Secured Transactions Outline
Cassi Franks
Fall 2010
Triple play of Art. 9
File EOE so that you can’t be beat in bankruptcy
Stay fully secured so you get what you are owed
Provide for default in SA so you can get collateral upon default
CHAPTER 1
 General Definitions
o Lien: an interest in the debtor’s property given by the law to protect a creditor
 Two types:
 Consensual lien: debtor voluntarily grants the interest
o Mortgage: consensual lien on debtor’s real property
o Security interest: consensual lien in personal property or fixtures
 Involuntary lien: Not consensual
o Judicial lien: arising from judicial proceedings
o Statutory line: imposed by either statute or common law in favor of certain
creditors the law deems worthy of protection
 Examples: liens given to landlords, artisans, repairing personal property,
attorneys, etc.
o Pledge: the debtor (pledgor) gives physical possessin of the collateral to the creditor (the pledge) until the
debt is paid
 Possession perfects the creditor’s interest in the collateral, even against the bankruptcy trustee
o Chattel mortgage: mortgaging of personal property (chattels), allowing the debtor to keep possession with
a record of the mortgage kept in a designated place & indexed under the name of the debtor
o Factor: a financing entity who loaned money against inventory the manufacturer put up as collateral in
exchange for a lien in the inventory
o Security interest: an interest in personal property & fixtures which secures payment or performance
 Defined in UCC § 1-201(35)
 Interest defined by Barnes as any interest at all that would support a claim of ownership,
possession, right to use (ex: lease), or any other equitable claim
 Note: ownership interest is not what is required- instead, it is equitable or title interest
 Personal property or fixtures:
 Barnes defined fixtures as those things that are so associated with the real estate that if
you mortgaged/purchased/etc. the real estate, those things would go with it
 Notice: not included here are services & real estate
 Which secures
 Barnes defined as standing in the place of performance; collateral
o Thus, Art. 9 secures the personal payment obligation
 Payment or performance
 And if there is no payment or performance, then we get into the secondary part: the
collateral
 Security interest includes:
 Any interest of a consignor & a buyer of accounts, chattel paper, a payment intangible, or
a promissory note in a transaction that is subject to Art. 9.
o Other definitions: See § 9-102
 Article 9 & Bankruptcy
o Perfected creditors
 If you have met Article 9 requirements, if the debtor declares bankruptcy, the creditor (your
client) can get the secured property (collateral) out of the estate.
o Unperfected creditors
 If you are an unperfected creditor, you don’t get anything until the following are paid in full: the
expenses of the bankruptcy proceedings, wages of the bankrupt’s employees, some tax claims, &
certain other priority claimants.
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Anything that falls under these two categories is lost under the strong arm provisions in
bankruptcy code § 544(a) & (b):
o Unsecured creditors
o Unperfected creditors
o The trustee is always an unperfected lien creditor coming into existence on the date of the bankruptcy
petition filing.
o The validity of the security interest is a matter of state law & will be measured by state standards
 If a security interest is determined to be unperfected, the interest is destroyed & the creditor
becomes unsecured (falls into general creditor category)
 Case: Benedict v. Ratner
o FACTS: Hub Carpet was selling carpet to buyers on account. Ratner lent $15,000 to Hub in return for
collateral (present & future A/R of Hub). At the time, the A/R was over $100,000, and thus, the debt was
over-secured. The existence of the assignment was to be kept secret, & Hub reserved the right to dispose
of the security (the accounts). Benedict is the trustee for Hub Carpet & sues Ratner
o Justice Brandeis held that the conveyance was fraudulent under NY property law.
 There was no notice of the conveyance, as it was to be kept secret. Thus, the public notice which
was given at the time of the original transaction that such a security exists was eviscerated when
that security was sold.
 Note: only common law at time of this case
o To have given proper notice, Ratner would have had to notify all of Hub’s customers of the transfer,
telling them that he now owned the loan & they were to make payment to him & not Hub.
o Everything that comes after this case, including Article 9, is because we believe in public notice
 Public notice  “perfect”
CHAPTER 2: SCOPE
 The Scope of Article 9
o Security interest, defined in 1-201(35): an interest in personal property or fixtures which secures payment
or performance of an obligation & includes interests of ….
 Thus, elements are:
 Interest
 Personal property or fixtures
 Which secures payment or performance of K
 Obligation
 Includes:
o Consignments
o Buyer of accounts
o Buyer of chattel paper
o Buyer of payment intangible
o Promissory note in a transaction subj. to art. 9
 *Barnes says that the categories of those specifically include in the definition are those
that “would otherwise try to cheat.”
 Barnes says: Memorize: A security interest is an interest in personal property or fixtures which
includes debt or obligation to perform which includes consignments, buyers of accounts, chattel
paper, or payment intangibles, or a promissory note in a transaction subject to article 9
 Secured by personal property or fixtures but not real estate or services
 Problem 2: Baker took his car into Mack’s Garage for repairs. He couldn’t pay the bill & mechanic wouldn’t
return the car. State statute gave a repairman a possessory artisan’s lien on the property repaired.
o Is the artisan’s lien an Article 9 Security interest?
 No. 9-109(d)(2): Article 9 does not apply to liens (other than ag. liens) given by statute for
services or materials
 So, doesn’t apply to mechanic’s liens or landlord liens
o If, prior to the work, Baker signed a statement giving the garage right to repossess if the bill wasn’t paid,
does that create a S.I. under the Code?
 9-109(a)(1): This created a security interest in personal property by contract, so Article 9 covers
this agreement
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Problem 3: Farmer Brown’s Vegetable Stand sold all of it/s A/R to Nightflyer Finance. It was an outright sale, not
a loan.
o Is this an Article 9 Security interest?
 9-109(a)(3) - Art. 9 applies to sale of accounts - YES
 Farmer Brown is termed an Art. 9 “debtor.”
 Nightflyer must file an Art. 9 financing statement to perfect it’s interest
 Perfection beats 3 categories:
o Future perfected parties
o All prior & future unperfected parties
o A later lien creditor (including bankruptcy trustee)
o Why would the Code drafters have brought an outright sale of accounts & chattel paper, payment
intangibles, and promissory notes under Article 9?
 It provides certainty- you don’t want to have to look at the fine print to determine whether it is or
isn’t a sale- either it is or it isn’t. Putting it in Article 9 gives clear & concise answers to whether
these categories are included- they are
Consignments
o Example: Nikon sends Camera Land 20 cameras to sell, and only when the cameras are sold does Camera
Land send any money to Nikon, with Camera Land keeping the profit. As a customer, you presume
ostensible ownership (that CL owns the cameras). But how do you indicate that these items are actually
owned by Nikon, and on consignment with CL?
 Thus, consignments raise a problem with ostensible ownership.
 OO - we want no one to claim interest in ppty w/o putting name in the public or taking
actual possession
o Defined in 9-102(20)
o Consignments are included under Article 9 (9-109(a)(4))
 And Article 9 says that if it is a consignment, no matter how you phrase it, you MUST comply
with Article 9
o Priority Section for Consignments - 9-319 & 9-322
 319: Lose to a buyer
 322: b/t multiple consignors: first to file (General FITFIR provision)
Problem 4: Antiques R Us holds goods & collects proceeds for antique dealers. ARU takes out a loan with ONB,
listing as collateral “all its property.”
o Will the bank’s S.I. reach the items in the store that belong to the dealers if the dealers never took steps
required of consignors under Art. 9?
o See § 9-102(a)(20)(A)(iii) - YES, if there is no public notice. You have to comply with Art. 9 w/r/t
consignments. Must cure public notice problem!
Case: In re Fabers
o The consignment agreement provided that the title to the rugs remained in the dealer until fully paid for.
Dealer shipped to Fabers. Fabers went bankrupt.
 It doesn’t do the dealer any good to say that they kept title.
o BRIGHT LINE RULE: If I deliver goods for sale on consignment, or if I have a client who does so, the
transaction MUST comply with Article 9.
o No matter how the dealer tries to argue their case, they will still lose because they did not comply with
Article 9.
o The dealer failed to establish ostensible ownership, b/c he did not file.
o Bankruptcy trustee wins!
Problem 5: Luke took a handcrafted sword to WOW, which was a large weapon dealer who sold items it
manufactured itself or bought from other dealers. WOW agreed to sell the sword for Luke.
 Is this an Art. 9 consignment so that Luke needs to take Art. 9 steps to protect himself from
WOW’s other creditors who have an interest in the store inventory?
 Must meet all requirements of 9-102(a)(2): Consignment means a transaction, regardless
of its form, in which a person delivers goods to a merchant for the purpose of sale and the
merchant … is not gen. known to be substantially engaged in selling goods of others; the
aggregate value of the goods is $1,000 or more at time of deliver, the goods are not
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consumer goods immediately before delivery; and the transaction does not create a S.I.
that secures an obligation
This IS an Art. 9 consignment, so Luke needs to take steps to protect himself from WOW’s
creditors
Leases
o § 1-201(35): Whether a transaction in the form of a lease creates a security interest is determined
pursuant to § 1-203
o § 1-203: Lease Distinguished from Security Interest
 Whether a transaction in the form of a lease creates a lease or security interest is determined by
the facts of each case.
 Thus, Art. 9 does not have a clear answer to whether a lease is covered.
 A transaction in the form of a lease creates a security interest if the consideration that the lessee is
to pay the lessor for the right to possession and use of the goods is an obligation for the term of
the lease & is not subject to termination by the lessee and one of four factors are present.
 **If it is terminable at any time for reasons stated in K, then it is not a security interest but rather
a genuine lease.
 Four factors:
 Essentially a sale:
o Original term of lease is equal to or greater than the remaining economic life of
the goods
o The lessee is bound to renew the lease for the remaining economic life of the
goods or is bound to become owner of the goods
 Where you have problems:
o The lessee has an option to renew the lease for the remaining economic life of the
foods for no additional consideration or nominal additional consideration under
compliance with the lease agreement
 This basically means you’ve paid all of it already
o The lessee has an option to become an owner of the goods for no additional
consideration upon compliance with the loan agreement
 Test for answering whether an amount is nominal:
 Is there any reasonable choice to be made in the face of the value of those goods? Is the
amount of what is to be paid so small in relation to the actual economic value of the
goods that it would be unreasonable to turn down such a deal?
 Ex: No reasonable business person would turn down goods worth $1000 for $50
 If the lessee can get out of the lease by the end of the lease, then it is a true lease & not a security
interest.
 If they cannot, then go forward with analysis under § 1-203.
Problem 6: BIG (lessor) leased a duplicating machine to Connie. Lease was for 5 years, & the rental payments
over the period exactly equaled the current FMV of the machine. The lease provided for a $5 purchase option at
end of the lease. BIG did not file an Art. 9 FS Connie then borrowed money from ONB, signing a S.A. &
granting ONB an interest in all its equipment. ONB perfected it’s security interest by filing a FS Connie failed to
repay, & ONB seized the shop’s equipment, including duplicating machine.
o In suit b/t ONB & BIG, who gets the machine?
 Element of § 1-203(b)(1) met - this is a security interest, not a lease
 Thus, ONB wins, b/c BIG failed to file.
Problem 7: Business Corp. leased a copier from Copies, Inc. for 5 years. At outset, copier had a FMV of $300,000
& a predicted 10-yr useful life. (Thus, presume a $30,000 depreciation.) Over the course of the lease, the rental
payments would total $330,000. Lease provides Business has option to purchase copier at end of lease for
$10,000.
o Is this a true lease or a secured sale?
 There is no mention of an early termination right
 Look at § 1-203(b)(4) - lessee has option to purchase copier for nominal additional consideration
 Nominal here b/c the value remaining of the asset is $150,000 & lessee can purchase for
$10,000
Easy answer: if you see a lease, FILE.
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Case: In re Architectural Millwork
o Facts: Debtor Millwork filed for bankruptcy & retained two assets - a freightliner truck & a forklift - both
the subject of leases. Debtor hadn’t paid on either of the leases.
o When to determine whether a purchase option is nominal: the time of creation of the option to purchase
o The forklift contained an option to purchase for $1 at end of lease - clearly nominal  Art. 9 transaction
o The truck contained an option to purchase for the residual value - this would not be “nominal
consideration.” It was actual value & debtor must make a “real choice” - do I want to purchase a truck for
$9,000 when it is worth $9,000?
 Court held that the truck agreement was a true lease
o Test: What would a reasonable, sensible person, similarly situated, do? Would he have a choice?
Suretyships
o Def.: usually in the form of a bond—either secures payment or performance of a party who is unable to
do so
o Suretyships are OUTSIDE Art. 9 - do not have to file
Problem 8: Crash Construction was hired by Mercy Hospital to build a new addition. Crash was required to get a
surety to guaranty the performance of the job & the payment of all workers & suppliers (to avoid a mechanics lien
on Mercy). Standard Surety issued the performance & pmt bond covering Crash’s obligation to Mercy. Crash
borrowed money from ONB & gave as collateral the right to collect the progress payments from Mercy. ONB
filed a financing statement. Halfway through the job, Crash went bankrupt. Standard Surety had to finish & pay
off e’ees & suppliers. Standard then claimed (by subrogation) a superior right to unpaid monies retained by Mercy
which were to be paid to Crash. ONB also claimed this money under its filed security interest, claiming
Standard’s subrogation right was only an unfiled Art. 9 security interest. Who wins?
o Crash’s rights to payments from Mercy is going to be called accounts- they had a right to payments for
goods sold or services rendered.
o Two answers here:
 Suretyships are outside Art. 9 - don’t have to file
 Do secured parties always lose to a surety?
 It wasn’t ONB’s money, anyways, b/c Crash wasn’t the one who finished the work.
 ONB knew that the accounts depended on the work being done, & they took that risk
 But, as the surety company, you should file an Art. 9 financing statement every time to be safe.
Then, in bankruptcy, you can say (1) we didn’t have to file & (2) we filed anyway.
Exclusions from Article 9
o § 9-109(c) & (d)
 (c): Federal statutes (preemption)
 Ex, Philko Aviation: Article 9 would apply to airplanes, but we file with FAA because the
federal statute preempts. Thus, the winner will be the one who files with the FAA
 (d)(1)-(2): Landlord’s liens & other Statutory liens (except agricultural)
 Problem 9: LL wanted security for rent from Morley’s bookshop. Lease agreement said
that all inventory would be subject to a lien in LL favor & could be seized in case of
default.
o Is the LL lien required to be perfected under Art. 9?
 Yes, the LL’sliens is required to be perfected, because it was a
consensual lien (the lease provided that the first failure to pay would
allow the landlord to come in and take the books) - It was not a statutory
LL lien
 (d) (3): Assignment of wages of an employee
 Problem 10: Jugular, an indep. insurance agent selling policies for many companies, did
most business with MIA. To get a loan, Jugular gave bank a S.I. in all present & future
commissions earned or to be earned from MIA. Does Art. 9 cover this assignment?
o Jugular is an agent, NOT an employee.
o It is a commission - Art. 9 covers
 Not wages
 Non-financing assignments
 (d)(4)Sale of intangibles & quasi-intangibles as part of the sale of a business
 (d)(5): assignment of intangibles & quasi-intangibles to a collection business
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(d)(6): assignment of right to payment under a K to an assignee that is also obligated to
perform under the K (delegation)
 (d)(7): sale for full or partial satisfaction of a preexisting debt (no new value)
 Problem 11: Dean sold his entire business to John, including all tangible assets &
outstanding A/R.
o Must the buyer take the steps required by Art. 9?
 No - It is a sale of accounts (which would normally be included under 9109(a)(3)), but it is EXCLUDED under 9-109(d)(4) b/c part of a sale of
business.
o If a client refused to pay Dean & he sold to a collection agency, must the
collection agency take Art. 9 steps?
 No - 9-109(d)(5)
o If Dean transferred a commissioned painting job to another artist, must the new
artist take Art. 9 steps?
 No - delegation - excluded under 9-109(d)(6)
 (d)(8): individual assignment of an insurance claim
 (d)(9): an assignment of a right represented by a judgment
 (d)(10): right of recoupment or set-off
 (d)(11): interest in or lien on real property
 Problem 12: ONB agreed to loan LLC money, taking possession as collateral some real
property mortgages & accompanying promissory notes given to LLC by its borrowers.
Does ONB need to do anything in the real property recording office or under Art. 9 to
protect its interest in this collateral?
o Yes - must comply with Art. 9 if they want promissory notes (money); if they
want right to real estate (mortgage) upon default, must also file in RE records
 Promissory notes = instruments - filed with SOS under Art. 9
 Mortgage filed with chancery clerk
o 9-109(d)(11) says doesn’t apply to real estate interests, but must compare that
with 9-109(b) - Art. 9 application to a S.I. in a secured obligation is not affected
by the fact that the obligation itself is secured by a transaction outside Art. 9
o NOTE: Never only take the mortgage w/out promissory note - then all you get is
real estate
 (d)(12): assignment of a tort claim (except a commercial tort claim)
 (d)(13): assignment of a consumer deposit account
 Note: Assignments of commercial deposit accounts ARE within Art. 9
 Problem 13: ONB issued Connie a credit card, and for collateral took a security interest in all
items purchased using the card & her personal checking account with the bank. Does Art. 9 apply
to the bank’s rights in this account?
 No - it is a consumer deposit account & thus falls under 9-109(d)(13) exclusion.
 Note: If they want to take an interest in the things bought with the card, they’d have to
file an Art. 9 FS for all those items (difficult)
Article 9 protection
o Bankruptcy trustee becomes lien creditor at time of filing for bankruptcy
o 9-317 says you take priority over bankruptcy trustee IF you have already filed
 File early or lose in bankruptcy.
o Article 9 protect you if you have a debt interest secured by personal property & the person files for
bankruptcy, so long as you got there first (filed first).
CHAPTER 3: THE CREATION OF A SECURITY INTEREST
Classifying the Collateral
 It is the debtor’s announced use of the collateral that determines its classification.
 Art. 9 divides collateral into may categories:
o Goods
 Consumer goods
 Equipment
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Inventory
Farm products
*each one is clearly defined as to what it is, and if it’s unclear, then the default is equipment.
 This rule comes from “equipment” def. in 9-102(a)(33)
o Quasi-intangible property
 Instruments (negotiable instruments, promissory notes, etc.: instruments that float in commerce)
 Primary to note is that it is negotiable
 Investment property (stocks & bonds)
 Quasi intangible b/c there is usually some piece of paper associated w/them (ex: stock
certificate)
o Debt that has been Reified: they have been made into a thing by virtue of them
being captured on the piece of paper
 Documents (“Documents of title”)
 Includes warehouse receipts & bills of lading
 Chattel paper
 Paper that has been written on a chattel
 Kind of like a document of title for a particular item
 Most common is paper of a particular item that is being used as collateral
 Letters of Credit
 Indicate debt instruments & are used in international practice
 On his handout, this is listed as intangible? In notes & book pg 42, listed as quasiintangible
o Intangible Property
 Accounts
 Deposit Accounts
 General Intangibles
 Payment Intangibles (subcategory of gen.)
Problem 14: classifying collateral
o A professional pianist’s piano: equipment
 Not inventory - inventory would be his songs or piano oil
 Not consumer goods - using it as a professional
o Cattle fattened by a farmer for sale: Farm products
 9-102(a)(34): livestock defined as farm products
o Farmer’s tractor: equipment
o Manure from the dairy herd: farm products 9-102(34)(D)
o Mobile home: consumer good (with their own special category to avoid issue of where to put, b/c look
like real property - see § 9-102(a)(53))
o A right to sue someone for breach of contract: General intangible (9-102(42))
o Right to sue someone for negligence arising out of a car accident: Article 9 doesn’t apply to personal torts
o Right to sue a corporation for wooing away a trusted employee : commercial tort- general intangible
o Pencils & other stationery : inventory
o A liquor license : General intangible
o A right to the return of a security deposit held by a landlord: general intangible; payment intangible (9102(a)(61))
o Newspaper’s right to payments for papers already delivered: account
o Newspaper’s right to payments for papers not yet delivered: account
o Curtains bought by a lawyer for a law office: equipment
 If lawyer then decides to use at home: still equipment
 Rule: The time of the transaction is the characterization time
o No need to care about its use one transaction is done
 B/c of this rule, good idea to put in S.A. the purpose of the purchase
Case: Morgan County Feeders Inc. v McCormick
o Allen agreed to sell cows to McCormick; Morgan Co. seized the cows, which were subject to a perfected
SI in their favor. The cows were not farm products; they were being used for recreational cattle drives.
So, the question arose over whether they were inventory or equipment (catchall).
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“In ascertaining whether goods are inventory or equipment, the principal use of the property is
determinative.”
 Inventory passes to the buyer free of even perfected security interest if buyer is BIOC (9320); equipment does not
o McCormick was not in business of selling cattle - not inventory under 9-102(a)948)
o 9-102(a)(33) defines equipment  Catchall
o Here, cattle was equipment = Morgan County won b/c perfected
 Problem 18: Lawyer Sam purchased one of Elvis’s guitars when he died. He kept it for years, letting it appreciate.
He did not play it. How would the guitar be classified if used for a collateral for a loan for Sam’s new law
practice?
o Wouldn’t be inventory unless we knew he was holding it for ultimate sale.
o Would it be consumer goods? Could be that he is a hobbyist, so it might be.
o Always file as to equipment, no matter what it is, just in case, as it is your catchall.
o THUS, should file under equipment & consumer goods & could file under inventory, as well
 File early, often, everywhere - this is the ‘often’ category
 Problem 19: Dime-A-Minute leases cars & uses the car lease contracts as collateral when it borrows money.
o Car lease contracts: would not be chattel paper b/c it is a debt owed, BUT the asset comes back to the
owner b/c the time expired, NOT because it’s collateral in a S.I. that was defaulted upon.
o It is not a tangible good - must be either quasi-tangible or intangible
o It falls into account
 Accounts: right to payment on account of services rendered- use of a car for a determined period
of time is a services K (“time-slice use right”)
o Could fit into catchall of general intangibles if it didn’t fit in account
 Thus, put both account & general intangible in the security agreement
 Problem 20: Montana has a statute giving unpaid crop dusters a lien on a farmer’s crops. Is this an Art. 9
transaction requiring compliance?
o Agricultural lien is defined in 9-102(a)(5)
 Very broad definition, includes any kind of obligation incurred for goods & services in the
farming operation
o See 9-109(a)(2) & 9-109(d)(2): Agricultural liens are within Art. 9
o Compliance required!
9-502: Contents of a Financing Statement
 9-502(a): A financing statement is sufficient only if it:
o Provides name of debtor (9-503)
o Provides the name of the secured party (9-503)
o Indicates the collateral covered by the financing statement
 9-504: Permits a “super generic” OR a description under 9-108
 Minimum required is that you indicate the type or classification
o NOTE: No requirement of signature by either party
Contents of a Security agreement
 § 9-201: A security agreement (the K) is the law
 9-203: Elements of the security agreement:
o It is in writing
o It contains a description of the collateral
 May be categorized by above classification
 9-108: Description for the S.A. is sufficient if it “reasonably identifies” the collateral
 List of different descriptions in 9-108
 Cannot use a “super generic” such as “all the debtor’s assets”
o It is authenticated by the debtor (signature or ID # or etc.)
 Test: Must be sufficiently specific to resolve contract disputes
Effectiveness of security Agreement
o 9-109
o 9-201
 Statute of Frauds
 (2)(a): A security agreement is effective:
o
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 Between the parties
 Against purchasers of the collateral
 Against creditors
 Attachment of Security Interest
o 9-203: S.I. attaches to collateral when it becomes enforceable against debtor
o Attach = enforceability
o Attachment :Security Interest is connected to the collateral & coll. becomes yours to ‘grab’
 You have a legal right to collect from the collateral when the debtor doesn’t pay their debt
 Enforceability of security Agreement
o Attachment: It becomes enforceable against the debtor & third parties w/r/t the collateral only if:
 Value has been given by the creditor (9-203(b))
 Quid pro quo- debtor is granting a right in the collateral upon default, creditor is giving
value in exchange
 Debtor has rights in the collateral w/the rights to give to the creditor, and
 Debtor covenants that he/she owns the collateral w/out prior security interests- i.e., has
full rights in the collateral
 One of the following is met:
 Debtor has authenticated a S.A. that provides a description of the collateral,
 Secured party has possession under § 9-313
 Secured party has control
Perfection
 Cures ostensible ownership
 Most common way to perfect: FILE with the secretary of state
 Other ways:
o Filing other places (as may be required; ex: FAA office- Fed. Statute preempts)
o Possession
o Certificate of Title
Technical Validity of the Forms
o 9-300’s tell you what you are going to do to perfect
o 9-501 tells you where you are going to perfect
o Security Agreement
 The contract between the debtor & creditor by which the debtor grants the creditor (the secured
party) a security interest in it’s collateral
 Purpose: Creates property rights between the debtor & a creditor
 Attachment & Enforceability: 9-203
o Problem 21: Frederick bought a new computer on credit from Center Office Supply & was required to
sign a “Conditional sales Contract,” agreeing that title to the computer remained in the store until he had
fully paid for his purchase. The K described the computer but did not mention a security interest. Does it
qualify as a S.A. under 9-203, the attachment provision?
 It lacks the granting clause!
 It does provide a condition & remedy upon default.
 Here, it passes the test as a security agreement.
 Barnes: S.A. should include identification of the parties, signature by the debtor, description of
the collateral, & contain a granting clause by the debtor to the creditor of a security interest in the
collateral
 Note: it should also include default conditions/events
o Financing statement
 The notice that is filed in the place specified by 9-501
 in order to give later creditors an awareness that the collateral is encumbered
 Purpose: To create property rights in the creditor against most of the rest of the world
 Commonly called a “UCC-1”
 Four things required to be on a financing statement:
 Name of debtor
 Name of the secured party
 Collateral covered by financing statement
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Authentication by the debtor
o This is NOT a signature - it follows automatically from the signing of the
security agreement
Debtor’s Identity
 The Financing statement will be indexed under the debtor’s name
 9-502: Name of Debtor & Secured Party: A FS sufficiently provides the name of the debtor:
 (a)(1): If debtor is a registered organization, only if the FS provides the name of the
debtor indicated on the public record of the debtor’s jurisdiction of organization which
shows the debtor to have been organized
 (a)(2): If the debtor is a decedent’s estate, see pg 795
 (a)(3)If the debtor is a trust or trustee… see pg 795
 FALL BACK SECTION: (a)(4)
 (a)(4)(A): if the debtor has a name, only if it provides the individual or organizational
name of the debtor
 (a)(4)(B): if the debtor does not have a name, only if it provides the names of the
partners, members, associates, or other persons comprising the debtor
 If the business is a registered organization with a filed, organized business name, you use the
organization name. Otherwise, use the name of the individuals.
 Problem 22: Harry Fellini ran a movie theater called “Fellini’s Art Theatre” as a sole proprietor.
He gave a security interest in the business’s equipment to Shark Teeth Finance Company. The
financing statement requires a listing of the debtor’s name.
 Should the parties use the business name or the individual name?
o Fellini should use his individual name. 9-503(a)(4)(A). Can’t use proprietorship
name b/c it is not legally registered
 If the theater were run as a partnership, would the partnership’s name be used as the
debtor’s name?
o You would use the names of both of the individuals unless it was an organized &
registered partnership (if organized, 503(a)(1) says use registered name)
9-506 Effect of Errors & Omissions
 (a): A financing statement … is effective, even if it has minor errors or omissions, unless the
errors or omissions make the FS seriously misleading.
 (b): A FS that fails sufficiently to provide the name of the debtor is seriously misleading
 (c): If a search of the records of the filing office under the debtor’s correct name, using the filing
office’s standard search logic would disclose a financing statement that fails sufficiently to
provide the name of the debtor in accordance with 9-503(a), the name provided does not make the
FS seriously misleading.
Problem 23: Debtor’s correct name was “Michael A. Erwin,” but the financing statement listed him as
“Mike Erwin.” Art. 9 excuses “minor errors unless seriously misleading. 9-506(a) Is the secured party
okay here?
 Barnes says: for our purposes, this is seriously misleading & we require the full & complete,
correct legal name.
 No d/b/a, no a.k.a., no nicknames or shortened names
 Some courts would say this is seriously misleading; others would not
 To avoid this problem: Require the debtor to provide identification & include a photocopy on
the S.A. for ID purposes
Case: Pankratz Implement Co. v. Citizens National Bank
 Rodger house purchased a tractor from Pankratz. House executed a note & security agreement on
the day of purchase (PMSI), & Pankrazt assigned the note & collateral to Deere. A financing
statement was filed on March 23, 1998, but gave House’s name as debtor as Roger instead of
Rodger. On April 8, 1999, House executed a note & S.A. for a loan from Citizens Bank, pledging
all equipment owned & thereafter acquired as collateral. Citizens filed its FS with the name of
House, Roger. House went into bankruptcy. Both parties sought the proceeds from the courtordered sale of the tractor.
 The inquiry was whether a reasonably diligent search would find the prior S.I.
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o
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The filing creditor bears the burden of listing the debtor correctly, so searching creditors are
under no obligation to conduct multiple searches using variations of the debtor’s name.
 Article 9 was not satisfied here, as the Court found the misspelling of a first name to be a major
error b/c the information couldn’t be readily located.
Problem 24: Barbara Song borrowed $50,000 from ONB to start a business called “Barb’s Interiors.”
ONB & Song signed a S.A. showing her as the debtor & giving ONB an interest in the inventory &
equipment. ONB filed its financing statement. Song then married Dancer & changed her name to Barbara
Dancer. She borrowed another $50,000 from Nightflyer Finance, which loaned her the money after
searching the records under “Dancer” & finding no prior encumbrances on the business’s inventory or
equipment.
 Did ONB lose its security interest b/c it failed to re-file when her name changed?
 § 9-507(c): If a debtor changes its name so that the FS becomes seriously misleading,
o The FS is effective to perfect S.I. in collateral acquired by the debtor BEFORE,
or within FOUR MONTHS AFTER, the change, &
o The FS is NOT effective to perfect a S.I. in collateral acquired MORE THAN
FOUR MONTHS AFTER the change, UNLESS a correcting amendment to the
FS is filed within 4 mo. of the change
 ONB did not lose its security interest when it failed to re-file when -her name changed if
it re-filed within 120 days
 Barnes:
o Every “90” days you should be checking certain items so as to give yourself 30
days to cure if there is a problem.
 Check name- if it has changed, file.
 Check corporate changes- if corp. change & new debtor, immediately get
a new SI & re-file
Problem 25: LNB filed a FS in the proper place to perfect its S.I. in the A/R of the American Electronics
Store. AES was later sold to VOJ.
 Must LNB re-file to keep its security interest perfected in:
 The accounts actually transferred by AES to VOJ ?
o Don’t need to re-file for those things which were transferred. They’re good
forever. They stay that person’s property even when their name changes.
o Later secured parties must check the origin of title.
 Accounts thereafter acquired by VOJ?
o The FS on the accounts are good for 120 days - then must re-file
 What if AES merged with VOJ & the new entity was called VOEI?
 Barnes: Have to re-file & attach immediately. Lose the 120 days.
o Isn’t this wrong?
 9-203(d): A person becomes bound as debtor by a S.A. entered into by another person if
… the person becomes generally obligated for the obligations of the other person,
including the obligation secured under the S.A., and acquires or succeeds to
all/substantially all of the assets of the other person
 9-203(e): pg 687
 Comment 7, 9-203: pg 688
 BUT, 9-508(b) says it if the difference b/t the name of the original debtor and that of new
debtor causes a filed FS that is effective to be seriously misleading:
o (1) the FS is effective to perfect a SI in the collateral acquired by new debtor
before, and within 4 months after, the new debtor becomes bound under 9203(d); and
o (2) FS isn’t effective to perfect SI in collateral acquired by new debtor more than
4 months after the new debtor becomes bound unless an initial FS is filed w/
name of new debtor
 Problem 26: Robin got permission from his brother, Richard, to use Richard’s yacht as collateral
for a loan.
 Should lender make both sign the security agreement, or just Robin?
o Make both. You want SA to have signatures for everybody you can possibly get.
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Which of the parties is the debtor & which is the obligor?
o Richard is the debtor, because he is the one who owns the collateral asset.
 Remember, Art. 9 isn’t about the underlying promissory note, it is about
the collateral.
 So, person who owns the collateral is always the debtor.
o Robin is the obligor - he is the one who owes the money
 Thus, Robin’s signature on the SA isn’t really significant, but you MUST
have Richard’s signature
o Under whose name should the FS be filed?
 Under Richard’s name, b/c he is the debtor
9-507: Effect of Certain Events on Effectiveness of Financing Statement
 A security interest continues on:
 Even if the collateral is disposed of
 Even if it becomes seriously misleading under 9-506
 As the debtor acquires new collateral, there are new “time periods” that you have to look at:
 9-507(c): everything owned at time of change continues - don’t have to do anything about
it, even if you know there is going to be a change. It’s good.
o Later creditors assume the risk that someone else owned it or had a different
name before them
o Practice point: Require that your S.A. contain not only a grant, name & copy of
identification, corporate ID & prior corp. status, but also a clause that they are
disclosing all prior names
 After the change in debtor’s name, you have 4 months to re-file an amended financing
statement or file a new financing statement
o 9-507(c)(2): amended FS
o 9-508(b)(2): initial FS providing name of new debtor
 After the 120 days (forever after), you lose - your FS not effective
o Check every 90 days to see if name changed or collateral classification changed
Description of the Collateral
 9-108: Description of collateral on the security agreement
 9-504: description of collateral on the financing statement
 Problem 27: Peter signed a S.A. & FS in favor of Total Finance Co., giving the company a S.I. in
“all personal property debtor now owns or ever owns or even hopes to own b/t now & his death.”
Does this perfect an interest in his guitar?
 No. Doesn’t reasonably identify the guitar on the security agreement, as required by 9108.
o Note: it would have been good enough on the FS
Case: In Re Grabowski
 An error in the address of the debtor on a FS does not matter - immaterial
 All that we require on FS is name, name, & description of collateral
Problem 28: Polly borrowed money from a bank, which took a S.I. in “all inventory, accounts receivable,
equipment, instruments, general intangibles, & personal property;” she also pledged her extensive jewelry
collection. The bank filed FS. A year later, she took the jewelry back for a social event, & before she
could return it back to the bank, another creditor seized it. Is the Bank’s interest in the jewelry perfected
by the filed FS?
 Personal jewelry = consumer goods
 You can take a pledge & file a FS
 As Art. 9 stands now, the FS would be good to go w/out describing the jewelry as consumer
goods.
 However, the SA would NOT be sufficient. If you start including a bunch of single categories, &
then put in a general category, the presumption is that the other single categories (which would be
consumer goods) are excluded.
 So, either be super generic & just say “personal property” or you should be very specific &
include it by category (include “consumer goods” in the list)
Floating Lien
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§ 9-204(a): A S.A. may create or provide for a security interest in after-acquired collateral,
EXCEPT for the following:
 Consumer goods, unless the debtor acquires rights in them w/in 10 days of the SP giving
value
 Commercial tort claim
 Thus, debtors are allowed to use future as well as current property as collateral for a credit
extension (with the above exceptions), & the creditor’s lien will attach to new property without
the signing of any further paperwork
o Problem 29: If the SA & FS describe collateral as “inventory,” it limits the SI to existing inventory only.
If you want it to be “inventory for all time” you have to indicate that, using “after acquired property”
(AAP) as the term in the security agreement.
 Note: you don’t have to indicate the AAP term in the financing statement as long as you describe
it as inventory
 But, in S.A., you MUST have an adequate description, which includes AAP, in order to include
any additional inventory
o Problem 30: The FS description said “various equipment; see attached list.” No list was attached. Is the
statement sufficient to perfect a security interest in the debtor’s equipment?
 No. It would have been sufficient if you just said “inventory” (under 9-504), but b/c it said “list
attached” & it wasn’t, it wasn’t sufficient.
o Problem 31: The SA stated that the collateral was “machinery, equipment, furniture & fixtures.” The FS
added to the list “inventory & A/R.” The parties state that the loan was intended to cover all of these
items. Does the SP’s interest reach inventory & AR?
 No. Can’t include these other things. Although public notice was out there with the FS, there is
extreme potential for later abuse. This is a bankruptcy concern. It indicates a preference for one
side or the other. To allow one party to go back & essentially reconstruct the documents would be
extremely unfair!
o Problem 32: ONB wants to lend money to Luddite, taking a security interest in all of Luddite’s
equipment, and specifically in the Abacus-12. What should the SA say?
 Remember: SA requires more specificity than the FS.
 Also remember: tack on the AAP clause, as well to cover future equip. purchases
 Barnes is okay with saying:
 “all equipment, particularly the Abacus-12”
 “the Abacus-12 plus all other equipment”
 BUT, risk that you might misspell the name of the machine
 So, nothing wrong with saying “all equipment, particularly the Abacus 12, and particularly
intending NOT to exclude any other equipment”
o Problem 33: The S.A. stated that a tractor buyer granted a S.I. to ___, but the seller forgot to fill in his
name. The Seller later filed a FS showing he had a secured interest in the buyer’s tractor. Is the document
with the blank at 9-203 S.A.?
 Remember the purpose of this document is as between the creditor & debtor, not the notice to the
rest of the world. This problem can be cured with parol evidence, so not necessarily a problem.
 If both parties signed the security agreement, that might cure the problem.
 NOTE: if the FS had left off a name, then it would NOT be valid!
Attachment of the Security Interest
o Attachment v. Perfection
 Attachment is the process by which the security interest in favor of the creditor becomes effective against the
debtor.
 Perfection is the process by which the creditor’s security interest becomes effective against most of the rest of
the world.
o “The time of attachment occurs at the time of the agreement & enforceability between the parties.”
o § 9-203: Steps for attachment:
 A security agreement must be authenticated
 Creditor must give value, and
 Debtor must have rights in the collateral
o The security agreement should also include the description & a granting clause
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Rights, discussed by Barnes
 Sufficient rights: anything that is of value between two parties that they are willing to divvy up/assign a value
to/share gives sufficient rights in the collateral
 Clearly includes title, lease interest, rights of reverter (or other equity rights), bailments, suretyships,
consignments, etc.
 Anything that you can conceive of that would be worth money being paid back & forth for you to have those
rights
 Thus, rights are very, very broad
 Ex., Border St. Bank v. Bagley: A person holding cattle for sale for someone else has sufficient rights in the
cattle for an interest to attach to them
Problem 34: Gabriel borrowed money from ONB. On Jan. 6, he signed a S.A. with ONB, giving an interest in “all
existing & after acquired inventory in the store.” He received his money that same day. Gabe’s store consisted of 4
guitars & a pitch pipe on Jan. 6. He had a contract with TTMC to sell him 40 trumpets, which were paid for in
advance of delivery date. The trumpets were packaged on March 15 & marked for delivery to Gabriel. They were
shipped & received on March 30.
 On what day/days did the bank’s security interest attach to:
 The guitars & pitch pipe?
o January 6. That day there was value, rights, & authentication of the SA
 The trumpets?
o March 15- From a sales perspective, when the goods become identified to the K, i.e., they
were identified to go to Gabriel, they became Gabriel’s. He didn’t own them at that point, but
b/c they were identified to his K, they were of value to him, therefore they were his goods &
he had identifiable rights in
o Those rights are adequate to make attachment b/t the parties
 What if the bank had filed a proper FS covering the inventory on Jan 7?
 Doesn’t change anything at all as to when attachment is done.
o Perfection doesn’t change attachment date
 Why would a creditor wish to file a FS before the S.I. had attached?
o 9-322(a)(1): First to file wins b/t 2 perfected S.I.
 Filing dates your priority under this prov.
 If the bank did not advance any money until March 31 & if the bank did not make any commitment to
advance any money until then, when did attachment occur?
 March 31, when value was given - this becomes the date of perfection, too, presuming they filed on
Jan 6 or some date b/4 March 31
Practice Rules of how to go about a secured transaction:
 File the financing statement
 By filing first, you date your priority as of that date
 Make sure that there exists rights in the collateral
 Sign the security agreement
 At this point, missing value - you (creditor) haven’t given over the loan, thus NO ATTACHMENT &
NO PERFECTION
 Value is given (money)
 At this moment, you get attachment & perfection
o Perfection: Last event test of 9-308
 Priority dates back to the filing of the FS!
§ 9-317: FITFIR provision
 The lien creditor has to beat not only perfection, but ALSO the filing
 By filing earlier, a lien creditor that comes in b/t the filing & your attachment has to have filed earlier
than YOUR filing date
 So long as you file at that first & earlier date, you never have to investigate it again. You know you
were FIT & no one can beat it
o You then have up to 5 years to perfect the transaction & no one can beat you
o NOTE: You get nothing unless & until you perfect, but you win in terms of priority in the
future.
Case: In re Howell
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Tradax & Howell both sell rice. Bar Schwartz wanted to purchase rice, but not from Tradax. Tradax &
Howell agreed to sell Tradax’s rice to Bar Schwartz under the name of Howell. Howell would send the
money, minus a commission, to Tradax.
Bar Schwartz got a LOC to pay for the rice, which was given to Howell, but really belonged to Tradax
Howell listed the letter of credit as an asset account & a liability on their books in obtaining a loan of
$2,100,000 from FNB
 This was a fraud upon FNB & Tradax. Howell did not have the right to book that LOC as an asset, as
they didn’t have any rights in it.
Ct. said they didn’t care whether it was a LOC or an account. Howell had no rights in the letter of credit, and
thus, no S.I. could attach to it.
Thus, Howell could not legitimately encumber any interest in the Bar Schwratz account.
CHAPTER 4: Perfection of the Security Interest
 Three Methods of Perfection:
o Automatic (9-309)
o Filing (most common) (9-310)
o Controlling the asset in some way (typically by possession) (9-312, 9-313)
o * Note: actually a 4th method: statutory, like CTs (9-311)
o *Note: for certain instruments, § 9-312 provides for permissive filing/control/possession
 Perfection sections:
o 9-308 to 9-316
 If a security interest is perfected, it is senior to most later creditor interests (especially of note, bankruptcy
trustee!)
 But, a security interest must first ATTACH before perfection is possible
o Makes sense: It must first be effective b/t the debtor & creditor before it has legal meaning as to other
parties
 Perfection by Possession (9-313)
o Also called a pledge
o 9-313(a): except as otherwise provided in subsection (b), a secured party may perfect a SI in tangible
negotiable instruments, goods, instruments, money, or tangible chattel paper by taking possession of the
collateral. A secured party may perfect a SI in certificated securities by taking delivery of certificated
securities
o Only collateral having physical form can be possessed
o If the creditor has physical possession of the collateral, the world is alerted to the creditor’s possible
interest in the property, & therefore no other notice required
o Problem 35: Archibald owned a large diamond, currently on display at the Astor Museum. Molly has
agreed to buy the diamond. She has made a large down payment & has agreed to make 3 more payments
before taking possession. Archibald & Molly have signed the purchase agreement, which contains a
clause granting Archibald a S.I. in the diamond until she meets all required payments.
 Can he perfect a S.I. in the diamond by simply notifying Astor Museum of the sale & telling them
to hold it for his benefit until she makes payment in full, creating an escrow arrangement in which
possession is held by the escrow agent?
 9-313(c): If someone else signs an agreement, making themselves an escrow agent, you vouch
them in as an agent for possession & perfection
 So, they’d have to sign
 Possession is only good so long as it’s in control by the person or their agent, so if he lets Molly
take the diamond, perfection is interrupted (?) - 313(c)(f)-(g)
 B/c Molly is debtor, not the creditor or agent
o Problem 36: Kiddie wanted to borrow money & use its inventory of toys as collateral. Fred’s Field
Warehousing came to the plant, put the toys in a locked room, & posted a sign saying “Contents Under
Control of Fred’s.” Fred’s then issued a negotiable warehouse receipt deliverable to the order of Kiddie.
Fred’s hired Mort, the Kiddie janitor, as the warehouse custodian (paying him $1 to mind the goods).
Kiddie pledged the warehouse receipt (a negotiable document) to Mammon Bank in return for a loan.
Kiddie then went bankrupt.
 By having possession of this document, did the bank have a perfected security interest in this
inventory?
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§ 9-312(c): When goods are in the possession of a bailee that has issued a negotiable doc.
covering the goods,
o A security interest in the goods may be perfected by perfecting a S.I. in the
document, and
o A S.I. perfected in the doc. has priority over any S.I. that becomes perfected in
the goods by another method
 BUT, there is a problem here. Although Fred’s is the bailee, the real possessor is Mort
(has the key), and b/c Mort is an employee of Kiddie, & thus Kiddie is still the possessor.
Fred’s didn’t have true possession under 9-312.
 By hiring Mort, it is not a valid negotiable document, and as such, any attempt to get the
negotiable document as a perfected interest will fail & you will not have perfection. B/c
of this potential, you should also file, so at least then you won’t lose to the bankruptcy
trustee.
 See 9-313 cmt. 3: “A court may determine that a person in possession is so closely
connected to or controlled by the debtor that the debtor has retained effective possession,
even though the person may have agreed to take possession on behalf of the secured
party. If so, the person taking possession would not constitute the secured party’s taking
possession and would not be sufficient for perfection.”
 If the warehouse receipt is validly issued & effective, if the Bank & Kiddie signed a written S.A.
covering the receipt & the inventory it covered & if the bank gave Kiddie the money, does the
bank have a perfected S.I. in the warehouse receipt even before it gets possession of it?
 Yes - § 9-312(e) gives you 20 days to grab the document of title & get it into your
possession
 If Kiddie wanted to get the warehouse receipt back in order to get to the goods & clean them &
then give it back to the bank, does the bank lose its perfection?
 § 9-312(f): No. They can do that, under 9-313(f), provided the receipt is returned to the
bank within 20 days.
o 9-308: Last event test
 Perfection is not complete until the very last thing required has been done
 Contrasted with priority - it can be timed to be earlier; perfection waits until the last
moment
o Problem 37: Karate pledged 36 of its promissory notes given by customers to Nightflyer Finance Co. in
return for a loan. The parties signed a security agreement, & the finance company took possession of the
notes. Karate asked for one of the notes back 1 month later, to present to customer for payment.
Nightflyer gave him the note on April 6. Karate never presented the note for payment. On Oct. 12, Karate
went bankrupt.
 Does the bank have a perfected security interest in any or all of the PN?
 These notes are negotiable instruments.
 They have a perfected S.I. in the 35 notes that they kept. But the one they gave up is no
longer perfected, b/c under, 9-312(f), the 20-day grace period has expired
 Could the finance co. have protected itself by filing a financing statement as to the PN?
 Yes. They could & should have filed to perfect their interest. 9-312(a)
o Calculating the 20 days under 9-312:
 Art. 9 takes it literally, taking the 20 days to include weekends
 But other courts have interpreted it to exclude weekends & holidays
Automatic Perfection
o Automatic perfection means that the secured party need only make sure that its security interest has
attached & they are thus perfected.
 I.e., filing not required for these types of interest
o § 9-309: certain security interests are perfected when they attach
 To have attachment: must have value given, rights in collateral, & an authenticated security
agreement (or alt., possession under the K)
PMSIs
o Most important language of 9-309: (a): It gives automatic perfection in consumer goods when a purchasemoney security interest (PMSI) is attached
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o
o
o
To qualify for automatic perfection under 9-309(1), the S.I. in consumer goods must qualify as a purchase
money interest
 9-103: defines PMSI
 A PMSI is granted to sellers or lenders whose willingness to extend credit permitted the debtor to
acquire the collateral
 NOTE: PMSI will trump a FITFIR holder!
Problem 38: Bilko put new siding on Brown’s home. They signed a contract on August 4, giving the
company a security interest in all their currently owned consumer goods plus those acquired in the future.
On Sept 25, Brown went to First Finance Co. & borrowed $80 for a sewing machine. Brown signed a
S.A. w/ FF, granting it a security interest in the machine. FF did not file a FS Brown bought the sewing
machine on Oct. 11. Brown filed for bankruptcy on Oct 12. Now, Bilko, FF, & the trustee all claim the
machine.
 Did Bilko’s security interest attach to the sewing machine?
 9-204(b): A security interest does NOT attach under a term constituting an after acquired
property clause to consumer goods, unless the debtor acquires rights in them w/in 10 days
after S.P. give value
 Was the loan agreement a PMSI even though FF was a lender & not seller of the machine?
 § 9-103(a)(2): Yes. Can be a seller or financier
Two different types of purchase money:
o Purchase Money Seller: those who sell the goods & take back a PMSI in
exchange
o Financier: called either a Purchase Money Obligor or a Purchase Money
Financier
 Would it have been a PMSI if Brown had used the $80 to pay a liquor bill & had used $80 from
savings to buy the sewing machine? How can finance companies protect themselves from the
debtor’s misuse of the funds advanced?
 No. This is not acceptable. They should have sent the money directly to the seller.
 Assuming the $80 was used for the announced purpose, who gets the sewing machine?
 First Finance Co. wins. They had a PMSI in the machine.
o Bilko loses completely as to the machine
o Trustee will not be able to use the machine as part of the estate (unless there is a
surplus after it is sold)
Priority of PMSIs
 9-324
 (a): A perfected PMSI in goods other than inventory or livestock has priority over a conflicting
S.I. in the same goods, and … a perfected S.I. in its identifiable proceeds also has priority, if the
PMSI is perfected when the debtor receives possession of the collateral or within 20 days.
 **This is an exception to our FITFIR rule!
PMSI & bankruptcy (pg 83)
 § 522(f) of the bankruptcy code was enacted to permit a debtor in bankruptcy to avoid security
interests in consumer goods which were taken by a creditor as a non-PMSI when the consumer
would otherwise want to claim as exempt from creditor process.
 If a PMSI has later been renegotiated & either consolidated or new money loaned, does it retain
its purchase money character so as to escape avoidance under § 544(f)?
 Case: In re Short
 The Short’s took out a loan with Anderson for some furniture. Anderson sold the loan to
a financier. Shorts later refinanced the note & combined it with other notes.
 Issue: Was the Short’s note still a PMSI?
 Two different circuit approaches to characterizing it:
o One line of cases holds that the resulting lien on the purchased goods no longer
qualifies as a purchase money security interest.
o The other circuit said they’d ‘pick out’ the characteristics of each, finding that a
lien may be partially purchase money and partially non-purchase money.
o “Dual status test”
 The court says to look at “K intent” in deciding how the collateral was to
be used
17


The PMSI taken under the original note is preserved to the extent of the
balance remaining unpaid on the original PM loan
o Problem 39: Façade decided to buy an Oriental rug for its office from Treasures of Persia. Treasures let
Façade take the rug back to the office to try it out to see if it wanted to purchase the rug. Façade’s
equipment was covered by a perfected floating lien in favor of ONB.
 As soon as Façade got possession of the rug (& before it decided to buy), did the bank’s lien
attach?
 No. Façade had no rights in the rug, so there was no way the lien could attach to it
 After Façade decided to buy the rug, it signed a K with Treasures, making a down payment. To
finance the rest, Façade borrowed from Nighflyer Loan, giving a S.I. in the rug. Does
Nightflyer’s S.I. qualify as PMSI?
 § 9-103(a) & Cmt. 3: No. It is not a PMSI. Façade already purchased the rug from
Treasures. Comment 3 says a S.I. does not qualify as PMSI if a debtor acquires property
on unsecured credit & then subsequently creates the S.I. to secure the purchase price
o Case: General Elec. Capital v. Spartan Motors
 GECC agreed to finance the inventory of Spartan Motors, taking a blanket lien (“dragnet” lien)
on Spartan’s inventory (defined as all inventory, now owned or after acquired, etc.) GECC filed
their S.A. Then GMAC agreed to finance Spartan’s inventory, taking as collateral new vehicles .
The S.A. stated that, as each vehicle was sold, Spartan would remit to GMAC the amount
advanced on the vehicle. GMAC filed their S.A.
 May 7: Spartan used its own money to purchase a Mercedes. Six days later, GMAC reimbursed
Spartan & added the car to GMAC’s financing plan.
 July 7: Spartan used its own money to purchase a second Mercedes. Two days later, GMAC
reimbursed.
 The two vehicles remained unsold.
 October: GECC filed suit against Spartan, & Spartan filed for bankruptcy.
 GMAC then took the two Mercedes & sold them. GECC claims this violated GECCs antecedent
security interest.
 Analysis
 A perfected PMSI in inventory has priority over a conflicting prior security interest in the
same inventory
 The totality of the circumstances here indicated it was a PMSI
 GMAC falls under 9-103(a)(2)—obligation of an obligor for all or part of the collateral,
or for value given to enable debtor to acquire rights in or the use of the collateral.
o Could more easily have been solved by GMAC giving $ directly to seller, and
seller not relinquishing possession of cars to Spartan until $ was received. If this
was done, perfection would have been automatic.
 Even if GMAC proves PMSI, does it mean automatic perfection or priority?
o No—these goods are inventory, and the only PMSI perfection which is automatic
is consumer goods—9-309(1).
 But, do get priority—9-322(d) & (a)(1)-general rules
Certain Accounts & Other Intangibles
o 9-309(2): Perfected when they attach: an assignment of accounts or payment intangibles which does not
alone or in conjunction with other assignments to the same assignee transfer a significant part of
assignor’s outstanding accounts or Pmt. Intang.
o “de minimis provision”
o Test:
 Is it a professional financier?
 Yes - then look more closely at it
 No - then look to see if they are significant parts of the assignor’s outstanding
Accounts/Pmt. Intangs.
o For ex: would be done by a lawyer’s office, doctors office, etc.
o 9-309(3)-(4) : A single sale of a payment intangible or a promissory note is exempted from filing & a
security interest is perfected upon attachment.
 **But you should still file for these - cost is too low, relative to the risk you are taking!
18
o

Case: In re Wood
 Although a sale of accounts is included within § 9-109(scope), 9-309(2) says that you are
automatically perfected in an assignment of accounts if not significant
o Problem 40: ONB sold all of it’s P.N. to LNB. Must LNB file a FS or make sure it has possession in order
to perfect its S.I. in the notes?
 A sale of accounts is included within § 9-109(scope). BUT, under 9-309, you only exclude a sale
of a promissory note if it is a SINGLE note. Here, it’s a group of notes, so it must file or take
possession. Best to take possession, b/c we don’t want a holder in due course to take the notes,
b/c they’d beat us in priority dispute
o Problem 41: NFC loaned $20k to Portia Moot. She gave NFC a S.I. in her A/R, which NFC perfected by
filing a FS in the appropriate place. One of the accounts has a surety (the mother of a client promised to
pay if child did not). What must NFC do to perfect its interest in the surety obligation?
 9-308(d): Perfection of a security interest in collateral also perfects a security interest in a
supporting obligation for the collateral.
 So, if NFC meets it’s perfection requirements for the other accounts, the mother’s surety
obligation is also perfected.
Perfection by Filing
o 9-310: When Filing Required to Perfect Security Interest or Agricultural Lien
 (a) General Rule: Except as otherwise provided in (b), a financing statement must be filed to
perfect all security interests & agricultural liens.
 Except for the transactions listed therein, the filing of a financing statement is the
exclusive method of perfection of the creditor’s security interest
 Per 9-505(b), there is no prejudice to you for filing
 Example: Your lessee/lessor characterization for tax purposes won’t be affected by
having a perfected Security Interest in the lease.
o Mechanics of Filing
 9-509: Authorization by Debtor
 You can file a financing statement under the debtor’s name only if the debtor authorizes
o Thus, on the S.A., put a clause authorizing secured party to file a FS on behalf of
debtor
 9-501: Filing Office
 The State should designate their filing office
o Most often, secretary of state’s office
 The office to file a financing statement to perfect a security interest or ag. lien is:
o If a fixture filing: the office designated for filing record of a mortgage
 Also if collateral is as-extracted or timber to be cut
o For everything else: the state-authorized office
 9-502: Form that you File
 See above discussions of financing statement
 9-301: Choice of Law Provision
 Default: local law of the jurisdiction in which the debtor is located governs perfection,
effect of perfection or nonperfection, & priority of a S.I. in collateral
 For a possessory Security interest in collateral, the local law of the jurisdiction where
collateral is located governs
 For tangible negotiable documents, goods, instruments, money, or tangible chattel paper,
local law of that jurisdiction governs …. See 301(3)(A)-(C)
 9-515: Duration & Effectiveness of Financing Statement
 Generally, a FS is effective for 5 years after filing
o 515(d): A continuation statement may be filed ONLY w/in 6 months before the
expiration of the 5 years
 (e): Continuation statement makes initial FS effective for five years
beginning on the day on which it would have become ineffective in
absence of continuation statement filing
 Succeeding continuation statements may be filed
19
o

If you file the continuation statement too early, you lose all the perfected priority
up to that point. A premature renewal kills original priority.
 Thus, don’t file too early or too frequently
 Courts approach a premature filing differently:
 Some say later filing kills old FS
 Others say new one is ineffective.
*You lose, either way.
 Problem 42: Hamlet Corp. borrowed $100,000 from Elsinore Finance, giving a S.I. in the
corporation’s equipment. The parties filled out the financing statement. Shakespeare was
mentioned on the FS as the president of Hamlet. Elsinore gave the FS & filing fee to a SOS office
clerk. The clerk indexed the FS under Shakespeare, instead of Hamlet. One year later, another
finance co. lent Hamlet money, taking a S.I. in same equipment.
 Since priority of creditors in this situation depends on order of filings (§ 9-322(a)(1)), did
Elsinore file first, or did it bear the risk of clerical error? It filed first.
o 9-516(a): Communication of a record to a filing office & tender of the filing fee
or acceptance of the record by the filing office constitutes filing.
 9-517: Failure of a filing office to index a record correctly does not affect
effectiveness of the filed record
 Imposes risk of filing-office error on those who search the files,
so they would be the ones to sue clerk’s office for negligence
 Problem 43: ONB had a S.I. in Weekend Construction Co.’s equipment. ONB filed a FS on May
1, 2009. ANB took a S.I. in the same collateral & filed its FS on May 2, 2009. Both were in same
office.
 If ONB never files a continuation statement at all, after May 1, 2014, does it nonetheless
retain priority over ANB?
o 9-515(c): NO! The FS lapses, and therefore ceases to be effective. Any S.I.
perfected by the FS becomes unperfected & thus no longer effective.
 If ONB fails to file a continuation statement in time, so that its perfection lapses, but a
week later it files another FS, it is still senior to ANB?
o NO! Once you lose it, its lost.
 An attorney who fails to file a continuation statement is guilty of malpractice - his/her job
was to safeguard the client’s interest & he failed
 Problem 44: Portia paid off her debt to LNB, which had loaned her money for an office computer
& taken a PMSI interest in the collateral & which had also filed a FS (had to file - equipment, not
consumer goods). Portia wanted the bank to clear up the records at the filing office.
 Does she have this right? Yes! § 9-513(c) gives her the right to request the creditor file a
termination statement in the filing office within 20 days of the request.
 If the bank fails to do this, 9-625(b) & (e)(4) provides that the bank will be liable for
actual damages + $500 statutory damages
 Problem 45: Sam Ambulance handled a divorce for Betty Anarchist. Andrew Anarchast, the irate
ex-spouse, filed 42 phone FS in the public records showing that all of Sam’s assets were security
for various nonexistent loans in favor of Anarchist as SP.
 What can Sam do to clear up these clouds on his title to property?
o 9-513(a)(2) & (c)(4): even though you can’t normally clear the filings as the
‘debtor,’ Comment 3 says that where it is bogus filings, if after informing the
fake one of your request, a termination is not forthcoming, then the debtor itself
may authorize the filing of a termination statement, which will be effective if it
indicates that the person authorized it to be filed.
Perfection by Control
o For certain types of collateral, the SP may achieve perfection of the S.I. by gaining control over the
collateral
o “Control” generally means that the SP has taken the steps described in §§ 9-104 - 107 so that it is obvious
to anyone investigating the state of the collateral that the SP has rights therein.
o See § 9-312 through 9-314: Perfection Sections
20
Chapter 5: Multi-State Transactions
 General Choice of Law Rules
o § 1-301(a) - (c): You can specify you choice of law, but where you file is governed by § 9-301 through
307
o 9-301: Law governing Perfection & Priority of Security Interests
 NOTE: Four pieces/topics included in 9-301:
 Perfection
 Effect of perfection
 Effect of non-perfection
 Priority of a security interest in the collateral
 (1) Default: local law of the jurisdiction in which the debtor is located governs perfection, effect
of perfection or non-perfection, & priority of a S.I. in collateral
 GLOBAL SECTION: deals with all four pieces
 9-307: Location of the Debtor
 (2): For a possessory security interest in collateral, the local law of the jurisdiction where
collateral is located governs priority
 Local law of the jurisdiction where the collateral is located governs possessory S.I.
 (3): narrows subsection (2) & separates these named types of collateral out:
 Tangible negotiable documents, goods, instruments, money, or tangible chattel paper
 NOTE: It doesn’t include payment intangibles or stocks & bonds
 NOT a GLOBAL section
 Subparts (A) & (B): To the extent doing a fixture filing or on timber, local law where
they are located
 Subpart (C): The local law of perfection doesn’t govern this, so (1) still does - so law of
the location of the debtor governs where you perfect
o It does govern the effect of perfection/non-perfection & priority - so where the
thing is located, for this
 For tangible negotiable documents, goods, instruments, money, or tangible chattel paper, local
law of that jurisdiction governs …. See 301(3)(A)-(C)
 Old outline: Domicile of the party dictates where you perfect. Priority is determined by location
of goods
o Certain types of collateral have their own special provisions, as exceptions to 9-301: Laws governing
 9-303: Perfection & Priority of S.I. in CTS
 9-304: Perfection & Priority of S.I. in Deposit Accounts
 9-306: Perfection & Priority of S.I. in Letters of Credit
o Problem 46: Mary lived in a home in Cheyenne, WY, but wanted to buy a large sailboat in Cleveland,
OH. Ohio law provided that when a consumer paid more than 75% of a debt secured by consumer goods,
the creditor’s S.I. is automatically stripped from the consumer goods, but WY had no such rule.
 If a creditor loans Mary money to buy the boat & takes a S.I., where should the creditor file?
 9-301(1): Should file in WY, the location of the debtor
 When Mary has paid off 75% of debt, will the creditor’s S.I. still be attached to the boat?
 9-301(3): Choice of law for collateral located in a jurisdiction - Ohio - So, Ohio laws will
determine effect of perfection & priority
o 9-307: Location of Debtor
 (a): “Global rule:” Place of business = place where debtor conducts affairs
 (b): Debtor’s location:
 Individual debtor = individual’s principal residence
 Organization, 1 PPB = it’s place of business
 Organization, +1 PPB = chief executive offices
 (c): … If (b) doesn’t apply, the debtor is located in District of Columbia
 (e): A registered organization is that is organized under the law of a State is located in that St.
o Problem 47: PeriPath Corp. was organized under Delaware laws, but had its large retail store outlet in
New Jersey. All of the corporate paperwork was done in Baltimore, Maryland (where records were kept)
 When the corp. borrows money against its A/R, in what state should the financing statement be
filed?
21



9-307(b)( & (e): Should file in Delaware, under 9-307(e) & 9-301(1)
If the corp. was registered in another nation, where should the FS be filed?
o 9-307(c): They should file in D.C. as a non-resident foreign corp. which is
properly licensed to do business in the United States
o Problem 48: FF&M is a legal partnership that has only one place of business in Chicago, IL, where ONB,
holder of a S.I. in the AR of the firm, filed its FS.
 If the law firm makes a permanent move to Washington, D.C. on Jan 1, 2013, does the bank lose
its perfection or does it have a grace period in which to re-file in the new jurisdiction?
 9-316(a): It has 4 months to re-file after a relocation of the debtor to another jurisdiction
 If the law firm merges with a D.C. firm, with the new D.C. firm assuming all the debts of the
former one, is the time period the same?
 9-316(a)(3): They will have one year
o Problem 49: FF&M is a legal partnership that has only one place of business in Chicago, IL. FF&M had
2 creditors before its permanent move to D.C., both of which had a perfected S.I. in the AR. ONB filed
first, & LNB filed second. When the firm moved to D.C. the next year, LNB promptly re-filed in D.C.
within 3 months. ONB didn’t file until 9 months later.
 If ONB doesn’t file until 9 months later, will it retain priority over LNB?
 9-316(b) & Comment 3: ONB lost priority because failed to file within the 4 months.
o Policy: This encourages everybody to file early, often, & everywhere. It
promotes having no gaps between the filings
Certificates of Title
o To determine if something is covered by a certificate of title, you check the state statutes to determine if
that state includes that “thing” in their definition under Cert. of Title or not.
 Often: vehicles, off-road vehicles, RVs, trailers, boats (but not in MS), etc.
o 9-303: Law Governing Perfection & Priority of S.I. in Goods covered by a CT
 (b): Goods become covered by a CT when a valid application for the CT & the applicable fee are
delivered to the appropriate authority. Goods cease to be covered by a CT at the earlier of:
 The time the CT ceases to be effective under the issuing jurisdiction’s law, or
 The time the goods become covered subsequently by a CT issued by another jurisdiction
 (c): Local law of the jurisdiction issuing the CT governs all four things listed in § 9-301
o Issuance of a CT as opposed to filing: Instead of issuing a financing statement, you issue a CT, & note
your lien on that Cert. You hold onto the original & give a copy to the buyer.
 Then, if they try to sell the vehicle, the potential buyer has notice of the first lien holder
 NOTE: If the debtor manages to get a clean CT through fraud,
 A dealer cannot take free & clear of that original lien
o “They know better.”
 A regular buyer does take free & clear of that original lien
 Also, a dealer cannot have good title in this situation but CAN give good title to a
consumer
o Problem 50: Saylor was a trucker living & working in Michigan. He bought a new truck in PA on credit
from Ringer. Saylor told Ringer that the truck would be domiciled in Indiana, giving his sister’s address
in Indiana. Ringer noted the lien interest on the Indiana CT. Saylor went bankrupt 1 year later.
 The trustee argued that Ringer was unperfected b/c it didn’t get a Michigan CT & have it’s
interest noted thereon. Result?
 9-303(a): Ringer wins.
o We don’t care about the fraud. 303(a) says that it doesn’t matter if the buyer lies,
cheats, steals, etc. If it is properly issued as a CT, even if no connection to the
state, it is good as a proper CT until somebody else issues one
o Case: Metzger v. American Credit Financial Services
 American held a S.I. in a 1997 Taurus from the finance of the purchase for James in NY. The NY
CT reflected American’s S.I. in the vehicle, but when James moved to GA & applied for a new
Georgia CT, the DMV thorugh clerical error issued the CT w/o nothing American’s S.I. in the
vehicle. James transferred the Taurus to a car dealer, & it subsequently passed through an owner
& another dealer before Metzger purchased in 2002. None of these subsequent GA CTs reflected
American’s S.I. American reposed the Taurus from Metzger. Metzger brought suit.
22

o
o
o
9-337: If a State issues a CT that does not show that the goods are subject to a perfected S.I. or
contain a statement that they may be subject to S.I. not shown on the CT from another state,
 A buyer of the goods, other than a person in the business of selling goods of that kind,
takes free of the security interest if the buyer:
o Gives value
o Receives delivery
o After issuance of the certificate
o Without knowledge of the security interest, and
 The security interest is subordinate to a conflicting security interest that attaches & is
perfected … after issuance of the CT & without the conflicting S.P.’s knowledge of the
SI.
 Metzger met the elements  She wins
Problem 51: Tourist lives in TX, buys car in OK; OK dealer does a CT. Tourist drives back to TX & reregisters the car there. Tourist sold the car to her neighbor, William Innocent. Dealer repossesses car.
 Who is entitled to the car?
 Was dealer correctly perfected in OK? Yes.
 Where they perfected in TX? Yes, b/c perfected in OK.
 BUT, when TX issued the new CT, they lost perfection & TX CT now controls
o Practice point: Provide in the K for the buyer to notify you if they move out of
state w/the collateral.
 9-337: Innocent was a buyer in good faith. Dealer loses! William wins!
 NOTE :There cannot be an innocent buyer in TX once she gets her CT in TX - b/c 337
requires the SI be from another state for 337 to apply.
 9-316(d)( & (e):
 9-316: Talks about continuing perfection of a security interest, which specifies a 4 month
rule
 9-316(d): There is no mention of 4-month rule for certificates of titles
 9-316(e): This section includes the 4-month period
 But, reading 316 (d)-(e) & 337, the effect appears to be that it takes effect instantaneous
(appears to be instantaneous loss), without the 4-month period
 9-337 appears to give priority to an innocent purchaser. Innocent buyer wins & is favored
over everybody else.
 Secured party (dealer) must chase the cash from Tourist
Note:
 9-303: “where” provision - mechanics
 9-337: priority provision - resolves multiple claims
 Trumps everything else - specific over general (thus, trumps 9-316)
Problem 52: Armstrong bought a yacht in a state that doesn’t use CTs for boats, but does a FS instead.
ONB filed the FS. Armstrong moves to a CT state. Armstrong never got a CT.
 Does ONB’s perfection in 2nd state last as long as its filed financing statement is still effective, or
for 4 months, only?
 9-316(d): A S.I. in goods covered by a CT which is perfected by any method under
another jurisdiction’s law when the goods becomes covered by a CT of this State remains
perfected until the S.I. would have become unperfected under the law of the other
jurisdiction had the goods not become so covered.
 9-316(e): See text, pg 727
 But, there is no provision where we go from a Non-CT state to a CT state.
o Go to the general provision of 9-316(a): earliest of 5 years or 4 months = 4 mo.
 What if Armstrong started in a CT state, with ONB’s interest noted on the CT, & then moved to a
state w/no CT & ONB never files & Armstrong never re-registers?
 9-303: ONB is still perfected as long as the CT is issued & good under 9-303(b)
o Problem: New creditor in the non-CT state won’t be looking for CTs, thus the
original issuer of the CT bears the risk.
 See drawing on pg 122: different scenarios of CT & Non-Ct states
23
CHAPTER 6: PRIORITY
Simple Disputes
 Basic priority provisions:
o 9-317: Interests that take priority over or take free of security interest or agricultural lien
o 9-322: Priorities among conflicting security interests in and agricultural liens on same collateral
 Other priority provisions:
o 9-317 through 9-339
 9-317
o A security interest or agricultural lien is subordinate to:
 Perfected parties under 9-322 (FITFIR)
 Lien creditors becoming such before the earlier of the time:
 The security interest is perfected, or
 The security interest is attached
 *Basically, providing for perfected lien creditors that perfect first*
 Places you get “beat,” no matter how well you’ve done to secure your interest:
o 9-320: BIOC beats a perfected party, even if the buyer knows of the perfected party
o 9-322: Unperfected parties lose to basically everybody (purchasers, lien creditors, trustee)
o 9-337: CT - innocent purchaser - beats other CT holders
o 9-330: purchaser in good faith of chattel paper & instruments
o 9-324: PMSI purchasers
o POLICY FOR THESE RULES:
 Art. 9 should not interfere with basic ideas of commerce. Financiers provide the money, but the
buyers are what ultimately make commerce run. “Friendly buyers” argument - notes pg. 36
 Priority is a pure race system
o By encouraging people to get there to file, it encourages others to actually file & to determine if others
have filed. This creates efficiency & increases knowledge of the information within the system. The
system runs on information, so by encouraging people to file early, everywhere, & often, then the system
is better off
 Problem 53: Bookstore borrowed $10,000 from ONB, signing a S.A. & giving the bank a floating lien over the
inventory. ONB failed to file a FS. Martin’s was an unpaid creditor of the bookstore that sued on the debt &
recovered a judgment against the store. A sheriff then levied on the inventory.
o Does ONB or Martin’s get paid first when the inventory is sold?
 ONB is attached (Value, rights, agreement), but they have not filed, so NO PERFECTION.
 9-317(a)(2): Martin wins
 Lien creditor, defined in 9-102(a)(52)
o If instead of a judgment lien creditor, Epsteins had filed a bankruptcy petition while ONB was still
unperfected, what result?
 ONB loses to the bankruptcy trustee (who is a judgment lien creditor)
 Problem 54: Coke used its AR as collateral on loan from MSB, but MSB failed to file the FS b/c the bank’s
attorney lost it. Six months later, Coke applied for another loan from BNB. BNB searched the files, saw no
recorded FS, and took a security interest in the agency’s AR. BNB did file their FS in the proper place. Which
bank has superior interest?
o § 9-322(a)(2): Perfected S.I. beats Unperfected S.I.
 BNB had priority
o 9-317(a) says you lose to a person who had priority under 9-322
 So, BNB wins!
 Problem 55: Eastriver got a loan from FNB & SSB using his clothing inventory as collateral. Both banks made
him sign a S.A. FNB filed its FS on Sept 25, but did not loan Eastriver any money (or make commitment to) until
Nov. 10. SSB loaned Eastriver the money & filed it’s FS on Oct. 2 Eastriver paid neither of the banks.
o Did both banks have a perfected security interest, assuming they filed in the proper place?
 Yes. Perfection is not exclusive. It’s possible for 2 creditors to have perfected S.I. in same
collateral.
o Which bank has superior right to the inventory?
 When were they attached?
24





Attachment: Must have given value, debtor must have rights in collateral, & must sign
SA (or control)
 FNB wasn’t perfected & attached until the last event (9-308)= Nov. 10
 SNB got attachment on Oct 2
 What’s their priority date? (NOTE: Separate in mind: perfection & priority)
 9-322: they rank in terms of priority according to time of filing or perfection
 Priority dates from the earlier of the filing or perfection, if there is no period thereafter
when there is neither filing nor perfection
 For FNB:
o They filed on 9/25, & there is no time thereafter where there is neither filing nor
perfection, b/c they have filed
 For SSB:
o Their priority date is Oct 2, the date of attachment & filing
 Although both had perfected S.I., FNB has the superior interest b/c they were the first to file, &
thus had priority.
Problem 56: FNB took a perfected S.I. in Eastriver’s clothing inventory. The S.A. provided that the inventory
secured the current loan & all future advances. Six months later, FNB loaned Eastriver more money & had him
sign a new promissory note.
o Do the existing filed FS & S.A. need to be altered, or are they sufficient to protect bank?
 § 9-204(c): The first filings are sufficient. & FNB is still first in priority.
 Note: You don’t have to mention future advances in the SA (But you do have to mention if you
want to have AAP or inventory come under the SA).
 SA should mention yes or no on AAP, but don’t have to put in on FA. If you do say FA
as part of the commitment, you need to put in the language “including future advances
but not limited to them.” (Don’t limit yourself with the specific, leave it open to general).
o Note: FNB doesn’t gain priority in an amount. Each of them gains priority in the inventory according to
the classification of the goods.
 FITFIR monopoly is to all inventory, w/o restriction as to amount of debt.
 See other notes on pg 37 of notes
Problem 57: See problem, pg 125
o The earlier financing statement protects the later loan’s priority, even though the loan was not
contemplated when the first financing statement was filed
 9-323(a): Future Advances: When priority based on time of advance
 Cmt 3: A S.P. takes subject to all advances secured by a competing S.I. having priority
under § 9-322(a)(1)
  See Example 1 for clarity
 The lender in 2nd place can never be safe - future advances always retain priority
o Even if the future advances clause had not been in the original S.A.,that does not affect the answer!
Problem 58: Phillip pledged his stamp collection to CNB in return for a loan (gave CNB an oral S.I. in the
collateral; no FS was signed). The bank put the stamp collection in the bank. Phillip then borrowed money from
his father, Filbert, giving him a signed S.A. in the same stamp collection. The father properly filed his FS
o Who has priority b/t CNB & Filbert?
 CNB. It doesn’t matter what method of perfection you have, so long as you are first to perfect or
file.
o If Phillip goes & gets the stamps from the bank & then returns it, does the answer change?
 9-313(d): Perfection which is dependent upon possession of the collateral occurs no earlier than
the time the SP takes possession & continues only while the SP retains possession.
 9-312(f): Would have been temporarily perfected if Phillip had taken them back temporarily for
one of the purposes listed in (f)(2). But he didn’t.
o If CNB makes Philip sign a SA & then turns the collection over to him but never files a FS, who wins?
 9-308(c): Father wins. CNB should have filed.
Dragnet v. Future Advance clauses
o Anything that happens after your SA that’s a future advance on the same transaction. Monopoly situation,
ok under Art. 9
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Dragnet clause reaches back, behind, to other transactions that you’ve taken out prior to the current
transaction. It’s a different & older transaction.
 See Comment 5, §9-204, pg 689
 SA can specifically mention other things.
 Art. 9 rejects the similar type/class test
 But, at the same time, Art. 9 leaves it for state law to decide
o Barnes: Be careful about distinguishing between these!
 Future advances that are completely unrelated to your original transaction are where you have
problems
 Similarly, you have problems with the dragnet clauses.
 But, with FA that are related & similar enough to the original transaction give you no problem
 Problem 59: Poll borrowed from BNB to finance part of the purchase of some cattle. Poll signed a S.A. using the
cattle as collateral for that & “all other obligations now or hereafter owed to the bank.” A FS was filed. Two years
later, Poll received a credit card from BNB & used it to finance a cattle trip to Australia. When he failed to pay
the CC bill, the bank repo’ed the cattle.
o Did the bank’s S.I. in the cattle encompass the CC obligation?
 The original SA included both a dragnet clause (“now owned”) & future advances clause
(hereafter acquired”)
 Yes - 9-204(a) & (c) & Cmt. 5: Can include these.
o Would it make a difference if he had used the money to finance the trip as a vacation for surfing?
 Intent test: did you intend for the money to be used for the same type of transaction as the
original loan?
 “Same class or category:” did you intend for it to be used for the same class of assets?
 Case: In re Wollin
o Look to the class: Ct. rejected bank’s claim here under the dragnet clause b/c the debts weren’t of the
same class
 Loans of the same general category (ex: all business loans, all consumer loans) do not necessarily
meet the “same class” standard
 Problem 60: Aware of difficulties with cross-collateralization clauses, rancher Howard was always careful to keep
his consumer obligations (from his Visa card) with a different bank than the one that financed his ranching op.
(with a traditional loan, cattle as collateral) Both banks had him sign a SA with a dragnet & future advances
clause. The two banks then merged & the loan officer insists that his cattle also protect his debts on the Visa card.
o Argue the intent of the parties test: if he made it that clear that he did not want to subject himself to that
sort of agreement, his intent was clear by him trying to get two separate accounts
Purchase Money Security Interests
 The Basic Rule: If a seller extends credit to the buyer or a lender advances money to enable the buyer to purchase
the collateral, & the parties sign a S.A., the seller/lender gets a PMSI.
o 9-103: PMSI provision
o The goods become subjecting to an existing S.I. when they come into the buyer’s possession, but the
PMSI gets priority, even though the PMSI is later in time to earlier perfected interests.
 PMSI in Consumer Goods
o If the collateral is consumer goods, no further steps are required for a PMSI to prevail over prior or later
interests (9-309(1)
 All other PMSI interests
o 9-317(e): Must be perfected during a 20-day grace period following buyer’s possession of the goods in
order to take advantage of a relation-back priority to that date
 Priority of PMSIs
o 9-324(a): Perfected PMSI interests in goods other than inventory or livestock has priority over a
conflicting interest in the same goods & in the identifiable proceeds, if the PMSI is perfected within 20
days of the debtor receiving possession of the collateral
 *This is an exception to our FITFIR rule!
 This section is for anything under Art. 9 EXCEPT inventory & livestock
o 9-324(b): Priority of PMSIs taken in inventory: A perfected PMSIin inventory has priority over a
conflicting S.I. in the same inventory or its proceeds, if:
 The PSMI is perfected when the debtor receives possession of the inventory,
o
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 No 20 day grace period!
The PM secured party sends an authenticated notification to the holder of the conflicting S.I.,
The holder of the conflicting S.I. receives the notification w/in 5 years before the debtor receives
possession of the inventory, and
 The notification states that the person sending the notification has/expects to acquire a PMSI in
inventory of the debtor & describes the inventory.
 BARNES NOTES:
 *The function of the letter giving notice to the other party that you have a PMSI in that
inventory cures ostensible ownership, putting the world on notice that you hold a titled
interest in this inventory. It also functions to give notice to the original creditor to prevent
the debtor from getting more money loaned to them on that inventory (fraud prevention,
kind of), unless this creditor is okay with being in second place on that additional money
(they are moved to 2nd place on the first loan as to that new inventory, as well). “Lazy
person’s provision.” If I knew at the time that I was first in time, I don’t have to look at
Art. 9 filings again. The later person who could come along later & beat you is the one
responsible for giving you notice.
 The first creditor hasn’t lost anything on their first transaction, they just lose the ability to
be first on that additionally acquired inventory. Those “extra goodies” may not be added
to that creditor’s pile though- they may be added to that next creditor’s pile (if they
comply with these notice requirements above
 NOTE: as the original SP, you can put a clause in your SA saying that if you do go & get
a PMSI, that’s considered a default
o But, not a good position for a debtor, b/c it takes away bargaining power - notes
pg 42
o 9-324(d): Priority of Livestock PMSI: A perfected PMSI in livestock that are farm products has priority
over a conflicting S.I. in the same livestock & in their identifiable proceeds & unmanufactured products
if:
 The PMSI is perfected when the debtor receives possession of the livestock,
 The PM secured party sends an authenticated notification to the holder of the conflicting S.I.,
 The holder of the conflicting S.I. receives the notification within six months before the debtor
receives possession of the livestock, and
 The notification states that the person sending the notification has/expects to acquire a PMSI in
inventory of the livestock & describes the livestock.
Problem 61: To furnish an apartment complex Paramount had built, Bill (construction mgr) purchased $2,000 of
furniture on credit, signing a S.A. in favor of Sophy, the seller. The agreement was signed on June 8. The goods
were delivered the same day. Bill failed to mention that all of Paramount’s equipment was designated as collateral
on an existing S.A. & FS in favor of SNB, which included an AAP clause (9-204(a)). Sophy had a policy to not
file FS for its credit furniture sales.
o Have attachment, b/c we have V, R, & SA
o Why might Sophy have such a policy? Is it wise here?
 Probably they sell most of their goods to consumers, which doesn’t require a filing to get a PMSI
 BUT, this is not a consumer sale! It is a sale to a business.
o On June 10, which creditor has priority in the furniture? On June 30?
 9-317(e): They have a 20-day grace period from June 8, so on June 10, Sophys has priority.
 On June 30, if Sophy still hasn’t filed, then SNB has priority, b/c 20 day period has expired
Case: Galleon Industries Inc. v. Lewyn
o See Facts, notes pg 39
o For a PMSI secured party, if you come into a situation unintentionally & realize you aren’t filed on an
interests, you have the 20-day grace period under 9-317(e)
Problem 62: Video Wonder had granted a floating lien in inventory & equipment to LNB, who perfected by
filing. Video then purchased a guard dog on credit from Agatha, with Video not to get title to the dog until he was
paid for. Video then stopped making payment to all creditors. LNB seized all store assets, including the dog. Can
Agatha get the dog back?
o No. She falls under Art. 9 as a creditor.
o Video Wonder had rights in Fang, & because they did have present rights, then they can attach an Art. 9
S.I.
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

o Agatha should have filed! She had 20 days after they took the dog to do so.
Problem 63: Hart Farm Equip. leased a construction backhoe to Farmer Bean for 6 months, giving Bean an option
to purchase the backhoe at any time during that period. Bean’s equipment was already subject to a perfected
floating lien in favor of ONB. Three months into the lease, Bean agreed to buy the backhoe, & Hart filed its FS
the next day, claiming a PMSI.
o Who wins a priority battle b/t Hart & ONB?
 Hart wins, b/c they filed their security interest in a timely manner. They filed it within 20 days of
the purchase of the backhoe
 Comment 3,§ 9-324 says “within 20 days of possession “means “possession as a debtor.”
 He didn’t become a debtor until he purchased it; he wasn’t a debtor during the lease
 Problem 64: MCA held a perfected S.I. in Harold’s Clothing Store inventory. Harold contracted to buy $4,000
worth of new clothes from Madame Belinda, which took a PMSI in the clothes on Dec. 10, the date of sale.
Madame Belinda wrote MCA on Dec. 11 & informed them of the sale. They protested, but did nothing. Belinda
filed on Dec. 11 & the goods were delivered on Dec. 12.
o Who has priority?
 Madame Belinda. She has met the priority requirements of 9-324(b)(1)-(4)
o Would the answer change if Belinda’s notice wasn’t received until Dec. 13?
 § 9-324(b)(3): it must be received within 5 years before the debtor takes possession
 Belinda loses! It was received the day after the inventory was received by Harold
o If notice was received on Dec. 11, is it sufficient to permit Belinda to keep selling goods to Harold for an
indefinite period or for only this one transaction?
 9-324(b)(3): OK for up to 5 years, as long as your description is not too specific so as to exclude
 Case: Kunkel v. Sprague National Bank
o See notes & book, PG 139 - skipped
 Problem 65: Hans Racing Equip. bought inventory from Standard Wholesale, which always took a PMSI in the
goods & which filed a FS on the same day. Hans borrowed from MDNB to finance the purchase of inventory
from wholesalers, part of which was used to pay off Standard. MDNB filed a FS, claiming a S.I. in Hans’s
inventory. Hans bought goods from Std., giving a PMSI. Same day, Hans also borrowed money from MDNB to
make a down payment on part of that purchase & gave MDNB a PMSI in the same goods. Both sent written
notice. Hans received the goods on April 2.
o Hans purchases qualify as a PMSI
o If both parties want to be PMSI for inventory, they must file their FS on or before Hans receives
possession & must send notice to holder of the conflicting S.I. & meet the other requirements of 9-324
o It doesn’t matter who files first in PMSI here, but it does matter the role of the parties.
 § 9-324(g)(1) says that where you have conflicting PMSI interests, the SI securing an obligation
incurred as all or part of the price of the collateral has priority over the security interest securing
an obligation incurred for value given to enable the debtor to acquire rings in the use of collateral
 I.e., the seller is preferred over the financier
o So, financier fears other PMSI sellers!
 § 9-324(g)(2) says that, in all other cases, 9-322(a) applies to the qualifying SI- it will be strictly
by filing date- FITFIR
 So, Standard has priority over MDNB
 Consignments
o 9-103(d): The S.I. of a consignor in goods that are the subject of a consignment is a PMSI in inventory
o 9-319 & Cmt 3, pg 734
o Problem 66: Barbara gave Tim, owner of Isle’s Fine Art Works, 5 of her pieces to exhibit & sell. The next
day, she learned that ONB, which held a perfected floating lien on the store’s inventory, had foreclosed &
seized her paintings. Can ONB do this?
 Delivery of the goods on consignment meant that they were considered inventory of the gallery
 See 9-319, cmt 2: She should have filed a financing statement. Consignors who don’t file lose to
purchasers (The bank here is a purchaser, b/c they are a person who acquired rights in the
collateral). Barb loses.
Control & Priority
 Control over Investment Property
o Investment property: defined in 9-102(a)(49)
 Security defined in 8-102(a)(15): basically, stocks & bonds
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o

9-328(1): Control trumps filing
 9-106: What it takes to have control
 Sends us to 8-106: tells how to have control of the different forms of securities
o Bearer certificated securities
o Registered certificated securities
o Security entitlements
o Uncertificated securities: nothing changes hands; it’s a notation in someone’s
books
 Safest kind
 Two types of control here
o So, if’s it in certificated bearer or registered, GRAB IT.
o If it’s an uncertificated security, the issuer notes it on their books that you are the
owner.
 But note, you don’t want just the intermediary to tell you that you own ityou want to make sure that they comply with 8-106(c)(2) & recognize
your ownership.
 How would a lender get Article 9 perfection on a person’s stock?
o They are going to get security entitlement.
o They would go to the securities intermediary, & the stock owner will have to
send a form agreeing to it.
o Basically, you are trying to get whoever issues the stock to comply with your
orders (?)
 See back of code book- graphical description of § (8)-106
o Problem 67: Goldbury instructed BBB (stockbroker) to buy 100 shares of Utopia stock & place it in his
account. BBB purchased the shares & kept them in an account it held at Clearing Corp., but marked its
records to indicate that Goldbury was the real owner. Goldbury went to ONB & asked to borrow money,
using the shares as collateral.
 Art 8 would deem Goldbury an entitlement holder who has a securities entitlement in a security
account with a securities intermediary (defined in 8-102)
 What methods of 8-106(d) would be safest way for ONB to get “control”?
 8-106(d), comment 4: Becoming the entitlement holder - clears any conflict
 If another creditor also gets control over the rights, which has priority?
 9-328(2): Priority of S.I. in investment property
o Ranked in priority of time
o See old outline for better notes
Control over Deposit Accounts
o A creditor can get a perfected security interest in bank accounts by obtaining control
o NOTE: consumer accounts may NOT be used as collateral for consumer debts
 But they CAN be used as collateral for non-consumer debts
o 9-327: Priority of Security Interests in Deposit Account
 Control of the deposit account gives priority over a conflicting security interest held by a secured
party that does not have control
o Problem 68: Computer World wanted to borrow money from IBA, which will grant it a revolving line of
credit, secured in party by Computer World’s bank account held at LNB.
 How can IBA perfect its S.I. in this bank account, & which of the methods of control specified in
9-104 would be the safest form of security?
 9-104 tells us 3 possibilities of control: A SP has control of a deposit account if:
o The SP is the bank with which the deposit account is maintained
o The debtor, SP, & bank have agreed in an authenticated record that the bank will
comply with instructions originated by the secured party directing disposition of
the funds w/o further consent by the debtor; or
o The SP becomes the bank’s customer w/r/t the deposit account
 If CW later borrows money from LNB & grants the bank a S.I. in the account carried there,
would LNB have priority over LNB?
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
§ 9-327 tells us that between 2 banks, the bank that wins is the banking bank (the holder
of the account) unless you give control to that other bank under 9-327(3)&(4)
 Control over Letter of Credit Rights
o NOTE: Barnes said would not be tested on. If we ARE, see textbook pg 152, notes pg 46, OO pg 21
o Problem 69
o 9-312(b)(2): Perfection of letter of credit achieved by control only
Buyers
 General provision: 9-201(a): Except as otherwise provided by the UCC, a S.A. is effective according to its terms
between the parties, against purchasers of the collateral and against creditors.
o 9-320(a): Buyers in the ordinary course of business, other than a person buying farm products from a
farmer, takes free of a S.I. created by the buyer’s seller, even if the S.I. is perfected & the buyer knows of
its existence. [BUSINESS PROVISION]
 BIOC defined in 1-201(9) - see qualifications below for being a BIOC
o 9-320(b): A buyer of goods from a person who used/bought the goods for use primarily for personal,
family, or household purposes takes free of a S.I. (even if perfected), if the buyer buys:
 Without knowledge of the S.I. (note: this is knowledge, not notice)
 For value
 Primarily for buyer’s personal, family, or household purposes, and
 Before the filing of a FS covering the goods
 [CONSUMER TO CONSUMER PROVISION]
o 9-317(b): A buyer, other than a S.P., of tangible chattel paper, tangible documents, goods, instruments, or
a security certificate takes free of a security interest IF the buyer gives value & receives delivery of the
collateral WITHOUT KNOWLEDGE of the S.I AND before it is perfected.
 BIOC: Qualifications that a buyer must meet to purchase free of a prior Sec. Int. in the purchased
property:
o Must be a buyer in the ordinary course of the seller’s business
o Must not buy in bulk
o Must NOT take the interest as a security for or in total or partial satisfaction of preexisting debt (buyer
must give some new value)
o Must buy from one in the business of selling goods of that kind
o Must buy in good faith & without knowledge that the purchase is in violation of other’s ownership rights
or S.I.
o Must not buy farm products from a person engaged in farming operations
o The seller’s creditor must part with possession
o The competing security interest must be one created by the buyer’s seller
 Problem 70: Betty Consumer bought a TV set from Distortion TV, a retailer. A month later, Distortion went
bankrupt, and ONB asked Betty yo turn over the TV, explaining that ONB held a perfected S.I. in all of
Distortion’s inventory & that since Distortion had not paid ONB, it was repossessing.
o What should Ms. Consumer say?
 9-320(a): Betty is a BIOC. She wins.
o Would it matter if she had known that ONB had a perfected S.I. in Distortion’s inventory?
 No - 9-320(a) says BIOC takes free, even if has knowledge of the S.I.
 The knowledge provision is in that consumer-to-consumer provision
o Would it matter if she had bought the set at a Liquidation Sale & was told that the store planned to file for
bankruptcy? NO.
o What if it had been put on layaway, with Betty paying 50% of the price, but permitting Distortion to keep
the TV?
 Problem! You must take delivery to be a BIOC.
 § 2-502: gives buyers 10 days upon notification of insolvency to pay remainder owed & take
possession
 Case: International Harvester
o Parties: IHC: Creditor - Barnes: Dealer - Glendenning: Farmer/trader
o Barnes sold Glendenning three tractors for $16,000 cash. Barnes wrote on his books, & Glendenning
signed order forms with knowledge of the falsity, that Glendenning had given the cash PLUS traded in
two used tractors (which he never traded in). Barnes used the ‘new assets’- the two used tractors- to get an
advance of more cash from IHC. Barnes went bankrupt.
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o
o
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A BIOC gets to keep the asset unless there has been FRAUD
To be a BIOC, must always act in good faith
 Good faith: (1) observance of reasonable commercial standards & (2) acting with honesty in fact
 Objective & subjective test
o Glendenning engaged in fraud & thus LOSES. IHC gets tractor.
Problem 71: Deering was a textile mfr which routinely sold textiles to Mill. Mill would then resell the fabrics to
Tanbro, a wholesaler. While the textiles were still in Deering’s warehouse, Mill contracted to buy them from
Deering, signing a S.A. & giving Deering a FS, which it filed. Mill then sold the textiles to Tanbro, which paid
Mills., but delayed taking possession for 2 weeks (Deering kept). Mills became insolvent, never paid Deering, &
Deering refused to deliver to Tanbro. Who prevails?
o Deering wins.
o To be a BIOC, must take possession.
o Tanbro could argue that they are a creditor of Mills b/c Mills owes them performance (giving textiles).
 Tanbro culd then file against Mills, making themselves a S.P., & if anything is left over after
Deering is paid, Tanbro could get paid bac (to extent there is surplus)
 Deering is 1st, b/c they possess. Tanbro would be 2nd, if they file (3rd if not- b/c bkty te)
Problem 72: ONB had a perfected S.I. in the cars on Smiles Motors’ lot. (floating lien on inventory) Smiles owed
$5,000 in past due insurance premiums to its insurance agent, Teeth. Teeth came to buy a car. Smiles gave Teeth
a check for $5,000, but Teeth endorsed it back over to Smiles when he found a car he wanted. Is Howard a BIOC
so as to take free of ONB’s S.I.?
o To be a BIOC, buyer must give “new” value
 He should have written a new check of his own to avoid this problem.
o Case law has attempted to solve this problem:
 If you just cancel a debt on the books: not new value
 If the check goes out, is endorsed, & comes back in: new value, b/c you are obligated on the ck
Case: First National Bank v. Ford Motor Credit
o Overton & Magill bought 2 cars out of inventory of the FLM dealership, getting financing from FNB. The
cars were covered by a floating lien held by FMCC. FNB took a S.I. in the cars but didn’t take a CT. O &
M then put the cars back on the lot for sale by the dealership.
o FMCC is first in time on these two cars b/c they held that floating lien. FMCC holds PMSI interest
o For FNB to beat FMCC, they would have to have a PMSI financier under 9-324(g) (see cmt. 13)
 They have to go to Ford, enable the cash to be presented, & buy the car.
 They cannot do that, unless they acquire the loan from FMCC
 FMCC wins
o If they can’t beat FMCC under 9-324, then they (O & M) would need to be a BIOC to get priority in the
cars. For FNB to beat FMCC in any other way, they have to beat them through O & M as BIOC, b/c then
they would have taken free of FNB’s S.I.
 BUT, Overton & Magill can NEVER be a BIOC here, b/c they KNEW that the sale violated the
other S.I.
o So note, two ways FNB could have won here: PMSI or becomes S.P. for a BIOC. Neither present here.
Problem 73: Greenbaum bought a new card on credit from Lori’s Car City, which took a PMSI on the vehicle,
perfecting it by notation of its interest on the CT. Arthur was a used car dealer by profession, but he had
purchased the car for private use. He frequently parked the car on his lot, & sold it one day to Ann, a customer.
Arthur did not tell her it was his personal car. Ann found out, and sued Lori’s, demanding title be released.
o Ann doesn’t’ qualify sufficiently for BIOC protection. Lori’s Car City wins b/c they have a PMSI
 9-320, 9-337
o CT provision & choice of laws- § 9-303
 The CT is good until a new one is issued or until it expires. (Basically, good forever.)
 When the buyer purchased it from the dealer, presumably Greenbaum issued a clean CT.
 But, the problem here is that Greenbaum is selling his personal car.
 9-337: If Greenbaum issued a CT to Ann, & it’s clean, she gets away clean.
o If doesn’t issue clean CT, t hen go back to §9-320 (BIOC):
 Look at BIOC from the view of the buyer: Ann will still be protected.
 She is a buyer in good faith
o She had no way of knowing it was his personal car
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

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o NOTE: If she knew, then different result
 Greenbaum is in the OCOB
 She doesn’t have notice
  She takes free of the interest.
o As Lori’s Car City, you hold on the CT & don’t give him a copy, & you either don’t finance cars for
dealer, or put controls in place so that they can’t/don’t issue new CTs.
Problem 74: Wonder Spa pledged 50 of its P.N. to CSBTC in return for a loan. The bank took possession of the
notes. The spa asked to have 10 of the notes back for presentment to the maker for pmt., & the bank turned them
over. Wonder Spa then sold (discounted) the notes to ONB, a BFP w/o knowledge of CSBTC’s interest. The
resale directly violated Wonder Spa’s agreement with CSBTC. Which bank is entitled to the instruments?
o Recall: A pledge means that the debtor (pledgor) gives physical possession of the collateral to the creditor
(the pledge) until the debt is paid
o 9-312(g) gives 20 days in which a perfected S.I. in an instrument or certificated security remains
perfected w/o filing, if the S.P delivers the thing to the debtor for the purpose of:
 Ultimate sale or exchange, or
 Presentation, collection, enforcement, renewal, or registration of transfer.
o 9-331 gives priority to a purchase of a promissory note, if they correctly purchase, it, EVEN THOUGH 9312 gave the 20-day provision
 Holders in due course take priority over an earlier S.I., even if perfected…
 THUS NOTE: Never let go of a promissory note!
 And put in SA b/t CSBTC & Wonder that Wonder is required to give notice of any sale
of the notes.
o Can chase the proceeds, under 9-324 & other sectoins
Problem 75: Andy Audio bought a stereo receiver on credit from VOJ, an electronic store, giving it a PMSI. VOJ
did not file a FS. Six months later, Andy sold it to Nancy at a garage sale. If Andy stops making payments, can
VOJ repossess the receiver from Nancy?
o 9-320(b) & Cmt. 5
 Nancy was a buyer of consumer goods (consumer-to-consumer sale).
 Although VOJ did not need to file (b/c it had an automatically perfected PMSI interest), Nancy
took free of that PMSI b/c of the lack of filing, b/c of 320(b)(4).
o SA should have provided that Andy was required to notify VOJ of any sale of the goods
o THUS, WISE TO FILE A FINANCING STATEMENT FOR BIG TICKET CONSUMER
TRANSACTIONS!
Problem 76: Repo. Finance Co. had a perfected (filed) S.I. in WTIC’s equipment. WTIC, though technically a
corporation, was a family business. One day, Bill White-Truck met Frank Family, a consumer, who bought an
ice-cream-making machine from Bill. Frank paid cash. WTIC stopped making payments, & Repo. repossessed all
equipment. Frank refused to turn over the machine, & Repo. sued him for conversion .
o Does Frank lose?
 Repo. Co. wins
 This is not consumer goods - it is equipment
 The buyer is not a BIOC, b/c this is equipment & 9-320 says that equipment is not protected (not
inventory)
 It is not WTIC’S ordinary course of business to sell their ice cream making machines.
 By selling equipment, you are reducing the chances of the creditor being paid b/c you are
selling off part of what is used to MAKE the money. (as opposed to with inventory, you
are increasing your chances of being paid)
 9-315(a)(1) complements 9-320: A S.I. continues in collateral, unless disposition is authorized
 Most commonly authorized with inventory; NOT with equipment
o Would we get a different result if the bank’s interest were unperfected at the time of the sale?
 Yes - 9-317(b): unperfected secured party loses to everybody
o Would we get a different result if the bank knew & approved of the sale?
 Yes, under 9-315(a)(1)
Problem 77: Paul Pop was a rock singer. He borrowed $8,000 from ONB to buy stereo equipment for his show.
On April 2, Paul purchased, & ONB filed its FS on April 10. But, in interim (Apr. 8), Paul sold the equipment to
Used Stereo Heaven, which bought w/no knowledge of the bank’s PMSI. Does ONB or USH have superior int.?
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o
o
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Category of the collateral: Equipment
9-317(e): gap protector: 20 day protection period after taking delivery of the collateral for filing a FS automatic perfection in that situation, so the buyer can’t beat you
 NOTE: This is not a BIOC situation - this is not Paul’s OCB.
o Side note: if you are buying equipment from yard sales or such, if there is no filing, then ask when it was
bought. Never buy anything that has been bought within the last 20 days, b/c buyers not in the OCOB
have to worry about this!
Problem 78: Farmer Bean borrowed a large sum from FFFC. Bean was required to sign a S.A., promising not to
sell the collateral crop w/o written consent of FFFC. Every year, he sold the crop to the same buyer & remitted the
proceeds to FFFC w/o it’s written consent.
o Does the buyer take free of the S.I. of the SP under 9-320(a)?
 NO! 9-320(a) does NOT apply to a person buying farm products from a person engaged in
farming operations. They take subject to a farmer’s lender’s security interest.
 BUT, § 1631 (Farm Security Act) says that a buyer of farm products takes free of a S.I. unless
there is a filing or direct notice of the S.I.
 § 1631: How to protect yourself if you are a secured party:
 Maintain a filing system approved by the Sec. of Ag., which will basically approve a
statewide filing system.
o File by debtor (farmer) name & list the crop & year.
o Short description of the land talking about
 Give personal direct notice (“Direct notice system”)
o If you know that the debtor is a risk to sell, you look at all the people who are
going to buy the crop.
o Directly notify everybody with the same information & say ‘don’t buy from this
person, or if you do, you commit a conversion, & thus you will owe their debts
on the crop’
o If FFFC never protested what was going on as the SA was continually violated, can it be said to have
waived its S.I. Can a S.I be waived?
 If you have a S.A. that says you cannot violate my SA, then you are fine, but you can’t routinely
let them violate your SA, or then you lose
Case: Clovis National Bank v. Thomas
o Bunch got a loan from CNB, giving a SA in his cattle. Thomas bought Bunch’s cattle at a consignment
sale. CNB said that if Thomas had already given the money to Bunch, that he’d have to pay THEM, too,
thus paying twice. (They claimed that taking the property was conversion.) WRONG- Thomas wins.
o Here, Clovis had impliedly consented to the sale of the cattle by never actually demanding prior written
consent from any of their customers for such sales. Rather, they had let them auction their cattle three
times per year for 4 years. It was only on this 13th time that CNB sued for conversion, b/c Bunch didn’t
give that money over.
o The Court indirectly makes the point that if they had done things correctly (i.e., enforced the agreement
that Bunch was not to sell, was to notify before sale, & was to get permission from the bank first), the
bank would have been protected.
 So, buyers should recognize that farmers are not authorized to sell their cattle.
Problem 79: Bean borrowed money from ONB, which had him sign a S.A. covering his crops. The S.A. forbade
him the right to sell his crops w/o written consent of bank & required him to give the bank a list of potential
buyers of the crops. Bean did so, & the list included the 5 buyers to whom he had sold his crop to in the past. The
bank sent written notice in compliance with § 1631 to each of these buyers, telling them to make payment for the
crops to ONB. One buyer not on the list was Rural Silo, which contracted to buy all of Bean’s 2010 crop. Rural
knew of ONBs filed FS (though the state had no FSA central filing system). Rural bought crop & paid Bean.
o Is Rural Silo a BIOC under s 1631(c)(1)? YES
o Does Rural take free of the bank’s S.I.?
 §1631(d): Yes
 Under federal scheme, Rural Silo’s direct personal knowledge does not prevent them from
becoming a protected buyer.
 It makes the lender responsible for giving DIRECT NOTICE to all buyers, as required by the
federal statutes.
 To the extent that you should file, you should do so.
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 But, b/c no federally recognized system, you are not perfected against a buyer like Rural.
 BUT, still protected against bankruptcy trustees.
 If there IS federal system, that system protects you against both types of parties
o Does the bank have any other remedy?
 § 1631(h)(3): Bean can be fined $5,000
Case: Farm Credit Bank v. F & A Dairy
o Dairy farm operator Bonneprise borrowed $300,000 from FCB, giving as collateral a S.I. covering the
Bonneprise’s milk & all accounts arising from the sale/disposition of their milk & milk products.
Bonneprise was selling to Land O’Lakes, which had notice as required under § 1631. Bonneprise
switched dairies & began selling to F & A Dairy. Bonneprise refused to make an assignment directing the
dairy to pay the bank. Bank notified F & A that month of the FS & of its perfected S.I. in the milk &
accounts. F & A refused to pay FCB.
o Court found that Bank won b/c they had given notice to F&A by sending information.
 The notice that they sent out said all of the things stated on p 178
o There is a requirement of sending notice of a payment obligation, but no requirement that you state the
amount.
o F & A was liable to FCB.
Problem 80: Halyards purchased a sailboat with money borrowed from Boilerplate Nat’l Bank, which took a S.I.
& filed a FS Halyards sold the boat to Oil Slick, a used boat co., telling OS of the bank’s interest & of the
necessity of making monthly payments to the bank. OS sold the boat to Blink, innocent purchasers believing OS
had clear title. When it did not receive payment, BNB found the boat & repossessed.
o Do the Blinks fit within 9-320(a)?
 This S.I. was not created by the buyer’s seller (OS), as required to be protected under 320(a). It
was created by Halyards.
 Blinks lose the boat.
 Note: The Blinks WOULD HAVE taken free of a S.I. created by OS & would thus take
free of all the people who loan money to OS. But, this one wasn’t created by OS.
o Here, we have 2 innocent parties: Blink & Boilerplate. Halyards are the bad party. OS didn’t really do
anything wrong, either, b/c they paid Halyard. B/c there is no way to put the loss on the right person
(Halyard), the loss must be between BNB & Blink. Blink has a better shot at getting their money back
than BNB.
 Blink can sue Oil Slick (b/c it likely gave Blinks a warranty of title which was defective)
 Blinks can probably recover b/c this is one problem had by a going concern business, &
thus they probably have the money to pay.
 Oil Slick would then go sue Halyards, & loss would fall where it should
CONTRAST # 80 WITH THE TYPICAL “CREATED BY A SELLER” SITUATION:
o BNB loans money to Halyard, a boat seller. BNB takes a SA & FS on the inventory in return for the loan.
The Blinks go directly to Halyard & buy boat. Blinks are classic BIOC under 9-320 or 9-321. We would
not put the loss on the Blinks here.
o Why would BNB be pursuing the boat (collateral) from the Blinks?
 Bankruptcy of halyards
 If we put the loss on the Blinks, they’d lose every time to the bankruptcy estate. (or, almost every
time)
 If we put it on BNB, they’ll be searching for the cash proceeds that went to Halyards.
o 9-315 gives you protected SI in proceeds the same as you had original SI in goods
 So, when BNB had the SI in the boats, everything that came in as replacement of the boats was
also subject to that SI. Thus, when cash comes in, BNB can trace the cash & get it.
Leases
 Problem 81: Highbid construction gave a S.I. to ONB in all of its construction equipment “now owned or after
acquired.” ONB filed its FS. Two yrs. later, Highbid was in middle of an enormous construction project when it
was forced to farm out the project to another builder, Newcomer Construction Co. Highbid agreed to lease all of
its construction equipment to Newcomer for the project so that the job could be finished.
o Is the lessee (Newcomer) subject to ONB’s existing S.I. in the equipment of lessor (Highbid)?
 § 2A-307: A creditor of the lessor takes subject to the lease unless their lien attached before the
lease became enforceable
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
BUT, exceptions in 2A-306 & 308
 § 2A-306: If a person in OCOB furnishes services/materials w/r/t goods subject to a lease
K, a lien upon those goods in the possession of that person … for those materials/services
takes priority over any interest of the lessor or lessee under the lease K unless the lien is
created by statute/rule of law & the statute/rule of law provides otherwise.
 308(1): a creditor of a lessor in possession of goods subject to a lease K may treat the
lease K as void if as against the creditor retention of possession by the lessor is
fraudulent…
o So, if FNB goes in & loans money to High on the lease, they take subject to the
lease unless it is fraudulent.
 308(2): nothing in the article impairs rights of creditor or lessor if the lease is enforceable
in satisfaction of a preexisting claim and would constitute a voidable preference or
fraudulent transfer.
 308(3): A creditor of a seller may treat a sale or an identification of goods to a K for sale
as void if as against the creditor retention of possession by the seller is fraudulent…
 Thus, test under 2A-308 is good faith & not fraudulent
o What indicates that this is a good faith lease or not?
 They didn’t tell New that ONB had a SI in the equipment, but that doesn’t indicate fraud.
 Passes minimal test of 2A-308
o Under 2A-307, New takes subject to the SI held by ONB, the creditor of High.
o NOTE: Among these parties, we have 3 different competitors:
 Rule for creditor of lessee: 2A-307(1)
 TAKE SUBJECT TO THE LEASE K
 Rule for creditors of lessor: 2A-307(2)
 FITFIR
 Rule for dispute b/t lessee & creditors: 2A-307(3)
 LESSEE TAKES SUBJECT TO THE SECURITY INTEREST
o UNLESS the lessee was one in the ordinary course of business (9-321(c)) (LIOC)
o LIOC IS SAME AS BIOC
 We will let them get away w/the lease b/c they are providing cash back
to the enterprise.
 But if they are not a LIOC, it is ‘dangerous’- it is like selling the
equipment out from underneath ONB’s SI
o Here, Newcomer is not a lessee in the OCOB, b/c HB was normally just a contractor.
 If they had been a leasing co., then Newcomer’s lease would have been a LIOC.
o ONB wins!
Problem 82: Highbid paid off all loans, freeing all assets from any S.I. Highbid then purchased a new grading
machine, and for tax reasons, sold it to & leased it back from ONB. The lease term exactly equaled the life of the
machine. Two months after the lease began, Highbid’s president absconded with the liquid assets. ONB refused to
loan any more money, so Highbid went to ANB, offering the grading machine as collateral. They did nto tell
ANB about the subsequent sale & leaseback arrangement. ANB checked the records & found no evidence of a
S.I. in the grading machine. It loaned the money, having Highbid sign the necessary Art. 9 docs & a P.N. , & then
filed a FS. When Highbid defaulted on its lease payments, ONB repossessed the grading machine. ANB claimed a
superior interest, arguing that ONB was a party to fraud.
o ONB should have filed on the machine! Remember, filing does not change tax results/status
o B/t ANB (creditor of Highbid) & the lessor (ONB), who wins?
 ANB wins.
 When ONB did the lease, they made the term of the lease the entire life of the equipment &
provided for a nominal consideration amount for a buyback.
 This is a disguised secured transaction!!!! Not a genuine lease!!
 SO, if this is the case, you definitely should file.
 And, you should do a termination clause & require real termination value at end, in order
to make it a true lease
o If you do these two things, then you DEFINITELY beat ANB.
 W/o the genuine lease, ANB is the only secured filed party.
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 And 9-317 tells us that unperfected secured parties lose to everybody!!!
If it had included termination provision, then it is a genuine lease, and 2A-308(3) governs- if it is a true
lease made in good faith, then ANB takes subject to it.
 SO, § 2A-308(3) backs up 9-321(3)
 Rules we have for leases:
o Lessess in OCOB almost always win
o Creditors against lessees or lessors win, unless LOCOB
o Creditors vs. other creditors (creditors of lessor v. creditors of lessee): FITFIR (2A-307)
o 2A-307(1): Creditors of the lessee take subject to the lease K.
o 2A-307(2)Creditors of the lessor take subject to the lease K, unless fraudulent
o 2A-307(3): Lessees take subject to SI unless LOCB
Article 2 Claimants
 The rights of an unpaid seller are governed by Art. 2 & Art. 9.
o If a seller gets a S.A. covering the item sold, a PMSI (9-103) arises, & 9-324 governs priority.
o If the seller extends credit to the buyer but fails to reserve a S.I., § 2-702 applies.
 Problem 82: Gladhand, a traveling salesman, needed new luggage to carry his samples. He bought a set from
Alligator Fashions, which reserved a S.I. & filed a FS A month later, Gladhand sold the luggage & all samples to
Mark Impulse, a compulsive buyer. Gladhand told Mark that it was alligator (although G knew it was lizard).
Mark discovered the truth & revoked his acceptance of the goods under § 2-608 & claimed a S.I. in the goods. (§
2-711(3)) On learning of the resale & sub. revocation, Alligator called the loan & repossessed the luggage.
o Who is entitled to the luggage?
 § 2-608 & § 2-711 provide for a buyer’s remedies
 Impulse had right to revoke under § 2-711!
 Gladhand was a BIOC from Alligator Sales
 Gladhand is a debtor under § 9-110 (debtor to Alligator, creditor)
 Until Gladhand gets the goods back (until debtor gets goods back), under 9-110:
 The S.I. is enforceable
 Filing is not required to perfect the S.I.
 The rights of the S.P after the debtor’s default are governed by Art. 2 or 2A
 S.I. has priority over a conflicting S.I. created by the debtor.
 Even though Impulse had no S.A., there was a S.I. arising under Art. 2
 Impulse’s security interest takes priority over the creditor’s SA, so long as Impulse does not give
up possession to Gladhand (debtor) - see 9-110
 Alligator will have to chase the cash in Gladhand’s possession & must leave the luggage alone.
 *see review class notes, pg 57
Statutory Lien Holders
 Black-letter law: arise by non-consent, arise by statute—mechanics lien for example;
 most common are building and construction liens
 Absent something in art. 9 which says that art. 9 wins, these liens win out
o 9-333(b): A possessory lien on goods has priority over a S.I. in the goods unless the lien is created by a
statute that says otherwise.
 333(a): A possessory lien is an interest, other than a S.I. or ag. lien,
 Which secures pmt. or performance of an obligation for services or materials furnished
w/r/t goods by a person in the OCOB
 Which is created by statute in favor of the person, and
 Whose effectiveness depends on the person’s possession of the goods
 Problem 86: RFC had a perfected S.I. in Hattie’s car (the lien was properly noted on the CT). The car was towed
to Mike’s Garage to be repaired. State law gave a possessory artisan’s lien to repairmen. The garage told Hattie it
was claiming such a lien, but then it let her take the car for work. She promised to return the car to the garage
every night. RFC found out & accelerated the amount due, repossessing the car from Hattie’s work.
o Which creditor has superior interest under § 9-333?
 RFC - b/c the statute required possession, & Mike didn’t have it, he loses.
 NOTE: RFC must fear possessory lien creditors in possession of their collateral, unless state
statute provides otherwise!
 And very unlikely that you will find a statutory lien that bows to Art. 9
o
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o
o
If the car had been in Mike’s possession when the conflict arose, would it matter under § 9-333 that RFC
never gave consent to the repairs? Nope, Doesn’t matter!
Once Mike’s released the car to Hattie, did its lien reattach whenever she returned it to the garage?
 Yes. “You give it up, you lose it. You get it back, you win. You give it up again, you lose again.”
 Barnes says, if rep’ing Mikes, file anyways!
 You can definitely do a filing for a statutory lien. It doesn’t change the character of the
statutory lien, but you get protection from both- safest way.
o The filing would give you safety from the trustee in bankruptcy, but it would not
protect you from the financing co. if you did still give up possession.
Fixtures
 § 9-109: Scope includes fixtures
 9-501: Fixture filings are to be made in the real property records (“file locally”)
o B/c fixtures are land related
o *The purpose of these first two statutes is to mollify real estate persons - see notes, pg 59
 Real estate persons’ responsibility is unchanged by Art. 9
 9-334: Priority of S.I. in Fixtures: FITFIR, generally
o But, (c) says a fixture S.I. is subordinate to a conflicting interest of an encumbrancer or owner of the
related real property other than the debtor (so, would lose to RE mortgagee, but not bkrty trustee)
 9-102(a)(41) defines fixtures, but unhelpful
o Three tests for determining if something is a fixture:
 Physical Annexation test: if it was annexed (physically connected to RE, it was a fixture)
 Virtually unused, nowadays
 Industrial plant test: is the thing (collateral) necessary to the manufacturing/business idea of the
plant?
 Almost a business purposes test: is the business one that can’t run without that asset?
 If the good are necessary to the purpose of the property, then they are affixed to it (they
are part of it).
 Intentional/”Purpose of” test:
 Trend is to use this test: Most common
 Was it your intention (of both parties, as both parties interests are important, but
particularly the debtor’s purpose) to use it as part of the real estate?
 If the SA makes allusions to or makes statements that it is part of the real estate, then that
is the intention & that’s what we go with
 9-502(b): Real Property-Related Financing Statement
o Must indicate that the FS covers the following types of collateral: mineral, timber, fixtures
o Must indicate that it is to be filed locally.
o Must provide a description of the collateral to give constructive notice (must be described adequately so
that if someone searche the name of the property, they’ll find the fixture filing
o Must provide the name of the record owner
 Thus, again, if they search for filings on the real property under the owner’s name, they’ll see also
this filing
 Case: George v. Commercial Credit Corp
o Asset in question is a mobile home, which is a fixture under state law. Dispute b/t Commercial credit &
the trustee. CCC said it was a fixture, & trustee argued that it was still a motor vehicle & thus personalty.
o Failure to do both an Art. 9 financing statement & a mortgage interest resulted in this dispute
o Court used the Intention test: It is not a question of how closely affixed the property is, but about
intention
 Here, he had gotten a permit to build a foundation, which would require him to lay a concrete
foundation within one year, and he hadn’t done this at the time of the case b/c he had filed for
bankruptcy before he could do that
 Physical attachment did occur, b/c he put down cinder blocks, connected it to utilities, etc.
o Court found it was a fixture  CCC wins.
 Manufactured home provisions
o 9-515(b): Manufactured home transaction:
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An initial FS filed in connection with a manufactured home transaction is effective for a period of
30 years after the date of filing IF it indicates that it is filed in connection with a manufactured
home transaction.
 As opposed to 5 years, for most filings
o 9-334(e)(4): Filing on a manufactured home beats the real property encumbrance or interest
 Like a PMSI in the manufactured home
o NOTE: difference in a manufactured home & mobile home
Problem 87: Monopoly Railway went to ONB & asked to borrow money, using as part of the collateral its
extensive network of railroad tracks, which winds through 12 states & 117 counties.Must ONB file a financing
statement in each one?
o 9-501(a)(1)(B) normally requires a fixture filing be filed locally.
o BUT, 501(b) says that if it is a transmitting utility, which crosses several states you file with the office of
the SOS instead of having to file in all those offices
Problem 88: Simon borrowed $4 million from CSB to build an apartment building on his land, mortgaging the
real estate & all appurtenances or things affixed to, present or after acquired. Simon & CSB signed the mortgage,
which contained a legal description of the realty, & the mortgage was filed in the real property recorder’s office.
o Is the mortgage effective as a financing statement? Yes.
 9-502(c): You can take a real estate mortgage & use it as a financing statement , provided the
requirements of (c) are met
o During construction, Simon bought a furnace on credit from Blast, giving them a S.I. in the furnace that
described the real estate.
 Where should Blast file its FS?
 9-501 requires it be filed in the local records where mortgages are filed.
o It must be filed as a fixture filings
o The collateral must either (1) be or (2) be to become fixtures
 Barnes: Should also file it in the SOS office
o If you have both of those filings, then you can never lose to the trustee in
bankruptcy, b/c you are covered as having a filing for the goods, & for the
fixture, you are protected against real estate people
 Is there a technical sentence that needs to be in this FS?
 9-502(b)(2): Must indicate that it is to be filed (for record) in the real property records.
The requirement gives notice to you and to the clerk’s office
 Even if Blast files a proper FS before the furnace is installed, will Blast prevail over CSB?
 9-334(d) & (h) & Cmt. 11: A PMSI security interest in fixtures is subordinate to a
construction mortgage if a record of the mortgage is recorded before the goods become
fixtures & the goods become fixtures before the completion of construction.
o A PMSI in fixtures does take priority over a regular mortgage, though
 If CSB’s interest is not perfected, will Blast prevail?
 9-334(e)(1): Yes?
 What can Blast do to ensure itself of priority?
 9-334(f)(1), 9-339: Get a subordination agreement: get construction co. to subordinate
prior to installing the furnaces
SO:
o First level: FITFIR trumps
o Second level: PMSI trumps FITFIR
o Third level: PMSI construction mortgages (§ 9-334(h)) “really trumps”: like a SUPER PMSI- trumps
everybody else
Problem 89: Would the answer to 88 change if the object in question were a refrigerator?
o Presuming that the state says that adding an appliance to real estate makes them fixtures, § 334(e)(2): the
original group goes with the construction or mortgage lender, but if it is a replacement appliance, (e)(2)
gives the lender on the replacement priority over the original mortgage lender
Case: Lewiston Bottled Gas v. Key Bank of Maine
o Key bank loaned DiBiase $2.5 million. The loan was secured by a mortgage on real estate located @ East
Grand Ave & covered after-acquired fixtures. It was properly recorded. DiBiase incorporated Grand
Beach to build a hotel on the E. Grand Ave. property. Grand Beach contracted to purchase 90 H & A/C
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units from LBG. The K stated that the units remained personal property of GB, notwithstanding their
attachment to the hotel. GB granted LBG a PMSI in the units. Financing statements were filed with SOS
& recorded in local deeds office. They were indexed under Grand Beach, but nothing under DiBiase. Key
Bank then made a 2nd loan to DiBiase, with a 2nd mortgage on E. Grand, also covering AA fixtures, &
recorded the loan. A title search prior to the mortgage failed to disclose the FS & existence of LBG’s S..I.
in the units b/c of the indexing under “Grand Beach,” even though DiBiase was record property owner.
o Key Bank’s first mortgage takes priority unless LBG’s S.I. falls within one of the 9-334 exceptions.
o To perfect a security interest in a fixture, the SP must file a fixture filing, giving a description of the real
estate & must show the name of a record owner.
 Fixture filing was improper here, b/c DiBiase’s name was left off.
o To be a PMSI victor under 334(d), you have to have a PMSI fixture filing, & if you don’t do that, you
lose. And if you do it, do it correctly or you lose.
o Note: this means you lose to the mortgage/real estate person. It doesn’t necessarily mean you lose to
trustee (so, here’s where you file the additional filing for Art. 9, to protect yourself against trustee)
Problem 90: Mustache failed to pay his attorney, Susan, so she sued, recovered judgment, & levied on the
apartment building & contents.
o Will Simon’s creditors holding S.I. in the fixtures prevail if they have perfected by fixture filings?
 9-334(e)(3): a perfected SI in fixtures has priority over conflicting interest of an encumbrancer or
owner of the real property if:
 (3) the conflicting interest is a lien on the real property obtained by legal or equitable
proceedings after the SI was perfected by any method permitted by this article.
 (trustee always loses here)
o W hat if those creditors filed FS in all the correct places except RE records?
 See old Outline, pg 26
Problem 91: After Simon completed the building, Tenant moved in. She had Simon remove the refrigerator & she
bought another one from Easy Credit Dept. Store, which reserved a S.I. but never filed. Assume state real
property law permits CSB’s AAP mortgage to reach fixtures installed by lessees
o If state real property law does not permit the mortgage to reach these fixtures, Easy credit always prevails.
§ 9-334(f)(2)
o Will Easy Credit be entitled to priority if it is forced to repossess?
 9-334(e)(2)(C): A perfected S.I. in fixtures takes priority over a conflicting S.I. of an
encumbrancer/owner of real property if … before the goods become fixtures, the S.I. is perfected
under Art. 9 & the fixtures are readily removable … replacements of domestic appliances that are
consumer goods.
 Easy Credit wins against Real Estate person
Problem 92: Tuesday bought a trash compactor on credit from Easy Credit & had her kitchen remodeled to
accommodate it. Tuesday’s only interest in the real estate is that of a lessee. It was installed on May 5. Easy
Credit comes to you on May 5.
o Is it entitled to automatic perfection of the S.I. in consumer goods here?
 No- 9-309, which provides for auto- PMSI in consumer goods makes specific exception for
fixtures, & requires you to file them in fixture filings (See Cmt. 3)
o Suppose it has a FS indicating the debtor is Tuesday. Should the statement contain Simon’s name too?
 Yes. Fixture filings require the real estate record holder’s name to be effective
 If Simon’s name is put into the record, Tuesday has the victory!
o Will Easy Credit prevail over CSB if it files on May 10?
 9-334(d) requires that there be a fixture filing w/in 20 days after the goods become fixtures, so
yes b/c well w/in the 20 day period
o Will it prevail over Simon’s LL lien?
 Perfected fixture interest in a tenant’s property. Simon comes in & evicts the tenant & claims a
landlord’s lien under statutory law- Tuesday beats landlord.
 9-317 says if you are unperfected, lose to lien creditor. By negative interpretation, if you are
perfected, you beat the lien creditor.
 NOTE: b/c not a replacement, but b/c it is an original equipment, § 9-334(e)(2) doesn’t apply
Problem 93: Assume that Blast Home Supplies had a perfected S.I. in Simon’s furnace & that this interest was
entitled to priority over CSB, the real estate mortgagee.
39
o
If Simon defaults on his payments, what liability does Blast have to CSB if removal of the furnace will do
$1,000 damage to the build’s structure, & if to replace it Simon will have to spend $8,000?
 9-604 & Cmt. 2:
 (a): Can go under Art. 9 & proceed against the personal property but can also proceed
under real estate rules
o The problem with proceeding under RE rules is that most of those rule will
provide protection for the general property mortgagee over you, the secured party
in the fixture.
 (c): Removal of Fixtures: If a S.P. holding a S.I. in fixtures has priority over all owners &
encumbrancers of the real property, the secured party, after default, may remove the
collateral from the peal property.
 (d): A secured party that removes collateral shall promptly reimburse any
encumbrancer/owner of the real property, other than the debtor, for the cost of repair of
any physical injury caused by the removal.
o SP does not have to reimburse encumbrancer/owner for diminution in value
o What are CSB’s rights?
 § 9-604(d): pay them $1,000 for repairs.
 Case: Maplewood Bank & Trust v. Sears
o Sears installed a completely new kitchen for Capers. Sears filed a FS. Maplewood held a first mortgage
on the real property. New Jersey Bank gave a second mortgage on the premises. Capers defaulted, &
Maplewood foreclosed. Sears sought declaration that their interest was prior to the mortgage of
Maplewood & to compel Maplewood to pay Sears the amount due it under the FS.
o § 604: Sears had 2 options: remove the fixtures, or forego removing the fixture & pursue real estate rights
 If Sears has done their filing correctly, they’d get a PMSI interest in the fixtures, & if there was
any equity, they get paid first
 Problem 94: Bean filed a mortgage on his home in favor of RSB. Mortgage stated that it extended to realty & all
things growing on or attached to, now in existence or in future. When Bean borrowed money to plant this year’s
crops, he gave a S.I. in the crop to Seeds, the purchase money lender.
o If Seeds files its FS statement in the proper place, will it prevail over RSB’s mortgage lien?
 9-334(i) & Cmt. 12: Crop financier beats mortgage lender for that year
 334 (d), (h), (i) very strongly support PMSI crop lenders over mortgage lenders
 But know that buyers of crops beat you under the federal system
 Problem 95: Bean bought a doublewide trailer from Traveling Homes for $100,000 & had it towed to a vacant lot
on his farm. Trailer never made another road trip. It was placed on a foundation, attached to utilities, & a deck
was built around it .
o What steps should the bank which lent the money to buy the trailer take to perfect it’s PMSI in the
collateral?
 To have priority, you must have correct method of perfection.
 If you have a CT state, then you have to keep the CT & follow the CT rules (9-311)
 Most states only apply their CT statutes to TRUE mobile homes. Modular homes, once set on
land, usually are not covered by the CT.
 The correct method of filing is a fixture filing under 334(e)(4)
 The security interest in this fixture is greater than that in the real estate if the requirements of 9334(e)(4) are met
Accessions & Comingling
 See notes, pg 64
 Said wouldn’t be tested on
Federal Priorities for Debts & Taxes
 Two statutes concerned with here:
o 31 USC 3713 & 26 USC 6323
o § 6323 limits § 3713 w/r/t tax liens that arise as a governmental claim (does not supersede/repeal)
 31 USC § 3713- General Statute giving priority to government claims
o Grants pre-bankruptcy priority for all federal claims, no matter how they arise
o All government claims covered (Can be tax matters, contract debts, federal insurance loans, etc.)
o These claims are paid FIRST upon a debtor’s insolvency
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o


§ 3713 states that the USG will be paid first where:
 A person indebted to the G is insolvent and either
 The debtor without enough property to pay all debts makes a voluntary assignment of
property; or
 A property of the debtor, if absent, is attached; or
 The act of bankruptcy is committed
 OR the estate of a deceased debtor doesn’t pay all the debts of the debtor
 OR A representative of a person or an estate (except under title 11, as §3713 doesn’t apply to title
11) paying any part of a debt of the person or estate before paying a claim of the G is liable to the
extent of the payment for unpaid claims of the G.
o Courts have subordinated the federal claim to an earlier lien if the lien was choate
 S. Ct. held that a lien is choate if the lien is definite in at least 3 respects:
 The identity of the lienor,
 The amount of the lien, and
 The property to which it attaches
 Since 1946, a lien has never been found sufficiently choate to survive a federal challenge
o A floating lien on AAP or claiming priority for future advances is inchoate & inferior to fed. claim
26 USC 6323- Specific tax statute
o § 6321-22: When a taxpayer fails or refuses to pay any tax due after demand, a federal tax lien will arise
on assessment & the lien will cover all of the taxpayer’s property, real or personal, presently owned &
after acquired. If the date is not otherwise specifically fixed by law, the lien arises upon assessment &
continues until the liability for the amount assessed is satisfied or becomes unenforceable by reason of
lapse of time.
o § 6323: The lien imposed under §6321 is not valid against any purchaser, holder of a security interest,
mechanic’s lienor, or judgment lien creditor until notice thereof which meets the requirements of subsec.
(f) has been filed by the Secretary
 I.e., the government wins over all parties claiming an interest in the property except those
specifically listed in this section.
o § 6323(f): Giving notice
 File under state law for
 Real property lien: file in the office in the state in which the property subject to the lien is
situated
 Personal property lien: the office as designated w/in the state in which the property
subject to the lien is situated
 With the clerk of the district court
 If the state has not by law designated one office which meets the requirements of (A), it
must be filed in the office of the clerk of the US district court for the judicial district in
which the property subject to the lien is situated.
 With recorder of deeds of DC
 If the property subject to the lien is in DC, the notice must be filed in the office of the
Recorder of Deeds of DC
o Other possibility is to take a judgment & execution - become a lien creditor
o ** Basically, feds have to go through the usual routes
 Become a lien creditor, or
 Follow state route (for almost all states, Article 9)
Case: US v. Estate of Romani
o A judgment was entered in favor of Romani Industries against Francis J. Romani for $400,000 on January
25, 1985. The judgment was recorded & became a lien on all of Romani’s real property in the county.
Thereafter, the IRS filed a series of notices of tax liens on Romani’s property totaling approximately
$490,000. Mr. Romani died in 1992; at that time, his estate was only worth $53,000 & was comprised of
real estate, only.
o Issue: Whether § 3713 (which requires the G be paid first where a decedent’s estate cannot pay all of its
debts) requires that a federal tax claim be given preference over a judgment creditor’s perfected lien on
real property, even though such a preference is not authorized by the Federal Tax Lien Act.
o There was an inconsistency between § 3713(General Federal Priority Statute) & the Tax Lien Act
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

§ 3713 appeared to give the US an absolute priority over all competing claims, but the Tax Lien
Act provided that it was not to be valid against judgment lien creditors until a prescribed notice
had been given.
o The lower court found that the Tax Lien Act of 1966 had the effect of modifying the G’s preferred
position in the tax area & recognized the priority of many state claims over federal tax claims, thus
limiting the operation of § 3713 as to tax debts.
o In affirming the order of the lower court, the Supreme Court stated as reasoning for treating the Tax Lien
Act as the governing statute when the Government is claiming a preference in the insolvent estate of a
delinquent taxpayer, and not the General Federal Priority Statute:
 The Tax Lien Act is the later statute
 It is the more specific statute
 Its provisions are comprehensive, reflecting an attempt to accommodate strong policy objections
to enforcement of secret liens.
 The secret liens unfairly defeat the expectations of innocent creditors & frustrate citizens’
need for certainty & convenience in the legal rules governing commercial dealings
o In Romani, it was the first time that the court allowed something to limit § 3713.
 Made the government like everybody else: a secured party: if they are going to win, they have to
have priority
 They stand in line like everybody else!
Filing for Federal Taxes:
o Follow 9-322 or 9-317
o *FITFIR or lien, Romani says you beat the G!
Tax Liens & AAP
o 9-315 says that AAP has same priority as the original interest.
 Monopoly: Not only do I have FITFIR as to original inventory, you have same priority as to the
new property under §315
o But Now, have to ask about this in the federal lien context
 Under § 6323(c), the loan or purchase to the taxpayer to be secured by commercial financing
security or to purchase commercial financing security MUST BE MADE befor the 46th day of
the tax lien filing or before the lender/purchaser had knowledge, whichever is EARLIER.
o Problem 97: ONB had a perfected IS in inventory, AR, instruments, & chattel paper of Smiles Motors, to
which the bank made periodic loans. Smiles failed to pay its federal taxes, & a tax lien was filed 10/1. On
Nov. 1 & Dec. 1, new shipments of cars arrived at the car lot, & Smiles continued to sell cars on credit,
generating chattel paper & AR.
 Does the filing of the tax lien cut off ONB’s floating lien in whole or in part? Is this issue in any
way affected by the bank’s knowledge of the tax lien?
 § 6323(c) permits a commercial financing security to fall under an existing perfected security
arrangement & take priority over a filed federal tax lien IF the new collateral is acquired by the
taxpayer-debtor within the 45 days following the tax lien filing.
 §6323(c)(2) defines a commercial transactions financing agreement as an agreement
entered into by a person in the course of his trade or business to
o Make loans to the taxpayer to be secured by commercial financing security
acquired by the taxpayer in the ordinary course of his business or
o To purchase commercial financing security (other than inventory) acquired by
the taxpayer in the ordinary course of bus.
 § 6323(c)(2)(C) defines a commercial financing security as (1) paper of a kind ordinarily
arising in commercial transactions, (2) accounts receivable, (3) mortgages on real
property, and (4) inventory.
 So, for 45 days after the filing of the tax lien, ONB is protected & their lien is not cut off. But,
after that, they are not protected b/c the property is no longer qualified under subsec. (c).
 § 6323(c)(2)(A) says that if the lender had actual knowledge of a § 6321 tax lien filing, then the
security agreement will not be protected under (c)
 § 6323(c) protects only if within 45 days or before notice/knowledge is received
o Case: Plymouth Savings Bank v. I.R.S.
 First, does the filing of notice equal knowledge?
 No. Notice does not = knowledge.
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

To extent going to require IRS to give knowledge to the bank, we are going to require direct
knowledge, not knowledge from the filing.
 § 6323(c)(2): If there is knowledge, 45 days is CUT OFF
 See class notes, pgs 68-71 for discussion
Problem arises when you have beat them on the original inventory, but they later filed a tax lien & you still want
to do business with the debtor & want to be a SP when they can’t pay you immediately
o This is where you have to start thinking about 45 days & the FITFIR rule above starts breaking down
o Forty five day rule:
 As to AAP, remember 9-315 & 9-322 provisions: they reinforce each other.
 An original filed FS is good against everything that is acquired afterwards if it mentions
in the SA the AAP
 So, if FS says “inventory,” that covers current & future inventory (b/c of nature of
inventory & the turnover)
o 9-203: have to put in SA that you are covering AAP to get a floating lien
 If you have FITFIR, only way to beat you is PMSI
 Provision on AAP is straightforward- without restrictions - good forevero EXCEPT as against tax liens!!! (See below)
Tax Lien Statute & Future Advances
o If part of the original SA, there often is a commitment to make future advances.
o But, Art. 9 says w/o regard to commitment (so, with or without commitment), future advances have same
priority as original advance.
 9-322 & 9-323 specify this w/r/t FA
o So, to the extent that you make a future advance, people who come in after you will lose to you.
o WITH AN EXCEPTION: § 9-323(b) & (d)
 323(a): Limitation on FITFIR if your interest is under 9-309 or 9-322 or if it is made without a
commitment
 If the advance is made PURSUANT TO commitment, it dates to the original SA.
o To extent you already have a K deal here which includes a commitment, when
you learn about someone else (lien creditor) out there, you ought not have to
choose between breaching your K & becoming 2nd in priority
 If it is made WITHOUT commitment, modifications:
o 323(b): S.I. subordinate to a lien creditor to the extent that the S.I. secures an
advance made more than 45 days after the person becomes a lien creditor
 So, if going to make a FA & its w/o commitment, check the records!
 If someone else is out there already, the lien creditor will win.
 Once a LC has come into existence, you have a flat 45 day period in
which to make loans. - “safe harbor”
 After the 46th day, as creditor, don’t make any more loans to them, b/c
the lien creditor will have priority UNLESS the advance is made:
 w/o knowledge of the lien (323(b)(1)), or
 pursuant to a commitment entered into w/o knowledge of the lien
(323(b)(2))
 323(d): Non BIOC buyers of goods take free of a security interest to the extent that it
secures advances made after the earlier of:
o The time the secured party acquires knowledge of the buyer’s purchase, OR
o 45 days after the purchase.
o If you have a floating lien in inventory, the BIOC will always beat you.
o Here, the protection NEVER goes past 45 days. Under this one, non BIOC beat
you to the extent that you make your advance more than 45 days after they’ve
bought
 Tax Lien §: Feds used preemptive power & made it a flat” 45 days or less”
o Didn’t like the 323(b) provision
o Hypo: On June 1, there is a FS & SA b/t ONB & Manufacturer. ONB loaned Mfr. ½ million on June 1 on
all inventory & proceeds. At the time of the loan, there’s at least $1 million in inventory. But the
enterprise turns out to be failing. They failed to pay their FICA taxes, & the IRS levied a tax lien on 6/15
43

under 6323(f)(1). On 7/1, debtor comes back 7 wants an additional loan (Future advance). Assume there
wasn’t a prior commitment. ONB gave them a $100k loan. With the $100k, they acquire (AAP) $200k of
inventory the next day. Thus, their inventory value went up to $1,200,000 & their total loan from ONB is
$600,000. On 7/15, the IRS sent ONB a letter giving them knowledge of the tax lien.
 What § 6323(c) & (d) says is that at the earlier of 45 days or knowledge, you can no longer do
this stuff (i.e., make FA on AAP)
 § 6323(c) & (d) provided that, as of the date of knowledge, the bank is deemed to have that
knowledge.
 With the loan & the AAP (7/1 & 7/2 transactions), there is no issue- they were protected.
 But, after 7/15, no protection!
 TLD (tax lien date): 6/15
 KOTLD (knowledge of tax lien date): 7/15
 45 days would have run on 8/1
 BUT, got knowledge on 7/15, so that’s the earlier of the two!!
 Can’t do anything past that date!
 Same for future advances as it is for AAP
Summary of rules:
o Still want to get there first & be FITFIR for original collateral
 Tax liens stand in line like everyone else.
o As to Future Advances & AAP, so long as no tax lienor in there, good to go under 322 & 323
 AAP can go on forever.
 FA have absolute 45 day limit.
 Against lien creditors, except as against tax lienors
o B/c fed gov’t preempts for the tax lien rules, you get 45 days only if you don’t have knowledge.
 45 day limit, or shorter, for both FA & AAP
Chapter 7: Bankruptcy & Article 9
 Two basic provisions:
o § 362: Procedures
o § 544: Trustee Provision
 Other provisions:
o § 700 general liquidation provision
o § 900 Municipalities
o § 1100 Reorganizations
o § 1300 Farmers
o ^ *or something like that, he says *
o Most common one’s will see:
 700s (Ch. 7)
 1100s (Ch. 11)
 Insolvency lessened, on the idea that creditors will get more assets by going with reorg.
than by Ch. 7 liquidation
 Procedure (11 USC § 362)
o § 362 says that, at the moment of filing of bankruptcy, there is an automatic stay
 Everything that is done not in compliance with bankruptcy provision is null & void.
 Including “Thou shalt not file!”
 Once a petition for bankruptcy or a stay for bankruptcy is filed, you better not put
anything else in the filings!
 Trustee Provision ( 11 USC § 544)
o 544 says that the bankruptcy trustee becomes the hypothetical lien creditor.
 The strong arm clause gives the trustee the state law status of a hypothetical judicial lien creditor
who acquires a lien on all of the debtor’s property as of the moment of the filing of the
bankruptcy petition.
 Equivalent to a § 9-317 lien creditor
 So, if your debtor goes into bankruptcy & you are unperfected, you lose!
o The trustee is given the rights and position of any unsecured creditor who has a claim against the estate.
44

But the trustee gets better rights than the creditor represented b/c the trustee’s claim is not limited
to the amount of the actual creditor’s claim but rather is the size of the entire estate
o The bankruptcy trustee can avoid unperfected security interests.
o The trustee also has whatever defenses the debtor would have had against the creditor’s claim.
 For ex: If the debt is barred by the SOL, the trustee may assert that.
 Problem 100: Sun borrowed from ISB $10,000 on April 17. On April 18, one hour before the bank filed their FS
on the loan, Sun filed a bankruptcy petition.
o If no new general creditors came into existence b/t the loan on April 17 & the petition filing on April 18,
can the trustee avoid the bank’s security interest under § 544(a) of the Code?
 The trustee is truly a hypothetical lien creditor, they are just playing the part. Even though there
aren’t any other lien creditors out there, the trustee is playing that part. Even though no one else
out there under Art. 9 that you would lose to, you STILL LOSE under § 544 to the trustee
o What result if the bank had filed it’s FS two seconds before the bankruptcy petition was filed?
 The bank would have been perfected & would have been a secured creditor for purposes of
determining priority in the bankruptcy estate. Most clerks offices & the bankruptcy office go
down to the second. Bank wins!
o If the bank’s interest had been a PMSI, would the filing of the bankruptcy petition have cut off the usual
20-day grace period?
 No. It will stay the 20-day period.
 § 546(b)(1)(A) states that a trustee’s rights & powers are subject to any generally applicable law
that permits perfection of an interest in property to be effective against an entity that acquires
rights in such property before the date of such perfection.
 Priority of PMSI is determined by § 9-324, with the general rule being that a PMSI takes a
priority over a conflicting security interest in the same goods, if the PMSI is perfected when the
debtor receives possession of the collateral or within 20 days thereafter.
 So, the general rule that there is a 20 day grace period which would give the bank time to
get priority will not be cut off by §544/§ 546.
Preferences in Bankruptcy
 § 547 (pg 1281 of supp.)
 Trustees are basically given the two powers: to kill unperfected interests & to kill preferential transfers
 Note:
o (a) is definition section
o (b) gives elements of a preference
o (c) provides transfers that the trustee may not avoid
 1-5 are the big ones; rest will not be tested
o (d) special rules on liability
o (e) definitional ideas & timing mechanisms to decide what a transfer is
o Extended definition of transfer
o (f) insolvency
o (g) etc.
o **responsible for (a) - (g)**
 § 547(b)(1)-(5): Elements for a fraudulent/preferential transfer:
o (a) Transfers
(b) for the benefit of the creditor
o Antecedent debt
o Debtor insolvent
o Made:
 Within 90 days
 Within one year, if insider
o Creditor gets more than would have gotten in liquidation
 Remember, in liquidation, get about 5%, so any transfer where you get more than a minimal
amount, it’s a preference
 Almost always presumed that this happens, otherwise you wouldn’t have done the transfer
o *3, 4, & 5 are basically given  so in any hypo on test, assume its given that there is insolvency w/in 90
days, & there was more than liquidation
45
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

A “preference” is a transfer (defined to include the creation of a security interest in the debtor’s property) made or
suffered by the bankrupt to pay or secure a pre-existing debt within the 90-day period preceding the filing of the
bankruptcy petition, which has the effect of giving the transferee (the creditor) a greater payment than the creditor
would get under the usual bankruptcy distribution.
o An Article 9 creditor who delays perfection until the 90 day period before bankruptcy is often met with §
547- preferences.
o If the creation of a security interest is deemed preferential, the trustee can cancel it, turning the preferred
creditor into an unsecured one.
Problem 101:
o June 8 - SA & debt created (D)
o 7/18 - financing statement filed
 Under Article 9, perfected (P)
 This is also the transfer date (transfer under § 547)
 Transfer is the date in which a lien creditor can no longer beat you.
 ONB was unsecured creditor b/t 6/8 & 7/18
 D was antecedent to T, & was within 90 days- not protected
 If the Perfection has been done on 6/8, then it wouldn’t be an antecedent debt
 B/t 6/8 & 7/18, the debt to ONB was a secret lien!
 So, they should have done the transfer on the date of debt.
 Otherwise, it sounds like ONB is suddenly being preferred
Steps to check:
o § 544
 If you are perfected, then you are going to escape § 544 almost always
 Unless there has been a fraudulent transfer or something really bad
 Is there a Secured transaction? Are you a perfected SP?
o § 547: Transfers
 Remember: transfers occur in multiples!
 Most common we are concerned with is the granting of a ST, but also looking at repayment of
loans, gifts, etc.
 And also remember, perfection under Bankruptcy is much more broad than with ST
o § 547 (b) elements of preferential transfers:
 To or for the benefit of the creditor
 So, creditor has to gain something
 On account of antecedent debt
 Antecedent = earlier
 Can be difficult to figure out what is antecedent
 Made while insolvent
 *For our purposes, presuming insolvent*
 § 547(f) provides that debtor is presumed to have been insolvent beginning 90 days
before filing of petition
o Barnes: not going to ask about the 90-day presumption. For our purposes, just
assume insolvent.
 Made
 On or within 90 days before petition
 Or between ninety days and one year before the date of filing if the creditor at the time of
the transfer was an insider
o For an insider, you’d have to prove/offer evidence of insolvency, b/c only
presumed for 90 days.
 Enables creditor to receive more than the creditor would receive in liquidation
 Barnes: This one will be a given. He said he has never seen a case where this wasn’t the
case.
 SO: The ones presumed will be 1st element & 5th element, with the 3rd partially presumed.
o § 547 (e)(1):
 (A) transfer of real property other than fixtures, but including the interest of a seller…
 When do you beat everybody else by being a transferee of a mortgage or of real estate?
46
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
Establish title by recording your deed (interest), therefore putting yourself in the records
before the BFP comes around.
 If it’s there in the records before the BFP, you beat them!
 So, for real estate, TRANSFER = BEATING BFP if you have title first
 (B) For personal property,
 When a transfer occurs, when the judicial lien creditor can’t beat you
o A completed gift falls in this section
 We don’t care that there was no value given.
 When you have perfection (roughly, be careful b/c maybe a little more to it)
o § 547(c): Exceptions (Look for these AFTER you have applied elements of (b))
 § 547(c)(1): contemporaneous exchange - usually allowed max 10-15 days of ‘slop’
 Barnes: to be safe, consider this to safe for about 1-2 days
 § 547(c)(2): periodic loan repayment, installment debt
 Two tests:
o Loan must be made in ordinary course of business
o Repayment must be made in ordinary course of business
o I.e., it must be planned for in this way
 § 547(c)(3): New value given at or after the signing of a security agreement that contains a
description of such property as collateral, given by or on behalf to he secured party, given to
enable debtor to acquire property, and in fact used by the debtor to acquire such property
 I.e., PMSI
 Again, no gaps b/t SA & the debt
 Delayed for attachment b/c value is later, but effective date can be date of D & SA
 So, has to be new value with anticipation of secured loan
 “used by the debtor to acquire such property” = Possession date = Po
 § 547(d): Net gain/offset
 § 547(e): 2-point net improvement test
Example problems
o Problem 1
 Presume:
 Dec 1: bankruptcy petition filed
 Sept 2: 90 days from bankruptcy
 Uncle gives you a gift of $10,000 in mid-October.
 What’s the date of transfer (T = transfer)
o The date the check was given
o This is the day that the JLC can’t come & beat you, b/c you’ve already gotten
your value out of the estate
o Problem 2
 Suppose that on Sept. 15, there was a loan made from you to your uncle for $100,000 for his
Camera Land business.
 Any transfer involved?
 No. Nothing given to the creditor from the debtor.
 So, transfer - things that go from the debtor TO THE CREDITOR
o Problem 3
 Suppose in August that you had made the $100,000 loan to the uncle. On Oct 15, Uncle repays
you the $105,000 ($5k to cover interest). The uncle declares bankruptcy Dec. 1.
 This is CLEARLY a transfer
 Then, want to find the date that debt is owed (D = Debt)
 Compare D to T
 Until you find a transfer with debt before it, you aren’t into antecedent debt.
o Problem 4
 Sept 10, make loan to uncle of $100,000.
 Uncle repays it to you on Oct 15.
 Bankruptcy filed Dec 1.
 Dates:
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o
o
 Debt date: Sept 28
 Transfer: Oct 15
 So, transfer on account of antecedent debt
 Go through elements of § 547:
o It was for the benefit of the creditor
o It was on account of antecedent debt
o It was made while insolvent (b/c presumed)
o It was made within 90 days (and here, an insider, so would really have the 1 year)
o Received more than he would have gotten in bankruptcy (presumed)
  Preferential transfer!!!!
 If you didn’t prevent preferential transfers, every creditor would go & try to grab assets
from the struggling debtor. Without this rule, you would really insure the failure of a lot
of enterprises. So, a few good transfers may get blasted by this rulee, but we’ll allow to
save the enterprises.
Problem 5
 Sept 28, make loan to uncle of $100,000
 October 15: transfer date
 But, can we move transfer date to a different time?
 See § 547(e)(2): Transfer is made at the time it takes effect
 E = effective date b/t the transferor & the transferee (debtor & creditor)
 What’s the effective date here?
 It’s date when repaid
 So, Oct 15 = T & E
 But, see the remainder of § 547(e)(2)
 Provision for if you never perfected: (e)(2)(C)
 Bankruptcy perfection is basically the date when the person can no longer beat you, so if all
you are doing is giving someone property, then the perfection date is the date of transfer &
effective date
 But note, from Art. 9 perspective date, it is not perfected!!
 P= Perfection date - date on which no lien creditor can beat you
 So for bankruptcy, perfection means Art. 9 perfection or anything else that would prevent a
lien creditor from beating you
 Transfer date, perfection date, & effectiveness date will be the same here
 Then go through the § 547(b) elements
 Transfer date is after debt, so it’s on account of antecedent debt
Problem 6
 You rep. CL. Camera Land wants a loan from ONB. ONB makes Camera Land a loan on Sept 8.
 CL filed bankruptcy filed Dec 1.
 Security agreement is done on September 15.
 October 5: You as attorney for CL file FS.
 So, what are dates:
 D = Sept 8
 T = Oct. 5
o At least, initially.
o But, transfer date is effective date b/t parties.
 The transfer of collateral interest is effective b/t the parties on Sept. 15 the security agreement is the contractual agreement b/t the parties.
 So, for most transactions, the 9-203 attachment date (A date) will be the
E date
 A date = E date, almost always
 So, if looking for E date & having trouble, look at A date.
 Is the transfer within 30 days of the E date?
 Yes. Sept 15 - Oct 5
 YES  Move transfer date back to when it is effective
 Therefore ,T really = Sept. 15
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Then Sept 15 = SA, E, A, T
But, b/c Debt was on Sept 8, the T is still on account of antecedent debt!!!
 So, always antecedent debt where the security agreement is not done on same day
loan money is transferred.
 If CL paid ONB, ONB would be preferred & thus it would be a preferential transfer
 If you hadn’t filed FS until Nov 16, then you are outside the 30 day exception of § 547(e)(3), then
the T date CANNOT BE moved. You lose either way, though
 RULE: Never allow a gap b/t the loan & S.A.!!!
o File  S.A.  Make loan
o Example 6(b)
 Bank does FS on Sept 8 (name, name, description of collateral). File the FS b/t ONB & Camera
Land.
 From Art. 9 perspective, that’s date of priority, b/c filing came first
 Then SA is done & signed on Sept. 9. Loan is then made.
 Sept 9 = A, E, D
 Sept 8 = T
 So, it’s not on account of antecedent debt. It’s contemporaneous or prior debt
 NO PROBLEM HERE.
 What happens when they get ready to pay you back??
 Assume on Nov. 16 they repay the bank.
 Nov. 16 = T
 This transfer is on account of antecedent debt.
 When is the transfer effective so that a lien creditor cannot grab it? It’s when possession transfers.
 So, Nov 16 = E (under (e)(1)(A))
 SO, it’s clearly on account antecedent debt, BUT, this would not allow you to receive anything
more than you would receive in liquidation under § 547(b)(5) b/c you were perfected!
o Rules:
 No gaps b/t loan & perfection (b/t loan & secured loan)
 Never make an under-collateralized loan
 If enough money to secure you & you always do it right, you’ll get your money back.
 If you are under-coll. & they pay you back, you have been preferred!
Problem 101: On June 8, Business Corp. borrowed $80,000 from ONB & gave the bank a S.I. in it’s equipment
(worth $100,000). On July 18, ONB filed their FS. Business Corp. filed for bankruptcy the next day.
o 6/8 -- ONB loans $80,000 to Business Corp.
 SA in 100k equipment
o 7/18 -- bank files FS
o 7/19 -- bankruptcy
o Dates:
 P = July 18 (b/c when filed)
 T = July 18
 E= June 8 (b/c when attached)
 D = June 8
o T date is outside the 30-day move-back period
 July 18 not within 30 days of June 8
o Transfer on account of antecedent debt  Yes  Preferential transfer! Dead!
o But what about it being fully secured?
 Doesn’t matter, b/c they didn’t get the FS done on time.
o Assume that the SA was only on 60k equipment
 Bank would be under-secured
 Would routine payments made to service the debt be preferential?
 Yes. § 547(c)(2)
 7/18 is still one T date, b/c that’s perfection date.
 But, in bankruptcy you’d get what?
o It is a preferential transfer, so you are deemed unsecured.
o You cannot pay back in full an unsecured loan
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 If you are under-secured, you have a problem if you take back payments.
A routine payment servicing the debt is also a transfer.
So, two different transfer dates!!
Second transfer date is the date of the routine payment.
 It’s also on account of antecedent debt
o  Preferential transfer # 2! Dead!
o Not allowed to get paid back if not perfected!
So, again,
o Initial transfer date is the date when the lien creditor cannot beat you.
o But, then you must ask if the transfer date is within 30 days of effective & attachment date.
 If it is not within the 30 days, it cannot be moved back & the transfer date is fixed at it’s initial
date.
 If it is within 30 days, then the transfer date can be moved back & is moved back to the effective
date. (§ 547(e)(3)(A))
Problem 102: On Nov. 1, PNB loaned Kermit $1,000 to buy a banjo, making him sign a SA & FS. He bought the
banjo on Nov 15, & bank filed the FS on Dec 5. Kermit filed his bankruptcy petition the next day
o T = Dec. 5
o P = Dec. 5
o E = Nov. 15
 From Art .9 perspective, it’s def. 15 b/c that’s attachment date (rights in the collateral)
o D= Nov. 1
o can move T date back to Nov 15 under 30 day move-back period (T within 30 days of E)
o T now = Nov. 15
o So, Nov 15 = E, A, T
o Still on account of antecedent debt
o Violates all of the elements of § 547(b)
o BUT, exception in § 547(c)(3) for PMSI interests!
Problem 103: In early 2013, carter borrowed $1,000 from BS Bank on a signature loan (no collateral). On Sept
25, John made a $500 payment to the bank. On Oct 4, he borrowed $300 more, giving a S.I. in his sword
collection. The bank never filed a FS (perfected under bankruptcy but unperfected under Art. 9). John filed for
bankruptcy on Nov. 8, 2013. How much can his trustee recover from the bank?
o Subsection 547(c)(4) - offset/net gain - says that you are no better off than you would have been w/o the
transfers
o What are our transfers?
 $500 payment on Sept 25
 S.A. in the swords: even though effective & have attachment, NO PERFECTION, so not a
transfer
 This is an avoidable interest
o Analyze the $500 payment under § 547(b) elements: it is a preferential transfer
 Must be given back to the estate
o $300 value given from the creditor to the debtor: Does it go into the estate?
 See § 547(c)(4) :He gave the bank $500. Then, the bank gave him back $300. That suggests that
they (the bank) aren’t really being preferred.
 Note: Every time the bank gets back money, it’s a transfer!
 Net the two numbers (the $500 & the $300): $200 goes back to the estate
 It must be money given back after the “preference payment” -every time you pump new
money into the debtor’s estate, then it can offset any transfer which would have been a
transfer.
 So, to the extent that after the first transfer ($500) the creditor extends new value to the debtor
($300), we net it out/offset it.
 It must come AFTER the transfer & must be NEW value.
 This only applies b/c the $300 is unsecured- makes it critical that we identify the $300 transaction
as unsecured.
o If the bank had done a FS on the $300 transaction:
o Now have created a transfer, b/c it is a perfected sec. interest in the swords.
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o
Thus, after this transfer, even though we gave $300, we ALSO took out $300 by virtue of the SA & FS by
taking control of the swords.
o By doing that, no longer meet the language of (4) - this is a perfectly fine unavoidable security interest.
o But, by doing that, you don’t get to net anything against your $500 & have to give the full $500 back b/c
not followed by additional value secured by an avoidable security interest.
o The interest in the sword is good.
Floating Lien in bankruptcy
 § 547(c)(5) two-point test for after-acquired property/preference issue:
o Court must compare the debt/collateral ratio at two points:
 90 days before the filing of the petition (or the first date within that period where a debt was owed
if the loan was made within the 90-day period) AND
 The date of the filing of the petition
o There is a preference to the extent that the creditor’s position has improved within this period.
 Problem 104: LNB had a perfected S.I. in the inventory of the Epstein bookstore, which owed the bank $20,000.
On March 1, the inventory was worth $8,000. On May 28, when Epstein filed for bankruptcy, the inventory was
worth $20,000.
o Note: Every time they acquired inventory, there was attachment (they got rights in the goods), so that’s
the effective date under §9-208. And they are transfers. So, each time, A & E & T
o Transfer = increase in the collateral
 When a lien creditor can no longer defeat you. (e)(1)
o On account of antecedent debt? Yes
o for benefit of creditor? Yes
o during 90 days? Yes
o Creditor to receive more? Yes
o This is 89 days before the bankruptcy filing, so apply § 547(c)(5) 2 pt net improvement test:
o March 1: 20/8
o May 28: 20/20
o Preference= 12/20
 LNB’s security improved by $12,000 (went from being under-secured by 12 to fully sec.)
 Must pay back $12,000 to the bankruptcy estate
 Case: In re Smith’s Home Furnishings
o See notes, pg 85-86
o “Add back method” does not apply to floating liens
o Add-back rule: payments that they are getting cannot be added on top of collateral & say they are
improved b/c of the payments themselves
 Let’s say they are doing periodic payments. Trustee makes equitable argument that you have to
consider all the money they got in between, not just the snapshots.
 The Court rejected that argument, b/c as a floating lien creditor, what happens in between won’t
affect us.
 Note: each one of them is a transfer & must be analyzed individually. But, we don’t take
the cumulative amount and add that back to the unsecured amount to make it higher.
o So, you consider (1) individual transfers & (2) global transfers (and don’t add back intermediate transfers)
 Example 1: Assume that Camera Land wanted a $100,000 loan from FNB. FNB took a SA & FS in camera
inventory & AAP. On June 1 they do all of this, and become perfected, attached, & thus it is effective. To the
extent that they have cameras in hand, that’s also the transfer date.
o June 1= P, A, E, T
o This is called a floating lien, b/c it includes all after acquired property
o Assume that on June 1, there was $200,000 worth of cameras.
 Sell a lot of them in multiple transactions b/t June 1 & July 1.
 Each sale creates a transfer, b/c money comes in when they pay for the camera.
o The interest shifted from the cameras to the dollars.
 When they shift, we have lots of little E & A dates.
 But, the bank doesn’t have them until the payments are turned over to the
bank.
 June 30: Camera Land makes a $10,000 payment to FNB.
 July :1 CL will get a new shipment
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o
o
o
o
So, 3 things going on:
 Sales to customers
 New inventory received
 Payments paid to bank
o Money paid from debtor to creditor is clearly a transfer
o Lien creditor can no longer defeat you on that- can’t get that money.
o Presume the elements of §547(b) are met- looks like a preference.
o BUT, every payment that is made, so long as it is routine & typical, is accepted
under (c)(2) - ordinary course - going to let them have it, so long as routine.
 Remember must be incurred in ordinary course of business, & must be
paid in the ordinary course of business.
 Can’t just up & decide to pay them the $10k, has to be part of a
payment plan, installments, etc.
 Bankruptcy filed on Dec. 1
 90 days back  Sept 2
 So, from Sept. 2 until Dec. 1, have to be concerned about all this stuff we were just
looking at.
 Are those sales of cameras & the money coming in transfers?
o Yes. It’s money coming in & b/c of Art. 9 auto. perfection in proceeds, we will
have to worry about that proceeds interest.
 Will be okay under (c)(5)
 But what about the new collateral coming in?
o When they ship new goods on first of month & you have an AAP clause, that’s
the moment of time the debtor acquires rights, & so that’s the last event test &
thus the perfection date.
 Is it a transfer?
 You are using the proceeds money for new cameras.
o It went from camera  money  camera
 When the new camera is in hands of debtor, then it becomes a
transfer.
o It is a transfer on account of antecedent debt.
o Memorize: Every floating lien, to the extent that new collateral is acquired
under an after-acquired property clause, creates a transfer.
 It has to - meets all elements & definitions
 And, this means that they’d all be preferential transfers, b/c it is on
account of antecedent debt & presume its’ w/in 90days
 BUT- we can get around it with the § 547(c)(5)
For determining 2-pt net improvement: take a snapshot on day of bankruptcy & snapshot 90 days before.
 Determine for each date: Total debt - secured debt = unsecured debt
§547(c)(5)
 Applies only to inventory, receivables, or proceeds
 So no equipment, etc.!
 If the aggregate of all transfers b/t the two snapshots cause a reduction, as of the bankruptcy date,
avoidable as a preferential transfer
 Total debt - secured debt = unsecured debt
Back to Camera Land example:
 Assume that the debt in Snapshot 1 was:
 Debt (100) - Security (200) = 0 unsecured (totally over-secured)
 Assume that debt in snapshot 2 was:
 Debt (80) - Security (200) = 0 unsecured
o Unsecured did not change - no reductions caused!!
 In bankruptcy, you get $80,000 & the over-secured value (120k) goes to the trustee to distribute
as excess. You haven’t hurt the bankruptcy & you haven’t improved your position.
So, never go into bankruptcy without being fully secured.
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If you haven’t improved your position any, we don’t care about the transfers, b/c if not in a better
position, there is NO PREFERENCE.
 Example 2: Assume that on original loan from FNB to CL of $100,000 & the original inventory was $200,000.
On 9/2, they still owed you $100,000 but the security is only $80,000.
o Snapshot 1= debt - secured = unsecured = 100 - 80 = 20 unsecured
o Debtor then makes two $10,000 payments & reduces their loan down to $80,000 & thus they are fully
secured.
 The two transfers of the 10k payments to FNB are transfers but are not bad, b/c fall under (c)(2)
exception.
 BUT, they reduce the debt & affect the offset.
 Now, BANKRUPTCY VIOLATION!!
 You’ve reduced the amount of your unsecured debt
 Snapshot 2= 80 - 80 = 0
 You have to give $20 back b/c that’s the net improvement in position FNB got.
 **Have to look at the individual transfers within the 90-days, & the global transfers (2-pt. net
improvement snapshot test)
 Remember ,every transfer is subject to §547, and the snapshot change is a transfer
o You won’t ever know when your creditor will file bankruptcy, so you MUST stay fully secured at all
times, b/c you don’t know when the 90 days period will be that would catch you to potentially make you
have to end up later giving some back.
 If your client (creditor) can’t stay fully secured at all times, then have to have a CYA letter- I
cannot give you any assurance that my filed FS will get you anything in bankruptcy b/c you are
not ensuring that you stay fully secured.
o How do you get under-secured when you get a security interest in proceeds?
 You just never know what is going to be done with the proceeds. The debtor won’t always use
those proceeds to buy new cameras. They may use it to pay payroll taxes. If they do that, you no
longer have an interest in those proceeds.
Fraudulent Transfers
 Under § 548 or § 544(b), the trustee can avoid any “transfer” (Including creation of a security interest) that is a
fraudulent transfer
 Fraudulent transfer: an existing or later creditor (and the bankruptcy trustee, per §544(b)) may avoid two types of
fraudulent transfers:
o Those where the transferee from an insolvent debtor does not give “reasonably equivalent value in
exchange” and
o Those where the transferor & the transferee had actual intent to defraud the debtor’s creditors
 Problem 105: Arnold retired & was in much debt. He decided to write his memoirs. He gave a S.I. in the right to
receive royalty payments from his publisher to his wife as collateral for “the debts he owed her.” She filed a FS
five months before Arnold filed for bankruptcy. Can the trustee avoid this S.I.?
o Yes: the transferee from an insolvent debtor does not give “reasonably equivalent value in exchange”
Non-Consensual Liens & the Trustee
 § 547(b) of the BC condemns as preferential all judicial liens acquired by a creditor within the 90 days preceding
the bankruptcy filing if taken while the bankrupt was insolvent.
 Statutory liens are effective under § 545 against the trustee IF
o They would be good against a bona fide purchaser, AND
o They do not arise only on insolvency.
Chapter 8: Proceeds
The meaning of proceeds
 Defined in 9-102(a)(64)
o Anything received upon disposition of collateral
 Priority
o 9-315(a)(1): If it is an authorized disposition, secured party can follow proceeds
 If a BIOC, SP can follow (9-315(a)(2))
o 9-325 & 9-326
 Perfection
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o 9-506, 507, 508: What we need to do to continue to be perfected in new debtor
Begin with this principal: having given the S.P. a S.I. in the collateral, you are also giving them an interest in
whatever you get in return upon a disposition of that collateral (‘monopoly extends forever’), so long as it can be
proven to be proceeds
 9-315(d): If you have an interest in something that may change into proceeds, check routinely, b/c you have a 20day limit (unless there are certain conditions satisfied)
o No action required after 20 days if these conditions are satisfied:
 Filed FS covers original collateral;
 Proceeds are collateral in which a S.I. may be perfected by filing in same office; and
 Proceeds are not acquired with cash proceeds
 No “intermediate” cash (doesn’t go from car  cash  boat)
o Note: b/c almost everything is filed in S.O.S. office, almost never have a problem.
o Then you can think about where you’d have the problem & have to re-file
 Fixtures
 Crops
 Minerals to be severed
 What about C.T.?
 Problem 106: Rosetta Stone bought a new car from Champ Motors, trading in her old car & making a $200 down
payment. She signed a P.N. for the balance payable to the dealership. RNB had a perfected S.I. in Champ’s
inventory.
o Does the S.I. continue in the car once it is delivered to Stone?
 No. Stone is a BIOC & thus takes free of the interest (9-320(a))
o What are the proceeds of the sale?
 The 5-yr-old trade in car, the $200 down payment, & the PN
 Car: It’s proceeds of the collateral, but can also say that it is direct collateral, b/c the S.I.
was in “inventory.”
 $200: cash proceeds (9-102(a)(9) defines check as cash proceeds)
 As the secured party, you automatically get the trade in car, & you want to get the check.
o So, in the S.A., one of the most common clauses w/an inventory S.A. K is that
you will maintain a separate deposit account, and everything that is received on
sale of the collateral goes into that account.
o If you do allow it to go into the account, you require there be NO comingling
with other funds, either private or business.
 If comingling happens, have to allocate via forensic acctg.
 Promissory Note: negotiable instrument (quasi-intangible)
 Cash or non-cash proceeds? Non-cash proceeds, b/c not defined as such in 9-102(a)(9).
 Can’t deposit a PN, so no chance of comingling with other cash. Checks get deposited &
thus comingled with other cash
o Is the attachment of the creditor’s security interest in the proceeds automatic, or must they be claimed in
the original S.A.?
 9-203(f): Automatic attachment
 Case: Farmers Co-Op Elevator Co., pg 252
o Union State loaned Farmers money & took a S.A. covering equipment & farm products.
o Co-Op got a PMSI interest in hog feed.
o Hogs ate the feed.
o The hogs are not proceeds!
o Hog feed does not transmute into hog.
 Problem 107: FFCA loaned Farmer Bean money secured by his crops. In 2011, Fed. gov’t paid Bean not to grow
crops that year. Is the government payment “proceeds” from the crop?
o Almost all cases say not proceeds b/c no disposition of collateral; only a substitution.
o What would you put in S.A. to cover these payments from the gov’t?
 Make S.A. cover all general intangibles, inc. but not limited to subsidy payments.
Priorities in Proceeds
 Problem 108: Canis financed stereo equipment for AAAS. Canis did a S.A. & FS. Covered A.A.P. CFC later lent
money to AAAS, taking a S.I. in A/R & chattel paper.

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o
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
Is the chattel paper proceeds?
 When CFC takes chattel paper, it is proceeds. It is a direct interest of CFC, but still have to
recognize Canis’s perfected interest in the proceeds.
 Resolve the dispute b/t the two:
 9-330(a) & (b)
 Purchaser generally wins
o Purchaser = CFC
 9-330(a):
o Can’t be in bad faith
o Must be in OCB
o Purchaser must give new value (cash)
o Must take possession of chattel paper
o Without knowledge of S.I. directly in the proceeds.
 9-330(a)(2): So, if you are Canis, you require that the chattel paper have their name as
assignee stamped on the paper or require them to use your chattel paper docs. B/c if the
chattel paper is clean (no indication of Canis’s interest), then CFC takes it.
o This kills any potential of somebody coming in here giving cash for the paper
o If CFC, you should say that sales are fine, so long as they give notice, & they
give you 80%-90% of the value of the paper.
 CFC will prevail over Canis b/c no statement about priorities or such on the CP.
Problem 109: Shadrach borrowed $15,000 for Meshach Merchants Financing Association to purchase a new
furnace for its own home office. It then sold that new furnace to a client. The $17,000 it received in payment was
put in Shadrack’s checking account with another $81. Shadrach made one further deposit of $5,000, followed by a
$5,40 withdrawal.
o It was cash proceeds
o Assume the $81 was non proceeds.
o See chart in book, pg 256 for “Lowest Intermediate Balance” test
 Then, look at the difference in the N.P. balance just before the last transaction & the last
transaction. Assume that the bank draws it out of non-proceeds first.
 5081 - 5040 = 41 in non-proceeds
o Leaves the remainder to be proceeds ($17,000)
 **Then would use this to apply the 2-pt. net improvement test in
bankruptcy.
o Continuing the example :Look at lowest intermediate balance of proceeds
 Assume another $6,041 is withdrawn
o First take the $41 from the non-proceeds. That now equals zero.
o The remainder of the balance will be proceeds ($11,000)
 Bankruptcy tomorrow would get you $11,000 in proceeds.
o The $11,000 is the lowest intermediate balance of proceeds.
 If Shadrach defaults to MMFA & an unsecured PN to the bank, the bank can exercise right of
setoff & get the money over MMFA. The bank has the right to take the account & the right to
take the money out of the account, & thus 9-340 gives them the victory in these situations.
 If you are MMFA, You’d tell Shadrach to set up a separate account in trust for MMFA so
the bank can’t get it.
Case: HCC Bank
o Lindsey is a retailer of tractors and sold 14 tractors. The tractors were financed by HCC and had a
perfected SI in both the tractors and the proceeds. State Trans. Dept. buys 14 tractors and pays Lindsey
$199, 122 for the tractors. Lindsey takes the $ and deposits it into its account at Springs Valley Bank on
8/15/1991. On 8/16/1991, Lindsey pays the bank on some loans it has. In December 1991, Lindsey filed
for bankruptcy.
 9-340: setoff, gives victory to bank
 9-332: gives victory to anyone who receives proceeds in OCB (ord. course of business)
 Why did Ct. here say not in OCB?
 The 3 installment loans paid were not due yet
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They paid almost $200,000 out, reducing their balance to the lowest in their history of
business.
 Court said, looking at those 2 factors, it wasn’t in the OCB. Held that HCC got money.
o TODAY: Test is collusion.
 See examples to § 9-332: It’s just like this case, but says that it’s okay now.
 Don’t ask whether it’s reasonable, typical, ordinary or extraordinary, etc.
Problem 110: ONB loaned $200,000 to Big Dept. Store with a SA & FS in inventory with a floating lien in AAP.
FS filed on July 5. ANB loaned $100,000 to Total Store. Filed Sept 25. Then, the two retailers merged, with total
inventories worth $300,000 New entity called Total Dept. Store
o Under 9-506, name no longer matches what the original FS were filed under. Statement has become
misleading.
 So, original FS has to be cured/fixed
o 9-507 says If the collateral is transferred, person who receives transfer takes subject to the FS (still
effective) (RULE 1)
o 9-507(b): A financing statement does not become ineffective, if, after it is filed, the information becomes
seriously misleading under § 9-506.
o 9-507(c): You have 4 months to figure out the problem & re-file the FS. (RULE 2)
o Here, this is not a name change problem - it is a corporate structure change.
 507 talks about, if Big DS had changed their name to TBDS, 9-507 is what applies.
 BUT FOR THIS SITUATION (change in entity), 9-508 applies
o 9-508(a)
 Basically, to the extent that TDS has bound itself/made itself liable to these agreements, they are
still bound.
 Question 1: is there a new debtor?
 1(a) Are they bound?
o Most commonly seen with assumptions of debt
o If nto bound, 9-508 doesn’t apply. If not bound, you have a new debtor & have to
get them to sign the new SA & FS
 If they are bound,
o 120 days either to (1) re-file or (2) re-file & get a SA
 Here, they’d refile.
 Under 9-501, for FS, just need name, name, & description. Don’t have to have their
consent or signature. Just re-file it.
o How do you allocate priority b/t two people who were initially perfected in two separate debtors but are
now conflicting with one entity
 9-325: Changes in ownership status don’t destroy your interest.
 To extent that you rae just transferring collateral from one debtor to another, they take
subject to S.I. & can’t get out of it w/o paying it off.
 9-326(a): A S.I. created by a new debtor which is perfected by a filed FS which is effective solely
under 9-508 in collateral in which a new debtor acquires rights is SUBORDINATE to a S.I. in the
same collateral which is effective other than under § 9-508.
 How would you perfect other than under 9-508?
o Go get a S.A. & new FS from new debtor.
o Then, not just effective under 508
 If you only have 9-508 to go on, you have to follow FITFIR, even though you weren’t
originally in competition with each other
 9-326(b): If the S.A. to which a new debtor becomes bound were not entered into by the same
original debtor, the conflicting security interests rank according to priority in time of the new
debtor’s having become bound
 So if you go ahead & bind somebody, then the person binding gets priority over the one
relying on their 9-508 perfection
 If you do in this order:
o Bound to ANB
o Bound to ONB
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



Then you’ve reversed the order under 508 (b/c ONB was perfected first originally, but
then ANB re-perfected)
Transferred Collateral under 9-507
o How long can you continue to collect on debt by AAP? For 120 days. After 120 days, must re-file &
change name on filings. If you don’t re-file, you will probably lose everything past that point
 Same as with a new debtor
o Note: If a new bank came in & loaned money to TDS & did a SA & FS:
 Transferred property - take subject to old creditors
 Anything after acquired - new bank wins (first to bind)
 If during the 4 months ANB or ONB re-filed, it relates back
Problem 111: On August 2, when the filed FS in favor of LNB covered all business machines, the debtor engaged
in the transactions below. Decide for each if bank should take action before Aug 22 or if FS is sufficient as filed
o Trade computer for computer: Do nothing. Still all business machines. Doesn’t defect if it’s the same
category
 Basic teaching of 9-315
o Trade a computer for painting for office: Change in classification of collateral.
 Original FS doesn’t cover paintings. 9-315 says your FS is now seriously misleading & you have
to re-file for paintings within 20 days. (9-315(d))
 Must meet these conditions:
o Original filed FS covers original collateral
o Would file in same place ( here, yes)
o Proceeds not acquired with cash proceeds
 All 3 conditions met here. Still automatically perfected for those 20 days.
 If automatically perfected, 9-322 priority is FITFIR.
o Trades a duplicating machine for a used car (state law requires CT as sole means of perfection)
 Now the asset cannot be perfected by filing in the same place. Now, you have to go get the CT
within 20 days. On 21 day if you don’t have CT, you are unperfected as to car.
o Sold an adding machine for cash; put cash in account at different bank; Bank exercised right of set-off
 9-340: lose cash proceeds to bank if they have a debtor/creditor relationship
 Fear the bank if there are cash proceeds
o Sold a coffee maker; gave money to Salvation Army
 9-332(a): takes free of S.I. unless transferee acted in collusion. Presumed didn’t here
 So, fear cash leaving enterprise
Problem 112: Balboa bank floor-plan financed the inventory of Eric Motors & perfected its S.I. in the inventory &
proceeds by filing. (§ 9-11(d)). Erick sold a car to John, who paid $1,000 down & signed a K obligating him to
pay $25k more. The dealership assigned the K to Cartier Finance, which took possession of the K & notified
Smith he was to pay them. Smith made no payments at all b/c car was a lemon. Transaction was cancelled & car
was returned to Eric on Sept 11. On Sept 12, a rep. of Cartier came to the dealership, took possession of the car,
claiming it was proceeds from the K, which Cartier still had. Bank objected, asserting a priority interest in the
inventory of the dealership. Who prevails?
o 9-330(c): When it comes back into inventory, it would normally go to inventory financier. But, chattel
paper financier gets this one specific good first.
Chapter 9: Default
 Problem 113: Andy owned 100 shares of Titanic Telephone, which he pledge to MCNB as collateral for a
$10,000 loan. At time of pledge, stock selling for $100/share = $10,000 total value. The S.A. was oral; bank did
not file.
o NOTE: Didn’t have to file b/c had possession (pledge)
o If the stock began to fall in value & if on Nov. 4, when it was selling at $80/share, Andy told bank to sell,
is the bank responsible if it does not & the shares bottom out at $150/sh.?
 9-207: SP has a duty to use reasonable care. Reasonable for the bank to hold the stock if
it drops to $80. Also reasonable for the bank to hold it below $50, b/c presumed it will
come back.
 If you give something that diminishes in value, no longer control decisions about
buying/selling. You have transferred judgment on that.
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o

But if you know that they are wrong to hold it, you would try to substitute some
other collateral & get that collateral back. That’s the only way to get power back.
o Would it help the bank’s position if the pledge contained a clause saying that the bank was not
responsible for its own negligence in dealing with the stock?
 Wouldn’t help bank’s position b/c can’t disclaim duty to use reasonable care.
o Suppose, instead: No decline in value. Titanic stock offered a split option to be exercised by Dec 31, &
Andy wrote to bank asking about how many share it held. Bank, due to error, told him 50, when it was
really 150. Andy tendered 50 shares of equivalent stock to the bank in exchange for the Titanic stock &
exercised his option. He learned the next month that he had 100 more shares, but was too late to exercise
option. Does Andy have a CoA against the bank? What damages can he recover?
 Bank bears responsibility on that loss. Andy requested an accounting under 9-207. If they give
you bad information under that, then under 9-207 & 9-210, they are bound to pay damages.
Problem 114: Mazie borrowed $2,000 from MBSB, pledging her stamp collection as collateral (value =$2k).
While Mazie was away, the bank was destroyed in an earthquake, stamp collection with it. The bank was paid by
its insurance co $2,000. Insurance co. then told Mazie she should pay them $2,000 under subrogation doctrine.
o Debtor bears the risk of accidental loss where there is insufficient effective insurance coverage. § 9207(b)(2)
o If the insurance hadn’t covered the full loss, she’d be responsible for the remainder
o Insurance co., by paying loss to SP, stands in SP shoes.
o (b)(2) says no right to subrogate on insurance claims of this type
Default
 Default is defined by the two parties to the K
o If you specify default in the K, that will be the only definition you have. UCC & Art. 9 do not define
o Be wide ranging as the SP- if you don’t say, you can’t use
o Include a general provision - “if for any other reason I deem myself insecure..”
 Must be in observance of r’bl commercial standards - acting in good faith & with honesty
 Case: State Bank of Piper City v. A-Way (pg 270)
o Brenner gave interest in grain to State Bank. Grain was stored at A-way. Brenner defaults, and Bank gets
a default judgment against him. Bank sends A-way a citation to discover how much grain was there.
Bank made an error in the amount of $ they wished to collect (instead of asking for 5K bushels of grain,
asked for $5K). A-way sold the grain and sent the $, but kept the surplus for itself. State Bank moved
against A-Way to get the surplus. A-Way said that doctrines of merger and res judicata prevented them
from having to give the $--these do not apply in this case.
o Rules
o The doctrine of merger does not preclude a secured creditor from enforcing its security interest in the
property given as collateral.
o Res judicata will not bar a secured creditor from exhausting his remedies under the UCC
o The remedies of Article 9 are cumulative & separate from all other remedies
 Gives you more than one bite at apple
 Can go repossess by self-help & sell the collateral (remedy 1), then if not fully satisfied, file suit
for deficiency (remedy 2) & take civil procedure steps.
 Problem 115: Mr. & Mrs. Bankruptcy bought a mobile home from Nervous Motors. They signed a purchase
money security agreement in favor of the seller that contained an acceleration clause identical to the one above.
Which of the following events is sufficient to trigger proper use of that clause?
o SEE 9-609: Rights after default
 Article 9 doesn’t define default. Judicially recognized form of default is failure to pay the debt on
time. Could also define it within the security agreement. Include anything in SA that you want to
be considered a default. If it’s in there, then you can get the remedies under 9-600 for that
‘default.’
o A very bad financial quarter for Nervous Motors
 No - it’s not the basis of a failure of anybody
o A serious drop in the state of the economy
 No, b/c the couple themselves could still be doing fine
o Knowledge that the Bankruptcy fam. Had been talking to a lawyer
 No, could be for other purposes
o A report (which investigation showed to be false) that they failed to pay their grocery bills for 2 mo.
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 Make further inquiry: If not right answers, might be enough to default
An anonymous phone call that they were moving the house to Mexico
 Rumor based - not commercially reasonable to default upon this
o The confiscation of the home & the arrest of the couple for possessing marijuana
 Probably default!
 Case: Klingbeil v .Commercial Credit Corp
o 5/26/1966—P entered into K to buy a new car, and he made a down payment. Payments on car were to
commence on 6/26/66, under the K containing the acceleration and enforcement provisions. Dealer
assigned the K to Commercial. Before 1st payment was due, Commercial felt insecure, and directed
repossession—gave no notice, demand, communication or correspondence.
o K allowed if seller feels insecure—purchaser to pay amt. to seller, upon demand, or at election of the
Seller.
 This language was the problem here—b/c of the ‘upon demand” language, commercial was
required to give notice to purchaser
o 9-625: For each violation, you get up to $500 of exemplary damages for noncompliance with 9-210
o He got his car back + punitives!
Repossession & Resale
 9-609: Secured Party’s Right to Take Possession after Default
o 9-609(a): SP may take possession & may render equip. unusable & dispose of the collateral on a debtor’s
premises
 Ex: can remove starters from heavy equip.
o 9-609(b): Authorizes SP to skip judicial processes & repossess the collateral upon default if it can be done
without a breach of the peace.
 Case: Williamson v. Fowler Toyota
o Gilmore made K to buy car, giving SI to Fowler. Gilmore dies, and donates car to Camp Hudgens
(Williamson). Williamson had no knowledge of any lien on the car. Fowler sends repo man to repossess
the car. Repo guy finds out where car is, and shows up that night to look around. He repossessed the
vehicle after cutting the lock on the gate to gain access. Concern here is if this is a breach of the peace?
o As Camp Hudgens, how would you protect yourself?
 If someone wants to give you the car, make sure the CT is clean or get the title.
o Technically, he wasn’t stealing the car
 But, he broke in & he stole the lock
o 9-625: Remedies for Secured Party’s Failure to Comply with Article
 Actual losses: loss from reduction in credit score, for ex.
 Basic actual damages: credit charges + 10% of the principal
 Basically, getting finance charges + interest back
 Problem 117 through Problem 120: See notes. Said default tested minimally!
 Notice
o 9-613: non-consumer debtors
o 9-614: consumer debtors
 Include:
 Information from 613(1)
 Description of any liability for a deficiency
 Telephone number
 Etc.
o 9-616: A debtor may request an explanation for a calculation
o 9-627(a): basically, required to get a reasonable price for the “thing”
o 9-610(e): if it’s a private sale, then the creditor can’t be the only bidder.
 If they want to buy at a private sale & no one else is competing for it, they have to call it a strict
foreclosure. Have to give you chance to pay it back
 Public sale: meaningful opportunity for public competitive bidding - auction (people
standing & bidding next to each other competing)
o Everything else is private sale
 9-611(b): Reasonable notice to the debtor - reasonable time period
 (e): You get 20-30 days for “other people”
o
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o
o
What would be reasonable?
 If an auction, notice to them would be about same as notice to everybody
else (public)
Any obligation to give them chance to get property back?
 No - unless it was provided for under other statute
 If it has gotten to this point, you can sell it
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