Secured Transactions Class Notes
Class 1- August 26, 2020
Introduction to the course
● Focusing on Article 9
Secured Transactions- Reserving your place to get paid in advance
Security Interest
● A relationship between a debt and an asset (like marriage)
o With security interest the asset can be sold to pay the debt
▪ Mortgage or car note
● “An interest in property, Contingent on the non-payment of a debt”
o Must be consensual
o Or lien (Non-consensual)
Debt= Obligation
Collateral
● Real estate
● Equipment
● Accounts
● Inventory
● Patents
● Trade marks
● Copyright
● List continued on slide 29
Obligation
● Loans
o Home, Auto…
● Purchase money obligations
● List continued on slide 38
Lien
Security Interest (our focus)
● Article 9
● Mortgage
● Non-article 9
Statutory Lien
● Agriculture
Collateral= Asset
●
●
●
●
●
Mechanics
Tax
Landlord
Charging
Retained
Judicial Liens
● Judgement
● Execution
● Attachment
Filing System- How to reserve your seat
Assignment 1
Remedies of unsecured creditors under state law
Basic concepts: Time and money
Judgement � Levy (getting your money)
10 day minimum between judgement and levy
Cost to pay legal fees
Basic Concepts: Remedies
● Money judgment
o Orders defendant to pay
● Execution
o Sheriff seizes and sells
▪ Court must order a writ
▪ Sheriff levies
▪ Sheriff sells the property
▪ Sheriff applies proceeds to pay the debt
▪ Sheriff returns the writ
Levy
● Seizure of property pursuant to execution
● Take physical possession
Sheriff has liability for amercment/conversion
● Amercment
o Sue the sheriff for not doing his job and executing the writ
Exemption
● Property the sheriff cannot seize on a writ of execution
● Necessities specified by state statute
Pre-judgment Attachment
● Holds the property before the trial is complete
● Very rare
Self-help Repossession
● Creditor take possession
● Not allowed for unsecured creditors
Setoff
● Lets call it even
● If partial a portion of the larger debt will remain
Fraudulent Transfers
● With actual intent to hinder, delay, or defraud
● If good faith cannot avoid the transfer
● If without receiving reasonable value and insolvent
o Reversible regardless of intent
It’s hard to collect unsecured debts
Problem 1
Remedies of unsecured creditors
● People who win a lawsuit- unsecured and most important
The law is in the statute- not the cases
1.1 Take it to small claims court
● The quickest route t collecting the money
● Not much attorney involvement
● Can’t resort to self-help for unsecured debt
o Could be liable for conversion or criminal for stealing
● Send a demand letter asking for the money back
1.2 Must make payments every 3 months
● Prime plus five points= public rate published (prime)
o 5 points= +5%
● She hasn’t missed a payment yet but the conditions are bad
● She can secure her interest in case she does default
● Can’t collect anything more since she hasn’t missed a payment.
o Must be in breach of contract
● Renegotiate the contract to have security interest or collateral
● In this case you can’t do anything until you have something to bargain with
1.3 6 months later with a $65,000 default judgment (loan + interest amount)
● Send a demand letter with the judgement first
● Must figure out what property Natalie Martin owns so we can send the sheriff to levy
o Search public record
▪ House
▪ Car
o Discovery to collect debts
▪ Put her under oath and ask questions
● This puts her on alert and she could move the property
● Risk to levying the daycare equipment
o May try and fail
o Risk of conversion
▪ Risk of her not actually owning the equipment
Hard to collect on judgments that people don’t voluntarily pay
1.4
● Setoff is a legitimate remedy
o The problem is the way the debt was created
o Didn’t go through the proper channels
● The actual case he was liable for theft and owed $30,000
● Not in the best interest to resort to self-help
1.5
● Statute Application
● 2. The home is exempt if he lives in it as a homestead
● 3. Partially exempt
o Must be equal to
▪ Looking at value as a fair market value
▪ Most of the time just agree to the value
● Is there a rush?
o Yes. Don’t want them to use/spend the non-exempt property
Exemption law rarely help people because most people don’t know about exemptions and you
have to claim the exemption before the sheriff takes the property
● Usually doesn’t help the poor people
● Helps the big guys who have lawyers on hand
Class 2- August 28, 2020
Security and Foreclosure
Secured
● Force sheriff’s sale of collateral
● Secured gets priority
o Big difference to unsecur3ed
o Priority at the beginning of transaction
Security Interest
● An interest in property contingent on the non-payment of debt
● Doesn’t matter what its called
Personal Property
● Article 9
Security Interest (mortgage)
● An interest in property
● Contingent on the non-payment
● Of a debt
If the debtor pays the creditor has no interest in the property
Right to redeem
● The debtor’s right to pay the debt and own the property free if the security interest.
● If a security interest exists, debtor always has the right to redeem
Foreclosure:
● Termination of the right to redeem
● Judicial foreclosure
o Court declares, sale by sheriff
● Power of sale foreclosure
o No court, by trustee, real estate
● UCC Foreclosure by sale
o No court, by creditor, personally
● Strict foreclosure
o Court declares, no sale, contract for deed
Deed in lieu of foreclosure:
● Voluntary transfer of the debtors ownership/right to redeem
1. Sale of Accounts
a. Account debtor
i. Person obligated on account
b. Account
i. Obligation to pay for goods or services (pay later)
c. Original creditor sells the accounts owed by account debtor
2. Asset Securitization
a. Multiple buyers, multiple investors in a pool of assets
b. Sale from original to a trust
i. Issue securities and investors pay
c. Tranche=Priority
i. Risk profile
ii. Low investments get paid first with smallest property
3. Sale of Accounts with Recourse
a. Original will buy back if the debtor doesn’t pay
b. Buyer is taking risk in original, not the account of debtors
4. Asset Securitization with Recourse
Problem set 2
2.1
● Now Moll has a security interest
● The law says you can’t give up your exemptions but he waived the exemption by the
security interest
o He can foreclose on all of it
o With the security interest, there is no exemption
o Security interest is different than waiver
● No property may be claimed as exempt against the claim of a holder of a security
interest
o Wis. Stat. §815.18(12)
o In the statute
o Need to read everything in the statute
● They can waive the exemption once the debt is in default
2.2
● Wanting them to “rent” the car
● Still creating a security interest even if you don’t intend or call it a security interest
o They have to pay rent for 3 years
o Giving the option to buy at the end makes it a security interest
● If in substance it’s a security interest that’s how we treat it
o What’s a security interest?
Class 3- September 2, 2020
Assignment 3
Repossession of Collateral
● Possessing/grabbing collateral
Replevin- A cause of action for possession
● Secured party has right to possession UCC §9-609
● Powerful
o Sheriff delivers temporary possession early
● Two procedures both constitutional
o Varies based on state
Self-help
● The creditor takes possession of the collateral to collect the obligation
● No judicial process; No “state action”
o Secured parties have the right to self-help, §9-609
Breach or peace (limits self-help)
● Criminal standard
o Public disturbance
● Article 9 standard
o “Tending to provoke other to break the peace”
o Callaway v. Whittenton (Lower standard)
Trespass
● Criminal
o Fenced, posted, “after warning”
● Civil
o Intentional entry on land without authority
o Lower standard
Privilege (to trespass)
● An entry to reposes is privileged if “there is no confrontation and the timing and
manner, including notice or lack of notice, are found reasonable.”
Concealment
● “whoever… conceals any personal property in which he knows another has a security
interest… is guilty of a class E felony.”
Receiver
● An officer of the court who takes possession of collateral during foreclosure to preserve
it
Repo by Property Type
Methods
Voluntary
Self-help
Receiver
Replevin
Real Estate
Yes
No
Yes
No
Tangible Personal
Yes
Yes
Yes
Yes
Creditors don’t get possession by foreclosure; purchasers do
Account
Intangible Personal
Yes
Yes (some)
Yes
No
● A right to payment of a monetary obligation… for property sold or services rendered,
§9-102(a)(2)
Account Debtor
● Means a person obligated on an account
● UCC §9-102(a)(3)
Account Financing
● Selling or borrowing against a group of accounts
The seller or borrower is the “debtor”
The policy in favor of account assignment
● §9-406(d)(1)
o You cannot restrict assignments
o Account debtors need only pay money, they should not care who they pay
●
●
●
●
Cardholder had a bad experience paying Citibank, does not want to have to pay Citibank
Cardholder creates account with Chase, Chase agrees no to assign.
Restriction is invalid, §9-406(d)
Cardholder must pay Citibank §9-406(a) §9-607(a)
Assignment 3 Problem Set
3.1
● Mr. Albert has now completed a valid security agreement
o As a secured creditor he can result to self-help
▪ Can’t breach the peace
o The security interest justifies self-help
▪ Limited property rights
▪ Like she consented
3.2
● How do we reposes?
o No guard, no fence
▪ Time of day?
● Probably at night when no one is there
● If someone objects you can’t reposes and breach the peace
▪ Is it ok to trespass?
● Generally yes you can go onto property unless they tell you to
leave
● Not on notice so no criminal trespass
● If they do ding trespass it will be nominal damages
● Not something to worry about
▪
o
o
o
o
Give prior notice?
● Probably bad idea
▪ If someone objects?
● Must withdraw
▪ Instructions?
● Avoid people
● Take the bulldozer and get out
Fence, but no guard
▪ Ok to trespass?
▪ Cut the lock?
● If damage the lock must pay for damages
● If we leave the gate open other equipment could be stolen
o Lock it back when you leave
Guard and Fence
▪ What happens if we ask?
● They could let you in
● Chances are low they let you in
▪ What if we defraud?
● I would not council misrepresentation
● From a legal perspective probably get away with it
o What’s the harm?
o Generally not criminal
In debtor’s steel building
▪ Pick the lock?
● Could include the right to enter any property in a security
agreement
● If interrupted? Return?
o Must stop for breach of peace
o Can come back at another time
Anything we should put in the security agreement?
▪ Breach of peace waiver?
● Not allowed
3.3
● When ITT comes to reposes, how should Lipson handle it?
● How do we prevent repossession “for a week or two?”
o Could move the equipment without concealing the equipment
▪ Can’t advise to commit a crime
▪ Can advise on the consequences
● Explain how repossession works
o If it’s not there it can’t be taken
o Maybe someone needs to borrow?
● What if the reposessor persist? If they take the equipment?
o Object and make it known you don’t want them to take it
● Gun?
o Don’t shoot them
o Having the gun is probably ok depending on state gun laws
● Is there an ethical problem? Rule 1.2
o Can’t tell them to break the law
o Can tell them the consequences
● What if they bring the sheriff?
o Does the sheriff have a writ of replevin?
▪ No
● Can’t help with the repo, just keep the peace
▪ Yes
● He can take the property
Marcus v. McCollum
● Cross the line if they help during self-help
● What the sheriff can do with a writ of replevin depends on the state you are in.
o Wis. Sheriff can only ask for the property the first time. You can object.
o Okla. Sheriff may break in to take the property
● Should we call the sheriff?
o Doesn’t hurt
● Should we hide the bulldozer?
o Against the law
3.5
● Deare has requested that Firstbank’s interest in the accounts not be made known to the
account debtors “because it might make them nervous”
● Firstbank is considering to do this
● What can go wrong?
● How do you reposes something you can’t hold?
o People who finance accounts receivables
o Can check the books of the debtor so you can be aware
o Checks can go directly to the bank
o Watch financial records to have a warning
3.6a
●
●
●
●
Deare defaults on the loan
Bank sends notification to Horne’s
Horne’s pays Deare anyway
Can Firstbank make Horne’s pay again to Firstbank?
o §9-406(a)- important
▪ Account debtor (Horne) may discharge by paying the assignee (Firstbank)
the obligation is not discharged by paying assignor (Deare)
▪ Cannot use defense that they paid the wrong person
3.6b
● To how much is Firstbank entitled?
o §9-404(a)
▪ 1. Original contract
▪ 2. After its assigned (only after notice is given)
● Not related to the assignment
● Any other claims
o The amount can be offset
3.6c
●
●
●
●
Deare defaults on the loan
Bank sends notification to Horne’s email
Is notification by email enough?
How do we know Horne’s received notice?
o §1-202(e)
▪ If you can prove they received notice OR
▪ It is delivered reasonable under the circumstances at the location of
business
● Does federal law protect consumers from email notices?
o §9-406(h)
▪ If not consented you cannot send email notice in consumer cases (things
that don’t come under the UCC)
3.7
● A. Is it possible your credit card companies notice is effective?
o §9-406(a)
▪ If you can prove they received the email
▪ The email has come to their attention
● B. You think it might be a scam. What next?
o Request proof of the assignment
▪ If waiting on proof pay the original §9-406(c) (assignor)
▪ When you get proof pay the new (assignor)
3.8
● How to prioritize payment?
Most legal power
Least time sensitive
Southern savings
Legal Power
Citizens Bank
Not Article 9
Receivers or Foreclosure.
Have time because it has to
go through the judicial
process
Security interest governed by
Article 9
Most time sensitive
Utility
Legal power
Supplier 1
Supplier 2
Self-help repossession.
They can take everything.
This can happen quicker than
foreclosure.
Replevin- bring the sheriff
Service that is needed
Can shut off utilities as soon
as the notice period is up
Can self-help repossession
Must get a judgement to get
a levy civil action
Suppliers could stop supplying to you.
Southern savings is the last priority.
Class 4- September 9, 2020
Assignment 5
Article 9 Sale and Deficiency
Judicial sales
● Procedure:
o Sell collateral to the highest bidder
o Apply proceeds to the debt
o Return surplus to the debtor
o Creditor can more for “deficiency”
Reasoning:
● Property sells for “market true value”
● Secured party receives full value of collateral (up to date) and with deficiency, full
amount of debt
● Debtor pays no more than it owes (no “forfeiture”)
Credit Bidding
● Assume the debtor owes a $100k secured debt
● The secured party forecloses and the court orders a sale
o Sheriff sells the collateral to the highest bidder
o Sheriff pays proceeds to the secured party
o Payment reduces the amount owing
● If the secured party is the buyer, the money would go in a circle. So the law excuses
both payments. Take the collateral.
Judicial Sale Procedure Problems
Current System:
● Legal notice
● Buyers are unable to inspect
● Caveat emptor as to title and condition
● Hostile situations
● Statutory right to redeem
Typical bidding dynamics
● Some sales are for substantial bargain prices; debtor suffers forfeiture
● Some creditors bid without determining value; losing deficiencies, misleading others
● Sale becomes a strategy game
Sale Procedures Compared
Purpose
By whom?
When final?
Deficiency judgement?
Effect?
Judicial
Divide the collateral value
between the debtor and
secured
Sheriff, clerk
On court confirmation
Lien less sale price
Lien less market value
No deficiency
Double sale (98%)
Article 9
Divide the collateral value
between the debtor and
secured
Secured party
On contract to sell
Lien less sale price
Lien less “would have”
No deficiency
Usually a single sale
Real Estate System
Deed in lieu
Settlement, can’t bind junior
liens
Deed intend to be absolute
(in full satisfaction only if so
agreed)
Article 9
Acceptance of collateral
Settlement can bind junior
liens
1. Authenticated agreement
for partial satisfaction
2. Lack of objection for full
satisfaction
No acceptance:
1. If debtor paid 60%
2. In partial satisfaction
3. While debtor still has the
collateral
§9-620(a)(3)
Settling a foreclosure
Legal device
Function
Formal Requirements
Consumer exceptions?
No
Consent to collateral acceptance under Article 9
Full Satisfaction
Partial Satisfaction
Secured Party’s action
Debtor’s Action
Secured party sends
unconditional proposal
§9-620(b)(1)
Secured party receives no
objection within 20 days
§9-620(c)(2)(c)
Secured party consents in an
authenticated record
§9-620(b)(1)
Debtor agrees to terms in
recorded authenticated after
default
§9-620(c)(1)
The 3 Article 9 Deficiency Provisions
§9-615(d)(2)
● After you apply the proceeds of the sale
§9-626(a)(3)
● Not commercially reasonable
o Not sale price, what you would have got
§9-615(f)
● If secured party buys
o What someone else is willing to pay
Assignment 5 Problems
5.1
● A. The sale was commercially reasonable
● How much is the deficiency?
o 30,000
● B. How much must Maxwell pay to redeem?
o 100,000
o Redemption
▪ Stop the sale and get the car back
● C. When?
o Before the sale happens
● Is an auto auction commercially reasonable?
o Most likely reasonable
o Irrelevant that someone else would pay more
5.2a
●
●
●
●
5.3
20,000
Don’t include the 4,200 judgement
Assume all fees are reasonable
Auto parts is not entitled to the 4,200
o The statute says the surplus goes back to the debtor
● A. Does Eastbank have to send notices?
o §9-611(b)
▪ Statute says you must send the notice
▪ Not crime to not send
▪ Could be sued by the debtor who would get statutory damages
An auto auction is no a “recognized market”
● Could the debtor waive right to notice?
o §9-624(a)
▪ No, cannot waive before default
● C. If they don’t send notices?
o §9-625(a)
▪ (a) court could order the sale on hold until the notice is sent
● Low risk that this happens
▪ (b) not many actual damages
Statutory damages
● The debtor gets 10% the price of the car they bought (price of loan)
● Add credit service charge (interest)
● Could make the loan not profitable
o Could lose a lot of money
o A class action is possible
● Probably no consequences in a non-consumer case
5.4
● What should the Bank do?
o 4 guarantors are responsible for the loan if the debtor can’t pay
▪ You have other options to get the money back
▪ Can get the deficiency from the guarantors
o First need to give notice so we don’t lose the deficiency
▪ Notice that we are getting rid of it in a commercially reasonable manner
● Sell vs dispose of
o Sell= Proceeds
o Dispose of= Broad- Doing something with it
o Second, dispose of the hill in a commercially reasonable manner
o Should they spend money to fix it up?
▪ §9-610(a)
● Might cost too much to repair
● Not required
● If throwing away is not commercially reasonable they can’t collect
on the deficiency
o Must mitigate the risk
▪ Needs to hire an expert to find out what’s commercially reasonable
▪
Need better information for evidence during litigation
5.5
● Paid 50K outright and granted a security interest to secure 227k
● 131K deficiency
o Can dispute the amount of deficiency
o Should be what they would have gotten in a sale
● Deficiency
o §9-615(d)(2)
▪ Not liable until after making payments
▪ They never conducted a sale and made the payment
o §9-620(c)(1)
▪ If partial the debtor must consent
▪ No consent
● What if they sell to themselves?
o Only is a recognized market
▪ Stock exchange, etc.
▪ Publicized price
o Not a recognized market
o Not a public sale
o Only if you’ve done a sale
5.8
● There wouldn’t be a deficiency
● $255k spent would be the expense of sale if sold for price of loan $245 would be the
deficiency
● Should spend the money to restore so you can collect the deficiency
Class 5- September 11, 2020
Assignment 6 and 7
Assignment 6: Bankruptcy and the Automatic Stay
Article 9 “Lien creditor”
● A creditor that has acquired a lien on the property involved by attachment, levy, or the
like.
Article 9 “Secured Party”
● A person in whose favor a security interest is created under a security agreement
Security interests are contractual; liens are judicial
Mutually exclusive
Bankruptcy Code Terminology
Security Interest
● A lien created by agreement
Judicial Lien
● Lien obtained by judgement, levy, sequestration
Statutory Lien
● Lien arising by statute, but does not include security interest or judicial lien
Lien
● Charge against property to secure payment of a debt
Bankruptcy Courts
Specialized courts: Bankruptcy is a separate court system
● Federal
● Fully Electronic
● 200 Locations
Purpose
● Coordinated resolution of debt problems
o Consumer
o Business
1. Petition
a. Document that commences the case
2. Schedules
a. List of assets and debts, filed with petition
3. Proof of Claim
a. Creditors statement of debt owing
4. Automatic Stay
a. A temporary “injunction” that takes effect on the filing of a bankruptcy case
5. Discharge
a. A permanent injunction against future efforts to collect the debt from the debtor
6. Motion to lift automatic stay
a. Secured creditor remedy
7. Adequate Protection
a. Protection against decline in value of the collateral. In re Timbers of Inwood
Forest Association (1988)
b. Example: Value of collateral drops from 100 to 90 provided by payments, liens,
cushion of equity
8. Reaffirmation Agreement
a. Agreement between an individual debtor and creditor that a debt not be
discharged
9. Property of the Estate
a. “All legal or equitable interest of the debtor in property as of the
commencement of the case,” except exempt property
10. Property of the Debtor
a. Property exempt in bankruptcy or earned post-petition
11. Trustee
a. Independent lawyer/accountant who administers property (“Panel of trustees”)
(as distinguished from the United States Trustee and debtor-in-possession)
12. Pro-rate Distribution
a. Distribution of the same percentage of debt to each creditor in a class
b. Example: 5 cents on the dollar
13. Plan
a. Proposal to make specified payments
Problem 6 Problem Set
6.1
● Protect under the bankruptcy automatic stay (customer)
o Can’t try to collect on the debt
● According to the statute you cannot call them to try to collect
o Statute says “any” (§362(a))
6.2
● They have a court order to hand over the collateral
● Debtor files bankruptcy what can you do?
o Creditor must stop according to the automatic stay
o Automatic stay is applicable to all entities
▪ §362(a)(3)
● What is an entity?
o §101(15)
▪ Entity includes governmental unit
6.3- Lifting the Stay
● Can’t foreclose
● Motion to lift the stay
o If the court does this they can proceed with collection
● §362(d)
o Only need 1 or 2
▪ (1) for cause
● There is a cause
o Lack of adequate protection
▪ Protection on collateral losing value
▪
(2) no equity and the property is not necessary
6.4
●
●
●
●
They won’t be able to lift the stay
Way over secured
The debtor has equity
No argument to lift the stay
6.5
● Over secured debt
● The boat is uninsured so the boat could be destroyed and worth nothing
o Collateral value would be nothing
● Could be an argument to lift stay because the boat is not protected
6.6
● A. Tell them to get lost. They have no leverage
● B. They can file a motion to lift stay then repo the collateral
o Not enough information to know if they could lift the stay
o Could repo in 60 days if stay is lifted
Liquidation: Chapter 7
Deal: “Fresh Start”
● Debtor surrenders all property to the trustee
o Except exempt
● Court discharges all debt
o Except non-dischargeable and reaffirmed debt
● Trustee sells the surrendered property and distributes the proceeds pro-rata
o No assets are distributed to unsecured creditors in 93% of chapter 7 cases
o A median of 5 cents on the dollar is distributed to unsecured creditors in the
other 7% of cases
Reorganizations: Chapter 11
● Debtor remains in possession during case
● Debtor proposes plan to repay some or all debt, makes disclosure
● Creditors vote on plan
o Each “class” as a veto
● Court can “confirm” a plan despite class veto, if the plan follows the absolute priority
rule
o “Cramdown”
● Confirmed plan binds all creditors
o Including the “no” voters
Debtor Adjustment: Chapter 13
Eligibility: Individuals (humans) with unsecured debt less than $383,175 and secured debt less
than $1,149,525
● Debtor keeps all of debtor’s property
● Debtor proposes plan to pay
o Secured creditors at least value of their collateral
▪ At least what they would get in chapter 7 and
▪ All “disposable” income for 3 or 5 years
● No voting; court confirms plan if plan meets statutory requirements
o Cramdown
● If debtor performs plan, remaining debt is discharged
o 60% don’t
Automatic Stay
§362
● Protects the debtor
● Protects property of the estate
● Only before the commencement of the case
Motion to lift stay
§362(d)
● Creditors can ask to have the stay lifted
o Secure creditors only
Assignment 6 Problem Set
Assignment 7: Treatment of Secured Creditors in Bankruptcy
Bifurcation
● When a secured creditor is under secure
o Asset value is under the value of the loan
o The asset doesn’t cover the amount of the loan
What secured Creditors get in Bankruptcy
● Bifurcation of claim
o §506(a)
● Secured Portion
o Payment in full
● Unsecured Portion
o Pro rata payment with other unsecured claims
What secured Creditors get in Chapter 13
● At least equal to the value of collateral
Interest on Claims
● Over half of all payments will be interest
● In first year, 83% of payments will be interest
Is a Creditor Entitled to Interest in Bankruptcy?
Prepetition
Pendency
Unsecured
Yes
No
§502(b)
§502(b)(2)
Post-confirmation
Undersecured
Yes
§502(b)
No, Timbers
Yes
§1129(b)(2)
Oversecured
Yes
§502(b)
Yes
§506(b)
Yes
§1129(b)(2)
Sale “free and clear of the lien”
● Buyer gets the car free and clear of any lien
● Can sell with lien still attached
Sale “subject to the lien”
● Buyer is subject to the lien
● Pays trustee “x” and pays to secured creditor
Assignment 7 Problem Set
7.1
● What items are included in the claim?
o $30,000 principle
o $0 interest Feb 15-March 15
o $2,700 interest March 15-Sep 15 at 18%
o $0 interest Sep 15-Dec 15 (§502(b)(2))
o $0 Attorneys fees (not in the contract)
▪ Not in the contract
o $32,700 Unsecured claim
7.3
●
●
●
●
Client Claim: $32,700
Total Claims: $1,191,500
Total Available: $59,575
What percentage of the claim will the client get?
o $59,525/$1,191,500= 0.05
o $32,700 x .05= $1,635
7.2a
● What is the claim?
o $340,000 Principle
o $20,400 6 mo interest (12%)
o $10,812 3 mo interest
o $371,212 Secured claim
o $0 unsecured claim
7.4b
● What if a plan is not confirmed for a year?
o Interest would accrue until the value of the collateral is reached
o $400,000
▪ Nothing over the value.
▪ No unsecured claim (0)
7.2b
● Value of collateral $325,000 is secured
● $35,400 unsecured
o Get the principle and interest up until filing
o 15,000+20,400
● secured claim is 325,000
7.2c
● No security interest
o $360,400 unsecured claim
▪ Principle and interest up to filing
7.5
● A. How much to the estate? §541
o $1,000,000 Sale proceeds
o $850,000 Secured Claim (mortgage/loan)
o $42,500 Six months of interest
o $60,000 Broker
o $10,000 Cost, Property Tax
o $37,500 net
● §506c
o To the benefit of the creditor
o Reasonable and necessary cost
● Does Capital benefit from the sale?
● B. What happens if it takes longer to sell?
o Interest continues to accrue
o Eventually will run out of equity
● C. Can they prevent the sale?
o §554(b)
▪ If the property is burdensome to the estate
● We are advising the trustee. What should they do?
o Try to sell the house, but if it doesn’t sell abandon the property
Assignment 8: Formalities for Attachment
Attachment: Creation of a security interest
● §9-203(a)
o When it becomes enforceable
▪ (b)(1) value has been given (§1-204)
▪ (b)(2) the debtor has rights in the collateral
▪ (b)(3)(A) the debtor has authenticated a security agreement that provides
a description of the collateral
Value has been given (by the secured party)
● §1-204
o If the person acquires them as a security for a pre-existing claim or
o In return for any consideration
● Ordinarily the value is the loan
● Anything bargained for
● Can be nothing if for a pre-existing claim
Debtor has rights in the collateral
● (Any rights)
● Example 1: Limited interest
o 5-year lease
o Secured party has a security interest in the debtor’s lease
● Example 2: Voidable title
o Seller can take back the collateral
Debtor has authenticated a security agreement
● §9-102(a)(74)- Security agreement
o Agreement that creates or provides a security interest
● §9-102(a)(7)- Authenticate
o (A) to sign; OR
o (B) with present intent to attach to the record
● §9-102(a)(70)- Record
o Information on a tangible medium
Description of collateral
● §9-108(a)
o Reasonably identifies
o Doesn’t have to be specific
Alternative
● §9-203(a)(3)(B)
o Oral agreement
o Secured party is in possession
Assignment 8 Problem Set
8.1
● Is there a valid security agreement?
o 3 Elements
▪ Value is given
● Value is given with the “$150,000”
▪ Debtor has authenticated the agreement OR creditor is given possession
● Has the description of the collateral been given?
o Yes: “our lab equipment”
● Intent
o Yes: “I grant”
▪ Debtor has rights in the property
● Has rights because they own the equipment
o Fully intended the security agreement
▪ §9-102(a)(7)
● Adopt or accept a record
● Emails can be valid
● B. Over the phone?
o Oral agreements can be valid if possession of the collateral is given to the
creditor
o No possession was given so the oral agreement would not be valid
o no record
● C. Voicemail
o Information inscribed on a tangible medium
o §9-102(a)(70)- Record
▪ Oral testimony can prove lost or destroyed documents
▪ Deleted voicemail makes the case harder
● B. (revised) Is human memory “stored” in a “medium”?
o Not a good argument
o Not a tangible medium
o There would be no record requirement if this was allowed
8.2
● Are the records enough to show a security agreement?
o Promissory note
▪ Missing a description of the collateral
▪ May be missing the intention to create
o Financing Statement
▪ Not signed by the debtor
▪ They do have the description
o Cover Letter
▪ Has a description
▪ Says gives but doesn’t actually give the security agreement
▪ It is signed by the debtors attorney
● Can sign for the client
● If you look at them all together there is probably a security agreement
o Composite document rule
▪ Internal connection
8.4
● Does the bank have a security agreement?
o No
▪ No description of collateral
● The collateral list is mailed to other party and stapled to the agreement
o Probably
▪ Need the description at the time of authenticating or not?
● Some courts yes
● Most courts no
● Two years later?
o Same analysis as above
8.5
●
●
●
●
Debtor signed security agreement, no collateral description
Debtor authorized us (creditors lawyer) to fill in the description
We didn’t fill it in; debtor filed bankruptcy
The trustee has requested a copy of the security agreement
o If we sent the agreement now, as it, what will happen?
▪ The trustee will find that there is no security agreement
o Will the trustee challenge and what will happen?
▪ Become an unsecured creditor
o If we send the agreement, do we put the description in the envelope?
▪ Can’t fill in the blank description now because of the automatic stay
▪ Trying to act like the documents go together
▪ It this ethical?
● On the boarder
● Not outright lying, but not telling the whole truth
o Whose decision is this?
▪ The clients decision to make
● Rule 1.4b
o Inform the client
o Client: “what do you recommend that I do?”
▪ Options:
● Tell client, refuse to fill in the blank, don’t promise confidentiality,
get fired (violates no rule; client loses $500k-600k)
● Don’t tell the client, send the documents, (violates Rule 1.4),
litigate the composite document rule (we are witness, can’t be
the lawyer), our malpractice is exposed and client is not made
whole.
● Don’t tell the client, fill in the blank, send documents (violates
many rules, fraud, contempt of court)
8.6
● You withdrew from representation of Porter
● By accident, you are present when Porter testifies:
o Signature on the security agreement is her own
o The agreement was “genuine”
o The document expressed the agreement between the parties
● Porters new lawyer offered the agreement into evidence and the court accepted it
● What should you do now?
o Fine line on if you need to report it
o Don’t really know if the client offered false testimony
8.5 and 8.6 make the lawyer choose between bad alternatives
● If the system required filing this wouldn’t have been an issue
Assignment 9: Collateral and Obligations Covered
2 Issues
● ObligationSecurity InterestCollateral
● What obligations are secured?
What collateral secures the obligations?
o Answer: Whatever the security agreement says (with minor exceptions)
Rules for interpretations and validity
● Interpretation
o Generally: Contract rules that govern
● Validity
o §9-108(b)(3)(a) requires a description that “reasonably identifies” the collateral
● §9-108(b) Permits
o Specific listings (“coyote loader, serial number…”)
o Category (“loader” or “refrigerator”)
o UCC Category (“Equipment”, “accounts,” “Inventory,” etc.)
o Quantity (“200 bushels of corn”)
o Computational Formula (“33% of corn”)
o Other words that make collateral “objectively determinable”
§9-108(c)
● Prohibits “all assets” (the super-generic problem)
§9-108(e)
● Prohibits “commercial tort claims” or “consumer goods”
§9-108(b)(6)
● Other methods must make the collateral “objectively determinable”
● But by whom? Using what additional information?
o Example: “crops growing on real estate described by ASCS form serial number J028.”
▪ Determinable only if one knows what Farm Serial Numbers are. Held
Valid.
o Example: “The equipment in the restaurant at 123 Main Street on the date of
this agreement.”
▪ Determinable only if one knows what equipment was there at the time.
Held valid.
o Example: “Inventory” Is goods held for sale- depends on debtors intention- Valid
o Example: “All merchandise purchased with the Credit Card.”
▪ Determinable only with the account records
▪ Held valid (murphy)
▪ Held invalid (Shirel)
Courts will allow additional information or most descriptions would fail.
In re Shirel
● Oklahoma is in the minority
● Found invalid
After-Acquired Collateral
● Collateral the debtor acquires after the security agreement is signed
o §9-204(a)
▪ A security agreement may create or provide for a security interest in
after acquired collateral
o Issue: Must the description say “after-acquired” to include it?
▪ §9-108 Comment 3
● Some categories it is implied
▪ Case Law
● Depends on parties intent. The most likely outcomes are:
o “Inventory” is held to include after-acquired inventory
(generally)
o “All equipment” is generally held not to include afteracquired equipment
Assignment 9 Problem Set
9.1
● “All equipment and inventory”
o §9-108(b)(3)
● “All merchandise purchased with this card”
o Outside of Oklahoma this is good
● “Restaurant equipment located at 123 Main Street”
o Ambiguity:
▪ Is the collateral the equipment there now or whatever equipment is
there at a given time?
● “All of the debtors consumer goods”
o §9-108(e)
o §9-102(a)(26)
● “All goods other than consumer goods”
o §9-108(e)
o §9-102(a)(26)
o Is the description invalid as a super-generic?
▪ §9-108(c)
▪ Goods is specific
9.2
● Have a list of categories that would be repossessed
9.4
● Remember the distinction between legally sufficient and well drafted
● Is the description sufficient?
o §9-108(a)
▪ Very specific
o §9-203(b)
▪ Has value
▪ Security agreement
▪ Debtor owns
o §9-204
▪ After-acquired property
● Were they planted at the time of the agreement?
o No, planted after
● Inventory meant to be sold is assumed to include after-acquired
property
o Are crops like inventory?
▪ Could make arguments both ways
● Does it matter if there were crops at the time of signing?
o In no crops they must have intended future crops
o What should they do?
▪ How can we give PCA a better deal?
● PCA could pay off the existing loan and now they are the only
ones with a security agreement
● Even if the description is sufficient ambiguities are bad for the borrower
o Hard for the borrower to use the crops
9.5
● A riddle (real case):
o Wisconsin Bank makes a loan against the “fixtures and equipment” of a lessee
bar (no after acquired property clause)
o Six years later, the debtor absconds to Minnesota. The bank takes possession of
the bar and finds no collateral
o Debtor took no collateral. How?
▪ They replaced the fixtures 2 years after the agreement and there was no
after acquired property allowed
9.6
● Is the equipment included?
o It doesn’t say after-acquired property
o Have to argue after-acquired property is included
Assignment 10: Proceeds, Products, and Value-Tracing: State Law
Basic Concepts
● §9-203(f)
o The attachment of a security interest in collateral gives the secured party the
right to proceeds provided by section 9-315
● §9-102(a)(64)
o “Proceeds” means the following property:
▪ (A) whatever is acquired upon the sale, lease, license, exchange, or other
disposition of collateral
▪ (B) Whatever is collected on, or distributed on account of collateral
▪ (C) Rights arising out of collateral
▪ (D) To the extent of the value of collateral, claims arising out of the loss…
of, … or damage to, the collateral, OR
▪ (E) to the extent of the value of collateral… Insurance payable by reason
of the loss… of, … or damage to, the collateral
● §9-315(a)(1)[A]
o Security interest… continues in collateral not withstanding… disposition thereof
unless the secured party authorized the disposition free of the security interest…
and
▪ (2) a security interest attaches to any identifiable proceeds.
● §9-332(a)
o A transferee if money take the money free of a security interest
● §9-315(a)(1)
o (b) proceeds that are commingled with other property are identifiable proceeds
▪ (1) if the proceeds are goods, to the extent provided by 9-336
▪
(2) if the proceeds are not goods, to the extent that the secured party
identifies the proceeds by a method of tracing… permitted under law
other than this article
● §9-336
o “commingled goods” means goods that are physically united with other goods in
such a manner that their identity is lost in a product or mass
o Examples:
▪ Grain in a grain silo
▪ Steele in automobile
The Lowest Intermediate Balance Rule
● The proceeds of the disposition of collateral remain in a commingled account as long as
the account balance is equal to or exceeds the amounts of the proceeds.
o Proceeds are first in and last out
Limitation on Funds in Bank Account as Collateral
● §9-332(b)
Segregated Bank Account
● A bank account containing only a single secured creditors collateral
Definition of Accounts
● §9-102(a)(2)
o A right to payment of a monetary obligation
Assignment 10 Problem Set
10.1
● Does the description cover the proceeds?
o §9-203(f)
▪ Yes
● Does it cover the products, offspring, substitutions…?
o Are proceeds if they fall under the proceeds definition
10.2
● Does it cover money in the bank account?
o Personal accounts are not included in “accounts”
o Only if proceeds
● A parrot that Polly took in in payment?
o Yes, parrot taken as proceeds
● A new computer she bought after the agreement?
o Equipment
● Does it cover the Myna Bird?
o No
o An account is a “monetary obligation”
10.3
● Horace won the race. Does ELP get the purse
o §9-102(a)(64)
▪ Not being sold so (A) does not apply
▪ This is not given just on Horace so not (B)
▪ Doesn’t arise out of Horace it arises out of winning the race so no (C)
o Probably not proceeds (weak arguments)
o Is the purse a “product” of Horace?
▪ “product” is defined as “the results of fabrication or processing”
▪ Probably not a product
o Is the purse a “profit”?
▪ Would get after deducting expenses
▪ Not a clear route to the purse
10.4
● Never know what someone may have a security interest in
● Could be a security interest if any of the items are proceeds of the inventory
● Just reading the agreement doesn’t tell us what has a security interest beyond the
names collateral
10.5
● ELP loan $35000 secured by XT-100 copier
o What is ELPs collateral?
▪ The insurance claim for the copier
o Once the check sent?
▪ Interest in the check
o Once deposited?
▪ The amount in the account that is proceeds
o Wrote check for rent?
▪ Proceeds are first in and last out
o If you sell inventory the proceeds are whatever is received regardless of the
value of the collateral
Assignment 11: Tracing Collateral Value During Bankruptcy
The Special Bankruptcy Rules
● After acquired property clauses aren’t effective during bankruptcy
o §552(a)
▪ Except as provided in subsection (b)… Property acquired by the estate…
after the commencement of the case is not subject to any lien resulting
from any security agreement enters into by the debtor before the
commencement of the case
● The right to proceeds is effective during bankruptcy
o §552(b)(1)
After-acquired property/proceeds distinction
After-acquired Property
Time debtor acquires
After security agreement is
property
signed
Source if the right
Security agreement
description
Extent of the right
Security agreement
description
Policy justification
Contract
Concept operate in
No §552(a)
Bankruptcy?
Does the right follow value?
No
Proceeds
After security agreement is
signed
§9-203(f)
§9-102(a)(64)
Value-tracing
Yes. §552(b)
Yes, but loosely
Proceeds differs from value tracing
● Proceeds is broader than value tracing
o §9-102(a)(64)
● Proceeds is narrower than value tracing
o Deminimis exception
The Equities of the case exception
● §552(b)(1)
● Secured party has the right to proceeds under sate law
● But the bankruptcy court can change that right when it is equitable
Interpretation
● Strict value tracing.
o Secured party gets value attributable to its services/contributions
Three “equitable” ways to trace value
● Strick Chex Rule
o Reimburse cost of the collateral; the rest is the debtors.
o In most cases the cost of food inventory=cash collateral
● Delbridge Rule
o Contributors share in proportion to contributors
● Gunnison Rule
o Reimburse services; the rest is the secured creditors
Why is matters: Cash Collateral in Bankruptcy
● §363 use, sale, or lease of property
o Must be approved to use cash collateral
Assignment 11 Problem Set
11.2
● Now Polly has filed bankruptcy
● Description: “Equipment, inventory, accounts”
o Does this cover payment
▪ No after-acquired property once filed for bankruptcy
▪ Have to trace back to pre bankruptcy collateral
▪ Did the work create an account?
● Yes
● §552(a)
11.3
● Doesn’t change the analysis. Can still collect proceeds.
● Might have a claim for violating bankruptcy law.
11.6
● The after-acquired property doesn’t apply after bankruptcy commencement
Assignment 12: The Legal Limits on What May be Collateral Where Article 9 Ends
Basic Concepts: Scope of Article 9
● §9-109
o A transaction that creates a security interest in personal property or fixtures by
contract
o Agricultural lien
o Sale of accounts, Chattel Paper, Payment Intangibles, or Promissory Notes
o Consignment
o Attempt to reserve title by sellers
o Banks security interest in checks and letters of credit
“Property” can be collateral only
● Collateral means the property subject to security interest
● Security interest is an interest in personal property which secures payment obligation
● §9-109(a)
o This article applies to a transaction that creates a security interest in personal
property
● §9-102(a)(42)
o “General intangible” means any property
● Personal property is property that is not real property
● Property-right to exclude others
Security interest in Non-property
● Debtor grants a security interest in “inventory.” Debtor has no inventory, so the security
interest does not attach.
● Seller sells inventory to debtor. The debtor has “rights in the collateral” security interest
attaches
● Security interest cannot attach after bankruptcy §552(a)
● Debtor grants a security interest in (non-property) “license”
● Security interest does not attach to the license
● Debtor sells the license. The payment received is proceeds.
● But is it proceeds of the collateral?
o Majority says yes, the license is “shadow property”
§552
● Security agreements reach property acquired during bankruptcy only if it is proceeds of
pre bankruptcy property
§9-108
● (c) Does not apply
● (1) if the statute preempts Article 9
● (2) Statute of State
● (3) Statute of other state
● (4) Letter of Credit
● (d) Does not apply
o (1) Landloard’s Lien
o (2) Statutory lien
o (3) Assignment of wages
o (4) Sale of accounts as part of a sale of the business
o (5) For the purpose of collection only
o (6) Part of sale of contract
o (7) Single account for pre-existing debt
o (8) Policy of insurance
o (9) A right represented by judgement
o (10) A right of recoupment or set-off
o (11) Real property
o (12) Claim arising in tort other than commercial tort claim
o (13) Assignment of a deposit account
Intangibles
● (61) “Payment intangible” means a general intangible under which the account debtors
principle obligation is a monetary obligation
● (42) Definition of general intangibles
§522(f) Lien avoidance
● Purchase many security interest (PMSI) §9-103(a)-(b)
o Secures
▪ Payment of the purchase price of collateral or
▪ An advance made to pay the purchase price and used to pay it
● Possessory Security Interest
o The security interest of a secured party who is in possession of the collateral
● Lien Avoidance
o A judicial process that voids a lien
§522(f)
● If the lien impairs and exemption
o (A) a judicial lien
o (B) nonpossessory, non PMSI
▪ Household goods
▪ Tools of the trade
▪ Health aids
When does a lien “impair and exemption?”
● §522(f)(2)(A)
o The amount of exemption exceeds the value of property
o To the extent of the exemption
Assignment of Wages
● The grant of security interest in future earnings
● Most states don’t allow this
Assignment 12 Problem Set
12.1
● Can bank get a security interest in this collateral?
o A. Electronic equipment used in broadcasting
▪ Yes. “Debtor’s electronic equipment”
o B. Peacock Logo (protected by trademark)
▪ Yes. “general intangibles” and “art work”
o C. Broadcast License
▪ Can put in but likely won’t be enforced
o D. Reputation
▪ Can’t buy a reputation
▪ Could buy the company with a good reputation
o E. Action for slander of that reputation
▪ Need to say something specific
o F. Future advertising revenues
▪ Any existing or future accounts
▪ Need an after-acquired property clause
12.2
● The debtor files chapter 7. We are under secured. What should we do?
● What happens if we life the stay and foreclosure?
● What can we do?
o If we lift the stay and foreclose the station will likely lose its license and will not
have value.
o Need to sell as a whole, not in pieces
▪ Trustee won’t let is sell the license
▪ Ask the trustee to sell as a whole for us.
12.4
● Bank of Friend wants to take a security interest in the bar and liquor license
o A. What should Bank take a security interest in?
▪ Furniture, fixtures, leasehold, general intangibles, and liquor license
o B. What can Bank do if the debtor does not repay?
▪ Foreclosure on the collateral, buy at the sale, apply for a liquor license.
▪ If debtor defaults, get debtor to voluntarily sell
o How?
▪ Personal guarantee and mortgage on debtor’s home
o C. Any advantage in requiring Harry’s bar to incorporate
▪ Bank can foreclose on the stock instead of the license but what research
under state law do we need to conduct?
12.5
● Offers to accept a security interest in Desmond’s ERISA Pension rights
o Can’t take a security interest in pension funds under federal law
● A. If we make the deal, what is the effect?
o States can’t nullify federal law
o The agreement won’t be valid and they would get no collateral.
● B. Are we legally required to tell Short what the effect will be?
o If the security interest is invalid there may be a contract consideration issue.
o Not required to tell him he is making a mistake
▪ He requested the deal and should have done his research
Assignment 13: Default, Acceleration, and Cure under State Law
● Concept of breach (called default in this context)
Common Types of Repayment Agreements
● Installment loans
o A loan repayable in more than one payment
● Line of Credit
o An arrangement in which the creditor legally commits to lend and receive
payment at a time elected by the debtor, up to the contract line amount and
until the contract due date
● Payable on demand
o Immediately payable when the creditor requests payment
● Hypo:
o 1 year ago you “loaned” $1,000 to a friend. You did not discuss when friend
would pay. Can you sue?
▪ Yes. The court will determine the implied time for repayment
● Default
o The debtors breach of a contract to repay (contract law applies
● Acceleration
o Rendering a debt previously payable at some future time due and payable now
● Cure
o Reversing the default by tendering performance
● Tender
o “An unconditional offer of money or performance to satisfy a debt or
obligation.” A party must tender its own performance to sue for the other
party’s breach.
If acceleration is first, the debtor can’t cure.
Acceleration occurs when the contract says it does
● Some contracts say “on default”
● Most give an option to accelerate
o Must give notice even if the contract does not require
Waiver
● The voluntary relinquishment of a known right
Waiver by Estoppel
● Misleading debtor into the honest and reasonable belief that the creditor intended a
waiver
Good Faith
● §1-201(b)(20)
o Honesty in fact
Insecurity Clause
● A provision that the secured creditor may accelerate or require more collateral if it
“deems itself insecure”
● §1-309
Demand loans don’t need good faith
Basic Concepts, Good Faith
● §1-201(b)(20)
o Honesty in fact
● §1-304
o Every contract imposes an obligation of good faith in its performance or
enforcement
Unconscionability
● Unconscionable clause will not be enforced
Substantive Unconscionability
● Involved deception, compulsion, no reasonable alternative
Procedural Unconscionability
● “no meaning choice on how to enter the transaction”
Assignment 13 Problem Set
13.1
● Contract: Missing two payments is a default and the creditor may accelerate
o Pat is in default
o Pat sends check and the bank rejected the payment
o Does the bank have the right to foreclose?
▪ When Pat sent the check the default should have been cured
▪ Not if Pat cured before acceleration
● They can accelerate after 2 payments are missed
● Just have to elect the option
o When he sent the check is a cure if before acceleration
o When did Pat cure?
▪ When he tendered the check
o When did the bank accelerate
▪ When the contract says
o What happened first?
▪ We don’t know
● In the role of the banks lawyer, what is your reaction to Pat’s lawyer’s call?
o Contact the client to get the facts
o Practical advice to client
▪ Accept the payment because it is not clear this is the cheapest option to
get paid
13.2
● A. Is Art in default?
o No. The amount is not exceeding one payment at 10 days after the one payment
is due
o Just late
● B. When will Art be in default?
o More than 10 days after the second payment is missed
o Nov. 12
● C. What if Art doesn’t pay? When is his last chance to keep the house?
o The loan will be accelerated and he will have to pay the entire loan.
o Acceleration is last chance. Before the foreclosure sale.
● D. In Illinois can pay the late amount to not lose the house even after acceleration.
13.3
● Second National plans to call Rebel Discount’s $600,000 demand loan
o A. Art wants to give notice
▪ The client is the bank, not Art.
▪ For the bank it makes sense not to give notice. There is risk in giving
notice
o B. If we give notice, what’s the worst that could happen?
▪ Could dispose of the collateral, destruction of equipment, lease default
▪ Loss of all collateral
o C. What should we do?
▪ Demand payment, file for replevin
o D. With or without notice?
▪ Safest option is not to give notice
▪ Never tell the debtor you are coming to collect.
13.4
● The bank kept the check
o Did the bank waive acceleration?
▪ To have a waiver they would have to say they waive
o Did the bank waiver by estoppel?
▪ No. Bank didn’t mislead Pat and she didn’t rely.
o Is the bank in good faith?
▪ Honesty in fact
▪ Reasonable
▪ Bank is in good faith
13.6
● A. Mortgager wants to call the loan
o Did they waive?
▪ No, may have waived by estoppel
o Can they call for failure to provide insurance proof 23 days ago?
▪ 23 days is a little short
▪ Argument that by waiving last year they waive forever
▪ Probably in bad faith
▪ If they don’t have insurance calling the loan would not be bad faith
● B. Even if waived last year the wording of the contract favors the creditors argument
● C. Probably not
● D. Don’t want to
● E. Notify the debtor of default before calling the loan. Find a different debtor to collect
on.
Assignment 15: The prototype Secured Transaction
● Shoreline commits to full-price repurchase (floorplan agreement)
● 3a. Shoreline will purchase repossessed merchandise, regardless of its condition, at the
point where Otis repossesses it
● 3b. The purchase price will be an amount equal to the total unpaid balance owed to you
with respect to the merchandise… or our original invoice price… whichever is greater
● First State Bank replicates Otis’s financing for Gladys.
o Differences:
▪ Bonnie’s signed with Otis. Gladys signed the security agreement with First
State
▪ Otis repossesses; First State calls the guaranty and turns over the chattel
paper to Bonnie.
● Then what happens?
o Bonnie repays and repos the boat
● Restatement (third) of suretyship & Guaranty §27(1)(1996):
o Bonnie must pay if Gladys doesn’t
o Bonnie gets the rights of First Bank to recover debt
● Basic Concepts
o Most states make it criminal to sell/dispose of collateral in a way not allowed
under the security agreement
▪ Not just breach of contract
Assignment 15 Problem Set
15.1
● This is “field warehousing” collateral in the possession of the secured party while
immediately available to the debtor
o Floor checker didn’t find out the swindle
▪ The great salad oil swindle November 1963
● A little salad oil is floating on a lot of water
● Pumped the same oil in each drum
15.2
● “Miller… double collateralized vehicles… by using them as collateral on two or more
floor plan loans…”
o How should the 5 banks have caught that?
▪ Find the other lenders by UCC search, compare auto lists.
● Miller told the floor checker that the missing vehicles were on test drives or were out on
loan to customers whose vehicles were being services
o What the fraud?
▪ Miller sold the vehicles, but didn’t pay the banks
o How should the banks have caught this?
▪ On the floor check, always find the vehicles immediately
o Miller told customers to bring cars back
▪ Always show up unannounced
15.4(a)
● What interest rate has Bonnie agreed to pay?
o Otis sends a statement of transaction for each boat
o No set interest rate
o First statement of transaction
▪ First 30 days no interest
● Incentivize selling the boats quickly
▪ After 30 days it depends on the prime rate
● Prime Rate
o Rate of interest publicly announced
o Prime gets reset each month
15.4(b)
● Is BBW’s 1 collateral?
o Probably yes, under real estate law
● Are BBW’s bank accounts collateral?
o Probably no, except to the extent they contain proceeds
o Must include “deposit accounts”
o Not all account
o Not a general intangible
15.4(c)
● Does a demonstration ride violate the agreement?
o Yes
● Would a demonstration ride be ground to call the loan?
o Yes, subject to the good faith requirement
15.4(d)
● Does Bonnie need to worry about a deficiency judgment?
o Missing or destroyed boats
● Otis repos boats and sells them to shoreline for the full balance owing. Is Otis entitled to
a deficiency?
o No. Debt was paid
● Is Shoreline entitled to a deficiency?
o No. No debt created
● The boat is destroyed. No interest exists. Is Otis entitled to a deficiency? §9-615(d)
o Yes
● Is Shoreline?
o No. BBW does not owe the obligation to shoreline
● Shoreline is bankrupt, the boats are damaged, no insurance, sale for 40% of the
obligation
o Is Otis entitled to a deficiency?
▪ Yes. §9-615(d)
15.5
●
●
●
●
●
●
o inventory
o non-consumer good § 9-102(a)(48)
A. Does Otis have the right to the boats?
o Yes, Bonnie defaulted so they have right to repo
▪ §9-609
o Added contractual rights to demand deliver of the boats
B. Assume Bonnie surrendered the boats. Is Otis entitled to a deficiency for the missing
boats?
o §9-615(d)(2)
o Yes, for the missing boats
o would it be in the interest of Otis to pursue that deficiency ???
▪ maybe?
▪ even tho she could be held personally liable--not worth it bc she put
everything into the business
▪ incentivize her to cooperate (pg 259)
o need to send notice of the disposition
o Notice of the disposition of non-consumer goods is sufficient if the notice
▪ (1) identifies the debtor and secured creditor,
▪ (2) describes the collateral that is subject to disposition,
▪ (3) indicates the specific method of disposition that will be used,
▪ (4) describes the debtor’s entitlement to an accounting of the unpaid
debt, and
▪ (5) provides the time and location of an intended public sale.
C. Has Bonnie committed a crime? Ill. Stat. p. 169
o Yes, under the Illinois statute
▪ Felony
o yes, under new york
▪ misdemeanor
D. If Bonnie has surrendered the boats, should Otis file a criminal complaint?
o Yes, strategic if Bonnie files bankruptcy
▪ things not dischargeable--if done to buy time
● 11 US Code §523
▪ we dont want her
o Set precedent for other clients
o state has to take up certain expenses
E. How long would it take to repossess the boats?
o No set time line
o She could keep them for months. Not likely to get them in their current
condition
Bonnie committed crimes; she owes $250,000 she can’t pay we conclude (strategic
analysis)
o Bonnie is legally obligated to surrender possession of the boats
▪ if could be criminally charged then would be best to cooperate
o options:
▪ file for bankruptcy
● not entirely dischargeable
● 523(a)(2)(a)
o what is not dischargeable under any debt
o bc of the fraud might not be dischargeable
▪ pay back the debt
▪ continue to breach the peace and keep the collateral
o If we do, Otis will probably seek a $250,000 judgment (non-dischargeable in
bankruptcy) and Bonnie may go to jail
o Through procedural rights, Bonnie could keep the boats for months. She could
destroy them.
15.7
● How can Otis get out of the deal?
o Section 20(a)
▪ Either party may terminate by given written notice
▪ 30 days notice is fine. There is wiggle room that could do less but likely
would cause a dispute.
▪ Bonnie will have to pay back the loans and Otis will have to continue to
loan during the notice period
Assignment 16: The Personal Property Filing System
● Priority: The Basic Idea
o The right to be paid in full in preference of others
▪ Example 1: 1st get all available value
● General Rule
o The first to attach and prefect has priority.
● Perfection
o Public notice by a proper notice
● Rational for Priority
o First treatment is fair because debtor agreed to it and no one else was injured
(they ignore the unsecured creditors)
o Second’s treatment is fair because they knew about first (They ignore seconds
who didn’t know to search; involuntary)
● Rejected Rules
o Pro rata distribution
o Distribution based on status
o Right to trace value given
Methods of Perfection
● Filing
o Financing statement
●
●
●
●
Possession
Control (“possession” of intangibles)
Automatic Perfection
Levy
For most collateral, a secured party can perfect multiple ways:
File Financing Statement
Secured Party
OR
AND
Searcher
Possession
The searcher must look for both.
UCC searches are now online and publically available
Thousands of Filing Systems
● Real estate and fixture filing systems in each of 3,000 counties
● UCC filing system in each of 50 states
● Motor vehicle title filing system in each of 50 states
● Mobile home title filing system
● Boat title
● Alcoholic beverage license filing in Florida
● Patent
● Copyright
● Trademark
● Ship mortgage
● Aircraft
● Railroad
● Mobile goods
● Insurance
For communication to occur, filer must file in the right system and searcher must search in that
system
Filing System Roadmap
● §9-109(a)
● §9-310(a)
● §9-310(b)- exceptions
● §9-311 (a)- exceptions
o Statute must preempt
o Certification of title statute
● §9-310(b)(7)-(8)- exceptions
● §9-501(a)
o Where to file based on state
Must know which state law governs
Assignment 16 Problem Set
16.1
● Bobby owes our client, Patti, $30k for alimony and child support.
o Patti has a judgment
▪ Patti is unsecured
● Bobby owes Bernie $36k for money loaned unsecured
● Bobby gives Bernie a perfected security interest
o A. Where does Patti stand?
▪ Unsecured creditor, second behind Bernie
o B. Can she go ahead with the levy? §9-401
▪ With the levy Patti is now in second
▪ Must look to state law
o C. What will happen if Patti levies? §9-317(a)(2)
▪ Bernie is getting everything
▪ If person is perfected they beat a lien creditor
o Why should Bobby decide who gets paid?
▪ It’s Bobby’s car and he can do what he wants with it.
16.2
● You are looking to buy a set of state statutes. Someone is advertising a set.
o A. Is there anything you should do before buying?
▪ A UCC search to see if there is any interest in the books by someone else
▪ The books are considered goods
▪ If UCC search is clean there is no perfected interest
o B. Buying on Ebay?
▪ No different then buying in person
▪ Could have some practical protection from ebay
o C. Buying from a used-textbook dealer?
▪ Some statutory protection
● Security interest generally continues in the property unless there is an exception
● Financing statement does not create a security interest, must have a security agreement
● Ordinary course of business of the seller
16.3
● A. Can GFC take the cart?
o Yes, the security interest was perfected
o §9-315(a)
▪ Security agreement continues notwithstanding sale
o §9-201(a)
▪ Security agreement is effective against the purchaser
o §9-402
▪ Secured party is not liable for the debtors acts
o §1-103(b)
▪ Might help establish fraud, can’t sue them directly
● B. What if GFC repoed 3 carts in 12 months from defrauded buyers?
o Might suggest GFC knew what Adam was doing and was involved in Adams
scheme
o Must prove they were involved
▪ Would need to find in discovery
16.4
● We are the law firm go to person on where to file and search
o A. where do we file on Keith Pipe’s tools?
▪ §9-109(a)(1), 9-310(a), 9-501(a)(2)
▪ For all personal property start with filing where?
● Secretary of state
● UCC filing system
o B. Where do we file on Wolfson’s Patent?
▪ §9-109(c)
● UCC filing system
● Not preempted by the patent act
▪ Where do we search?
● Patent office, then the UCC filing system
o C. Where do we file on NYI Ikcupol’s royalties? Does Article 9 apply?
▪
▪
▪
▪
Copyright Act preempts Article 9
§9-109(c)(1)
Royalties are not copyright documents
File and search in both systems, even though the law is clear we only
need to file and search in the state system
o D. Where do we file on the Indiana auto dealer’s auto inventory?
▪ UCC filing system. §9-501(a)(2)
▪ Where do we file on the dealer’s autos not for sale?
● Motor vehicle certificate of title system (DMV)
▪ Where do we file on the dealers accounts from sale of inventory?
● UCC filing system. §9-501(a)(2)
▪ Where do we file on the Indiana auto dealer trademarks?
● UCC filing system. Text pg. 288, §9-501(a)(2)
16.5
● We represent a bank, taking security interest. If first to file wins, should we search or file
first? Are any of these filings a problem?
o First thing you should do is file the financing statement then search later
o Answer:
▪ File
▪ Search
▪ If search shows first, disburse
Assignment 17: Financing Statements: The Debtor’s Name
Communication Through the filing System
● Debtors name
● Debtors address
● Collateral Description
Matches by address or collateral is impractical
System for naming individuals
● Article 9: No definition of “name”
o §9-521 Financing Statement Form: “Debtors name”
Blacks Law Dictionary:
● Legal Name
o A person’s full name as recognized in law. A legal name is usually acquired at
birth or through a court order
● Full Name
o An individual’s personal name, second or middle names OR initials (if any), an
surname arranged in a customary order
Common Law Name:
● The name by which the debtor is generally known, for nonfraudulent purposes, in the
community
Driver’s license name requirement
● §9-503(A)(4)
o Name on state issued driver’s license in the state you file
Name requirement if no license
● §9-503(a)(5)
o Personal name and surname
● §9-503(b)
o Fails if seriously misleading
A person can have more than one correct name
The Identification Problem
● Name-based filing requires identification; Americans fear identification
o A federal identification card is impossible
● Real ID (Federal 2005) sets technical standards for drivers’ licenses
o 24 states passed laws or resolutions against compliance
System for Naming Corporations
● “Registered Organization”
o An entity created by the state
o Correct name is name on the state’s records
● 2010 Amendments made 2 changes
o §9-102(a)(68)
▪ Public organic records
● Record initially filed
o §9-503(a)(1)
▪ Most recently filed
Name Errors
● 2 steps to determine debtor’s name sufficiency on a financing statement
o Does the filing show the correct name?
▪ If so, the name is sufficient
o If not, is the name shown seriously misleading?
▪ If not, the name is sufficient
§9-506(c)
● If search would disclose the filing
IACA Standard Search Logic
● For Organization Names:
o Replaces “&” with “and”
o Disregards punctuation marks and accents
o Disregards endings like “corp”
o Disregards “the” at the beginning
o Disregards spaces
Standard Search Logic: Individuals
Name Type
Rule
First and Middle
Initials are the equivalent of all names that begin with the initials
Middle
No middle name is the equivalent of all middle names
Surname
Requires an exact match in the surname field, including punctuation
and spacing
Name Errors
Drafters thinking:
● Filers and searchers can easily get exact correct names (wrong)
● A single search in the correct name will find all effective filings. (wrong because tax liens
in UCC have different name rules)
● States will protect filers by adopting search logic that overcomes minor errors (mostly
true)
“As of” Dates
● A filing is effective when the filling office receives it. §9-516(a)
o The record won’t show up on a search until indexed
● §9-529(h)
o Filing office has 2 business days to index after it is received
● §9-513(c)
o Not earlier than 3 business days before date of request
Assignment 17 Problem Set
17.1
Copy from slides
17.2(a)
● We represent Center Bank, lending $2.5 million against equipment, inventory and
accounts receivables
o Bob Lee: How do we determine what name to search under?
▪ Ask for his drivers license; Search in the name on it
17.2
● B. Which is the “debtor,” whose name goes on the financing statement?
o §9-102(a)(28)
▪
Debtor means person with the interest in the collateral who gives a
security interest (may not be the one owing money)
● C. How do you know that Lee Leasing, Inc. owns the collateral? What if “Hidden Assets
Corp.” owns it?
o We should demand documents showing sale of the collateral to Lee Leasing, Inc.
(Bills of sale, checks for payment, etc.)
17.4
● A. Assume filing office compliance with Article 9, what do you do and in what order?
o File financing statement day 1
o §9-523(c)
o Wait until the end of day 3 to indexing to search
o “As of date” will include day 1 search
● B. Assuming our filing will remain in the basket 14 days, what do you do in what order?
o File
o Wait for indexing
o Search
o When should we make a request? (expedited)
▪ After indexing
Assignment 18: Financing Statements: Other Information
What should be in a financing statement?
1. Name of the debtor
2. Name of the secured party
3. Indication of collateral
4. Mailing address of secured party
5. Mailing address of the debtor
6. Individual organization
What MUST be in a financing statement: To qualify for filing: §9-516(b)
1. Name of the debtor
2. Name of the secured party
3. NOT an Indication of collateral
4. Mailing address of secured party
5. Mailing address of the debtor
6. Individual organization
What MUST be in a filed financing statement: Against a bankruptcy trustee §9-506(a)
1. Name of the debtor
a. Must not be seriously misleading
b. §9-502(a)
c. §9-606(c)
2. Name of the Secured Party
a. Must be present but need not be right
b. §9-506 Comment 2
3. Indication of Collateral
a. Must not be seriously misleading
4. 4-6 not needed
The totality of information must not be seriously misleading, §9-506(a)
What MUST but in a filed financing statement: Against a reliance purchaser: §9-506(a)
1. Name of debtor
a. Must not be seriously misleading
b. §9-502(a), 9-506(c)
2. Name of the secured party
a. Can’t seriously mislead but might give rise to estoppel
b. §9-506 Comment 2
3. Indication of collateral
a. Must not be seriously misleading
Basic Concepts
● §9-502(a)
● §9-502(c)
o If filed it is effective
● §9-516(d)
o Wrongfully rejected
● §9-516(b)(A)(5)
Summary Chart
Terminology
● Initial financing statement
o UCC-1, shown in §9-521(a)
● Amendments – Form in §9-521(b)
o Termination Statement
▪ Makes the financing statement ineffective
o Assignment
▪ Transfers the secured party’s rights (optional)
o Continuation Statement
▪ Makes the financing statement effective for 5 more years
o Party Information Change
▪ Changes to names and addresses
● Financing Statement
o The initial financing statement plus all amendments. §9-102(a)(39)
The Strong-Arm Clause of Bankruptcy
● §544(a)
o Trustee is like a judicial lien creditor
o If financing statement is ineffective trustee can bring a claim
● §9-317(a)
o If not perfected subordinate to lien creditors
Authority to File a Financing Statement
● §9-509(a)
o Can only file a financing statement if the debtor authorizes
● §9-625(e)
o Can sue for $500 for false financing statements filed
Assignment 18 Problem Set
18.1
● You have to file the financing statement now, but don’t know the debtors mailing
address.
o A. Leave the address blank? OR fill in the wrong address?
▪ If the address is blank it will not be perfected and you will lose to anyone
▪ If the wrong address the filing office cant reject it
● Will be accepted and perfected
o As long as someone isn’t fooled by it
▪ Fill in the wrong address
● §§9-520(a), 9-516(b)(5)(A)
o b. You include the phony address and the filing office rejects. Are we perfected?
▪ Yes, §9-516(d)
● Wrongly rejected is effective
o C. What if the filing office accepts the record?
▪ Yes, §9-516(d)
o D. If we filed in the phony address, did we violate the rules of professional
conduct?
▪ MRPC Rule 8.4
● No. we didn’t intend to deceive anyone
18.2
● We represent a trustee in bankruptcy
18.3
● Smith has $76k judgment; sees these filed financing statements:
o Before a levy Smith is unsecured
o If levies he becomes a lien creditor
o No secured assets in the Trimble store
▪ What is the risk other financing statements may cover the collateral?
● If the equipment was moved
o Should our client levy?
o A. If Glacier bank’s security agreement covers the Trimble store and one of the
financing statements was intended to, could Glacier be protected?
▪ Teel arguably? Pickle logging, no.
o B. What should we do? Call Glacier and ask? No. Levy or fold?
▪ Do the levy then call
▪ Uncertainty is as much their problem as ours
● We represent Glacier bank. We were supposed to have the Trimble store, but Trimble is
not in our security agreement description.
o A. Smith’s lawyer asks. “Does Glacier have a security agreement covering the
Trimble Store?” You reply?
▪ “I will have to call you back on that.”
o B. Different if the call is from another bank? §9-210
▪ Somewhat. The other bank won’t want to lend into trouble
18.5
● Walter’s Department store wants to file financing statements on thousands of consumer
debtor customers. ($5 in Cali.)
o A. Does Walter’s nee to seek permission for the debtor’s?
▪ §9-509(a)
▪ No, we already have authority
o B. What description of collateral should Walter’s use?
▪ §9-509(a)
▪ Same one used in the security agreement
▪ §9-625(e)
Assignment 19: Exceptions to the filing requirement
Basic Concepts: Possession
● Possession
o Physical control of property or the right to physically control property
o Gives notice
● Possession-gives-notice theory
o Searcher will look at the collateral
o Possession will be visible
o (These assumptions are often wrong)
● Law
o Possession is constructive notice of a lien against goods and other tangible
collateral
● Acknowledgment and Agency are 2 means of possession
o §9-313(c)(1)
▪ Acknowledges that the secured party holds possession
o §9-313 Comment 3
▪ Agency is the fiduciary relationship
▪ In possession of the agent
● Possession by Agent
o Given to a 3rd party agent
● §1-201
o “Money” a medium of exchange currently authorized by the government
▪ Cash, but not bank accounts
o Are Bitcoins money?
▪ No
o What are they?
▪ General intangible
● §9-102(a)(47)
o Instrument means a negotiable instrument
o §3-104(a)
▪ Negotiable instrument means unconditional promise to pay in writing
● Promissory Note
● Check
● Or any other writing people act like are instruments
● §9-102(a)(11)
o Chattel Paper
▪ Evidences a monetary obligations and a security interest
▪ Lease of specific goods
UCC Monetary Obligations: Nested Definitions (mutually exclusive)
● §9-102(a)(11)
o Chattel Paper
● §9-102(a)(47)
o Instrument
● §9-102(a)(2)
o Account
● §9-102(a)(61)
o Payment intangible
● §9-102(a)(42)
o General intangible
● A monetary obligation is a payment intangible only if it is not an account, instrument, or
chattel paper.
Basic Concept: Control
● Control
o §9-102(a)(29)
▪ Deposit Account
● Account maintained with a bank
o §9-312(b)(1)
▪ May be perfected only by control
● §9-104
o The secured party is the bank
o Agreement
o Secured party becomes bank customer
Security Interest in Investment Property
● §9-102(a)(49)
o Security, Security entitlement
o Investment in a business
● §9-314(a)
o By control
Interests that may be collateral
● §8-102(a)(17)
o Security entitlement
● §8-501(a)
o Securities account
● §8-106(c)
o Has control
● §9-102(a)(49)
o Investment property
● §9-314(a)
o By control
● §9-312(a)
o By filing
Perfection Methods
Goods
Chattel Paper
Tangible
Instruments
Filing
§9-312
Optional
§9-310(a)
Optional
§9-312(a)
Optional
§9-312(a)
Possession
§9-313
Optional
§9-313(a)
Preferred
§9-330
Preferred
§9-330
Deposit Accounts
Electronic Chattel
Paper
Money
Optional
§9-312(a)
Certified Securities
Optional
§9-312(a)
Optional
§9-312(a)
Uncertified Securities
Control
§9-314
Exclusive
§9-312(b)(1)
Optional
§9-314(a)
Exclusive
§9-312(b)(3)
Optional
§9-313(a)
Preferred
§9-328(1)
Preferred
§9-328(1)
Automatic Perfection
● Purchase Money Security Interest (PMSI)
o A secured obligation is purchase money to the extent it is incurred
▪ As all or part of the purchase price of the collateral OR
▪ For value given to enable the debtor to acquire rights in the collateral if
the value is in fact so used
o Consumer Goods
▪
§9-102(a)(23)
● Goods used for purchase purposes
▪ The Particular owners use controls
▪ If goods satisfy the “bought” or the “used” test, they are consumer goods
▪ White and Summers: “Bought” controls. (Debtor’s representation to the
seller)
Assignment 19 Problem Set
Other Methods of Perfection
● Perfection is important later for priority battles.
o (1) If you are unperfected, you will lose to the trustee in bankruptcy (you will
rank with unsecured creditors)
o (2) If another person perfects before you, they get priority over you
● Filing a financing statement is the default method under the law
o But there are exceptions
● KEY THINGS TO KNOW
19.1
● (a) Cash means physical money. ONLY way to perfect is by possession by an agent who is
not the debtor.
o Now, note, you can end up with a security interest if it transfers into other
forms. Once money goes into a deposit account, you have a security interest in
it. But you aren’t perfected in it as “money”
o 9-313 Comment 3
▪ The debtor cannot be your agent
● (b) Taking possession is preferred for a negotiable promissory note.
o Also possible to file (acceptable against the trustee in bankruptcy), but the
person who takes possession will have priority over you
● (c) Money in a bank account (talking about the bank account itself). Must have control
o Methods to get “control”: (1) enter into authenticated agreement with debtor
and the bank, (2) put secured’s name on the account
● (d) Share certificates
o You can (1) file a financing statement [weakest]; (2) take possession of the
certificate, or (3) take control
o Control can be done in two ways: delivered to the purchaser (possession) AND
endorsed to the purchaser, OR certificate is registered in the name of the
purchaser
▪ Don’t need to know all the nuances of Article 8, but need to know the
Article 8 stuff for this section
● (e) THIS is chattel paper. “Students get strangely obsessed with chattel paper.” Involves
two things: either an obligation to pay secured by a security interest in specific goods
OR a lease of specific goods.
o Can file or take possession [preferred]. Like a negotiable promissory note.
o Purchase of chattel paper has priority if in the ordinary course of the purchaser’s
business, the purchaser gives new value and takes possession of the chattel
paper.
▪ As long as a bank purchaser the chattel paper gets priority.
● (f) USS doesn’t know what to do with Bitcoins. Important to know it is NOT “money”
currently; however, if a foreign country were to adopt it as its legal tender, then Bitcoins
would become money.
o NOT a right to payment, so it must be a general intangible
o Therefore, you file a financing statement
19.2
● Canards sold their franchise pursuant to a contract, paying some money now and
promising to pay $500K in the future.
o Aims to use for security interest in a $300K loan.
o First, need to classify the contract as an asset within UCC terminology
▪ Could be either an account (because right to monetary payment for
goods/property sold) or payment intangible (just a general monetary
obligation)
▪ Good news is that for either, you perfect by filing.
● In the real world, don’t need to determine which it is. Just need to
know what you do.
● Just make sure you fine in such a way that it doesn’t peg it into
only one of these categories
▪ Possibly a negotiable instrument (promissory note), but probably not.
● Need a signature, obligation to pay money.
● Problem is that there are very specific requirements to be a
promissory note rather than a contract. Must be only a promise of
payment (nothing else at all – if it has any other promises of the
Watson family, won’t be a promissory note). And must be made
out to the Canards.
● Likely, there are lots of extra promises in this contract.
● Very, very low bar to fall out of the negotiable instrument
category.
▪ If it WERE a negotiable instrument, could file, but taking possession is
best so that no one else can get ahead of you. You should advise the
client to file AND take possession just in case.
▪ Could it have been chattel paper?
● On its face, it looks like chattel paper, BUT the franchise is NOT a
“good” More like an IP right.
19.3
● New facts: we are told it DOES meet the definition of an “instrument.”
● Casa Grande is okay that it will rank behind Garp, BUT want to rank ahead of anyone
else.
● Options:
o Filing in the UCC will protect against the trustee in bankruptcy (filings always
beat them), but not against a secured party who takes possession.
o Another party might get possession if Garp is repaid, Canards receive s the note
back, then Canards gives possession of the note to someone else. Then, that
person would be ahead of us—not a timing issue. Possession just straight-up
beats a filing.
o SO, filing works perfectly on the current facts. However, we need to anticipate
what might happen in the future.
▪ Want to try and make an agreement with Garp to become their agent.
Then, Casa Grande will hold it in possession FOR Garp (agency) and also
for itself.
▪ No legal obligation for Garp to do this—freedom of contract. Practically,
might get them to agree to do this by (1) getting the Canards to ask them
(possible incentive if they have a close relationship with Garp), (2) paying
them (“agency fee”)
▪ “Cheap man’s way” to try to get this
● Make a negative pledge with the Canards: “we promise not to
give this note to someone else.”
o Then, we would have an unsecured breach of contract
claim against the Canards if they do.
o Not great, because we lose out on our secured claim, but it
might discourage them from giving the note to someone
else, and it could be better than nothing.
● OR could get an affirmative covenant that they would give Casa
Grande the note if Garp gives it back.
o Again, same unsecured breach of contract remedy.
19.4
● No financing statements found in a search. Question is whether there is another way to
get a security interest in these objects by another route.
● (a) What’s important is that you are told there is no certificate of title system in this
state. If these WERE, would need to look in the state filing system.
o Looking to see if there was a perfection upon attachment.
o Possible if the specific lender gave the money with the understanding it was for
personal or family purchases
o Not saying there IS a security interest; but doing our due diligence after figuring
out it is a possibility
● (b) Again, look to the moment of purchase and figure out why it was bought. Was it
bought by some rich eccentric for personal use or by a rare book dealer?
o NOTHING in the statutes says that the goods must be cheap.
o Either the Library of Congress is a secured party (unlikely) or they have entered
into an agreement to hold the books as an agent.
▪
Cannot make a 9-210 request to see if LOC is an agent (because we are
not the debtor). LOC does not have to tell us- no obligation
▪ So, we need secured’s name to ask for a connection to get this sort of
info
● (c) Remember Assn 16. If you have a certificate of title statute, kicks you out of Article 9
to look at certificate of title in the state. Look at the state statute. Filing a financing
statement would do nothing. Must do a search on the certificate of title.
o If no encumbrance on the certificate of title, we would know it is free and clear
o Now, doesn’t mean there isn’t an UNPERFECTED security interest out there. But
if we perfect, we would beat out any potential unsecured parties.
● (d) Same as rare books analysis. Doesn’t matter that it is so expensive. Maybe you
bought it as a Christmas gift for your wife. Or maybe you’re a jewelry dealer.
o Still don’t know what category it falls into. Could be consumer goods if the use is
personal.
o How do we check what it was bought for?
▪ Examine documents for sale. See if debtor makes an affirmative
representation in loan documents. Even if they change their mind and
use it for business purposes later, this representation was enough
▪ Court practice, not a UCC rule
● (f) Bank can’t tell you whose account it is. Need to ask debtor whether a control
agreement (private contract) has been made. Need to issue a due diligence request.
19.5
● (a) Sally has an oral security interest. Is she attached without a security agreement in
writing?
● §9-310(b)(3)(B)
o Remember, we covered this in Assignment 8. You need an authenticated security
agreement OR the collateral is in the possession of the secured party pursuant to
the security agreement (can be oral or written)
o Need two things: (1) oral security agreement AND (2) Sally takes possession. This
is goods, so she can take possession of it.
▪ Possession does not mean physically holding it. Just “being within your
dominion or control.”
▪ Does it matter that Joe’s mother house sists when bankruptcy is filed?
No, Sally hasn’t given possession to the mother.
● (b) Your advice?
o Now here, they have never had an oral security agreement. Lysing to say that
they have once before bankruptcy.
o This is FRAUD.
▪ Don’t get involved with these people. Probably need to withdraw.
Assignment 20: Land and Fixtures Recording System
Separate Filing Systems
Real Estate Recording System
1. Mortgages
2. Financing Statements filed as fixture
filings, §9-502(b)
3. Mortgages effective as fixture filings under
§9-502(c)
Article 9 Filing System
1. Financing Statements
2. Financing Statements filed against fixtures,
but not as fixture filings, §9-501(a)(2)
3. Fixture and non-fixture filings against
transmitting utilities
The Relationship between Article 9 filing and real estate recording
● Property lies along a continuum from real to personal
§9-102(a)(41)
● Fixtures
o Goods that have become so related to a particular real property that an interest
in them arises under real property law
Article 9 recognizes and accepts real property law interests in fixtures
● §9-334(b)
o Does not prevent creation of an encumbrance upon fixtures under real property
law
Article 9 authorizes its own interests in fixtures
● §9-334(a)
“Trade fixtures” is a term used to refer to sole shelving and display cases that are not part of
the real estate
§9-102(a)(44)- Goods
● Goods includes fixtures
§9-334(e)(2)
● If perfected before becomes a fixture
Fixture Filing Formalities §9-502(b)
1. Provide name of debtor
2. Provide name of the secured party
3. Indicate the collateral covered
4. Indicate that it coves fixtures (so real estate searchers will know what it is) [on the §9521 addendum]
5. Indicate it is to be filed in the real estate records (so filing officer knows what to do) [§9521 addendum]
6. Describe the real property (needed to identify the collateral or search by tract) [§9-521
addendum]
7. Provide the name of a record owner (so it will be in the chain of title if fixture owner is
not land owner) [§9-521 addendum]
Transmitting Utility
● §9-501(b)
o File in the office of the secretary of state
● §9-102(a)(81)
o Railroad, subway, street railway, trolly bus
o Communications
o Transmitting goods by pipeline or sewer
o Transmitting or producing and transmitting electricity, steam, gas, or water
Assignment 20 Problem Set
20.1
● How should SLP perfect in these items of collateral:
o A “one-third interest in a 160-acre tract of land?” The deed says “pacific
interests, Martin Hammer, and Devil’s valley LP.”
▪ This might be a joint tenancy or tenancy in common (3 owners). If so,
record a real estate mortgage against pacific interests.
▪ This might be a general partnership of LLP (1 owner). If so, file a financing
statement against pacific interests’ share.
▪ The deed says “Billie ochs”
● Obtain a copy of the trustee agreement and file a financing
statement against the trust. The name rules are in §9-503(a)(3).
o Pine trees growing on straight rows for harvesting?
▪ File in UCC and Real Estate System
▪ §9-334(i)- Comment 12
o Parcel of land with virgin growth of $10,000 walnut trees?
▪ §9-334(i)
▪ Part of the mortgage
▪ File under both
▪ Fixture filing
▪ §9-502(c)- ordinary building materials
o Should the mortgage mention the trees?
▪ Statutory construction canon: “To mention one this is to exclude others.”
In re Estate of Davis
▪ Maybe, but mentioning the trees may exclude the topsoil
o Promissory note and the mortgage
▪ Article 9 does not apply to the land
▪ A security interest against the note
● Probably an instrument
▪ Perfect the right to payment, §9-203(g), 9-308(e)
● Take possession and file
o Cell phone tower?
▪ What does pacific interest own?
● Stock of pacific cellular
● How do we perfect a security interest in stock?
o Control-Issue certificate, take possession, register transfer
on pacific cellular stock ledger. File a financing statement
▪ We also want the tower as collateral, is it a fixture?
● We don’t know
▪ Who is the “debtor” on out Article 9 filings?
● The owner of the collateral: pacific cellular inc. for the tower. §9102(a)(28)
▪ Is Pacific Cellular inc. a transmitting utility?
● §9-102(a)(81)
o Maybe. “in a business of” is ambiguous
▪ How do we perfect the tower if:
Fixture
Not Fixture
Transmitting Utility
State UCC Filing
State UCC Filing
§9-501(b)
§9-501(b)
Not Transmitting Utility
Fixture filing in real estate
State UCC Filing
records
§9-501(a)(2)
§9-501(a)(1)
▪
o
o
o
o
o
Where do we file?
● 3 filings
o Fixture filing in real property records
o UCC filing in the state system
o UCC filing in the state system, check the transmitting
utility box
How do we perfect in the land and easements on which the gas pipeline runs?
▪ §9-109(d)(11)
▪ We file mortgages in every county with descriptions of the real property
Assume the transmitting utility provisions did not exist. How would we perfect in
the pipeline, land, and easements?
▪ File mortgages in every country with descriptions of the real property; file
four non-fixture filings in UCC filing systems
Did the transmitting utility provision help us perfect in this pipeline?
▪ No. The mortgages perfected in the pipes.
When would the transmitting utility provisions help?
▪ When the debtor doesn’t own the real property
Pacific interest owns “store fixtures” used in its pet store in the Oaks mall
▪ How do we perfect in the store fixtures?
● We make a fixture filing and a UCC filing
20.2
● Philbrick lends $2 million unsecured to Marland, Inc. Edwards, owner of Marland, Inc.
hand writes on a bar napkin:
o Is this a valid Article 9 security agreement in inventory, equipment, and fixtures?
▪ §9-108(a)
▪ Probably in the fixtures and equipment, not inventory
o Can we file a financing statement?
▪ §9-509(b)
▪ If we have a security interest, we have the right to file a financing
statement
o Is there a valid real estate mortgage?
▪ It is merely ambiguous. State law may require a signing witness (or rarely,
notarization). We may or may not be able to add them now.
o If this is a valid real estate mortgage, can we record it?
▪ State law may require a signing witness or notarization. We may or may
not be able to add them now.
o What if the mortgage is valid, but we can’t record it?
▪ We can reserve priority by filing a “notice of lis pendens.”
Assignment 21: Characterizing Collateral and Transactions
UCC Monetary Obligations: Nested definitions
● §9-102(a)(11)
o Chattel paper
● §9-102(a)(11)
o Instrument, must be in writing
● §9-102(a)(2)
o Account
● §9-102(a)(61)
o Payment intangible
● §9-102(a)(42)
o General intangible
A monetary obligation is a payment intangible only if it is not an account, instrument, or chattel
paper.
Characterizing Goods
● Inventory §9-102(a)(48)
o Goods held of sale
● Equipment §9-102(a)(48)
o Not inventory or farm products
● Farm Products §9-102(a)(48)
o Debtor engaged in farming operations
● Consumer goods §9-102(a)(48)
o Personal family or household purposes
“consumer goods” are goods used or bought for personal, family, or household purposes—not
business use
Equipment, farm products, or consumer goods may be fixtures
Basic Concepts
● §9-109(a)(3)
o Article 9 applies to…a sale of accounts, chattel paper, payment intangible, or
promissory notes
● §1-201(b)(35)
o “Security interest” includes any interest of a buyer of accounts…
● §9-102(a)(72)
o Secured party means…a person to which accounts…have been sold
● §9-102(a)(28)
o Debtor means a seller of accounts
o Comment 5
▪ The principle effect…is to apply this article’s perfection and priority rules
to these sales transactions
● Article 9 tells us to re-label
● Who owns the accounts?
o §9-623(c)
● Octagon Gas: The Debtor
● Bankruptcy Code §541(a).
o The estate owns “all legal or equitable interests of the debtor in property of the
estate.”
● §363(a)
o Bankruptcy stays “any act…to exercise control over property of the estate.”
● §363(b)(1)
o “The trustee…may use…property of the estate.”
● §9-318(1)
o “A debtor that has sold an account…does not retain a legal or equitable interest
in the collateral sold.”
● §9-310(a)
o A financing statement must be filed to perfect all security interests except: [§9309(2), (3), and (4)]
All must be done by filing unless there is an exception
§9-309 Security Interest Perfected Upon Attachment
● The following security interests are perfected when they attach:
o (3) a sole of a payment intangible
Stripping
● Official comment 5.d. to UCC §9-102:
o “A right to payment of money is frequently buttressed by ancillary rights…such
as…the lessor’s right within respect to leased goods that arise upon the lessee’s
default. This article does not treat these ancillary rights separately from the
rights to payment which they relate.”
o “For example, attachment and perfection of an assignment of a right to payment
of a monetary obligation, whether it be an account or payment intangible, also
carries these ancillary rights. Contrary to the opinion in re commercial money
center, Inc…if the lessor’s rights under a lease constitute chattel paper, an
assignment of the lessor’s right to payment under the lease also would be an
assignment of chattel paper, even if the assignment excludes ither rights.”
Problem 21.5, Page 378
● We represent Fidelity, buying chattel appear from Auto Finance
● We are worried about this possible scenario:
o Auto Finance creates paper
o March 1:
▪ Auto Finance strips/sells the payment stream to X
o March 2:
▪ Fidelity buys and takes possession of chattel paper
● After creation of the paper, payments when to Auto Finance
● Auto Finance sells the payment stream to X on March 1
● Auto Finance sells the chattel paper to Fidelity on March 2
● How can Fidelity protect itself?
Money owing on sale of license
● Not chattel paper
● Not instrument- no writing
● Account?
● Payment intangible?
Wheat growing
● Fixture?
Assignment 21 Problem Set
21.1
● How should a secured party perfect in:
a. Money owing from sale of liquor license (oral agreement)?
▪ Chattel paper? §9-102(a)(11). No Record.
▪ Instrument? §9-102(a)(47). No writing
▪ Account? §9-102(a)(2). “right to payment of a monetary obligation (i) for
property that has been sold.”
▪ Payment intangible? Not if it is an account. §9-102(a)(42)
▪ How does one perfect in an account? §9-310(a) and (b).
● File
b. How does a Secured party perfect a security interest in this mortgage?
▪ Article 9 applies. §9-109(b).
▪ Secured perfects in the payment right.
● That perfects in the mortgage §9-308(e)
▪ The payment right could be:
● An instrument, if it is negotiable note or rough equivalent
● An account, if it is not an instrument and the mortgage was given
as a purchase price of the property
● A payment intangible, if it is not an instrument and not an
account. E.G., the mortgage secured repayment of a loan.
▪ If buyer failed to perfect, Secured’s collateral is an unperfected interest in
a perfected mortgage
c. The lessee’s interest in a lease?
▪ Article 9 probably doesn’t apply.
▪ §9-109(d)(11). “This article does not apply to…the transfer of an interest
in…real property.”
d. Wheat growing in the farmer-debtor’s field?
▪ Step 1. Does Article 9 apply?
● §9-109(d)(11). Are crops “real property?” No, because they are
not permanently affixed
● Comment 12 to §9-334. Article 9 overrides real estate law.
▪ Step 2. What does Article 9 require?
● Filing. §9-310(a)
e. A franchisee’s interest?
▪ Step 1. Does Article 9 apply?
● §9-109(a)(1). “This article applies to a…transaction…that creates a
security interest in personal property…”
▪ Step 2. What does Article 9 require?
● Filing for a general intangible (contract rights).
● The franchisor is an account debtor., §9-102(a)(3)
● The “nontransferable” restriction is not effective. §9-408(a)
f. An electronic CD?
▪ Instrument? No, §1-201(b)(43)
▪ General Intangible? Not if it is a deposit account
▪ Deposit Account? Yes. §9-102(a)(29) “time account”
▪ How does a secured party perfect in a deposit account?
● Control. §9-314, 9-104
g. Electronic Chattel Paper?
▪ Can secured perfect by filing?
● Yes, §9-312(a)
▪ Can secured perfect by control?
● Yes, §9-314(a)
▪ How can secured take control of chattel paper? §9-105
● Create the authoritative copy and keep possession
h. Software on a consumer debtor’s computer?
▪ Is this goods? Software? General Intangible?
● Not goods. Comment 4.a to §9-102
● General intangibles includes software: §9-102(a)(75), §9102(a)(42)
● File a financing statement. §9-310(a)
i. Documentation and manuals for software?
▪ Probably included in the software, §9-102(a)(75)
21.4
● Draft a contract effective as a lease
o Economic life 5 to 15 years
o Payment period 7 years. 1.2 billion plus 10% = $19,921.42
o Lease term?
▪ Don’t know how long the economic life is upfront
▪ Closest to 5 years the safer
▪ Flexible finance wants a lease term of 7 years
● Decrease the monthly payment with smaller buyout payment
o Risk of not getting as much money
o Might be stuck with the printing press not worth anything
o “This lease is for a term of six years. Lessee shall pay lessor $19,921.42 on the
first day of each month of the lease term. At the end of the lease term, lessee
shall have the option to purchase the press for its fair market value.
Assignment 22: Maintaining Perfection Through Lapse and Bankruptcy
System Comparison
Real Estate
UCC
Adds documents, never removes documents
1. Mortgage
2. Satisfaction of Mortgage
Filing lapse after 5 years, can be destroyed
after 6
1. Financing Statement
2. Termination Statement
3. Continuation Statement (filed within
5 years)
Duration
● §9-515(a)
o 5 years
Lapse
● §9-515(c)
o Lapse at 5 years if no continuation statement
o If unperfected because of lapse it is deemed never perfected against purchaser
of the collateral for value
Filing a continuation statement
● §9-515(d)
o Six months before the expiration
A few Exceptions
● §9-515(f)
o Transmitting utilities
▪ Good until terminated
Late Filings
● §9-510(c)
o Ineffective
In re Motors Liquidation, Page 379
● JP Morgan made 2 secured loans to GM: $1.5 billion Term Loan: $300 million Synthetic
Lease
● JP Morgan instructs Simpson: “Terminate the synthetic lease filing.” Simpson instructs
mayer
● §5 Termination of UCC
o Termination Statement
● Terminated the wrong loan
● Committee sues to void JP Morgan’s security interest. Defense?
o §9-509(d)(1)
▪ Can file an amendment if authorized
o JP Morgan only authorized termination of the synthetic lease filings. Bankruptcy
court held the termination unauthorized. Delaware supreme court and second
circuit reversed. Both law firms authorized filing the paper that was filed.
What cause the error?
● Poor filing system design
o Filings are identified solely by number; no context
● Poor review procedures
o The partners apparently had nothing to compare the proposed filings to. (They
should have had the security agreement)
● No transaction description
o The collateral description may have been boiler-plate
In re Motors Liquidation
● Loan investors sued JP Morgan, Simpson Thacher, and Mayer Brown for malpractice
● The class action against Simpson Thacher and JP Morgan voluntarily dismissed
seemingly due to settlement
● The class action against Mayer Brown was dismissed by the District Court in 2016 on the
theory that MB owed creditors no duty
Assignment 22 Problem Set
22.1
● Our Bank client filed a financing statement December 30, 2011, and a continuation
statement July 7, 2016. Was continuation timely?
o Yes, filed in last 6 months of effectiveness, §9-515(d)
● When is the next continuation statement due?
o June 30, 2021 to December 30 2021, §9-515(e)
● Does a 3/29/20 bankruptcy change your advice?
o §362(a)(4)
o §362(b)(3)
o §546(b)(1)(B)
o No change of advice. Continuation is not stayed.
● The Bank filed its continuation statement a week late. Where does it stand now?
o §9-515 Comment 3
o The Bank remains perfected against the bankruptcy trustee, but is unperfected
against “purchasers.”
22.2
● Five years ago, we represented Juan Gomez in the sale of his restaurant.
● No continuation statement was filed
o Was continuation our job or the clients job?
▪ Barnes v. Turner
▪ Attorney needs to make sure the client knows
o Should we file a continuation statement not?
▪ §510(c)
● Is ineffective after lapse
● Should file a new financing statement
o Must get authorization from debtor
o What will happen if we ask the debtor for permission to file?
▪ Debtor may file bankruptcy or give someone else priority
o §1-106(1)
▪ Unless context otherwise requires
o We should file a financing statement without asking
▪ No penalty for trying
22.3
● How could they be in possession?
o Be in possession of the property while in transit
● Date of priority?
o Date of possession as long as there is no period of being unperfected
o §9-308(c)
● How will you do the closing next time?
o Have an agent go look at the collateral
o Make sure you can have possession
o §9-339
▪ Does not preclude subordination by agreement
o Agreement that says they get paid first.
Assignment 22 Problem Set
22.5
● Beaver grants our client Firstbank a security interest in “fork lifts” and authorizes a
financing statement against “equipment”
o Must Firstbank release the drill press when Beaver requests?
▪ No. The financing statement is authorized
o Does Firstbank have a security interest in the drill press?
▪ No. They are not described in the security interest.
o Can Beaver borrow on the drill press?
▪ §9-322(a)(1)
● Rank in priority in time of filing and perfection
▪ Who is first on the drill press?
● Firstbank
▪
▪
Will §9-210 help?
● No
Can Beaver bind itself contractually not to borrow from Firstbank?
● No
22. 6
● Would the Florida Statute solve out problem?
● Would the Suarezs be better off under the UCC rule?
o §9-513(c)
o Maybe. The rule is ambiguous
● Can Suarez solve the problem by filing a termination statement?
o §9-509(d)
● If you are a New Lender, is this termination statement acceptable?
o No. The filing is effective only if Global was required to make it.
22.9
●
●
●
●
You represent JP Morgan, lending $1.5 billion to General Motors
In re Motors Liquidation is the law
You discover that Citibank filed and terminated.
How do you discover whether Citibank authorized termination?
o §9-210(d)
o §9-625(g)
o Request an estoppel letter from Citibank. Make a §9-210 request listing the
collateral as “none.”
Assignment 23: Maintaining Perfection Through Changes of Name, Identity, and Use
Perfection-maintenance Problem
How does Secured 2 find/recognize secured 1’s filing?
● 2 Approaches mixed:
o Filer updates the filing as changes occur
o Searcher must discover history of name and description
Name Changes, §9-507(c)
A seriously misleading name change creates a 4-month window.
● If filer amends within 4 months, the filing is valid for all collateral
● If filer does not amend within 4-months, the filing is valid for collateral acquired by the
end of 4 months
o But not later acquired collateral
● 9-507(c)
o Becomes misleading
o Effective for 4 months unless amended
● Comment 4 §9-507
o Amendment after 4 month period is effective for collateral after the amendment
Change in Owner (Debtor), §9-507(a)
● S1’s filing against “seller” remains effective
o §9-507(a)
● How would S2 fins S1’s filing?
o §9-507 Comment 3
▪ Search in name of former owner
o S2 would discover the sale, search in sellers name
Changes in Collateral: Physical Use
● §9-507(b)
o Financing statement remains effective (despite misdescription)
o The secured party may not remain perfected, if the financing statement is filed in
the wrong office for the changed collateral
▪ Example: Secured files and perfects against “auto parts.” Debtor
assembles auto parts into an automobile
Changes in Collateral: Proceeds
● 3 Types of collateral changes:
o Type 0
▪ The filing describes the proceeds (not just as “proceeds”)
▪ Filing is effective against the proceeds
o Type 1
▪ The description is seriously misleading, but the filing is in the right office
for the new collateral
▪ Filing is effective against the proceeds (barter)
o Type 2
▪ The filing is in the wrong office for the new collateral
● Filing is effective against the proceeds for 20 days
● §9-315(c)
o If perfected in collateral, perfected in proceeds
● §9-315(d)
o Becomes unperfected on the 21st day unless
▪ (1)(A)- Covered by original
▪ (1)(B)- Filing in the same office AND
▪ (1)(C)- Not acquired with cash proceeds
▪ (2) Proceeds are identifiable cash proceeds
▪ (3) When security interest attaches or within 20 days
Perfection Requires:
● Attachment AND
● Compliance with perfection requirements
§9-308(a)
● If the security interest hasn’t attached, it isn’t perfected
● The problem asks: “is the security interest perfected.”
● McCall will ask: “Is the security interest attached? Is it perfected?”
Affixing and Securing Collateral
● Secured Party By non-fixture filing; Collateral us affixed to the real estate
o The security interest remains perfected in fixture, §9-501(a)(2)
o The fixture is real property, so the mortgage attaches. Cliffs Ridge.
● Collateral is severed. Security interest follows. Courts split on mortgage.
● Sale probably strips the mortgage, but not the security interest.
o §9-317(b)[A]
Assignment 23 Problem Set
23.1
● GBT is monitoring collateral owned by Bonnie’s Boat World. The description is:
“Inventory, accounts, and chattel paper.”
o Bonnie took an inventory boat home; used it personally. Is the boat still
inventory?
▪ §9-102(a)(48)
● Inventory…held for sale or lease…
▪ The boat was not inventory during the time it was not “held for sale.” The
boat became inventory when returned.
o Did the non-inventory use affect GBT’s perfection?
▪ No
▪ §9-507(b)
● The statement is not seriously misleading
o If Bonnie took ownership of the boat, what evidence would exist?
▪ Bill of sale, a check
o If BBW sole the boat, does GBT still have a security interest?
▪ Not if sale is in the ordinary course of business
▪ §9-315(a)(1)
● Authorizes free and clear
▪ §9-320(a)
● Ordinary course of business takes free and clear
o If GBT still have a security interest, is GBT still perfect?
▪ Yes
▪ §9-507(a)
o BBW trades an inventory boat for a fork lift. Does GBT have a security interest in
the fork lift?
▪
▪
o
o
o
o
o
o
o
Yes
§9-315(a)(2)
● Proceeds
Is GBT’s security interest perfected?
▪ Yes
▪ §9-315(c)
● Proceeds are perfected if original collateral was
▪ §9-315(d)
● Perfected after 21 days if same office
● Need to meet (A)-(C) to not lose at 21 days
BBW sells an inventory boat for cash, uses the cash to buy a fork lift. Does GBT
have a security interest in the fork lift?
▪ Yes. The fork lift is the proceeds of proceeds.
▪ §9-315(a)(2)
Is GBT perfected in the fork lift?
▪ §9-315(d)
▪ Fails (3)
▪ Must refile in 21 days
▪ GBT is unperfected unless it files within 20 days
Inventory boat suffered insured storm damage. GBT claims the insurance. Does
Article 9 apply?
▪ Yes, to the extent the claim is a proceeds claim.
▪ §9-109(d)(8)
Does GBT have a security interest in the insurance claim?
▪ §9-102(a)(64)
● Up to the amount of the boat
Is GBT perfected in the insurance proceeds?
▪ No. 20 days expired; GBT has not perfected in the payable
▪ §9-315(c)-(d)
How can GBT perfect now?
▪ Be named lass payee on insurance policy. (Article 9 does not apply)
23.2
● GBT files against Southwest Appliance Corporation in that name
● Six months ago, debtor changed its name to Southwest General, Inc.
● Is GBT’s filing seriously misleading?
o Yes.
o §9-506(c)
● §9-507(c) The seriously misleading name change created a four-month window for
amending our financing statement. We missed it. Where do we stand?
o Not perfected in recently acquired inventory
● What should we do now?
o Amend
● Then what is our priority date?
o Filing date (collateral acquired through four months); amendment date
(collateral acquired after four months.)
o §9-507 Comment 4
● What if GBT’s original collateral had been a construction crane>
o GBT’s financing statement remains effective against the crane
● What if Southwest sells the crane for $232,000 without amending?
o Financing statement effective against the crane
o GBT is perfected in the cash proceeds §9-315(c) and (d)(2)
● What id Southwest spends the $235,000 for a new crane? §9-315(d)(3)
o To perfect in the new crane, GBT must amend the name, within 30 days
● Does this change our answer to b?
o We need a new financing statement in case collateral changes after name
change
● Further Explanation:
o If GBT had corrected the South West’s name on the financing statement when it
learned about the change, GBT would be perfected against the new crane. §9315(d)(3). We can’t fix the name when Southwest buys the new crane because
we probably won’t know about it. That is why we should have amended in b.
23.3
● GBT’s proposed loan: $500,000 to RLE, secured by:
o Equipment
o Inventory (minus “lawn dogs manufactured by Suti”)
o Accounts
o Money in Bank Accounts
● Prior financing statement: “Lawn dogs manufactured by Suti.”
● Could that security interest be attached to more than the lawn dogs?
o Yes. Anything that is proceeds of Suti lawn dogs, problem 10.4
● Could that security interest be perfected in more than the lawn fogs?
o Yes, accounts for Suti sales, any collateral obtained by barter, and cash (if it is
proceeds). §9-315(c), (d)(1), (d)(2)
● For how much money?
o Whatever is owing to Suti
23.5
● October’s description of collateral: “equipment, inventory, accounts, chattel paper,
general intangibles, fixtures, money, and bank accounts.”
● Does October have a security interest in debtor’s bank account at Gargantuan?
o Yes. By description
o Yes. If proceeds
● Is October perfected in the bank account?
o As original collateral:
▪ Only if October has control
o As Proceeds:
▪ Yes, to the extent “identifiable” §9-315(d)(2)
● Does it matter how long the proceeds are in the account?
o No
● Does it matter if Beaver comingles other money in the account?
o No
Assignment 24: Maintaining Perfection Through Relocation of Debtor Collateral
Where to file
● Debtor, a Nevada LLC, raises crops on a farm the LLC owns in California and trucks them
to Arizona for processing. Where should creditors file to perfect in debtor’s assets?
Lien Type
Place to File
Agricultural liens on farm products (Not
Location of the collateral, §9-302
security interest)
(California and Arizona)
Goods covered by a certificate of title
State that issued the certificate, §9-303
(Maine, where trucks are titled)
Fixture Filings and Real-estate related
Location of the real-estate §9-301(3)(A),(B)
collateral
and (4)
(California)
All other security interests
Location of the debtor, §9-301(1)
(Nevada)
Where is the debtor located?
Debtor Type
Individual
Debtor Location
Principle residence
§9-307(b)(1)
Registered Organization
State of incorporation
(Chartered by state)
§9-307(e)
Registered Organization
Place designated by United States or District
(Chartered by US)
of Colombia
§9-307(f)
United States
District of Colombia
§9-307(h)
Organizations with chief executive offices in a Chief executive offices
filing jurisdictions
§9-307(b)
Organizations with chief executive office in a District of Colombia
non-filing jurisdiction
§9-307(c)
Interstate movements, §9-316(a)
● Remains effective until 4 months after the move of a debtor
● Remains effective for one year after change of debtor
o Transfer of collateral
● §9-316(a)
● §9-316(b)
o If becomes perfected in state B before the end of 4 months it remains perfected.
If not it becomes unperfected.
o Don’t perfect in 4 months deemed never perfected against a purchaser of
collateral for value
● It beats the first trustee, and loses to the second.
o Did not file in the new state
Assignment 24 Problem Set
24.1
● Where should Secured Lending Partners file to perfect in this collateral?
o Henrik Deurst’s equipment, used to operate a business in New York. Durst lives
in New Jersey
▪ §9-307(b)(1)
▪ At the location of the debtor, New Jersey
o The Fixtures Durst uses in his business
▪ §9-301(3)(A)
▪ In the county where the real estate is located, New York
o The automobile Durst uses in his business
▪ §9-303(c)
▪ In the department of motor vehicles that issued the certificate of title
o Equipment owned by a Nevada LLC and used in New York business that is
operated from a chief executive office in New Jersey
▪ §9-307(e)
▪ At the location of the debtor, Nevada
o A Boeing 747 based in New York and owned by a Delaware corporation with
headquarters in California
▪ With the FAA in Oklahoma City and with the International Registry of
Mobile assets
24.2
Hawaii: Intended future domicile
Kansas: Tabb’s apartment
Arizona: Business, Godfrey (manager), Tabb
Missouri: Tabb’s office, “nerve center” and
summer home
chief executive office
● I recommend this method to determine where and how to file:
o Who or what is the debtor?
o Where is that entity located?
o What is that entity’s name?
● “Tabb remains the sole owner of the business.” Who or what is the debtor?
o §9-102(a)(28)
o §1-201(27)
o §1-201(25)
o Tabb is probably the debtor. Other possibilities are a partnership with Godfrey;
or “Tabb Engineering” is a “commercial entity” even though it is not a “legal
entity”
● In what states should we file? Where is Tabb located?
o §9-307(b)(1)
o He may principally reside in Kansas, Arizona, or Missouri
● Where is the partnership or commercial entity located?
o Probably in Missouri, but maybe in Arizona
● What debtor names should be listed?
o §9-503(a)(4)
o §9-503(c)
o Charles Tabb (individual) and Tabb Engineering (partnership or commercial
entity)
● Three years ago, Tabb formed a Nevada corporation under the name Tabb Engineering
Products, Inc. Now where do we file?
o §9-307(e)
o In Nevada if the Nevada corporation owns the collateral
● How would we find out if the Nevada corporation owns the collateral?
o We would demand documentation of the transfers from Tabb as a condition of
making the loan
● Louise owns one-third as a tenant in common, In what states do you fine?
o §9-102(a)(28)
o §9-307(b)(1)
o In Arizona for Godfrey and in Arizona, Kansas, and Missouri for Tabb
● In what names?
o Tabb, Godfrey, and Tabb Engineering in case it is an organization
● If some of the “equipment” is affixed to real estate, where do you file?
o §9-301(3)
o In the county office where a mortgage would be filed, where the fixtures are
located. Probably Tucson, Arizona.
● Filings Summary
o Against Charles Tabb in Kansas, Arizona, Missouri (Residence)
o Against Louise Godfrey in Arizona (residence)
o Against Tabb Engineering, in Missouri and Arizona (chief executive office)
o Against all three as fixture filings in Tucson
24.3
● On a $500l loan at 5% interest, Firstbank’s gross profit is $25,000/year
o What should Firstbank monitor as a practicle matter?
▪ §9-316(a)(2)
▪ Comment 2
▪ Notice changes in contact information. Tax records?
o How could Bank monitory principle residence on a $25million loan?
▪ Maybe driver’s license, incoming and outgoing mail. Private detective?
o Is filing at the debtor’s principle residence a good rule?
▪ At the debtor’s place of birth if in the United States or
▪ District of Columbia if born outside the United States
24.4
● We represent Global Bank, lending to Tang against California assets
● In what names/systems will we search? Could a filing against Argon be good against
Global?
o §9-507(a)
o Yes
● Where should we search against Argon?
o §9-307(e)
o Nevada, Argon’s state of incorporation
● Could a filing against X Corp in Oregon be good against Global?
o §9-507(a)
o §9-316(a)(3)
o Yes, if the sale was less than a year ago
● In what state could that filing be located?
o Oregon
● X Bank discovers that its collateral was sold to Argon 11 months ago, and then to Tang.
What should it do?
o File against Argon in Nevada and Tang in California
● Did Argon authorize those filings?
o §9-509(c)
o Yes
24.5
● The debtor is Afghan, Inc. an Afghanistan corporation with its headquarters and
operations in New York. Is it a registered organization?
o No, Afghanistan is not a “state”
▪ UCC §9-102(a)(77)
▪ UCC §9-102(a)(71)
● Registered organization under the law of a state
● Where does First Bank File?
o New York, where Afghan, Inc. is located
▪ §9-307(b)(3)
● Only one place of business, at that business
▪ §9-307(c)
● Chief executive office
Assignment 26: Priority Under State Law
The Rules Governing Foreclosure
● Sale discharges the lien under which the sale is held and all subordinate liens, §9-617
● The buyer takes subject to prior liens
● The proceeds go by §9-615(a)
o To the expense of sale
o To the lien under which the sale is held
o To subordinate liens
o To the debtor (ignoring unsecured)
● No proceeds go to prior (“senior”) liens
The Rules Governing Possession
● §9-609 Comment 5
o Junior liable for conversion
1. §9-601(a)
a. Secured party may take possession
2. Vitale v. Hotel California
a. Judgment creditor may take possession
3. §9-609, Comment 5
a. Senior is entitled to possession over junior
4. Frierson v. United Form Agency
a. Cannot frustrate the purpose of other creditors
5. The wrongful exercise of dominion and control over another’s collateral constitutes
conversion
Notification Date
● §9-611(a)
o Date on which notification is sent to creditor
● Notice period must be “reasonable”, §9-611(b). 10 days is a safe harbor in nonconsumer transactions. §9-612(b)
● Secured party must also send notice to other lien holders perfected as of 10 days before
the notification date (the “record date”) by filing or notation. §9-611(c)(3)(B) (record
refers to public filing)
● Gist: Secured party must notify easy-to-find lien holders the ones perfected by filing at
the debtor’s location as of the record date.
Notification Safe Harbor
● §9-611(e)
o Did not receive a response by notification date
▪ No notice needed
Safe Harbor Steps
1. Send a search request and wait 20 days
2. If no search report received in 20 days, notify only the debtor and requestors
3. If search report, notify the creditors listed on it, §9-611(c)(2)(B)
4. The “as of” date become the record date
5. Within 10 days, the secured party notifies parties on the report
6. Secured party complied even though some did not get notice
Assignment 26 Problem Set
26.1
● Sale discharges the lien under which the sale is held and all subordinate liens
● The buyer takes subject to prior liens
o What title does the buyer get?
▪ Subject to the $17k lien.
o How much should Kinski bid?
▪ Up to $8k
o Who pays the expense of sale?
▪ The creditor who forces the sale pays the expenses from the proceeds, if
any.
● The proceeds go:
o To the expenses of sale
o To the lien under which the sale is held
o To subordinate liens
o To the debtor
26.2
● Sale discharges the lien under which the sale is held and all subordinate liens
● The buyer takes subject to prior liens
● The proceeds go:
o To the expenses of the sale
o To the lien under which the sale is held
o To subordinate liens
o To the debtor
● What title will the buyer get?
o Subject to $90k in liens
● What will be the highest bid?
o Little or nothing
● Who will pay the expenses of the sale?
o Sheriff required the secured creditor to post a bond
26.3
● Client Diamond Head Bank has $270k first
o Is this sale a problem for us?
▪ Yes. The Miami sheriff sale
o Can we protect ourselves by bidding?
▪ Yes, but we are bidding real money
o Can we prevent the sale?
▪ Maybe. (Reasonable sale?)
▪ §9-609(a)
▪ Grocer’s Supply v. Intercity
o Were we entitled to sale notice?
▪ Yes, if our filing is where a current filing would be
▪ §9-611(c)(3)
o What is our remedy?
▪ §9-625(b), §9-617(b)
▪ Actual damages
26.4
● Friend wants to borrow $100k on a second mortgage
o If friend doesn’t pay $100k mortgage, what will we do?
▪ Foreclose and bid on
o Will we recover out $100k?
▪ Yes, we get house or $100k
o What of friend pays the second, but defaults on first?
▪ We would need $800k to protect our position at sale
o Could we avoid the problem by a provision in the mortgage?
▪ Cross default clause helps a little
▪ “Wraparound” mortgage. She pays on $900k, we pay on $800k.
26.5
● Intercity levied on Grocery Store’s inventory for a $36k judgment
● Grocer’s Supply sued Intercity; won return of collateral plus $24k in damages
● Why did Grocer’s Supply win?
o Grocer’s Supply v. Intercity
o After default, prior perfect lienholder have the right to possession against
subordinate lienholders
● Intercity released levy; Grocer’s Supply gave the inventory back to Grocery Store
● Intercity: What rights do we have?
o Frierson v. United Farm Agency
o Pessimist: Intercity Can’t collect
o Optimist: Grocers Supply had right to property only for sale
● What should we do? How do we raise this?
o Don’t levy. Motion to set aside earlier judgment for fraud? Motion to permit
levy?
Assignment 28: Lienors v. Secureds: The Basics
A Review of Article 9 Terminology
● §9-102(a)(5)- Lien Creditor
o A creditor that has acquired a lien on the property involved by attachment, levy
or the like
● §9-102(a)(72)- secured creditor
o Creditor under a security agreement
● Security interests are contractual; lien are judicial
● The categories are mutually exclusive
Mortgage
Security Interest
Lien
Statutory Lien
A Review of Bankruptcy Code Terminology
● §101(5)- Security Interest
o Lien created by agreement (includes mortgages)
● §101(36)- Judicial Lien
o Lien obtained by judgment (lien creditor)
● §101(53)- Statutory Lien
o Lien arising by statute
● §101(37)- Lien
o Charge against property to secure payment
The Priority Rules
● The system of priority is basically “first in time, first in right”
● Precisely what must a creditor do to be first?
o Answer up until now: File to perfect
o Answer now: The act specified by the governing priority rules
● Model:
o Two competitors
o A priority rule that governs their particular contest
o A priority date and time for each competitor
● Surprise:
o A competitors date and time can differ depending on the type of opponent
Security Interest 1
§9-322(a)(1)
The earlier of perfection or
filing.
Perfection requires
attachment, which is the
latter of
1. Value given
2. Rights in the collateral
3. Security Agreement
Security Interest 2
The earlier of perfection or
filing.
Perfection requires
attachment, which is the
latter of
1. Value given
2. Rights in the collateral
3. Security Agreement
§9-322(a)
Lien Creditor
Become a lien creditor
§9-317(a)(2)
Security Interest
The earlier of perfection or
filing and “one of the §9203(b)(3) conditions is met.”
Lien Creditor
Majority Rule: Levy
Minority Rule: Deliver writ to
sheriff or file in the UCC filing
system
State Statutes
Lien Creditor
Majority Rule: Levy
Minority rule: Deliver writ to
sheriff or file judgment in
UCC
Lien Creditor
§9-317(e)
Purchase Money Security
Interest
Attachment, provided a
financing statement is filed
within 20 days after delivery
Majority Rule: Levy
Minority Rules: Deliver writ
to sheriff or file in the UCC
filing system
§9-317(1)(2)
Majority Rule: Levy
Minority rule: Deliver writ to
sheriff or file in the UCC filing
system
Purchase Money Priority
●
●
●
●
●
§9-317(e)
Security interest v. Security interest
Lien creditor v. Security interest
Lien creditor v. Lien creditor
Lien creditor v. PMSI
Assignment 28 Problem Set
28.1
● Is Phyllis perfected?
o §9-308(a)(2)
o §9-203(a)
o Depends on whether she has given value.
● If Phyllis disburses, does she have priority over Star?
o §9-317(a)(2)
o Yes
28.2
● Who has priority now?
o Neither, but Sheng can get priority by levy after 10 days.
● How could RFT get priority over Sheng
o Obtain and perfect a security interest before the levy
● How could RFT obtain and perfect a security interest?
o By security agreement with Conda Copper and filing
● Why would Conda Copper grant a security interest to RFT?
o Possible answers: Gratitude for not suing; spite because Sheng sued; payment
from RFT; Grocer’s Supply protection from RFT
● Would a financing statement be enough to assure RFT’s priority?
o §9-317(a)(2)
o No
● Key points:
o A secured creditor can establish priority faster than a lien creditor
o A debtor can “auction” priority
28.3
● Rule: A judgment creditor “becomes a lien creditor at levy.”
● National’s system:
o File a financing statement
o Search
o View collateral in the possession of the debtor
o Close the lien
● Does this system beat all three levies?
o §9-317(a)(2)
o Only beats levy 3 if the debtor signs a security agreement before National views
the collateral
o Will discover the first 2, won’t discover 3
28.4
● Who has priority?
o The mortgagee in most states. First created, subject to the recording statute.
Most statutes do not protect judgments.
● Who has priority?
o The judgment
o §9-317(a)
28.5
● Can BBW get the boat back from the sheriff right now?
o Grocer’s Supply v. Intercity
o Yes, if BBW is perfected
● Is BBW perfected?
o Yes, if the boat is consumer goods. UCC §9-309(1)
● Can BBW get the boat back if it is not consumer goods?
o §9-317(e)
▪ Yes, filing a financing statement gets §9-317(e) priority
o BBW must also demand possession from the sheriff
28.6
● Edith did not sign the security agreement. Where do we stand?
o No attachment, so we are unsecured
● Should we get Edith’s signature now?
o §9-317(e)
o Yes, but it’s too late for purchase money priority
● What would Edith’s lawyer advise?
o Don’t sign. Boat proceeds will pay her child support
● Do you advise Bonnie to have Edith sign?
o Ethics Rule 4.3
o Ethics Rule 8.4
o Yes. Second levy is possible. Boat value is BBW’s.
Assignment 29: Lienors v. Secured Creditors: Future Advances
Terminology
● Advance
o Means payment of money to borrower as a loan
● Future Advance
o Means an advance made after
▪ The initial advance or
▪ The promissory note and security agreement are signed
● Nonadvance
o Means an amount that was not advanced to the borrower, but that the borrower
is obligated to pay
▪ Interest
▪ Attorneys fees incurred in collection
▪ Other expenses of the loan paid the third parties
Priority Rules
● General Rules:
o (Schutze v. Creditthrift) All advances and nonadvances have the priority of the
mortgage (creation)
● The mortgage, including all these advances and any nonadvances, has priority over the
levy
Real Estate minority rule:
● Future advances have priority over intervening liens only if made:
o Within 45 days after lienor “became a lien creditor”
o Without knowledge of the lien, or
o Pursuant to commitment made without knowledge of the lien (not optionally)
● Nonadvances have the priority of the advances to which they relate
Priority Rules:
● §9-203(b)
● §9-204(c)
o Money provide future advances
● §9-323(b)
o Priority
● UCC Rule:
o Advances have priority over intervening liens only if made:
▪ Within 45 days after lienor “became a lien creditor” or
▪ Without knowledge of the lien, or
▪ Pursuant to commitment made without knowledge of the lien
● Where did the 45 days come from?
o Avoid tax lien
o 26 USC §9-6323(d)
Uni Imports v. Exchange
● How can a bank refuse to permit a levy
o This was a garnishment, not an attempt to take physical possession
o The sheriff was avoiding possible conversion
Assignment 29 Problem Set
29.1
● Lindsey loans $1l secured by Henry’s boat.
● BCA gets a $45k judgment lien
● BCA forces an execution sale
o What happens if BCA knows the amount owed and Lindsey does not advance
more?
▪ BCA gets the boat or $31k
o If Lindsey advances $31k before the sale, is the advance secured?
▪ §9-203(b)
▪ §9-204(c)
▪ Only if the security agreement says this advance is secured
o If Lindsey’s $31k advance is secured, what it its priority against BCA?
▪ §9-317(a)(2)
▪ §9-201(a)
▪ §9-323(b)
▪ The advance has priority
o What title passes at the sale?
▪ Ownership subject to Lindsey’s lien
o What does BCA get from the sale?
▪ Nothing. Henry beat the execution
o What is the policy for allowing Lindsey to advance with knowledge in 45 day
period?
▪ To allow secured creditors to beat tax liens
29.2
● We represent BCA. Sheriff’s sale is in a few days. Deficiency may be collectible.
● If BCA doesn’t know the amount owing to Lindsey, what should BCA bid at the sale?
o Impossible to calculate
● How can we find out the amount of Lindsey’s lien? Will §9-210 help?
o No. only debtor can request
o §9-210(b)(1)
o §9-210(a)(2)
● If Lindsey told us that only $1,000 is owing now, does that help?
o No. the amount could change before the sale
● What is our bidding strategy for the sale?
o If Lindsey advanced and we bid $5,000 at the sale, Henry gets our $5,000 and we
get nothing! We must guess their plan
● Can a court help with this problem?
o §9-625(a)
o We do not have grounds for an injunction
● What can we do?
o Ask the court to delay the sale past 45 days and then seek discovery in aid of
execution
o If Lindsey hasn’t advanced already, can no longer do it
o If Lindsey has advanced, we can stop at a nominal bid
● Is the 45-day rule fair to execution creditors?
o No
o Uni Imports, Page 487 quoting the Article 9 drafters
o But they didn’t change the statute
29.3
● Schutze (general) rule applies
● Mortgagee has actual knowledge of the lien at time of future advance
● As between Mortgagee and judgment, who has priority?
o Mortgagee
● Optional advance rule applies
● Mortgagee has actual knowledge of the lien at time of future advance
● As between Mortgagee and judgment, who has priority?
o Judgment had priority over the future advance
29.4
● §9-323(b) rule applies
● Secured has actual knowledge of the lien at time of optional advance
● As between Secured and Judgment, who has priority?
o Judgment has priority over future advances
29.5
● What is debtor, Conda Copper, doing?
o Possible answers:
▪ Borrowing secured?
▪ Converting unsecured debt to secured debt? Problem 28.2
▪ Establishing priorities for future loans
● What should we do?
o Request information from the secured parties, levy, and then start discovery (or
give up now)
Assignment 31: Trustees v. Secured: Preferences
The policies
The Preference Statute
● §547(b)
o The trustee may avoid if the conditions are met
When is a security interest transfer made?
● Importance: (1) for antecedent debt? (2) within the preference period?
o §547(e)(1)
▪ Transfer occurs
o §547(e)(2)
▪ A transfer is made
▪ On perfection
● Example: April 1, debtor signs an Article 9 security agreement; secured party files a
financing statement. June 1, secured party gives value; debtor acquires the collateral.
o On what date was the transfer “perfected” under Article 9?
▪ June 1
o On what date was the transfer “perfected” under §547(e)(1)?
▪ April 1
§547(c)(3) Purchase Money Exception
● §547(c)(3)
o On or before 30 days after the debtor receives possession
Inventory and Accounts
● §547(c)(5)
o May not avoid a transfer of inventory and accounts unless the transfer improved
the secureds position
Assignment 31 Problem Set
31.1
● We represent the trustee in bankruptcy
● The debtor filed under Chapter 11 on September 1; then converted to Chapter 7 on
December 30
● We are deciding whether to attack transactions as preferences
● From what date does the preference period run?
o September 1
o §547(b)(4)(A)
● Wooden borrows $300k secured from Firstbank Aug. 15. Firstbank files a UCC-1 the next
day. When was the transfer made?
o §547(e)(2)(A)
o August 15
● Is the transfer an avoidable transfer?
o §547(b)(2)
o No. The debt is not “antecedent.”
● Secondbank lends Wooden $300k unsecured February 7. On July 11, Wooden grants a
security interest and Secondbank files a UCC-1 what is the transfer? When was it made?
o §547(e)(2)(A)
o The grant of a security interest, made July 11
● Is the transfer an avoidable preference?
o Yes, it is made on account of an antecedent debt. (Secondbankcould retain it by
proving Wooden solvent 7/11)
● Thirdbank lends Wooden $300k secured February 7. Thirdbank send the UCC-1 on
February 7 and the filing office receives it July 11. What is the transfer? When was it
made?
o §547(e)(2)(B)
o The grant of a security interest, made July 11
● Is the transfer an avoidable preference?
o Yes, it is made on account of an antecedent debt.
● Fourthbank lend Wooden $30k secured to purchase a network and seller delivers on
July 10. Fourthbank files a UCC-1 on August 4. What is the transfer? When was it made?
o The grant of a security interest, made July 10
● Is the transfer an avoidable preference?
o §547(c)(3)(A)
o No, §547(c)(3) applies
● Does it matter whether this loan is a PMSI?
o §547(e)(2)(A)
o If it is a PMSI, §547(c)(3) applies. No avoidance
o If it is not a PMSI, §547(e) applies. No avoidance
● Can §547(c)(3) ever give broader protection than §547(e)(2)
o Yes. Thirty days in §547(c)(3) runs from possession.
o Thirty days in §547(e) runs from attachment
● Elsa (CEO’s wife) disburses on March 9, the security agreement is singed and financing
statement filed on April 12. What is the transfer? When was it made?
o §547(e)(2)(B)
o The grant of a security interest, made April 12
● Is the transfer an avoidable preference?
o Yes. The transfer was for an antecedent debt. Because Elsa is an insider, the
preference period is on year
31.2
● Debtor offers us a security interest? What happens if we accept?
o Debtor continues to operate; files bankruptcy 89 days later; avoids our security
interest
● What will happen if we levy?
o Debtor may pay us or let Sheriff close the business; Debtor files bankruptcy 89
days later; avoids the levy or payment
● What will happen if we file an involuntary bankruptcy?
o §303(b)
o If we win, we share pro-rata, with all creditors. (But debtor may have discretion
not to avoid the Friendlies’ lien)
● What should we do>
o Offer Deal: For a pro-rata share (e.g. 50%) of Friendlies’ claims, we won’t file
involuntary.
▪ Example: Assets $1.2 million; Friendlies $1.5 million; other unsecured
creditors $3 million.
o Absent deal, involuntary is our best option. $6 million of claims share pro-rata
(20 cents per dollar, which is $300,000 for us)
o With the deal. Friendlies get the entire estate. We get half of the estate from
them ($600,000 which is 40 cents per dollar).
o If other creditors figure this out, we cut them in on the deal.
31.3
● Gifter reduces its inventory and inventory loan before bankruptcy.
● Did Swissbank receive an avoidable preference?
o When did Swissbank get security interests in the $700k inventory?
▪ §547(e)(3)
▪ When Gifter bought the collateral (all within 90 days)
o Can Gifter avoid the transfer as preference?
▪ Not the items for which Swissbank made later advances (new value,
PMSI). But that may be difficult to calculate/prove.
● Does the $547(c)(5) safe harbor protect Swissbank against preference liability?
o Yes, except to the extent of $500k.
o How much is the reduction?
▪ $500k
31.4
●
●
●
●
We settle a class action, $247 million to the class, $33 million to us
The defendant pays by check
We deposit the check and the check clears
Is it time to celebrate?
o §547(b)
o No. Payment may be avoidable
● When will it be time to celebrate?
o 91 days after the check clears
Assignment 32: Secured Creditors against Secured creditors
The Priority Rule
● §9-322(a)(1)
Question: Precisely what must a creditor do first to be first?
Security interest 1
§9-322(a)(1)
The earlier of perfection or
filing.
Perfection requires
attachment, which is the
latter of
1. Value given
2. Rights in the collateral
3. Security agreement
Security interest 2
The earlier of perfection or
filing.
Perfection requires
attachment, which is the
latter of
1. Value given
2. Rights in the collateral
3. Security agreement
§9-322(a)(1)
Security Interest granted by
transfer
§9-325(a)
Security interest granted by
transferee
Perfect against transferor
before debtor acquires the
collateral
§9-325(a)
Transfer Priority
● Another sells equipment to Debtor without Secured 2’s consent
o §9-315(a)(2)
● Secured 1’s security interest attaches. Which has priority?
o §9-322(a)(1) says secured 1, but §9-325(a) overrides it
▪ Secured 1 is subordinate to Secured 2
Purchase Money Priority
Security interest 1
The earlier of perfection or
filing
1. Value given
2. Rights in the collateral
3. Security Agreement
PMSI Priority Rules Compared
§9-324(a)
Purchase money security
interest
The earlier of perfection or
filing
But the PMSI always wins if
perfected when debtor
receives possession or within
20 days
Purchase Money Priority
PMSI Seller
§9-324(g)(1)
PMSI Lender
PMSI Lender
The earlier of perfection or
filing
1. Value given
2. Rights in the collateral
3. Security Agreement
§9-324(g)(2)
§9-322(a)
PMSI Lender
The earlier of perfection or
filing
1. Value given
2. Rights in the collateral
3. Security Agreement
PMSI Seller
The earlier of perfection or
filing
1. Value given
2. Rights in the collateral
3. Security Agreement
§9-324(g)(2)
§9-322(a)
PMSI Seller
The earlier of perfection or
filing
1. Value given
2. Rights in the collateral
3. Security agreement
Assignment 32 Problem Set
32.1
● Bank1 v. Bank2. Who wins? §9-322(a)(1)
o Bank1, filed before Bank2 filed or perfected
● Bank 2 v. C-Dogs. Who wins? §9-317(a)(2)
o Bank2, perfected before C-Dogs levied.
● C-Dogs v. Bank1. Who wins? §9-317(a)(2)
o C-Dogs, levied before Bank1 perfected or filed and complied with §9-203(b)(3)
● Who is first?
o “Circularity of liens.”
▪ Cause: Bank1 has two priority dates
32.2
● FlightCo owns a flight simulator.
o Who has a security interest in the flight simulator?
▪ Centurion and Firstbank
o Who has priority in the simulator?
▪ Firstbank, §9-325
● §9-325(a)
● FlightCo owes Centurion $2.5 million.
● FlightCo sells simulator, deposits $750k proceeds to its Centurion account.
● Does Centurion have a security interest in the $750k?
o Yes, FlightCo granted a security interest. §9-203(b)
● Is Centurion perfect in the $750k?
o §9-314(a)
o §9-104(a)(1)
o Yes, Centurion is automatically perfected in the account
● Does Firstbank have a security interest in the $750k?
o The money is identifiable (§9-315(b)) proceeds (§9-102(a)(64)) of Firstbanks
collateral.
● Is Firstbank perfected in the $750K?
o §9-315(c)
o §9-315(d)(2)
o Yes, as long as the cash proceeds remain identifiable
● Who perfected first against the $750k?
o Firstbank perfected at the moment of sale. §9-315(c)
● Who has priority in the $750k?
o §9-327(1)
o §9-327(3)
o Centurion. Bank accounts are financial black holes.
32.3
● Is a new financing statement necessary?
o §9-502(d)
o No. “Equipment” describes the dry cleaning equipment. §9-502(d)
o The new security interest will have priority as of the old financing statement
(provided the old one was authorized).
32.4
●
●
●
●
●
Lindsey loans $1k secured, files.
BCA loans $45k secured, files.
Assume boat worth about $32k.
BCA repossesses; about to collect $31k.
What effect if Lindsey advances $31k?
o If secured, the advance will have priority §9-322(a)(1)
● What title passes at the sale?
o §9-617(a)
o Buyer takes subject to $32k.
● What can BCA expect from the sale?
o Nothing. Henry beat BCA.
● What if Lindsey had only a financing statement on file?
o Lindsey still wins.
32.5
● How can BCA prevent first-secured creditors from lending more money with priority
over BCA?
o §9-339
o By subordination agreement with Lindsey
● What would the subordination agreement say, and why would Lindsey sign it?
o It would subordinate only future advances. Lindsey would sign because Henry
wants her to and she won’t make any future advances.
32.6
● Sara sells speakers; on default, the inventory lender takes them. How can sara get
priority?
o By taking a PMSI
● What must she do to get priority?
o Comply with §9-324(b)
● What problems do you foresee?
o Inventory lenders declare defaults
● What can Sara do about the inventory lenders?
o For now, nothing.
o Workaround in assignment 36
o §9-324(b)
● What if Sara borrows secured against her inventory
● Sara sells, Lender does not consent to sale free of liens. §9-315(a)(1)
o This wont work because Sara is selling in the ordinary course.
o §9-325(a)
o §9-320(a)
32.7
●
●
●
●
Grumman owes Centurion $1 million unsecured
Grumman owes First $5 million, secured by all assets
First’s financing statement does not show up on a search
Plan: Centurion lends another $400k, gets first position (Then First will refile)
o Is there any way First could have an effective financing statement on file?
▪ In a state where collateral or debtor were recently located
▪ Against a former owner of the collateral. §9-507(a)
▪ Incorrectly indexed by filing office error. §9-517
● Hypothetical: The filing office wrongfully rejects Firstbank’s filing. Centurian knows that
Firstbank claims a SI, but gets a clean search and purchases.
o §9-516(d)
o Is Centurian’s reliance unreasonable? If not, whose is?
▪ §9-338 Comment 2
▪ One who doesn’t search? Or one who knows of the rejection?
● Is it safe to search for a misindexed filing? If we find an erroneous filing before we lend,
is it binding to us?
o No. §9-322(a)(1). Knowledge is irrelevant.
o Yes. §9-516(d). We can’t reasonably rely on absence of the record from the files
● What should we do?
o Don’t just lend. We could be wrong.
o Make a contingent deal. File a financing statement. Then give First a call.
● Is there an ethical issue here?
Assignment 33: Priority in Land and Fixtures
Priority Rules: Mortgage v. Mortgage
Mortgage 1
State law
Mortgage 2
Creation, subject to the
Creation, subject to the
recording laws
recording laws
● Three types of recording laws:
o Race statute
▪ First to record has priority (creation is irrelevant)
o Notice Statute
▪ Second created has priority if created without actual or constructive
notice of first.
o Race-notice Statute
▪ Second created has priority if created without actual or constructive
notice and records first
● Recording laws protect only good faith purchasers for “value”
Purchase Money Mortgage v. Mortgage
Purchase Money Mortgage
State Statutes
Has priority, subject to the
recording laws
Mortgage
Judgment Liens v. Mortgage
Judgment Creditor
State Statutes
Mortgage
Creation (recording or levy),
Creation (attachment),
subject to the recording laws
subject to the recording laws
● Only a minority of recording statutes protect judgment liens
● Is an unrecorded N.Y. mortgage void against a later judgment lien?
o N.Y. Real Property Laws §291
o No. Judgment lien is not a “purchaser”
Priority Rules: Mechanic’s Liens
● If “erection or construction” (big jobs): All mechanic’s liens have priority from
construction commencement.
● If “alterations or repairs” (small jobs): Mechanic’s liens have priority from the Claim of
Lien filing (after construction).
● You own a home. Oven breaks. You call a repair person. She fixes the oven. Can she file
a mechanic’s lien against your home?
o Yes.
● If you don’t pay for the repair, what is her remedy?
o File a lien against your home and foreclose.
Fixture Filing v. Construction Mortgage
Fixture Filing v. Ordinary Mortgage
Purchase-Money Fixture Filing v. Mortgage
Assignment 33 Problem Set
33.1 & 2
● Wanda v. Security Finance. Who wins?
o Security Finance as purchase money mortgage
● Security Finance v. Pacific State. Who wins?
o Pacific State wins under the recording statute
● Wanda v. Pacific State. Who Wins?
o Wanda recorded before Pacific State created mortgage
● Who is first?
o Circularity of Liens
33.3
● Folds sells mobile home that is a fixture, takes a security interest, and makes a nonfixture filing. Did Folds make a valid filing?
o §9-501(a)
o Yes
● Debtor files bankruptcy. Between the trustee in bankruptcy and Folds, who has priority?
o Folds
● Folds sells mobile home that is a fixture, takes a security interest, and makes a nonfixture filing.
o After the mobile home is affixed to realty, Commercial takes a security interest in
the mobile home and makes a fixture filing.
o As between Folds and Commercial, who has priority?
▪ §9-322(a)
▪ Folds has priority. First to file or perfect.
● Do these provisions govern this competition?
o §334(c)
o §334(e)
● Is Commercial an “encumbrancer?”
o §9-102(a)(32)
o §9-102(a)(52)
o No, because “encumbrance” does not include Commercial’s security interest. (If
it did, “encumbrance” would include all security interests.)
33.4
● Sound city installs a sound system during “remodeling;” the buyer doesn’t pay. What
should Sound City do?
o Record a claim of lien in the real property records and then file an action to
foreclose that lien.
● Can Sound City make a fixture filing?
o Only if the debtor authorizes it. §9-509
● Mercantile Bank records a mortgage. Now where do we stand?
o If we record our lien claim and the remodeling is “erection or construction,” we
have priority over Mercantile. In re Skyline.
● What if Mercantile refinanced the remodeling construction mortgage?
o §9-334(h)
o Mercantile will have priority because the construction mortgage has priority
● If Jake’s granted us a security interest now, could we get purchase money priority over
Mercantile?
o §334(d)
33.5
● Sound City plans to install a sound system. No remodeling. Wants to rip the system out
if buyer doesn’t pay. Will Sound City be entitled to a mechanic’s lien?
o Yes, if “the owner” authorizes the work.
● Dubs is running a business in the premises. Does that give Dubs the power to authorize
the work that gives us a mechanic’s lien?
o Yes, but only if he has a lease for at least one year.
● Will a mechanic’s lien entitle Sound City to “rip the system out?”
o No. Sound City can only foreclose on the building
● Whose authorization does Sound City need to make a fixture filing?
o §9-509(a)
o §9-102(a)(28)
o Dubs can authorize the fixture filing because Dubs is buying the sound system.
We do not need the owner’s signature.
● Will that filing give Sound City the right to rip the sound system out?
o §9-604(c)
o §9-334(d)
o Yes
● Would Dubs’ written consent give Sound City the right to remove a sound system
installed during construction?
o §9-604(c)
o §9-334(f)
o Only if the owner gave Dubs the right to remove fixtures in the lease and the
lease had priority over the mortgage
33.6
● What rule governs priority between Northcorp and Finance America?
o §9-322(a)(1). None of the rules in §9-334 apply.
● As between Northcorp and Finance America, who has priority in the ski lifts?
o Northcorp filed before Finance America filed or perfected.
● As between Finance America and Refi America, who has priority?
o §334(e)(1)(A)
o Finance America because it perfected before Refi recorded
● As between Refi America and Northcorp, who has priority?
o §334(c)
o §334(e)(1)(A)
o Refi America has priority. The lifts are not covered by the “readily removable”
exception. (used with the real property)
● Who is first in the ski lifts?
o “Circularity of liens.”
● Who is first in the land?
o Refi America is the only creditor with an interest in the land.
Assignment 35: Sellers Against Secured Creditors
Power to Confer Property Rights
● Nomo dat.
o An owner can transfer only what it owns, §2-403(1)
o A thief has no rights (“void” title); can convey no rights
● Exceptions from nemo dat
o §2-403(1)
▪ A secured lender is a good faith purchaser for value, even when claiming
collateral as after acquired property. §1-204(2)
o §2-403(2)
Sellers Tools Against Inventory Lenders
1. Purchase money security interest.
● §9-324(b) requires prior perfection and notice to the inventory lender.
● Inventory lenders usually bar this
2. Retention of title: Seller retains title until the buyer pays.
● Retention of title is a trap for the unwary.
● §2-401(1)
● §9-324(b) requires prior perfection and notice to the inventory lender.
3. Consignment: Seller-consignor delivers possession of goods to consignee, who sells them on
behalf of consignor
● In practice, consignees are separate businesses, often franchises.
● In form, consignment is agency, like hiring a clerk to work in consignor’s store
● §2-401(1)
● Article 9 ignores form and sorts consignments into three categories:
o Non-UCC consignments. Enforced as written.
o UCC consignments. Treated in most respects as security interests.
o Security interest. Treated in all respects as security interest.
Consignment: Division into three categories
● §9-102(a)(20)
Non UCC Consignments
UCC consignments
UCC Security Interest
1. Generally known
Selling the goods of others
and fits the definition in §9102(a)(20)
Disguised security interest
2. Under $1,000
3. Consumer goods
UCC consignments don’t beat the inventory lender.
● §1-201(b)(35)
● §9-103(d)
● §9-319(a)
● A UCC consignor must comply with §9-324(b) to beat inventory lenders
4. UCC right of reclamation from insolvent debtor
● §2-702(2)
● §2-702(3)
● §1-201(b)(29)
● The buyer’s inventory lender has priority over the right of reclamation.
● So the UCC right of reclamation is rarely valuable.
● §546(c)- Bankruptcy
o 45 days
o Rights of reclamation are subordinate to inventory lenders
5. Express or implied agreement
● Shoreline sells only for cash
● Shoreline sends invoice directly to Otis. Floorplan Agreement, ¶1
● Otis pays the invoice directly to Shoreline (but is never obligated to pay an invoice)
6. Equitable Subordination: At the time of bankruptcy, the court subordinates the lender to the
unsecured creditors.
● Grounds:
o (i) The inventory lender must have engaged in some type of inequitable
conduct (moral turpitude if not insider)
▪ Fraud, illegality, or breach of fiduciary duty (Feresi case)
▪ Undercapitalization
▪ Use of debtor as a mere instrumentality
o (ii) Injury to creditors or conferred an unfair advantage on the inventory
lender and
o (iii) Not inconsistent with bankruptcy law
● $2 billion settlements with Citicorp and JP Morgan Chase for their role in planning
and financing the Enron offshore transactions
Equitable subordination: Feresi v. The Livery, LLC
● Court orders Mesa to pay Feresi; orders the obligation secured.
● Feresi doesn’t perfect; Hartley does.
● Court subordinates Hartley. Right?
o §9-322(a)(1)
o §1-103(b)
o Yes. But many courts would say equity was displaced
7. Unjust Enrichment (Feeding the lien)
● Example: Bank has a security interest in crops.
o Beetles are destroying the crop
o Debtor hires crop duster who saves the crop and gets a subordinate lien
o Bank forecloses
o Crop duster claims “unjust enrichment”
▪ §1-103(b)
▪ §9-402
▪ Court: Secured creditor is liable if it “initiates or encourages” the
supplier and benefits (but it did not in the above example)
Assignment 35 Problem Set
35.1
● Museum sues Downs for return of the diamond. Who wins?
o Museum: Nemo dat
● Museum, Downs, Fairchild’s Trustee, Whittington, and Guru all claim the diamond. Who
wins?
o Museum
● Madam Downs buys the diamond, delivers it to Fairchild with instructions to turn it into
a ring.
o Fairchild sells it to Whittington. Whittington gives it to the Guru.
o As between Downs and the Guru, who is entitled to the diamond?
▪ §2-403(2)
▪ The Guru (“Shelter doctrine;” §2-403(1) does not apply)
35.2
● An airline sells a passenger’s luggage to another airline. Can the passenger recover it
from the other airline?
o §2-403(2)
o §2-104(1)
o §1-201(9)
o “Bulk sale” is a sale of inventory to a single buyer, not in ordinary course
o Unclear. Issues are “merchant” and “ordinary course.”
● Is Hertz Rent A Car in the business of selling cars?
o Probably
35.3
● Trillian transfers the copyright and all publishing rights to Publisher; retains the right to
royalties. Publisher publishes and files bankruptcy. Is the royalty claim secured or
unsecured?
o Unsecured
● Trillian transfers all publishing rights but retains copyright to prevent publication
without payment. Does he have more rights?
o §9-109(a)(1)
o No more rights. Trillian’s interest in the publishing rights is contingent on
nonpayment, so secured. But Trillian is unperfected.
● If Trillian has a security interest, can he file a financing statement?
o §9-509(b)
o Yes
● Will Trillian have purchase money priority over bank lender?
o §9-103(b)
o §9-102(a)(48)
o No. Purchase money security interests are only goods and software. Bank Lender
is first to file or perfect.
● Trillian has not yet contracted with Publisher. How can he protect himself?
o Strawman transaction to be disclosed later. §9-325(a)
35.4
● 32.6 Sara sells speaker; on default, the inventory lender takes them. How can Sara get
priority?
o By taking a PMSI
● What must she do to get it?
o Comply with §9-324
● 35.4 Would selling on consignment do any good?
o §9-109(a)(4)
o §9-103(d)
o §9-319(a)
o No. This is a UCC consignment. Foster must give notice to the inventory lender to
have priority. §9-324(b)
● 35.4b Would reclamation do any good?
o §2-702(3)
o §546(c)- Bankruptcy
o No
Assignment 36: Buyers Against Secured Creditors
Main Rule: Security Interests Survive Sale
● §9-201
● §9-315(a)(1)
o Exception 1
Exception 2: Buyer in the Ordinary Course
● §9-320(a)
● But not if the buyer “has knowledge that the sale violates the rights of another person in
the goods.” §1-201(b)(9)
Exception to §9-320(a) exception: Possession
● Tanbro v. Deering, 1976. Tanbro buys fabric from Mills Fabrics, knowing that the fabric
is in the possession of Deering.
● Court holds that Tanbro is a buyer in the ordinary course who takes free of Deering’s
security interest.
● Uniform Laws Commission revises Article 9, 2001.
o §9-320(e)
● Would you buy and pay for something that may be in the secured party’s possession?
o Yes. Custom manufactured goods. Stuff on Ebay.
Exception 3: Unperfected Security Interest
● §9-317(b)
● Secured Creditors have better rights than buyers:
o §9-322(a)(2)
o §9-317(b)
o §9-322(a)
Exception 4: Future Advances
● A secured creditor can lend to the debtor against collateral after the debtor sells it.
● §9-323(d)
● Example: Buyer at an execution sale.
Daniel v. Bank of Hayward, Page 599
● Daniels order a custom van; pay $9,000 down.
● GM makes the van; ships it to the dealer’s lot.
● Bank repos van from the Dealer’s lot.
● Court: Daniels are buyers, take free of the banks interest.
● The Daniels won under §9-320(a)
● But does §9-320(e) apply?
o No. The Daniels became buyers on identification to the sale contract and took
free before the bank took possession.
Exception 5: Consumer to Consumer
● §9-320(b)
Assignment 36 Problem Set
36.1
● Markell grants security interest, agrees not to sell.
● Markell sells in violation of security agreement.
● Sunrise sells to Card in ordinary course.
o Card sues All Seasons to remove lien. How good is her case?
▪ §9-320(a)
▪ Card loses. In re Sunrise Rv, 105 BR 587 (1989)
o What would Card have learned by asking for the certificate of title?
▪ (Sunrise probably has it, and it probably shows All Season’s lien.)
▪ “We pay that off. You will get a certificate from the DMV in about two
weeks.”
▪ Significance: If Sunrise doesn’t pay All Seasons, All Seasons can repo the
Lindy from Card
36.2
● Card is buying a reconditioned Piano from Mall Store
● She wants you to represent her at the closing.
o Is there anything to her fears?
▪ §9-320(a)
o
o
o
o
o
▪ Same as the Lindy
Can we protect Card by doing a thorough UCC search?
▪ Difficult. We would have to discover Studio, §9-507(a), Lender could be
automatically perfected. §9-309(1)
What should we do?
▪ Tell her fears are irrational?
▪ Taker her money, do some investigation?
Could this problem occur with new goods?
▪ §1-201(b)(9)
▪ Yes. Dealer sells encumbered inventory in bulk.
What is the policy for the “created by the buyer’s seller” exception?
▪ Wrongfully sold collateral is like stolen goods. Don’t make a market for it.
Void title rule. “Secureds need certainty.”
Is she protected if she buys with a credit card?
▪ Sometime, but not this time.
▪ Truth in Lending Act §170(a)
36.5
● Davis sells TV to Meredith; takes PMSI and files financing statement. Meredith sells TV
to Christina, who is a bona fide purchaser for value.
o Can Davis repossess the TV from Christina? §9-201; §9-315(a)(1)
▪ Yes
o Does consumer to consumer exception save Christina? §9-320(b)
▪ No, because Davis filed a financing statement
o Must Davis give Christina his money back? §9-315(a)(2)
▪ No. Davis didn’t get the money. The money is proceeds, so it is Davis’
collateral
o Is Christina liable for conversion?
▪ Yes, if he resists Davis
36.6
● Sound City grants UCB a security interest in inventory. Terms: “Cash sales in ordinary
course only; all proceeds deposited to a UCB account.”
● Sound City files Chapter 7
● Trustee abandons the collateral
● UCB sells the collateral
● Rhonda bought on unsecured credit without knowledge of restrictions.
● Sound City sold the note and spent the cash.
o Can UCB repo system from Rhonda?
▪ §1-201(9)
▪ No. Rhonda is a buyer in ordinary course.
o SC sells the note to Quickloans for cash. QL takes possession. Can UCB repo note
from QL? §9-330(d)
▪ No
● George, Sound City layer, received a sound system in partial satisfaction of a $16k
account
o Can UCB repo sound system from George? §9-320(a)
▪ Yes. George isn’t a buyer in ordinary course.
o Does the exception in §9-315(a) protect George?
▪ It depends on whether the court follows Earthlink view or the opposing
view on sale conditions
● George, lawyer for Sound City, wants to accept a sound system in payment of his bill.
How should he structure the transaction?
o What if George buys a sound system on unsecured credit, then claims a setoff?
▪ George wins; on credit is in ordinary course. (Rhonda)
o What if George persuades Sound City to pay his bill by saying he will buy a sound
system if they do? They pay, and he buys
▪ George is a buyer in ordinary course §9-320(a)
36.7
● Deal: Wiz Marketing agrees to take subject to Deutshe’s security interest.
o Can Wiz Marketing agree to take subject to Deutshe’s lien?
▪ Yes. All parties agreed.
▪ §1-302(a)
o Does Mall Store take free of Deutshe’s security interest?
▪ No. Manufacturing created the security interest.
▪ §9-320(a)
● Richard and Martha Steendland are the only officers and directors of RSS and All Quip.
Case Powers is a BIOVB.
o Does Case Power take free of Deutshe’s security interest?
▪ No. Deutsche Credit v. Case Power and Equipment.
● This strategy may work. Is it ethical to use it?
o Paolella, p. 580
▪ Yes. Inventory lenders overreach when they take as collateral property
sold on credit by third parties.
▪ Wiz is only righting a wrong, within the bounds of the law.