Secured Transactions Outline
Fall 2006
I.
Fraudulent Conveyances
A. Common Law
1.
Clow v. Woods – An attempt to take personal property as collateral fails at
common law unless creditor also takes possession of property
a. Nonpossessory interest creates an ostensible ownership problem
2.
Erosion of Common Law
a. UFTA and Article 9 cured ostensible ownership problem and also dealt
with fraudulent conveyance problems
B. Uniform Fraudulent Transfers Act
1.
UFTA § 4 – Voids all transactions as to creditors, even those creditors who
arose after the transaction
2.
UFTA § 5 – Only creates a remedy for creditors who were owed at the time of
the fraudulent transaction
C. UFTA Question Tree
1.
Was reasonably equivalent value given?
a. If yes, only two ways to void transaction:
i. § 4(a)(1) – Transferee knew transferor’s intent to hinder or
defraud creditors
ii. § 5(b) – Transfer made:
1. To an insider
2. Where debtor was insolvent
a. More debts than assets; or
b. Not paying debts as they come due
3. Insider had knowledge of debtor’s insolvency
4. On account of antecedent debt (to the insider)
2.
Was transferor insolvent?
a. If yes, look at what kind of insolvency:
i. If insolvent only because not paying bills on time (§ 2(b)),
transaction can be voided under § 4(a)(2)(ii) or § 5 (a)
ii. If insolvent because liabilities exceed assets (§ 2(a)), only § 5 (a)
applies
1. Only creditors that existed at the time the transfer was
made can petition the court
b. If no, can argue § 4(a)(2)(i) – Equivalent value was not received and
remaining assets are unreasonably small
c. If not insolvent and assets not unreasonably small, no means to argue
fraudulent conveyance occurred (except § 4(a)(1))
3.
If debtor does not run afoul of a substantive provision of the UFTA, preferring
one creditor over another is okay
II. Scope of Article 9
A. Defining Security Interest
1.
Definition (1-201(37)) – An interest in personal property or fixtures which
secures payment or performance of an obligation
2.
Types of Collateral
a. Goods – Things that are moveable
i. Consumer goods – Goods used or bought primarily for personal,
family or household purposes
ii. Inventory
iii. Equipment
iv. Farm products
b. Instruments – Assignment can transfer the right to payment through
endorsement
c. Documents
d. Chattel paper – Document that contains both a security interest and a
promise to pay money
e. Investment property – Includes stocks and bonds
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Secured Transactions Outline
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f.
Accounts – Right of payment for goods or services leased or sold
i. Includes healthcare insurance receivables
g. Letter of credit rights
h. Deposit accounts
i. Commercial tort claims
i. Claims filed by organizations
ii. Business-related, nonpersonal injury claims filed by individuals
j. General intangibles – Covers other personal property that doesn’t fit into
other categories and includes:
i. Intellectual property rights
ii. Business goodwill
iii. Licenses (i.e., liquor licenses and FCC licenses)
iv. Software not embedded in goods
v. Payment intangibles – General intangibles under which account
debtor’s primary obligation is the payment of money (i.e. oral
promise to repay a loan, contingent contractual rights; annuity
contracts)
vi. Right of Publicity – Probably no reason why someone’s publicity
rights cannot be categorized as a general intangible and taken
as collateral
1. Potential Constitutional Problem – Prohibition against
involuntary servitude
vii. Domain Names – Probably similar to trademark in that other
assets associated with business goodwill need to be taken as
collateral as well
1. Execute transfer documents at the time SA is signed and
keep transfer documents in vault – Only send to ICANN
in case of default
B. Included Transactions
1.
Transaction that creates a security interest in personal property or fixtures by
contract
2.
Agricultural lien
3.
Sale of accounts, chattel paper, payment intangibles or promissory notes
a. Accounts = Income stream from the sale of goods
i. Perfection
1. Insubstantial amount – Automatic perfection
2. Substantial amount or all – Must file to perfect
ii. Excludes chattel paper
iii. Differentiate from Secured Loan
1. Distribution of risk
2. Ability to negotiate terms
b. Chattel Paper = A record that evidences both a monetary obligation
(promise to pay) and a security interest in specific goods (i.e. furniture
purchased from furniture store on credit)
i. Perfection
1. File; or
2. Physical possession of chattel paper
a. Best to take possession in order to defeat any
other perfected interest in chattel paper
ii. Excludes accounts
c. Securitization – Must be structured as a true sale (with attorney’s letters)
in order for creditor to immediately repossess collateral in bankruptcy (In
re LTV Steel Co.)
4.
Consignment
C. Excluded Transactions
1.
Pre-emption
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Secured Transactions Outline
Fall 2006
2.
3.
4.
5.
a. Copyright
i. General Rules:
1. Copyright Office is the correct place to file when it is
possible
2. Unregistered Copyrights – File with Secretary of State
a. Caveat: Once copyright is registered with
Copyright Office, state filing is no longer valid!
3. Disputes – Look to Copyright Act §205 for an answer. If
no answer there, go to state filing system.
ii. Rights granted – Negative right to prevent others from copying or
displaying the work
iii. Copyright Office – Proper place to record copyrights and
transfers of copyrights
1. 9-311 – UCC-1 filing in a state office is not sufficient
where federal statute or treaty provides a national or
international filing system
2. Most copyrights are never recorded, thus recording
record of transfer of copyright in Copyright Office is
impossible
iv. Priority
1. Conflicting Transfers – Where neither party recorded a
transfer with the Copyright office, Copyright Act §205(d)
doesn’t provide an answer as to who prevails (only
applies where one or both recorded)
a. Federal law does not pre-empt where it is silent
b. Patent
i. General Rule: Advise clients to file both with the Secretary of
State and in the Patent Office
1. Patent Act – Priority rule applies only to disputes as to
ownership and assignment
2. Silent as to lien creditors and secured parties – Go to
Article 9
ii. Patentable Subject Matter
1. Machines
2. Articles of manufacture
3. Compositions of matter
4. Processes
iii. Patent Act
1. Allows filing for transfers of ownership, including
“hypothecation” (putting something up as collateral)
2. Priority Rule – Only applies to subsequent purchasers
and mortgagees; not to lien creditors or in bankruptcy
a. Where neither party records, last in time wins
c. Trademark
i. General Rule: Advise clients to file in state where debtor is
located and in Trademark Office
ii. Prohibition on Assignments in Gross – Cannot sell a trademark
without associated business goodwill
1. Constitutes abandonment as a matter of law
2. Can foreclose on trademark along with associated
goodwill
Statutes that expressly create a separate system
Interests in health insurance policies
Landlord’s lien
Right of recoupment or set-off – 9-109 excludes recoupment and set-off but
points to other code provisions
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Secured Transactions Outline
Fall 2006
6.
7.
8.
9.
a. Bank (9-340(a)) – Bank with set-off rights prevails over a secured party
i. Exception (9-340(c)) – Where secured party has a security
interest in a deposit account perfected through control
1. Gaining Control – Must get authenticated document
signed by secured party, debtor and bank
b. Account Debtor
i. Consumer Goods (9-404(1)) – Where an account debtor
purchases consumer goods and the goods don’t meet
specifications and account debtor stops paying – Account debtor
does not have to honor any assignments debtor makes
ii. Separate Deal (9-404(2)) – Where an account debtor stops
paying debtor due to problems in an entirely separate transaction
– Account debtor will not have to honor any assignment unless
the secured party gives account debtor notice before account
debtor’s cause of action accrues against debtor
1. Look at two dates:
a. Date notice is sent by secured party to account
debtors
b. Date debtor defaulted on obligation to account
debtor
c. No Priority Rule – Article 9 does not give a priority rule where a debtor
obtains a judgment against an account debtor, but still owes the account
debtor for something else
Assignment of right to payment under contract
Real estate transactions
Bailments
a. Definition (2-403) – Any entrusting of goods to a merchant who deals in
goods of any kind gives the merchant the power to transfer the rights of
the entruster free of any interest
i. Only protects buyers in the ordinary course of business (not
secured parties)
b. Filing Requirements
i. Conditional Sale/Consignment – Transferor must file
ii. Lease/Bailment – Transferor is not required to file
c. Characteristics (Medomak)
i. No purchase price specified
ii. K does not say “sale”
d. Example
i. True Bailment – Buy cloth and take it to tailor to have suit made
ii. True Security Interest – Advance tailor money to purchase cloth
and get a signed SA permitting purchase money lender to
repossess cloth if suit doesn’t meet specifications
True Leases
a. Test: Whether, at the time K was entered into, the parties assumed
lessee would end up as owner of goods
i. Factors:
1. Nominal purchase option
a. Nominal = Buy or renew lease are the only
choices and buying is cheaper
b. Judged at the time K entered into
c. BUT, nominal purchase option after optional
additional lease term does not make transaction
a security interest (Marhoefer)
2. Economic life of goods
3. Renewal option higher than market rate
4. Option to buy is fair market price
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Secured Transactions Outline
Fall 2006
b. Filing Requirements – No need to file
c. Rent to Own – Generally treated as leases by courts
III. Attachment
A. Generally
1.
Process by which security interest is made effective as between the two parties
2.
Definition – Debtor has authenticated a writing granting the creditor an interest
in described collateral that secures debtor’s performance, value is given by the
creditor and the debtor acquires rights in the collateral.
B. Requirements for Attachment
1.
Authenticated Security Agreement
a. Definitions
i. Authenticated = Signed, or contains something indicating debtor
adopts it (9-102(a)(7))
1. Definition permits electronic
signatures/acknowledgements
ii. Record = Information in tangible form or electronically stored and
retrievable (9-102(a)(69))
iii. Effect of Signature
1. Individual – When individual signs, he has posted
personal property as collateral for loan for business
2. Company – Must be signed by an actual person,
generally an individual acting on behalf of company
b. Grants Interest
i. Intent – Must be intent on the part of the parties to establish a
security interest
ii. In re Clark – No security interest because agreement that debtor
would not remove or transfer liquor license did not give creditor
rights in the license
c. Written Agreement
i. Holistic Approach (In re Bollinger) – A financing statement, taken
together with other documents and correspondence, can be
sufficient to evidence SA
1. FS alone, however, is insufficient
2. Many courts do not follow this approach
d. Adequate Description of Collateral
i. Standard: Can it be determined from the description what
collateral was intended?
ii. Security interest attaches only to collateral described in SA
(Martin Grinding)
iii. Better to categorize collateral using UCC categories
1. Providing a laundry list is not a good idea because of
interpretive problems (In re Laminated Vaneers)
iv. No Supergeneric Descriptions (9-108(c)) (i.e. “any property”)
1. Broad terminology OK
2. Supergeneric descriptions OK in FS (9-504)
v. Tort claims must be listed separately
vi. After-Acquired Property – Security agreement may cover afteracquired property (9-204(a))
1. Security agreement must generally specify that it covers
assets to be acquired in the future
a. Exception: Inventory
i. Term implies not only present inventory,
but that to be acquired in the future
2. Floating Lien – Debtor can acquire and dispose of
individual items or assets; lien “floats” until debtor
acquires rights in collateral
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Secured Transactions Outline
Fall 2006
2.
3.
3. Exceptions:
a. Consumer Goods (9-204(b)(1)) – Security
interest does not attach to consumer goods
unless debtor acquires rights in them within 10
days after secured party gives value
b. Commercial Tort Claims (9-204(b)(2))
e. Oral Agreement – An oral security agreement will suffice only when:
i. Secured party has control of collateral (9-203(b)(3)(d))
ii. Secured party has possession of collateral (9-203(b)(3)(B))
Debtor Has Rights in Collateral – Debtor cannot put up as collateral something
in which it has no rights
a. Exception: Can put up collateral owned by someone else with consent of
the owner (In re Whatley)
i. Statute of Frauds – Guaranteeing the debts of another requires a
written K
ii. To clarify, can either:
1. Make addendum to K by individual giving consent for
corporation to post collateral, or
2. Have two separate transactions
Value Given to Debtor
a. Generally – Any kind of value is usually sufficient, including a promise to
give money
b. Timing – If giving value is the last event to occur, may be helpful to fix
the specific time at which value is given
c. Future Advances (9-204(c)) – Security agreement may provide that the
collateral secures future advances
IV. Perfection
A. Generally
1.
Process by which security interest is made effective against the rest of the
world (unsecured creditors and subsequent secured creditors)
2.
General Rule – Perfection requires all attachment requirements plus
requirements set forth in §§ 9-309 – 9-315
3.
Categorization of Collateral
a. Important because action taken to perfect depends on classification of
the collateral
i. In re Vienna Park – Contingent right to receive money (i.e.
escrow account) is not money. Must file to perfect; possession is
not sufficient.
4.
Bottom Line – Just file.
B. Methods of Perfection
1.
Perfection by Filing
a. General Rule - All security interests must be perfected by filing
i. Collateral Perfected by Filing
1. Goods
2. Accounts – Filing is only means of perfecting
a. Exception: Insignificant number of debtor’s
accounts  automatically perfects (9-309(2))
3. Agricultural Liens
4. Documents
5. Instruments
6. Chattel Paper
7. General Intangibles – Filing is only means of perfecting
ii. Exceptions:
1. Interests that are automatically perfected under 9-309
2. Compliance with another type of statute (i.e. purchasing
a car) (9-311)
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Fall 2006
3. Possession of collateral under 9-313
4. Control of deposit accounts under 9-314
5. Assignment of security interest
a. Assignee steps into shoes of prior secured party
iii. Filing Permissible Where Possession Previously Required (9312)
1. Chattel Paper
2. Instruments
3. Exceptions:
a. Deposit accounts (must control)
b. Money (must possess)
b. Requirements of Filing Statement:
i. Name and address of debtor
1. FS indexed under debtor’s name
ii. Name and address of secured party
iii. Description of the collateral (if collateral is real property-related,
must describe real property as well)
iv. Debtor’s authorization – Debtor does not need to sign FS, but
debtor’s authentication of SA is automatically authorization for
secured party to file FS (9-509(b))
c. Debtor’s Name (9-503)
i. Corporation – File against debtor corporation’s name of record
ii. General Partnership – File against all partners comprising debtor
if it does not have a name (9-503(a)(4)(A))
1. Large firm with hundreds of partners – File against
individual or organizational name (i.e. King & Spalding)
iii. Trade Name – Filing against trade name is insufficient (9-503(c))
iv. Safe Harbor (9-506(c))
1. If a search of the recording office under the debtor’s
correct name, using filing office’s standard search logic,
would still disclose the financing statement with debtor’s
(incorrect) name, the error in debtor’s name does not
make the financing statement seriously misleading
a. Standard Search Logic – Uncertain what it is
where you can perform search with computer
d. Secured Creditor’s Name – Complies with requirements even if it
contains minor errors or omissions so long as it is not seriously
misleading (9-506(a))
i. Examine from perspective of a potential lender
ii. Address must merely be “adequate under the circumstances” (9516)
iii. Omission of Related Secured Creditor – Probably seriously
misleading (In re Copper King Inn)
1. Omission of a related secured creditor likely to mislead a
potential creditor
2. Raises possibility of insider collusion
3. Distinguish: Joint Venture – Probably not seriously
misleading because JV completely controlled by other
listed creditors
iv. Use of Agent or Representative – Permissible to use the name of
an agent or representative in the FS
e. Identification of Collateral (9-504)
i. A description of collateral in a FS is sufficient if:
1. Description reasonably identifies what is described (9108); or
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2.
2. Provides an indication that the FS covers all assets or
personal property
ii. Supergenerics Permitted (9-504(2))
iii. After-Acquired Property and Future Advances – FS is effective to
encompass transactions under a SA not in existence and not
contemplated at the time notice was filed, if description of
collateral in FS broad enough to encompass them. FS also valid
to cover AAP whether or not mentioned in the SA
1. But, SA must be clear that AAP is collateral and that
FAs are meant to be collateralized
f. Governing Laws – Location of Debtor
i. General Rule – Rules of perfection governed by location of
debtor (9-301(1))
1. Corporations and “Registered Organizations” – Located
in the state of incorporation (9-307(e))
2. Organizations Other than Corporations – Located in
place of business (if only one) and chief executive office
(if more than one) (9-307(b)(2)-(3))
a. Place of Business – Where debtor “conducts its
affairs”
3. Individuals – Located at primary residence (9-307(b)(1))
4. Federal Government – Located in District of Columbia
(9-307(h))
5. Foreign Debtors – If foreign debtor’s country has Article
9-type filing system, that country’s law governs. If
debtor’s country does not have Article 9-type filing
system, debtor deemed to be located in District of
Columbia (9-307(c))
ii. Exceptions:
1. Security interest in timber to be cut (9-301(2)-(3)) –
Location of collateral governs
2. Minerals – Location of wellhead/minehead governs
3. Goods covered by certificate of title – State issuing
certificate governs (9-303)
4. Deposit Accounts – Law of depository bank’s jurisdiction
governs (generally specified in agreements between
debtor and bank; otherwise, bank’s chief executive
office) (9-304)
5. Investment property perfected by control
6. Letter of credit rights
7. Agricultural liens
iii. Mellon Bank Test for Determining Chief Executive Office
1. Where does the debtor manage the main part of its
business?
a. Look at publicly visible signs of location
(letterhead, press releases, etc.)
2. Where would creditors reasonably be expected to
search for credit information?
iv. Priority – Rules of priority governed by location of collateral
Automatic Perfection Upon Attachment (9-309)
a. Security interest automatically perfects upon attachment for:
i. Purchase-money security interest in consumer goods (9-309(1))
(i.e., goods purchased using a credit card)
1. Security Agreement Required – Even though filing not
required, secured party still required to have an
authenticated security agreement
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Secured Transactions Outline
Fall 2006
ii.
3.
Sale or assignment of an insignificant number of debtors
accounts or payment intangibles
iii. Promissory notes
b. Temporary Automatic Perfection of Proceeds (9-315) – A security
interest in proceeds is automatically perfected if a security interest in the
original collateral was perfected
i. 20-Day Grace Period – Automatic perfection lasts for 20 days.
Security interest becomes unperfected on the 21st day unless:
1. The following conditions are satisfied:
a. A filed financing statement covers original
collateral;
b. Proceeds are collateral in which a security
interest may be perfected by filing in the office in
which the FS has been filed; and
c. Proceeds are not acquired with cash proceeds;
2. The proceeds are identifiable cash proceeds; or
3. The security interest in proceeds is perfected other than
under 9-315(c) when the security interest attaches to the
proceeds or within 20 days thereafter
Perfection by Possession (9-313)
a. Security interest may be perfected by possession with regards to:
i. Tangible negotiable documents
ii. Goods
iii. Instruments
iv. Tangible chattel paper
1. Chattel paper = Writing that evidences a security interest
+ promise to pay
v. Money – must possess to perfect
1. Money = medium of exchange; cash (must be currency
that is currently used in any country as a medium of
exchange)
b. Timing (9-313(e))
i. Perfection occurs when secured party takes possession of
collateral
ii. Perfection continues only so long as secured party maintains
possession of collateral
rd
c. Possession by a 3 Party
i. Collateral in Possession of Person Other than Debtor (9-313(c))
1. SP “takes possession” of collateral in possession of a
person other than debtor, SP or lessee when:
a. Person in possession authenticates a record
acknowledging it holds possession of collateral
for SP’s benefit; or
b. Person takes possession of collateral after
having authenticated a record acknowledging
that it will hold possession of the collateral for
SP’s benefit
2. Only applies when bailee is not the formal legal agent of
the secured party
3. Does not apply to goods covered by a document
a. Overruled Marlow v. Rollins Cotton Co.
4. In re Coral Petroleum, Inc.
ii. Bailments (9-313(h))
1. A secured party having possession of collateral does not
relinquish possession by delivering collateral to a 3rd
party so long as 3rd person is instructed:
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a. To hold possession of collateral for secured
party’s benefit, or
b. To redeliver collateral to the secured party
d. Rights and Duties of Secured Party in Possession of Collateral
i. Duty of Reasonable Care – Secured party must use reasonable
care in storing and preserving collateral (9-207(a))
1. Duty of reasonable care cannot be waived or disclaimed
2. Includes duty to insure
ii. Right to Reimbursement of Expenses (9-207(b)(1))
iii. Accounting for Rents, Issues, and Profits (9-207(c))
iv. Risk of Loss (9-207(b)(2)) – Borne by debtor to extent secured
party’s insurance is insufficient
v. Right to Repledge (9-207(c)(3)) – Secured party can repledge
collateral to a 3rd party
vi. Right to Use Collateral (9-207(b)(4)) – Secured party can use
collateral only:
1. For purposes of preserving collateral or its value
2. Pursuant to court order
3. Except for consumer goods, as agreed to by the debtor
4.
Perfection by Control (9-314)
a. Secured party can perfect through control of:
i. Deposit account
1. Requirements for Control of Deposit Account (9-104):
a. Secured party is bank with which deposit
account is maintained;
b. Debtor, secured party and bank have agreed in
an authenticated record that the bank will
comply with instructions originated by the
secured party directing disposition of the funds
in the deposit account without further consent by
the debtor; or
c. Secured party becomes bank’s customer with
respect to the deposit account
ii. Letter of credit rights
iii. Electronic chattel paper
iv. Accounts – There used to be no means of filing as to accounts
and control was the only way to perfect. (Benedict v. Ratner)
Now, must file as to accounts.
b. Timing
i. Perfection occurs when secured party obtains control of
collateral
ii. Perfection continues only while secured party has control of
collateral
5.
Unique Methods of Perfection
a. Motor Vehicles
i. Perfection typically accomplished through a notation on the title
1. Security interest remains perfected if vehicle was in the
jurisdiction when the security interest attached
ii. Motor Vehicles as Inventory – Works the same as regular
inventory (goods)
C. Continuation of Perfection
1.
Possession – Continues so long as secured party retains possession
2.
Control – Continues so long as secured party retains control
3.
Filing – Effective for a period of five years from date of filing
a. Continuation Statement (9-515) – Must be filed within the six months
preceding the expiration of the filing statement
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i.
4.
Must identify original FS by file number and must either:
1. Indicate it is a continuation statement, or
2. Indicate that it is filed to continue the effectiveness of the
identified statement
ii. Adds another five years to the effectiveness of original FS
iii. Relation Back – Priority date relates back to original date of filing
iv. Filing a new FS is not sufficient – does not provide notice of a
superior interest
Continuation of Perfection After Transfers and Changes
a. Changes in Location
i. Change in Location of Collateral (9-316)(a)(3) – Collateral
remains perfected for one year but secured party must make a
new filing in the new jurisdiction before that time is up
1. Law of new jurisdiction governs priority
ii. Change in Location of Debtor
1. Location of Debtor (9-301) – Governs where to file
a. 9-307 – Governs where debtor is located
2. Debtor Moves (9-316(a)(2)) – New filing needs to be
made as to the debtor in the new jurisdiction within four
months
b. New Debtor
i. Name Changes (9-507(c)) – If debtor changes its name such
that the FS becomes seriously misleading under 9-506:
1. Original FS is effective to secure collateral acquired
before and within four months after the name change;
and
2. Original FS is not effective to secure collateral acquired
more than four months after the name change unless an
amendment to the FS is filed within four months of
name change rendering it not seriously misleading
ii. Incorporations, Mergers and Transfers (9-508) – Where Debtor
incorporates and transfers all assets and debts to corporation,
security interest survives and new debtor becomes party to the
original SA
1. Secured party of original debtor has priority over debtor
of new entity (9-325 provides exception to first to file
rule)
2. Priority (9-326) – FS that continues to be effective under
9-508 against the new debtor is subordinate to an
interest in the same collateral filed against the new
debtor
c. Transferred Collateral (9-325) – Security interest survives perfected even
when collateral is transferred to another owner
i. A security interest created by a debtor is subordinate to a
security interest in the same collateral created by another person
if:
1. The debtor acquired the collateral subject to the security
interest created by the other person;
2. The security interest created by the other person was
perfected when debtor received the collateral; and
3. There is no period thereafter when the security interest
is unperfected
ii. Exception: Buyer in the Ordinary Course of Business (9-320(a))
1. A buyer in the ordinary course of business from a
dealer’s inventory takes free of any perfected security
interests held by dealer’s creditors.
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2. Does not matter whether buyer knew inventory was
covered by a security interest, so long as buyer does not
know that sale is in violation of terms of the SA
3. Requirements for Buyer in Ordinary Course of Business:
a. Ordinary Purchase – Buyer must buy goods out
of inventory in the ordinary course of business
b. New Value – Buyer must give new value, not
merely cancel out old indebtedness
c. No Knowledge – Buyer must buy in good faith
and not know the sale is a violation of the terms
of the SA between seller and seller’s creditor
4. Interest Created by Seller – Security interest in item sold
must have been created by the buyer’s seller
d. Good Faith Purchaser (9-320)
i. Buyer in the Ordinary Course of Business (9-320(a)) (see above)
ii. Buyer of Consumer Goods from Other Consumers(9-320(b))
1. A buyer of consumer goods from a person who used or
bought the goods for use primarily for personal, family or
household purposes, takes free of a security interest,
even if perfected, if the buyer buys:
a. Without knowledge of the security interest
b. For value
c. Primarily for the buyer’s personal, family or
household purposes; and
d. Before the filing of a financing statement
covering the goods
iii. Buyer Not in the Ordinary Course of Business – Future
Advances (9-323(d)-(e))
1. A buyer not in the ordinary course of business takes free
of increases in the security interest due to future
advances unless the advances are made within 45 days
following the sale and are made either without
knowledge of the sale or pursuant to a commitment that
was entered into without such knowledge
e. Future Advances (9-323)
V. Priority
A. General Effectiveness (9-201)
1.
A security agreement is effective according to its terms between the parties,
against purchasers of the collateral and against creditors
B. Rights To Collateral Against Competing Interests
1.
General Rule – First to file or perfect wins (9-322(a)(1))
a. Continuation of Priority – A timely filed Continuation Statement preserves
original priority date
2.
Subordination Agreement – Competing secured creditors can enter into a
subordination agreement that alters the normal (statutory) priority rules.
3.
Rights Against Unsecured Creditors – Secured creditors take first and then
unsecured creditors share remaining assets pro rata
a. Pro Rata Rule
i. Total the unsecured claims against the assets
ii. Total the assets
iii. For each creditor, give that creditor the fraction of assets that the
creditor holds for the claims
4.
Rights of Junior Secured Creditors
a. Marshaling
i. Elements:
1. Parties are creditors of the same debtor;
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5.
2. There are two funds belonging to that debtor; and
3. Only one of the creditors has the right to resort to both
funds
ii. If elements are met, a junior secured creditor can invoke
marshaling against a senior secured creditor, forcing the SSC
to get its debt satisfied from the singly-charged fund first before
going against the doubly-charged fund
1. Unsecured junior creditors cannot invoke marshaling
iii. Marshaling and Article 9 – Marshaling not specifically sanctioned
by Article 9, but 1-103 permits courts to impose principles of
equity on top of the UCC so long as they are not supplanted by
the UCC
Purchase-Money Security Interests – PMSI created when value is extended to
debtor to purchase a specific asset
a. Scope of PMSI – Only extends to money lent to purchase specific assets
i. MBank Alamo v. Raytheon – Seller provided machines to Debtor
to re-sell, taking a security interest in accounts generated from
sales of machines. Court held Seller not a purchase money
lender because it did not lend money to debtor to acquire
accounts (instead extended equipment to debtor to sell to get
accounts).
1. 9-324 favors financers in accounts over PMSIs in
inventory
ii. 9-324(b) – Accounts are not traceable proceeds of a PMSI in
inventory
b. PMSI Superpriority (9-324(a)) – Perfected PMSI in goods other than
inventory or livestock has priority over a conflicting security interest in the
same goods if PMSI is perfected when debtor receives possession of the
collateral or within 20 days thereafter
i. Prevails against other security interests, regardless of time or
method of perfection of those interests
ii. Limitation – Priority limited to the extent of the “purchase money”
used in acquisition of the collateral
c. Consumer Goods – Automatically perfects; thus PMSI superpriority takes
effect at that time as well
d. Inventory (9-324(b))
i. PMSI in inventory has priority in inventory and identifiable
proceeds provided:
1. PMSI perfected when debtor receives possession of the
inventory
a. No 20-day grace period for perfection
2. Secured party sends an authenticated notice to the
holder of the conflicting security interest
3. Holder of conflicting security interest receives notification
within five years before the debtor receives possession
of inventory; and
4. Notification states that the person sending it has or
expects to acquire PMSI in inventory of debtor and
describes inventory
ii. Proceeds – PMSI superpriority extends to identifiable inventory
cash proceeds received on or before delivery of inventory to the
buyer, chattel paper proceeds and instrument proceeds
iii. Article 9 Consignments – Treated as PMSIs in inventory
e. Competing PMSI Creditors – As between a seller and a lender who both
have PMSI in the same collateral, seller has priority over lender (9324(g))
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f.
6.
7.
Refinancing and Transformation of PMSI
i. Refinancing (9-103(f)) – Refinancing does not destroy purchase
money characteristic of security interest
1. Billings v. Avco Colorado Industrial Bank – PMSI is not
extinguished upon refinancing if parties intended for it to
remain PMSI
a. Rationale: Permitting PMSI to be extinguished
upon refinancing makes creditors less likely to
extend credit to struggling debtors
2. Exception: Consumer goods
a. Code punts issue of consumer goods to the
courts (9-103(h))
g. Application of Payment in Non-Consumer Goods Transactions (9-103(e))
i. If the extent to which a security interest is PMSI depends on the
application of a payment to a particular obligation, the payment
must be applied:
1. In accordance with any reasonable method of
application to which the parties agree;
2. In the absence of parties’ agreement, in accordance with
any intention of debtor manifested at or before time of
payment; or
3. In the absence of agreement between parties and
debtor’s intention, in the following order:
a. To the obligations that are not secured; and
b. If more than one obligation is secured, to
obligations secured by PMSIs in the order in
which those obligations were incurred
After-Acquired Property – Priority generally dates back to original filing
a. Exception: Consumer Goods (9-204(b)) – Security interest does not
attach under an after-acquired property clause to consumer goods
unless debtor acquires rights to them within 10 days after the secured
party gives value
Future Advances – Priority generally relates back to original filing
a. Exceptions
i. Where Security Interest Automatically Perfects (9-323(a)) –
Priority dates from time of advance (i.e. credit card cash advance
– dates from time of advance, not from prior purchases made
with credit card)
ii. Lien Creditors (9-323(b)) – Secured creditor must make
advances within 45 days of lien arising
1. Advances made after 45 days do not have priority over
lien creditor
2. GA – does not have this rule
a. Most likely that GA is a notice jurisdiction –
Once lien creditor notifies bank, Bank can no
longer lend and gain priority over those
advances
iii. Advances Based on Commitment (9-323(e)) – Where secured
party makes an absolute commitment to lend a specific amount
of money at regular intervals, each advance relates back to
original date, regardless of 45 day period
1. 45 day period doesn’t apply; otherwise secured party
would break contract
b. Use of “Floating Secured Parties” Prohibited
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Secured Transactions Outline
Fall 2006
i.
8.
In re E.A. Fretz Co. – A company cannot include “future divisions
and affiliates” in its security agreement to permit assignment of
interest in order to gain priority
1. Secured parties’ names and addresses must be listed on
the FS
2. Policy: Banks will not lend money due to fears that junior
secured creditors can jump in front of them through
shady dealings
Proceeds of Collateral (9-315)
a. Proceeds as Collateral – Secured party can take security interest in
proceeds of assets without taking security interest in assets themselves
i. But, interest does not attach until proceeds are realized (Horse
Hypo)
1. Might be voidable preference if proceeds are acquired
within 90 days of bankruptcy
b. Temporary Automatic Perfection – A security interest in proceeds is
automatically perfected if a security interest in the original collateral was
perfected
i. 20-Day Grace Period – Automatic perfection lasts for 20 days.
st
Security interest becomes unperfected on the 21 day unless:
1. The following conditions are satisfied:
a. A filed financing statement covers original
collateral;
b. Proceeds are collateral in which a security
interest may be perfected by filing in the office in
which the FS has been filed; and
c. Proceeds are not acquired with cash proceeds;
2. The proceeds are identifiable cash proceeds; or
3. The security interest in proceeds is perfected other than
under 9-315(c) when the security interest attaches to the
proceeds or within 20 days thereafter
ii. Intervening Cash Proceeds (9-315(d)(1)) – Refile!
c. Commingled Proceeds
i. Identifiable Proceeds – Commingled Proceeds are identifiable
proceeds:
1. If the proceeds are goods, to the extent provided in 9336; and
a. Commingled Goods (9-336) – Secured parties
whose goods are commingled into one mass
share pro rata in the resulting mass
2. If the proceeds are not goods, to the extent that the
secured party identifies the proceeds by a method of
tracing, including application of equitable principles
[punts to state law]
ii. Deposit Accounts
1. Proceeds in Bank Account vs. Secured Party with
Control of Account (9-327) – Secured party with control
over bank account will always defeat perfected secured
party who has interest in the money in the account as
proceeds
2. Lowest Intermediate Balance Rule – Determines what
money in deposit account is subject to a perfected
security agreement
a. Proceeds = Oil (float to top)
b. Existing Funds = Water (sink to bottom)
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Secured Transactions Outline
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c.
9.
10.
11.
Money drains from bottom – Non-proceeds drain
first, then proceeds
3. Proceeds in Bank Account Divided Between Competing
Creditors – UCC punts to state law
a. Four Possibilities:
i. First to File (9-322)(b)(1))
ii. Pro Rata
iii. First In/First Out (FIFO)
iv. Last In/First Out (LIFO)
4. Transferee of Funds from Deposit Account (9-332(b)) –
Takes money free from any security interest in the
deposit account unless transferee was acting in collusion
with the debtor in violating rights of secured party
5. Special Priority Rule (9-322(c))
a. A security interest in collateral which qualifies for
priority over a conflicting security interest under
9-327 – 9-330 also has priority over a conflicting
interest in:
i. Any supporting obligation for the
collateral; and
ii. Proceeds of the collateral if:
1. The security interest in
proceeds is perfected;
2. The proceeds are cash
proceeds of the same type as
the collateral; and
3. In the case of proceeds of
proceeds, all intervening
proceeds are cash proceeds,
proceeds of the same type as
the collateral or an account
relating to the collateral
Claimants to Deposit Accounts
a. Priority of Deposit Accounts (9-327) – Where secured party with interest
in deposit account perfected by taking control, that interest has priority
over a secured party that does not have control
b. Set-Off Rights Against Deposit Account (9-340)
Lien Creditors
a. General Rule – Lien creditors are junior to perfected security interests
(but superior to unperfected security interests).
i. Secured party must perfect before lien arises
ii. When does an unsecured creditor become a lien creditor?
1. Most States – Attachment, garnishment or levy
a. Priority date not necessarily date lien arises
(assets seized)
2. GA and CA – Lien arises when it is recorded by the court
a. Special statute grants priority over perfected
secured creditors when lien is recorded
b. Future Advances – Once secured party has knowledge of lien, it has 45
days to make any additional advances to the debtor
i. Exception: No 45-day rule where there was a pre-lien
commitment to extend advances at regular intervals
Trustee in Bankruptcy
a. Types of Bankruptcy
i. Chapter 7 – Liquidation
ii. Chapter 11 – Reorganization
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b. Effect of Bankruptcy Petition
i. Automatic Stay – Stays civil actions, debt collections,
repossessions, attempts to perfect, set-offs, and Tax Court
proceedings
1. Relief from Stay – Must ask for permission from court
and can make two arguments:
a. Lack of adequate protection; or
b. Debtor has no equity in property and the
property is not needed for a successful
reorganization
2. Adequate Protection – Periodic cash payments,
additional or replacement liens, administrative priority
constituting “indubitable equivalent” for depreciation or
consumption of collateral
3. Interest – Oversecured parties entitled to interest at
contract rate; undersecured parties no entitled to interest
on lost opportunity cost
ii. Trustee as Lien Creditor – Can avoid lesser interests
1. Preferences – Trustee can avoid some last-minute
transfers
iii. Turnover – Trustee may force secured creditor to turn over
repossessed goods in which debtor still has redemption rights
c. Trustee Avoiding Powers
i. Post-Petition Effect of Security Interest (BC 552)
1. Property acquired by the estate or by the debtor after
bankruptcy filing is not subject to any lien resulting from
any security agreement entered into by the debtor before
the commencement of the case
ii. Fraudulent Conveyances (BC 548)
1. Uniform Fraudulent Transfer Act
2. Presumption of Fraud (BC 548(a)(2)) – Transfers of
property made within two years of filing of bankruptcy
petition by an insolvent debtor for less than fair
consideration are presumed fraudulent
3. Intent to Defraud (BC 548(a)(1))
iii. Preferences in Bankruptcy (BC 547)
1. Test for Preferences (BC 547(b)) – Transfer must:
a. Be to or for the benefit of a creditor
b. Be for or on account of an antecedent debt
i. Transfer = time of attachment if
perfected within 30 days
ii. If perfection occurs after 30 days, debt
is antecedent BUT
iii. No earlier than when debtor acquires
rights in the collateral
c. Have been made while debtor was insolvent
i. Insolvency presumed within 90 days
prior to filing of bankruptcy petition
d. Have been made on or within 90 days of the
filing of the petition
i. Or within one year of filing of petition if
creditor is an insider
e. Make the creditor better off than if no transfer
had been made and the creditor had only
enjoyed what rights it had in the collective
proceeding
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Secured Transactions Outline
Fall 2006
f.
12.
13.
No Safe Harbor (BC 547(c)):
i. Debts and payments incurred in the
ordinary course of business
ii. PMSI perfected within 30 days
iii. Inventory or accounts acquired by
debtor which do not increase the value
of those categories of collateral beyond
their value at the start of the preference
period
2. Floating Lien in Bankruptcy – Voidable preference
because transfer does not occur until debtor gains rights
in collateral, and is made on account of antecedent debt
a. Can be saved by BC 547(c) safe harbor –
Inventory or accounts acquired that do not
increase the value of those categories of
collateral beyond their value at the start of the
preference period
i. Inventory and accounts constantly
changing – Not a last-minute grab or a
tardy perfection
d. Valuation in Bankruptcy (Associates Commercial Corp. v. Rash) – Where
asset is necessary for effective reorganization in Chapter 11 (cram
down), secured party cannot repossess and sell. Must value asset in
order to determine what adequate assurance and indubitable equivalent
of asset would be
i. Standard: Replacement value (what debtor would have to pay on
open market to obtain the asset)
1. Almost always more than foreclosure value
2. Value of asset measured by value to debtor
ii. Rationale: Alternative is not what secured party wants, justifying
additional compensation for involuntary participation
State Law Lienors (9-109(d)(2)) – Article 9 does not apply to liens, other than
agricultural liens
a. Priority (9-333) – State lien will only have priority over a perfected
security interest under Article 9 if it is a possessory lien
Federal Tax Liens
a. Steps Taken by IRS
i. Lien naturally arises when tax is assessed
1. Assessment = invisible ministerial act by IRS when it
determined the amount of tax debtor owes
2. This alone permits IRS to defeat an unsecured creditor
3. Most commonly arises when employers stop making
withholding and FICA contributions
ii. IRS must file either in a state office designated by the laws of
the state or if the state doesn’t specify or specifies two different
places, with the clerk of the district court in the judicial district in
which the property subject to lien is situated to defeat:
1. Purchaser
2. Holder of security interest
3. Mechanic’s lienor
4. Judgment lien creditor
iii. Filing lasts for six years from date of assessment
b. Future Advances – Future advances made within 45 days after IRS files
have priority over IRS
c. Qualified Property (Rice Investment Co. v. US) – Chattel paper,
accounts, and inventory acquired within 45 days of IRS filing
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Secured Transactions Outline
Fall 2006
i.
14.
15.
Secured party can prevail as to qualified property, but must be
able to prove assets are qualified property
Fixtures
a. Definition – Good that has become so related to real estate that an
interest in it arises under real estate law
i. Three-Part Test for Fixtures (Wyoming State Farm Loan Board v.
Farm Credit System Capital Corp.)
1. Real or constructive annexation of the article in question
to the realty
2. Appropriation or adaptation to the use or purpose of that
part of the realty with which it is connected
3. Intention of the party making the annexation to make the
article a permanent accession to the freehold
a. Standard: Intent of annexor measured by the
objective intent of an ordinary reasonable
person based on the facts and circumstances of
the case
ii. Mobile Homes – Depends on context (i.e., existence of poured
foundation, hooked up to utilities, etc.)
b. Priority (9-334)
i. No security interest in construction materials when incorporated
into improvements on land
1. Interest exists as long as materials are not used (i.e. pile
of lumber or stack of bricks)
ii. Purchase Money Priority (9-334(d)) – A perfected security
interest in fixtures has priority over a conflicting interest of an
encumbrancer or owner of the real property if the debtor has an
interest of record in or is in possession of the real property and:
1. Security interest is a PMSI
2. Interest of the encumbrancer or owner arises before the
goods become fixtures; and
3. Security interest is perfected by a fixture filing before the
goods become fixtures or within 20 days after
iii. Priority of Interest in Fixtures over Interest in Real Property (9334(e))
Other Issues Between Secured and Unsecured Creditors
a. Non-Encumbrance Clauses
i. Intentional Interference with Contractual Relations – Where one
party intentionally and improperly interferes with performance of
rd
a K by inducing or otherwise causing a 3 person not to perform
a contract
ii. First Wyoming Bank v. Mudge – Where Bank knew of nonencumbrance clause on buyer’s property, yet knowingly induced
buyer to disobey clause, Bank liable in tort for intentional
interference with contractual relations
b. Unjust Enrichment
i. Ninth District Production Credit Ass’n v. Ed Duggan, Inc. –
Where feed provider provided feed to cattle at feedlot for benefit
of secured party and secured party did not pay, liable for unjust
enrichment because feed was necessary for maintenance of
collateral (cattle)
ii. 1-103 – Common law imposed upon Article 9 if it is equitable and
not supplanted by Article 9
VI. Default
A. Defining Default
1.
Contractual Specification – Generally, K specifies what constitutes breach, i.e.:
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a. Missing a payment on this or another loan
b. Breach of warranty or representation
c. Reasonable grounds for insecurity with respect to debtor’s performance
of obligations
d. Being levied against
e. Bankruptcy
f. Voluntary suspension of business by debtor
g. Collateral becomes unsatisfactory in character or value
h. Any material adverse change in financial condition (even if current on
payments)
2.
Contract is Silent – Default is probably uncured material breach – A breach of
the K and a reasonable person would assume the breach will not be cured
B. Overview of Rights After Default
1.
Article 9 Provisions
a. 9-601 – Permits secured party to go to court and repossess at the same
time; assures secured party they have no further obligation if they buy
collateral at sheriff sale
b. 9-602 – Possible to waive certain duties
i. Cannot waive important duties, i.e. right to an accounting, right to
be free from breach of peace
c. 9-603 – Allows secured party to stipulate how some of the standards will
be satisfied
i. Must be commercially reasonable
d. 9-605 – No duties arise until secured party knows identity and location of
debtor
i. Can rely on last-known location of debtor
ii. No duty to search further
e. 9-607 – Secured party’s rights in accounts and deposit accounts
i. Person in control of deposit account can take money out upon
default to apply to balance of debt
ii. After notice to account debtors, they have to pay the secured
party directly
f. 9-608 – How proceeds from account debtors and deposit accounts must
be applied
i. First – Collection expenses (including attorney’s fees)
ii. Second – Satisfaction of debt itself
iii. Third – Satisfy debts of other subordinate secured parties or
lienholders if they have provided secured party with
authenticated notice
iv. Finally – Remaining funds, if any, goes to debtor
g. 9-609 – Right to repossess or render equipment unusable
i. Subject to breach of peace limitation
h. 9-610 – Duties owed by secured party after repossession
i. Must dispose of assets in a commercially reasonable manner
1. Limitation applies to method, manner, time and place of
sale
ii. Secured party my purchase collateral at a public sale but may
not purchase at a private sale unless collateral is subject to
standard price quotations
i. 9-611 – Notice of disposition
i. Secured party must provide notice as to disposition of collateral
to:
1. Debtor and secondary obligors (guarantors and sureties)
2. If collateral is not consumer goods, to everyone who
makes an authenticated claim and any secured parties
and lienholders who are on file
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Secured Transactions Outline
Fall 2006
j.
9-612 – Timeliness of notice
i. Notice must come within a reasonable time and in a reasonable
manner
1. Safe harbor (nonconsumer goods) – 10 days of notice
before earliest possible disposition date is reasonable as
a matter of law
2. No safe harbor for consumer goods
k. 9-613 – Contents of notice
l. 9-615 – Application of proceeds of disposition under 9-610
i. Same as application in 9-608
m. 9-616 – Explanation to debtor of calculation of surplus or deficiency
n. 9-617 – Quality of title received if collateral purchased from secured
party
i. Transferee of value – Gets all of debtor’s rights in collateral
ii. Discharge of secured party’s interest
iii. Discharge of subordinate secured parties’ interest or subordinate
liens
iv. Do not take free of a security interest that is superior to that of
secured party
1. Exception: Take free of interest if purchased at sheriff’s
auction
o. 9-623 – Debtor has right to redeem up until the moment of disposition so
long as it makes good its obligations completely
i. Redemption must include collection costs, attorney’s fees, etc.
p. 9-624 – Debtor can waive certain rights after default:
i. Notice
ii. Commercial disposition
iii. Redemption
1. Exception: Consumer cannot waive this right
2.
Post-Default Options
a. Sue, sheriff levies and sells (no commercial reasonableness necessary)
– Deficiency recoverable
b. Repossess, give notice, sell in commercially reasonable manner, return
surplus or sue for deficiency [debt – sale price + costs]
c. Repossess, give no notice, sell in commercially reasonable manner
[Easterbrook v. Ripple]
d. Repossess, give notice, sell in non-commercially reasonable manner,
prove value at time of sale, get deficiency [debt – value + costs]
e. Repossess, give no notice, sell in non-commercially reasonable manner,
prove value at time of sale, get deficiency [debt – value + costs]
f. Keep collateral in full satisfaction [notice + acceptance or 20 days of
silence]
g. Keep collateral in partial satisfaction, sue for deficiency [no consumer
transactions; no acceptance by silence]
C. Repossession (9-609)
1.
Right to Repossess (9-609(a)) – After default, a secured party has the right to
a. Take possession of the collateral; and
b. Without removal, render equipment unusable
2.
Limitation: Breach of the Peace (9-609(b)(2)) – A secured party that proceeds
without judicial process may do so only if it proceeds without breach of the
peace
a. Defining Breach of the Peace
i. Permission Not Required – Secured party not required to ask
permission before repossessing on public street or private
driveway
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Secured Transactions Outline
Fall 2006
1. No per se rule that repossessing from someone else’s
property is a breach of the peace, either
2. “Trickery” is permitted
ii. Debtor Uncooperative – If debtor confronts and objects, further
action by secured party is a breach of the peace
1. Secured party must then go through judicial process
iii. Fact-based Inquiry
1. Location (public place, outside private property, garage,
business, home?)
2. Time (day, night?)
3. Debtor (present without objection, absent, present and
objecting, intimidated, assaulted?)
a. Present and Objecting – De facto breach of
peace
4. Notice (notice, no notice?)
5. Manner (trespass, clean trespass with no damage,
trespass with damage?)
b. Consequences of Wrongful Repossession
i. Debtor can sue for conversion or trespass (if anything damaged)
ii. Debtor can recover costs of wrongful repossession
iii. Debtor cannot get the collateral back
3.
Repossession of Accounts (9-607)
a. Account Debtors – Secured party may give notice to account debtors
i. Right to Demand Proof – Before paying secured party, account
debtor has right to demand proof before obligation to pay arises
ii. Required to Pay SP – After proper notice, account debtor is
required to pay secured party under 9-406
iii. Non-Assignment Clauses Void – Any attempt to make account
non-assignable is void
b. Deposit Accounts – Secured party with control can withdraw funds from
deposit account to satisfy debt
c. Application of Proceeds (9-608)
i. After collecting money from accounts or deposit accounts,
secured party must apply proceeds in the following order:
1. Apply money to collection expenses (including
reasonable attorney’s fees)
2. Satisfy the debt itself
3. Balance (if any) to satisfy debts of other subordinate
secured parties or lienholders if they have notified
secured party by authenticated letter
4. Balance (if any) to debtor
D. The Commercially Reasonable Sale (9-610)
1.
Commercially Reasonable Disposition (9-610(b)) – Every aspect of the
method, manner, time, place and other terms must be commercially
reasonable.
2.
Purchase by Secured Party (9-610(c)) – Secured party may purchase
collateral:
a. At a public disposition (auction)
b. At a private disposition only if the collateral is of the kind that is sold on a
recognized market or is the subject of widely distributed standard price
quotations
3.
Notice Requirement (9-611) – Secured party must provide authenticated notice
of the sale to debtor, sureties, and other creditors of record
a. Exceptions
i. Perishable collateral
ii. Collateral is of a type sold in a recognized market
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Secured Transactions Outline
Fall 2006
b. Oral Notice Insufficient – Must be some sort of authenticated written
notice
c. Contents of Notice:
i. 9-613 – Notice is sufficient if it provides:
1. Description of debtor and secured party
2. Description of collateral
3. Method of sale (public or private)
4. Time and place of a public sale or time after which a
private sale will be made
5. Statement that the debtor is entitled to an accounting
ii. Additional Notice for Consumer Goods:
1. Liability for a deficiency
2. Telephone number to find out what amount is due to
redeem collateral
3. Telephone number or mailing address from which
additional information is available
d. Timing of Notice (9-612) – Must be sent after default and a reasonable
time before date of disposition of collateral
i. Safe Harbor for Nonconsumer Transactions – Notice sent at
least 10 days before earliest possible disposition of collateral
cannot be attacked on the basis of timeliness
ii. Consumer Transactions – No safe harbor
1. Reasonableness of notice determined on a case by case
basis
4.
Surplus and Deficiency (9-615) – Debtor entitled to surplus proceeds after
disposition. Secured party entitled to deficiency where proceeds are not
sufficient to satisfy debt
a. Legal Consequences of Failure to Provide Adequate Notice
i. Majority Rule (9-626) – Amount earned by sale = amount of debt
1. Rebuttable Presumption can be overcome by showing:
a. Commercial reasonableness (where problem is
notice)
i. Result – Recover full deficiency
b. Expert appraisal (where problem is commercial
reasonableness of sale)
i. Result – Recover partial deficiency if
appraisal is greater than sale price
2. Current law as to all transactions except consumer
goods
a. UCC – Punts to state law to choose which rule
to apply to commercial goods
3. In re Excello Press
ii. Minority Rule (Easterbrook) – Debtor only has a remedy under 9625
1. Debtor, rather than secured party, bears burden of
finding appraisers and proving sale did not fetch as
much as it should have
iii. Absolute Bar Rule (vast minority) – If secured party does not
provide notice, it is absolutely barred from asking for a deficiency
judgment
E. Retention of Collateral in Satisfaction of Debt (9-620)
1.
General Rule – Secured party may elect to keep the collateral in full or partial
satisfaction of the debt, provided requirements of 9-620 are met
a. Exception: Consumer Goods (9-620(e))
Page 23 of 24
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Secured Transactions Outline
Fall 2006
i.
2.
3.
4.
5.
Where collateral consists of consumer goods and debtor has
paid at least 60% of the price or loaned amount, the secured
creditor must sell the collateral within 90 days of repossession
Notice Requirement – Secured party must provide notice to debtor and all
other secured parties and parties that provide authenticated notice of debt due
and owing
a. Misbehavior policed by good faith and notice requirements
b. Notice requirement cannot be waived
Effect of Objection – If, within 20 days after notice is sent, any person entitled
to notice objects to secured party’s proposal to keep collateral in satisfaction of
debt, secured party must dispose of collateral by sale
Retention in Partial Satisfaction
a. A partial retention in satisfaction occurs if:
i. Secured party gives authenticated notice to debtor and other
parties (same as full satisfaction)
ii. Debtor consents in an authenticated record
iii. No other perfected secured parties object within 20 days of when
authenticated notice was sent
b. Exception: Consumer Goods (9-620(g))
i. A secured party may not accept collateral in partial satisfaction of
a debt if the transaction is a consumer transaction
Good Faith Requirement?
a. Reeves v. Foutz and Tanner, Inc. – Pawn shop wrongfully kept plaintiff’s
collateral and owed a surplus to plaintiff because pawn shop had every
intention of reselling the collateral rather than keeping it in satisfaction of
the obligation
b. Article 9 does not prohibit keeping collateral in satisfaction and then
selling
i. FTC Ruling – Can still comply with 9-620 and not be able to keep
the collateral in satisfaction of a debt if you intend to resell it right
away
ii. Article 9 Good Faith Provisions – Do not come into play unless
there is a large discrepancy between debt and value of collateral
c. Instance of bad facts making bad law
Page 24 of 24
Copyright © 2004-2013 Erin Fortney
All rights reserved. No part of this material may be reproduced or distributed without permission of the author.