SECURED TRANSACTIONS
OUTLINE
PREPARED BY: WELLS M. WOODS
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I. INTRODUCTION TO SECURED CREDIT
A. WHY DO WE NEED IT?
B. WHAT DOES IT DO?
C. IS IT FAIR?
II. ATTACHMENT (OR HOW CREDIT BECOMES SECURED) - § 9-203(B)
A. THE SECURITY AGREEMENT
1. COMPOSITE DOCUMENT RULE
2. DESCRIPTION OF COLLATERAL
i. AFTER-ACQUIRED COLLATERAL
ii. PROCEEDS
B. VALUE
C. RIGHTS IN COLLATERAL
III. PERFECTION
A. BY FILING
1. THE FILING SYSTEM
2. WHERE TO FILE
3. THE FINANCING STATEMENT
i. INDICATION OF COLLATERAL
ii. NAME OF DEBTOR
4. POST-FILING CHANGES
B. BY POSSESSION
1. SPECIAL RULES FOR CONSUMER GOODS
C. BY CONTROL
D. BY CERTIFICATE OF TITLE
IV. PRIORITY
A. FIRST TO FILE RULE
1. FUTURE ADVANCES
B. PURCHASE MONEY PRIORITY
1. SPECIAL RULE FOR INVENTORY
2. SPECIAL RULE FOR CONSUMER GOODS
C. LIEN CREDITORS
D. SPECIAL RULES BY COLLATERAL
1. BUYERS OF GOODS
i. ORDINARY COURSE
ii. DOUBLE DEBTORS
2. RIGHTS TO PAYMENT
3. ACCOUNTS AND GENERAL INTANGIBLES
4. CHATTEL PAPER AND INSTRUMENTS
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5. DEPOSIT ACCOUNTS
6. CASH PROCEEDS
E. FEDERAL TAX LIENS
V. DEFAULT AND ENFORCEMENT
A. WHAT IS DEFAULT?
B. REPOSSESSION
1. SELF-HELP
2. BREACH OF THE PEACE
3. JUDICIAL ACTION
C. DISPOSITION OF COLLATERAL
1. NOTIFICATION
2. COMMERCIALLY REASONABLE DISPOSITION
3. DEFICIENCY
D. EFFECT ON THIRD PARTIES
VI. LEASE VS. SECURITY INTEREST
A. BRIGHT LINE TEST
B. MEANINGFUL RESIDUAL INTEREST
VII. FIXTURES
A. FIXTURE FILINGS
B. PRIORITY
VIII. BANKRUPTCY
A. OVERVIEW
B. SECURED CLAIMS BY CHAPTER
C. TRUSTEE AVOIDANCE POWERS
1. PREFERENCES
2. FRAUDULENT CONVEYANCE
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I. INTRODUCTION TO SECURED CREDIT
A. WHY DO WE NEED IT?
1.
2.
Businesses use credit to leverage their capital.
Consumers enjoy goods and services while they pay for them.
A. Personal loans, secured by all the borrowers’ household goods;
B. PMSI sales in which the seller takes a SI in the goods sold to secure the unpaid indebtedness to be
repaid in monthly installments;
C. unsecured retail charge account credit (open-end credit), in which buyers make monthly payments on
balances owed.
3. Permitting lenders to take security interests in debtors’ property reduces their risk of not being repaid
and expands the volume of credit.
B. WHAT DOES IT DO?
1.
Secured credit allows a party lending money to repossess some object if the debtor fails to pay.
C. IS IT FAIR?
1.
Secured creditors have so much more power than unsecured creditors.
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II. ATTACHMENT (OR HOW CREDIT BECOMES SECURED) - § 9-203(B)
9–203(a). A SI attaches to the collateral when it becomes enforceable against the debtor w/r/t/ the collateral,
unless an agreement expressly postpones the time of attachment.
9–203(b). A SI is enforceable against the debtor and third parties w/r/t/ the collateral ONLY IF:
1. value has been given;
2. the debtor has rights in the collateral or the power to transfer rights in the collateral to a SP; and
3. one of the following conditions met:
A. debtor has authenticated a SA that has a description of the collateral;
B. the collateral is not a certificated security and is in the possession of the SP under § 9–313 pursuant to
debtor’s SA;
C. the collateral is a certificated security in registered form and the security certificate has been delivered
to the SP under §8–301 pursuant to the debtor’s SA; or
D. the collateral is deposit accounts (DA), electronic chattel paper (ECP), investment property, letter-ofcredit rights, or electronic documents, and the SP has control under §§ 7–106, 9–104, 9–105, 9–106, or
9–107 pursuant to debtor’s SA.
Requirements for Attachment:
1. value given
2. rights in collateral
3. one of following conditions:
a. authentication + description
b. possession
c. certificated security & delivery
d. control
A. THE SECURITY AGREEMENT (SA)
A SA is the most common condition met under § 9–203(b)(3).
A Secured Party (SP) gives value by either:
1. making a loan to the debtor; or
2. making a credit sale to the debtor.
3. value may be accepting delivery under a preexisting purchase contract. § 1–204
The debtor need not receive the value and the secured party need not be the one who gives the value.
Authentication:
 Authentication may be completed by the debtor signing the SA.
 A debtor may also authenticate a SA by indicating agreement or consent to the terms of the agreement,
if not by a signature, then by email or some other communicative medium.
1. COMPOSITE DOCUMENT RULE (CDR)
In order to create a SA, there must be: (1) a writing (2) signed by a debtor (3) containing a description of the
collateral or types of collateral.
9–402. A SA may also serve as a FS if signed by both parties.
No formal grant of a SI need exist before a SA arises.
A promissory note, standing alone, is insufficient to act as the SA.
 But a promissory note, read in conjunction with the FS, supported by correspondence during the course
of the transaction between the parties, is sufficient to establish a valid SA. [In re Bollinger Corp.]
 The promissory note was insufficient to constitute a SA because it referenced that a separate SA would
be forthcoming (and it was not).
Composite Document Rule: wiggle room in the law where there is clear intent to create a SI and some
documentation of that intent, a SI may be created.
 Not within the UCC itself. It is a separate doctrine that looks at the record as a whole for the parties’
intent to create a SI.
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2. DESCRIPTION OF COLLATERAL (DOC)
[GR] A description of collateral (IN A SA) is valid if it “reasonably identifies” the thing it describes.
◈ A collateral description is deemed to meet the test of reasonably identifying what it describes if it falls
into one of the following types of description: § 9–108(b)
o a specific listing,
o a category,
o a type of collateral defined in the UCC,
o a quantity,
o a formula or procedure,
o or any other method where the “identity of the collateral is objectively determinable.”.
◈ A description of the collateral in the security agreement using “all assets” or “all personal property” of
the debtor is deemed to be an inadequate description of the collateral for purposes of attachment of the
security interest to the collateral. § 9–108(c).
[CASE] I: whether a description of collateral that is prior in time, but more general as to what property it
applies, has priority interest over a more specific, but later in time SI?
 The degree of specificity required of a description of collateral depends on the nature of the document
involved – whether it is a SA or FS – and the purpose to be fulfilled by such document.
 [In re Grabowski]
o the earlier-filed FS that was more general had priority over the more specific and later-filed FS.
SA:
◈ TEST: a description of the collateral is sufficient if it “reasonably identifies” what is described.
◈ What counts as “reasonable identification”?
o specific listing; and
o category/type.
◈ What is not a reasonable identification?
o Only a super-generic such as “all the debtor’s assets” or “all the debtor’s personal property” is
insufficient under the “reasonable identification” standard of § 9–108. See § 9–108(c).
FS: super generic description such as “all of debtor’s personal property” is allowed.
To determine how a piece of collateral is characterized, look at its principal purpose at the time purchased/SI
taken.
i. AFTER-ACQUIRED COLLATERAL
Majority-view: A SI in inventory or accounts presumptively includes an interest in after-acquired inventory or
accounts.
◈ Presumptive inclusion is rebuttable by evidence showing a contrary intention of the parties.
Minority-view: to create a SI in after-acquired inventory or accounts, there must be express language evincing
the parties’ intent to cover after-acquired inventory or accounts.
9–204(b) restricts creditors from taking a SI in after-acquired collateral in a consumer goods transaction.
◈ The rule also renders after-acquired property clauses ineffective with respect to commercial tort claims.
ii. PROCEEDS
9–102(64). Proceeds are included in the definition of “collateral.”
◈ (A) “whatever is acquired upon the disposition of collateral.”
◈ WHAT YOU RECEIVE IN RETURN.
◈ “Proceeds” fall into the following categories: § 9–102(a)(64)
o whatever rights are acquired upon disposition of the collateral including disposition by sale,
lease, or license of the collateral;
o whatever is collected or distributed on account of collateral;
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o rights arising out of collateral;
o claims arising out of loss, defects, infringement, or other impairment of the value of collateral;
and
o insurance payable by reason of claims arising out of loss, defects, infringement or other
impairment of the value of the collateral.
In order to be “identifiable,” the proceeds must fall into one of 28 the categories of proceeds set forth in the
definition and result, in a factual sense, from the original collateral. § 9–102(a)(64)
B. VALUE
9–203(b)(1). A SI in collateral does not attach until value has been given.
Value: any consideration sufficient to support a simple contract. see 1–204(4).
1–204(2). A creditor gives value by taking a SI “for, or in total or partial satisfaction of, a preexisting claim.”
New Value: money, property or new credit given up front. See 9–102(a)(57).
C. RIGHTS IN COLLATERAL
9–203(b)(2). A SI in collateral does not attach until the debtor has rights in the collateral or the power to
transfer rights in the collateral to a SP.
◈ Under the UCC, a debtor need not have title to collateral to grant a SI in such collateral.
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III. PERFECTION
Perfection: A SI is perfected when it has attached, and the SP has either filed a FS or taken possession of the
collateral.
◈ Perfection establishes the SP’s priority in the collateral w/r/t/ third parties.
Automatic Perfection (upon Attachment):
1. PMSI in consumer goods.
2. an assignment of accounts or payment intangibles, IF:
a. the assignment does not transfer a significant part of assignor’s outstanding accounts or
payment intangibles.
Methods of Perfection:
(1) Attachment. § 9–309 sets out the cases in which security interests are automatically perfected when
they attach.
(2) Possession. The oldest form of a security interest in personal property is the “pledge,” in which the
secured party takes possession of the collateral. § 9–313(a) states that possession of the collateral by the
secured party constitutes perfection with respect to the goods, instruments (promissory notes, checks),
negotiable documents (bills of lading, warehouse receipts), chattel paper (leases of personal property,
sales contracts reserving a security interest), money (currency) and certificated securities (stocks,
bonds). What these types of collateral have in common is that they are capable of being possessed.
(3) Control. Revised Article 9 expands the role of perfection by control present in former Article 9. In
general, “control” is the ability to dispose of collateral unilaterally without cooperation of the debtor.
Where perfection by control is permitted for an item of collateral, the means of obtaining control are
specifically defined. Control is a permissible method of perfection for letter-of-credit rights, investment
property, electronic chattel paper, and deposit accounts. 9–314(a).
(4) Compliance with other law. § 9–311 provides that security interests subject to other law can be
perfected only in compliance with that law; filing under Article 9 is neither necessary nor effective.
(5) Filing. § 9–310(a) sets out the basic rule that perfection must be by filing a financing statement. § 9–
310(b) enumerates the cases discussed above in which filing is not necessary to perfect a security
interest. In most of the cases in which a security interest can be perfected by possession, it can also be
perfected by filing: goods, instruments, negotiable documents, chattel paper, and certificated securities.
§ 9–312(a).
CHOICE OF LAW:
9–301(2): with respect to possessory security interests, all issues of perfection, effect of perfection, and priority
are governed by a situs test: the location of the collateral controls, not the debtor’s location.
◈ EXCEPTION for nonpossessory perfection of SI in tangible property: issue of perfection becomes
governed by the law of the location of the debtor.
9–307(b): a debtor that is an organization is located at its place of business if it has one, and at the debtor’s
residence if the debtor is an individual. (organization = anything that isn’t an individual. see 1–203=1(b)(25))
◈ EXCEPTION that devours the rule in most business cases:
o A “registered organization” is “an organization formed or organized solely under the law of a
single state or the United States 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 United States.”
A. BY FILING
General rule: perfection by filing. § 9–310(a).
When filing not needed to perfect a SI: § 9–310(b).
1. PMSI in consumer goods & assignment of accounts or payment intangibles(PI) if not “significant part”
of assignor’s outstanding accounts or PI.
a. Purchase-Money Security Interest (PMSI): security interest given in collateral for the sake of
purchasing it.
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i. Can be from the seller of the collateral, or from a separate lender (for the purpose of
buying the collateral).
b. A SI perfects in PMSI for consumer goods if debtor agrees that collateral will be used as
consumer goods at time of sale.
2. certificated securities, documents, goods, or instruments which are perfected w/o filing. 9–312(e), (f),
or (g).
3. collateral in the SP’s possession. 9–313.
4. in DA, ECP, electronic documents, investment property, or letter-of-credit rights, which are all perfected
by control. 9–314.
5. in proceeds. 9–315.
a. Same Office Rule: perfection continues with proceeds unless the collateral turns into something
that falls outside of the confines of the filing system (i.e., land, cars, airplanes, etc.).
b. 3 types of exchanges:
i. collateral that gets turned into cash
1. rule: this has perpetual perfection as proceeds. § 9–315(d)(2).
ii. collateral that gets turned into non-cash
1. as long as you have to perfect the new collateral in the same filing office,
perfection continues. 9–315(d)(1).
2. if the new collateral is not perfected in the same office, you have 20 days to reperfect it (does not continue forever).
iii. Collateral that gets turned into cash and then more collateral
1. As long as you have to perfect the new collateral in the same filing office,
perfection continues. 9–315(d)(1)(C).
§ 9–210(a)(3) allows potential creditors to “request regarding a list of collateral” in order to determine which of
the debtor’s collateral is securing an obligation, and reasonably identifying the transaction creating that
obligation.
Notice Filing: the only record filed is a FS that merely gives notice that a SI may exist in the debtor’s collateral.
§ 2–403. 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.
1. THE FILING SYSTEM
9–501(a)(2). The state’s central filing office (usually the Secretary of State) is adopted as the place of filing a
FS in all cases except those involving real property-related collateral.
Same Office Rule
2. WHERE TO FILE
The state in which the debtor’s collateral is located.
If debtor is corporation, the state of incorporation.
1.
Location of Debtor governs the place of filing
2.
Unless you’re a foreign Debtor, in which case it’s D.C.
3.
This is for Filing, not Possession.
§9–307(b) – only applies if you’re a citizen of the U.S.; §9–307(c) says if you aren’t a citizen of the U.S., then
file in D.C.
Exceptions to the Debtor-Location Rule
1. Possessory Security Interests. If the security interest is perfected through possession of collateral (and
possession of collateral is an effective method of perfection as to that type of collateral), the law of the
jurisdiction where the collateral is located will govern perfection of the security interest. § 9–301(2).
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2. Fixture Filing. If the security interest is in goods that are fixtures and perfection is through filing a
fixture financing statement, then the law of the jurisdiction where the fixtures is located governs
perfection. § 9–301(3)(A).
3. Timber to Be Cut. If the security interest is in timber to be cut, the law of the jurisdiction where the
timber to be cut is located governs perfection. § 9–301(3)(B).
4. As-Extracted Collateral. If the security interest is in as-extracted collateral, the law of the jurisdiction
where the minehead or wellhead is located governs perfection. § 9–301(4).
5. Goods Covered by Certificate of Title. If the security interest is in goods that are covered by a certificate
of title and the goods are not inventory held for sale or lease by the debtor, then the law of the
jurisdiction that issued the certificate of title governs perfection until the goods cease to be covered by
the certificate of title. § 9–303(c), cmt. 5.
6. Deposit Accounts. If the security interest is in a deposit account, the law of the jurisdiction where the
depositary bank is located governs the perfection of the security interest. § 9–304(a).
a. 9–304 contains specific rules regarding where a bank is deemed to be located.
3. THE FINANCING STATEMENT
Requirements for Valid FS:
§ 9–502(a)  “sufficient”
1. Name of Debtor
2. Name of Creditor
3. Indication of collateral
§ 9–516(b)(4) & (5)
4. Mailing Address of SC
5. Mailing Address of D
6. Debtor is individual or corporation
If you leave out a SC’s address, the filing office will rightfully reject the FS.
For 4-6, if you leave out, filing office will rightfully reject.
i. INDICATION OF COLLATERAL
[GR] An indication of collateral (IN A FS) is valid as long as it says, “all of debtor’s assets.”
ii. NAME OF DEBTOR
§ 9-502(a)(1): FS must include the name of the debtor.
The name of an individual is best determined by the name on their driver’s license.
The name of an organization is either the name it uses, or the name of its partners, associates, or members.
The name of a registered organization is the name it filed with the secretary of state of the state in which it is
registered.
4. POST-FILING CHANGES
1. Transfer of Collateral. A creditor’s FS remains effective w/r/t collateral that a debtor sells to a buyer
even if the secured party knows of or consents to the disposition. 9–507(a).
a. The SI remains perfected for 1 year after the transfer.
b. To remain perfected, the SC must perfect its SI in the transferee-debtor’s (new debtor’s)
jurisdiction with that year.
2. Name Change. A creditor’s FS remains effective w/r/t the collateral depending on whether the changed
name renders the FS seriously misleading.
a. If not seriously misleading: SI remains perfected.
b. If seriously misleading: SC has 4 months to amend its FS to include the changed name to render
the on-file FS not seriously misleading. Otherwise, SI attaches only to collateral acquired before
or during the 4-month window.
3. Change in Business Structure. Generally, collateral that is transferred in the course of the incorporation
or merger normally would remain subject to a perfected SI.
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a. A business that changes structure may become bound as a debtor under 9–203(d) by a SA
previously entered into by another person.
b. Ways for a successor entity to become bound:
i. agree to become liable for all debts of its predecessor at the time when it -receives
transfer of its predecessor’s assets.
ii. when state law renders successor entities liable for the debts of old entities.
Relocation of Debtor. If the location of the debtor determines the law governing perfection, the change in
location of the debtor to another jurisdiction will require that the secured party take action to keep its security
interest perfected.
1. Collateral in Which the Security Interest Has Attached at the Time of Relocation. The law of the
debtor’s old jurisdiction will continue to govern questions regarding the perfection of the security
interest in collateral to which the security interest has attached at the time the debtor relocates until the
earlier of the following three events: § 9–316(a)
a. the expiration of the old financing statement by its own terms;
b. four months after the debtor’s location changed to the new jurisdiction; or
c. one year after the collateral has been transferred to a person that is located in another jurisdiction
and that is a debtor with respect to that collateral.
2. If the secured party takes the necessary perfection step in the jurisdiction of the debtor’s new location
within the applicable time period, the security interest is perfected by that new step.
3. If the secured party does not take the necessary perfection step in the jurisdiction of the debtor’s new
location within that time period, the security interest becomes unperfected and is deemed to be
retroactively unperfected as against a purchaser of the collateral for value. § 9–316(b).
4. The debtor’s authentication of the security agreement is authority for the secured party to file an initial
financing statement in the new jurisdiction to perfect a security interest in collateral covered by the
security agreement and its proceeds. § 9–509(b).
5. After-Acquired Collateral. Assume the security interest attaches to collateral acquired by the debtor
after relocation to a new jurisdiction under a properly constructed after-acquired property clause.
a. As to collateral acquired within four months after the debtor’s relocation, the financing statement
filed in the first jurisdiction continues to control for the shorter of the time of four months or
when the statement would have lapsed.
b. If the secured party files a proper financing statement as to the collateral in the second
jurisdiction during that time period, the security interest will remain continuously perfected.
c. If the secured party does not file in the new jurisdiction within the time period, the security
interest as to that after-acquired collateral becomes unperfected and is deemed retroactively
unperfected against a purchaser for value. § 9–316(h).
New Debtor: a person who becomes bound as a debtor under § 9–203(d) by a SA previously entered into by
another person.
If debtor’s address changes, not seriously misleading.
If debtor’s location changes, have 4 months to update.
If debtor sells or transfers collateral, but doesn’t leave jurisdiction, stay perfected in perpetuity.
What is the duty of a secured party to monitor its debtor w/r/t post-filing changes?
◈ GR: a security interest continues in collateral after the debtor transfers it to another person unless the
secured party “authorized the disposition free of the SI.” 9–315(a)(1).
o The SI attaches to “any identifiable collateral.” 9–315(a)(2).
B. BY POSSESSION
Both Attachment (9–203(b)(3)(B)) and Perfection (9–313(a)) occur when a SP takes possession of collateral
pursuant to the agreement of the debtor.
If the SP physically possesses an article of collateral belonging to the debtor, the debtor’s other creditors should
be on notice and have reason to investigate.
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A SP cannot perfect a SI in property by possession of a non-agent third party unless the third party agrees in an
authenticated record to hold possession of the goods for the SP and further agrees as to the nature of the duties
under which it holds the property. [In re Rolain]
Secret Lien: undermines principle of notice (anathema to Art. 9 notice). Banking is policing of secret liens.
Generally, a perfected lien is not a secret lien.
1. SPECIAL RULES FOR CONSUMER GOODS
PMSI in consumer goods are perfected when sold to the consumer.
§ 9–320(a). Buyers of goods in the ordinary course take free of SI created by the buyer’s seller, even if the SI is
perfected and the buyer knows of its existence.
§ 9–320(b). A buyer of goods from a person who bought the goods primarily for personal, family, or household
purposes takes free of the SI, even if perfected, if the buyer buys:
(1) without knowledge of the SI;
(2) for value;
(3) primarily for the buyer’s personal, family, or household purposes; and
(4) before the filing of a FS covering the goods.
Consumer Protections:
1. after-acquired property clause
2. automatic perfection in consumer goods. 9–309(1).
a. works if you argue that the automatic perfection allows the creditors to reduce the price of
lending.
C. BY CONTROL
Control is an alternative way of perfecting a SI in the following types of collateral:
(1) deposit accounts
a. only way to perfect = control
(2) electronic chattel paper
(3) investment property
(4) letter-of-credit rights
a. only way to perfect = control
The key to the control concept is that the purchaser has the present ability to have the securities sold or
transferred without further action by the transferor.
D. BY CERTIFICATE OF TITLE (COT)
CoT trumps FS.
CoT is a mechanism for sale & SI.
CoT is an exception to the general rule of using FS to perfect SI in inventory.
§ 9–315: perfection is sticky.
Exchange certificate of origin for CoT.
If the CoT is filed w/in 10 days of selling the vehicle, the filing relates back and is considered perfected on the
date of sale.
Accession: goods that are physically united with other goods in such a manner that the identity of the original
goods is not lost. 9–102(a)(1).
◈ A security interest may be created in an accession and continues in collateral that becomes an accession.
9–355(a).
◈ If a SI is perfected when the collateral becomes an accession, the SI remains perfected in the collateral.
9–355(b).
◈ A SI in an accession is subordinate to a SI in the whole which is perfected by compliance with the
requirements of a COT statute under 9–311(b). 9–355(d).
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IV. PRIORITY
[GR] First in time, First in right. (FITFIR)
9–201(a): A SA is effective according to its terms between the parties, against purchasers of the collateral, and
against creditors.
9–317(a): A SI is subordinate to the rights of:
(1) a person entitled to priority under 9–322; and
(2) except with respect to PMSI, a person becomes a lien creditor before the earlier of the time:
(A) the SI is perfected; or
(B) one of the conditions specified in 9–203(b)(3) is met and a FS covering the collateral is filed.
9–322(a): Priority among conflicting SI in the same collateral is determined according to the following rules:
(1) Conflicting perfected SI rank according to priority in time filing or perfection. Priority dates from the
earlier of the time a filing covering the collateral is first made or the SI is first perfected, if there is no
period thereafter when there is neither filing nor perfection.
(2) A perfected SI has priority over a conflicting unperfected SI.
(3) The first SI to attach or become effective has priority if conflicting SI are unperfected.
9–322 cmt 3: under subsection (a)(1), the first SP who files or perfects has priority. Under (a)(2), a perfected
SI has priority over an unperfected one. Under (a)(3), if both SI are unperfected, the first to attach has priority.
Subordination. Even though application of the priority rules results in a determination of the priority of a
creditor’s property claim, the creditor may agree with another creditor that its property claim will be
subordinated in priority to the other creditor’s property claim. § 9–339.
A. FIRST TO FILE RULE
9–317: A SI is subordinate to the rights of: (1) a person entitled to priority under 9–322; or (2) except as to
PMSI, a person that becomes a lien creditor before the earlier of the time: (a) the SI is perfected; or (b) one of
conditions in 9–203(b)(3) met and a FS covering the collateral filed.
9–322(a). First to File or First to Perfect.
9–317(a)(1) cedes to 9–322.
1. FUTURE ADVANCES
§ 9–323: future advances are perfected as long as the original loan/debt was perfected, with two exceptions:
1. The SI was only perfected under 9–309 (such as PMSI) or is merely temporarily perfected under 9–312
2. The SI is not made pursuant to a commitment entered into before the SI was perfected.
Future Advance: clauses concern the type of debt secured by the debtor’s assets.
Dragnet Clause: a provision in a SA that secures both a specific loan as well as future loans made by the
creditor to the debtor with the same collateral.
A SP takes subject to all advances secured by a competing SI having priority under 9–322(a)(1).
An advance has priority from the date it is made only in the rare case in which it is made without commitment
and while the SI is perfected only temporarily under 9–312 (20-day temporary perfection when delivering to
debtor).
B. PURCHASE MONEY PRIORITY
9–324(a): a PMSI has priority over conflicting SI in the same collateral.
PMSI lets you cut in line (preempts otherwise applicable FITFIR rule).
PMSI has priority over other SI as long as it is perfected (FS is filed) within 20 days after debtor takes
possession.
◈ 20-day period begins when the possessed goods become “collateral.”
◈ Party claiming the PMSI has the burden of proving that the
9–103(a)(2): defines purchase-money obligation as one incurred:
(i) as all or part of the price of collateral (seller sells goods to buyer and takes a SI in the goods to secure
the unpaid price); or
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(ii) for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact
so used (lender lends money to debtor to enable it to buy goods).
A PMSI includes all expenses incurred in connection with the purchase of collateral, not just the purchase-price.
9–103, cmt. 3.
Art. 9 creates an exclusive property right for Sellers in purchase-money.
Conflicting PMSI.
1. If both purchase money security interests would qualify for priority over other security interests under
the rules stated above, the seller’s purchase money security interest will have priority over the non-seller
secured party’s purchase money security interest. § 9–322(g)(1).
2. If neither of the conflicting purchase money security interests are held by the seller, the general rules of
§ 9–322(a) apply. § 9–322(g)(2).
Transformation Rule: a PMSI does not lose its status as a PMSI, even if:
(1) the purchase-money collateral also secures an obligation that is not a purchase-money obligation;
(2) collateral that is not purchase-money collateral also secures the purchase-money obligation; or
(3) the purchase-money obligation has been renewed, refinanced, consolidated, or restructured.
See 9–103, cmt. 7a.
The dual-status rule of 9–103(f) does not apply to consumer-goods transactions.
1. SPECIAL RULE FOR INVENTORY
§ 9–324(b): requirements for establishing a PMSI in inventory:
◈ the PMSI is perfected when the debtor receives possession of the inventory;
◈ the purchase-money SP sends an authenticated notification to the holder of the conflicting SI;
◈ the holder of the conflicting SI receives the notification w/in 5-years before the debtor receives
possession of the inventory; and
◈ the notification states that the person sending the notification has or expects to acquire a PMSI in
inventory of the debtor and describes the inventory.
§ 9–103(f)(2): preserves a PMSI even if PM collateral also secures nonPM obligations.
◈ Thus, cross-collateralization does not destroy PMSI status.
◈ this section therefore overrules Southtrust.
2. SPECIAL RULE FOR CONSUMER GOODS
Consumer goods transactions were excepted from subsections (e) and (f). § 9–103.
§ 9–103(h): in consumer goods transactions, courts are free to make their own rules about the desirability of the
dual status and payment allocation rules.
C. LIEN CREDITORS
9–102(a)(52): “Lien Creditor” means:
(A) a creditor that has acquired a lien on the property involved by attachment, levy, or execution;
(B) an assignee for benefit of creditors from the time of assignment;
(C) a trustee in bankruptcy from the date of the filing of the petition; or
(D) a receiver in equity from the time of appointment.
Basic Priority Rule
 Subject to two exceptions, a security interest or agricultural lien that is attached but unperfected at the
time the lien creditor becomes a lien creditor is subordinate in priority to the lien created by the lien
creditor. § 9–317(a)(2)(A).
Exception to the Basic Priority Rule: No Value as the Only Missing Step to Perfection of a Security
Interest.
 If the secured party has filed an effective financing statement against the debtor and has obtained the
debtor’s authenticated security agreement with an adequate collateral description but has not yet given
value at the time the lien creditor’s lien arises, the secured party’s security interest created subsequently,
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through the giving of value after the lien creditor’s lien arises, will be superior to the lien creditor’s lien.
§ 9–317(a)(2)(B).
Exception to the Basic Priority Rule: Purchase Money Security Interests
 If a purchase money security interest has attached but is not perfected prior to the lien creditor’s
obtaining of its lien and the purchase money secured party filed a financing statement covering the
collateral within 20 days after the debtor received delivery of the good subject to the purchase money
security interest, the security interest is not subordinate to a lien creditor’s lien that arises between the
time the security interest is attached and the time the secured party files the financing statement.
 The same result should obtain if the secured party complies with an applicable certificate of title law
during that time period instead of filing a financing statement. § 9–317(e).
Treatment of Future Advances
 If the secured party makes future advances and the secured party’s security interest is otherwise superior
to the lien creditor’s lien, the lien creditor’s lien will be subordinate to the security interest that secures
those advances unless the advance is made more than 45 days after the date of the lien creditor’s
obtaining 75 of the lien.
 Even if the advance is made more than 45 days after the lien creditor’s lien arose, the security interest
securing the advance may still have priority over the lien creditor’s lien if the advance is made without
knowledge of the lien creditor’s lien or made pursuant to a commitment entered into without knowledge
of the lien creditor’s lien. § 9–323(b).
 This rule subordinating security interests securing future advances to the lien creditor’s lien does not
apply to secured parties that are buyers of accounts, chattel paper, payment intangibles, or promissory
notes or a secured party that is a consignor of goods. § 9–323(c).
9–317(a)(2): an unperfected SI is subordinate to the rights of a lien creditor.
A trustee in bankruptcy is a lien creditor. 9–102(a)(52)(C).
Conflict between future advance and subsequent lien creditor: 9–323(b): the future advance has priority if:
(i) the advance is made within 45 days after the lien arises (even with knowledge of the lien); OR
(ii) the advance is made after the 45-day period, so long as the SP does not have knowledge of the lien at the
time the advance was made.
Conflict between a Lien Creditor (LC) and an advance made pursuant to a SI determined by 9-323(b):
 the SP making the future advance has priority if:
o future advance is made within 45 days of the date the lien arises; OR
o future advance is made after the 45-day period IF SP does not have knowledge of the lien.
Lien Creditor (“LC”) – Loses to SP if SP has SA (or possession) & FS before LC attaches judgment to
collateral.
Circularity of Priority: occurs between two SP and a LC where every party’s interest is subordinate to another
party’s interest.
D. SPECIAL RULES BY COLLATERAL
Buyers and Lessees of Non-Inventory Goods
 Under 9-317(b), buyers and lessees take subject to perfected security interests, and 9–315(a) provides
that the security interest continues in the goods sold or leased and in any identifiable proceeds.
 9–317(e), under certain conditions, grants unperfected PMSI-parties a 20-day relation-back period after
the debtor has received delivery of the collateral in which to perfect by filing.
Basic rule: buyers and lessees from a debtor take subject to perfected security interests
 major exception: buyers and lessees of inventory collateral take free of inventory security interests.
9–320(a): A buyer in the ordinary course of business takes free of a security interest created by the buyer’s
seller, even if the security interest is perfected and the buyer knows of its existence.
1. BUYERS OF GOODS
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9–317(b): buyers and lessees take subject to perfected SI.
9–315(a): the SI continues in the goods sold or leased and in any identifiable proceeds.
Even unperfected SI are prior to the rights of buyers and lessees other than those who:
(i) give value; and
(ii) receive delivery w/o knowledge of the SI.
i. ORDINARY COURSE
A person is a buyer in the ordinary course of business depends on whether it is the SELLER’S ORDINARY
COURSE of business. [Madison Capital Co., LLC. v. S & S Salvage, LLC]
1–201(b)(9): “Buyer in ordinary course of business” means a person that:
(i) buys in good faith;
(ii) without knowledge that the sale violates the rights of another person in the goods; and
(iii)in the ordinary course from a person in the business of selling goods of that kind.
ii. DOUBLE DEBTORS
Dual Debtor Dilemma: if both SP have perfected SI before the date of sale, TRANSFEROR lender has priority
over the transferee lender. [Bank of the West v. Commercial Credit Financial Servies, Inc.]
Dual Debtor Dilemma – Transferor’s SI takes priority
2. RIGHTS TO PAYMENT
9–109(a)(3): covers virtually all the rights to payment, including promissory notes.
◈ extends Art. 9 to cover the sale of payment intangibles (by implication, other sorts of general intangibles
are excluded).
9–309(3): the sale of a payment intangibles is automatically perfected.
9–309(4): the sale of promissory notes is automatically perfected.
Commercial Money Center
◈ monetary obligations of lessees sold separately from leases are payment intangibles, not chattel paper.
3. ACCOUNTS AND GENERAL INTANGIBLES
9–310(a): accounts and general intangibles can be perfected only by filing: possession is not a means of
perfection for intangibles such as these.
◈ priority determined by the first-to-file rule of 9–322(a).
9–103: PMSI can be created in goods and software and not in accounts.
9–302: a financing statement must be filed to perfect all SI except an assignment of accounts which does not
alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding
accounts of the assignor.
◈ See [In re Tri-County Materials, Inc.]
o Assignment must be both:
 insignificant; and
 casual.
4. CHATTEL PAPER AND INSTRUMENTS
Chattel Paper: a record or records that evidence both:
(1) a monetary obligation; and
(2) a SI in:
a. specific goods; or
b. a lease of goods.
A SI in accounts and general intangibles can only be perfected by filing; there is no physical embodiment of the
right to payment of which a creditor can be given possession.
[CASE] I: priority between certain secured creditors and purchasers of chattel paper.
◈ [Rex Financial Corp. v. Great Western Bank & Trust]
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◈
9–308: A purchaser of chattel paper who gives new value and takes possession of it in the ordinary
course of his business has priority over a SI in chattel paper which is claimed merely as proceeds of
inventory subject to a security interest (9–306), even though he knows that the specific paper is subject
to the security interest.
o allows the purchaser of chattel paper to have priority even if he has knowledge of a prior security
interest in the collateral.
§ 9–330: (a) vs. (b):
◈ depends on whether chattel paper is claimed
o (merely as proceeds of inventory) or
o (other than merely as proceeds of inventory)
◈ even if the security interest is more than a mere proceeds interest, the chattel paper financer under 9–330
will take free of the interest unless it has knowledge that the purchase violates the rights of the secured
party.
5. DEPOSIT ACCOUNTS
Deposit Account (“DA”)
9–102(a)(29): deposit account: a demand, time, savings, passbook, or similar account maintained with a bank.
 does not include accounts evidenced by negotiable certificates of deposit.
 does not include “investment property,” meaning money market funds or mutual fund accounts, even if
redeemable by check.
 everything from simple checking accounts on through savings and trust accounts.
9–109(d)(13): excludes deposit accounts from being original collateral for a SI in a consumer transaction.
 only excludes the treatment of “deposit accounts” from Art. 9 treatment.
 can be transacted around by instead using investment property or a C.D.
9–109(d)(10): excludes setoff rights by banks from coverage with 2 exceptions:
1.
9–340: allows the depository bank to exercise setoff against a SP who holds a SI in the deposit account.
2.
9–404: relates to defenses or claims of an account debtor.
Priority Rules in Deposit Accounts:
CONTROL GOVERNS ATTACHMENT (9–203(b)(3)(D))
CONTROL GOVERNS PERFECTION (9–312(b)(1), 9–314(a))
 control is the sole method for perfection of SI in DA as original collateral
CONTROL GOVERNS PRIORITY (9–327)
9–104: a secured party has control of a deposit account if:
(1) the SP is the bank with which the deposit account is maintained;
(2) the debtor, SP, and bank have agreed in an authenticated record that the bank will comply with
instructions originated by the SP directing disposition of the funds in the account without further consent
by the debtor; or
(3) the SP becomes the bank’s customer with respect to the deposit account.
Prototypic priority case for DAs:
 Debtor/Retailer grants SP a SI in inventory & proceeds, which SP perfected by filing a FS covering “all
D’s personal property.” Buyers of goods from Debtor usually paid by check or by unsecured credit
issued by D, which were deposited in the DA maintained at Bank. When D opened its DA at Bank, it
granted a SI in the DA to secure all existing and future obligations to Bank. Bank granted credit to D
but did not file a FS. When Debtor defaults on debt to SP, DA has $100k in it, all identifiable proceeds
of the disposition of the inventory collateral. SP claims the amount of the DA as cash proceeds in which
it had a perfected SI under 9–315(d), the priority of which dated from the time it filed on the inventory.
9–322(b).
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
Bank prevails in this priority dispute under 9–327(1): a SI held by a SP having control then also has
priority over the SI of a SP that does not have control.
 Once proceeds are deposited in a DA in which the depositary bank has a SI, the SI in the proceeds is
likely to be subordinated to the bank’s SI.
9–327(4): a SI perfected by control under 9–104(a)(3) has priority over a SI held by the bank with which the
DA is maintained.
9–104(a)(2): A SP has control over a DA if the debtor, SP, and Bank all agree in an authenticated record that
the Bank will comply with instructions originated by the SP directing disposition of the funds in the DA without
further consent by the debtor.
9–104(a)(3): A SP has control over a DA if the SP becomes the bank’s customer with respect to the DA. THIS
IS THE ONLY WAY A SP WINS OVER A BANK HOLDING THE DA.
9–104(b): A SP that has satisfied subsection (a) has control even if the debtor retains the right to direct
disposition of funds from the DA.
6. CASH PROCEEDS
9–332:
(a) A transferee of money takes the money free of a security interest unless the transferee acts in collusion
with the debtor in violating the rights of a secured party.
(b) A transferee of funds from a deposit account takes the funds free of a security interest unless the
transferee acts in collusion with the debtor in violating the rights of the secured party.
E. FEDERAL TAX LIENS
The FTLA says that a tax lien arises in favor of the government when the tax is assessed. Because the
assessment doesn’t require filing, the lien is secret.
Notice is the FTLA’s counterpart to perfection.
Real Property: the IRS must file notice in the office designated by the state in which the property is located.
Personal Property: the IRS must file in the state of the taxpayer’s residence.
◈ if the state hasn’t designated an office for tax lien filings, filing is in the federal district court for the
judicial district in which the real or personal property is located.
A tax lien filing is effective for 10 years and 30 days after the date the tax is assessed. The IRS may refile
within one year of the end of the effectiveness window.
FTLA Priority Rule:
◈ the tax lien shall not be valid as against any purchaser, holder of a SI, mechanic’s lien, or judgment lien
creditor until notice thereof which meets the requirements has been filed by the IRS.
◈ § 6323(a)’s general priority rule is that the federal tax lien primes the interests of purchasers, SI,
mechanic’s liens, and judgment liens that come into existence after proper notice of the ax lien has been
filed;
o these competitors have priority when their interests exist before filing notice of the tax lien
occurs.
◈ By its terms, § 6323 only gives priority to holders of SI at the time of filing notice of the tax lien is
given.
◈ A post-notice advance creates a SI not in existence at the time of the tax lien filing.
o similarly, a post-notice acquisition by the debtor of collateral covered by an after-acquired
property clause creates a SI that didn’t exist at the time of the filing of the tax lien.
◈ Exceptions to the FTLA protecting PMSI and post-lien proceeds:
o in some circumstances, a PMSI has priority over an intervening tax lien.
◈ §6323(d) gives priority against a tax lien to prescribed future advances. The tax lien is subordinate to SI
that come into existence within 45 days of the tax lien filing.
o To have priority,
 the secured party must make the advance without actual knowledge of the tax lien filing
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

the advance must be secured by collateral existing at the time of the filing, and
the advance must be protected under local law against the rights of judgment lien
creditors.
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V. DEFAULT AND ENFORCEMENT
A. WHAT IS DEFAULT?
Default is what the SA says it is.
Waiver of Default is a real possibility.
 If you’re picking your own rules (defining default), then courts expect you to abide by them.
 Majority Rule: a SP who has not insisted upon strict compliance in the past, who has accepted late
payments as a matter of course, must, before he may validly rely upon such a clause to declare a default
and effect repossession, give notice to the debtor that strict compliance with the terms of the contract
will be demanded henceforth if repossession is to be avoided. [Moe v. John Deere Co.]
B. REPOSSESSION
Cumulative Remedies
9–601:
 sale or other disposition of the collateral
 collection of rights to payment
9–615: allows SP to apply proceeds of sale of debtor’s property to satisfy the obligation secured by the SI.
9–601(c): “The rights under subsections (a) and (b) are cumulative and may be exercised simultaneously.”
 NO ELECTION OF REMEDIES!!
If a debtor has paid over 60% of the obligation secured by consumer goods, the SP must dispose of the
collateral within 90 days after repossession. 9–620(e)-(f).
9–609: provides the right of extra-judicial self-help repossession.
9–609(b): A SP may repossess w/o judicial process only if it can do so w/o breach of the peace.
If SP cannot repossess collateral w/o risking breach of the peace, it may have judicial officers seize the goods
by a replevin action, and have costs assessed to debtor under 9–608(a).
If collateral is bulky or otherwise difficult to move, the SP may render it unusable and sell it on the debtor’s
property (without moving it) under 9–609(a)(2).
If breach of peace occurs in a repossession case, 9–625(b) subjects the SP to liability for any damages suffered
by debtor arising therefrom.
 debtor gets “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.” 9–625(c)(2)
Breach of Peace (BOP)
 Large body of case law suggests that a SP commits BOP when entering an enclosed area w/o consent:
o a house
o an apartment
o a garage
o an office
 A SC cannot avoid liability for BOP by employing an independent contractor to serve as the repo agent.
 Self-help repossession is used most commonly w/r/t/ unattended motor vehicles parked in streets or in
unenclosed areas.
1. SELF-HELP
Repossession and sale must be commercially reasonable.
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Repossession is not the only option
 9–601(a)
2. BREACH OF THE PEACE
“Breach of the Peace”
 Technically no notice required under 9–609.
o but good practice to provide notice, unless some fear that the debtor will hide or destroy the
collateral.
3. JUDICIAL ACTION
Cla-Mil East Holding Corp. v. Medallion Funding Corp., 6 N.Y.3d 375 (2006).
 a creditor is not liable for the negligence or damages caused by the sheriff
 if a secured creditor executes on a judgment, and they are not liable for the acts of the judicial officer in
retrieving the property.
C. DISPOSITION OF COLLATERAL
Possession through judicial process
Sale through judicial process
Public or Private sale
Self-Help
rely on SA for rights
repossess via § 9–609
Article 9 sale (“commercially reasonable”)
Judicial Process
obtain a judgment (only route for unsecured
creditors)
Execution
Foreclosure
9–611 through 9–614 are the notice requirements
1. NOTIFICATION
Notice Required.
1. Prior to the disposition, the secured party must give a reasonable and authenticated notice of the
disposition. § 9–611(b).
2. The content, the manner, and the time of the notice must all be reasonable. § 9–611, cmt. 2.
3. Debtors and secondary obligors may only waive notice after a default has occurred. § 9–611(b), § 9–
611, cmt. 2.
Notice issues:
 Was it sent to whom it was supposed to be sent? 9–611(c).
 Was it sent within a reasonable time?
 For non-consumer good transactions: 9–613
 for consumer good transactions: 9–614
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Within a Self-Help Article 9 sale, you can have either public sales or private sales:
 if private sale:
o if debtor not able to come they might be able to purchase property back through redemption
o SC cannot credit bid and purchase the collateral for itself (except some sales of securities)
 whether the sale is private or public can inform whether it was commercially reasonable
o if private, less likely to be commercially reasonable
 especially if low price.
2. COMMERCIALLY REASONABLE DISPOSITION
9–602(7): you cannot waive the “commercial reasonableness” requirement
3. DEFICIENCY
1. Once the collateral is disposed of and the value received applied to the debt, the obligor is liable for any
deficiency remaining unless the parties have agreed that the obligor is not liable for the deficiency.
2. The parties may vary the obligor’s liability for a deficiency pursuant to an agreement entered into before
default. § 9–602.
3. The debtor is entitled to any surplus unless the secured party was required to pay the surplus to the
consignor as specified above. § 9–615(d).
4. The parties may not vary the debtor’s entitlement to the surplus. § 9–602(5).
5. If the transaction creating the security interest was a sale of accounts, chattel paper, payment intangibles
or promissory notes, the debtor is not entitled to the surplus and the obligor is not liable for the
deficiency. § 9–615(e).
a. This rule may be varied by the agreement of the debtor or obligor. § 9–602.
6. If (i) the disposition is made to the secured party, a person related to the secured party, or the secondary
obligor, and (ii) the disposition that occurred resulted in proceeds that were significantly below the range
of proceeds that a disposition complying with Article 9 to a transferee other than the secured party, a
person related to the secured party, or a secondary obligor would have brought, then the surplus or
deficiency is calculated by determining the amount that the disposition would have brought if it
complied with Article 9 and was made to a person other than the secured party, a person related to the
secured party, or the secondary obligor. § 9–615(f).
7. In a consumer-goods transaction, the secured party must send to the debtor and consumer obligor a
notice subsequent to the disposition regarding the calculation of the surplus and deficiency.
a. If there is a surplus, the debtor must get a notice.
b. If there is a deficiency, the consumer obligor must get a notice. 9–616(b).
c. This rule may not be varied by the agreement of the parties. § 9–602(9).
Secured Creditor as Sole Bidder
 Deficiency is limited to the amount of proceeds that would have been realized by a commercially
reasonable disposition to a person other than the SP, a related person, or a secondary obligor. 9–615(f).
Strict Foreclosure (full satisfaction)
 SP can take the collateral as full satisfaction as the underlying debt if debtor:
o gives express consent; or
o gives notice and no response after 20 days.
 CAN ACCEPT BY SILENCE
Partial Satisfaction
 SP can take collateral as partial satisfaction only under express consent of the debtor.
o CANNOT ACCEPT BY SILENCE.
 therefore, presumptively a full satisfaction if strict foreclosure.
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Special Rules for Consumers:
 If the debtor has paid over 60% of the debt, then SP must foreclose by disposition under 9–610. 9–
620(e).
 possession rule – 9-620(a)(3).
 SP needs to conduct disposition within 90 days of possession. 9–620(f).
D. EFFECT ON THIRD PARTIES
For Transferees: No Returns.
 transferee = purchaser at a foreclosure sale
 One the transfer happens at a foreclosure sale, it is final. 9–617(a)(3).
 If SP screws over the debtor, has a claim under 9-625(b) and (c)(1).
Foreclosure Sales Extinguish the Lien Down.
 Example: L gives loan to R for $10k, unsecured. F gives a loan to R for $7k w/ SI in collateral. N gives
5k loan to R w/ SI in collateral. Once a foreclosure sale is conducted, the person conducting the sale on
down gets to extinguish.
 Senior creditor’s interest remains attached to the collateral.
 junior lienholders must have requested (after notice) via written demand (9–615) proceeds from the sale.
Redemption
 debtor in bankruptcy allowed to purchase back collateral at its market value, not the price of the loan.
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VI. LEASE VS. SECURITY INTEREST
Lease vs. Security Interest – Who Cares?
 Whatever the parties call it doesn’t matter. Look beyond what the parties call it.
 Leaseholders get tons of benefits over secured creditors (especially in bankruptcy)
o Third parties are affected more.
In re Warne
 $20k initial payment
o $2.185/mo  $131k
 $31.1k security deposit
 $31.1k purchase price
 If it’s a lease, you return to normal terms; if it’s a SI, then you don’t.
Problem (p. 341)
 $33,225 for equipment.
 $31,920
 rule of thumb: cost of option to purchase at end of lease is greater than 50% of its FMV, then likely
lease. If less than 50% of FMV, then likely nominal (therefore SI).
Sale v. Secured Transaction (the “duck” test)
 Major’s Furniture Mart, Inc. v. Castle Credit Corp., Inc., 602 F.2d 538 (3d Cir 1979).
A. BRIGHT LINE TEST
Bright Line Rule
 1–203(b) Bright–Line Test:
o use of the goods is an obligation for the term of the lease
o not subject to termination by the lessee
 original term of the lease is equal to or greater than the remaining economic life of the
goods;
 lessee is bound to renew the lease for the remaining economic life of the goods or is
bound to become the owner;
 lessee has an option to renew the lease for the remaining economic life of the goods for
no additional consideration or nominal consideration;
 lessee has an option to become the owner of the goods for no additional consideration or
nominal consideration upon compliance with the agreement.
Economic Realities Test
 1–203(c) lists things that do not automatically transform the purported “lease” into a SI.
B. MEANINGFUL RESIDUAL INTEREST
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VII. FIXTURES
Identifying a Fixture
 Depends where you are!
Fixture Filings
 UCC FS
o controlled by 9–322
o good against all other SCs (other UCC filings)
o 9–334(e)(2): “readily removable” fixtures may be subordinated to the mortgage filing
 Fixture Filing
o filed with registry of deeds office (real property system not personal property system)
o keeps priority against other real property filings (fixture filing and mortgage)
 Mortgage Record
o Containing an appurtenances clause
Priority
 20-day perfection period for PMSI – even wins over already-perfected real property interest. 9–334(d).
 First in time, first in right
 NO PMSI PRIORITY AGAINST CONSTRUCTION MORTGAGES
Enforcement Issues
 9–604: may remove fixture from the property
o must pay to repair any physical injury to the real property
A. FIXTURE FILINGS
Three ways to perfect a fixture:
1. UCC filing
2. Fixture filing
A. FS must contain (a description of the realty to which the collateral is or will be affixed) & (indication
that it is being filed in the realty records).
B. A fixture filing is ineffective against a SC who has perfected a SI in the affixed good by making a
UCC filing.
i. fixture filing only effective against realty interests that extend to the fixture.
3. Recorded mortgage
to be protected against realty and competing SI’s, a prudent SC must make both a fixture and a UCC filing
covering the goods.
B. PRIORITY
9–334(c): a SI in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real
property other than the debtor.
9–334(d) & 9–334(e): exceptions to the general rule of subordination.
 a perfected SI in fixtures has priority over a conflicting interest in the owner of the real property IF:
o the debtor has an interest in or is in possession of the real property;
o the SI is a PMSI;
o the interest of the owner arises before the goods become fixtures; and
o the SI is perfected by a fixture filing before the goods become fixtures or within 20 days
thereafter.
 a perfected SI in fixtures has priority over a conflicting interest in the owner of the real property if:
25
o the debtor has an interest in or is in possession of the real property and the SI:
 is perfected by a fixture filing before the interest of the owner of the real property; and
 has priority over any conflicting interest of a predecessor in title of the owner;
o before the goods become fixtures, the SI is perfected, and the fixtures are readily removable:
 factory or office machines;
 equipment that is not primarily used or leased for use in the operation of the real
property; or
 replacement of domestic appliances that are consumer goods.
o the conflicting interest is a lien on the real property was obtained after the fixture’s SI was
perfected.
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VIII. BANKRUPTCY
A. OVERVIEW
Effect of Bankruptcy on Future Advances.
1. Any future advances the secured party makes to a debtor or debtor in possession after commencement of
the bankruptcy case will not automatically be secured by any collateral that is part of the bankruptcy
estate even if the secured party has a valid future advances clause in its security agreement.
2. The court may, after notice and hearing, approve the granting of a security interest in property of the
estate to secure advances made after the bankruptcy petition is filed. 11 U.S.C. § 364.
C7 – Redeem, Reaffirm, Ride-Through
 3 options what to do for encumbered collateral.
 Reaffirmance: debtor signs an agreement that allows the debtor to waive their discharge with respect to
a certain debt.
 Surrender: debtor can surrender the collateral to the secured creditor to discharge that debt.
 Redemption: debtor gives the creditor the current value of the collateral and discharges the rest of the
debt.
 Ride-through: debtor continues to pay the debt, but debtor is not personally liable on the debt.
C13 – Cramdown
 reduce property to the depreciated value, then allow the rest to be paid out over time pursuant to a plan.
o the amount of the reduction in value is paid out over time at a pro rata basis.
 amount determined by (income) - (reasonable expenses)
§ 1325(a) Hanging Paragraph
 cramdown does not apply to cars purchased within 910 days prior to bankruptcy filing.
 cramdown does not apply to collateral acquired for personal use obtained in past year.
Lifting the Automatic Stay
 § 362(d)(1) and (2).
 (1): if collateral is not insured or is depreciating quickly.
o solution: either
 lift automatic stay
 or keep stay, but make debtor pay cash during bankruptcy proceedings to creditor.
 (2): if debtor has no equity in collateral and don’t need it for reorganization.
C11 DIP Financing
 Debtor In Possession (DIP) allowed to get credit post-petition by offering priority to new creditors.
o Allows new creditor to skip in line!
 § 364
C11 Plan of Confirmation
 creditors divided up into classes of claims
o all secured creditors have their own class.
o meaning, every SC has a veto of the C11 plan.
 default rule: every SC class has to vote in favor of the plan.
C11 Cramdown
 as long as 1 SC votes in favor of the plan, each creditor must be paid value of the claim.
B. SECURED CLAIMS BY CHAPTER
What is the Claim?
 BC § 101(5) – claim is any right to payment, whether secured or unsecured
o EVERYONE WHO ASKS FOR IT get the interest (as long as the agreement contained it).
o and pre-petition interest
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
BC 506(b) – post petition interest provided for secured claims to the extent that it does not exceed the
value of the collateral.
How do you calculate value?
 Associates Commerical Corp. v. Rash, 520 U.S. 953 (1997).
o Supreme Court says the way to value collateral in a CH13 cramdown is whatever the
replacement (probably wholesale not retail replacement)
C. TRUSTEE AVOIDANCE POWERS
1. PREFERENCES
Preferences.
1. Requirements to Find a Preference. The bankruptcy trustee may avoid: 11 U.S.C. § 547.
a. a transfer of an interest in the debtor’s property
b. made to or for the benefit of a creditor on account of antecedent debt made while the debtor was
insolvent,
c. made within 90 days preceding the bankruptcy filing (1 year if the transfer is made to or for the
benefit of an insider), and
d. that enables the creditor to obtain more than it would in a Chapter 7 liquidation if the transfer had
not been made.
2. Exceptions to Preference Liability. Even if all of the requirements for preference liability are met, a
creditor may attempt to prevent the bankruptcy trustee from avoiding the transfer of the debtor’s
property to or for the benefit of the creditor by attempting to bring the transaction within one of the
exceptions to preference liability found in 11 U.S.C. § 547(c).
a. Contemporaneous Exchange for New Value Exception. If the transfer of the debtor’s interest in
property was intended by both the debtor and the creditor to be a contemporaneous exchange of
the interest in property for new value given to the debtor and the exchange was indeed
“substantially” contemporaneous, the transfer of the debtor’s interest in property may not be
avoided as a preference. 11 U.S.C. § 547(c)(1).
b. Ordinary Course Payment Exception. If the transfer of the debtor’s interest in property is a
payment of a debt that was incurred in the ordinary course of business or financial affairs of the
debtor and the transfer was either made
i. in the ordinary course of business or financial affairs of the debtor or
ii. made according to ordinary business terms, the transfer is not avoidable as a preference.
11 U.S.C. § 547(c)(2).
c. Purchase Money Security Interest Exception. If the transfer of the debtor’s interest in property is
a purchase money security interest in collateral, the transfer is not avoidable as a preference if all
of the following requirements are met. 11 U.S.C. § 547(c)(3)
i. the security interest must secure new value the secured party gives to the debtor at or
after the time a security agreement granting the security interest is signed.
ii. the new value must enable the debtor to acquire the property
iii. the debtor must use the new value to acquire the property
iv. the security interest must be perfected on or before 30 days after the debtor receives
possession of the collateral.
d. New Value Exception. If the debtor makes a transfer of its interest in property to a creditor and
subsequent to that transfer, the creditor gives new value to the debtor that is unsecured and did
not result in the debtor making an unavoidable transfer of an interest in the debtor’s property to
the creditor, the previous transfer of the debtor’s interest in property is not avoidable as a
preference to the extent of the amount of the new value given subsequently. 11 U.S.C. §
547(c)(4).
2. FRAUDULENT CONVEYANCE
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Fraudulent Transfer.
1. The bankruptcy trustee may use either the state law fraudulent transfer provisions (under 11 U.S.C. §
544(b)) or 11 U.S.C. § 548 to avoid transfers of the debtor’s property made prior to bankruptcy that
were made with the actual intent to hinder or defraud creditors or that were made for less than
reasonably equivalent value and made while the enterprise was undercapitalized, the debtor was unable
to pay debts when they came due, or the debtor was insolvent or rendered insolvent.
2. Effect of Transfer Avoidance. The usual effect of avoiding a security interest or agricultural lien is that
the secured party will no longer be considered to have a secured claim in the bankruptcy proceeding
because the trustee recovers the property transferred (i.e. effectively nullifying the grant of the security
interest or the agricultural lien). 11 U.S.C. § 550(a).
a. The secured party will still be able to make an unsecured claim in the bankruptcy for the amount
of the debt that is owed according to the claims allowance procedure. 11 U.S.C. §§ 501, 502.
b. The avoided security interest or agricultural lien is preserved for the benefit of the estate. 11
U.S.C. § 551.
c. The bankruptcy trustee may also recover, in most circumstances, the value of the transferred
property from the initial transferee or a subsequent transferee from the initial transferee. 11
U.S.C. § 550(a).
d. The trustee is entitled to only a single satisfaction so that if the transfer is avoidable and the
trustee recovers the property transferred, the trustee may not then, in addition, recover the
property’s value from the transferee. 11 U.S.C. § 550(d).
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