Secured Transactions
An Elucidation of Secured Transactions
Secured Transactions, Winter 2013, BYU Law, Prof. Gotberg
Contents
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I.
Remedies of Unsecured Creditors under State Law
Creditors are unsecured unless a statute or contract gives them secured status. A judgment can lead to the judgment creditor being secured.
The point of secured transactions is to avoid the difficulties of collecting judgments on remedies that already cost a lot of money.
One of those difficulties is the ban on self-help, though setoff is okay.
So, with judgment, you get writs and levies and executions. Amercement is when you bring action against the sheriff for not executing properly. Vitale is the extreme case of the cowardly sheriff. But, the rule generally is that the court is not going to hold the sheriff responsible, especially if there are discretionary factors.
Even with successful collections, you’ve got to do discovery to figure out what to collect.
You might have to deal with a bank if you’re trying to garnish. And, you must never violate the exemption statutes for any of that unless you have a consensual agreement.
Why might some people be unsecured? No transaction, no choice, victim of a tort, customary in that business, high interest rate, airline flights, warranties, guarantees, etc.
II.
Foreclosure
Claim of default or whatever on a debt or lien because of non-payment or other violation of an agreement or condition > equity of redemption granted by courts after complaint filed > at some point the court forecloses the equity of redemption > surplus/deficiency > a statutory right of redemption might apply.
A.
Intended As Security Doctrine
Transactions, even if characterized as not a secured transaction will be treated by courts as a secured transaction if it has the form, purpose, effect, etc. of a secured transaction. This is useful because sometimes the creditor will try to dodge redemption or other rules put on secured transactions. The principles of equity cry out against such behavior.
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Conditional sales: Customer buys car, but does not get deed until he has made payments over the course of a year.
Leases intended as security interests: Where the leased object has no value after the lease period, it turns out that there was a secured transaction with the borrower making payments as if they had bought it.
Sale of accounts: A company might sell its accounts receivable for some quick cash. If the buyer accepts the risk that not all accounts will pay, they have bought it outright. Whereas, if the seller will make good on losses, that is more of a secured transaction. UCC 9.109.a.3 leans toward making them all secured transactions, regardless.
Asset Securitization: Selling mortgages, basically. Like accounts receivable.
B.
Foreclosure Procedure
1.
Judicial Foreclosure
This is what gets you ownership, but not necessarily possession. The creditor files a civil action detailing the situation and requesting that the equity of redemption be foreclosed. The defendant can raise technicalities. Eventually, there is a court order, and the sheriff holds a sale. The purchaser then gets possession via a writ of assistance. Statutes may require certain procedures after sale—like an extended redemption time.
2.
Non-Judicial
A creditor might persuade the debtor to do a deed in lieu of foreclosure, or short sale, or whatever. There is also the deed of trust option with a trustee who will sell the property for bank if debtor does not pay. Such practice involves a creditor waiving deficiency. Trouble might come in court after eviction.
3.
UCC Sale
After default, the creditor may sell the personal property. 9.610. Or, the secured party can choose judicial procedure.
III.
Repossession of Collateral
Strategically, the party who possesses the collateral between default and foreclosure has some advantages—use of the collateral, protection of the collateral, bargaining chip, ability to continue normal operations, etc. The security agreement may contain wording answering the question, but once cannot be sure that will be effective.
A.
Personal Property
The secured creditor has right to take possession immediately via self-help if possession is possible without a breach of the peace. Otherwise, judicial process is required—usually a replevin order for the sheriff. 9.609. Replevin can involve
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posting of bond for almost immediate results. Rendering the collateral inoperable is also acceptable.
1.
Breach of the Peace
Whether it occurred is a question for a jury. The magic words are “potential for violence” and “nature of the premises entered upon.” The security agreement can waive potential trespassing charges. Nighttime usually bodes well. Any situation where someone thought they could get hurt is bad. But, once the repo people are in the car, they technically have achieved possession. Violation can lead to penalty under 9.625.
2.
Accounts Receivable & Self Help
9.607 allows secured party to directly contact accounts receivable. 9.406 allows a debtor to pay creditor’s secured party, and even provides that after notification, they cannot pay creditor to satisfy debt. This is detrimental to the creditor/debtor because the debtor gets bad signals. It also hurts the secured party because these debts are difficult to prove without help.
B.
Real Property
The secured party might never be in possession of the property because it goes from debtor to purchaser at the foreclosure sale. A writ of assistance may be necessary.
The bank might be able to get a receiver appointed. It helps if the agreement provides this. The court will need strong evidence that foreclosure is inadequate.
This would be danger of property being lost, removed, injured materially, etc. A receiver will almost never be appointed for a residence. But, Illinois allows immediate possession if the agreement provides it and the creditor will probably win.
Assignment of rents might be achieved by creditor.
Zombie foreclosure: the owners abandon the property, but the bank never forecloses or even takes repossession. This leads to trouble with taxes, depreciation, squatters, etc. Once discovered, maybe you can rent or sell it.
IV.
Judicial Sale and Deficiency
This is both for real estate and Article 9, though Article 9 judicial sales are rare. Proceeds of sale go toward expenses of sale, the debt, then there is a surplus or deficiency. Also, in some rare states, there is a strict foreclosure pattern, where the deed might not go toward the debtor until they pay off. The debtor loses equity that way.
Procedure of Sale: Statutes dictate the procedures of sale. The highest bidder wins and must pay quickly, or put down a deposit. The court may need to review and confirm sale. At confirmation, the deed is signed away. Creditor may request a deficiency judgment—an unsecured debt.
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Redemption: So long as sale is still pending, debtor has right to redeem, as well as any postsale redemption right granted by statute. If there is a statutory redemption, the debtor might still have property until that expires. The debtor can sell this right of redemption to other people. Also, keep in mind that statutory redemption is going to be the price at sale.
A.
Problems that Could Invalidate or Just Make Sale Crappy
Low Price: Debtors are generally disappointed with sale price. Unfortunately, that is the nature of the beast. Courts will invalidate if the price 1) shocks the conscience or 2) is inequitable and should not stand. The rule is that Below
10% is really bad, above 40% is acceptable, according to one academic.
Poorly Advertised: Public notices aren’t very good.
Inspection: It is difficult for creditor or potential buyer to even get a chance to inspect the property.
Title and Condition: Caveat Emptor. Buyer would have to show a false statement of material fact and a knowledge or belief that the statement was false, and an intent to induce plaintiff to act, and an act in justifiable reliance, and damage. Also, liens may survive the foreclosure.
Hostile situation: Nobody is going to be cooperative in this situation.
Right of redemption makes it a bad buy, sometimes
Anti-Deficiency Statutes: Different states have varying schemes from no deficiency, to deficiency based only on current market value, etc. They want to encourage banks to do better sales.
Credit Bidding: Bank can credit bid. Captures the equity. Result: unlikely to be invalidated. Unlikely to be redeemed.
B.
Strategic Discussion
In a situation where deficiency is not possible, the bank does not want to go low and have the sale invalidated or have the debtor redeem for cheap, but the bank does not want to outbid other people who would go up to the debt. On the other hand, the bank can play along, seeing how far the competing bidder will go, credit bid, and then if competitor does not surpass, could turn around and sell to the competitor.
On the other hand, if the FMV is higher than debt, probably doesn’t matter. If quite a bit lower than debt, everybody all around is screwed.
If the FMV is less than the debt, and deficiency judgments are possible, the debtor will want lots of people at the sale. If FMV is above debt, probably does not matter so much. The bank will do a full credit bid.
The debtor would love a low bid from bank, especially if they have a friend who will front some money and take ownership. On the other hand, a friend would want to push the bank to the top of the credit bid as well, to help debtor.
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V.
Article 9 Sale and Deficiency
A.
Acceptance of Collateral—or Mandatory Disposition
After default, the debtor can consent to the secured party retaining collateral in full or in partial satisfaction of obligation. 9.620.
1) Debtor must consent via silence of 20 days after proposal or via an authenticated writing. 2) Creditor must receive no objections from other interested parties. 3) For personal goods, the collateral must not be in debtor’s possession at time of acceptance. 4) Consumer goods, whose debtors have paid 60%+ must be sold, unless waived via 9.624.
BUT if it is a consumer transaction (personal, household, family purposes), the secured party may not accept collateral in partial satisfaction of the obligation is secures.
B.
Sale Procedure
This applies to sales resulting from self-help or replevin. This is controlled by 9.610.
Proceeds of the sale are distributed as per 9.615. Debtor becomes liable for
deficiencies, 9.615 and 626. The sale must be commercially reasonable.
9.610.b/9.627. The debtor must receive notice of the sale. 9.611.c.1. Redemption is possible through 9.623. It includes the full amount of debt, attorney fees, and expense of sale. No redemption is possible after sale.
How do debtors get screwed? The collateral sells for a crappy price and equity is lost.
Most debtors do not have a lot of equity, lack money to sue, and fear an unprofitable suit. Trouble will probably come from excessive deficiency judgments allowed for in
9.615. UCC 9.625 and 9.626 will contain remedies for most of the violations. More often, the suit is about deficiency because the creditor brings it and the debtor is replying.
1.
Failure to Sell Collateral
A secured party may sell the collateral after default—9.610.a. Or it may not— it can dispose of them in a commercially reasonable manner, whether that be the garbage or a delayed sale or other way to use it. 9.620.e and f can force a sale, though. The complaint for not selling will be if it fits the bill of 9.620 in general. 9.625 will have damages.
2.
Lack of Notice
Notice to debtor, guarantors, lien-holders, etc. is required before sale as per
9.611. Failure does not invalidate the sale, but can involve other penalties.
9.617 (transferee rights) and 9.625. The BMW case declared that you needed to strictly comply with procedure in order to collect a deficiency. Thus,
BMW lost out, even if it was a private sale.
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3.
Commercially Reasonable Sale
UCC 9.610 governs. If this is brought into dispute, 9.626 governs. Basically, there is a presumption that the sale was reasonable. If challenged, then the creditor must prove reasonably commercial. From there, if the creditor fails, the debtor gets credited for the higher of what it sold for or should have sold for. And for the latter, the sum is considered equal to the debt, attorney fees, and sale costs unless the secured party proves it is less.
This all applies to commercial transactions. The courts can set their own rules for consumer transactions.
VI.
Effects of Bankruptcy
The Automatic Stay goes into effect—362. Violation can result in punitive damages. In bankruptcy, the secured party will get their collateral or equivalent value. Any debt beyond collateral becomes unsecured.
The Automatic Stay breaks 1) for cause, including lack of adequate protection (10% equity cushion is not enough, but 20% is) (but 361 has options for adequate protection), 2) if debtor has no equity and no need for property, and 3) in rem fraud relief.
Bankruptcy 506 bifurcates the secured claim. It also allows interest until the equity cushion is gone.
Case law calculates loss of adequate protection based on bankruptcy petition date, though some courts say it dates to petition for relief from stay.
Creditors files claims under 501. The debtor is not likely to quibble here, though they might have outside of bankruptcy. The court calculates the claim; there is no unmatured interest introduced; bifurcation happens under 506; interest allowed if there is a cushion, it is reasonable, and was agreed to or allowed in state law.
Secured creditor will get value as of effective date of plan in cramdown. Till sets the interest rate at prime rate plus reasonable risk. It applies to 13 mainly, but stretches to 11.
VII.
Creation of Security Interest
Security interest is created or attaches when the secured party possesses the collateral or an authenticated security agreement, value has been given, and the debtor had an interest in the collateral. 9.203.b. Perfection is not necessary to make it enforceable.
Value given is easy—1.204 defines value broadly. It can also be past value.
Debtor’s right in collateral is also easy—this sometimes can be the last thing to go into effect.
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A.
Possession or Authenticated Security Agreement
Signed writings, e-mail, or oral agreements can work. Writing are the most used. The security agreement will describe the collateral and obligations secured, define default, outline the rights of the creditor at default, and also place an obligation on the debtor to care for or insure the collateral. When there is a screwup, what minimum record will suffice? The rule is that you need enough documentation to show that it was the intention of the parties that a security interest be created. Some courts will buy it easier than others. Lack of a signature can be damning. But, keep in mind for real estate, the state laws can be pretty firm about signed writings.
VIII.
Extent of Collateral Covered
There will be two extant descriptions—the security agreement and the financing statement.
FYI, the security agreement probably controls. However, an overbroad financing statement can stake a claim of perfection for stuff that is later secured via later agreement. An overbroad financing statement is bad news for the debtor.
The security agreement is a contract and is interpreted as such. 9.201? The court will look for intentions as objectively expressed, though parol evidence might be considered for ambiguities. Mistakes can lead to reformation.
When enforced against a third party, the agreement will be interpreted narrowly.
The interpretation of collateral descriptions is based on Article 9 meanings. E.g., accounts, equipment, inventory, general intangibles, etc. UCC 9.108 and 9.203 control the collateral description. The key is that it reasonably identifies what is described. “All merchandise” has been held as too vague in the store credit card case. 9.108 gives examples.
A.
After-Acquired Property
As per 9.204, a security agreement may provide for after-acquired property. But, this doesn’t happen in two situations: Consumer goods acquired more than ten days after creditor gives value. Commercial tort claims. You want to announce this in the agreement, but it also might fall in via proceeds. There can be fancy interpretation of wording to see if it counts as after acquired—inventory is naturally after-acquired, but all equipment or equipment that happens to be there?
B.
Which Obligations Secured?
The agreement describes the obligation secured. There must be a debt if you are to collect. Dragnet clauses can cover any obligations that happens to be owed. These can result in a secured interest living a long time without the debtor knowing.
C.
Real Estate
Must describe land, or refer to other documents. A Mother Hubbard clause can cover all land owned in the county is collateral. After-acquired doesn’t pop up much in real estate. Sometimes, future advances are possible—construction mortgages. The
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dragnet clauses are discouraged, however. There must be proof that the later advance was contemplated from the beginning. Some states require a cap on the mortgage.
And, if the obligation cannot be reduced to money, real property cannot secure it.
IX.
Proceeds, Products, & Value Tracing
Often, when you pull out the security agreement and go for your remedy, you discover the collateral has transformed. Secured parties have rights in proceeds as per 9.203.f and 9.315.
Proceeds is defined by 9.102.a.64.
Proceeds is all or nothing. Proceeds of proceeds are collateral.
The secured party’s collateral increases—it sucks in the profit margin from the sale of stuff, and if the disposition is unauthorized, they will also still have the security interest in the collateral and its proceeds.
The secured party can authorize disposition and keep security interest in only the proceeds.
9.315.a.1.
But, unauthorized disposition leaves the lien on whatever it is, despite the debtor having power to transfer ownership. 9.401. 9.315. The debtor can face criminal liability for selling collateral without permission. Some states will not prosecute unless requested. Others require a demonstration that debtor had no intent to pay creditor at all, ever.
The collateral must remain traceable and identifiable as per 9.315.a.2. Comingling is going to cause trouble. For money in the bank, the lowest intermediate balance rule prevails. Some courts won’t even try to deal with comingled funds. Separate bank accounts is good if you’re letting somebody hold cash as yours.
Proceeds include products, profits, rents, and offspring.
X.
Bankruptcy—After Acquired & Tracing Value
As per bankruptcy 552, no secured creditor is allowed to acquire interest in property acquired after the bankruptcy petition. But, bankruptcy allows the proceeds, products, offspring, or profits of property secured prior to bankruptcy as being collateral of the secured creditor. The problem is that proceeds is all or nothing, and sweat equity is almost always involved in proceeds of inventory, etc. The bankruptcy courts will often take an equity of the case approach (as per the wording of the statute) and split the baby instead of adhere to the all or nothing rule. Some follow practicalities, others take into account expenses, labor, etc.
There’s also the cash collateral under bankruptcy 363. Once the secured creditor has interest in cash, they get adequate protection before it can be used.
XI.
Collateral Limits
Remember that real estate and insurance is not covered by Article 9.
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The FTC also regulates predatory lending. Wage assignments must be revocable, a deduction plan, or applicable to wages already earned. There is also no non-possessory security interests in household goods other than purchase money security interests allowed. (A pawn shop is possessory.)
What are household goods? Clothing, furniture, appliances, radio, television, linens, china, crockery, etc. Wedding rings are also included. Non-household goods are art, electronics beyond the radio and television, acquired as antiques products, jewelry.
There is to be no security interests in pensions.
Collateral must be property. Intangibles is problematic, but maybe you can secure the proceeds from the sale or license of such.
XII.
Default, Acceleration, & Cure under State Law
The security agreement will contain language defining default. Most agreements define default expansively. The typical agreement talks about lack of payments, breach of warranty, death/insolvency, lost/destroyed collateral, mood of creditor, etc. Once default occurs, the entire debt becomes payable.
A.
Payment Structures
Installment Loans: Debtor makes a series of payments—usually regular and equal payments.
Single Payment Loans: Everything is due on a single day, perhaps at the arrival of an account receivable. Such a loan might be made with the understanding that the bank will probably rollover and renew without payment. Sometimes there is no date and the bank can call it due at any time.
Lines of Credit: Debtor writes checks as needed and then when revenue comes in, it pays it off. There will often be a due date because such a plan is precarious for the bank.
B.
Acceleration & Cure
The common law viewed each installment as a separate obligation and required suit for payment of each. So, contracts will have acceleration clauses providing that everything becomes due once default occurs. However, to exercise acceleration, the creditor will usually have to affirmatively notify the debtor and demand a cure or else acceleration.
After acceleration, the debtor’s cure option is to pay the entire accelerated debt.
Although, some statutes dictate that cure can happen with past due payments only.
Such statutes are usually limited to homes or consumer loans, however.
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C.
Limiting Enforcement of Acceleration Clauses
1.
Waiver
Failure of the creditor to act promptly can lead to waiver. The official definition of waiver is an intentional relinquishment or abandonment of a known right. Conduct can be a sign if it reasonably leads the other party into a belief. In the construction company case with the confusion over the past due payments but ongoing negotiations, the court declined to find that there was a waiver, but it opened the possibility of waiver by estoppel. The debtor might have reasonably relied on the bank to demand payment as it had done in the past.
2.
Nasty, Unenforceable Payment Terms
Acceleration clauses are subject to the 1.304 and 1.309 good faith requirements. The first requires every contract under the UCC to involve good faith behavior—basically, not taking advantage of the other party. The latter requires that if an acceleration clause is triggered by a determination by the secured party that they are not safe in their investment, such decision must be made in good faith.
So, in one case, a company’s income was sent straight to the bank and then the company drew on a line of credit. The bank stopped letting the company draw even while the company was depositing. This made it impossible to sell the company. The court reasoned that this was most like an acceleration clause and imposed the limitation in 1.309 on demanding acceleration clauses.
But, in another instance, cancellation on five day notice was deemed to be controlled by the general good faith provision—that you do not take opportunistic advantage in a way not contemplated at time of drafting. But, either party is not the other’s fiduciary. Easterbrook did not buy that you could squeeze too much into the good faith acceleration rule.
XIII.
Default, Acceleration, & Cure in Bankruptcy
Bankruptcy allows debtor to reel everything that is potentially a right on in and then use it to get things ironed out—especially in Ch. 11 and Ch. 13. In one case, this included the lady’s nearly expired right to redeem a recently repossessed car. Once the property has been sold, bankruptcy is too late, though.
A.
Step One
The Automatic Stay comes to pass, and everything is stuck until it leaves the estate, the case is closed or dismissed and the debtor is granted/denied discharge. Adequate protection and cram down will allow the debtor to hang onto things. Ch. 13 requires adequate protection payments within 30 days. Ch. 11 has no such requirements.
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B.
Step Two
1.
Modification
This is basically rewriting the loan. The debtor proposes a new payment schedule in which arrearages are included and interest is set based on market and risk by the court. The debtor pays the unsecured portion to the extent it pays other unsecured. Regardless of bankruptcy chapter, this is unavailable to homeowners. This is probably the only step for loans payable on demand because there is no fixed schedule.
2.
Cure and Reinstatement a) Ch. 11
A secured creditor is unimpaired if debtor cures (as determined by agreement and state law), future payments remain due, damages are paid, and the legal, equitable, and contractual rights of creditor are not altered. Why do this when cramdown is effective? Interest rate might be better. b) Ch. 13
1322 allows you to cure and reinstate. Debtor must cure within reasonable time—within time of plan. Future payments will remain due. State law will determine amount needed to cure. Also agreement.
There will be no altering of legal or contractual rights. Modification requires payment within plan in Ch. 13 (Ch. 11 probably does too, but those plans can last forever), so reinstatement is the key.
XIV.
Prototypical Secured Transaction—At Least for Floor Plans
Bonnie has a boat shop. She visits banks. Bank noses around and gets information. Both loan officer and computer make decision. Branch manager approves. The bank inspects inventory, check the filing system for prior perfected interests. Basically, they set up a line of credit. Bonnie also signs a guarantee that puts her butt on the line. Bonnie becomes an authorized dealer and buys from a company that the banks has a relationship with. Bonnie orders, bank approves, dealer ships and promises to make good to bank on returns. Bonnie sells a boat, setting the buyer up with another bank that pays Bonnie off immediately.
Bonnie them reimburses the big bank for the wholesale boat cost, and will expect financing charges and whatnot in the mail later. Throughout this, the bank will be sending inspectors to monitor collateral, check for honesty, etc. If things go bad, the bank can sue, press criminal charges, or try to negotiate with Bonnie.
XV.
Perfection
Basically, you have your security agreement, which attaches or becomes valid or whatever.
But then, you have the perfection process, which sets up the security agreement as taking priority over other security interests that were perfected later. Junior creditors can always
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seize the stuff and hold a sale, but they run the risk of having to deal with sale and ultimately get nothing out of it. It should also be noted that you can file your financing statement ahead of time to get ahead in the perfection line. 9.502.d. Also 9.509, which controls who can file.
This also applies to descriptions of collateral that might happen to cover stuff later purchased by the company.
You can file notice in the records system, take possession of the collateral, take control of the collateral, or post notice on the property.
The filing system theoretically gives out notice. Searching is a pain, however. And, the creditor might screw up anyway. And, you need to file in the correct office.
The rule for determining the filing system can be complicated. Copyrights are in the national system because the statute overrides. Patents, however, have a statute that mentions the register of ownership transfers, but not security interests, unlike the situation in the copyright system, so patents are state.
There are costs to filing and searching.
XVI.
Filing in the System
The clerk gives a date and time, gives a receipt, and then indexes it. Know the idiosyncrasies of the system so that you can figure out how to search and how to know what is seriously misleading. (AKA—if your interest doesn’t show up in a standard search, then it is probably seriously misleading.) Also remember “the basket”—the stuff that might be waiting to be filed. It might be good to file and then search.
A.
Correct Name on Financing Statement
Individual Names: 9.503 has two alternatives. There is the driver license standard, or the one that makes the driver license a safe harbor. Also, the name the person is generally known for in community for non-fraudulent purposes (what community?)
Corporate Names: Whatever is on file with the state.
Partnership Name: Probably the names of partners, etc. However known in community?
Trade Names: Categorically unacceptable.
B.
Errors
In the case where the creditor put too much information, the 9.506 seriously misleading analysis turned on whether the search logic turned up the entry. If not, it was seriously misleading.
9.517 puts a burden on the clerks. If the office screwed up, the first in time person wins.
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C.
Requirements
9.502.a requires 1) name of debtor, 2) name of secured creditor, and 3) indication of collateral required to achieve “sufficiency.”
But, 9.520 requires the filing office to refuse if 1) and 2) from above are not there, and if there is lacking a 4)mailing address of creditor, 5) mailing address of debtor, and 6) indication of whether the debtor is an individual or corporation. Such rejection should result in notification to filer.
If the office accepts regardless of 9.520, the filing is effective if it meets 9.502. But, as per 9.338, the lien becomes subordinate to the extent that the later buyer or creditor detrimentally relied on the erroneous filing or inability to discover. The
Comments suggest that such situation is rare. Also, even if lien creditors and bankruptcy trustees get duped, this sort of filing is good against them.
If the filing office wrongfully rejects, it is still good against lien creditors.
Minor errors and omissions okay, but not if they are seriously misleading. 9.506. A debtor’s name is seriously misleading if a search doesn’t turn up the entry. Wrong name of secured party is troublesome. Wrong collateral is troublesome—9.504. You need a 9.108 description, or something that says everything is covered. What kind of errors? If the error leaves room for a red flag, that’s good. If the serial and model numbers don’t match, that might be a flag, but if both serial and model number are wrong, you’re screwed.
D.
Authorization to File
9.509 controls who can file. The debtor needs to authenticate or sign some overall contract that allows repeated filings. 9.510 says unauthorized are invalid. 9.518 lets debtor file statements to correct.
XVII.
Other Ways to Perfect Without Filing
A.
Possession
9.310.b.6 and 9.313.a recognize possession as valid means to perfection. This is as good as notice theoretically, because creditors should look at the goods ahead of time. But, unsophisticated people might not realize that somebody has possession.
What is possession? Property is under one’s power. A somebody possesses the stuff sitting in their house—until the burglar walks off with it and achieves naked possession. Agents can have possession of stuff—for instance the agent running the cash register.
As per 9.313, possession works for negotiable documents, goods, instruments, money, or tangible chattel paper. As per 9.312.b.3, it is the only option for money.
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For all but goods and cash, as per 9.330.d, and somewhere in 9.331, possession is superior to filing. A purchaser might want to check both the system and the paperwork, now.
B.
Control
Filing is not necessary for deposit accounts, electronic chattel paper, investment property, and letter of credit rights. 9.310.b.8.
Deposit Accounts: Either the secured party is the bank, the bank is instructed to comply, or the account is in the name of the secured party. This is defined by 9.104.
Ability of the debtor to draw on account does not necessarily kill.
Investment Property as defined by 9.102.a.49: Basically, stock. Control via registration okay, possession also okay. Control gives you priority—9.328.1.
C.
Automatic Perfection of PMSI in Consumer Goods
9.309.1 declares that PMSI stuff for consumer good does not need filing. Definition is 9.103.b.1 Consumer goods is personal, family, household use—use is key. Maybe the Queen Mary is excessive, but the letter of the law allows it.
D.
Security Interests Outside of Article 9
Wage claims, insurance policies, real estate interests, non-commercial tort claims, etc.
Perfection thus not required.
XVIII.
Perfection in Lapse and Bankruptcy
To remove the filing from the system you must file a satisfaction. You have closings to make sure the satisfaction is filed only after the money goes through and whatnot.
Subdivision developers also try to have release clauses in the contract so they can sell and close stuff piecemeal.
In Article 9, this happens in 9.512 and 9.513. There are time limits, and 625 kicks in with penalties if the secured party screws up. The seriously misleading standard applies. 9.506.
Lapse—system clears itself. Statements are effective for five years. As per 9.515, a lapsed statement is no good. You can renew during the six-month period before expiration.
Renewal extends to the five years beyond expiration date. The record is destroyed a year after lapse. 9.522. Second statements do not count as a continuation.
Bankruptcy? Continue filing your statement renewals. The automatic stay does not block this action.
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XIX.
Maintaining Perfection
A.
Change of Debtor Name
If the name on the financing statement becomes seriously misleading, everything already perfected and perfected within the four months thereafter is perfected.
9.507.c.
B.
Collateral Gets New Owner
The new owner is still called a debtor, though the original owner is a obligor. New debtors can be bound. 9.203.d. Basically, it works the same as a change of debtor name. If the name changes, you have four months before new possessions are no longer perfected. But, 9.507.a seems to keep collateral perfected in the hands of a new owner as well—there is some sort of difference.
C.
Change of Collateral Description
Same office rule, basically. Otherwise, you lose perfection. 9.311 requires certificates, for example. 9.507 says that changes don’t screw creditor, but 9.311 says that filing is not effective sometimes, so that will kill 9.507’s niceness. Equipment to and from personal property is okay. Moving stuff between inventory and something that would require certificate of title is problematic.
D.
Collateral is Exchanged
If collateral description still covers the new collateral, there is no problem. This is a practicality and proceeds question. 9.203.f. 9.315.d.
If the proceeds are not covered by description, but are the same nature, then it is same office rule. 9.315.d. The proceeds are perfected.
If filing in another office is required, you have 20 days to file. 9.315.d. No authorization required to re-file. 9.509.b.2.
You’re screwed if it goes to property, though—UCC 9 does not cover.
E.
Collateral to Cash to Collateral
Proceeds to proceeds is okay. 9.102.a.12 and 64. Same description okay. 9.315. Cash to stuff not described requires filing within 20 days, and cash to different office type is also 20 days. 9.315.
F.
Collateral to Cash
Perfection remains so long as cash proceeds identifiable. 9.315. Also, if this stuff is later used to take it to new collateral, then the 20 days starts then, no matter how much time already went by.
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G.
Relocation of Debtor
9.316.a.2 gives creditor 4 months to file in the new state before losing perfection against purchase people, but retaining against lien and bankruptcy. But, if it would have expired before that 4 months, then that’s when it dies.
H.
Transfer to Another Debtor in Another State
9.316.a.3 gives a year.
XX.
Where to File
9.301 and 9.307 are the big statutes. They control internationally—as much as possible, anyway. International filings are a big problem. Filing is what the book covered, here— possession and control are not as likely to spawn cross-state problems.
9.301 says that non-possessory interests are based on the local state law. Possessory interests are governed by the state in which stuff is. If there are banks involved, it is whatever law the bank is governed by, etc. Check the random sections.
9.307 says that an individual is located at the principal residence—which is something more than presence but less than domicile, which is concerned with permanency.
If an organization is registered, the state of incorporation always is the state. If not registered and only one place of business, that’s it. If more than once place of business, then you go for the headquarters or central nerve center or whatever.
Fixture filings go toward real estate—kind of a location of collateral thing.
A.
Certificate of File Systems
These are considered advantageous. It’s specialized, it doesn’t clog the filing office, it facilitates law enforcement, etc. UMVCTA is the big thing. The numbers are nice.
However, ownership isn’t necessarily controlled by the certificate of title. A title is prima facie evidence. 9.311 gives a laundry list of things that filing does not work for—certificate systems present in the state are usually included. So, perfection via the certificate system is required.
Perfection happens at time of car being sold if title submitted to DMV within ten days (relation back). Otherwise, it is time of filing.
Changes to certificates are mailed in. The owner or priority lienholder then gets the certificate in the mail.
While cars are inventory, they are on Article 9 filing. Registration is different—that is taxing the presence of the car on the road.
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1.
Accessions
Three categories—not sufficiently related to whole to be considered part
(spare tire), integrated that is part of the whole, not so much that it can no longer be subject of separate financing.
Accession party should hurry and get it filed if they’re going to try to file on the individual part.
9.335 controls—it gives interest in a whole priority over any interest in an accession. It also bars the accession holder from causing enforcement. The best they can hope for is to collect when a lien holder for the whole auctions it off.
2.
Car Changes States
Certificate of Title to COT
COT to UCC9
UCC9 to COT
UCC9 to UCC9
9.316.d and e. Four months to file new perfection, otherwise lose priority to purchasers for value, and potentially lose out to purchasers in good faith as per 9.337, especially since 303 says that the certificate dies when new state issues new certificate. Perhaps it doesn’t kill if new one not valid and is revoked.
9.303.b says you need a new certificate of title in new jxn or lapse of current certificate before it becomes invalid. Also 9.316.d and e. Don’t need to do anything.
9.316.a—new jxn gives four months to perfect before losing unless it naturally expires before.
9.316.a—new jxn gives four months to perfect before losing unless it naturally expires before.
XXI.
Priority
A.
Sans Bankruptcy
1.
Priority in Foreclosure
Any lien holder may foreclosure while the debtor is in default to that lienholder unless there is some sort of contract. But, no lienholder is compelled to foreclose. Some creditors might see no profit in forcing a foreclosure. Others with priority might not want to expend the effort.
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Ultimately, the person who started the foreclosure receives maximum satisfaction possible from value of collateral and any surplus goes down the line. Any liens senior to the foreclosure starter survive as to the value of collateral.
General rules:
1.
Sale discharges from collateral the lien under which sale is held and all subordinate liens. 9.617.a. It does not discharge prior liens.
2.
Sale transfers to purchaser, subject to all prior liens. 9.617.a. But it is the lien only that transfers--not the debt or obligation.
3.
Sale conductor pays off surplus to later liens or the debtor. Prior liens don't get anything except continued security. 9.615.
4.
Deficiency judgments! 9.615.
Sophisticated bidders at sales understand this. If the very first lien holder holds the sale, the bidders will realize that what they pay extinguishes ALL the liens and that they will not be responsible for anything.
If the second lien is selling, then the bidders will keep their bids that much below what they are willing to pay. The bidders might go in already having worked something out with the first lien holder—like to cure deficiency and continue the mortgage. (Keep in mind that the sheriff is paid from proceeds of sale, so sophisticated bidder doesn’t have to worry.)
Credit Bidding: It gets complicated with multiple liens. If the first lien forces sale, then it bids up to what is owed. The other liens don't get to count credit until they exceed the first lien. If the second lien starts the sale, then they get to start with credit bids. Also keep in mind, that if a bank credit bids, they might get stuck paying another bank, too.
What happens when there are so many liens that it is ridiculous! Nobody would want to invest. So maybe somebody bids a really low price and treats the property auctioned off like a rental. They don’t get bad credit.
Negotiation is going to be happening all the time.
2.
Reconciling Inconsistent Priorities
What happens when buyer has a statute that lets him take free of liens? That doesn't help the first lienholder if he wants to forebear. It also makes the foreclosure fight more crowded.
There are also many different schemes that control--the legislature's originality, the UCC, federal law, etc.
A NY statute directed that once the original sale person sold the stuff, the rest went to the judgment debtor. But, in this case, the judgment debtor was
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the one who started the sale. Some sort of understanding prevails that mortgages must win in priority.
Bank Leumi v. Liggett, NY 1985
Does the law make judgment creditors more priority than mortgages? Exwife sued and filed liz pendens. Then guy put successive mortgages on. Then another creditor got a judgment.
The "unless the court otherwise directs" language is clearly there to ensure that the proper lien takes priority.
3.
Right to Possession Between Lien Holders
What happens with foreclosure between simultaneous lien holders?
Generally, senior gets it.
Grocers Supply Co. v. Intercity Investment Properties, Tex. Ct. App. 1990
With the exception of Wisconsin, other states considering the issue have consistently held that the right of a prior perfected creditor to take possession of collateral is superior to any right of a mere judgment creditor.
You can even maintain an action for conversion against fetcher creditors that take your collateral when you have priority.
So, in sum, if senior lien objects to the second lien collecting, it is screwed.
The second lien even has a duty to bring it up.
Frierson v. United Farm Agency, Inc. 8th Cir. 1988
Merchant cannot refuse to declare debtor in default and refuse to let junior creditors collect. The junior creditor will take subject to the lien. And, when senior comes round, they can figure it out.
Debtor needs to be in default for creditor to be able to seize the property.
Probably would want language.
You would probably have to figure out the state law to see who wins.
UCC Notice of Sale
Other lienholders want their notice. UCC 9.611 only requires notice to easyto-find creditors. The safe harbor is to search the filing system 20-30 days before the notification date. Once you do that, all subordinate liens will be discharged.
B.
In Bankruptcy
Liens generally survive bankruptcy unless they are avoided because they are unperfected or are preferences. Here, though, no creditor can foreclose while the automatic stay is in effect.
The trustee can also sell the property at any time, though it must hand over enough funds to the secured creditor. In that respect, the secured creditor cannot forebear or whatever.
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Bankruptcy also holds secured creditors in place to try to maximize the bankruptcy estate for creditors potentially on the fringe. The creditors who will probably be okay and those who are screwed no matter what are ignored. (This is a difference between bankruptcy and state law—the bankruptcy law gives a fig about subordinate creditors.)
1.
Bankruptcy Sale Procedure
Sale procedure is controlled by the trustee or debtor-in-possession. Secured creditors cannot conduct foreclosure sales because of the automatic stay.
Such sales might be formal, or they might be according to debtors in possession or whatever. Trustee might sell property subject to lien. Once it has exited the estate, the creditor can foreclose. But if the liens are excessive and make the property unsellable, then the trustee can abandon the property for the lienholder. Might need a stay lift even then.
Or, you can sell the stuff free and clear from the estate and the proceeds have the lien on them. 363.f sets the conditions.
2.
Power to Grant Senior Liens
Generally, a creditor stays in first place if they managed to get there, with the potential exception of property taxes. Also mechanics liens and whatnot.
But in bankruptcy, that isn't the case.
364.d allows post-petition lenders. The court allows if the estate is unable to borrow money without granting prior lien and if there is adequate protection for the displaced creditor.
Creditors still hate it--there is not guarantee of adequate protection, and creditors get screwed all the time.
XXII.
Lien Creditors v. Secured Creditors
Congress determines the priority of tax liens, various organizations control the priority rules of the
UCC, and state legislatures control judicial liens. Future advances and purchase-money status also place interesting roles.
A.
How to Become a Lien Creditor
Basically, an unsecured creditor has won a judgment, obtained a writ, and obtained a lien by levying or "attachment." There is also garnishment. There is also the recordation of money judgments in the real property recording system against any property in the county. You can also perfect a judgment via filing in some states. California says that judgment lien on real property happens via recording, on personal property by filing, and if you file, you can have a laundry list.
Bankruptcy trustee is also an ideal lien creditor--it can prevail over anything, that is not perfected, even if he knows about it.
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B.
Priority Among Lien Creditors
First in time to accomplish the legally significant act, first in right.
Legally significant Acts:
1.
Date of levy: The day the sheriff takes into possession or nails a notice to the door or whatever.
2.
Date of writ delivery: When the clerk issues writ to deserving creditor who then delivers to the sheriff. Sometimes, there is a relation back, where the date of delivery doesn't count until the sheriff levies.
3.
Date of service of a writ of garnishment: When the sheriff delivers to bank or employer.
4.
Date of recordation of judgment: When the judgment is delivered to the recorder's office.
Majority rule is first to levy wins.
Minority rule: first to deliver to sheriff wins
Even more minor minority rule--no lien until sheriff levies, and then first in time.
C.
Priority Between Lien Creditors and Secured Creditors
9.317? The question is whether the lien creditor becomes a lien creditor before the secured creditor perfects the security interest or files a financing statement.
Under UCC 9, perfection is when attachment occurred and applicable steps for perfection have been taking. So, if filing is required, perfection occurs after the later of attachment or filing.
The lien creditors exist at levy, and even in minority states that go by delivery to sheriff, they seem to wait for actual levy.
People v. Green, Cal. App. 2004
Freeze and Seize allows the court to enjoin defendant from disposing of white collar crime assets and allows levy to pay restitution to victims.
Guy was busted, his property was attached. Lawyer put on an attorney's lien. Lawyer filed for return of property. Gov opposed, and the court agreed.
Lawyer filed an $80k lien, filed on property and proceeds, but couldn't get cash. Also, couldn't perfect vehicles because sheriff had certificates.
Guy was found guilty. Prosecutor was having trouble proving assets were tied to crime.
Levy is key! Even if the court has seized.
D.
Priority Between Lien Creditors and Mortgage Creditors
Usually in favor of first lien created, and only goes other way if failure to perfect offends the state's recording statute. But, the judgment doesn't usually benefit from the recording statute.
Ultimately, the mortgage usually wins, even if the judgment was perfected first.
E.
Purchase Money Priority
The exception to first in time.
9.317.e: If the PMSI attaches first, there is a 20-day grace period to perfect and defeat a lien that came into existence between the dates of attachment and perfection. The 20 days starts at delivery of the collateral.
XXIII.
Lien Creditors v. Secured Creditors and Their Future Advances
9.323.b gives future advances priority provided that the creditor does not have knowledge of the lien. Also any advance made within 45 days after the lien's creation is entitled to priority
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even if made with knowledge. Also any advance made pursuant to a commitment made without knowledge of the lien is protected.
A.
Priority of Non-advances: Personal Property
What about when the secured party also tacks on fees and crap that aren't advances but are tied to advances? Secured creditor’s non-advances—interest, attorney fees, and expenses of collection can accrue and count and are not limited by the 45- days usually, when they’re accruing as part of something within the 45 days.
Uni Imports v. Exchange National Bank of Chicago, 7th 1991
Revolving line of credit. Then, lien creditor who tried to collect but was rebuffed by creditor who continued to make advances. And it was a lot of money.
In Dick Warner, the Court in 2d concluded that the non-advance stuff counts as advance. The non-advances were used by the creditor.
We don't think that is very convincing. Why should we keep favoring the creditor like this?
All of this has been endorsed by the Board.
It seems that not even the 45 day limit stops the non-advances from growing— especially interest.
B.
Priority of Future Advances and Non-advances—Real Property
Home equity lenders win.
Shutze v. Credithrift of America, Miss. 1992
The mortgage had a dragnet clause, but nothing obligated the bank to make future advances. Debtors abandoned their house and now the creditors are fighting.
Sorry—but dragnet clause covers it.
The recording gives notice. The dragnet clause was on public record.
Some states will differ between obligatory and optional advances in this nature—but this state seems to go really far.
XXIV.
Strong Arm Clause in Bankruptcy
If the security interest is unperfected, it does not retain priority in bankruptcy. 544 allows trustees to avoid secured interests that are unperfected at the time of filing. The result is that secured becomes unsecured.
Purpose of 544
The philosophy is one against secret liens. If there is a perfection problem, it is probably the bankruptcy trustee who will challenge it.
544 is a pain to interpret because the writers wanted the effect of lack of perfection means no secured status to apply to all the potential perfection schemes.
Thus, we have the idea of an ideal lien creditor. The impact nevertheless is different state to state.
Basically, 544.a gives trustee the authority to avoid any transfer that could be avoided by three hypothetical persons. Transfer is defined broadly.
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Judicial Lien Creditor
Hypothetically, if a lender extended credit at the beginning of the bankruptcy case and immediately obtained a judicial lien. (Impossible in real life.) Giving the trustee the lien as of commencement of the case makes sure that everything only had to be perfected before filing of the case.
Hypothetical lien creditor has rights as if exercised all possible judicial remedies, and its rights exist at moment of filing of case.
What does this give victory to? 9.317.a.2 and 9.323.b. Ideal lien creditors defeat unperfected security interests for which no effective financing statement and security agreements exist.
All other interests win.
Creditor with an Execution Returned Unsatisfied.
544.a.2. This is like the prior, but has in the trustee's hand at moment of filing an unsatisfied execution, which will allow it to go after fraudulent transfers.
Bona Fide Purchaser of Real Property
As for real property, trustee can be someone who bought and paid for property at commencement. Only works if the competitor was a transfer capable of perfection. Courts only enforce if competitor was supposed to do something to perfect and did not do it. For fixtures, trustee is only the judicial lien creditor.
Midlantic National Bank v. Bridge, 3d Cir. 1994
Bank is claiming it's unrecorded mortgage stands in shoes of prior recorded mortgage under doctrine of equitable subrogation. We think the trustee's hypothetical bona fide purchaser counts for more.
The bank certainly has an equitable lien on the property.
If something goes wrong with a new mortgage, the creditor can through equitable subrogation fall back on the priority of the previous perfection. NJ courts have done this, but look to other parties, too.
The problem here is that the ideal bona fide purchaser type takes free and clear from equitable liens because they are considered to have searched for another recorded interest.
Ultimately, the bona fide purchaser is more protected against equitable liens because the
UCC commands equitable principles to be considered for personal property, whereas the realty priority is determined by bankruptcy.
Implementation of Bankruptcy Code 544.a
This section makes certain transfers avoidable, but it does not require the trustee to avoid them. Ch7 will probably always avoid. Ch11, probably not.
Ch7: Trustee want money! Needs money! :P Trustee s are like junkyard dogs. Secured creditors can ignore the bankruptcy and collect on the collateral later. If they file a claim, however, and even if they don't, the trustee might eyeball their security perfection and see if it can be taken.
Ch. 11: Shoots self in foot to pull this trick. Also doesn't help the DIP stockholders much-unsecured creditors take before shareholders. Sometimes, fiduciary duty and the threat of a creditor committee can compel. Conversion to Ch. 7 can be a disaster.
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Recognition of Grace Periods
9.317 gives 20 days from debtor's receipt of possession to file. 9.324.e, PMSI. Mechanic lien
90 days. If bankruptcy is filed during the grace period, the creditor can still file normally.
XXV.
Preferences
Bankruptcy estate can grant a security interest, but only for new value furnished to the estate at or after the time of the grant.
Bankruptcy shifts things to encouraging equal payment of creditors. That equality stretches back 1 year for insiders and 90 days for non-insiders. That is the preference period. 547 allows the trustee to avoid anything that is a preference. Many of these avoided things were perfectly legal at the time.
Preference Requirements
1.
Transfer of interest to a creditor.
2.
On account of an antecedent debt.
3.
Insolvent debtor at time of transfer. Hypothetically, no other creditor is getting ripped off in this situation. Presumption of 90 days.
4.
Preference period--90 days/1 year.
5.
More than they would have gotten in Ch 7 liquidation.
When does transfer actually occur?
Need to know for preference, and need to know for relation back. Transfer occurs at attachment if perfected within 30 days. Afterward, takes place when perfected. Perfected for real property when the bona fide purchaser can't get priority, perfected for personal property when it is too late for lien creditor to acquire superior interest. If attachment occurs later, then that is the transfer date.
Exceptions
Making it so that after-acquired property doesn't have a transfer date until debtor has rights could be bad.
Floating lien--so long as collateral value remains constant, okay. 90 days before filing and filing date.
Relation Back Rules
Yup. Grace periods and Relation Back rules work.
Strategic Implications of Preference Avoidance
Unsecured creditors might watch for filings on their debtors. They can force involuntary bankruptcy, but they will only get pro rata. So, they might go to the debtor or preferentialized creditor and put some screws on.
On the other hand, there isn't proof positive that the trustee will avoid. Ch7 will probably attack, Ch 11 not, but their creditor committee might.
XXVI.
Secured v. Secured
Controlled by 9.322. (If you want to go secured against real estate, the relevant section in
9.334.)
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A.
Non-purchase Money Security Interests
Same collateral? First to perfect has priority and retains so long as continuously perfected/filed. The key is first to file, despite what the language implies. Even if not security agreement yet exists. Although, if somebody possesses or controls, then they pretty much have it instead. Would be better to do this check on same day as filing for possession. Also beware that something can be continuously perfected by different methods so long as there is no moment when there is not perfection. The exception to the 9.322 rule is 9.325 that says that security interests perfected against a transferee are subordinated to those perfected against a transferor.
Future advances? All advances have priority. 9.322.a.1. Firstbank files, Second bank loans and files, Firstbank loans, Firstbank advances, Firstbank wins. This isn’t as nice as real estate where you can check the mortgage—here, you just have to look at the existence of the first creditor and make assumptions.
So, who the heck would take second interest? People who don’t know about future advances. Creditors who hope to benefit but do not advance. Creditors who make a contract with the first interest. 9.339.
Also—if the filing description covers, it can be the priority for two separate agreements, separated even by time.
After-Acquired Property? If the agreement describes, then yes. Same priority date.
9.322.
B.
Purchase-Money Security Interests
9.324.a gives priority if perfected within 20 days. No different than debtor taking collateral subject to title. Tough for searchers to deal with.
Multiple purchase money security interests: What if the seller finances and the bank loans the down payment? Seller wins according to 9.324.g.1.
Inventory: The 20-day grace period does not apply when the property will be inventory. This accommodates inventory financing. 9.324.b allows purchase-money priority in inventory if purchase-money financier perfects no later than the time the debtor receives possession, and the purchase money financier gave advance notice to the inventory lender. This usually results in default and so the debtor isn’t usually willing to let suppliers do this.
Purchase-Money Priority in Proceeds: The security interest stretches to proceeds, even if another creditor has perfected on those proceeds. But, the flow-through of purchase money interest proceeds is limited—9.324.b allows only purchase-money state in inventory to flow into chattel paper, instruments, and cash proceeds. But, not accounts. And, there innate limitation of those types allowed—is control problems.
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But anyway, this allows banks to take safe interest in accounts. The purchase-money person will be on notice and can make arrangements.
Priority in Comingled Collateral: The security interest continues into the product or mass. 9.335.c if you use something as an ingredient. If there is more than one security interest on the mass as a result of comingling, the creditors get pro rata distribution based on their debtor’s contribution to the mass.
What if you can still identify the comingled crap? That’s an accession. 9.335. Any creditor with more priority can prevent removal of the part. If another creditor has priority over the whole, the accession creditor only wins if they are purchase money.
DIFFERENC BETWEEN Certificate and Basic Accessions
XXVII.
Buyers against Secured Creditors
Creditors expect that debtors can sell stuff, but of course expect that they should be paid off from the proceeds. Consumers do not do title searches when they buy fridge from the store.
But, people who buy property know full well they need to do a title search.
A.
Buyers of Personal Property
Generally, buyers take subject to pre-existing security interests. 9.201 and 9.315. But, there are exceptions everywhere.
1.
Buyer-in-the-Ordinary-Course Exception
9.320.a. Ordinary course is when you’re buying from somebody who is the business of selling that kind of item. Ordinary course is the seller’s business.
So, when the buyer is buying from a seller who usually sells that stuff, they take free and clear. The buyer’s status does not matter.
If the buyer knows of the security interest, they take free and clear only if they do not know that the sale is a violation of the security agreement.
And, you can only take free and clear of security interests created by the person doing the selling. So, if consumer knows of violation, does not take free and clear, and then sells to an ignorant buyer, the security interest remains.
So . . . when does somebody become a buyer? This is important because a buyer has more protections that an unsecured creditor.
Daniel v. Bank of Hayward
When does a retail purchaser who makes a down payment but does not take title become a buyer in the ordinary course of business?
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We conclude that the purchasers became buyers in ordinary course of business when the vehicle was identified to the contract. Suckers bought a vehicle that had not yet been manufactured. Potential other options: Date of contract, date of identify, the date of title transfer, date of delivery, date of purchaser accepting goods.
We think the bank should bear more burden. Further, this is ordinary course of business. We don’t really want to make an official rule, but in this case, they became buyers when the goods were identified, given the circumstances and the manner of sales in the industry.
After this case, the drafters revised the code to say that you had to possession or right to recover the goods from seller to be a buyer. But, it identifies other provisions that give consumer buyers the right to recover.
What about the debtor selling stuff that is in the possession or control of the secured creditor? Tanbro Fabrics involved an industry where the seller’s seller often retained possession. The seller made off with the money and the court gave the stuff to the buyer. The UCC writers did not like this at all.
And so they came up with something that says that where the seller’s seller has the stuff, the exception does not work.
2.
Buyer-Not –in-the-Ordinary-Course Exception
If a buyer gives value and receives delivery without knowledge of the security interest, they are free and clear. Maybe, if they have no constructive notice— are not required to search? 9.317.b
Apparently this is based on unperfected stuff.
3.
Authorized Disposition Exception
9.315.a.1. Regardless of the buyer’s behavior . . they can take free and clear if there is some sort of authorized disposition—it doesn’t have to be express. If the bank knows and is not doing anything, that is authorized disposition.
But, the new UCC 9 has a split on conditional authorizations. Basically, if the seller screws up the condition, the buyer gets whacked, though, sometimes they escape.
RFC v. EarthLink, Ohio App 2004: Basically, the creditor can attach any condition it wants on a free and clear disposition, keep it secret from the buyer, and put the buyer on the line if anything bad happens.
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4.
Consumer to Consumer Sale Exception of 9.320.b
If a consumer good user sells the good to another consumer good user, the automatic consumer PMSI fails. But, if the creditor filed, then they are still safe.
B.
Buyers of Real Property
One who buys in good faith, for value, without notice may take free. Race, race notice, notice.
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