Secured Transactions | Outline
Aden Kebede
I.
Introduction to Debtor-Creditor Law
A.
(Most) Non-UCC Debtor-Creditor Law
1.
In most contractual agreements, we see one party voluntarily enter into an
obligation to pay another party. If the creditor has extended a loan of some
sort to the debtor in exchange for the debtor’s promise to repay at some time
in the future without more, this is an unsecured debt and not covered by the
UCC. This is a simple contractual obligation.
a.
Under this process, the first steps in collecting money that a creditor
is owed is by some extralegal means. The creditor makes phone calls
or letters to get the debtor to pay back the money it has defaulted on.
If the creditor is not successful, it will send the debt to a debt
collection agency.
b.
Next, the unsecured creditor may file a lawsuit to collect the money.
Under contract theory (where the creditor will need a lawyer), the
court may enter a judgement in favor of the creditor, and there is a
good chance it will get its money back by one way or another. If the
debtor doesn’t satisfy the payment of the debt, the creditor can get a
satisfaction of judgment where the creditor can go after some
valuable property (real or personal) of the debtors.
i.
This process is an execution against specific property (wage
garnishes, etc.). the creditor will have to get a writ of
execution before it can get any money or value back.
2.
B.
Bankruptcy
a.
There are three principle chapters of bankruptcy that will relevant for
this course. Chapter 7 allows for the liquidation of any debtor’s
estate and for the debtor to come out of the bankruptcy with most of
its debt forgiven by law. Chapter 11 allows a business organization
(or a wealthier individual) to come up with some plan for
reorganization of its financial situation that stands at least a fairly
good chance of allowing it to continue on in business with a greater
probability that it will stabilize.
b.
The important step in the bankruptcy process for our purposes is
when, upon petition for bankruptcy, there is an automatic stay which
enjoins (with only a few exceptions) all creditors from taking the
kind of remedial measures that they would otherwise by entitled to
take to collect debt. The creditor will have to apply for an order from
the BK court to fight for its interest (hence that we see a lot of the
cases we studied as BK cases)
UCC Article 9’s Scope
1.
2.
There
Generally, subject to the exceptions in Sec. 9-109(c) and (d), Article 9
applies to a transaction, regardless of form, that creates a security interest
in personal property or fixtures by contract. 9-109(a)(1). It also applies to
an agricultural lien, a sale of accounts, chattel paper, payment intangible,
promissory note and a consignment.
a.
Personal property is a tangible or intangible property not
constituting an interest in real property
b.
Fixture is an item of personal property that has become so attached
to a real property that a right in it arises under real property law. § 9102(a)(41).
c.
A security interest is an interest in personal property or fixture that
secures payment or performance of an obligation.
Security Interest vs. Lease
a.
A lease grants the lessee the right to possess and use goods for a
period of time in exchange for consideration. § 2A-103(1)(j). A
frequent issue is whether something purported to be a lease is really a
disguised sale. Whether a transaction in the form of a lease creates a
lease or a security interest is determine by the facts of each case.
are no statutes that say something is a lease as a matter of law, but
there are statutes that say something is a security interest as a matter
of law.
b.
Whether a transaction “in the form of a lease” is truly a lease or is a
disguised sale creating a security interest is determined, in part, by:
i.
whether the lessee can terminate her obligations under the
lease;
(a)
if the lessee has no legal ability prior to the end of the
lease term to terminate that obligation to pay, then it
is a security interest rather than a lease.
ii.
whether the lease term is for the full “economic life” of the
goods (i.e., at the end of the lease, the goods will have little
or no market value);
(a)
if the term is equal to or greater than the remaining
economic life of the good, it’s a security interest
rather than a lease
iii.
whether the lessee must renew the lease at the end of the
original lease term for a period beyond which the goods are
not expected to have any appreciable value or may renew the
lease for such a period for little or no additional
consideration; and
(a)
if the contract requires the lessee to renew the lease
for the remaining economic life of the goods or to
become the owner of the goods, it’s a security
interest rather than a lease
iv.
whether the lessee may or must purchase the leased goods
for little or no additional consideration when the lease ends.
(a)
2.
(1);
if the contract gives the lessee an option to renew the
lease for the remaining economic life of the goods
without additional consideration or only nominal
consideration, it’s a security interest rather than a
lease.
c.
A per se security interest as a matter of law is created is: (main test)
i.
the lessee cannot terminate the early and;
ii.
the original term of the lease is equal to or greater than the
remaining economic life of the good
iii.
the lessee is bound to renew the lease for the remaining
economic life of the goods or is bound to become the owner
of the goods
iv.
the lessee has an option to renew the lease for the remaining
economic life of the goods for no additional consideration or
for nominal additional consideration upon compliance with
the lease agreement
v.
the lessee has an option to become the owner of the goods
for no additional consideration or for nominal additional
consideration upon compliance with the lease agreement
d.
Economic Realities Test (In re Paz-wrong conclusion)
i.
Considers the likelihood, at the time the parties entered into
the transaction, that the goods would still have meaningful
economic life when they reverted to the lessor at the end of
the lease term. If there is a reasonable likelihood the lessor
will retain some residual interest in the goods, the transaction
is probably a true lease; if not, the transaction is most likely
a disguised sale intended for security. Use this test when
something is not a per se security interest, but to determine a
true sale as a matter of fact or a true lease as a matter of fact)
Preempted Transactions
a.
Article 9 does not govern to the extent that:
i.
a federal statute, regulation, or treaty preempts it (e.g., the
federal law requires that security interests in patents be
registered with the U.S. Patent & Trademark Office), § 9109(c)(1).
ii.
another state statute expressly governs the creation,
perfection, priority, or enforcement of a security interest
created (e.g., a certificate of title statute), § 9-109(c)(2).
iii.
another sovereign’s statute, other than a statute generally
applicable to security interests, expressly governs creation,
perfection, priority, or enforcement of a security interest
created by the state, country, or governmental unit, § 9109(c)(3).
b.
Most or all of Article 9 also does not apply to:
i.
a landlord’s lien, other than an agricultural lien, § 9-109(d)
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
C.
a lien given by statute or other law for services or materials,
(e.g., a mechanic’s or artisan lien) § 9-109(d)(2);
an assignment of a claim for wages, salary, or other
employee compensation (e.g., a garnishment order), § 9109(d)(3)
a sale of accounts, chattel paper, payment intangibles, or
promissory notes as part of a sale of the business out of
which they arose, § 9-109(d)(4);
an assignment of accounts, chattel paper, payment
intangibles, or promissory notes solely for purposes of
collection §9-109(d)(5);
an assignment of a contractual right to payment to an
assignee which the contract also obligates to perform § 9109(d)(6)
an assignment of an account, payment intangible, or
promissory note to an assignee in full or partial satisfaction
of a preexisting indebtedness, § 9-109(d)(7);
most transfers of interests in or assignments of claims under
an insurance policy, § 9-109(d)(8);
an assignment of a right represented by a judgment, other
than a judgment taken on a right to payment that was
collateral, § 9-109(d)(9);
a right of recoupment or set-off, except as included, §§ 9-340
or 9-404, § 9-109(d)(10);
the creation or transfer of an interest in or lien on real
property, including a lease or rents thereupon, except to the
extent that provision is made for:
(A) liens on real property in Sections 9-203 and 9-308;
(B) fixtures in Section 9-334;
(C) fixture filings in Sections 9-501, 9-502, 9-512, 9-516,
and 9-519; and
(D) security agreements covering personal and real property
in Section 9-604;
an assignment of a claim arising in tort, other than a
commercial tort claim
an assignment of a deposit account as collateral (other than
as proceeds) in a consumer transaction
Characterizing Collateral
1.
The key consideration is the collateral’s actual or intended use, rather than
its intrinsic nature, when the security agreement attaches.
2.
Article 9 applies to personal property and fixtures. Courts typically consider
three factors when deciding whether personal property collateral has
become a fixture:
a.
a firmness with which the collateral is affixed to real estate;
b.
3.
debtor
(35).
has
these
the parties intent as to whether the collateral is a permanent part of
the realty;
c.
the degree to which the collateral is essential to the ability of the
realty to serve its intended function;
i.
Statutory exception: Article 9 defers to non-UCC state law
to determine whether an item of personal property has
become a fixture, except that Article 9 dictates that
“ordinary building materials incorporated into an
improvement on land” lose their identity as personal
property. (See 9-334(a) and comment 3).
Tangible (Goods) Personal Property
a.
Consumer Goods
i.
Goods used or bought for use primarily for personal,
household, or family purposes, § 9-102(a)(23).
b.
Farm Products
i.
Crops, livestock, farming supplies, and unmanufactured
products of crops and livestock § 9-102(a)(34), belonging to a
debtor engaged in farming operations. § 9-102(a)(34). A
is engaged in a farming operation if it is “raising, cultivating,
propagating, fattening, or grazing livestock or crops engaging
in any other activity that is considered farming. § 9-102(a)
The term far products does not include standing timber.
(a)
Ex: A owns a Christmas tree farm in which customers
come and cut down trees at Christmas time. While A
may be engaged in a “farming operation,” the trees are
not farm products as the trees are “standing timber.”
(b)
Ex: A owns an apple orchard. The apples produced by
the orchard are farm products. Apple cider, produced
from applies raised by the orchard is not farm product
(its manufactured).
c.
Inventory
i.
means goods, other than farm products, which:
(a) are leased by a person as lessor;
(b) are held by a person for sale or lease or to be furnished
under a contract of service;
(c) are furnished by a person under a contract of service; or
(d) consist of raw materials, work in process, or materials
used or consumed in a business for “short term” § 9102(a)(48).
ii.
Ex: A owns a hardware store. All items that A holds for sale
that fall within the definition of goods are also inventory. A
paper, pens, computer toner cartridges and other supplies,
are also inventory (short term use, they run out). A has cash
registers, computers, and desks , these are not inventory, these
are equipment, long term use in business.
d.
Equipment
i.
the
4.
the
paper,
payment
is
Goods other than inventory, farm products, or consumer
goods. Goods used in business for long term. Equipment is
default type of tangible collateral unless the setting permits
using the more generic “goods” . § 9-102(a)(33).
Intangible Personal Property (Non-Goods)
a.
Accounts
i.
The rights to payment under wholly executory contracts; if
right to payment is evidenced by an instrument or chattel
it is not an account. It does not mean commercial tort claims,
deposit accounts, investment property, letter of credit rights,
letter of credit, etc. § 9-102(a)(2).
ii.
Ex: A buys a good on credit from B. A’s obligation to pay B is
an “account” and an assert of B.
iii.
Ex: A buys real estate from B on credit. A signs a negotiable
note evidencing that obligation to pay B. The right to
is not an account.
iv.
Ex: A promises to render services over the course of a year to
B in return for B’s promise to pay for those services. B’s
obligation to pay is an account regardless of whether A has
performed any services.
b.
Chattel Paper
i.
A recording evidencing both a monetary obligation and a
security interest in/lease of specific goods. § 9-102(a)(11).
ii.
Electronic Chattel Paper – chattel paper evidenced by one or
more electronic records. § 9-102(a)(31).
c.
Commercial Tort Claims
i.
A tort claim in favor of a corporation or other business
organization or an individual, provided that the claim arose
in the course of his/her business or profession and does not
include damages arising out of personal injury or death. § 9102(a)(13).
d.
Deposit Account (both consumer and nonconsumer accounts)
i.
A demand, time, or other account in a depository institution,
excluding investment property and accounts evidence by an
instrument. Must be a bank, an entity engaged in the business
of banking; § 9-102(a)(29).
ii.
Ex: A maintains a money market account at Brokerage, Inc.
The account is not a deposit account because Brokerage Inc.
not a bank.
e.
Document
i.
A document of title as defined or a receipt of the type
described. A document of title is a record that is considered
to be evidence that the person holding the record is entitled
to hold the record and entitled to the goods described in the
record. May be either electronic or tangible. Must be issued
by a bailee. § 9-102(a)(30).
(a)
stated
delivered
document
f.
g.
include
brokerage
h.
i.
j.
k.
e.g., Warehouse receipts, bills of lading issued by
carriers in the business of transporting goods.
ii.
Negotiable or Nonnegotiable
(a)
A document of title may be either negotiable or
nonnegotiable. § 7-104. A document of title is
negotiable if by the terms stated in the document the
goods are to be delivered “to the order of” a named
person or to “bearer.” Any other document title is
nonnegotiable.
(b)
Ex: A stored goods with Warehouse, Inc. Warehouse
issued a warehouse receipt describing the goods and
stating the goods are to be delivered to “bearer.” The
warehouse receipt is a negotiable document of title.
(c)
Ex: A gave goods to Carrier, Inc. to transport to a
destination. Carrier issued a bill of lading describing
the goods and stating that the goods are to be
“to A.” The bill of lading is a nonnegotiable
of title.
Instrument
i.
An instrument refers to a “writing” that falls within one of
two categories, a negotiable instrument, or a writing that
evidences a right to payment of money, is not itself a security
agreement or lease, and of the type which is in the ordinary
course of business transferred by delivery with any
necessary endorsement or assignment; cannot be electronic, §
9-102(a)(47).
(a)
Examples: promissory notes and checks
Investment Property
i.
Securities, securities accounts, securities entitlements,
commodities account, and commodities contracts. The
items such as stocks, bonds, mutual funds, and
accounts. (§ 9-102(a)(15)).§ 9-102(a)(49).
Letter of Credit
i.
An issuer’s undertaking, at the request of an applicant, to pay
a beneficiary upon the beneficiary’s presentation of certain
documents evidencing its entitlement to payment. § 5102(a)(10).
Letter of Credit Rights
i.
A right to payment or performance under a letter of credit
other than the beneficiary’s right to demand payment or
performance. § 9-102(a)(51).
Money
i.
A domestic, foreign, or intergovernmental medium of
exchange. In the U.S., money is currency bills and coins
authorized by the federal govt. § 1-201(a)(24).
General Intangibles
i.
5.
II.
Attachment
Software
(a)
excluding software that is embedded in goods § 9102(a)(76); and
ii.
Payment Intangibles
(a)
a general intangible under which the account
debtor’s primary obligation is to pay money; § 9102(a)(61);
iii.
Other General Intangibles
(a).
any intangible personal property but excluding
accounts, chattel paper, deposit accounts, documents
of title, electronic chattel paper, instruments,
investment property, letter of credit rights, letters of
credit, money, and unextracted oil, gas, and other
mineral. When in doubt with intangible collateral,
call it general intangible. § 9-102(a)(42).
Collateral Expansion
a.
Proceeds
i.
In order to have something that is proceeds, a security
interest or agricultural lien must first arise in an item of
“collateral”. The proceed is value the debtor receives from
selling, exchanging, collecting on, or otherwise disposing of
collateral. § 9-102(a)(64). An attached security interest in
collateral automatically attaches to its identifiable proceeds.
§§ 9-203(f) & 9-315(a)(2).
(a)
cash proceeds – money, checks, deposit accounts, or
the like
(b)
non-cash proceeds – proceeds other than cash
proceeds
ii.
Proceeds can go through several transformations and still
retain their character as proceeds.
b.
Product
i.
An asset made by or of the collateral
c.
Offspring
i.
A biological descendant of the collateral (usually refers to
farm products)
d.
Profit
i.
Value the collateral generates in excess of the cost of
generating it.
e.
Rent
i.
Value the debtor receives for letting someone use the
collateral
A.
In order for a security interest to attach to a specific collateral, (i) the debtor must
have “rights in” the collateral, (ii) the secured party must have given value to
another party (usually the debtor, and (iii) there must be a valid security agreement
or another formality that the creditor must satisfy.
B.
Creditor Must Give Value
1.
The creditor must give the debtor consideration to bind the debtor to the
security interest. § 9-203(b)(1).
2.
Value encompasses all forms of consideration that would support an
ordinary contract, as well as past consideration. Anything is accepted other
than “sham” transactions § 1-204
3.
Future Advances
a.
Collateral may secure future as well as past or present advances if
the security agreement so provides. § 9-204(c).This is in line with the
policy of this Article toward security interests in after-acquired
property under subsection (a). Indeed, the parties are free to agree
a security interest secures any obligation whatsoever.
C.
Debtor Must Have Rights in the Collateral
1.
A debtor cannot grant a security interest in a property in which she has no
rights. § 9-203(b)(2). However, this does not must the debtor must own the
collateral.
a.
If the debtor owns a limited interest in the collateral/asset, the
security interest will generally attach only to the extent of the
debtor’s interest.
b.
A debtor who acquired its limited interest by entrustment may be
able to grant a buyer in the ordinary course of business (excluding
secured parties) more rights than the debtor has in the collateral. So
this will not allow a debtor to satisfy ‘rights in the collateral’
requirement.
c.
Rights by Fraud or Deceit
i.
A debtor who acquires its limited interest by fraud or deceit
may be able to grant a bona fide purchaser (including a
secured creditor) more rights than the debtor has in the
collateral.
D.
Security Agreement & Other Attachment Mechanisms
1.
Security Agreement § 9-203(b)(3)(A)
a.
Parties can agree to create a security interest by entering into a
security agreement. A valid security agreement is (i) a record
(written or electronically stored information) (ii) authenticated by
the debtor, (iii) and that describes the collateral.
i.
A record is authenticated if it is signed or attached
to/associated with an electronic sound, symbol, or process
with the present intent to adopt it.
that
ii.
tractor),
goods,
b.
The description of the collateral in the authenticated
agreement is sufficient if it reasonably identifies the
collateral. Description may be:
(a)
specific item (by serial number or by identifying it as
“the debtor’s tractor” if the debtor only has one
§ 9-108(b)(1)
(b)
by category (i.e., exercise equipment, household
pets) § 9-108(b)(2);
(c)
by type (i.e., all of the debtor’s equipment, accounts,
farm products) § 9-108(b)(3);
(d)
quantity
(e)
computational formula
(f)
or any other method in which the identity of the
collateral is objectively determinable. Super generic
description such as “all of the debtor’s assets or “all
of the debtor’s personal property” is not sufficient.
iii.
Some collaterals cannot be described by type alone including
(i) commercial tort claims, § 9- 108(e)(1). (ii) consumer
§ 9-108(e)(2).and (iii) consumer securities accounts. § 9108(e)(2). These must be described specifically to be covered
by the authenticated security agreement.
(a)
for example, non-consumer securities account,
commodities account, or securities entitlement must
say “debtor’s securities account(s), so on an so forth.
iv.
A security agreement reasonably identifies a commodities
account, securities account, or securities entitlement by
describing the underlying financial asset or commodity
contract. § 9-108(d)(2).
v.
A security agreement reasonably identifies a non-consumer’s
commodities account, securities account, or securities
entitlement if it describes the collateral as “[debtor]’s
commodities account(s),” “[debtor]’s securities account(s),”
or “[debtor]’s securities entitlement(s),” respectively, or as
investment property. § 9-108(d)(1).
After-Acquired Property
i.
This is property of the same description covered by a
security interest that the debtor acquires after the security
interest first attaches. Article 9 allows after-acquired property
clauses. See § 9-204(a).
ii.
Article 9 prohibits an after-acquired property clause from
attaching to (i) an after-acquired commercial tort claim and
(ii) most consumer goods in which the debtor acquired rights
more than 10 days after the secured creditor gave value. § 9204(b)(1)-(2)
iii.
If SP does not expressly include after-acquired property in
the security agreement, it risks not being able to attach it.
(a)
2.
The only exceptions courts typically apply it to is
after-acquired accounts and after-acquired inventory.
This is because both are assumed to be perpetually in
flux.
c.
A security agreement should (but not must) also express the
following:
i.
the primary debtor’s obligation
ii.
conditions of default by debtor
iii.
the secured creditor’s rights/remedies on default; and
iv.
the debtor’s other undertakings, such as maintenance and
insurance of the collateral.
d.
Composite Document Rule
i.
More than one document, read together, may satisfy a
security agreement. But courts differ on what evidence they
will consider to connect documents for purposes of a
security agreement. The best practice is to expressly crossreference the other documents and if practical, attach them. §
9-203(b)(3)(A).
Possession
a.
If the parties so agree, the secured creditor may attach a security
interest in a consumer good, equipment, a farm product, an
instrument, inventory, money, tangible chattel paper, or a tangible
document (of title) by possessing, or having someone under its
control by operation of law or by agreement, possess the collateral. §
9-203(b)(3)(B).
b.
Collaterals That Cannot be Attached by Possession
i.
Notwithstanding the parties’ agreement, a secured creditor
may not attach a security interest in an account, commercial
tort claim, deposit account, electronic chattel paper,
electronic document of title, general intangibles, investment
property, or a letter of creditor right by actual or constructive
possession. Duh, you cant possess these things. See § 9-
313(a).
c.
Rights and Duties of Secured Party in Possession
i.
Duty of Reasonable Care
(a)
the secured party must use reasonable care in storing
and preserving the collateral
ii.
Right to Reimbursement for Expenses
(a)
the secured party may charge the debtor for any
reasonable expenses incurred in preservation of the
collateral, including the cost of insurance
iii.
Risk of Loss
(a)
risk of accidental loss or damages is on the debtor to
the extent of any insurance coverage deficiency.
iv.
Accounting for Profits
(a)
v.
3.
taking
4.
account
authenticated
the
will comply
account
the secured party may hold as additional security any
increase in value of or profits from the collateral
except money (??)
Right to Repledge
(a)
the secured party may repledge the collateral (i.e., the
secured party may use the collateral as collateral for
an obligation under which the secured party is a
debtor itself)
(b)
However, debtor also has a right of redemption as to
the collateral. In resolving questions that arise from
the creation of a security interest by Secured Party
1(SP-1), one must take care to distinguish D’s rights
against SP-1 from D’s rights against Secured Party 2
(SP-2). Once D discharges the secured obligation, D
becomes entitled to the note; SP-1 has no legal basis
upon which to withhold it. If, as a practical matter,
SP-1 is unable to return the note because SP-2 holds
it as collateral for SP-1’s unpaid debt, then SP-1 is
liable to D under the law of conversion. Cmt 5.
Delivery
a.
If the parties so agree, the secured creditor or its agent may attach a
security interest in a certificated security (see § 8-102(a)(4)) by
delivery of the certificate. This is only for investment property § 9203(b)(3)(C). (??)
Control
a.
If the parties so agree, the secured creditor or its agent may attach a
security interest in a deposit account, electronic chattel paper, an
electronic document of title, investment property, or a letter of credit
right by controlling the collateral. § 9-203(3)(D).
i.
Deposit Accounts
(a)
the bank in which a deposit account is maintained
automatically has control over the deposit account. So
this is not taking about my checking account with
Chase, for example.
(b)
If the SP is not a bank, it may obtain control over a
deposit account by either (i) putting the deposit
in the SP’s name or (ii) agreeing in an
record with the debtor and the bank in which
deposit account is maintained that the bank
with the SP’s orders regarding the deposit
without requiring the debtor’s consent.
ii.
Electronic Chattel Paper
(a)
Control of electronic chattel paper is the functional
equivalent of possession of tangible chattel paper. A
SP has control over electronic chattel paper when a
system showing the transfer of interests in chattel
b.
c.
paper reliably establishes the secured party as the
assignee.
(b)
For example, a SP may have an authoritative copy of
the records, such as a computer file, that identifies
the SP as the assignee of record.
iii.
Investment Property
(a)
A SP has control of an item of investment property
when the SP has taken whatever steps are necessary
to be able to have the investment property sold
without further action from the owner of the
investment property.
(b)
Stocks and Bonds – a SP has control over a
certificated stock or bond if the SP takes possession
of the stock or bond. If the certificate stock or bond
says it is payable only to a specific person rather than
to a bearer, the SP must also have the specific person
indorse the certificate over to him. This means the SP
would much rather prefer the certificate to be payable
to bearer.
(c)
Generally, stocks and bonds are held in a securities
account by brokers and mutual fund companies. A
SP can take a security interest in such an account
through control if the owner of the account contacts
the broker, mutual fund company, etc, and instructs
the intermediary either that the SP now has whatever
right in the account that the owner has or the
intermediary is to comply with the SP’s orders
without further consent of the owner.
Rights and Duties of Secured Party in Control
i.
A SP in control must account for profits of the collateral. She
may also repledge the collateral. What does this mean
Duties of SP in Control When There is No More Obligation by
Debtor
i.
Deposit account, securities account due to an agreement with
the debtor and the bank
(a)
the secured party must send the bank or intermediary
an authenticated record releasing the bank or
intermediary from its obligation to comply with the
secured party’s orders.
ii.
Deposit account by putting the account in SP’s name
(a)
the secured party must pay the debtor the balance of
the deposit account or transfer the balance into a
deposit account in the debtor’s name.
iii.
Electronic Chattel Paper
(a)
the secured party must either return the authoritative
copy of the electronic chattel paper to the debtor or,
D.
III.
if the electronic chattel paper is in the possession of
a custodian, instruct the custodian in an authenticated
record to only follow the debtor’s orders regarding
the electronic chattel paper
Purchase Money Security Interest (PMSI)
1.
A PSMI is a security interest in favor of a seller or lender who finances the
debtor’s purchase of the good or software that serves as collateral. See § 9103(a)-(c). Article 9 only recognizes PMSIs in goods and software, not in
intangible collateral.
2.
A PMSI lender can be (i) a credit seller, who sells the buyer the collateral
on credit, or (ii) an enabling lender, who lends the buyer funds with which
to buy the collateral.
3.
Creating a PMSI
a.
a PMSI can attach to collateral in the same ways that a non-PMSI
can attach (possession, control). But, an authenticated security
agreement is the best way to attach a PMSI.
4.
Losing PMSI status
a.
A PMSI lender may lose its PMSI status if:
i.
the borrower/buyer does not use the exact funds lent to
purchase the collateral, see § 9-103(a)(2) or
ii.
in a consumer goods transaction, the creditor consolidates a
purchaser money loan or purchase money collateral with one
or more non-purchase money loans or with non-purchase
money collaterals. see § 9-103(f) & (h).
Perfection
A.
Perfecting by Filing: The Financing Statement
1.
Subject to certain exceptions, a secured creditor may perfect an attached
security interest in any type of Article 9 collateral by filing, or having its
agent file, a financing statement satisfying. Sec. 9-502.
a.
Account, Commercial Tort Claim, or General Intangible
i.
A secured creditor must file to perfect an attached security
interest in an account, commercial tort claim, or general
intangible.
2.
Required Elements of Financing Statement
a.
A financing statement must contain (1) the debtor’s name § 9502(a)(1), the secured creditor’s name or its representative § 9502(a)(2), and the statement indicating the collateral, § 9-502(a)(3).
i.
Minerals To Be Extracted or Timber to Be Cut/Fixture Filing
(a)
a description of the real property to which the
collateral is related § 9-502(b)(3) and if the debtor
does not have a record interest in the realty, the
record owner’s name § 9-502(b)(4).
c.
Debtor’s Name
i.
ii.
iii.
iv.
v.
vi.
Uniqueness – at any time, each debtor has only one correct
name
Substantial Compliance – a financing statement is effective
“even though it contains minor errors that are not seriously
misleading.” § 9-506(a)
Safe Harbor – A financing statement is not seriously
misleading if a search of the records using the filing office’s
standard search logic would discover it § 9-506(c)
The key is to provide anyone searching the personal property
records constructive notice that the secured creditor claims
an interest in some or all of the debtor’s assets.
Individual
(a)
A financing statement must provide the debtor’s
name as it appears on the most recent unexpired
driver’s license (or other specified state-issue
identification) issued by the state whose law governs
perfection. § 9-503(a)(4) & (g) [Alt. A]. If the
relevant state has not issued an unexpired driver’s
license to the debtor, the FS must include the debtor’s
individual name or the debtor’s surname and first
personal name. § 9-503(a)(5) [Alt. A]
(b)
Nonuniformly Alert – as of June 30, 2016, that
requirement survives in 8 states [REREAD]
Registered Organization
(a)
the financing statement must include the registered
org’s name “indicated on the public organic record
most recently filed with or issued or enacted by the
registered org’s jurisdiction of organization. § 9503(a)(1). Remember, it has to be filed, issued, or
enacted by an office; a mere record of a business
ledger won’t be sufficient.
(b)
A public organic record means a record or records
consisting of the record initially filed with or issued
by a State to form or organize an organization and
any record filed with or issued by the State which
effects an amendment or restatement of the initial
record, if the record or records are available to the
public for inspection. § 9-102(a)(68)
(c)
Inc. or Co. not being spelled out or omitted does not
matter because Art. 9 considers them to be “noise
words.” By contrast, omitting or abbreviating other
words may make a financing statement seriously
misleading.
(d)
A financing statement may also include the debtor’s
trade name(s), but will fail to satisfy § 9-502(a)(1) if
d.
e.
f.
B.
it contains only the debtor’s trade name(s). § 9503(a)(6)(B)
vii.
General Partnership or Other Non-Registered Organization
(a)
The financing statement must include the debtor’s
org name, if it has one § 9-503(a)(6)(A), or it
constituents name, if the debtor does not have an org
name, § 9-503(a)(6)(B).
(b)
If a non-registered org names the correct org name
but omits its constituents names from the financing
statement, it does not make the financing statement
ineffective. § 9-503(b)(2). But if the non-registered
org has no public record, filer should consider
naming the individuals and entities that constitute the
non-registered org even if the non-registered org has
an org name.
(c)
financing statement should also include the name by
which the debtor is commonly known in the
community in which it does business – although that
name alone may be legally insufficient under § 9503(c)
Secured Party’s Name
i.
No details about naming a secured creditor in § 9-502(a)(2).
Makes sense because UCC filings are indexed and searched
by the debtor’s name. Secured creditor’s name only provides
a searcher with a source to turn to for additional information
or to corroborate info the debtor provides.
Collateral
i.
A valid financing statement indicates collateral by satisfying
§ 9-108 or stating the collateral is “all assets “or “all personal
property. Remember, although “all assets” or “all personal
property” is not a sufficient description of collateral in a
security agreement, its sufficient for financing statement. §
9-502(a)(3) & 9-504.
Related Real Property
i.
Must reasonably identify the realty § 9-502 cmt. 5.
Perfecting by Filing: The Filing Process
1.
Time to File
a.
Pre-Attachment Filing
i..
A prospective secured creditor may file an authorized
financing statement before the security interest it purports to
perfect has attached. § 9-502(d).
b.
Concurrent or Post-Attachment Filing
i.
A secured creditor may file an authorized financing
statement when the security interest it purports to perfect
2.
3.
attached or at any time thereafter, as long as the security
interest remains attached and the debtor remains bound.
c.
Perfection Date
i.
An authorized financing statement will perfect a security
interest when the security interest attaches or the financing
statement becomes effective, whichever occurs last. § 9308(a).
Authority to File
a.
A secured creditor may file a financing statement only if the debtor
authorizes the filing (1) in an authenticated record § 9-509(a)(1), (2)
by authenticating or otherwise becoming bound by a security
agreement § 9-509(b)(1), or (3) by acquiring collateral in which a
security interest continues after the debtor disposes of it § 9315(a)(1) & 9-509(c)
b.
A secured creditor may file a financing statement only if the subject
collateral is proceeds of collateral in which the secured party held a
perfected security interest, $ 9-315(a)(2) & 9-509(b)(2) & (c).
c.
A secured creditor may file a financing statement only if an
unauthorized filing cannot perfect a security interest. § 9-510(a).
Proper Jurisdiction for Initial Perfection
a.
As a general rule, a secured creditor must perfect by filing according
to the law of the state where the debtor is located. § 9-301(1).
b.
An individual debtor is located at her principle residence. § 9307(b)(1).
c.
A non-registered organization is located at its sole place of business
§ 9-307(b)(2) or, if it has more than one place of business, at its chief
executive office, § 9-307(b)(3). Under this rule, a debtor has more
than one place of business only if it has places of business in more
than one state.
d.
A registered org is located in the state in which it was organized. §
9-307(e). Only a registered org if organized in the U.S., or certain
U.S. territories.
e.
Foreign Debtors
i.
§ 9-307(b) applies only if the debtor’s foreign residence,
place of business or chief executive offices is located in a
jurisdiction whose personal property system is sufficiently
similar to UCC Article 9, otherwise, the debtor is deemed to
be located in D.C. §9-307(c).
f.
Fixtures
i.
A secured creditor may perfect a security interest in goods
that are or will become so attached to realty that an interest
in them arises under real property, § 9-102(a)(41), by filing:
(a)
a realty mortgage or a fixing filing in the office that
maintains real property records for the county where
the realty is located, § 9-301(3)(A) & 9-501(a)(1)(B)
or
(b)
g.
h.
i.
j.
4.
a non-fixture filing (e.g., a financing statement) in
the office that maintains personal property records
for the state where the debtor is located § 9-301(1) &
9-501(a)(2). ASK ROWLEY
Timber to be Cut & Minerals to be Extracted:
i.
A secured creditor perfects a security interest in timber to
be cut or as- extracted minerals to be extracted by filing in
the office that maintains real property records for the state
where the realty is located. §§ 9-301(3)(B) & (4) & 9501(a)(1)(A).
Realty-Related Security Interest
i.
A secured creditor perfects in personal property that
evidences ownership of a lien on realty or fixtures (e.g.,
chattel paper secured by realty) according to the Article 9
rules applicable to the personalty, not the rules applicable
to the underlying realty or fixtures.
Transmitting Utility
i.
A secured creditor perfects in personal property and
fixtures owned by a “transmitting utility,” see § 9102(a)(81), by filing in the personal property records of
each state where collateral is located. § 9-501(b).
Federal Preemption
i.
A secured creditor perfects a security interest in collateral
for which federal law prescribes the exclusive location for
perfection by filing where federal law requires.
Filing Office Rules
a.
Grounds for Rejection
i.
A filing office must reject (§ 9-520(a)) a financing statement
that does not contain the following information in addition
to that which § 9-502 requires for perfection (1) the secured
party’s mailing address, § 9-516(b)(4), (2) the debtor’s
mailing address § 9-516(b)(5)(A), and (3) whether the debtor
is an individual or organization, § 9-516(b)(5)(B).
b.
Consequences of Filing
i.
Incorrect Information
(a)
the filing office may not inquire about or consider the
accuracy of the financing statement. However, if a
filed financing statement provides incorrect
information that 9-516(b)(5) requires, the secured
creditor whose financing statement contains the
incorrect information will (1) lose priority to a
subsequent secured creditor who gave value
reasonably relying on the incorrect information, § 9333(1) AND (2) will lose its security interest to the
extent that a subsequent buyer of the collateral gave
C.
value in reasonable reliance on the incorrect
information, § 9-338(2).
ii.
Rightful Rejection
(a)
A secured creditor whose financing statement the
filing office rightfully reject will know of its
rejection promptly and may promptly remedy
whatever error or omission triggered the rejection.
iii.
Wrongful Rejection
(a)
A financing statement the filing office rejects for
a reason other than one § 9-516(b) provides is
effective against lien creditors, but not against
subsequent buyers or secured creditors who give
value in reasonable reliance on not finding the
financing statement in the filing office’s records. § 9516(d).
iv.
Wrongful Acceptance
(a)
A financing statement the filing office accepted but
should have rejected for failing to satisfy 9-516(b) is
effective as of the filing date but is subject to 9-338
(losing priority) if any of the information 9-516(b)
requires was incorrect when filed.
Perfecting by Other Means
1.
Possession
a.
A secured creditor must perfect an attached security interest in
money by possessing or having its agent or a bailee possess, the
collateral, § 9-312(b)(3) & 9-313(c).
b.
A secured creditor may perfect an attached security interest in a
consumer good, equipment, a farm product, an instrument,
inventory, tangible chattel paper, or a tangible document by
possessing, or having its agent or a bailee possess, the collateral. § 9313(a) & (c).
c.
Proper Jurisdiction for Initial Perfection by Possession
i.
A secured creditor perfects an attached security interest by
possession under the law of the state where the collateral is
located. § 9-301(2).
2.
Control
a.
A secured creditor must perfect an attached security interest in a
deposit account or letter-of-creditor right by control. § 9-312(b)(1)(2).
b.
A secured creditor may perfect an attached security interest in
investment property, electronic chattel paper, or an electronic
document by control § 9-314(a).
c.
Non-consumer Deposit Account
i.
A secured creditor can control a deposit account by:
(a)
(b)
(c)
being the bank that maintains the account, § 9104(a)(1);
agreeing, in an authenticated record, with the
debtor and the bank that maintains the debtor’s
account that the bank will comply with the secured
creditor’s instructions regarding the account without
the debtor’s further consent, § 9-104(a)(2); or
becoming the bank’s customer on the deposit
account, § 9- 104(a)(3), by either
(1) becoming a joint accountholder with the debtor
(giving the secured creditor and the debtor equal
rights to direct the bank regarding the account) or
d.
e.
taking
notation
(2) opening a “lockbox” account, over which the
secured creditor would have the sole authority to
direct the bank, into which funds the debtor receives
would be deposited according to the terms of its
agreement with the secured creditor.
ii.
Proper Jurisdiction for Initial Perfection
(a)
A secured creditor perfects an attached security
interest in a deposit account according to the law of
the state where the bank is located. § 9-304.
Letter-of Credit Right
i.
A secured creditor can control a letter-of-credit right by
obtaining the issuer’s (see § 5-102(a)(9)) or the nominated
person’s (see § 5-102(a)(11)) consent to assign the letter of
credit’s proceeds to the secured creditor. § 9-107
ii.
Proper Jurisdiction for Initial Perfection
(a)
Except where letter-of-credit rights are only a
supporting obligation, see §§ 9-308(d), a secured
creditor perfects an attached security interest in
letter-of-credit rights according to the law of the
jurisdiction § 5-116 prescribes. § 9-306.
Investment Property
i.
§ 9-106 empowers a secured creditor to control a certified
security (physical certificate evidencing the interest) by
delivery of the certificate
(a)
in a bearer form, 8-106(a) or
(b)
in registered form, if the registered certificate is (1)
indorsed to the secured creditor or in blank OR (2)
registered in the secured creditor’s name
ii.
§ 9-106 empowers a secured creditor to control an
uncertificated security ( the rights are evidenced by a
on the books of the issuer by
(a)
becoming its registered owner, §§ 8-106(c)(1) & 8301(b); or
(b)
f.
obtaining the issuer’s and registered owner’s
agreement that the issuer will comply with
the
secured
creditor’s
instructions
regarding the security
without the debtor’s further
consent, § 8-106(c)(2) &
iii.
§ 9-106 empowers a secured creditor to control a securities
entitlement by
(a)
becoming the entitlement holder, § 8-106(d)(1);
(b)
obtaining the securities intermediary’s and
entitlement holder’s agreement that the
intermediary will comply with the
secured creditor’s
instructions regarding the
entitlement without the
entitlement
holder’s further consent, § 8- 106(d)(2)
& (g);
(c)
having a third party control, or acknowledge that
it
controls, the entitlement on the secured
creditor’s
behalf, § 8-106(d)(3); or
(d)
being the securities intermediary with respect to
the entitlement at issue, § 8-106(e);
iv.
§ 9-106 empowers a secured creditor to control a
commodity contract by
(a)
being the commodity intermediary with respect to
the contract at issue, § 9-106(b)(1); or
(b)
obtaining the commodity intermediary’s and
commodity customer’s agreement that the
commodity intermediary will comply
with the
secured
creditor’s
instructions regarding the contract
without
the
commodity customer’s further consent, §
9106(b)(2);
v.
§ 9-106 empowers a secured creditor to control a securities
account or commodity account by controlling all of the
securities entitlements or commodity contracts in
the
account, § 9-106(c).
vi.
Proper Jurisdiction for Initial Perfection
(a)
A secured creditor perfects an attached security
interest in investment property according to
the law
of the state § 9-305(a). If a secured
creditor elects to
perfect against investment
property by filing, it must
do so where the
debtor is located. § 9-305(c)(1).
Electronic Chattel Paper
i.
A party has control over electronic chattel paper when a
system showing the transfer of interests in chattel
paper
assignee.
reliably establishes the secured creditor as the
3.
delivery
D.
collateral.
Delivery
a.
A secured creditor may perfect an attached security interest in a
certificated security by taking, or having its agent take, a
of the collateral. §8-301(a) & 9-313(a)
b.
Proper Jurisdiction for Initial Perfection
i.
Automatic Perfection
1.
Purchase-Money Security Interest (PMSI) in Consumer Goods
a.
A security interest in favor of a seller or lender who financed the
debtor’s purchase of the good or software that serves as
§9-103(a)-(c)
b.
Consumer Goods – a PMSI in a consumer good not subject to a
certificate of title statute perfects when it attaches. § 9-
309(1).
c.
security
2.
Non-Consumer Goods – A secured creditor perfects a PMSI in a
non-consumer good by the same method(s) as any other
interest in that type of collateral.
Proceeds
a.
A perfected security interest automatically perfects all identifiable
proceeds arising from the collateral for 20 days § 9-315(c)
& (d).
i.
perfection
automatically
general intangible
despite not
intangible. See §§
ii.
perfection
an automatically
identifiable
possessing the money.
iii.
perfection
automatically
account or letter-ofproceeds of that collateral
deposit account, see §§ 9letter-of-credit right, see §§ 9[look for examples]
A secured creditor with a perfected security interest in
underlying collateral for which Article 9 permits
by a means other than filing will have an
perfected security interest in an account or
that is identifiable proceeds of that collateral
having filed against the account or general
9-310(b)(9) & 9-315(c).
A secured creditor with a perfected security interest in
underlying collateral for which Article 9 permits
by a means other than possession will have
perfected security interest in money that is
proceeds of that collateral despite not
See §§ 9-312(b)(3) & 9-315(c).
A secured creditor with a perfected security interest in
underlying collateral for which Article 9 permits
by a means other than control will have an
perfected security interest in a deposit
credit right that is identifiable
despite not controlling the
312(b)(1) & 9-315(c), or the
312(b)(2) & 9-315(c).
v.
In
proceeds. See
b.
interest
office in
been filed; and
The automatic perfection § 9-315(c) affords is temporary.
many cases, the secured creditor will have to take some
action within 20 days to stay perfected in the
§ 9-315(d). Discussed more below
Continue of Perfection on Interest in Proceeds
i.
A perfected security interest in proceeds becomes
unperfected on the 21st day after the security
attaches to the proceeds unless:
(1) the following conditions are satisfied:
(A) a filed financing statement covers the original
collateral;
(B) the proceeds are collateral in which a security
interest may be perfected by filing in the
which the financing statement has
(C) the proceeds are not acquired with cash
proceeds;
attaches
E.
(2) the proceeds are identifiable cash proceeds; or
(3) the security interest in the proceeds is perfected other
than under subsection (c) when the security interest
to the proceeds or within 20 days thereafter.
Special Case: Perfecting Against Certificate of Title Goods
1.
To perfect a security interest in goods subject to a certificate of title
statute,
the secured creditor must note its lien on the certificate of title or
file
notice of its lien in a special registry, whichever the relevant
certificate of
title statute requires. § 9-311(a)(2) & cmt. 3.
a.
Certificate of title goods held as inventory for resale or lease by
someone in the business of selling them are generally
exempt from
the otherwise applicable certificate of title statute, § 9311(d), and
are perfected by filing where the debtor is located,
§ 9-301(1), or
by possession where the inventory is located, § 9301(2).
2.
Proper Jurisdiction for Initial Perfection
a.
As a general rule, the law of the state whose certificate of title
covers
a good governs perfection. § 9-303(c).
i.
A certificate of title covers a good as soon as a valid
certificate of title application and applicable fee are
delivered to the authority identified in the
certificate of title
statute and continues to cover the good until
the certificate
expires of (or?) the good is retitled in
another jurisdiction. §
9-303(b).
F.
Maintaining Perfection
1.
Lapse
a.
remains
released
property law.
2.
effectiveness
the last six
§
the event
original
secured
3.
authorize
A security interest perfected by filing a financing statement
perfected for five years from the filing date. § 9515(a).
i.
One year after a financing statement lapses, the filing office
may remove it from the filing system and destroy it. § 9522(a).
b.
Special Case: Realty Fixture Filing
i.
If a creditor files a record of a realty mortgage as a fixture
filing, the filing will not lapse until the mortgage is
or satisfied or otherwise terminates under real
§ 9-515(g).
Continuation
a.
A secured creditor may extend a financing statement’s
by filing a continuation statement, § 9-102(a)(27), during
months before the filing lapses. § 9-515(d).
i.
Filing more than 6 months before lapse, or at any time after
lapse is ineffective to continue a filed financing statement,
9-510(c); but if the filing satisfies § 9-502 (initial financing
statement), it will establish a new perfection date in
the original filing lapses.
ii.
A timely-filed continuation statement extends a financing
statement’s effectiveness for five-years from the
lapse date. § 9-515(e).
iii.
Article 9 imposes no limits on the number of times a
creditor may continue a previously-filed financing
statement.
Termination
a.
Once the debt, if any, to which a filed financing statement relates is
fully satisfied, § 9-513(a)(1) (c)(1), or if the debtor did not
filing the financing statement, § 9-513(a)(2) &(c)(4):
i.
the secured creditor must file a termination statement
within
(a)
(b)
§ 9ii.
one month if the collateral is consumer goods, or
20 days after receiving an authenticated demand
from the debtor, whichever period is shorter.
513(b) & (c)
the termination statement must
(a)
identify by filing number the financing statement it
terminates §§ 9-102(a)(80)(A) & 9-512(a)
(1) and
(b)
4.
indicate that the financing statement is no longer
effective, § 9-102(a)(80)(B).
b.
The financing statement is extinguished as soon as the termination
statement is filed. § 9-513(d)
c.
If the secured creditor fails to timely terminate, § 9-509(d)(2)
empowers the debtor to file its own termination statement.
Release
a.
5.
perfection
debtor prior
financing
effective
collateral the debtor
change. The
statement prior to
collateral acquired
A secured creditor may relinquish collateral in which it is perfected
by amending an existing financing statement. § 9-512(a). Why
would it do that?
Debtor’s Name Change
a.
Existing Collateral
i.
A change in the debtor’s name does not affect the
of a security interest in collateral acquired by the
to or at the time of the name change. § 9-507(c)(1).
b.
“After-Acquired” Collateral
i.
When a change in the debtor’s name renders a filed
statement “seriously misleading,” the filing is not
to perfect an attached security interest in
acquired more than four (4) months after the
secured creditor must file a new financing
the 4 month deadline in order to perfect in
more than 4 months after the change.
c.
A searcher should always consider the possibility that the debtor’s
name changed before the debtor approached the searcher
for a loan.
d.
Provisions in security agreements requiring the debtor to notify the
secured creditor of any name change are not much help to the
secured creditor and no help at all to searches.
6.
Debtor’s Interstate Relocation
a.
Individual Debtor
i.
When an individual debtor changes her principal residence,
a security interest properly perfected in State A will remain
perfected for four months following the relocation,
§ 9316(a)(2), or until perfection would have lapsed in
State A,
§ 9-316(a)(1), if the latter would occur less
than four months
after the debtor relocated to State B.
b.
Non-Registered Organization
i.
When a partnership or other non-registered organization
moves its chief executive office from State A to
State B, a
security interest properly perfected in State
A will remain
perfected for four months following the
relocation, § 9316(a)(2) & cmt. 2 (ex:1), or until
perfection would have
lapsed in State A, § 9-316(a)
(1), if the latter would occur less
than four months after the
debtor relocated to State B.
c.
Registered Organization
i.
When a registered organization reorganizes in State B, a
security interest properly perfected in State A will
remain
perfected for one-year following the
reorganization, § 9316(a)(3), or until perfection would
be lapsed in State A, §
9-316(a)(1), if the latter
would occur less than one year after
the debtor reorganized in
State B.
d.
Effect of Filing in the Old Jurisdiction
i.
A financing statement filed in State A before the debtor
relocates to or reorganizes in State B will perfect a
security
interest in collateral the debtor acquires
during the first four
months after relocating to or reorganizing in
State B,
provided that the filed financing statement
would have been
sufficient to perfect the security interest had
the debtor not
relocated/reorganized. § 9-316(h) & (i).
e.
Effect of Timely Reperfection in the New Jurisdiction
i.
A timely filed financing statement or other action necessary
to perfect in State B will keep the security interest
continuously perfected dating back to the original
perfection
date in State A. § 9-316(b) & cmt. 2 (Ex:3).
f.
Failure to Timely Reperfect
i.
The secured party must file or otherwise perfect in State B
before the relevant grace period expires, or its
security
interest will become unperfected as a matter
of law against
anyone whose claim arises after the grace
period expires and
against any purchaser or secured creditor
who gave value
before or after the grace period
expires. § 9-316(b) & cmt.3
(Exs 5&6).
7.
Change in the Collateral’s Appearance, Use, or Location
a.
General Rule
i.
A change in circumstances other than the debtor’s name or
the debtor’s location will not alter the effectiveness
of a
creditor’s pre-change perfection, even if the change
makes
the pre-change financing statement seriously
misleading. §
9-507(b).
b.
Collateral Perfected by Possession
i.
A security interest in non-certificate-of-title goods
perfected
by possession in State A remains perfected in State
B upon
its relocation. § 9-316(c).
c.
Certificate-of-Title Goods
i.
If the debtor relocates certificate of title goods to another
state, the law of the new state may require the
debtor to
obtain a replacement certificate of title
within a certain
period of time.
(a)
NRS §428.385 requires new residents to register all
vehicles operated in the state of Nevada
within 30
days of becoming a resident or at the
time they obtain
a Nevada driver’s license, whichever
occurs earlier.
ii.
certificate
new
trustee) until
under the
§ 9-316(d);
In any event, once the debtor obtains a new certificate of
title, any security interest that attach after the new
issues, must be noted on the new certificate,
(a)
any security interest that attach after the new
certificate issues must be noted on the new
certificate, § 9-303(b); and
(b)
any security interests perfected under the law of
another jurisdiction, but not noted on the
certificate,
(i)
will continue to be perfected against lien
creditors (including bankruptcy
they would cease to be perfected
law of the other jurisdiction,
(ii)
certificate
perfected four months
certificate issues, and will be
to have been perfected, unless
new certificate within four
the new certificate issues, § 9d.
collateral, §
interest in identifiable
twenty 20 days after
proceeds unless:
Proceeds
i.
A perfected security in collateral automatically
perfects in identifiable proceeds of that
9-315(c). However, a security
proceeds become unperfected
the debtor receives the
(a)
proceeds”
cash
funds in
(b)
security
perfected by filing
the original
9-315(d)(1)
(c)
acquired
collateral, and
falling with the
but against purchasers and secured creditors
who give value after the new
issues, will cease to be
after
the
new
deemed never
noted on the
months after
316(e).
the
proceeds are identifiable “cash
§ 9-315(d)(2), § 9-102(a)(9) defines
proceeds to include “money, checks,
deposit accounts, and the like.” OR
the proceeds are non-cash proceeds,
i.
a filed financing statement covers the
original collateral, and the proceeds
are collateral in which a
interest is properly
in the same office as
financing statement, §
OR
the proceeds are non-cash proceeds
with cash proceeds, a filed financing
statement covers the original
the proceeds are collateral
collateral description
in the original financing
(3) & cmt. 5.
IV.
statement, § 9-315(d)
Priority
A.
Basics
1.
Unsecured and (Judgment) Lien Creditors v. Secured Creditors
a.
A general unsecured creditor has the lowest priority claim to a
debtor’s assets.
i.
Non-UCC law beyond the scope of this course affords
special priority to certain unsecured creditors over
other
unsecured creditors.
b.
An unsecured creditor becomes a judgment lien creditor, with
respect to at least some of the debtor’s property, after she:
i.
wins a judgment against the debtor and has the sheriff
serve
a writ of execution based on that judgment;
ii.
obtains, and has the sheriff serve, a prejudgment writ of
attachment based on the likelihood that the creditor
will win
judgment against the debtor and that the debtor will
dissipate, prior to the judgment, the property
on which the
creditor would execute post-judgment;
iii.
obtain and serves a writ of garnishment, before or after
judgment against the debtor, permitting the creditor
to attach
funds owed by a third party to the debtor and collect
them
directly from the third party; or
iv.
records a (domestic or foreign) judgment against the debtor
for money damages, giving the creditor a lien against all
non-exempt property the debtor owns in the
jurisdiction
where the creditor records.
(a)
generally, this recordation occurs in the real
property
records, and gives the creditor a lien against
all real
property owned by the debtor within
the county,
however, some states now allow
recordation in the
UCC filing system, thus
creating and perfecting a
lien against personal
property.
c.
Priority Among (Judgment) Lien Creditors
i.
Governed by state statutes, lien creditors generally take
priority on a “first-come, first-served” basis as
follows:
(a)
majority rule: first to levy (repossess or disable)
takes priority;
(b)
minority rule: first to deliver the writ of execution
(under the auspices of which the sheriff will
levy) to
the sheriff takes priority.
c.
Judgment Lien Creditor v. Filed (But Not Attached) Security
Interest
i.
If a secured party files a security interest but does not
attach
before a judicial lien creditor’s interest arises, the secured
party has priority over the judicial lien creditor as
long as
the secured party (i) evidences its security
agreement with
an authenticated security agreement,
possession, or control,
and (ii) eventually attaches and
perfects its security interest.
§ 9-317(a)(2) and cmt. 4.
(a)
Ex: On September 1, Mae agrees to lend Tom
$1,000
in return for a security interest in Tom’s
equipment.
Tom signs a security agreement and
Mae files a
financing statement on the same day,
but Mae does
not yet loan Tom the money. On
September 5, Sarah
causes a lien to attach to Tom’s
business computer.
On September 30, Mae gives
Tom the $1,000. Even
though
Mae’s
security
interest was unperfected at the
time Sarah’s lien
attached, Mae has priority in the
business
computer (equipment) because she
authenticated a security agreement and filed a
financing statement before Sarah’s lien attached, and
Mae eventually attached and perfected.
d.
Judgment Lien Creditor v. Purchase Money Secured Creditor
i.
A PMSI that attaches before the lien creditor can obtain its
lien will take priority over the lien as long as the
secured
creditor perfects by filing within 20 days of
attachment. § 9317(e).
e.
Judgment Lien Creditor v. Non-Purchaser Money Secured
Creditor
i.
Priority will depend on which happens first: (1) the
creditor
becomes a lien creditor (as described above), or (2)
the
secured creditor perfects its interest or files a valid
financing
statement and later perfects. 9-317(a)(2).
f.
Judgment Lien Creditor vs. Future Advances
i.
If an already-perfected secured creditor lends additional
funds to a debtor (claiming the same collateral in
which the
secured creditor is already perfected) after a lien
creditor
attaches, the secured creditor has priority
with respect to any
such future advances it makes:
(a)
within 45 days after the lien creditor’s lien attached,
regardless of whether the secured creditor knew
about the lien’s existence when it made the
advance,
§ 9-323(b);
(b)
more than 45 days after the lien creditor’s lien
attached, if the secured creditor did not
know about
9-323(b)(1);
(c)
creditor entered into
even if the secured creditor
made the advance, § 9(d)
collection, attorneys’
secured creditor’s
debtor, but which the
incur until after the lien
attaches. See § 9-323 cmt. 4.
ii.
for
the
On April
of a lien
made more
the judicial lien
these future
commitment.
2.
the lien when it made the advance, §
and
more than 45 days after the lien creditor’s lien
attached, if the advances is “pursuant to a
commitment” that the secured
before it knew about lien,
knew about the lien when it
323(b)(2).
Note: § 9-323(b) extends the secured creditor’s
priority over an intervening lien creditor to
“nonadvances” (e.g., costs of
fees, etc.), provided for in the
security agreement with the
secured creditor does not
creditor’s
lien
Ex: Bank perfects a security interest in Debtor’s equipment.
The security agreement provides that the collateral will also
secure future advances and obligates Bank to make loans
one year, as long as Debtor makes regular repayments on
loan balance. Pursuant to its commitment, Bank loans
Debtor $10,000 every month, starting in February.
1, the equipment is seized by the sheriff on behalf
creditor. All of Bank’s loans, including those
than 45 days after April 1, have priority over
creditor’s interest in the equipment, because
advances were made pursuant to the
Secured Party v. Statutory Lien Creditor
a.
By statute or common law, most states grant people who supply
goods or services a lien on goods in their possession to
secure
payment for the goods or services provided (e.g., so-called
mechanics’ liens or artisans’ liens). Generally,
Article 9 does not
govern such liens (other than agricultural
liens) except with regard
to priority. Article 9 provides that
such possessory liens have
priority over any security interests in
the collateral as long as the
goods or services were provided in
the ordinary course of business
and the collateral remains in
the lienholder’s possession, unless the
lien is created by a statute
that provides otherwise. §9-333
b.
Examples of Statutory Liens
i.
Mechanic and Materialman’s Liens
(a)
in favor of a person who performs labor upon or
furnishes materials used in erecting, altering,
or
repairing improvements to real property;
against
property (see,
both the improvements and the real
e.g., N.R.S. §§ 108.221 to 108.246)
ii.
Artisan’s Lien
(a)
in favor of a person skilled in some trade, craft, or
art; against the personalty the artisan created
repaired (see, e.g., N.R.S. §§ 108.249 &
iii.
Garage Keeper’s Lien
(a)
in favor of persons who repair and store vehicles;
against the vehicle (see, e.g., N.R.S. §§
108.360)
Cleaner’s & Launderer’s Lien
(a)
a lien in favor of a person who cleans or launders
clothes; against the debtor’s clothes in the
possession (see, e.g., N.R.S. §§
or
108.370)
108.270 to
iv.
cleaner’s
108.770 to 108.820)
v.
recovers from
omissions
e.g.,
CIV.
§§
a third
properly left
a client (see,
c.
in time
indicate how and
Hospital Lien
(a)
in favor of persons providing medical care; against
any amount the patient (or her estate)
the person (or his insurer) whose acts or
caused the patient’s hospitalization (see,
N.R.S. §§ 108.590 to 108.668)
vi.
Veterinarian’s Lien
(a)
in favor of persons who care for, feed, and keep
animals; against the animal (see, e.g., CAL.
CODE § 3051)
vii.
Landlord’s Lien
(a)
in favor of a landlord; against either (1) the debtor’s
personalty located on the leased premises or (2) all
of the debtor’s personalty (see, e.g., N.R.S.
108.270 to 108.360)
viii. Attorney’s Lien
(a)
in favor of an attorney owed unpaid fees and
expenses; against the client’s recovery from
person and any file or other property
in the possession of the attorney by
e.g., N.R.S. § 18.015)
Priority of Statutory Liens (Non-Article 9 Priority Schemes)
i.
“First in Time, First in Right
(a)
priority base on whether the statutory lien arises or
the security interest perfected first. If a firstrule applies, the statute should
when the statutory lien arises.
ii.
Secured Creditor Wins
(a)
regardless of when the statutory lien creditor liens
arose or;
iii.
d.
Statutory Lien Creditor Wins
(a)
regardless of when the secured creditor perfected its
interest.
Priority According to Article 9
i.
§ 9-333(b) – in the absence of a contrary statute, a statutory
lien creditor has priority over an earlier perfected secured
creditor if
(a)
the statutory lien creditor furnishes services or
materials in the ordinary course of its
business;
(b)
the lien is for (only) the price of the services and
materials;
(c)
the statutory lien creditor possesses the liened
personalty, and
(d)
the liened property is property with respect to which
the statutory lien creditor furnished the goods or
services giving rise to the lien.
4.
Security Party v. Secured Party
a.
Basics
i.
Between two or more unperfected secured creditors, the
first to attach has priority. § 9-322(a)(3). This rule
has little
practical application because either secured party
can easily
get priority by perfecting.
ii.
A perfected secured creditor has priority over an
unperfected secured creditor. § 9-322(a)(2)
iii.
Between two or more perfected secured creditors, the first
to file (and later attach) or to perfect has priority
and retains
its priority as long as its perfection never lapses. §
9322(a)(1)
(a)
as long as the security interest eventually attaches,
the secured creditor has priority as of the
date of the
filing. § 9-322 cmt. 5.
(b)
if one party perfected by filing and the other party
perfected by some other method (e.g., taking
possession), the party who filed will have
priority if
he filed before the other party perfected.
(c)
Ex: On June 1, Debtor applies for a $10,000 loan
from Bank A. Debtor signs a financing
statement and
a security agreement granting a security
interest in
Debtor’s equipment. On June 2, after
checking the
files and finding no competing
interests, Bank A files
the financing statement. On
June 3, Debtor borrows
$20,000 from Bank B,
giving Bank B a security
interest in the same
equipment. Bank B loans the
money
and
immediately files a financing statement
covering the equipment. On June 10, Bank A loans
Debtor $10,000. Bank A has priority to the
equipment under the “first to file or perfect” rule
because it was first to file, even though Bank B
perfected its security interest before Bank A
perfected its security interest.
b.
Priority in After-Acquired Property
i.
A security interest in after-acquired property attaches when
the debtor acquires the property. § 9-9203(b)
ii.
As against other secured creditors, the after-acquired
lender’s priority dates from the time of filing, § 9322(a)(1).
c.
Priority of Future Advances
i.
Perfected by Filing
(a)
advances by a secured creditor who properly
perfected by filing have priority based on
when the
secured creditors filed (or otherwise
perfected and
then filed without lapse), regardless
of whether the
secured creditor makes the
advance pursuant to a
commitment. § 9-323(a) &
cmt. 3.
ii.
Otherwise Perfected
(a)
advances by a secured creditor who properly
perfected by some method other than filing
have
priority based on when the secured creditor
made
the advance, unless the secured creditor
makes the
advance pursuant to a commitment it
entered into
before or while the security interest
properly
perfected by another method (in
which case, priority
will be based on the date the secured
creditor
perfected.) § 9-323(a)(1)-(2) & cmt.
3.
d.
Priority in Goods the Debtor Transfers
i.
This arises when a debtor acquires property that is subject
to
a security interest created by another debtor. As general
rule,
a security interest created by a debtor is subordinate to a
security interest in the same collateral created by
another
person if:
(a)
the debtor acquired the collateral subject to the
security interest created by the other person,
§ 9325(a)(1);
(b)
the security interest created by the other person was
perfected when the debtor acquired the
collateral, §
9-325(a)(2) & cmt. 4 and
(c)
there is no period thereafter when the security
interest is unperfected. § 9-325(a)(3) & cmt.
5.
ii.
Ex: A owns an item of equipment subject to a perfected
security interest in favor of SP-A. A sells the
B, not in the ordinary course of business. B
interest subject to SP-A’s security interest.
section, if B creates a security interest in the
favor of SP-B, SP-B’s security interest is
A’s security interest, even if SP-B filed
A filed against A, and even if SP-B took a
security interest. Normally, SP-B
the source of the equipment
before making an advance
SP-A had no reason to
other than its debtor,
equipment to
acquires its
Under this
equipment in
subordinate to SPagainst B before SPpurchase-money
could have investigated
and discovered SP-A’s filing
against the equipment, whereas
search the filings against someone
A.
e.
Priority in Certificate of Title Goods
i.
If a state issues a certificate of title covering goods that
does
not provide notice of a security interest in those goods
perfected in another jurisdiction,
(a)
a buyer not in the business of selling goods of the
kind who gives value and receives delivery
of the
goods after the certificate issues and without
knowledge of the (undisclosed) security
interest
takes free of the
(undisclosed
security, § 9-337(1),
and
(b)
a security interest attached and perfected in
accordance with the law of the issuing state
after the
certificate issues has priority over the
(undisclosed)
security interest as long as the
secured party lacked
knowledge
of
the
(undisclosed) security interest, § 9337(2).
ii.
Ex:
B.
priority
even one
no later
324(a).
Special Priority Rules: Non-Fixture Personal Property
1.
Purchase Money Priority
a.
A PMSI in collateral other than inventory (or livestock) has
over a conflicting security interest in the same collateral –
perfected before the PMSI arose – if the PMSI is perfected
than 20 days after the debtor possesses the collateral. § 9b.
does
PMSI Priority in Inventory (or Livestock)
i.
the across -the board 20 day grace period in § 9-324(a)
not apply in inventory or livestock. Instead, a PMSI in
(a)
the
the
(b)
(after?) the
expects to
324(b) & (d).
ii.
existing
financing
promises to loan
Bank immediately
Bank in a signed
purchase money
Acme, which indorses the
distributor in exchange
the flour has priority
property interest.
iii.
PMSI
the
(first to
2.
other than
inventory (or livestock) has priority over an earlier perfected security interest only if:
a purchaser money lender (PML) perfects no later
than when the debtor receives possession of
collateral (the filing must take place before
inventory is delivered to the debtor); and
the PML notifies the earlier-perfected secured
creditor, no more than five years before
debtor takes possession that the PML
acquire a PMSI in the collateral. § 9-
Ex: 1) On March 1, First Bank loans Acme Feed Store
money and takes a security interest in Acme’s
inventory and all after-acquired inventory. A
statement is filed. On April 1, Second Bank
Acme $10,000 to purchase flour. Second
files a financing statement and notifies First
writing of the impending loan and its
interest. The loan is then made to
Second Bank check over to the flour
for the flour. Second Bank’s PMSI in
over First Bank’s after-acquired
Ex: 2) If in the above example Acme sold some of its newly
purchased flour to Customer in exchange for a promissory
note (an instrument), Second Bank would have
superpriority in the promissory note as a proceed of
inventory.
c.
Competing PMSIs
i.
If two or more creditors have perfected PMSIs in the same
collateral,
(a)
a seller’s PMSI takes priority over an enabling
lender’s PMSI, § 9-324(g)(1), and
(b
conflicts between two or more enabling lenders’
PMSIs are resolved according to § 9-322(a)
file (then attach) or perfect)
Priority in Deposit Accounts
a.
Control v. Other Perfection Methods
i.
A deposit account security interest by control has priority
over all security interests perfected by methods
control. § 9-327(1).
b.
Control v. Control
i.
The first security interest perfected by control generally has
priority over all other security interests subsequently
perfected by control. § 9-327(2).
ii.
A bank maintaining a deposit account in which it has a
security interest has priority over a secured creditor
perfects by means of a deposit account control
iii.
A secured creditor that becomes an accountholder of its
deposit account collateral has priority over the bank
maintaining the deposit account, § 9-327(4),
else over whom that banks has priority.
Order: (1) Joint Holder (SC is an account holder with the
debtor), (2) SC is the bank that maintains the
account, (3) SC has a deposit account
that
agreement,
and everyone
iv.
deposit
control agreement
c.
unless the
secured
332(b).
Transferee of Funds
i.
Any recipient of funds from a deposit account takes them
free of any security interest in the deposit account
transferee colludes with the debtor to violate the
creditors’ rights by receiving the funds. § 9ii.
Ex: Debtor maintains a deposit account with Bank A. The
deposit account is subject to a perfected security
interest in
favor of Lender. Debtor draws a check on
the account,
payable to Payee. Inasmuch as the check is
not the proceeds
of the deposit account (it is an order to pay
funds from the
deposit account), Lender’s security
interest in the deposit
account does not give rise to a
security interest in the check.
Payee deposits the check into its own
deposit account, and
Bank A pays it. Unless Payee acted
in collusion with Debtor
in violating Lender’s rights, Payee
takes the funds (the
credits running in favor of Payee)
free of Lender’s security
interest.
This
is
true
regardless of whether Payee is a holder
in due course of the
check and even if Payee gave no value
for the check.
d.
Bank’s Right to Recoupment or Set-Off
i.
The bank maintaining a deposit account in which one or
more parties (including itself, see § 9-340 cmt. 3)
has a
security interest may exercise any right of
recoupment or setoff that non-article 9 law affords it,
(a)
even if the doing so seems to circumvent a secured
creditor’s priority § 9-340(a) & cmt. 2;
(b)
unless the secured creditor whose priority the
bank’s
set-off would circumvent perfected by becoming an
accountholder of the deposit account, § 9340(c).
3.
Priority in (Certain) Investment Property
a.
Control v. Other Perfection Methods
i.
means.
b.
A security interest in investment properly perfected by
control has priority over a security interest any other
§ 9-328(1)
Control v. Control
i.
Securities
(a)
the first security interest perfected by control has
priority over all other security interest. § 9-
328(2).
(b)
security
priority
perfected by any
328(5).
ii.
securities
(1), the
becoming the
328(2)(B)(i);
a security interest in a registered certificated
perfected by delivery under § 9-313(a) has
over all other security interests
means other than control. § 9-
Security Entitlement
(a)
As a general rule, priority goes to the first secured
creditor to perfect by:
(i) becoming the person for whom/which a
account is maintained if, under § 8-106(d)
secured
creditor
perfects
by
entitlement holder, § 9(ii)
agreement
entitlements
obtaining a
§ 9secured
which
has priority
commodity
commodity
distributed on
as the secured
further consent. §§
4.
obtaining the securities intermediary’s
to comply with the secured party’s
orders if, under § 8-106(d)(2), by
securities account control agreement,
328(2)(B)(ii); or
(iii) a third party gaining or acknowledging control,
in accordance with § 8-106(d)(3), on the
party’s behalf. § 9-328(2)(B)(iii).
(b)
Exception: A securities intermediary maintaining
a
security entitlement or securities account in
it has a security interest has priority over all other
secured creditors. § 9-328(3).
iii.
Commodity Contract
(a)
A commodity intermediary carrying a commodity
contract in which it has a security interest
over all other secured creditors. § 9-328(4).
(b)
Otherwise, priority goes to the first secured creditor
to perfect by obtaining the debtor’s and
intermediary’s agreement that the
intermediary will apply any value
account of the commodity contract
party directs without the debtor’s
9-106(b)(2) & 9-328(2)(C).
Priority in Letter-of-Credit
a.
Control v. Other Perfection Methods
i.
perfected by
interests
5.
course of the
as
it has
proceeds secured
chattel
other party,
A security interest in a letter-of- credit right perfected by
control has priority over all security interests
any other method. § 9-329(1).
b.
Control v. Control
i.
The first security interest perfect by control of letter- ofcredit rights has priority over all competing security
subsequently perfected by control. § 9-329(2).
Priority in Chattel Paper
a.
A security interest in chattel paper perfected by possession or
control in good faith, for value, and in the ordinary
secured creditor’s business has priority:
i.
over a perfected security interest in the same chattel paper
proceeds of inventory in which the competing claimant had
a perfected security interest when the proceeds arose,
provided that the chattel paper does not indicate that
been assigned to anyone other than the noncreditors, § 9-330(a);
ii.
over all other perfected security interests in the same
paper, provided that the secured creditor did not know that
perfecting its interest violated the rights of any
§ 9-330(b), and
iii.
in any proceeds arising from the chattel paper to the extent
that
(a)
§ 9-322 affords it priority in the proceeds
(b)
the proceeds are specific goods covered by the
chattel paper or cash proceeds of those
goods, or
(c)
§ 9-327 provides otherwise with regard to proceeds
held in a deposit account, § 9-330(c)
6.
Priority in Instruments
a.
Subject to § 9-331(a), a security interest in an instrument perfected
by possession, in good faith, for value, and not knowing that
perfecting its interest violated the rights of any other party,
has priority over a security interest perfected by any means
other than possession. § 9-330(d).
7.
Priority in Money
a.
A security interest in money perfected by possession has priority
over any other security interest claimed in the money;
however, a
transferee of money (e.g., a cash seller, a gift
recipient) takes free of
any security interest(s) in the money unless
the transferee colludes
with the debtor to violate a secured
party’s rights. § 9-332(a).
8.
Priority in Commingled Goods and Accessions
a.
Commingled Goods are goods that are physically united with other
goods in such a manner that their identity is lost in a product or
mass.
Accessions are goods that are physically united with other goods in
product or
does not
description in the
the product,
b.
creditor
collateral to
the value of the
c.
determined by the
9-335(c) & cmt.
d.
creditor
and one
accession,
by the basic
ex. 3.
e.
subordinate to a
interest in the product
statute. § 9-335(d).
such a manner that the identity of the original goods is not lost.
When collateral, or a portion thereof, becomes part of a
mass,
i.
if the collateral loses its identity in the mass, the security
interest continues in the mass, § 9-336(c); but
ii.
if the collateral does not lost its identity, then the security
interest continues in the collateral, § 9-335(a), but
extend to the product unless the collateral
accession lender’s security agreement covers
§9-335 cmt. 5.
If more than one secured creditor has a perfected interest in a
commingled mass under § 9-336(c), each perfected secured
is entitled to equal priority based on the cost of the
which each interest originally attached relative to
mass. § 9-336(f)(2).
If more than one secured creditor has a perfected interest in an
accession, priority with respect to the accession is
basic priority rules between secured creditors. See §
6.
Also subject to the exception below, if one or more secured
has a perfected interest in a product containing an accession
or more secured creditor has a perfected interest in the
priority with respect to the accession is determined
priority rules between secured creditors. See id. &
Certificate of Title Exception
i.
If a secured creditor has a perfected interest only in an
accession under § 9-335, its interest will be
perfected interest in the product if the
was perfected under a certificate of title
ii.
becomes
335(c) & 9-336(e).
C.
resale,
collateral
In all other cases, general priority rules determine the
priority of a security interest in collateral which
commingled or an accession. See §§ 9-
Subsequent Purchasers v. Secured Creditors
1.
An attached security interest continues in collateral notwithstanding
§ 9-315(a)(1), and is effective against someone who purchases the
from the original debtor or its successor, § 9-201(a).
2.
Exceptions
a.
Article 9 recognizes several exceptions to the rule that subsequent
purchasers take subject to attached security interests
b.
Authorized Disposition - § 9-315(a)(1)
i.
A security interest in collateral does not continue after sale
or other disposition by the debtor if the secured
creditor
security interest.”
authorized the disposition “free of the
ii.
the
secured
sell free of the
no inventory
except, perhaps, to
c.
sale security
perfected
reselling and
“belt-andgood. See § 9perfect
benefits a
good for which the
certificate of title.
“equivalent” to filing for
e.
security
by
clear
comparable
f.
The secured creditor’s authorization may be express or
implied; but courts distinguish between authorizing
debtor to sell collateral (which every inventory
creditor does) and authorizing the debtor to
secured creditor’s security interest (which
secured creditor would knowingly do –
keep the debtor out of bankruptcy).
Consumer-to-Consumer Sale - § 9-320(b)
i.
A buyer of a good that is a consumer good in the hands of
both the seller and the buyer takes free of a preinterest in the goods if she buys it:
(a)
for value
(b)
without knowledge of the pre-sale security interest,
and
(c)
before a financing statement covering the good is
filed
ii.
The principal beneficiaries of this “garage sale” exception
are buyers whose sellers gave an automaticallyPMSI in the consumer good they are now
whose PMSI seller or lender did not take the
suspenders” step of filing against the PMSI
320 cmt. 5.
iii.
Because a PMSI in a certificate-of-title good does not
automatically, the § 9-320(b) exception only
consumer buyer of a certificate-of-title
prior security interest is not noted on the
See § 9-311(b) (COT notation is
priority purposes).
Buyer in the Ordinary Course of Business (“BOCB”)
i.
A buyer of goods in the ordinary course of the seller’s
business takes free of a perfected (or unperfected)
interest the seller created in the goods.
ii.
The BOCB takes subject to any security interests created
the seller’s predecessors in title. § 9-320(a).
iii.
The BOCB may know a security interest exists as long as
she doesn’t know that the sale violates the security
agreement. § 9-320 cmt. 3
iv.
A BOCB of a certificate of title good can take free and
of a security interest its seller created that is perfected by
notation on the certificate of title. § 9-320 cmt. 5
v.
Farm products buyers do not benefit from § 9-320(a).
However, the Food Security Act provides
protection to BOCBs of farm products.
Buyers That Receive Delivery
i.
not
takes possession or
unperfected security
other
9-320
ii.
takes
A buyer unable to take advantage of § 9-320(a) – a buyer
in the ordinary course of seller’s business, takes subject to
any perfected security interest, but takes free of any
unperfected ones if she gives value and
delivery without knowledge of the
interest.
(a)
A buyer may avoid an unperfected security interest
in certificate- of-title goods as readily as any
kind of unperfected security interest. See §
cmt. 5.
Future Advance
(a)
A buyer unable to take advantage of § 9-320(a)
free of a security interest to the extent that it secures
an advance made:
(i)
more than 45 days after the BNOCB
purchased the collateral, § 9-323(d)
(2) or
(ii)
after the secured creditor knew that the
BNOCB purchased the collateral, if
secured creditor gained such
than 45 days after the
collateral, § 9-323(d)
(iii)
the secured creditor made the advance
“pursuant to a commitment” the
creditor entered into not
debtor had sold the
than 45 days
collateral, § 9-
the
knowledge less
BNOCB purchased the
(1); unless
secured
knowing that the
collateral and not more
after the BNOCB bought the
323(d)
D.
Priority in Proceeds
1.
Identifiability
a.
If the proceeds are goods that become commingled with other
goods to the extent that they lose their distinctiveness, they are
identifiable proceeds to the same extent that § 9-336 would deem
them to be collateral in which the secured creditor has priority. See
§ 9-315(b)(1). With a segregated account (if what comes in and out
is only related to this collateral), its easy. But often, these sort of
accounts get commingled. What was the balance of the account
when the proceeds went in – then money goes in and out whatever
– then debtor fails to comply with the SA – the balance when the
proceeds were first deposited and the balance when we questioned
whether the debtor commingled – the lowest point the balance goes
to is the amount we use.
b.
to the
debtor
claims
amount
2.
the receives
In all other cases, the secured creditor must identify its proceeds
using a legally-recognized tracing method. § 9-315(b)(2).
i.
Ex: Lowest intermediate balance rule: Proceeds deposited
into a non- segregated bank account are identifiable
extent of the lowest balance between when the
deposits the proceeds and when the secured creditor
the account as proceeds, inclusive, not to exceed the
of proceeds the debtor deposited.
Priority
a.
A security interest in identifiable proceeds becomes unperfected –
and lose priority – twenty (20) after the debtor receives
the proceeds unless
i.
the proceeds are identifiable cash proceeds, § 9-315(d)(2)
or
(a)
ii.
interest
office as
315(5)(1) or
cash proceeds includes money, checks, [funds in]
deposit accounts, and the like, § 9-102(a)(9),
the proceeds are non-cash proceeds
(a)
a filed financing statement covers the original
collateral, and
(b)
the proceeds are collateral in which a security
is properly perfected by filing in the same
the original financing statement § 9-
iii.
financing
3.
file
4.
extends
purchaser
chattel paper, and
E.
the
the proceeds are non-cash proceeds acquired with cash
proceeds,
(a)
a filed financing statements covers the original
collateral, and
(b)
the proceeds are collateral falling within the
collateral description in the original
statement, § 9-315(d)(3) & cmt. 5
Authorization to File
a.
The secured creditor does not need the debtor’s authorization to
in order to perfect proceeds. § 9-509(b)(2).
Purchase Money Priority in Proceeds
a.
As a general rule, purchase money priority under § 9-324(a)
to proceeds of purchase-money collateral. However,
money priority in inventory flows only into cash,
instrument proceeds. § 9-324(b).
Article 9 Priorities in Bankruptcy
1.
Under Article 9, the trustee in bankruptcy is deemed a lien creditor from
date of the filing of the bankruptcy petition.
2.
The “Strong Arm” Clause
a.
property as
debtor and
debtor files
b.
yet
insolvent,
of another
debtor filed
and
Under the strong arm clause, a bankruptcy trustee or debtor-inpossession has the same priority with respect to personal
a lien creditor who simultaneously extends credit to the
becomes a judgment lien creditor the moment the
bankruptcy.
Trustee will generally
i.
have priority over any unsecured creditor who had not
become a judgment lien creditor when the debtor filed
bankruptcy.
ii.
have priority over any statutory lien creditor whose lien
(a)
did not attach before the debtor filed bankruptcy or
another insolvency proceedings, became
or had an execution levied on behalf
creditor. 11 U.S.C. § 545(1), or
(b)
was not perfected or enforceable against a bona fide
purchaser when the debtor filed bankruptcy, 11
U.S.C. § 545(2).
iii.
have priority over any secured creditor whose security
interest was unperfected and unfiled when the
bankruptcy. § 9-317(a)(1) & § 9-322(a)(2),
iv.
future
interest
secured
(3) and
attachment, § 9c.
will be
secured creditor.
collateral
attached after the
lender perfected by filing
d.
have priority over any secured creditor which made a
advance more than 45 days after the debtor filed
bankruptcy, § 9-323(b), but
v.
yield priority to any secured creditor whose security
was
(a)
perfected when the debtor filed bankruptcy, § 9317(a)(2)(A) or
(b)
evidenced by a filed financing statement when the
debtor filed bankruptcy (provided that the
creditor had also satisfied § 9-203(b)
subsequently perfected upon
317(a)(2)(B).
Grace Period Exception
i.
If state law affords a secured creditor a period of time
following attachment in which to perfect or take the
necessary steps to establish its priority, the trustee
subject to retroactive priority in favor of the
11 U.S.C. §§ 362(b)(3) & 54(b).
ii.
For example, § 9-317(e) allows the holder of a PMSI who
files within 20 days after the debtor receives the
to defeat a lien creditor whose interest
PMSI arose but before the PMSI
After-Acquired Property and Value Tracing
i.
ii.
and
bankruptcy
collateral must
offspring, rents, or
agreement’s collateral
iii.
creditor
filing
V.
Default and Enforcement
A.
A secured creditor’s collateral may shrink, grow, or change
after the debtor files bankruptcy.
Proceeds and Other Derivative Collateral
(a)
11 U.S.C. 552(b) allows a secured creditor to claim
traceable proceeds, product, offspring, rents,
profits generated after filing by its precollateral.
(b)
Recall that a secured creditor seeking to claim
product, offspring, rents, or profits as
have made included product,
profits in the security
description.
After-Acquired Property
(a)
Except for proceeds and other derivative collateral,
11 U.S.C. § 552(a) does not allow a secured
to claim property the debtor acquires after
bankruptcy.
Introduction to Default and Enforcement
1.
Default
Under Article 9
a.
The rights of the secured party to enforce in accordance with
Article
9 are all predicated upon the debtor’s being in default in
some way.
A default is any failure by the debtor to pay its debt or
otherwise
perform its agreement with its creditor when due.
b.
Circumstances that Could Result in Default
i.
making of any false or misleading statements or the
provision of any false information by the debtor in
connection with its obtaining the loan or the
making of the
security agreement.
ii.
The collateral being lost, stolen, damaged, or destroyed.
iii.
The failure of the debtor to keep the collateral insured and
in
good repair.
iv.
A grant by the debtor of a security interest in the same
collateral to any other party.
v.
Any levy upon or seizure of the collateral or subjection of it
to any judicial process.
vi.
Failure of the debtor to notify the secured party as required
by other provisions of the agreement of any change
of name,
change in location of the debtor, and so on.
vii.
A disposition of any or all of the collateral other than in a
manner specifically authorized in the agreement.
viii. Failure of the debtor to properly inform the secured party or
account for any proceeds of an authorized disposition of the
collateral as it has agreed to elsewhere in the security
agreement.
ix.
2.
may
agreement spells
3.
itself
to have
decision to
4.
debtor
debtor due
5.
acceleration
6.
from,
Death, dissolution, termination of existence, reorganization,
insolvency, or business failure of the debtor.
Acceleration
a.
In the event of default on an installment obligation, the creditor
demand payment of the entire outstanding debt immediately or
within a fairly short time. Just as default, a security
out what justifies acceleration.
Insecurity Clause
a.
A common “event of default” occurs when the creditor “deems
insecure”
i.
if the security agreement includes such a provision, the
creditor may only exercise it in good faith. § 1-309
ii.
absent an objective basis upon which a reasonable person
would have accelerated, the creditor may be deemed
accelerated in bad faith
iii.
whether the creditor acts in good faith is a fact question
based on creditor’s knowledge at the time of the
accelerate.
Gun Jumping
a.
A secured creditor who accelerates or exercises any other postdefault remedy under the security agreement before the
actually defaults is liable for any damages caused to the
to the creditor’s premature acts.
Post-Default Cure Under Article 9
a.
After Default
i.
A debtor may cure after default by paying all amounts in
arrears
b.
After Acceleration
i.
A debtor may “cure” after acceleration only by paying the
entire debt remaining § 9-623 cmt. 2, unless the
is subject to non-UCC reinstatement statue.
Bankruptcy’s Effect
a.
If the debtor files bankruptcy before the secured creditor can
exercise its rights, 11 U.S.C. § 362(a) will stay the creditor
inter alia.
i.
“any act to obtain possession of property of the state or the
exercise control over property of the estate,” §
362(a)(3);
ii.
“any act to...enforce against property of the debtor any
lien...securing a claim that arose before” filing
iii.
initiating or continuing pending litigation “to recover a
against the debtor that arose before” filing, § 362(a)(1);
enforcing against the debtor or property of the estate a
judgment obtained before the debtor filed
362(a)(2).
§362(a)(5);
claim
iv.
bankruptcy, §
B.
debtor
foreclosed
statute)
Repossession
1.
Foreclosure v. Repossession
a.
Foreclosure is the process of transferring ownership from the
to the purchaser.
i.
A debtor loses the right to redeem once the debt is
(again, unless there is non-UCC reinstatement
b.
Repossession is exercising physical control over the collateral.
i.
it can occur before, during, or after foreclosure
ii.
it does not (independently) affect debtor’s right to redeem
2.
Secured Creditor’s Interest in Pre-Foreclosure Possession
a.
The debtor has no incentive to maintain the value of the collateral
it
is going to eventually lose. The debtor may waste/damage the
collateral.
b.
The use of the collateral may have significant value in of itself.
Most
collateral has inherent value and use value.
c.
It is easier for potential buyer to evaluate and view the collateral if
it is in the creditor’s possession before foreclosure
i.
A credible threat of repossession may give the secured
creditor leverage over the debtor, as long as the
debtor still
values collateral, but if the debtor is able to
retain possession,
it may gain leverage over the secured
creditor if the secured
creditor values collateral more than
outstanding debt.
3.
Personal Property Repossession
a.
The secured creditor has the right to repossession upon default. §
9609(a).
b.
The secured creditor may repossess by judicial process (writ of
replevin)
c.
The secured creditor may also repossess by self-help as long as it
does not breach the peace. § 9-609(b)(2).
i.
Two Common Factors of Breach of Peace
(a)
potential for immediate violence
(i)
if an actual confrontation occurs, the secured
creditor must cease self-help. However, the
lack of actual confrontation does not
mean
the secured creditor has not,
nonetheless,
breach the peace.
(b)
nature of the premises intruded upon
(i)
residence vs. non-residential property
(ii)
debtor’s property vs. third party’s property;
the fact that the third party property
owner is
unaware of the repossession doesn’t
necessarily avoid a breach of
the peace.
(iii)
notice are
privileged. Just
but does not
restatement (second)
apply to actions by a
liened collateral.
restatement (second) torts § 198 says if there
was no confrontation and the timing and
manner, including notice or lack of
found reasonable, the entry is
says it must be reasonable,
define
reasonable;
but
of torts 198 does not
lienholder
against
(c)
in the
d.
to use
debtor
down
that
their
secured
compare white & summer’s factors, discussed in
Giles
(d)
generally speaking, the secured creditor need not
give prior notice as long as the collateral is
debtor’s possession.
Self-Help Repossession of Accounts
i.
Four common accounts receivable lending arrangements:
(a)
the secured creditor may give the debtor virtually
complete freedom to collect its account and
their proceeds in the debtor’s business.
(b)
the secured creditor may agree to let the debtor
collect the accounts, but require that the
immediately apply a specified portion to pay
the outstanding obligation
(c)
the secured creditor may arrange with the debtor
the debtor’s debtors (the account debtors) make
payments to a dedicated P.O. box into a dedicated
deposit account.
(d)
the secured creditor may require the debtor to direct
its account debtors to make their payments to a P.O.
box or into a deposit account that is under the
creditor’s exclusive control.
ii.
Upon default, the secured creditor may notify debtor’s
account debtors directly and demand payment, § 9-
607(a)(1)
iii.
creditor’s
even if the
creditor’s
C.
An account debtor who fails to follow the secured
instructions may be liable to the secured creditor,
account debtor is not in default to the secured
debtor (the account creditor). § 9-406(c)
Disposition of Foreclosed Personal Property
1.
Types of Foreclosure
a.
Judicial
i.
the creditor sues debtor. Debtor and any subordinate lien
holder have opportunity to assert defenses. Court
issues an
order and sets the date for the foreclosure
sale. Court must
“confirm” sale.
(a)
If the collateral sells for less than outstanding debt,
creditor may seek a deficiency judgment; in
states, a creditor is barred from seeking a
judgment for any debt left unsatisfied by the
foreclosure
sale
(called
(b)
if collateral sells for more than outstanding debt,
“surplus” goes first to junior lien holders, if
then to debtor
Debtor typically remains in possession of collateral
until sale has been confirmed by the court
Debtor has right to redeem until sale is final;
therefore, debtor has incentive to delay the
proceedings by asserting defenses as
by objecting to the sale prior to
some
deficiency
antideficiency statutes)
any, and
(c)
(d)
the outset and
confirmation
(e)
“waiting
rather than personal
a.
Some states impose statutory delays on the
foreclosing creditor – most often these
periods” apply to real property,
property, foreclosures.
Article 9
i.
After default, the secured creditor is allowed to sell, lease,
or
otherwise dispose of the collateral and apply the proceeds
of
the disposition to the outstanding debt. The purchaser takes
free of any unpaid balance on the debt, and the
secured
creditor may then pursue a deficiency
judgment against the
debtor for what’s left.
2.
UCC Foreclosure-by-Sale
a.
The foreclosing secured creditor may sell by auction, by private
sale
at state price, or by negotiated sale between two or more parties, §
9-610.
i.
No court intervention is required, but a secured creditor
who elects to proceed by writ of replevin (judicial
process)
must still sell in accordance with Article 9.
ii.
The sale must be “commercially reasonable.” § 9-610(b).
iii.
Required notice
(a)
Section 9-611(c) requires the secured creditor to
give
the debtor notice prior to the time of sale unless the
collateral is (1) perishable, (2) threatens to
decline
rapidly in value, or (3) is the kind of
good
customarily sold on a recognized
market.
iv.
Notice enables the debtor to observe and participate in the
sale and to inform other potential buyers in hopes of
getting
the best price and therefore the small deficiency
judgment.
(a)
received written
collateral
(b)
right after
v.
attorney’s
but Article 9 does
except where the
party granted a
may waive that right
vi.
attorneys’
vii.
not
viii.
discharges all
secured
the
senior
ix.
In the case of non-consumer goods, secured creditor
must also give prior notice of sale to any other
secured creditor from whom she has
notice of a claim against the
Any party entitled to notice of a sale or other
disposition under § 9-611 may waive that
default. § 9-624(a).
Redemption
(a)
Debtor may redeem at any time prior to sale, by
paying the entire outstanding debt, plus
fees and expenses of sale, § 9-623;
not recognize post-sale redemption
collateral is consumer goods, any
redemption right by § 9-623
after default. See § 9-624(c).
Distribution of Sale Proceeds
(a)
Reasonable expenses of retaking, holding, preparing
for sale and selling the collateral and, to the extent
provided for in the security agreement,
fees and costs then
(b)
Satisfaction of the debt to the foreclosing secured
creditor, then
(c)
Satisfaction of subordinate liens, subject to notice
and demand requirements, then
(d)
Remaining balance to the debtor. See § 9-615(a).
Deficiency
(a)
The secured creditor may get a deficiency judgment
against the debtor for the amount of debt left unpaid
after sale, unless the collateral is accounts or chattel
paper for which the security agreement does
specifically entitle the secured creditor to a
deficiency. § 9-615(d)-(e).
Discharge of Liens
(a)
In addition to discharging the foreclosing secured
creditor’s lien, foreclosure by sale also
liens subordinate to that of the foreclosing
creditor. § 9-617(a)(2)-(3).
(b)
No Discharge of Senior Liens – if the foreclosing
secured creditor is not the senior lienholder,
buyer will take the collateral subject to any
liens.
Challenging the Disposition
(a)
Debtor (or any secured creditor entitled to notice
under § 9-611(c)) may challenge sale as
“commercially
unreasonable”;
however,
(b)
manner
commercially
(c)
of
The courts review will focus on whether the sale
conducted in a commercially reasonable
not whether the sale fetched a
reasonable price
A sale or other disposition is presumed to be
commercially reasonable if:
(i) The secured creditor sells or otherwise disposes
the collateral in the usual manner in a recognized
market for goods of that type;
(ii) The secured creditor sells or otherwise disposes
of the good at the prevailing price in the market for
goods of that type; or
x.
specific time
the
foreclosure if:
(iii) The disposition has been approved in a judicial
proceeding – including, but not limited to, an action
for a writ of replevin – or by a bona fide creditors’
committee. § 9-627(b)-(c)
Failure to (Timely) Sell Collateral
(a)
Subject to § 9-602(e) & (f), Article 9 permits, but
does not require sale and does not set a
for sale. § 9-610(a). A debtor may challenge
commercial
reasonableness
of
the
(i)
debtor’s right to
significantly
xi.
judgment,
foreclosure);
the secured creditor decides to keep the
collateral, rather than sell it, without
obtaining a waiver of the
sale, or
(ii)
the secured creditor delays in selling the
collateral,
and
it
devalues
during the interim
Other Recognized Objections
(a)
A foreclosure sale may be set aside for one more of
the following reasons:
(i)
the sale was not advertised in accordance
with applicable statutes (and/or the
if the sale follows a judgment of
(ii)
location
(iii)
sale;
the sale was not held in precisely the
advertised;
the debtor and/or other interested parties did
not receive proper notice prior to the
(iv)
(v)
some arrangement between interested parties
“chilled” the bidding;
the sale was not otherwise “commercially
reasonable”;
the creditor did not act in good faith; or
the highest bid was “grossly inadequate.”
(vi)
(vii)
xii.
Remedies
(a)
If a debtor or other secured creditor successfully
challenges a sale as not commercially
reasonable, the
remedies are set forth in § 9-625,
including
(i)
rescission of the sale – i.e., having it set
aside
(ii)
damages in the amount of the loss caused by
the foreclosing secured creditor’s failure to
comply
with
the
procedural
requirements of
Article 9; in the case
of consumer goods, the
debtor (only) may
recover an additional
penalty, as set forth in
§ 9-625(c)
xiii. Good Faith Purchaser
(a)
A good faith purchaser takes free of any right of
redemption, and claims of commercial
reasonableness. So, if the secured
creditor sells to a
good
purchaser
at
a
commercially unreasonable sale,
the secured creditor
may have to answer to the
debtor, but the good
faith purchaser gets to keep the
purchased collateral.
FAIR!
3.
Strict Foreclosure
a.
Strict foreclosure is when the secured party accepts the collateral in
full satisfaction of the remaining debt owed. The parties call it
even between them--the secured party could not pursue the debtor
for any deficiency and the debtor was not entitled to any surplus,
should the creditor later sell the collateral at a profit. Secured
creditors opted for full strict foreclosure in situations where the
value of the collateral at default approximated the debt owed at
default. By calling it even, the secured party avoided the Article 9
strictures on foreclosure sales if it decided to sell the collateral
down the road. Sometimes secured creditors chose full strict
foreclosure if they thought the value of the collateral exceeded the
amount of the remaining debt. If they could successfully achieve
strict foreclosure without the debtors objection, they would be able
to pocket any surplus generated at a later disposition of the
collateral.
b.
of the
c.
9-620(d)
receive the
entitled
objection, the
9-610 (UCC
any party
proposal of
secured creditor
there is a valid objection,
must proceed by sale.
d.
by,
collateral,
to sale
proposal to
debtor must
to sale in accordance
e.
collateral
forfeits the
debtor.
f.
Waiver of Sale
i.
After default (and in the case of consumer goods, after
repossession), the debtor may waive its right to sale
collateral. § 9-620(a)(1), (a)(3) & (c).
ii.
A pre-default waiver is unenforceable. § 9-624
Notice Requirement
i.
Before strictly foreclosing, the secured creditor must send
notice to the parties identified in § 9-612. Neither §
nor § 9-621 require that the intended recipient
notice, only that the secured party send it.
ii.
The secured creditor’s intent to retain can be defeated by a
written objection from the debtor or any other party
to notice within 20 days. If there is a valid
creditor must proceed by sale according to §
foreclosure by sale).
iii.
Implied Waiver
(a)
If the secured creditor does not receive within 20
days a written objection from the debtor or
entitled to notice under § 9-621 to its
intent to retain the collateral, the
may strictly foreclose. If
the secured creditor
Special Case: The 60% Rule
i.
Once a debtor has paid 60% of the purchase-money debt
owed on, or the non-purchase money debt secured
consumer goods, the secured creditor must sell the
§ 9- 620(a) & (e), unless the debtor waives its right
under § 9-624(b).
ii.
No Implied Waiver
(a)
The debtor cannot waive its right to sale by simply
not responding to the secured creditor’s
retain the collateral; rather, the
affirmatively waive its right
with § 9-624(b).
iii.
Time to Sell
(a)
In the absence of an explicit waiver, the secured
creditor must sell within 90 days. § 9-620(f).
No Right to Deficiency
i.
A secured creditor who elects to retain the debtor’s
in full satisfaction of the debt, rather than sell it,
right to seek a deficiency judgment against the
Partial Satisfaction
i.
Limited Availability
(a)
In non-consumer transactions, the secured creditor
may, with the debtor’s post-default
agreement, take
the collateral in partial
satisfaction of the debt. § 9620(g).
ii.
Actual Consent
(a)
If the SC proposes to retain the collateral in partial
satisfaction, the debtor must affirmatively
consent,
see § 9- 620(c)(1). There is no
implied waiver when
the debt survives.
iii.
Right to Deficiency
(a)
A secured creditor who elects to retain the collateral
in partial satisfaction of the debt, and those debtor
consents, may seek a deficiency from a nonconsumer debtor.
g.
Discharge of Liens
i.
The principal rationale for requiring notice to other
lienholders is that, in addition to discharging the
strictly
foreclosing secured creditor’s lien in whole
or in part, full or
partial strict foreclosure also discharges all
liens subordinate
to that of the strictly foreclosing secured
creditor. § 9622(a)(3), (a)(4) & (b).
ii.
If the strictly foreclosing secured creditor is not the senior
lienholder, it will take the collateral subject to any
senior
liens. § 9-622(a)(3).