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Secured Transactions
Fall 2017
CREDITOR-DEBTOR RELATIONSHIP
LIENS
• Lien – a charge against or an interest in property to secure payment of a debt or performance of an
obligation
o Security Interest (Voluntary Lien): any lien created by contract between debtor and creditor
o Involuntary Liens:
▪ (1) Liens granted by statute or common law
▪ (2) Judicial Liens: liens obtained by unsecured creditors through judicial process
• See Flowchart
• Most feared Lien Creditor: Bankruptcy Trustee!
SECURED v. UNSECURED
• Debtor – anyone with an interest in the collateral; person who owns the collateral (§ 9-102(a)(28)(A))
• Creditor – anyone who is owed a legal obligation that can be reduced to a money judgment
• Secured – when a debtor and creditor agree in authenticated (signed) writing that credit is secured by
debtor’s property
o Article 9: applied to “a transaction, regardless of its form, that creates a security interest in
personal property or fixtures by contract” (only consensual transactions – not lien creditors)
• Unsecured – if creditor does not contract with debtor for secured status
o Least amount of remedies available to unsecured creditors
PURCHASE MONEY SECURITY INTEREST
• What is a PMSI?
o Secured party (or third party) loans money or extends credit to a debtor to purchase specific
piece of property; debtor uses that money to buy the property, and the secured party has a
security interest in the property bought with its money
▪ The seller loans the buyer the purchase price, and the collateral is the goods acquired with
the loan
▪ EXAMPLES: Car dealership that makes loan to buyer to buy one of their cars; bank that
loans money for a new car and takes security interest in the car
• Two Types:
o 1. A security interest taken or retained by the seller of collateral to secure all or part of its
purchase price
▪ Classic two-party credit sale
o 2. A security interest is taken by a person who by making advances or incurring an obligation
gives value to enable the debtor to acquire rights in or the use of the collateral
▪ Enabling loan or three-party PMSI
• Determine if a SI is a PSMI:
o 1. Is there a security interest? (attachment)
o 2. Is value being given by the SP to debtor for the debtor to buy collateral?
▪ If yes, PMSI
o 3. If seller/creditor acquired security interest in something buyer/debtor already owns, that is
NOT a PMSI
REPAYMENT
• Common Repayment Arrangements:
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o Installment Loans – debtor will pay in a series of payments, ordinarily at regular intervals
o Single Payment Loans – payments are due on a particular day
o On Demand
o Lines of Credit – bank lending up to a fixed amount of money as the debtor needs it
DEFAULT
• Default – the debtor’s failure to pay the debt when due or otherwise perform the agreement between
debtor and creditor as defined in the security agreement
• § 9-601(a) – creditors have access to state law remedies when debtor is in default
• Acceleration
o Each installment payment is considered a separate obligation
o Debtor is only in default with regard to each installment payment missed
o Creditor may only sue for each one
o Acceleration Clause – states, in the event of default on any obligation under the contract, the
creditor may, at its election, declare all of the payment immediately due and payable
▪ Allows creditor to enforce the entire obligation in a single lawsuit
REMEDIES
REPOSSESSION
• Repossession – the physical and constructive taking of collateral
• § 9-609:
o (a) After default, a secured party may
▪ (1) take possession of the collateral; or
▪ (2) without removal, render the equipment unusable
o (b) A secured party may proceed under (a) either pursuant to
▪ (1) Judicial process; or
▪ (2) Without judicial process if it proceeds without breach of the peace
• Self Help Repossession Exception:
o § 9-608(b)(2): self-help allowed so long as creditor does not breach the peace
o Breach of Peace: (1) Potential for immediate violence, (2) nature of the premises intruded upon
▪ RULE: Trespass breaches the peace only if certain types of premises are invaded, or
immediate violence is likely (Salisbury Livestock Co.)
▪ RULE: Repossession of the vehicle from a public street without objection or
confrontation was not a breach of peace even if kids were in the car, unbeknownst to
repossesor. (Chapa)
▪ Entering a dwelling without contemporaneous consent is ALWAYS breach of peace
▪ Police cannot intervene to help reposessor
▪ Squib Takeaways:
• Best time to enter is middle of the night
• Need not inform the debtor the collateral is about to be repossessed
• Less expectation of privacy when entering a commercial building
• Resistance need not be strong, ignoring contemporaneous resistance constitutes
breach of peace
• Stealth and trickery allowed usually, reduced potential of violence
• Consent of property owner may be necessary if entering a third party’s land
• Contemporaneous consent needed to enter debtor’s actual home.
o Contractual Modification:
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▪ § 9-602(6) – certain rights and duties are too important to be waived or varied
▪ § 9-603(a) – parties may alter standards so long as not manifestly unreasonable, BUT,
this does not apply to the duty to refrain from breaching the peace
o Self-Help Against Accounts:
▪ § 9-607(a) and § 9-406(a) provide self-help remedies to a party holding a secured interest
in an account receivable
• Recall § 9-102(a) defines an account as an account receivable, not a bank account
▪ § 9-607(a): upon the assignor’s default, the secured creditor (assignee) who knows the
identity of the new account debtor can simply send written notes to pay the secured
creditor directly
▪ § 9-406(a): the account debtor who receives the notice can discharge its obligation only
by paying the secured party (assignee), not the debtor (assignor)
▪ EXAMPLE: Deare sells box on credit to Horne. Deare assigned assets from accounts to
First Bank (FB) to secure a loan (lien created). If Deare defaults on loan payment, FB can
notify Horne (§ 9-607(a)) to make payment to FB, NOT Deare. Horne can discharge debt
by paying FB (§ 9-406(a)). If Horne pays Deare instead of FB, still owes amount to FB.
Once Property has been repossessed, the secured party has two options: (1) Accept the collateral in
full/partial satisfaction of debt, or (2) sale of the collateral.
FULL/PARTIAL SATISFACTION
• Strict Foreclosure – secured party can keep the collateral to fully or partially satisfy the debt if they
follow the required steps:
o (1) Debtor consents to:
▪ (A) The full or partial strict foreclosure through authentication; or
▪ (B) Fails to make an objection within 20 days after the secured party sent a notice
o (2) Notify third parties (debtor and any other SP with interest in collateral) of intent to keep the
collateral in satisfaction of debt; AND
o (3) Wait 20 days to see if anyone objects
▪ If objection, sold under § 9-610
• Consumer Goods Transactions Exceptions
o § 9-102(23) – Consumer goods are goods that are used or bought for the use primarily for
personal, family, or household purposes
o Cannot keep Consumer Goods as partial satisfaction of debt – only full satisfaction
SALE
• Value of the collateral is determined and converted into cash to pay the creditor
• If the sale exceeds the amount owed to the creditor, the remainder is sent to the debtor
• If the sale is less than the amount of the debt, the creditor is paid in part and a court will have to decide
what remains owed
• § 9-623 – allows a debtor, secondary obligor, or another secured party to redeem the collateral after
default by paying the full amount of the debt until the moment the collateral is sold
• Under-secured lien – when the collateral is worth less than the debt owed
• Over-secured lien – when the collateral is worth more than the amount of the lien
• Deficiency – The amount that secured obligations, expenses and attorney fees exceed the greater of
either: (1) sale proceeds; or (2) proceeds that would have been realized had the sale been commercially
reasonable.
• Requirements: (1) Notice; and (2) Commercially Reasonable Manner
o (1) Notice
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§ 9-611: When Notice Required – given to debtor, secondary obligors (guarantors), and
any other secured party (if the collateral is not consumer good)
▪ § 9-612: Timing – reasonableness is a question for the trier of fact
• Safe Harbor in (b) – when it is not a consumer transaction, then notice given after
default and at least 10 days before date of sale is sufficient
▪ § 9-613: Contents of Notice: General (except in consumer goods transaction):
• Debtor and Secured Party;
• Described collateral;
• States method of intended disposition (public/private)
• States Debtor is entitled to accounting; and
• States time and place of public sale or time after which any other disposition is to
be made
▪ § 9-614: Contents of Notice: Consumer Goods
• Same as General; plus
• Description of any liability for deficiency
• Telephone number or mailing address
▪ § 9-602(7): Cannot contract to waive notice requirement; BUT
▪ § 9-624: Can waive notice requirement post-default
▪ § 9-617: Failure to give notice does not invalidate sale, but may reduce amount secured
party can recover
▪ RULE: failure to comply with Notice rules can affect amount secured party can recover;
possibly no right to deficiency (In re Downing)
(2) Commercially Reasonable Manner (Procedural Issue)
▪ § 9-610: After default, secured party can dispose of collateral (sale or lease) in a
“commercially reasonable” manner
• § 9-610(b): Every aspect of disposition must be commercially reasonable:
method, manner, time, place, and other terms
• Vague standard, but meant to protect the debtor
▪ § 9-627(b): Disposition is commercially reasonable if is made:
• In usual manner on any recognized market;
• At price current in any recognized market at time of disposition; or
• Otherwise in conformity with reasonably commercial practices among dealers in
type of property that was subject to disposition
• § 9-627(a): the fact a greater amount could have been obtained at a different time
or in a different manner does deem it commercially unreasonable
▪ § 9-627(c): Commercially Reasonable if approved:
• In judicial proceeding;
• By bona fide creditor’s committee
• By representative of creditors; or
• By assignee for benefit of creditors
• § 9-627(d): Such approval is not required for disposition to be commercially
reasonably
▪ § 9-602(7): Cannot waive commercially reasonable requirement; BUT
▪ §9-603(a) may create agreed upon standards as to what is commercially reasonable
▪ RULE: Courts consider a variety of factors to determine commercial reasonableness
(General Electric v. Nichols)
• Factors:
▪
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o Experts
o Advertising
o Timing
o Valuation/Appraisal
▪ RULE: Reasonableness is assessed by the procedure employed, not the price obtained
(Chavers v. Frazier)
Results from Proper Sale:
o Proceeds distributed according to § 9-615 in the following order:
▪ (1) Reasonable expenses of disposing of the collateral, including attorney’s fees
▪ (2) Satisfaction of obligations secured by the security interest in order of priority
▪ (3) Debtor gets any surplus under § 9-615(d)(1)
• Unsecured creditor has no interest in any proceeds or surplus from the sale
• § 9-615(e): Debtor is not entitled to surplus or liable for any deficiency if the
transaction is sale of accounts, chattel paper, payment of intangibles, or
promissory notes
• § 9-615(d): If there is a still a deficiency after disposition, the obligor is liable
Results from Improper Sale:
o If the only defect is that the disposition was commercially unreasonable, the debtor’s only option
is to sue the creditor for damages to his equity interest.
▪ Consumer Goods Exception: § 9-625(c)(2): debtor can recover
o § 9-617(b): Good faith purchaser at UCC sale should not lose its bargain because the sale is set
aside
o § 9-626: Questioning the Sale Procedure:
▪ Secured Party has the burden of proof
▪ Rebuttable Presumption Rule – If a SP fails to give notice of the sale to a debtor, or fails
to conduct sale in a commercially reasonable manner, then there is a rebuttable
presumption that the value of the collateral was at least equal to the amount of the debt.
(§ 9-626(a)(4))
• SP can then recover deficiency only by the rebutting this presumption and proving
the collateral was worth less than the debt
o Assuming SP does so, creditor is entitled to a deficiency in amount equal
to the amount by which the debt exceeds the value of the collateral
o If the secured creditor does not rebut, there is presumed to be no
deficiency
Consumer Goods:
o Jurisdictions are split as to the appropriate remedy for failure to give notice or conduct sale
commercially reasonably in consumer goods context
▪ Majority View: rebuttable presumption that the value of the collateral was at least equal
to the amount of debt, with consequence that, if consumer debtor objects, the court
determines what the sale price should have been
▪ Minority View: any significant irregularity is sufficient to deny deficiency
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ATTACHMENT
•
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•
Secured creditors attain their status by contract with the debtor, but to have priority (see below), secured
creditor also needs perfection
Big Three Requirements (§ 9-203(b)):
o (1) Value
o (2) Debtor has rights in the collateral
o (3) Debtor authenticates a security agreement describing the collateral; OR
▪ Secured party has possession of the collateral under § 9-313
▪ Secured party has control over the debtor’s accounts, electronic chattel paper, investment
property, etc. pursuant to the SA
ATTACHMENT OCCURRED ON THE DATE THAT ALL BIG THREE REQUIREMENTS AT
MET
VALUE
• § 1-204: Construes this broadly
• Can be given in advance or after security agreement
• Focus on the secured party giving the debtor value
o Debtor’s promise to repay debt usually is their value given
o Secured party’s lending of money or selling on credit is usually their value given
RIGHTS
• Debtor has rights in the collateral
• Does not necessarily have to be full ownership, debtor can grant a security interest in their limited
interest
AUTHENTICATION OF SECURITY AGREEMENT
• One of the following:
• § 9 -102(a)(7): Authenticated
o “With present intent to adopt or accept a record…” – doesn’t have to be a signature necessarily
o Usually means signed by the debtor (secured party does not necessarily have to sign
▪ If multiple debtors (multiple people with rights in the collateral), be prudent and obtain
authentication from all
▪ If debtor is an organization, authentication must be made by a representative with
authority
• § 9-102(74): Security Agreement
o Security Agreement – a contractual agreement that creates or provides for a security interest
▪ RULE: SA must have granting language but does not need to be “formalistic” or have
“magic words” (In re Schwalb)
• § 9-108: Describing the Collateral
o Collateral description must be reasonable and sufficient, whether or not specific, that reasonably
identifies what is prescribed (§ 9-108(a))
▪ PR: enable interested parties to identify collateral, e.g., what is subject to lien
▪ § 9-108(c): super generic descriptions, such as “all the debtor’s assets” or “all the
debtor’s personal property,” do not reasonably identify collateral
▪ SA required more specific description than financing statement
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RULE: SA description must be specific enough to identify the piece of collateral so a
third party to understand a security interest was created on the collateral (In re Shirel)
o § 9-108(b): states acceptable collateral description as defined in the UCC (§9-102)
▪ Accounts (§ 9 -102(2)) – right to payment of a monetary obligation for sold property
▪ Deposit Account (§ 9-102(29)) – savings, checking, bank account
▪ Goods (§ 9-102(44)) – all things that are movable when a security interest attaches
• Consumer Goods (§ 9-102(23)): used or bought primarily for use as personal,
family, or household purposes
• Farm Products (§ 9-102(34)): goods with respect to which the debtor is engaged
in a farming operation
• Inventory (§ 9-102(48)): good held for sale or lease
• Equipment (§ 9-102(33)): catch-all; if it doesn’t fit one above, it’s equipment
• **A good can be only one of the above, often depending on its using in the
debtor’s hands
o RULE: Composite Document Rule: as long as there is some internal connection between
documents, they may be read together for purposes of including collateral described in the
second document within the SA’s umbrella (In re Giamo)
▪
AFTER ACQUIRED PROPERTY
• § 9-204(a) After-Acquired/Hereinafter Acquired – terms used to refer to property that a debtor acquired
after the SA is authenticated (signed) or the security interest is otherwise created
o Can be used in any type of security interest
o Most important with inventory and accounts based on their revolving nature
• RULE: Collateral description including “all inventory and accounts” implies after-acquired property
because turnover is common, BUT equipment must have “after-acquired” language (Strombos Majority view)
o Minority View – if “after-acquired” is not in the SA, it is not part of the description for any types
of collateral and there is no direct attachment to after-acquired property
• After-acquired property NEVER applies to consumer goods more than 10 days after the secured party
gives value or for tort claims (§ 9-204(b))
• After-acquired property does not attach until debtor has rights in the collateral – NOT date of SA
FUTURE ADVANCES
• § 9-204(c): Future advances can be included in description to ensure security agreement applies to future
advances on the collateral
o Usually written: “and future debts”
o Absent a future advance clause, any additional debt without a new SA is unsecured
• Clauses providing debtor must pay creditor’s attorney fees and other expenses in event of default are
also valid
PROCEEDS OF COLLATERAL AND TRANSFERRED COLLATERAL
• Collateral may go through transformations that take them outside the description of the collateral in the
SA, but the security interest continues
• Two Way to Pick Up This Collateral:
o (1) Direct – description of after-acquired property in the SA
o (2) Indirect – proceeds (which are automatically implied for all SA descriptions and
automatically attach)
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• ANALYSIS:
o (1) Does the security interest continue in the original collateral when transferred to a debtor?
o (2) Proceeds Dance – does the security interest continue in the proceeds of the collateral?
• (1) Does the Security Interest continue in the original collateral when transferred?
o § 9-315(a)(1): YES; a security interest continued in collateral notwithstanding sale or other
disposition of collateral, UNLESS the secured party expressly authorized the disposition free of
the security interest
▪ Buyer takes collateral “subject to” the security interest
▪ However: buyer is not liable for the secured debt unless the buyer “assumes” the debt
▪ Therefore – SP can foreclose on the collateral but buyer will not be responsible for
paying the debt
o § 9-332 – Transfer of Money/Funds from a Deposit Accounts
▪ Transferee of money takes money FREE OF security interest, UNLESS a transferee acts
in collusion with the debtor in violating the rights of a secured party
• Basically: if debtor gives money to third party, SP cannot foreclose on that
money, and buyer is not liable to SP for debt.
• (2) PROCEEDS DANCE – Does the security interest continue in the proceeds of the collateral?
o § 9-315(a)(2) – a security interest attached to any identifiable proceeds of collateral
o Collateral (§ 9-102(12)): anything that is subject to a security interest (attached)
o Proceeds (§ 9-102(64)): basically whatever is acquired upon sale, lease, exchange or other
disposition of collateral – anything that replaces the economic value of collateral
▪ Automatically attaches under § 9-203(f) and § 9-315(a)
o Identifiable
▪ If proceeds are identifiable (can be traced back to the collateral from which they came),
they are covered under the security interest on the collateral
• Ask for a bill of sale or sufficient evidence to connect the sale of the collateral to
the proceeds
▪ RULE: Burden is on the secured party to establish that something constituted identifiable
proceeds from the sale or disposition of the secured party’s collateral (Oriental Rug)
▪ Comingling of Funds
• § 9-315(b)(2): proceeds are identifiable to the extent that the SP identifies the
proceeds by a method that is permitted
o NOT GOODS
• § 9-315, Comment 3: Lowest Intermediate Balance Test (LIBT) – most common
tracing method
o The amount of SP’s collateral remaining in bank account after the deposit
of proceeds and subsequent transactions is the lowest balance of all funds
in the account from the time of deposit to completion of the transactions
▪ If the lowest balance is greater than the proceeds deposited, all
proceeds are identifiable
▪ Example: Proceeds put in bank account with other money. Owner
spends money from the account. Remaining amount is more than
the amount of proceeds that had been deposited. Then can be
assumed that is the original proceeds amount. IDENTIFIABLE
o Rests on the premises that:
▪ When a debtor spends fund in deposit account, it spends the
proceeds of a security interest last
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The amount that constitutes identifiable proceeds is not increased
by a later deposit of non-proceeds unless the debtor intends that the
later deposit restore or partially restore the proceeds balance.
If the sale is not authorized by the SP, their interest attaches to BOTH the identifiable
proceeds and continues on in the original collateral
▪
▪
PERFECTION
•
Perfection is an act of public notice that notifies other potential creditors your interest in the collateral;
and may be accomplished by:
o (1) FILING a piece of paper with the appropriate office that discloses the security interest
(default rule); or
o (2) The secured party taking POSSESSION of the collateral (§ 9-310(a), (b)(6); 9-313); or
o (3) The secured party taking CONTROL of the collateral (§ 9-310(a), (b)(8))
FILING
• Filing systems are principal means used to communicate possible existence of a lien
• Gives constructive notice – intended to give actual notice.
• Article 9 Security Interest – Financing Statement
• What needs to be filed:
o § 9-312(a) determines when filing is permitted
o Mandatory filing to perfect in general intangibles (e.g., liquor licenses and copyrights) and
accounts
▪ § 9-102(a)(2) defines an account as a “right to payment of monetary obligation”
▪ § 9-102(a)(42) defines general intangible as a catch-all
o Alternative filing to perfect the four types of goods (consumer goods, farm products, inventory,
equipment), instruments (promissory notes), tangible chattel paper (money obligation + SI),
negotiable documents, and certifies securities (stocks)
▪ § 9 -310(a), (b); 9-312(a), 9-313
▪ Be aware for priority, possession of certain things gives priority over filing
• Which System:
o Type of Collateral Determines where the financing statement must be filed
▪ § 9-501: Secretary of State Office is Default
▪ § 9-109(c): Article 9’s Filing systems is preempted by the DMV, PTO, Copyright Office
• RULE: Copyright Office preempts Secretary of State Office (National Peregrine)
• RULE: Aircraft and railroad filing system preempts UCC; Patents do NOT
(Pasteurized Eggs)
• Car must be filed at a DMV in order to be directly perfected
• What to File:
o Article 9 Security Interest: UCC-1 Filing Statement § 9-310(a), (b); § 9-501:
o Automobile: Notation on Certificate of Title for DMV system
▪ Only if the automobile is inventory in the hands of the debtor, you file in the Secretary of
State’s Office.
• Where to File:
o § 9-301(1): File in the state where the debtor is located
▪ When in doubt, file in multiple locations (§ 9-307 Comment 2)
o (1) Individual Debtor
▪ § 9-307(b)(1): Principal Residence
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• Not defined by UCC
• Think a little more than mere physical presence somewhere, less than domicile
• Comment 2: Suggests a sole proprietor is an individual and not an organization
o (2) Organization Debtor (General Partnerships)
▪ § 9-307(a), (b)(2): Place of business
• Where debtor conducts his affairs
• If more than one place, Chief Executive Office (§ 9-307(b)(3))
• Comment 2: A Chief Executive Office is determined by the nerve center test → a
place from which the debtor manages the main part of its business operations and
other affairs (as opposed to day-to-day affairs)
o (3) Registered Organization Debtor (Corporation, LLCs, LPs)
▪ § 9-307(e): A registered organization is located in the state they are incorporated/filed in
Authorization:
o FS does NOT need to be signed by the parties to be effective – only the SA must be signed by
the debtor
o § 9-502(d): Financing statement may be filed before a security agreement is made of the security
interest otherwise attaches
o § 9-509(b): By authenticating a security agreement, a debtor authorized a filing of a financing
statement covering the same collateral covered in the SA
o If no authorization, filing statement is ineffective
Requirements:
o § 9-502 Requirements: (1) debtor’s name, (2) secured party’s name, (3) collateral indication
o Seriously Misleading: a financing statement substantially satisfying the requirements is effective
even if it has minor errors or omissions, unless the errors or omissions make the financing
statement seriously misleading. § 9-506(a)
o (1) Debtor’s Name
▪ Filing systems are indexed by Debtor Name, important they are correct (§ 9-519(c))
▪ § 9-503 – Correct Name:
• 1. Individual’s legally correct name (not trade name)
o RULE: Use of individual’s nickname is insufficient (In re Kinderkneck)
• 2.Registered Organization (Corporations, LLCs, LPs), the name on the articles of
incorporation (§ 9-503(a)(1))
o RULE: FS must list exactly the name of the company as listed on their
articles of incorporation (In re EDM Corp.)
o Trade name is NOT sufficient
o No more, no less than article of incorporation
• 3. Any Other Organization, either the organizational name of the debtor, or if the
organization does not have a name, an individual’s name that comprises the
debtor (§ 9-503(a)(4))
o Sole proprietorship should be listed under the individual debtor’s name,
not the organization name
▪ Seriously Misleading:
• § 9-506(b) – if the financing statement “fails to sufficiently provide the name of
the debtor,” it is seriously misleading
• § 9-506(c) – if a search of the records of the filing office using the debtor’s
correct name would disclose a FS with an incorrect name, then the incorrect name
on the FS is not seriously misleading
o “No harm, no foul”
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• § 9-517 – if the filer indexed the FS incorrectly, the FS is still effect if all
information on there is otherwise correct
o (2) Secured Party’s Name
▪ § 9-502, comment 2: Error in the name of the secured party is NOT seriously misleading
o (3) Collateral Indication
▪ § 9-504 – a collateral “indication” in a FS is sufficient if it covers a description of the
collateral pursuant to § 9-108 OR there is an indication that the FS covers all assets or all
personal property (super generic)
• § 9-108: descrption of collateral is sufficient if it reasonably identifies what is
described, whether or not it is specific
• RULE: broad collateral description is sufficient because it puts the searcher on
notice (Grabowski)
▪ NOTE – Different rules apply for sufficient of collateral descriptions in SA and FS
• SA is more specific than FS
▪ NOTE – Not need to include after-acquired property language in FS
▪ Seriously Misleading:
• Traditionally: Filer’s description is sufficient if it requires a searcher to make an
inquiring of the secured party
• RULE: if the description is specific to address, make/model, etc., the SP has a lien
on something and the searcher is then required to make further inquiry; red flag is
all that’s required (Teel – Lax Extreme)
• RULE: If the description in the FS is specific to address, make/model, etc., the
description must be correct. (Pickle – Strict Extreme)
• Total absence of collateral description is ALWAYS seriously misleading
Acceptance:
o Information:
▪ § 9-502(a) (see above)
• Debtor’s Name
• Secure Party’s Name
• Collateral Indication
▪ § 9-516(b)
• Debtor’s Name ((3)(a))
• Secured Party’s Name and Address ((4))
• Debtor’s Mailing Address ((5))
• Indication of whether debtor is an individual or organization ((5))
o If Organization: type, jurisdiction, and organizational number ((5))
• No requirement for a collateral description
o Two Questions:
▪ 1. What information must be on the FS to be accepted to be filed in the filing index?
▪ 2. Given the clerk’s action (acceptance or rejection), is the FS effective to perfect the
security interest?
o Four Possibilities: (1) Rightfully Accepted, (2) Rightfully Rejected, (3) Wrongfully Rejected, (4)
Wrongfully Accepted
▪ (1) Rightfully Accepted
• Q1. Clerk must accept the FS if the § 9-516(b) information appears on the FS,
even if it is incorrect
o § 9-520(a) – Clerk can only reject a FS for the total omission of any § 9516(b) information
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• Q2. Rightfully accepted FS is effective to perfect the security interest, UNLESS
o There is a seriously misleading error in § 9-502(a) information, OR
o There is an error in § 9-516(b)(5) information and a purchaser meets the
reasonable reliance test of § 9-338
o § 9-338(2) – a purchaser, other than a SP, of the collateral takes free of the
SI to the extent that in reasonable reliance upon an incorrect information,
the purchaser gives value (and in the case of tangible chattel paper,
tangible documents, goods, instruments or security certificate, receives
delivery of the collateral)
▪ Purchaser – anyone other than a lien creditor (§ 9-201(b)(29))
(2) Rightfully Rejected
• Q1. Clerk must reject the FS if any of the § 9-516(b) information is completely
omitted from the FS
• Q2. Rightfully rejected FS does not perfect the security interest. The secured party
must correct the omission of § 9-516(b) and refile the FS
(3) Wrongfully Rejected
• Q1. If a clerk rejects a FS for any reason other than a total omission of § 9-516(b)
information, it is a wrongful rejection
• Q2. The wrongfully rejected FS is still effective under § 9-516(d) except against a
reasonably relying purchaser for value
(4) Wrongfully Accepted
• Q1. A clerk wrongly accepts an FS which is omitting § 9-516(b) information
• Q2. The wrongfully accepted FS is effective to perfect the security interest,
UNLESS
o There is a seriously misleading error in the § 9-502(a) information, OR
o There is an error in § 9-516(b) information and a purchaser meets the
reasonable reliance test of § 9-338
o IF either of the above two occur, the FS is NOT EFFECTIVE even if it
was accepted by the filing office
POSSESSION
• Serves as constructive notice to the searcher and treats the searcher essentially as if they had actual
notice
• Possession is determined by legal right, not just physical act
• § 9-312(b)(3) – mandatory possession to perfect a security interest in cash money
o Protects those who accept money from the possibility that a prior security interest was perfected
by filing
• See § 9-310(a), (b); § 9-312(a), § 9-313
o Alternative possession to perfect the four types of goods (consumer goods, farm products,
inventory, equipment), instruments (promissory notes), tangible chattel paper (money obligation
+ SI), negotiable documents and certified securities (stocks)
▪ For instruments, tangible chattel paper, negotiable documents, and certified securities,
possession has priority over a security interest perfect by filing (possession trumps filing)
• However, filing is stull fully effective against a lien creditor and trustees in
bankruptcy
▪ For goods, possession is merely an alternative and provides on priority advantage
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Professor Korybut
Secured Transactions
Fall 2017
CONTROL
o Control is the way to take possession of things you cannot physically possess
o § 9-104(a): Three Ways to take Control of a Deposit Account:
o (1) The SP is the bank in which the account is maintained
o (2) The debtor, the SP, and the bank can authenticate a record instructing the bank to comply
with SP’s instructions
▪ No requirement the record be public
o (3) SP can become the bank’s customer (§ 9-104) by putting the account in the name of the SP
▪ § 9-104(b) states that the SP is still in control of the account even if the debtor can write
checks and make withdrawals
o Mandatory control to perfect a security interest directly in a non-consumer deposit account (§ 9312(b)(1); § 9-109(d)(13))
o Funds in both non-consumer and consumer deposit accounts indirectly might be subject to a
perfected security interest where they are identifiable proceeds of some other type of collateral
o § 9-109(d)(13): you can’t directly attach a security interest to a consumer deposit account
o Alternative control for investment property (stocks, bonds) and electronic chattel paper (§ 9-314)
o Control for these types of collateral gets priority over filing.
MANDATORY
•
•
ALTERNATIVE
•
•
•
•
•
FILING
General Intangibles
Accounts
POSSESSION
• Cash Money
Four Types of
Goods
Instruments
Tangible Chattel
Paper
Negotiable
Documents
Certificated
Securities
•
•
•
•
•
Four Types of
Goods
Instruments
Tangible Chattel
Paper
Negotiable
Documents
Certificated
Securities
CONTROL
• Non-consumer
deposit
account(direct)
• Investment
Property
• Electronic Chattel
Paper
PURCHASE MONEY SECURITY INTEREST (PMSI)
• § 9-309 – creates an exception to the filing requirement for most PMSIs in consumer goods in which the
security interest is automatically perfected when the security interest attached (big 3 requirements under
§ 9-309(a))
o RULE Look to hands of the debtor to determine if the PMSI is consumer goods (§ 9-102(23)) in
the hands of the debtor and it’s intended use or actual use (Gallatin National Bank)
o Consumer Good: If used primarily for personal, family, or household purpose
• § 9-309(1) PMSI = SI (§ 9-203(b)) + PMSI (§ 9-103(b))
• Motor Vehicle Exception:
o § 9-309(1): Consumer goods subject to § 9-311 (DMV filing) can never be automatically
perfected
LIEN CREDITORS
• Lien creditors are “perfected” when the sheriff levies on the collateral
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Professor Korybut
Secured Transactions
Fall 2017
MAINTAINING PERFECTION
• Amendment and Release
o § 9-512(a): release of collateral from the coverage of a FS is accomplished by amending the FS
▪ § 9-521(b) provides the form to use in amending the FS
o There is no obligation to file an amendment deleting collateral on partial payment unless the SP
has contracted to do so
o An amendment becomes part of the financing statement to which it related
▪ NOTE – minor errors or omissions in amendment would likely not render the entirety of
the FS ineffective unless errors make the FS seriously misleading
• Termination
o § 9-513(c)(1): If the debtor has satisfied the secured obligation and the SP is not required by
contract to lend more money, the debtor can demand that the SP file a termination statement
within 20 days
▪ If consumer goods, the SP must file a termination statement file a termination statement
within one month of the obligation being satisfied
• No affirmative duty to file a termination statement if not consumer goods
▪ If SP fails to do so, liable for damages and civil penalty of $500 (§ 9-625(b), (e)(4))
o § 9-513(d): Upon filing of termination statement, the financing statement to which it relates is no
longer effective
• Lapse
o Continuation Statement
▪ § 9-515(a): FS is effective for only 5 years
▪ § 9-521(b): MUST file a continuation statement within 6 months before laps for FS to
remain effective
▪ Renewed for the next 5 years from the date the FS would have lapsed, NOT the day the
continuation statement was files
▪ § 9-521(b): provides a sample continuation statement: file an amendment and check the
continuation box
▪ Content: signed by SP, identify the original FS by file number, state the original FS is
still effective
▪ RULE: A new FS is not sufficient to maintain a previous FS, must be a continuation
statement (Worthen)
o Not Filed in a Timely Fashion
▪ § 9-516(b)(7): Filing clerk should reject the continuation statement if not filed within sixmonth window
• RULE: Filing Continuation Statement earlier than six-month period is NOT valid
(Hilyard)
▪ § 9-510(c): If the FS is wrongfully accepted, it is still ineffective if not filed within the
six-month window
▪ § 9-509: Can try to remedy the lapse by filing a subsequent FS, but need debtor
authorization
• PLUS – later perfection date and lose priority
o § 9-515: Effects of Lapse
▪ Any competitor that comes in after the lapse date is a prospective lien, competitors before
lapse are retrospective liens
• Prospective effect of lapse: FS ceases to be effective against everyone, and any
SI that was perfected before the lapse becomes unperfected prospectively
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Professor Korybut
•
•
•
Secured Transactions
Fall 2017
• Retrospective effect of lapse: FS is deemed to have never been perfected against
a purchaser of collateral for value
o Purchaser of collateral for value is a secured party, NOT a lien creditor
Change of Debtor’s Name
o § 9-507: when a change in the debtor’s name renders a filed FS “seriously misleading” the FS is
not effective to perfect a SI in collateral acquired by the debtor more than 4 months after the
name change
▪ § 9-506 defines “seriously misleading” – if the FS can be found by searching under the
debtor’s “correct” name, the FS is not seriously misleading
▪ BUT the seriously misleading FS remains effective for all collateral owned by the debtor
at the time of the name change or acquired by the debtor in the first four months after
o § 9-507(c)(2): To remain continuously perfected: SP needs to file an amendment with debtor’s
new name
▪ Do not need debtor’s authorization (§ 9-509, § 9-512)
o If SP files amendment after 4-month period, creates a new perfection date for collateral acquired
after the 4-month period (see comment 4, § 9-507)
Change in Debtor Identity
o Changes in debtor’s identity or corporate structure (merger) receive the same treatment as a
change in the debtor’s name
o § 9-508(b): if the different in the old name and new name causes a FS to be seriously misleading
under § 9-506:
▪ (1) The FS is effective to perfect a SI in collateral acquired by the new debtor before, and
within four months after, the new debtor becomes bound under § 9-203(d)
• § 9-203(d) says a person can be bound as a new debtor by a SA that they did not
sign if they assume the debts and acquire the assets of the original debtor
• Ordinarily, even if a transferee takes the collateral subject to the SI of the debtor,
they do not become bound by the terms of the SA → this however, is a unique
situation they do
▪ (2) The FS is NOT effective to perfect a SI in collateral acquired by the new debtor more
than four months after the new debtor becomes bound unless an initial statement
providing the name of the new debtor is filed before the expiration of that time
Change in Collateral Use
o General Rule: § 9-507(b) – FS is not rendered ineffective if, after FS is filed, info provided in the
FS becomes seriously misleading under § 9-506
o (1) Type One Changes (Same Office Rule) – Changes in the collateral’s use, appearance, or
intrastate location that do not control the place of filing, but make the collateral difficult for a
search to identify as covered by the FS
▪ § 9-507(b): even if the change in circumstances makes the FS seriously misleading, it is
still effective
▪ This rule puts the burden on subsequent creditors
▪ EXAMPLE: FS correctly identifies collateral as “inventory” (SoS) but debtor changes
use to “equipment.” SoS office is still correct place to file, but the collateral description is
now inaccurate – STILL EFFECTIVE
o (2) Type Two Changes (Different Office Rule) – Changes in the collateral’s use, appearance,
or interstate location that do control the place of filing and may also make the collateral difficult
for a searcher to identify as covered by the FS
▪ RULE: When a car changes from inventory to consumer goods or vice versa, the lien
become unperfected and refiling in the correct office is required (Blue Ridge)
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Professor Korybut
•
•
Secured Transactions
Fall 2017
▪ Commentators argument § 9-507(b) does not apply in this situation
• Where the initial filing is made in a filing office that differs from the filing office
that should be used given the change in use, the FS is seriously misleading and
should be ineffective to maintain perfection
Exchange of Collateral:
o § 9-315(a)(1): If SP does not authorize sale free of SI, the SI will continue in the collateral
following the disposition
o § 9-507(a): No amendment to the initial FS or new filing required in order to have continued
perfection
▪ This puts the burden on the subsequent searchers
▪ This is true even if the perfected SP knows of or consents to the disposition (Comment 3)
▪ If the SP authorizes sale without SI, the SI will terminate upon disposition → no
perfection (§ 9-315(a)(1))
Relocation of Debtor or Collateral (Multi-State Transaction)
o After the SP has perfected by filing in the state the debtor is located, the debtor may move to
another state
o § 9-316(a): A security interest remains perfected until the earliest of:
▪ (1) The time perfection would have ceased under the law of that jurisdiction;
▪ (2) The expiration of four months after a transfer of collateral to a person that thereby
becomes a debtor and is located in another jurisdiction
• Mergers, sales of assets, etc. to a debtor located in another state
o § 9-316(b): If SP fails to file during applicable grace period, the SP becomes unperfected
prospectively and is deemed retrospectively to have never been perfected
▪ Burden is on the SP when the debtor relocates
PROCEEDS
• General Rule: § 9-315(c), (d), (e)
o If the SI was perfected in the original collateral, it is automatically, continuously perfected in the
proceeds for 20 days from the debtor’s receipt of the proceeds
▪ On the 21st day: SP becomes unperfected if they have no re-filed or take possession
• SI is now unperfected prospectively only (not retrospectively
▪ If SI re-files within 21 days, remains perfected from original filing date
• § 9-509(b)(2): SP does not need authorization for the new filing
▪ If refiling is done late, the SI is re-perfected, but with a new filing date (Comment 4)
• No continuous perfection relating back to the original perfection date
• A new, later priority date for the SI in the proceeds is established
• Three Exceptions: (SP is continuously perfected in the proceeds even after the 20 day grace period)
o 1. Barter Transactions – no cash proceeds involved
▪ Run through § 9-315(d)(1)(A) – (C) and § 9-315(d)(3)
▪ EXAMPLE 1 (Type 0 Barter): SA and FS lists “all D’s inventory and equipment.”
Collateral inventory is exchanged for equipment
• No re-filing is needed to maintain perfection in the proceeds because the proceeds
received by the debtor still fall within the collateral description in the existing FS
▪ EXAMPLE 2 (Type 1 Barter): SA and FS lists “All D’s inventory.” Collateral inventory
is exchanged for equipment
• No re-filing is needed because although the new collateral is not covered by the
collateral description, one would perfect in the proceeds (equipment) in the same
office (SoS)
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Professor Korybut
Secured Transactions
Fall 2017
• § 9-315(d)(1): collateral exchanged (inventory) for noncash proceeds (equipment)
which are property not covered by FS, but are property that could be perfected in
the same office where the FS is already on file, maintains perfection (SAME
OFFICE RULE
▪ EXAMPLE 3 (Type 2 Barter): SA and FS lists “All D’s inventory.” Collateral inventory
is exchanged for consumer good car
• General rule applies because it is a different office for filing
• SP will become unperfected prospectively within 20 days of debtor’s receipt of
the proceeds if he does not re-file in proper, new location with proper description
of proceeds
o 2. Collateral → Cash Proceeds → Non-Cash Proceeds
▪ Run through § 9-315(d)(1) – (3)
▪ Generally, assuming SP can trace the value through the transactions, the SI will reach the
new property as proceeds of proceeds (§ 9-315(a)(2))
▪ EXAMPLE 1: FS lists “All D’s inventory and equipment” collateral inventory is
exchanged for cash proceeds, which is used to buy equipment.
• No new filing is needed (§ 9-315(d)(3)) and the FS is sufficient to have
continuous perfection in the SI in debtor’s new equipment
▪ EXAMPLE 2: FS lists “All D’s inventory.” Inventory collateral is exchanged for cash
proceeds, used to buy equipment.
• General rule applies: Unless SP re-files describing equipment within 20 days,
there is no continuous perfection and the SP is prospectively unperfected
o § 9-315(d)(1) does not apply because cash proceeds were used to purchase
the equipment
o § 9-315(d)(2) does not apply because it only applies to identifiable
proceeds before purchasing the equipment
▪ EXAMPLE 3: FS lists “All D’s inventory.” Collateral inventory exchanged for cash
proceeds, which is used to buy a consumer good car.
• General rule applies: SP will become unperfected within 20 days of debtor’s
receipt of the proceeds if not refiled in the DMV with proper collateral
description.
o The car is purchased with cash proceeds (no (d)(1)) and could not be
perfected in the office where the FS is already on file
o 3. Collateral → Cash Proceeds Only
▪ § 9-315(d)(2): No new filing needed where proceeds are identifiable cash proceeds
▪ SP will use lowest intermediate balancing test to trace comingled cash to make it
identifiable proceeds (all this is covered above)
▪ NOTE – a transferee of cash proceeds takes free of the SI under § 9-322
PRIORITY
STEPS TO FOLLOW FOR PRIORITY FIGHTS
• 1. Identify the collateral
• 2. Identify the combatants
• 3. Determine if each party is attached and the date of attachment
• 4. Determine if each party is perfected and the date of perfection
• 5. Determine priority through the rules below
o If there is circularity – see if one of the parties did something wrong in attachment or filing
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Professor Korybut
• 6. Determine Remedies
Secured Transactions
Fall 2017
LC v. LC
• § 9-102(a)(52): Lien creditor is “any creditor who has acquired a lien on property involved by
attachment, levy, or the like.”
• Date of priority usually determined by the state statute (first to levy, deliver writ, serve writ, judgment –
all possibilities)
o First based on statute wins
SP v. LC
• § 9-317(a)(2): for an LC to defeat an SP, he must win on both of the following:
o (A): LC becomes and LC before SP perfects
▪ NOTE – an LC becomes and LC when the sheriff levies property on behalf of an
unsecured judicial lienholder
o (B): LC becomes and LC before one of the conditions in § 9-203(b)(3) (i.e., a security
agreement) is met by the SP and a FS covering the collateral is filed
▪ NOTE – this does not require attachment, just one of the requirements
o Basically a first in time rule
• § 9-323(b): exception that applies only if the LC wins on (A) but loses on (B)
o LC defeats SP if:
▪ The SI secures an advance (made by SP) more than 45 days after the person becomes an
LC, UNLESS the advance is made:
• (1) Without actual knowledge of the lien; OR
• (2) Pursuant to commitment entered into without knowledge of the lien
o SP wins if:
▪ Under § 9-323(b), future advances are protected:
• (1) In all cases for 45 days following attachment of the lien
• (2) Beyond 45 days if the secured party makes the advance without knowledge of
the lien; and
• (3) Beyond 45 days if the SP is committed to make advances, provided the
commitment was entered into without knowledge of the lien
• SP making future advances has priority over LC, provided that SP did not have
actual knowledge of the lien, subject to 45-day rule
• PMSI Exception:
o If LC prevails over SP, must check whether the PM SP can prime the LC’s interest (§ 9-317(e))
o If a PMSI attaches to the collateral before the LC becomes a LC, the holder of the PMSI has 20day grace period in which it can perfect and thereby defeat a lien that came into existence
between the dates of attachment and perfection of the PMSI
▪ 20-day grace period runs from the debtor’s receipt of delivery of the collateral
o PR: Shouldn’t have to file after every single sale
SP v. SP
• § 9-322(a):
o (1) Both Secured Parties are Perfected = First to File OR Perfect wins
▪ Go through § 9-308 (attachment + perfection) analysis for both parties to see when/if they
became Art. 9 SPs
▪ Proceeds: § 9-322(b)(1): Time of filing/perfection as to SI = time of filing/perfection for
proceeds
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Professor Korybut
o
o
o
o
Secured Transactions
Fall 2017
Future Advances: Generally, first to file or perfect SI has priority over others as to initial
advance and future advances (Comment 3, Example 1 § 9-323)
• Exceptions: Time of advance matter for priority only if advance is made wile the
SI is:
o (1) Perfected automatically under § 9-309 OR temporarily under § 9-312;
AND
o (2) Is not made pursuant to a commitment entered into before or while the
SI is perfected
• If the SA does not provide for future advances, but the SP lends additional money,
then it is unsecured (§ 9-204(c))
o BUT if the original FS describes the same collateral that serves as security
on the second loan, there is no need to file an additional FS
▪ Pre-Filing is RECOMMENDED
▪ § 9-322, Comment 4: pre-filing is effective for purposes of priority on day of filing even
though it isn’t technically authorized until later, when the SA is signed by the debtor
• § 9-502(d): FS may be filed before a SA is made or SI otherwise attaches
(2) Perfected Secured Party Wins over Unperfected Secured Party
▪ Perfected SI has priority over conflicting unperfected SI, regardless of timing
(3) With Two Unperfected Art. 9 Secured Parties – First to Attach Wins
(4) Implicit: One attached Art. 9 SP and a party that has not yet attached → Attached party wins
because second party is not a secured party yet
NOTE – these same rules apply to after-acquired property
▪ § 9-204/After-acquired property analysis to make sure that the SP has attachment and
perfection in the after-acquired property (remember, date of perfection on after acquired
property does not occur until ALL requirements are met, NOT the date of filing)
▪
PSMI
• PMSI holder wins even if other Art. 9 SP was first in time
• § 9-324(a):
o PMSI (§ 9-103 and § 9-203(b)) + Inventory in Hands of Debtor + Hoops
o A perfected PMSI in inventory has priority over conflicting SI in the same inventory if
▪ Hoops:
• (1) The PMSI is perfected when the debtor receives possession of the inventor
• (2) PM SP sends an authenticated notification to the holder of the conflicting SI’
o Know who to send to by doing a search and finding the FS
• (3) Notice must be given within five years before debtor receives possession of
the inventory
• (4) Notification states that the person sending the notification has or expects to
acquire a PMSI in inventory of the debtor and describes the inventory
▪ If don’t adhere to ALL hoops, revert back to § 9-322
o Proceeds:
▪ Super priority status flows through to proceeds of the inventory if:
• The proceeds are cash, chattel paper, or an instrument
• Super priority status DOES NOT flow through to accounts
o § 9-322(a)(1) would apply
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Professor Korybut
Secured Transactions
Fall 2017
BUYER v. SP
▪ Use the following when concerned if the SP can repossess from a buyer of collateral
o If lien is stripped and SP repossesses anyways, its conversion
▪ Authorized Disposition § 9-315(a)(1)
o SI continues in the collateral despite sale, lease, exchange, etc. unless authorized to be free of
SI by SP
▪ Authorization can be express or implied
• Some courts have held if SP knew debtor was selling collateral in violation of SA,
and did not object, the SP thereby waived the provisions and “authorized” the sale
so the buyer took free of the SI (depending on the course of dealing)
▪ Conditional Authorization
• Jurisdictions split on whether to enforce SI in collateral when a condition is not
triggered
▪ Effect of Authorization on Proceeds
• Even if SP authorizes disposition of the collateral free of SI, it does not
necessarily lose its SI in the proceeds of the collateral
▪ Buyer in the Ordinary Court (BIOC) Business § 9-320(a)
o A buyer takes free of the (perfected or unperfected) security interest, IF: (treat the following like
a checklist)
▪ They are a buyer in the ordinary course of business § 1-201(a)(9)
• Buyer
• Buying Goods
• In Good Faith
• Without actual knowledge that the sale violated the rights of another person in the
goods (SP)
• Buying in the ordinary course of the seller’s business
• On cash, exchange, or credit
▪ The security interest was created by the buyer’s seller
▪ Buyer’s actual knowledge of security interest is okay
▪ Perfected security interest is okay
▪ Consumer to Consumer Sale (“Garage Sale Rule”) § 9-320(b)
o Buyer takes free of the (perfected or unperfected) security interest IF:
▪ In the hands of the seller and the buyer, the goods are consumer goods
▪ Buyer does not have actual knowledge of the security interest
▪ Buyer must give value (§ 1-204)
▪ Buys before filing of FS covering the goods
▪ Perfect security interest is okay
▪ Buyer NOT in the Ordinary Course § 9-317(b)
o Buyer takes free of unperfected security interest IF:
▪ Gives value and receives delivery of the collateral
▪ Without knowledge of the security interest
▪ Before the security interest is perfected (cannot take free of a perfected security interest)
CHATTEL PAPER, INSTRUMENTS, and DEPOSIT ACCOUNTS
▪ Art. 9 creates a priority hierarchy based primarily on the method of perfection, without regard to the
time when perfection was accomplished
▪ Chattel Paper (e.g., a security agreement coupled with a promissory note; § 9-102(a)(11)
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Professor Korybut
Secured Transactions
Fall 2017
o SI in tangible chattel paper can be perfected by filing OR possession (§ 9-310(a)/9-312(a)/9313); electronic chattel paper perfected by filing OR control. (§ 9-314)
o Under § 9-330(a) & (b): Filing by possession (tangible chattel paper)/control (electronic chattel
paper) will have priority over:
▪ A. A SI not indicated that it has been assigned to anyone (other than the purchaser), and
▪ B. Any other SI in the chattel paper (e.g., perfected by filing), as long as the chattel paper
purchaser (includes a SP) acquired its interest in the chattel paper without knowledge that
its purchase violated the rights of the other SP (e.g., the one perfecting by filing)
▪ Instruments (e.g., negotiable promissory notes, checks)
o SI in instruments can be perfected by either filing OR possession (§ 9-310(a)/9-312(a)/9-313)
o § 9-330(d): Possession takes priority over someone who filed alone as long as they took
possession in good faith and without knowledge that they were violating the rights of the filing
SP
▪ Deposit Accounts
o SI in a non-consumer deposit account can be perfected directly only by control (§ 9-312(b)(1))
▪ NOTE – funds in both consumer and non-consumer deposit account might be subject to a
perfected security interest where they are identifiable proceeds of some other type of
collateral. § 9-315(a)(2), (c) – (e)
o Since there are three ways to take control of a deposit account (§ 9-104), more than one party can
have control. Art. 9’s priority hierarchy is:
▪ Perfection by control has priority over an SI perfected by any other method. § 9-327(1)
▪ If multiple SPs have control of the same deposit account, under § 9-1327(3) – (4) the
following hierarchy governs:
• 1. SP who has obtained control by putting the despot account in its own name;
• 2. SP that is the bank at which the deposit account in maintained
• 3. SP who has a control agreement with the debtor and the bank at which the
account is maintained
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