with its original terms, or to pay on new terms negotiated between the parties
(3) Whoever conducts the sale applies proceeds first to the expenses of sale, then to payment of lien under
which sale was held, then to payment of subordinate liens in order of priority 9-615(a) remaining surplus, if
any, is paid to debtor 9-615(d)(1) Neither prior lien holders nor unsecured creditors share in distribution prior
lienholders can continue to look to collateral USC can obtain judgments against DRs and levy on surplus in
DRs hands.
(4) Payment to a lien holder from proceeds of sale reduces the balance owing Lien holder is then entitled to a
judgment against DR for any deficiency (and becomes USC), unless statute provides otherwise 9-615(d)(2).
Case analysis
Example: First mortgagor forces sale.
House has two mortgages, first $50k, second $30k. Both in default
 Sale will discharge both liens, purchaser will own home free and clear.
 Sherriff will use proceeds of sale to pay expenses of sale.
 Pay the next 50k to the first mortgage holder.
 Pay the next 30k to the second mortgage holder.
 Remaining balance to DR (ignoring the claims of USCs)
Example: Second mortgagor forces the sale.
 Sale discharges only the second mortgage lien, purchaser takes subject to first mortgage
94
-




bidder will stop bidding at $50k less than they think house is worth and reserve that amount to pay
off the first mortgage after the sale is complete
Sheriff will first use sale proceeds to pay expenses of sale.
Sheriff pays nothing to first holder, pays next 30k to second mortgage holder.
Pay remaining balance to DR
If purchaser doesnt pay mortgage, first holder will foreclose DR is still on the hook for first mortgage, but
probably wont pay Purchaser will usually pay (and reduce their bidding price by the amount of the
mortgage)
B. Credit Bidding Revisited


Credit bidding is bidding on credit
- if the winning bidder in a foreclosure sale will be entitled to some or all of the sale proceeds, the
person conducting the sale is required to extend credit to that bidder for that amount once the
bidding is over
- other winners must pay their bids in cash the person conducting the sale collects from the credit
bidder by setting the credit bid off against the amount of the sale proceeds due to the credit bidder
the credit bidder pays the credit bid amount only when the bid is deducted from the sale proceeds
A SC is entitled to credit bid only to the extent that the SC would be entitled to the proceeds of sale
- Basically, if a lienholder who is subordinate to the lienholder who is forcing the sale, they will need
to pay cash up to the amount of the priority lienholders debt because they will need to satisfy the
priority lienholders debt by a payment in cash, then they can credit bid up to the amount of what
theyre owed
- A priority lienholder cannot credit bid at a junior lienholder foreclosure sale b/c not entitled to
the proceeds
Case illustration
First mortgagor holds 100k mortgage, second holds 50k mortgage, lienor holds third 15k lien.
 Example: 1M forces sale
- If 1M forces sale, 1M would get first 100k, 2M would get next 50k, and 3L would get next 15k, D
would get the rest.
- At sale, 1M could credit bid up to 100k, but would have to pay any excess of its bid over 100k in
cash.
- 2M must bid cash up to 100k, but then could bid 50k on credit.
- 3L must bid cash up to 150k but could bid an additional 15k on credit.
 Example: 2M forces sale.
- 1M not entitled to any proceeds, so couldnt credit bid.
- 2M could credit bid up to 50k.
- 3L must bid cash up to 50k but could credit bid an additional 15k.
 During the auction, no distinction is made between a credit bid and a cash bid each bidder simply bids a
dollar figure the distinction is made when the person conducting the sale requires the high bidder to pay the
amount bid
- If the high bidder claims a credit to which it is not entitled, the high bidder will be in default on its
bid and must either come up with the difference in cash or lose its right to purchase the collateral
95
C. Reconciling Inconsistent Priorities

In some sales procedures, purchaser takes free of all liens and proceeds of sale are distributed first (after
expenses of sale are paid) to the holder of the first lien.
o Relatively rare deprive the holders of senior liens of their option not to foreclose brings more
parties into foreclosure proceeding, further complicating the process
 Common feature to all priority systems: SCs whose liens are discharged by sale share in proceeds of sale in
the order in which their liens have priority.
 Mortgages and judgment liens ordinarily rank in the order in which they were created (first in time)
o Mortgages usually have priority over judgment liens because when a DR has judgment liens against
property, no one will make a mortgage loan to the D
o Potential judgment lienors can file notice of pendency (lis pendens) when litigation is pending
filed in RE records and discoverable in title search
 reserves a position in the priority queue for whatever judgment is later entered the case must
directly affect the title to real property
Bank Leumi Trust Co. of N.Y. v. Liggett:
 L perfected a judgment lien on the house Afterward, bank put mortgage on home and then third-party C
acquired lien against property C argues that even though banks mortgage would be discharged, Bank could
not share in the proceeds of the sale because it was not identified as a party entitled to distribution in the
statute
o Issue: whether a type of CR not explicitly identified in the statute is entitled to proceeds from the
foreclosure sale especially when it had priority to an identified CR type that would receive
proceeds?
o Holding: Yes. Language in statute that unless court otherwise directs permits court to direct
distribution of the proceeds of the sale when it appears to court that someone other than those
specified has an interest superior to specified persons. (p. 446)
D. The Right to Possession Between Lien Holders

If 2 lienholders decide to foreclose at the same time, most courts require that junior lienholders surrender
possession to senior lien holders effectively giving seniors the right of way
The Grocers Supply Co. v. Intercity Investment Properties
juniorspossessionpossession
 G perfected security interest for inventory financing of store IC later obtained judgment against store IC
knew of prior recorded security interest, but didnt contact G before taking possession (levying) of inventory
G then brought suit to determine its rights in the property.
- Rule: the right of a prior perfected SC to take possession of its collateral is superior to any right of a
mere judgment CR
 the prior perfected SC may regain possession of the collateral from an officer who has levied
on the property at the direction of a judgment
- Holding: Gs right, as a prior SC, to take possession of its collateral was superior to the right of IC, a
mere judgment CR G could regain possession of the collateral
 Holding otherwise would take away from the perfected SC the important repossession right
 Note: In the agreement between DR and G, a judgment against DR was an event of default
which gives rise to repossession right
96
-
-
Rule: a SC with a right of possession of the collateral after default may maintain an action for
conversion against one who exercised unauthorized acts of dominion over the property to the
exclusion of the CRs rights
Holding: ICs action caused G to incur additional expense, must reimburse G
 Court emphasized that IC knew of the Gs preexisting right before seizing the collateral
9-609, Comment 5 provides that a senior secured party is entitled to possession as against a junior
claimant non-UCC law governs whether a junior SC in possession of collateral is liable to a senior
in conversion normally, a junior who refuses to relinquish possession of collateral upon the demand
of a SC with a superior possessory right to the collateral would be liable in conversion
Frierson v. United Farm Agency ,juniorsale
U granted security first security interest in collateral to M F levied on the collateral M demanded that F return
the collateral to U
 Rule: a SC with a security interest over all the DRs property cannot rely on a default, whether technical or
not, to prevent another CR from executing on the DRs property, while treating the loan as not in default
when dealing with the DR (i.e., to keep the DR alive as going concern)
o Against spirit and letter of UCC
 Holding: M cannot refuse to exercise its rights under the S/A, thereby maintaining U as a going concern,
while it impairs the status of other CRs by preventing them from exercising valid liens
How to Reconcile Grocers with 9-401 2 Ways
 (1) The right of the senior to possession is not the right to possession for the purpose of leaving the DR in
business and frustrating collection by junior lienholders the senior lienholder must foreclose or stand
aside so junior lienholders can foreclose (Frierson reason)
 (2) Grocers requires the junior lien holder to surrender possession to the senior, but it does not bar the
junior from continuing with the sale under some sale procedures, property can be sold even though it is
not physically present
E. U.C.C. Notice of Sale



Lien holders other than the one forcing a sale need to know that the sale is occurring.
o Senior lienholders whose debts are in default may wish to demand possession and conduct their own
sales
o Junior lienholders may wish to protect their interests by bidding at the senior lien holders sales
9-611 requires foreclosing SCs to give notice of sale only to other lien holders that are easy to find those
who have properly indexed F/Ss on file or who have perfected by compliance with a federal statute or state
certificate of title statute.
o To take advantage of this safe harbor, SC request search of filing system 20 to 30 days before
notification date notification date is the date on which the foreclosing SC will send notice of sale
o If search results arrive before notification date, SC sends notice to those lien holders identified in the
search, and also sends notice to any lienholder who furnished the foreclosing SC with an
authenticated notice of its claim
o If those required notices are sent, all subordinate liens are discharged.
 If 9-611(c) doesnt require notice to holder of properly perfected valid lien, then lien is
discharged without notice.
DR and any guarantors always get notice
97
Assignment 27 The Concept of Priority: Bankruptcy Law




Through confirmation of a plan, bankruptcy can reduce the amount of the lien to an amount equal to the
value of the collateral as determined by the court, adjust the interest rate based on some market rate, and
extend the time of repayment some liens can be avoided entirely because they are unperfected or are
preferences
o Other than this, security interests and liens survive and retain their relative priorities in bankruptcy
Priority means that when the value of collateral is sufficient to pay only one of two lien CRs, the law will
seek to ensure that the value is applied to payment of the one who has priority this meaning of priority does
not change when DR goes into bankruptcy
In other respects, the meaning of priority does change in bankruptcy
o Usually, a lienholder may foreclose at any time after default
 The SC cannot foreclose until the automatic stay is terminated in bankruptcy
 SCs can seek relief from stay, but no guarantee of grant
o Usually, SC cant be compelled to foreclose
 In bankruptcy, T or DIP can sell the SCs collateral free and clear of liens, effectively
foreclosing the SCs lien on the Ts or DRs own timetable.
 Transfer of control over timing of foreclosure from SC to T/DIP
Bankruptcy shifts focus from most senior SCs interests coming first to maximizing the value of the
bankruptcy estate for the benefit of all concerned
o May compel SC to leave their collateral in place so that the business of the estate can continue or so
that the DR can go on earning a living.
o Not done for benefit of fully SC bankruptcy system holds full SCs in place primarily for the benefit
of the marginally secured or unsecured CRs and the DR
A. Bankruptcy Sale Procedure


T or DIP (A debtor in possessioncan) sell collateral sales may be judicial sales held pursuant to a court
order and confirmed afterward by the court or a non-judicial sale OR they may be non-judicial sales held
pursuant to the powers vested in the DIP or T by statute 363(b)(1), (c)(2)
Collateral may be sold subject to the liens of SC.
o Once sale is complete, collateral ceases to be property of BANKRUPTCY estate, automatic stay
expires, and SC is free to foreclose. 362(c)
o Purchasers in sale acquire only DRs equity in the property
o Ordinarily purchasers will deduct from their offers the additional amounts they expect to pay later to
SCs to clear the title to the property
o If liens [security interest] exceed the collaterals value [sale price of the collateral (DR has no equity
in the collateral), no one may be willing to buy it subject to the liens this property would be
considered burdensome to the estate (unless it can use it in some economically beneficial way) and
T/DIP can abandon it under 554
liencollateral (DR), lien, (burdensome)
 Abandonment removes property from the bankruptcy estate and revest it from the DIP/T
(acting on behalf of estate) to the DR (acting on own behalf) 362(b)(1), (c)(1)
 Provisions of the automatic stay that prohibit acts against property of the estate no longer
apply
98

However, provisions of the automatic stay that prohibit acts against the DR or against
property of the DR continue to apply SC who wishes to foreclose after an abandonment may
still need to obtain stay relief before doing so

DIP/T can sell collateral free and clear of liens. 363
state lawbankruptcysecured interestSTpriorityproceed
o Buyer takes unencumbered title (as good as title gets) to the property and presumably pays its full
value as purchase price
o Liens are transferred to the proceeds of sale applied to liens in order of priority.
 But SC who is unsure of amount/priority of its lien may face difficult problem in determining
amount to bid
o Deprives SC of control over timing of foreclosure/sale of collateral T/DIP choose when to sell
provided they can meet requirements for a 363 sale hurts SCs who would realize greater recovery in
better market
o There are very specific rules in 363(f) that are designed to protect the interests of junior CRs
 Free and Clear Sale - 363(f): IMPORTANT!
- authorizes T/DIP to sell property free and clear of any (junior) interest in the property if:
Requirements
(1) non-bankruptcy law allows free and clear sale;
(2) interest holder consents to free and clear sale;
(3) the interest is a lien, and the sales price is greater than the aggregate value of all liens;
- Most courts determine value as value after 506(a) bifurcation value of collateral at
time of filing (not the face amount of the debt)
- Most courts interpret greater than to mean greater than or equal to sale is permissible
if value equals the sales price
Obviously, there are courts who follow the minority rules
(4) interest is in bona fide dispute; OR
(5) interest holder could be compelled to receive monetary satisfaction of the interest in a state
legal or equitable proceeding
Majority of courts say a foreclosure proceeding counts under (f)(5)
o Other things to note
 SCs in 363 sale may credit bid in the amount of their liens 363(k)
 If court authorizes the sale, the authorization order is insulated on appeal under 363(m)
maintains finality/validity of the sale encourages bidding b/c bidders dont have to deal with
uncertainty that sale might later be deemed invalid
In re Oneida Lake Dev., Inc.
 DR has the right to sell a SCs collateral free and clear over SCs strong objection
SCsaletrusteedebtorsalestate lawSCtiming of forclosure
 collateral had been worth enough in the past to cover almost all of the 600k lien, but courts decision
authorized the sale for an amount barely sufficient to pay prior liens SCs lien wiped out with only nominal
payment.
o Holding:
 (f)(3) was met - DR could show that property was depreciating rapidly and the offer received
was best possible price plus the objecting CRs lien was s/t attack as a preference and if that
lien is avoided, offer would easily exceed sum of all other liens.
99


(f)(4) was met - lien of SC was in bona fide dispute because a preference action against it
was likely (even though not commenced)
One circumstance in which the bankruptcy power to sell free and clear of liens can achieve greater
economic efficiency than the non-bankruptcy foreclosure sale procedure is where the amounts and priorities
of competing liens against the collateral are in doubt and the collateral is depreciating in value by selling
free and clear of liens and transferring the liens, whatever their priority and amount, to the proceeds of sale,
the DIP/T can prevent further losses
B. The Power to Grant Senior Liens (Post-Petition Financing)



T/DIP can offer encumbered property as collateral for post-petition loans may be able to alter the priority of
preexisting liens in ways not possible under state law
o Under state law, priority generally doesnt change usually rank in priority in which they are created
allows CRs to manage expectations (i.e., through search for prior liens, etc.)
In limited circumstances, T/DIP can borrow additional money from a post-petition lender, secured by a lien
with priority over existing liens (priming) 364(d)
o Before doing so, T/DIP must notify the holder of the first lien of its intention if the first lienholder
objects (which it will), the court must hold a hearing to determine that the code prerequisites to
such financing have been satisfied:
Debtor/collateraldeb
(1) the estate is unable to borrow the money without granting a priority lien; AND
(2) there is adequate protection of the interest of the SC whose lien is being displaced
o Granting priority liens on already encumbered property is permitted because it is often necessary to
successful operations of the business (and a successful reorg) otherwise the business may fail no
future income to the detriment of the DR and unsecured CRs
o SCs dont like this because they often have nothing to gain and AP is no guarantee against loss
 When AP fails, 507(b) gives the SC priority over all other unsecured claims (super priority)
but worthless if nothing left to for unsecured CRs
o The non-bankruptcy analog is that the preexisting lienholder agreed to subordination agreement but
they didnt which illustrates that bankruptcy alters their rights
In re 495 Central Park Ave: existing CR had $4M mortgage against building worth $2.2M DR wanted to
borrow more money against the building post-petition post-petition lender wanted priority over existing CR
o Rule (DIP Financing Option 1): DR may incur unsecured debt as an administrative expense with
priority status under 507(a)(2)
o Rule (DIP Financing Option 2): if DR cannot obtain credit as admin expense, it may acquire a loan
that is either unsecured but senior to all admin expense claims, secured by a lien on property that is
unencumbered, or secured by a junior lien on property that is already encumbered - 364(d)
o Rule (DIP Financing Option 3): if DR cannot obtain financing by any of these means, the DR may
invoke 364(d) and obtain credit secured by a lien on property senior or equal to a prior lien
 Rule: DR must demonstrate that it cannot obtain financing by other means in order to grant a
post-petition priority lien to a post-petition lender on encumbered estate property
 Rule: 364(d)(1) does not require the DR to seek alternate financing from every possible
lender however, the DR must make an effort to obtain credit without priming a senior lien
o Holding: DR was unable to obtain financing by other means AP was provided because the money
lent would be spend on improvements to the building (transferred into value for the existing SC)
100
Chapter 9 Competitions for Collateral
Assignment 28 Lien Creditors Against Secured Creditors: The Basics



A lien CR is basically a CR with a lien created by the judicial process
Who is a judgment lien creditor a creditor is just a creditor until they get a judgment, then they become a
judgment creditor only judgment creditors who take the next step become judgment lien creditors
o RE filing judgment where land records are located generally in county recorders office
o Personal Property causing sheriff to levy go out and physically seize or otherwise constructively
control the asset
 Serving citation to discover assets constitutes lien on debtors property (minority)
 CA filing judgment with secretary of state (strong minority)
Among lien CRs (not SCs) GR, first in time has priority question is: when did lien arise
o For RE, first to record
o For personal property depends on whether the date of levy or the date of delivery of writ controls
majority - date lien from time of levy minority - date lien from date of delivery, so long as levy
eventually occurs (relate back)
A. How Creditors Become Lien Creditors






LCR is defined broadly in 9-102(a) (52) as any CR who has acquired a lien on the property involved by
attachment, levy or the like.
Judgement CreditorJudgement/Judicial Lien Creditor[recordation/levy]
Typical LCR is an execution/judgment CR - an unsecured CR who won a judgment against the DR,
obtained writ of execution, and obtained a lien by levying on a specific property
Attachment in this context is a legal remedy in which the plaintiff in litigation obtains a writ, delivers it to
sheriff, who then levies on property of the DR (pre-judgment remedy)
o Property seized pursuant to attachment is held by sheriff pending outcome of litigation.
o In most jurisdictions, attachment occurs before judgment is entered execution occurs after
Garnishment: process by which a judgment CR in most states reaches debts owing from a 3P to the DR or
property of the DR that is in the hands of a 3P
o Garnishing CR becomes LCR at moment the writ of garnishment is served on 3P
o In many jurisdictions, a USC can garnish before obtaining a judgment in certain cases (s/t statutory
and constitutional restrictions) but cant garnish wages prejudgment
Recordation of judgment for money damages: Recordation of money judgment in real property recording
system creates and perfects lien against all real property owned by DR within county Will also reach
property D later acquires while judgment lien remains perfected.
o In growing minority of states, judgment CR can record judgment in UCC filing system, creates and
perfects a lien against some kinds personal property of DR alternative to levy
DIP or T in bankruptcy, has rights of a hypothetical LCR that obtained a lien against all property of the
DR at the instant bankruptcy was filed.
101
B. Priority Among Lien Creditors



Rules governing priority among competing LCRs are generally found in state statutes
Generally, first-come, first-served first CR to take the legally designated crucial step has the first lien
Laws generally award lien priority as of one 4 dates, listed in order of frequency of use:
o Date of levy date sheriff took possession of property (some states constructive possession counts)
o Date of delivery of the writ date writ delivered to sheriff (minority)
 Lien comes into existence upon levy and relates back to date of delivery
o Date of service of a writ of garnishment delivery of the writ by the sheriff to the garnishee
o Date of recordation of judgment - date judgment is delivered to the filing/recording officer
In competition between writs of execution, the majority rule gives priority to the first to levy on the
particular property minority rule gives priority to the first to deliver the writ to the sheriff so long as levy
actually occurs
C. Priority Between Lien Creditors and Secured Creditors

9-317(a)(2): Priority b/w LCR and non-purchase-money SC depends on whether LCR becomes LCR before
SC does either of 2 things:
o Perfects security interest; OR
o Files F/S and complies with 9-203(b)(3)[signed security agreement]
 9-203(b)(3): Either the collateral must be in possession of the SC OR the DR must have
authenticated a S/A which contains a description of the collateralSI
filing F/S, secured creditorbeat Lien Creditor,attachment
A judicial lien beats an unperfected SI or perfected SI without filing FS before the judicial arose
 Note that filing and perfecting are not the same thing may not occur simultaneously
 LCRs priority date is the date on which the CR becomes a LCR 9-317(a)(2)
o Execution CR becomes LCR either at time of levy (majority) OR upon delivery of the writ to the
sheriff (minority) so long as the levy actually occurs
 People v. Green
o Seizures and demands not enough to create lien rights in USC USC must levy.
o If criminals give their lawyers Art. 9 security interests before they are indicted and the lawyers file
financing statements, the lawyers will come ahead of the victims scheme wont work if the collateral
is sown to be proceeds of the crime but difficult showing to make
D. Priority Between Lien Creditors and Mortgage Creditors


Governed by real estate law generally gives priority to first lien created opposite result only if failure to
perfect offends states recording statute
In most states, judgment lien CR against real property not entitled to benefit of recording statute
o a mortgage granted before the judgment CR became a LCR by recording its judgment has priority
over the judgment lien, even if the judgment lien was the first lien perfected.
E. Priority Between Lien Creditors and PMSIs


When a later interest takes precedence over earlier interest 2nd SC has primed the first
PMSIs may be granted and perfected long after competing liens they prime
102

o Exception to principle of first in time priority
PMSI can prime LCRs interest only if PMSI attaches to collateral before creditor obtains its lien against
that collateral. 9-317(e) if PMSI attaches first, the holder of the PMSI has 20-day period where it can
perfect and thereby defeat a lien that came into existence b/w dates of attachment and perfection.
o 20-day grace period runs from the DRs receipt of delivery of the collateral
o Facilitates sales of personal property on secured credit (and giving DR immediate possession)
Assignment 29 Lien Creditors Against Secured Creditors: Future Advances
secured creditor lien creditor priority
9-323(b): Future advance beats lienholder
1. Future advance made within 45 days
2. Future advance made without knowledge of the lien
3. Future lending pursuant to a commitment entered into without knowledge of the lien
o S/Afuture advance priority
o Future advancelien45
o SClien



Priority between competing secured creditors: who perfects or file first
Revolving line of credit draw down DR is going to have continued need for cash i.e., construction
companies as the DR needs money, it draws down the line of credit and then owes an outstanding balance
when it pays that it can borrow more
o When the parties enter into this lending relationship, its secured, and lender agrees to advance
money in the future (the future advance) include future advance clause
When it comes to future advances treated as if future advances have priority of original loan
o Difficult issues arise with lien holders creditors who get their secured claims through judicial
process didnt bargain for it
9-317(a)(2) General Rule that security interest beat lienholders if file or perfect (i.e., the original loan)
before lien arises
9-323(b) exceptions for future advances where lienholder beat security interests

Security interest is subordinate under a future advance made more than 45 days out unless
advance is made without knowledge of the lien or pursuant to a commitment entered into
without knowledge of the lien.
Remember, future advance clauses must exist in S/A to be effective
103
Assignment 30 Trustees in Bankruptcy Against Secured Creditors: The StrongArm Clause


Strong Arm Clause 544(a) Avoiding power of trustee
in bankruptcy, the T/DIP has the power to avoid most kinds of security interests that remain unperfected as
of the time of filing of the bankruptcy case if avoided, the once secured CR loses the benefit of security and
is thereafter treated as an unsecured CR.
(a)The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the
trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any
obligation incurred by the debtor that is voidable by
(1)a creditor that extends credit to the debtor at the time of the commencement of the case, and that
obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a
simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2)a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at
such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at
such time, whether or not such a creditor exists; or
(3)a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law
permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such
transfer at the time of the commencement of the case, whether or not such a purchaser exists.
A. The Purpose of Bankruptcy Code 544(a)



Policy against secret liens reinforces requirement that CRs give public notice of security interests
Bankruptcy Ts police compliance with perfection requirements
If security interest is successfully avoided, interest is preserved for the benefit of the estate. 551.
o Trustee steps into shoes of unperfected SC, enforces the security interest on behalf of the estate and
(indirectly) the unsecured creditors.
B. The Text of Bankruptcy Code 544(a)


Basically: trustee can avoid unperfected security interests and liens
The T steps into the shoes of 1 of 3 hypothetical persons who would have the greatest rights against a
particular competitor and defeat any liens that hypothetical person could defeat aside from the
characteristics specified by federal law, T has the freedom to imagine the characteristics of the most
powerful CR possible, the ideal lien CR, and to assume the rights of a lien CR with those characteristics
o State law determines what rights these ideal lien CRs have against others
o 544 gives T the power to avoid any transfer that could be avoided by one of the 3 hypothetical
persons
o 101 defines transfer broadly enough to encompass voluntary grant of security interest or involuntary
suffering of judicial or statutory lien.
T can avoid any interests that these hypothetical persons could avoid
trustee,beattrusteebeat
104
(1) power of judicial lien CR derived from debt on a simple contract

Hypo CR has extended credit at the time of the commencement of the bankruptcy case and got judicial
lien at the same time
 T gets that power on all DRs property as of moment of filing

if judicial lien CR would beat a claim as of date of bankruptcy, then T also beats this claim (i.e.,
unperfected security interest)
- Ideal lien CRs defeat unperfected security interests for which no effective financing statement
and security agreements exist, but lose to other security interests (9-323b) 9-317a2))
 As an ideal lien CR, T is unburdened by knowledge that a party who actually dealt with the DR might
have T will win against a SC with a defect in documentation
- Duckworth: parol evidence about the original parties intentions cannot be used to correct a
mistake in a S/A, even if a small clerical error cannot be used to undermine the ability of later
lenders (or bankruptcy Ts) to rely on unambiguous S/As
- Here the S/A referred to a 12/13 promissory note when the actual promissory note was
executed on 12/15 As an ideal lien CR, T was not charged with notice of the mistake and
could avoid the banks interest
(2) power of execution CR whose writ was returned unsatisfied
 No real practical relevance trying to fix loophole in (a)(1)
(3) power of a Bona fide purchaser of Real Estate









-
T treated as if BFP bought and paid for the property (and perfected) at the time of the commencement
of the bankruptcy case
Interest of any claimant that would lose to BFP of RE as of date of bankruptcy also loses to bankruptcy
T
Any mortgages unrecorded at date of filing
T usually deemed to have no actual notice, other than what could be discovered from a search of the
RE records at the date of bankruptcy filing
Dispute must be in real property does NOT include fixtures w/ regard to fixtures, T only has rights of
hypothetical judicial lien CR
T gets this right only in circumstances where competing transfer was capable of perfection
T will only prevail where:
(1) Competing CR was supposed to do something to perfect its lien; AND
(2) Failed to do so
If the competing CR was supposed to perfect and did, the competing CR prevails over the T
because the competing CR would prevail over a BFP who bought the collateral after the
competing CR perfected
Rights of a BFP are generally greater than those of a lien CR.
Conversion between chapters does not affect the filing date for these purposes - 348
Chapter 7/11filing FS
C. The Implementation of Bankruptcy Code 544(a)

When a transfer is avoidable, T has discretion to avoid it or not, as may be in the interests of the estate
105



In Ch. 7, almost always avoided In Ch. 11, DIP usually wields Ts discretion with regard to avoidable
transfers - Sometimes does not avoid.
Exercise of 544(a) discretion by Chapter 7 trustees
o Ch 7 trustees are professionals (usually lawyers) appointed and paid for their work from the estate
- Claims for compensation are subordinate to SCs, equal to other expenses of admin, and
senior to almost every other kind of claim.
- Only paid in cases where there are sufficient funds
- Have incentive to avoid
o In 93% of ch. 7 cases, Ds have no nonexempt property
o If T can avoid transaction, the proceeds are available to pay expenses of admin and trustees fees
o Ts can also charge estate for additional legal work like avoidance actions.
o T has two years to bring the action 546(a)
o T can bring the action regardless of whether the SC has filed a proof of claim in a Ch. 7 case 544(a)
o Basically, T scrutinizes S/As and related documentation for any errors that may cause them to not
be perfected (SC attaches when submitting proof of claim)
Exercise of 544(a) discretion by Chapter 11 debtors in possession
o Ts rarely appointed in Ch 11, usually debtor serves as DIP
o Unsecured CR entitled to absolute priority over SHs and person in control of DIP are SHs so no
real incentive to avoid a SCs lien shifting it from secured to unsecured total debt remains the same
and SHs subordinate to it all
- Maintaining relationships with SCs often is another reason not to avoid especially over
technical defects
o DIP is a fiduciary has to act in interests of the estate
o If DIP abuses discretion by failing to bring avoiding action, some courts permit USCs committee to
sue in place of DIP in extreme cases, may be grounds for appointment of a trustee
o 70% of Ch 11 cases are eventually converted to Ch 7
- Ch 7 T is then appointed
- As long as it occurs within 2 years of Ch 11 case, new T can examine documentation and
initiate avoiding actions against security interests that were unperfected at time of filing
D. Recognition of Grace Periods


When DR goes into bankruptcy during a grace period before SC has perfected, SC gets the remainder of
the grace period to perfect after the bankruptcy filing (i.e., 20-day grace period for PMSIs under 9-317(e))
362(a)(4) automatically stays any act to perfect any lien against property of the estate
o 362(b)(3) creates an exception from the stay to permit perfection to the extent that the Ts rights and
powers are subject to perfection under section 546(b) 546(b) makes the rights and powers of a T
subject to any generally applicable law that permits perfection of an interest in property to be
effective against an entity that acquires rights in such property before the date of perfection
o UMVCTA 20(b) and 9-317(e) both meet this test because they permit perfection of a security
interest to be effective against a person who became a lien CR before the date of perfection of the
security interest (by virtue of relation back rules)
Assignment 31 Trustees in Bankruptcy Against Secured Creditors: Preferences

348 conversion does not affect date of filing
106



Preference law doesnt care about intentions of parties in making the transfer
Any time you receive money from a potential bankruptcy DR wait 90 days before you blow it
Dissipate assets before filing bankruptcy
A. Priority Among Unsecured Creditors (Review)





State law gives priority among USCs based on the order in which they take particular legal steps to collect
their debts
o Either levy on the asset, deliver writ to sheriff, record a judgment, or serve a writ of garnishment
o Taking that step creates a judicial lien on the property, USC has established a priority in it
USC can also win by obtaining and perfecting a security interest before competitors establish judicial liens
o Valid even if USC who receives the grant gives no additional consideration.
DRs have the right to pay one CR in preference to another.
o May give debtor power
Under bankruptcy law, collection efforts are stayed and USCs have to file claims against the estate
o Some USCS have priority wage claimants, taxing authorities
o General USCs are paid pro rata bankruptcy policy to treat all USCs alike
o DR/T cant take any action to prefer one prepetition USC over another
o Estate can grant a security interest, but only for new value furnished to the estate at or after the time
of the grant BANKRUPTCY
Preference Period: bankruptcy law imposes policy of equal treatment of general USCs retroactively for a
period of a year against CRs who are insiders and 90 days for CRs that are not.
o 547 authorizes T/DIP to avoid any transfer made during the preference period that would have
the effect of preferring one USC over others.
o Preference law authorizes avoidance of transactions that were legal and proper when done
o Prevents DRs from defeating bankruptcy policy of pro rata distribution by liquidating their own
estates on the eve of a bankruptcy
B. What Security Interests Can Be Avoided as Preferential?
Preferential Transfers
1) Requirement for avoiding preferential transfers 547(b)
trustee
(1) must be a transfer of an interest of the DR in property to or for the benefit of a CR,
 Broad definition in 101 of transfer includes any mode, direct or indirect, absolute or conditional,
voluntary or involuntary, of disposing of property or an interest in property.
 Usually payments
 Creation and perfection of a security interest is a transfer
(2) transfer must be for or on account of an antecedent debt
 Transfer must be made to a party that, at time of receipt, was already a CR unsecured CR
 Shelters from avoidance interests securing loans that were secured from the time they were made.
- 547(c)(1) prohibits avoidance of a transfer that was intended to be a contemporaneous exchange for
new value and that was in fact a substantially contemporaneous exchange
[day of value given=day of perfection]
107
(3) the transfer must be made when the DR is insolvent
 547(f): Presumption of the DRs insolvency that extends 90 days before the filing to retain otherwise
preferential security interest, SC must prove solvency. (Fact question)
(4) Transfer must have been occurred within the preference period
3/transfer



90 days for most CRs 1 year for insiders
101(31): defines insider for all types of DRs
101(45): The term relative means individual related by affinity or consanguinity (marriage or blood) . . .
or individual in a step or adoptive relationship
- Relative doesnt seem to include wife but the definition of of insider uses includes, which means not
exhaustive list so court would probably hold the wife of the CEO as an insider of the corp
(5) transfer must have improved CRs position Must have enabled CR who received it to recover more than
the CR would have if the DR had been liquidated under Ch 7 without making the transfer.
 Basically, met if the transfer results in CR getting more than their pro rata share (b/c a security interest
transfer makes a previously unsecured CR secured paid up to value of collateral)
 CRs who come into preference period oversecured are never subject to preference liability fails to meet
the last preference requirement already going to be paid in full in ch. 7 liquidation
- But not necessarily if transfer in the preference period makes that CR over secured
 Almost all transactions that meet the other reqs meet this one
2) When Does the Transfer of a Security Interest Occur? 547 (e)


When a transfer of a security interest occurs is important for 2 reasons:
(1) can only be avoided if occurs in the preference period;
(2) 547 permits transfers of security interests that occur within certain grace periods to relate back to
earlier dates
If the earlier date is at or about the time the transferee first became a CR, the transfer is no longer for or
on account of an antecedent debt and becomes unavoidable even through it occurred within the
preference period
547 (e)
(1)For the purposes of this section
(A)a transfer of real property other than fixtures, but including the interest of a seller or purchaser
under a contract for the sale of real property, is perfected when a bona fide purchaser of such property
from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an
interest that is superior to the interest of the transferee; and
(B)a transfer of a fixture or property other than real property is perfected when a creditor on a simple
contract cannot acquire a judicial lien that is superior to the interest of the transferee.
(2)For the purposes of this section, except as provided in paragraph (3) of this subsection, a transfer is
made
(A)at the time such transfer takes effect between the transferor and the transferee, if such transfer is
perfected at, or within 30 days after, such time, except as provided in subsection (c)(3)(B);
(B)at the time such transfer is perfected, if such transfer is perfected after such 30 days; or
(C)immediately before the date of the filing of the petition, if such transfer is not perfected at the later
of
(i)the commencement of the case; or
(ii)30 days after such transfer takes effect between the transferor and the transferee.
108
(3)For the purposes of this section, a transfer is not made until the debtor has acquired rights in the
property transferred.
SI Attach30perfectretroactive 30retroactive

547(e)(2)(A) provides that if a SC perfects its security within 30 days after the interest takes effect
between DR and SC (attaches), the interest is deemed perfected as of the time it took effect between DR
and SC (attachment) perfectionSA
-


To determine when a security interest is perfected, 547(e)(1) refers to state law
 A security interest in real property is perfected when it is too late for a BFP to acquire a
superior interest
 A security interest in fixtures or personal property is perfected when it is too late for a lien
CR to acquire a superior interest
o when the security interest is perfected within the Art. 9 meaning of the term OR at such
earlier time that a S/A is executed, and a financing statement is filed (9-323(b), 9317(a)(2))
If not perfected within 30 days of attachment, but perfected before bankruptcy, the transfer of the
security interests takes place when perfected. 547(e)(2)(B)
- If not perfected before bankruptcy and if the 30-day grace period has run, the transfer of a security
interest takes place immediately before bankruptcy. 547(e)(2)(C)
A transfer is not made until the DR has acquired rights in the property transferred 547(e)(3)
- Implications for after acquired property
 transfer cannot occur before after-acquired property is acquired (may occur later if
underlying security interest is unperfected) always going to be on account of antecedent debt
SAafter acquired propertytransfer
-
547(c)(3) exempts a PMSI from preference avoidance provided that the SC disburses the loan
proceeds at or after the signing of the S/A and perfects the interest within 30 days after DR receives
possession of the collateral
 Distinct from regular PMSI rules in one important respect it cannot merely enable the DR to
acquire property it must in fact be used by the DR to acquire property
 Akin to UCC 9-317(e) creates a sort of 30-day grace period for perfection of a PMSI
3) The Exception for Accounts Receivable and Inventory 547(c)(5)
547(c)(5)
transferdebtor possessionpreference periodcreditoravoidance
(c)The trustee may not avoid under this section a transfer
(5)that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to
the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing
of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the
debt secured by such security interest exceeded the value of all security interests for such debt on the later of
(A)
(i)with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the
date of the filing of the petition; or
(ii)with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before
the date of the filing of the petition; or
109
(B)the date on which new value was first given under the security agreement creating such security
interest;



547(c)(5) creates a safe harbor for security interests in accounts receivable and inventory
- Instead of treating acquisition of each new item of after-acquired collateral as a transfer to the SC
to be tested and possible avoided as a preference, 547(c)(5) treats receivables and inventory as a
single item of collateral. 547
547(a)
- inventory includes farm products
- receivables include instruments, chattel paper, and payment intangibles
SC vulnerable to preference avoidance only if effect of all advances, payments, and changes in
inventory during preference period was to reduce CRs exposure to loss
exception transfer of AR/I USC

Measures aggregate changes in the value of the collateral and the amount of the debt rather than
individual transactions
Two-point test:
(1) Determine amount of loan outstanding 90 days (or 1 year for insiders) prior to filing and the
value of the collateral on that day compute the difference.
(2) Make same determinations as to date of filing the petition
The creditor becomes less undersecured: if the value of inventory increases, the debtor becomes more secured.
- conclusion: If there is a reduction of the amount by which debt exceeds the value of the
collateral, preference exists in the amount of such reduction security interest is voidable only to
the extent of the preference
 547(c)(5) transfer is preference to extent there was reduction in amount to which CR was undersecured [its position improved] amount by which undersecured portion shrinks then preference
liability in that amount only applies to inventory and receivables
110
Calculation
1. 90amount of loan/value of collateral
2. amount of loan/value of collateral
3. reduction,avoidable
C. Strategic Implications of Preference Avoidance




Ds can make preferential transfers they wish, wait until preferential period expires, then file Transfers arent
avoidable b/c not within preference period.
USCs can monitor public records when security interests appear, demand explanation from DR If DR cant
justify, petition for involuntary bankruptcy before preference period expires.
USCs can cut a deal with DR to get preferential treatment themselves if they notice this rather than a pro
rata share of the avoided preference
Preference avoidance is discretionary, not mandatory Ts usually avoid anything and everything with
potential DIPs in Ch. 11 usually have strategic incentives and dont pursue preference avoidance actions as
vehemently as Ts in Ch. 7 (same exact discussion as described above in strong-arm power section)
Secured Creditors against Secured Creditors Sc Vs Sc


3 Rules in 9-322
o Conflicting perfected security interest have priority based on first to file or perfect
o A perfected security interest has priority over unperfected security interest
o As between conflicting unperfected security interests first to attach has priority
Do not apply to competitions between Article 9 security interest and other kinds of liens (except agricultural
liens)
o If competitor is a lien creditor, 9-317 applies
o If competitor is a real estate mortgagee, 9-334 applies
o If competitor is a federal tax lien, Federal Tax Lien Act applies
A. Non-purchase Money Security Interests

Basic Rule: First to File or Perfect
o GR - 9-322(a)(1): Between holders of two security interests in same collateral, first to file OR
perfect has priority.
 Priority date is earlier date of either filing or perfection
 Perfection probably included to cover situation where perfection occurs through possession
File perfect
o Holder who gains first priority retains it so long as the holder remains continuously filed or
perfected.
o First file or perfect has priority even if the first filer knows the DR intended that another CR have
priority and even if first believed itself to be subordinate at the time it filed or perfected
(Justification: certainty)
111



Exception - 9-325subordination of security interest in transferred
collateral: subordinates security interests perfected against a transferee to those perfected
against the transferor
 SIABClenderASI
- The transferee DR must have acquired the collateral subject to a perfected security
interest and that interest must have remained perfected at all times
 The exception only apply when perfection by reason of 9-322
- 9-327: Security interest priority in deposit accounts goes to the party having control
over one without control. Problem32.2(b)
Priority of future advances
o Same as previous rule for future advances
o Provided that the SCs F/S covers the collateral, all advances made by the SC to the DR have
priority as of the filing of the F/S
o Future advances do receive priority provided they were included in the description of collateral
from earlier. 9-322.
 Relieves the lender who will make future advances from the necessity to file and search in
connection with each advance can make future advances and know they have priority
 But future advance language/indicators rarely show in the F/S and S/A may not exist yet
o The security interest whose priority date is fixed by filing may not yet be in existence a single filing
(F/S) has the effect of reserving priority for whatever security interest the DR later grants in favor of
the filer limited only by the description of collateral in the financing agreement
o What CR would take a 2nd security interest in a system in which the 1st can increase w/o limit?
 (1) lenders who do not understand the future advance rule
 (2) CRs who hope to benefit from their 2nd interest but do not advance funds in reliance on it
 (3) CRs who protect themselves against future advances by contract with the holder of the
first interest 9-339
Priority in after-acquired property
o If DR later acquires property that fits the description in the S/A, the security interest attaches - 9203(b) if the description of collateral in the F/S is broad enough to cover the after-acquired
property, the filing cover it thus, the after-acquired CRs priority dates from the time of the filing 9322(a)(1)
 A security interest has the same priority with respect to after-acquired property that it has
with respect to the original collateral
B. Purchase-Money Security Interests
1) PMSIs Generally
o Under 9-324(a), PMSI in collateral other than inventory has priority over a conflicting interest in
the same collateral if the PMSI is perfected not later than 20 days after DR receives possession of
collateral.
 20-day grace period increase burden on searchers grace period
 Beats preexisting non-PMSI perfected SCs
o A PMSI CR is first in the sense that they supplied the collateral OR made advances to enable the DR
to acquire the collateral 9-103(a), (b) which is why we think its fine that they beat an after-acquired
CR whose perfected security interest attaches at the same time (p. 528 for more policy)
 After-acquired lender would still have a 2nd interest in the PMSI collateral and additional
collateral may increase DRs income generating capability
112
o Non PMSI lenders commonly require DRs to agree that the granting of a PMSI to another CR is an
event of default (at least w/o consent)
2) Multiple kinds of PMSIs
o 9-324(g)(1): seller PMSI wins over cash-lender PMSI
 Security interest incurred as the price or part of the price of the collateral has priority over an
interest securing an obligation incurred for money given to enable D to acquire rights in or
use of the collateral (Favors sellers over lenders)
o If not that situation (both are lender PMSIs) 9-324(g)(2) refers the determination to the regular
priority rules under 9-322(a) first to file or perfect
3) PMSIs in Inventory
o 20-day grace period for the filing of a PMSI under 9-324(a) doesnt apply when property sold will
be inventory in the hands of the buyer
o PMSIs in inventory only on these conditions - 9-324(b)
purchase-money financier (seller):
(1) must perfect before DR receives possession of collateral;
(2) must send authenticated notification to the holders of conflicting security interests
 Must give advance notice to inventory lender that it expects to acquire a PMSI in
inventory
 To give this notice PM financier must search the filing system for the names and
addresses of all secured parties with a filing against inventory of the type it plans to
sell lender then sends notice to each of the inventory lenders
 (3) must send notice within 5 years before DR receives possession
 Notice last for five years financier can avoid expiration by repeating notice at
intervals of less than 5 years
 Obviates the need for inventory lenders to search filing system before each advance
 (4) notice must describe inventory and state that the PMSI seller is taking PMSI in it
o If the S/A prohibits liens against inventory other than the lien of the inventory lender, a notification
pursuant to 9-324(b) is a notification to the inventory lender that the DR is about to default
 to avoid that, DRs typically refuse to grant PMSIs to their suppliers suppliers typically have
little choice but to sell on unsecured credit and hope that the DR pays
4) Purchase-Money Priority in Proceeds
o GR: purchase-money priority under 9-324(a) extends to the collateral or its proceeds so long as
the seller takes whatever action is required under 9-315(d) to continue its perfection in the
proceeds
 Generally, PMSI holder whose collateral has turned into proceeds will have purchase-money
priority over a competing interest perfected against DR naming those proceeds as original
collateral. 9-324(a)
 Proceeds must be identifiable under 9-315(a) and 9-324(a)
o Exception 9-324(b): Purchase-money status in inventory flows only into chattel paper, instruments
and cash proceeds. 9-324(b)
 Most notably NOT accounts
113

Still limited by 9-327, 9-330(a), (d) protect purchasers of the chattel paper or instruments
and secured parties with control of the deposit account into which the cash proceeds are
deposited
C. Priority in Commingled Collateral (Goods) (mixed with other property)




Collateral is commingled when it is mixed with other property
If identity of collateral is lost by commingling as the collateral becomes part of a product or mass, security
interest continues in the product or mass. 9-336(c)
o i.e., component parts (from different perfected secured suppliers) combined to create a product
If more than one security interest attached to a product or mass as a result of commingling, interests rank
equally and share in the proportion that the cost each CRs contribution bears to the total cost of product
or mass.
o They do not share in proportion to the obligations owing to them
Where identity is not lost (like replacement part being installed into a machine an accession)
o If interest was only in the replacement part, SCs interest will continue to be perfected and have
priority over later-perfected interests in the whole. 9-335
o However, any SC with priority over the accession-secured party is entitled to prevent removal of the
accession from the whole. 9-335(e)
Sellers against Secured Creditors



In an after-acquired property clause where SC gains righter over property DR has bought, that DR may not
have full rights to
Dispute arise where
o DR buys from someone who has less than full ownership of the collateral
o DR induces the sale through questionable conduct, such as fraud, misrepresentation, or payment by
worthless check, and then fails to pay for the collateral.
In these cases, SC may right to the collateral even greater than its DR
A. Limits of the After-Acquired Property Clause


9-302(b)(2) does not require DR be owner of collateral in order to grant a valid security interest in it DR
need only have rights in the collateral
GR: DRs grant of a security interest in collateral in which the DR holds only a limited interest conveys only
a security interest in the limited interest
o But transferee of a security interest can sometimes obtain greater rights than those of its DRtransferor
o CR can only have security interest in rights DR has (nemo dat)
1) Rules governing title to personal property

Void title rule if property is stolen, true owner prevails over Good Faith Purchaser for Value
o An outright thief obtains no title to the property he or she steals
o Thus, the purchaser from the thief obtains no title, and thus cannot convey title to a subsequent
purchaser one who does not have title cannot convey title (nemo dat)
o Thief never conveys good title
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o It doesnt matter whether any future purchasers were in good faith for value
Entrustment: Any entrusting of possession of the goods to a merchant who deals in goods of that kind
(dealer) gives him power to transfer all rights of the entruster to a buyer in the ordinary course of business
2-403(2)
Merchant
- 2-104(1):
o Merchant means a person who deals in goods of that kind or otherwise by occupation holds himself
out as having knowledge or skill peculiar to the practices or goods involved in the transaction,
etc..
o Entruster would still have claim against the dealer for conversion if they get screwed
o If the owner gives the property to a dealer for repair that dealer can pass good title to a buyer in the
course of business, even if done fraudulently. 2-403(2)
o A dealer to whom a piece of property is entrusted for repair does not have title/ownership of the
property, but nonetheless can pass good title/ownership to a buyer in the ordinary course of business
o If the entruster is a thief a thief has no rights thus, the dealer cant transfer any of the rights that
the true owner has , ,
 BFP: BFP for value would also win over a true owner who lost the car in a fraudulent transaction of
purchase
o 2-403(1) A purchaser of goods acquires all title which his transferor had or had power to transfer
except that a purchaser of a limited interest acquires rights only to the extent of the interest
purchased. A person with voidable title has power to transfer a good title to a good faith purchaser
for value.
o Voidable title passed to con artist true owner get void transfer up until it is sold by the con artist

2) Rules governing security interests in personal property
o When a CR acquires a security interest in collateral, the CR purchases the collateral and receives
whatever protection purchasers have under the UCC the CR can purchase through an after-acquired
property clause, even though the CR makes no additional advance and does not rely on its newly
acquired rights a SC can be a purchaser for value even when it acquires its interest for nominal
value - or for no value under an after-acquired property clause
 Basically, a SC can be a good faith purchaser of collateral for value even though the SC
does not purchase the collateral in the ordinary sense of the word, has bad intentions, and
pays nothing for it
o SC obtains the rights of a good faith purchaser under 2-403 can prevail over true owner even if
the title of its transferor, the DR, was avoidable because the DR procured it through fraud see 2403(1) above
 Congress grant sellers of livestock in cash sales priority over inventory lenders
B. Suppliers Against Inventory-Secured Lenders
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SCs (banks) have priority over suppliers in the inventory even if inventory hasnt been paid for (and even if
recently provided) upon default SC can take possession of inventory and sell it. 9-609(a)
o F/S put suppliers on notice
If inventory supplier insists DR give them a security interest, it would be a PMSI and would have priority
over the other non-PMSI SCs. 9-324(b)
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C. Sellers Weapons Against the After-Acquired Property Clause
1) PMSIs
o Sellers can comply with PMSI requirements of Article 9, and then obtain priority.
o But many lenders bar their DRs from granting PMSIs (breach - allows SC to call loan) most sellers
are unable to retain security interests in what they sell.
2) Retention of Title
o Seller can decide not to sell on credit
o Seller can try to contract to sell, with title to pass to buyer only when buyer pays for goods but this
will be treated under the UCC as a sale w/ seller retaining security interest 2-401(1) seller will
probably not have filed, so will be subordinate to the inventory secured lender.
 2-401(1): any retention or reservation by the seller of the title (property) in goods shipped or
delivered to the buyer is limited in effect to a reservation of a security interest
3) Consignment
o Arrangement in which owner of goods (consignor) entrusts the goods to an agent or bailee
(consignee) for sale
consigneeSIretain title to ensure performance
 when consignee arranges a sale of goods, title passes directly from the consignor to the buyer
consignee remits portion of sale proceeds directly to the consignor and keeps the rest as a fee
for selling the goods unsold goods remain the property of the consignor and the consignee
ultimately returns them to the consignor
o GR: article 9 treats consignments as SI 9-109(a)(4) still have to file (perfect)
9-103(d): Security interest of consignor in goods subject to consignment is a PMSI in inventory
o Exception - 9-102(a)(20) - Consignments excluded from Art. 9 coverage:
(A) consignees who do business under the name of the consignor (franchisees);
(B) small consignments, <$1K per delivery; and
(C) consignments by consumers (individual gives watch to jewelry store to sell on consignment)
4) Sellers Right of Reclamation
o If buyer receives goods while insolvent, seller has right to reclaim them take them back form buyer
 Subject to the rights of the buyers SCs that attached to the goods in the hands of the buyer so
if a security interest in after-acquired inventory exists (usually does) - attachment occurs
upon acquisition - then right to reclaim will generally be ineffective, because it is s/t
those security interests SC will have the right to possession of the goods and that right will
probably translate into a right to insist that the DR be permitted to retain possession
 2-702(3) makes the sellers reclamation subject to the rights of a buyer in ordinary course
OR other good faith purchasers under 2-403 (i.e., the preexisting SC - bullet point above)
o Sellers demand under 2-702(2) must be made within 10 days of the buyers receipt of the goods,
but need not be in writing
o Or in bankruptcy, within 45 days of Ds receipt of goods, and not later than 20 days after
commencement of bankruptcy case, in writing. 546(c)
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
No good faith requirement the SC need only have prior rights to prevail over the reclaiming
seller (i.e., Article 9 sections that give effect to after acquired property clause)
o Paolella & Sons: The inventory secured lender is a good faith purchaser under 2-702(3) to whom
the sellers rights of reclamation is subject eviscerates rights of reclamation granted under 2-702(2)
inventory can no longer be reclaimed the moment the inventory security interest attaches
 Rule: A CR that enforces a financing agreement in a manner consistent with the clear terms
of the agreement and the expectations of the parties acts in good faith
 Illustrates that when a collapsing DR manages to buy additional inventory on credit, the
purchase can directly benefit the SC feed the lien
o Administrative expense priority for sellers that deliver goods within 20 days before bankruptcy not
as useful as reclamation but admin expense priority usually get paid in full
5) Express or implied agreement with the SC
o Seller can make an agreement with secured lender often inventory secured lenders sincerely intend
that money they advance to DRs be used to pay the inventory supplier
o If approached by the inventory seller and DR together with a request to do so, many inventory SCs
will disburse loan proceeds directly to seller to pay for DRs purchases
 Inventory SCs may insist on this setup
 DR ordinarily does not want the inventory SC to pay suppliers directly
 Inventory sellers are reluctant to insist on direct payment from the inventory SC if such
payment is not customary in the industry signals that DR is in financial difficulty
o Agreement by inventory secured lender to pay for goods is enforceable by action against the lender
6) Equitable subordination

Paolella & Sons: courts have the authority to subordinate claims on equitable grounds rare extraordinary
departure from the usual principles of equality of distribution and preference for SCs 3-Part Test
(1) the claimant must have engaged in some type of inequitable conduct
(a) fraud, illegality, or breach of fiduciary duties
(b) undercapitalization
(c) claimants use of the DR as mere instrumentality or alter ego
Also consider if claimant was an insider
- If SC is an insider and especially if SC owes fiduciary duties court more likely to order
equitable subordination
- Feresi: if a fiduciary engages in inequitable conduct with respect to a person to whom a
fiduciary duty is owed, then its claim, lien, or security interest may be wholly or partially
subordinated
(2) the misconduct must have resulted in injury to the CRs of the DR or conferred an unfair advantage
on the claimant
(3) equitable subordination of the claim must not be inconsistent with the provisions of the bankruptcy
Code or UCC (Code when in bankruptcy court; UCC when in other court)
o Holding: not inequitable for non-insider CR to monitor a DR closely, pursuant to a valid financing
agreement, for the purpose of choosing the most advantageous time to foreclose on a loan that has
been out of formula (noncompliant) for several years
 All CRs were aware of DRs precarious financial position no reliance by an CR that SC
would continue funding
 Nothing inequitable about inventory seller feeding the inventory SC lien
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7) Unjust enrichment claims
o USCs who feed a SCs lien may sue for unjust enrichment
o Rejected in Peerless but some courts have become more receptive to unjust enrichment suits in this
situation determined on case-by-case basis (p. 591)
 The UCC recognizes that equitable principles may require alteration of the priority system in
particular circumstances 1-103(b)
Buyers against Secured Creditors
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Property that goes out of the debtors door that may not be removed from SCs earlier interest
SC recognizes that the DR has the right to sell the collateral security does not interfere with the free
alienability of property 9-401
SC expects to be protected as to the value of its interest the protection may be in the form of a lien on the
proceeds DR receives from the buyer, a continuing lien in the hands of the buyer, payment of the loan, or
some combination of these protections
Dont want everyday buyers to need to worry about security interest in the stuff they buy would hamper
commerce UCC has rules that protect certain buyers from prior secured claims buyers that would not
expect to have to search
o Buyer outside the ordinary course of business buyer is s/t perfected security interest in whatever it is
they bought 9-315(a) but not necessarily if unperfected (see below)
o Buyer in the ordinary course of business (BIOCOB) takes free of security interest even if perfected
and buyer knows of its existence 9-320 (Limitation SCs rights
1-201(b)(9) defines BIOCOB buys in good faith, in the ordinary course of business from a seller in goods
of the kind
o 4 Limitations 9-320
(1) A BIOCOB only takes free of a security interest created by buyers seller
(2) A BIOCOB is only one who buys without knowledge that sale violates the rights of another
person in the goods (But knowledge of security interest is fine)
(3) BIOCOB must either have possession or rights to recover goods from the seller under A2
 Right to recover goods of the seller is covered in 2-716 buyer can recover if goods
identified in the contract and the buyer cannot cover
Cover substitute or replacement cover is usually possible Also, 2-502
(4) a BIOCOB does not take free of interest if in possession of SC
9-320(e) rights of buyer are subordinate to a SC in possession
A. Buyers of Personal Property


GR: buyers take property subject to pre-existing security interests.
o 9-201: a security agreement is effective against subsequent purchasers
o 9-315(a): even in the absence of a provision to that effect, a security interest continues in the
collateral notwithstanding sale However, many exceptions.
Buyer-in-the-Ordinary-Course Exception o Buyers of most goods arent presumed to have searched the public records before buying property
o System does not require those who buy goods in the ordinary course of their sellers business to
search
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 Only buyers of goods can be buyers in the ordinary course of business
o Good faith buyer of goods in ordinary course of sellers business can take free of a security interest
created by its seller even if security interest is perfected and the buyer knows of its existence. 9320(a).
 Buyers Knowledge: Cant be a buyer in the ordinary course of business if one knows that the
sale to him is in violation of the security interest of a 3P. 1-201(b)(9) Buyer can still take
free if he merely knows of the security interests existence. 9-320(a).
 Created by Seller: Buyer takes free only of a security interest created by its seller buyer
does not take free of a security interest created by the sellers predecessors in title
 Means the buyer is a debtor under 9-102(a)(28) CR entitled under 9-509(c) to file a
F/S against buyer if the party who created the security interest defaults on their debt,
the CR would be entitled to repossess form buyer
 Farm Products Exception: 9-320(a) omits from its protection those who buy farm products
from a person engaged in farming operations
 But they get parallel protection under the Food Security Act (p. 598) not much of an
exception at all
 BIOCOB includes both consumer and commercial buyers
 BIOCOB may buy for cash, by exchange of other property, or on secured/unsecured credit
 BIOCOB does not include a person that acquires goods in a total or partial satisfaction of a
money debt OR as security for a money debt
o Daniel v. Bank of Hayward:
 Issue: When do purchasers who make a down payment under a contract for sale and have not
taken title to the vehicle achieve the status of buyer in the ordinary course of business? When
does a purchaser under a contract for sale achieve the status of buyer in the ordinary course?
 Holding/Rule: Purchasers become buyers in the ordinary course of business when the
product is identified to the contract.
 Buyers have an insurable property interest in the goods upon identification 9-205(1)
 Court rests it decision on the manner in which sales are made in the industry
 Court emphasizes that CRs are in better position to bear the risk of loss
 Doesnt decide at what point the goods are identified to the contract
 Rule: a court must look to the customary manner in which sales are made in the sellers
business and to the expectations of the buyer under the contract ordinary course language
indicates deference to commercial practice
 Note: illustrates that a buyer in the ordinary course can defeat the inventory lenders security
interest without taking possession of the goods
o When Buyer Becomes Buyer: Only a buyer who takes possession of the goods OR has a right to
recover the goods from the seller under Art. 2 may be a buyer in the ordinary course of business - 1201(b)(9) (codification of Daniel)
 1-201, Comment 9 defers to 2-502 and 2-716 as the relevant provisions of Article 2
governing the right to recover goods
 2-502 gives consumer buyers the right to recover goods (from sellers) that have been
identified to the sale contract consumer buyers will be buyers in ordinary course from the
time the good are identified to the contract for sale
 2-716 buyer can recover if goods identified in the contract and the buyer cannot cover
 Cover substitute or replacement cover is usually possible
 Most business buyers even if they have paid the full purchase price do not have an Art. 2
right to recover until those buyers take possession, they cannot be buyers in the ordinary
course and their rights remain subject to those of the sellers inventory lender
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Some courts hold that business buyers who leave what they bought in the possession
of the seller nevertheless have constructive possession of it thus buyers in ordinary
course and take free of the inventory lenders security interest
o CRs efforts to retain possession of certificates of title to prevent sale of their automobile collateral
have generally been unsuccessful
o Sale of Goods in Possession of SC: Buyer of collateral is prevented from taking free of a security
interest if the collateral is in the possession of the secured party. 9-320(e), 9-317(b)
 A SC can possess collateral through an agent or as the consequence of the person in actual
possession authenticating a record that it holds possession for the SCs benefit 9-313,
Comment 3 both setups invisible to buyer
Failure-to-Perfect Exception:
o Those who do not qualify for the ordinary course of business exception still expected to search filing
system
o Unless SC authorizes DR to sell free of a perfected security interest, a buyer that does not qualify for
the ordinary course exception takes subject to it. 9-315(a)(1)
o A buyer not in the ordinary course can take free of an unperfected security interest if the buyer gives
value and receives delivery without knowledge of the security interest 9-317(b) same for intangible
collateral except no delivery requirement 9-317(d)
Authorized Disposition Exception: 9-315(a)(1)
o Security interest does not continue in the collateral if the SC authorized the disposition free of the
security interest.
 Doesnt matter if buyer knows of the security interest or searched the public record
o Authorization to sell need not be express
 Many cases hold that a SC who knew that the DR was making sales of collateral in violation
of provisions of the S/A, and did not object, thereby waived the provisions and authorized the
sale so that the buyer took free of the security interest
o Unresolved split of authority as to conditional authorizations
 Courts more likely to treat disposition as authorized if purchaser does not know of the
condition not dispositive though
 RFC Capital Corp. v. Earthlink SC expressly authorized the sale, but only on the condition
that loan be paid in full court holds condition binding on the purchaser, even though the SC
agreed to withhold knowledge of the condition from the purchaser.
 Because CR retained its SI, despite its consent to the sale, the collateral remained
encumbered as long as the sellers contractual obligations went unperformed
 Buyer Friendly View: a condition imposed on an authorization to sell is ineffective,
unless performance of the condition is within the buyers control
 CR Friendly View: regardless of the nature of the condition, no authorization exists
where the DR fails to satisfy the conditions of the CRs conditional consent
 Holding/Rule: any and all conditions a SC places upon its consent must be satisfied
for the consent to be effective buyer, who has the power to ascertain any potential
conditions prior to the sale and the status of those conditions, must bear the
consequences of purchasing anothers collateral just has the search the records and
communicate with the SC listed in the F/S
Consumer-to-Consumer-Sale Exception: 9-320(b)
o If a sale is outside ordinary course of business, even consumer buyers are expected to search
o Exception applies only if the goods are consumer goods in the hands of the seller before the sale and
consumer goods in the hands of the buyer after the sale 9-320(b) buyer must buy for value and
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without knowledge of the security interest Buyer in a consumer-to-consumer sale is protected from
an automatically perfected PMSI in consumer goods but not one perfected by filing
o Some legislatures have placed a dollar limit on the definition of consumer goods
 B/c intention of the drafters was to protect lenders of big-ticket items
B. Buyers of Real Property



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GR First in Time: if mortgage was created before DR sold property to buyer, buyer takes subject to the
mortgage if the sale takes place first, it will be free of a later mortgage granted by DR-seller
BFP: One who buys in good faith, for value, without notice of an unrecorded mortgage (BFP) may take
free of it under a recording statute
o Especially if they record the deed before the mortgage is recorded
BFCR: One who takes a mortgage in good faith, for value, without notice of an unrecorded deed may have
priority over the rights of the buyer pursuant to the recording statute
If mortgage is recorded before DR sells property, priority over rights of the purchaser are pretty much
absolute all purchasers of real property are expected to search the public record, are deemed to have notice
(constructive) of duly recorded mortgages, and take subject to them (No ordinary course exceptions)
Extremely important to do a titles search in RE transactions
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