Secured Transactions Outline
I.
II.
Nature of the Security Interest
a. Article 9 as an Assets Reservation System
b. The Key Attributes of Security Interests
i. Property rights good against the debtor
ii. Priority rights good against third parties
c. Article 9 as a Reified Priority System
i. Not general priority, but priority as to designated assets
d. The First-to-File Rule
i. Priority is usually, but not always, tied to the date of filing of a
financing statement
e. Possible Distribution Rules for USC
1. Pro Rata - proportional
2. Equal Asset – assets paid out equally until debt is satisfied
3. Equal Loss – assets pd out to distribute losses as evenly as
possible
ii. Equal Asset and Equal Loss make both total other debts and
distribution of those debts matter
iii. Under Pro Rata, only total matters
iv. EA or EL would increase monitoring: good if we want to, bad if
we do not
f. 9-322(a)(1) Priority Rule –
i. (ignoring perfection through possession), the first to file a FS wins
g. Ostensible Ownership Problem
i. inference of ownership from possession
h. Two Key Problems with Possession as perfection method
1. Loss of use of goods
2. Put goods in third-party hands and didn’t own, so no
solution
i. Perfection through Possession
i. Holdover
ii. Adds complexity to 9-322: early of first to file or perfect
iii. Can create misleading record of priority in FS record
Attachment Requirements
a. Decription requirement - 9-203(b)(3)(A)
b. Interest can be limited in scope- 1-201(37) says nothing about the scope of
the positive rights that are required to have an interest in property
c. After-Acquired Property:
i. Clark (the wrong way)
1. Facts: At time of transaction license is NOT property, so
debtor cannot grant SI. Instead signs acknowledgement to
creditor that will not sell or transfer license. Subsequently
state passes law that recognize rights in license as property.
2. Issue- Could acknowledgement suffice to create security
interest. And if so, when did SI attach?
3. Ct held SI failed -Court seems to suggest mere leverage not
enough
ii. The Right Way – creat interest in after-acquired property in the
SA.
1. SI attaches at the time property is received by the debtor,
not before.
iii. The Interest in Property Requirement
1. Organize cases along lines of positive rights v. negative
rights in property
a. Securing Payment or Performance
i. Court seems to suggest mere leverage not
enough
ii. Why not? Accomplishes goal; secured
creditor doesn’t want to grab the property
and often can’t
2. Top Down v. Bottom Up Approaches
a. Top down = Assume full rights then take
specifically enumerated rights away
b. Bottom up = specifically enumerate positive rights
c. Top down approach probably better, easier
3. Negative Pledgesa. Do not grant SI, instead just contractual right
b. Why the NP? Debtor might prefer it, and if done
correctly, may serve as anti-later SI commitment
c. If allowed SI to be granted, possibility of
inconsistent priorities pairwise (crops up a lot)
4. Separating SA’s and FS’s
a. Key design feature
b. SA grants interest, FS reserves spot in line vis-à-vis
other creditors
c. consequences: file first before pursuing SA to
reserve place in line
iv. When is an interest granted?
a. Two approaches Bollinger and Martin Grinding
i. Bollinger says: Sort through all of the
relevant documentation and the course of
dealing between the parties to see if
something can be pieced together that will
satisfy the written security agreement
requirement
ii. Marting Grinding says:
1. Close to insisting that a single
document memorialize the secured
arrangements between the parties
2. Nothing in Article 9 supports this
iii. Martin Grinding is probably better because
easier for 3rd parties to know when there is
a security interest
1. But not clear because presumably the
debtor would internalize these costs
2. No real answer
d. Formalities and Descriptions
i. 9-203’s Description Requirement
1. Implements Article 9’s reified priority system
2. Defines the collateral between the parties
ii. 9-108 Description Rules
1. Must reasonably identify collateral
2. Revised statute blesses Article 9 categories
3. Supergenerics barred, but brick-by-brick SI in all assets is
OK
iii. Laminated Veneers and Worldwide Tracers
1. Lamintated Veneers – Oldsmobiles were not considered as
“equipment” pledged under SA’s omnibus clause. Ct.
found
a. cars not typically considered EQ
b. specific listing of truck implied exclusion of other
vehicles
2. Worldwide Tracers – creditor described property as “any
property”. Ct. held this did not perfect SI in intangible
property because
a. creditor should have said “any property, tangible or
intangible” and
b. description was found with list of tangible property
III.
iv. 9-203 and Rights in the Collateral
1. Debtor cannot grant interest in rights it doesn’t have or
control – Monalisa hypo
a. The Whatley problem - In closed corp setting, need
to be sensitive to right way for creating and
perfecting SI in pledged assets of owner of corp
i. SA signed by individual as such
ii. FS filed against individual
Perfection
a. Creates independent second source of information about the underlying
transaction
b. Implementing Perfection
i. Three key methods:
1. file,
2. possess,
3. control
c. Must classify successfully – different classifications of collateral require
different methods of perfection
i. 9-310 – general rule is that a FS must be filed to perfect
ii. 9-312 – exceptions to 9-310 general filing requirement
Goods
Tangible Chattel
Paper
Negotiable Docs
Instruments
Investment Property
Deposit Account
Letter-Of-Credit
Money
General Intangible
Electronic Chattel
Paper
Certificated
Securities
Filing
Yes
Yes
Possession Control
Yes
No
Yes
No
Yes
Yes
Yes
No
No
No
Yes
Yes
Yes
Yes
No
No
No
Yes
No
No
No
Yes
Yes
Yes
No
No
Yes
Yes
Yes
No
iii. 9-313 – When Possession Perfects
iv. 9-314 – When Control Perfects
1. Newman – Ct. held annuity contract was not an
“instrument” under UCC, but a “general intangible” 
creditors interest was NOT perfected through possession,
filing of FS was required.
a. Key defs:
i. 9-102(a)(47): Instrument
1. A negotiable instrument or any other
writing that evidences a right to the
payment of a monetary obligation, is
not itself a security agreement or
lease, and is of a type that in
ordinary course of business is
transferred by delivery with any
necessary endorsement or
assignment.
ii. 9-102(a)(42): General Intangible
1. any personal property, including
things in action, other than accounts,
chattel paper, commercial tort
claims, deposit accounts, documents,
goods, instruments, investment
property, letter-of-credit rights,
letters of credit, money, and oil, gas,
or other minerals before extraction.
The term includes payment
intangibles and software.
2. Vienna Park – Ct held Right to receive funds from escrow
was not “money” under UCC, but instead was a “general
intangible”  creditor’s interest was not perfected through
possession, but required filing.
a. Key defs:
i. 1-201(24): Money
1. a medium of exchange authorized or
adopted by a domestic or foreign
government as a part of its currency.
d. Names:
i. Debtor’s Name
1. Financing statements are indexed in debtor’s name (9519(c)(1))
2. 9-506(a) – minor errors and omissions do not affect
sufficiency of FS, unless “seriously misleading”
3. 9-506(b) – An FS is seriously misleading if it does not
contain the debtor is not named in accordance with 9503(a)
4. 9-506(c) - If you can find the statement using the incorrect
name and the search system of the filing office, then the FS
is valid.
5. Comparing legal name and filed name irrelevant if you
would never find the statement in the first place
6. RA 9-503 ties down debtor name rules
a. No trade names (9-503(c))
b. Legal names for corporations (9-503(a)(1))
7. Clairmont- Correct name = Clairmont Pharmacy; FS under
Clairmont Skyline Pharmacy. Ct says ok b/c substantially
similar. Under new statute all that would matter is whether
you would find it under filing search.
ii. Secured Party’s Name
1. Not critical for finding financing statement
2. Should expect greater room for errors under 9-506(a) –
minor errors and omissions do not affect sufficiency of FS,
unless “seriously misleading”.
3. But little sympathy for getting own name wrong
4. Omitting the name is fatal
5. Chemical Bank and Copper King – both cases the secured
party’s name was not correct, but court held FS was valid.
[could fill in more detail here if time.
e. Description of Collateral
i. The Independent Importance of the Description in the Financing
Statement -Defines extent of priority over collateral
IV.
ii. Notice ala Thorp not particularly meaningful
1. Thorp – Ct held that description of collateral as
“assignment of accounts receivable” was sufficient to
include AR incurred after the date of the FS, because it put
future creditors on notice that they should inquire.
a. Ct rejected alternative theory that description should
be independently sufficient on its own terms
iii. Subsequent SP needs to negotiate to deal with scope of prior FS
f. Third-Party Possession 9-313(c)
i. Key change in 9-313(c): Move from possession occurring at time
bailee receives notice of SP’s interest under F9-305 to requiring an
acknowledgment by the bailee
ii. Coral Petroleum [complicated case. Ct held SI was not perfected.
Fill in detail later, if necessary]
g. Control as Third Method of Perfection
i. Relevant to
1. investment property,
2. deposit accounts,
3. electronic chattel paper and
4. letter-of-credit rights
ii. Exclusive means of perfection for deposit accounts (9-312(b)(1))
and letter-of-credit right (9-312(b)(2))
iii. Priority rules give better rights if you possess or control chattel
paper. See 9-330
iv. Control and Benedict v. Ratner
1. Court focuses on dominion debtor has over proceeds of
AR. Finds no SI because creditor was not policing the use
of funds in which it claimed an SI. This is not an ostensible
ownership theory; instead, this a control theory
2. Rejected by statute generally and but see esp. 9-104(b) on
deposit accounts.
Priority
a. Theory: Modigliani-Miller - capital structure cannot influence firm value
i. MM Theory is wrong - Use of Assets Depends on Capital
Structure
1. Debtor will choose projects with debt that it would reject in
all-equity capital structure
a. Example each project requires $100 investment
Project 1
Good: 50%: worth $146
Bad: 50%:worth $84
Expected value = +15
Project 2
Good: 10%: worth $635
Bad: 90%: worth $40
Expected value = -.05
Society wants 1, but debtor will choose
2. Creditors need to police this.
b. Secured Credit and Monitoring
i. Can use security interest to allocate debtor monitoring burden
among creditors
ii. Need monitoring to control debtor, but fears of creditor grab may
lead to over-monitoring
iii. Instead, grab ex ante through security interest to reduce overmonitoring incentive
iv. [bunch of stuff about the “monitoring game”, upshot is that the Art
9 system maximizes benefit. Put more in here if it looks like need
to know. See slides from Class 10].
c. The First-to-File Rule
i. Very strict. First to file wins even if SA came later. Pure Race
statute
ii. JI Case – Illustrates pure-race nature of priority rules
1. Facts: FS filed by Creditor in 1980. Creditor mistakenly
terminated FS 11/82. Bank secures same collateral with FS
in 12/82. There is evidence that Bank knew of the mistake.
Creditor discovers mistake and refiles in 1983.
2. Ct held: Bank wins, even if it knew about mistake. “In
short, this statute was intended to be and is a ‘pure race’
type statute. This means the secured creditor who wins the
‘race’ to the appropriate filing office has priority without
regard to the prevailing creditor’s state of mind and
knowledge.”
3. introducing knowledge into the equation could result in
inconsistent priorities between parties, because some
parties may have knowledge while other don’t A>B, B>C,
C>A
4. introducing knowledge into system would be expensive in
terms of litigation costs
d. Continuity of Perfection
i. General rule: SP must remain continuously perfected to keep place
in line.
ii. Continuation of Perfection by different methods – ok if no lapse.
1. 9-322(a)(1): Earlier of the time a filing covering the
collateral is first made or the security interest is first
perfected, if there is no period thereafter when there is
neither filing nor perfection
iii. Continuation of Financing Statements1. Relevant Statutory Framework
a. 9-515(a,c,d): (a) FS lapses after 5 years; (c) unless a
continuation statement is filed before the lapse; (d)
if FS lapses SI is no longer, and never was,
perfected
b. 9-308(a,c): (a) an SI is perfected if it has attached
and if all the requirements for perfection have been
met; (c) an SI is continuosly perfected if there has
been no lapse between periods of different methods
of perfection
c. 9-322(a)(1): conflicting SI’s rank according to time
of perfection, priority dates from the time of filing
or when SI was first perfected.
2. Hilyard –Facts: Instead of continuing FS, 1st creditor filed
a new FS before the old one lapsed. It also had received an
acknowledgement from the 2nd creditor that it’s lien was
junior.
a. Ct held that 1st creditor’s interest was not perfected
and thus 1st creditor lost to 2nd creditor
i. Contractual right via acknowledgement does
not = priority right via Art 9
ii. NBC lost because and FS did NOT refer to
first FS. Subsequent secured party couldn’t
look back and see chain. Failure to refer
back is core problem.
b. Idea behind 5-yr limit was to keep FS’s from
hanging around forever, but the downside is that
some creditors let them fall through the cracks or
don’t continue correctly as in this case.
e. Nature of Priority
i. First to File or Perfect wins
1. In filing situations, first to file
2. Attachment is bad option because is hard for third parties
to to see
3. Textured rules, contemplating facts such as knowledge,
introduce inconsistencies
f. Marshaling
i. Marshaling equitable doctrine. It may be invoked when
1. There are two or more creditors of the same debtor
2. There are two of more funds belonging to the same debtor
3. One of the creditors alone has right to resort to both (or
more) funds
ii. Marshaling doctrine = Senior creditor must exhaust fund, to which
junior creditor has no claim, before resorting to fund on which
junior creditor also has claim, so that junior creditor can collect
more of fund with overlapping claims. NB: senior creditor is only
required to marshal if it will not prejudice itself in so doing.
iii. Implicitly partially extends priority from one asset class to second
untaken asset class
iv. Computer Room- Ct answers whether Sr. Creditor must marshal.
1. Yes, as to Two Security Interests
a. Traditional doctrine applies in situation where one
secured creditor has access to only one fund, second
secured creditor has access to two
b. Done only if no harm to two-funds creditor
2. No, as to Guarantee:
a. Trustee in bankruptcy is looking to reduce claims
against bankruptcy estate
b. But guarantor may just substitute in for creditor
v. Delaware Truck – more complex marshaling case and a lot of
other issues. At issue was a settlement between two creditors
which effectively gave one creditor the opportunity to foreclose on
a mortgage granted the other creditor. Court though this might be
improper. [probably not worth the effort to fill in. See later]
g. Secured Creditors vs. Unsecured and Lien Creditors
i. The Lien Creditor:
1. 9-102(a)(52) “Lien creditor” means:
(A) a creditor that has acquired a lien on the property
involved by attachment, levy, or the like [i.e jump
through state hoops];
(B) an assignee for benefit of creditors from the time of
assignment;
(C) a trustee in bankruptcy from the date of the filing of the
petition; or
(D) a receiver in equity from the time of appointment.
ii. Priority of Lien Creditors vis-à-vis Secured Creditors
1. The statute 9-317(a)
(a) [Conflicting security interests and rights of
lien creditors.] An unperfected security interest
or agricultural lien is subordinate to the rights
of:
(1) a person entitled to priority under
Section 9-322; and
(2) except as otherwise provided in
subsection (e), a person that becomes a
lien creditor before the earlier of the
time:
(A) the security interest or
agricultural lien is perfected or a
financing statement covering the
collateral is filed; or
(B) one of the conditions specified
in Section 9-203(b)(3) is met
and a financing statement
covering the collateral is
filed.[this provision means that
an SA must be in place,
possession, or control of
certain types of collateral must
happen to keep a lien creditor
from jumping ahead of an SC.
A naked financing statement is
not enough
Unsecured
Creditor
Lien
Creditor
LC wins (9-317)
Unperfected UPSC wins
(9-201) (TRICKY
Secured
BOX) IS tricky box really
Creditor
that important? No, if
parties are paying
attention USC will turn
itself into a lien creditor,
or UPSC will try to
perfect
Perfected
Creditor
PSC wins
(9-201)
1st wins (9-317)
iii. This is a little loose 9-317(a)(2)(B) gives priority even if not a PSC
but merely have SA and FS without value extension
1. Old statute a lot turned on whether perfected. Turned on
whether had lent a single dollar.
iv. PSC v. LC Future advances rule must be consulted; see 9-323
v. Particularly important given the hypothetical lien creditor power in
bankruptcy
vi. Unperfected Secured Creditor loses to Lien Creditor. Key way for
to for one-time USC to jump ahead of SC
h. Negative Pledges –
i. Under Art 9- no priority. Just a contractual issue.
ii. Mudge – Ct upheld verdict that Bank had tortiously interfered with
another creditor’s conduct by inducing debtor to breach negative
pledge.
iii. Rarely specifically enforce limitations on alienability;
1. compare 9-401(b) –[Agreement does not prevent
transfer] An agreement between the debtor and secured
party which prohibits a transfer of the debtor’s rights in
collateral or makes the transfer a default des not prevent the
transfer from taking effect.
iv. So should just be breach and issues is damages
v. Tortious interference action requires knowledge. Difficult to know.
Circular priority possibilities
vi. Requiring filing of neg pledge would be cleaner
i. Unjust enrichment
i. Where a USC can show unjust enrichment, SC may be obligated to
pay USC out of secured collateral.
ii. To show unjust enrichment USC must show that SC initiated or
encouraged the transaction, and that the SCs collateral was
enhanced by the transaction.
iii. Ninth District- SC had SI in AR. Debtor’s suppliers would present
invoices to SC for payment. Debtor’s customers would pay SC,
and SC would credit payments against debtor’s debt. USC supplier
brought action against SC for payment.
1. Ct. Held: “Where a secured creditor is benefited by a
transaction between its debtor and an unsecured creditor
that enhances the value of the secured collateral, and the
secured creditor initiates or encourages the transaction, the
secured creditor can be held liable to the unsecured creditor
on the theory of unjust enrichment.”
j. PMSI (Purchase Money Security Interests)
i. Definition basically when debtor is loaned $ to purchase collateral,
the entity that loaned debtor the money for the purchase receives
an SI in the collateral up to the price of the collateral
ii. Statute Definition– 9-103(a) [Definitions.] In this section:
(1) “purchase-money collateral” means goods or software that
secures a purchase-money obligation incurred with respect to
that collateral; and
(2) “purchase-money obligation” means an obligation of an
obligor incurred as all or part of the price of the collateral or
for value given to enable the debtor to acquire rights in or the
use of the collateral if the value is in fact so used.
iii. Application of pmt 9-103(e) [Don’t really understand this]
[Application of payment in non-consumer-goods transaction.]
In a transaction other than a consumer-goods transaction, if the
extent to which a security interest is a purchase-money security
interest 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 the parties’ agreement to a reasonable
method, in accordance with any intention of the obligor
manifested at or before the time of payment; or
(3) in the absence of an agreement to a reasonable method
and a timely manifestation of the obligor’s intention, in
the following order:
(A) to obligations that are not secured; and
(B) if more than one obligation is secured,
to obligations secured by purchasemoney security interests in the order in
which those obligations were incurred.
iv. Priority of PMSI over other secured interests. 9-324(a): Priority of
PMSI
(a) [General rule: purchase-money priority.] Except as
otherwise provided in subsection (g), a perfected purchasemoney security interest in goods other than inventory or
livestock has priority over a conflicting security interest in
the same goods, and, except as otherwise provided in
Section 9-327, a perfected security interest in its
identifiable proceeds also has priority, if the purchasemoney security interest is perfected when the debtor
receives possession of the collateral or within 20 days
thereafter.
v. Key timing and notification differences for inventory and goods
other than inventory under 9-324(a,b)
1. PMSI in Goods –
a. No notice required
b. Must be perfected [presumably through filing. Ask
– how perfect a PMSI?]
2. PMSI in Proceeds of goods
a. No Notice required
b. Must be perfected within 20 days after debtor
receives possession of goods
3. PMSI in Inventory
a. Notice to other SC required
i. Notice must be received by SC within 5
years before debtor receives possession of
INV
ii. Notice must state that sender expects PMSI
status
b. Must be perfected prior to debtor receiving
possession of inventory
4. PMSI in “identifiable cash proceeds” of INV if
a. Identifiable cash proceeds are received on or before
buyer takes delivery.
b. All above requirements for INV
c. NB: “identifiable cash proceeds” DO NOT EQUAL
Accounts Receivable. See MBank Alamo
vi. PMSI and multiple debts (such as interest and attorney’s fees that
are included in price)
1. New statute is clear that all of these charges are part of the
purchase-money obligation under 9-103(a)(2); see
comment 3
vii. Time of possession of collateral important and can matter in
sequential lease/sale deal
viii.
ix.
x.
xi.
xii.
V.
1. If collateral is leased first, “Possession of collateral” for
purposes of PMSI status does not occur until the purchase
agreement is completed.
Notice scheme for INV introduces chance of circular priority
MBank Alamo- Three key take-away points
1. priority in inventory does not extend to priority in the AR
as proceeds of the inventory (9-324(b))
2. Need to track the progress of the collateral and possible
changes in priority
3. Alt agency structure suggested by the court would undercut
MBank’s position; secured creditor needs to be aware of
possible restructuring of underlying arrangement and
consequences for position
No loss of status of PMSI status (to the extent the original PMSI
debt survives) in non-consumer-goods transaction. 9-103(f). No
loss of PMSI even if:
1. the purchase-money collateral also secures an obligation
that is not a purchase-money obligation;
2. collateral that is not purchase-money collateral also
secures the purchase-money obligation; or
3. the purchase-money obligation has been renewed,
refinanced, consolidated, or restructured.
a. Billings – PMSI survived assignment and
refinancing (which meant new note and new SA).
Important to note that Bankruptcy Code gives preferential
treatment to PMSI’s by not allowing those liens to be avoided even
for household items, professional items, and health aids that
ordinarily are exempted under BC 522(f)
Cross-Collateralization
1. Security agreement terms will often look forwards and
backwards; Language will cover now assets and future
assets; Also now debts and future debts
2. All done through single SA and single FS
3. Need to track PMSI status
a. Generally only PMSI status for then assets and then
debts; Not for cross-collateralization: past or future
debts for now assets or past or future assets for now
debts
4. General rule often called off for inventory (9-103(b)(2)) –
PMSI status for all debts under FS.
Proceeds
a. Proceeds Perfection Mechanics
i. 20 Days Automatic Perfection (9-315(c), (d))
ii. After 20 days perfection will continue IF one of the following tests
of 9-315(d) can be met:
(1) filed FS covers original collateral; AND
a. the proceeds are the type of collateral that can be
perfected by filing in the same office where the
original FS was filed; AND
b. the proceeds in question have not been acquired
with cash proceeds (i.e. cannot be proceeds of cash
proceeds) ***
(2) – the proceeds are IDENTIFIABLE CASH PROCEEDS. 9315(b) defines when commingled proceeds are identifiable.
(3) – the security interest has been perfected in a manner other
than the automatic perfection of 9-315(c).
iii. NB
1. Identifiable cash proceeds automatically perfected
2. Filing usually necessary if intervening cash proceeds.
iv. Has the consequences of making an FS valid even if the
description is wrong. Computer- painting swap problem. Good
news fairly unusual transaction.
v. I in original collateral may file FS for proceeds without additional
consent of debtor. Sp is authorized under 9-509(b)(2)
vi. Orix/Beach TV – Ct held that creditor could have a security
interest in the proceeds of FCC licenses
b. The Collateral Cycle and Changes in Priority
i. Changes in collateral classification can change priority
ii. INV can be sold on credit and become AR. In this situation could
have 2 SP’s with a claim on the assets. One will have a claim on
AR as original collateral. The other will have a claim on proceeds
of INV. Earliest to file/perfect wins.
1. Diamond Walnut is one example of this. Growers’ Co-op
had a claim on member’s proceeds (from sale of walnuts).
Bank had claim on crop and proceeds. Growers’ Co-Op
pre-dated Bank, so Co-op wins. Before crop was sold, coop had no claim. Once sold Co-Op had claim. Even though
parties signed agreement saying sell the walnuts and sort
out the priority issues later. Shows how collateral cycle can
affect priority.
c. Priority over Deposit Accounts
i. 9-327(1) implements non-temporal priority scheme: control beats
non-control
1. Arises most frequently in dispute between secured creditor
with control of deposit account and second with proceeds
interest ultimately tied to financing statement
ii. Priority conflicts over proceeds and control
1. 9-327(1) generally control beats non-control
2. 9-322(c) If SP has priority of collateral also has priority
over proceeds if (1) the SI is perfected; (2) the proceeds are
cash proceeds or the same type as the collateral; and (3) for
proceeds of proceeds, all intervening proceeds must be
VI.
VII.
either cash proceeds or proceeds of the same type as the
collateral.
3. BUT for conflicts regarding proceeds from chattel paper,
deposit accounts, negotiable documents, instruments,
investment property, or letter of credit rights – control does
not trump filing, instead go to first-to-file rule.
a. BUT if the proceeds in questions are cash proceeds,
chattel paper, negotiable documents, instruments,
investment property, or letter of credit rights – the
above restriction does NOT apply and control
DOES trump filing. [??? Not sure this is right]
d. Proceeds and Senior and Junior Creditors
i. 9-332 has strong cleansing powers for cash and for transfers from
deposit accounts
ii. Junior secured creditor can jump in line
iii. Driven by desire to preserve integrity of the payments system
Transfers of Collateral Subject to a Security Interest
i. General rule is SI survives transfer unless SP authorized transfer
free and clear (9-315(a)(1))
ii. 9-320 limits this rule in many important situations, including most
normal sales from inventory
1. 9-320(a) “buyer in the ordinary course of business” takes
good free and clear of an SI. (Even if buyer knows of
existence of SI.) Only if the person selling the goods to the
buyer was the one who created the SI.
a. “buyer in the ordinary course of business” means
buying from someone who is engaged in the
business of selling that item. 9-307(1)
2. 9-320(b) someone who buys from a person who used the
goods primarily for household use takes free of SI if:
a. buyer has NO knowledge of the SI
b. buyer buys for value
c. buyer buys primarily for personal, family, or
household use
d. BEFORE the SP files FS covering the goods.
iii. Double Dipping?
1. Note that SP will often have rights as to both transferred
collateral and proceeds received in exchange
Location and Choice of Law
a. Location of Collateral and Choice of Law
i. Most fundamental change in Revised Art 9.
ii. Summary of Old 9-103
1. Property With Natural Location
a. Where the property has a natural location, the
substantive law of the jurisdiction where the
property is located controls. This covers ordinary
goods. (9-103(1)(b))
2. Property Without a Natural Location
a. Where the property does not have a natural location,
the location of the debtor controls. This covers
accounts, general intangibles, and mobile goods. (9103(3))
3. The Last Event Test
a. For a secured party, the “last event” test means
essentially this:Unless some other rule provides
otherwise, a security interest is perfected if there
was ever a time when the goods were in a particular
jurisdiction and the secured creditor had satisfied (at
or before that time) the requirements for obtaining a
perfected security interest under the laws of that
jurisdiction.
4. Old regime focused On Where the Collateral Has Been
a. Note that the only jurisdictions in which the
collateral has been located may be relevant.
b. Old 9-401 Required Filing in That State
c. If any of those jurisdictions are chosen to supply the
substantive law, that version of Old 9-401 will
require a filing in that state for perfection.
d. Only Hope for SP: Collateral Located in State with
FS on File
e. Thus, the secured creditor will have no claim to
being perfected if the collateral is never in a
jurisdiction in which there is on file an effective
financing statement.
f. Introduced unanticipated movement of collateral
problem among other things. Id debtor moved
collateral, could cause problems determining what
law to apply, and could in effect make SP lose its
SI.
iii. Under New 9-103 – Focus on location of debtor for perfection and
location of location of collateral for effect of perfection. (not
including accounts and GI, see below)
1. Under 9-301(1), local law of debtor’s location governs
perfection
2. Under 9-301(1) and 9-301(3)(C), collateral type determines
which local law governs consequences of perfection or
nonperfection and priority
a. For goods and many others, local law of location of
collateral (9-301(3)(C)
b. For accounts and general intangibles, local law of
location of debtor controls (9-301(1))
VIII.
b. Location of the Debtor Under 9-307
i. Entity specific
1. Corporations located where incorporated (9-307(e))
a. Key Consequence of Shift from Old Statute. Old
statute required filing in location of collateral for
collateral having a natural location. If corporate
debtor had goods in many states, file in each state.
Now, file once, where corporate debtor incorporated
ii. Changes of the Location of the Debtor
1. Still possible to lose priority
2. Need to act within four months of the change (9-316(a)(2))
3. Loss of perfection, even with reperfection, raises
preference issues under BC 547
4. Corporate debtors change location only through reincorporation; relatively rare
5. Old cases, such as Metro, on understanding location of
CEO, matter for some non-corporate entities (9-307(b)(3)
a. Should tie CEO location issued to third-party
observables, and not the unobservable, such as
where decisions are made
i. Two-part test under old statute:
(1) from which place does the debtor
manage the main part of its business
operations; and
(2) where would creditors reasonably be
expected to search for credit
information?
Changes: Debts and Debtors
a. After-Acquired Property (AAP) Mechanism
i. Under 9-204 (a) SP can take an interest in after-acquired property.
1. This was a contentious issue, but A9 has embraced. Cases
like Zartman held interests in AAP void because “one
cannot grant what he does not own, actually or potentially”
2. 9-204(b) No interest in AAP can be taken in
a. consumer transactions (some exceptions, see
statute): and
b. commercial tort claims
ii. Single Financing Statement, Multiple Loans
1. Future Advances
a. SP v. SP
i. No limit on extent to which subsequent
advances can subordinate SP2. A single FS
gives notice for all SA’s covered by it.
ii. 9-323 Comment 1 Under a proper reading of
the first-to-file-or perfect rule of Section 9322(a)(1) (and former Section 9-312(5)), it
is abundantly clear that the time when an
advance is made plays no role in
determining priorities among conflicting
security interests except when a financing
statement was not filed and the advance is
the giving of value as the last step for
attachment and perfection. Thus, a secured
party takes subject to all advances secured
by a competing security interest having
priority under Section 9-322(a)(1).
b. SP v. LC
i. SP1 protected for greater of 45 days or time
acquires knowledge of position of LC
ii. SP has absolute right over LC without
knowledge
iii. LC can create knowledge and limit to 45 day
window by giving notice.
iv. Why give LC’s this protection. LC’s are
raising red flags about financial health of
debtor and providing valuable signaling
service. Want to provide them incentives to
do this.
c. Fretz [we spent a lot of time on this, but I don’t
understand the problem very well. It has something
to do with USC’s selling positions to SP’s which
effectively allows th unsecured debt to jump ahead
of junior SP’s. I really don’t understand this, should
talk to Picker]
IX.
Name Changes
a. Generally Post-Filing changes that render a FS seriously misleading have
NO EFFECT on the FS. The SI on collateral acquired by the debtor
BEFORE the change remains perfected. 9-507(b)
i. Potential SP’s must inquire into source of title of debtor’s
collateral to insure that there is not a pre-existing SI in the
collateral.
ii. SI remains perfected even if debtor disposes of the property. 9507(a) Again potential SP’s should check chain of title.
b. Collateral acquired by the debtor AFTER the change is subject to the 4Month Rule of 9-507(c) –
i. SP remains perfected for collateral acquired after the change for 4
months.
ii. Within 4 months after change, SP must amend FS so that it is no
longer seriously misleading – or SP will no longer have a perfected
SI in collateral acquired after the change
c. Obviously all of the above only applies if name change renders FS
seriously misleading
X.
d. Name change of debtor is key given indexing rules for financing
statements
e. Burden allocation issue between initial secured parties and subsequent
secured parties
i. Unlike case of mistakes in initial filing, name changes are not that
difficult for subsequent SP’s to track down. So ok to allocate some
of burden to SP2.
ii. 4 month deadline allocates some burden to SP1 to monitor
changes, without creating excessive burden.
iii. In this case some party must bear the costs. Most important thing
here is to clearly allocate the costs so that parties know for sure
what their responsibilities are.
f. Practically - Secured creditor aware of pending change is wise to file in
both names
g. Woods/ Bath Industrial Sales –[ SP1 knows of impending name change,
but files under old name. SP2 files under new name. Who has priority in
after-acquired inventory?]
i. Bad decision. Ct subordinates SP1’s interest to SP2’s. Ct says SP1
did not act in “good faith”.
1. BUT: Never know schedule of name changes, would have
been dumb for SP1 to file under new name that did not
exist
2. Introduction of “good faith” generally messes up the
system. Creates possibility of circular priority.
Name and/or Entity Structure Changes
a. Incorporations – Individual Incorporates into typically Sole Proprietorship
(Joe  Joe Inc.)
i. What happens as to Transferred Collateral?
1. Attachment of SI should continue under 9-315(a)(1)
2. Financing statement remains effective under 9-507(a)
ii. What happens as to New Collateral (After-Acquired Assets)?
1. Under the old statute, SP of individual had no way to claim
security interest in new property acquired by new corp
2. New statute mechanism
a. 9-203(d) makes “new debtor” liable in some
circumstances; real question is scope
i. 9-203(d): By operation of law other than
this article or by contract:
(1) the security agreement becomes
effective to create a security interest in
the person’s property; [corp name
change scenario]
(2) the person becomes generally
obligated for the obligations of the other
person, including the obligation secured
under the security agreement, and
acquires or succeeds to all or
substantially all of the assets of the
other person. (this last clause could
potentially limit the scope dramatically;
remains to be seen. Many times there
will be a good argument that
substantially all of the assets were not
transferred)
b. 9-508(a) makes old FS effective as to new debtor,
but …
c. Frequently will have name change issue, and 9508(b) makes standard 4-month rule applicable
d. 9-326 addresses priority and generally subordinates
FS’s tied to 9-508
i. Don’t like it? File against new entity
b. Scott – Illustrates incorporation problem under old A9.
i. Scotts grant SI to Bank as individuals
ii. Scotts incorporate as Business
iii. Business grants overlapping SI to Finco
iv. Ct holds Bank loses because it did not have an SA with the new
entity Business
v. Under bew A9 – Still Not clear whether Scotts  Business would
fall into 9-203(d)
c. Bank of the West
i. Parent has two subs, Sub1 and Sub2
ii. Sub1 grants SI to Bank in INV. Bank duly files FS
iii. Later Sub2 does the same with Finco
iv. Sub2 transfers assets to Sub1 including INV
v. 3 months later, who has priority, Bank or Finco?
1. Another example where change re collateral could have
priority consequences (recall Diamond Walnut)
2. Court looks to avoid those consequences and bends statute
to hold for Finco
3. New A9 does not clearly resolve problem. Probably
stronger case that Bank of the West wins, since new statute
expressly considers the new debtor situation, but by no
means certain
4. Comment 7 acknowledges that many transactions will be
excluded:
a. “In many cases, paragraph (2) will exclude
successors to the assets and liabilities of a division
of a debtor.
BREAK NEW OUTLINE
Default
I.
II.
III.
Property rights of the SC: property rights describe the special rights the SC
acquires against its debtor. The SC receives property rights against the D in
order to short-circuit the collection process faced by the USC.
A. Default rights are an integral part of the SC’s property rights, for SCs have
an advantage over USCs: the ability to use these default rights against a
debtor without going through the USC’s collection process (which usually
involves getting a judgment and an execution lien
B. Note: because a SP’s default rights involve implementation of property
rights, and not priority rights, they concern primarily the rights of the SP
against the D, not against third parties (even though those rights are
inevitably implicated)
C. Thus, Part 6 of A9 is applicable whether or not the SP has taken step to
perfect its SI
Overview of Default Rights
A. The following rules protect the SC’s property right after default:
1. Right to repossess the collateral. 9-609
2. Right to sell the collateral to collect the debt. 9-610
3. Right to retain the collateral in satisfaction of the debt. 9-620 –
9-622
B. No definition of default:
1. Part 6 of A9 is applicable after default (9-601(a)), but default is
not defined anywhere. This was intentional so that parties would
define the events constituting default
2. Most SA provide that upon default, either the SP may accelerate
the unpaid balance or the unpaid balance accelerates
automatically. Without such a clause, balance cannot be
accelerated but by relying on Article 2, SP with rights associated
with anticipatory repudiation can acclerate if the underlying
transaction involves goods. 2-610
3. 9-602 sets forth an extensive set of nonwaivable debtor rights
Collection Mechanisms of 9-607 and 9-608
A. Must notify third parties of rights and collect. 9-607(a)
B. Must do so in commercially reasonable matter. 9-607(c)
C. SP may deduct from the collections reasonable expenses of collection, and
enforcement, including reasonable attorney’s fees and legal expenses. 9607(d)
D. Have duty to deliver surplus to debtor and right to pursue deficiency
1. 9-608(a)(4): when turn the collateral into cash, two things can
happen:
a. You have a surplus and must give surplus to debtor
b. You have a deficiency, which means you may pursue the
excess owed as an USC
2. 9-608(b): if the underlying transactions is a sale of accounts, CP,
payment intangibles, or promissory notes the D isn’t entitled to
surplus, and obligor is not liable for deficiency
IV.
Repossession Under 9-609: The Breach of the Peace Limitation
A. 9-609After default, a secured party: 1) may take possession of the
collateral; and 2) without removal, may render equipment unusable and
dispose of collateral on a debtor’s premises under Section 9-610. A SP
may do the aforementioned pursuant to judicial process or with out
judicial process if it proceeds without breach of the peace. 9-609
B. Key issue: actually turning collateral into cash may be difficult hard for
collateral possessed by debtor, such as inventory and equipment, easier for
accounts and deposit accounts.
C. Threat of confrontation or violence seems critical
D. Cases:
1. Salisbury Livestock Co., page 310: Related 3rd party private
property (father’s ranch); rural setting, early in the am, no
exchange or confrontation with anyone. Crt said there were two
main factors which need to be presented to the jury: potential for
immediate violence and the nature of the premises intruded upon
2. Williams v. Ford Motor Credit, page 317: Shared private
property (driveway); early in the am, “polite” verbal exchange bt
Williams (single female) and the repo man. JNOV affirmed,
reversing the jury judgment in favor of Williams: Williams did
not raise an objection to the taking, and the repossession was
accomplished without any incident which might tend to provoke
violence
3. Stone Machinery, page 322: prior communication with the debtor
suggested that confrontation was possible (debtor said someone
would get hurt if try to repo), so Creditor tried to solve the
breach of the peace problem by bringing a sheriff with him.
Debtor wins: presence of police officer prevented Debtor from
exercising his right to resist by all lawful and reasonable means a
nonjudicial take-over
4. Mel Farr and his cars: Mel Farr provides cars to people with bad
credit; have to make weekly payments; if don’t pay, the car shuts
off. Issues raised:
a. Is this a secured transaction?
b. Is when the car shuts off the equivalent of a repossession
and if so, is it a breach of the peace if the car shuts off in an
inopportune time (eg in traffic)?
c. Shutting off the car is more about the threat of value
(infliction of harm on debtor may induce them to pay) than
the creation of value
V.
5. Recap: To some extent the threat of violence is not really the
main issue; it’s more about requiring the SP to go through the
judicial process to get the collateral
Two Key Mechanisms:
A. 9-610: Disposition After Default: (a) After default, secured party may sell,
lease, license or otherwise dispose of any or all of the collateral in its
present condition or following any commercially reasonable preparation or
processing; (b) every aspect of a disposition of collateral, including the
method, manner, time place and other terms, must be commercially
reasonable. If commercially reasonable, a SP may dispose of collateral by
public or private proceedings, by one or more contracts, as a unit or in
parcels, and at any time and place and on any terms
1. Notice Provision: 9-611(b) and (c):...a SP that disposes of
collateral under 9-610 shall send the Debtor, any secondary
obligor (such as guarantor) and if the collateral is other than
consumer goods, other SPs, a reasonable authenticated
notification of disposition
2. Notice Time periods: In a transaction other than a consumer
transaction other than a consumer transaction, a notification of
disposition sent after default and 10 days or more before the
earliest time of disposition set forth in the notification is sent
within a reasonable time before the disposition
a. Whether notice is sent in a reasonable time is a question of
fact
b. Additional safe harbors—forms in 9-613, 614
3. Application of Proceeds to Disposition: 9-615
a. Tracks the discussion of 9-609 collections:
i.
(a) expenses, then secured debt is pursued, then
junior secured debts
ii.
(c) noncash proceeds rules
iii.
(f) calculation of surplus or deficiency in
disposition to person related to SP: where the SP
buds and buys at a low price, the sale can be
challenged after the fact (this represents a
compromise)
iv.
(g) cash proceeds received by Jr. SP
B. Retention of Collateral in Full or Partial Satisfaction of Debt:
1. 9-620: a secured party may accept collateral in full or partial
satisfaction of the obligation only if (1) the debtor consents to the
acceptance…
a. Mechanism for indicating consent: Can only agree to retain
in partial satisfaction if there is recorded consent—silence
doesn’t work. 9-620(c). This contrasts with full
satisfaction where SP gives notice and of no response
within 20 days the collateral will be accepted in full
satisfaction
VI.
VII.
b. This is not applicable in consumer situation
c. Note: this is a change; before it was all or nothing (ie
before could only retain in full satisfaction of debt; now
allows retention in partial satisfaction)
d. Reeves, page 343: Native Americans pawned jewelry for
money loan; promised to pay in 30 days. They defaulted
and SP sold jewelry, which was worth a lot more than the
amount loaned. Issues: If a secured party retains collateral,
when can it subsequently sell the collateral? If SP does so,
must the SP account for any surplus to the debtor? Crt says
that SP was allowed to sell, but must account to the debtor
for any surplus
2. 9-621: This section expands the group entitled to receive notice
of the proposed retention to include certain SC and certain
secondary obligors
3. 9-622: a secured party’s acceptance of collateral in full or in
partial satisfaction of the obligation it secures:
a. dischargers the obligation to the extent consented by the
debtor;
b. transfers to the SP all of the debtor’s rights in the collateral;
c. discharges the SI or agricultural lien that is the subject of
the debtor’s consent and any subordinate SI or other
subordinate lien; and
d. terminates any other subordinate interest
e. a subordinate interest is discharged or terminated under the
aforementioned sections even if the SP fails to comply
with this article
One Noteworthy right
A. 9-623: Right to Redeem Collateral: a debtor or any other SP or lienholder
may redeem collateral. To redeem collateral, a person shall tender…
1. This means that if the collateral hasn’t been fully disposed of, the
debtor has right to give SP money and get the collateral back
2. Requirements for Redemption:
a. Must pay all obligations;
b. And reasonableness expenses and attorney’s fees
c. I.e. can’t hand over the payments that you missed—you
have to pay out the remaining balance
3. Can be useful in some personal situations (see Salisbury where
Salisbury hands over check from his dad to get his cars back),
but requirement to pay full debt weakens utility of mechanism.
In other words, this rule is not that important because the Debtor
is rarely in a position to pay off debt in full anyway
Key Issues: Secured Creditor Opportunism and Debtor Indifference:
A. Examples of SC Opportunism:
1. Debtor is entitled to surplus left over after the disposition; SP
won’t care about the size of the surplus.
a. Stone Machinery, page 322: SP was owed $7448 and sold
the tractor for $7448
b. The issue is how to control for the fact that the SP therefore
won’t care to really maximize the amount it sells for since
it doesn’t share in the surplus
2. Reeves, page 344: SP tells debtor will keep collateral in
satisfaction of debt when collateral is worth much more
B. Debtor Indifference:
1. Debtor may not get to keep the surplus anyhow
2. Just goes to other creditors, so why would the Debtor care
whether the SP’s sale of collateral accrues a surplus?
3. Thus, need to get those with a stake in this disposition of
collateral involved
4. Possible Solutions: Excello Press (page 330) and the Rebuttable
presumption:
a. Excello Press: Crt says “main question in a deficiency
action is the commercial reasonableness of the disposition
of collateral. Oral notification producing actual knowledge
is notice. If debtor did not receive notice, the crt may use
the omission (along with other factors) to inform its
assessment of commercial reasonableness. Only if SP
cannot establish the commer reasonablenss of its sale need
it try to prove the mkt value using secondary evidence,
such as appraisals
b. 9-626 adopts the rebuttable presumption, so if party screws
up notice or reasonablenss, if has complied with statute, the
amount you would have realized would have paid off the
debt entirely—this you can rebut
VIII.
C. Debtor Ignorance
1. In consumer settings, debts may not fully understand
consequences of decisions
Secured Party Mistakes in Implementing Part 6
A. 9-625: Damages for noncompliance: a person is liable for damages in the
amount of any loss caused by a failure to comply with this article…
B. 9-626: Rebuttable Presumption Rule: creates presumption of zero
deficiency and puts burden on secured party to overcome that (ie SP has
burden of showing compliance); this is done by presuming that the amount
that would have been realized in complying with disposition equals the
amount owed to the secured party. In other words, Debtor will be
credited the difference bt what would have been realized if provisions had
been complied with and what was realized. In the absence of proof, it is
assumed that there is a zero deficiency; ie that the proceeds from the sale
equals the amount of the debt
C. 9-627: Commercial Reasonableness Standards
1. Safe Harbors:
a. Usual Manner;
b. At price current on recognized market
c. Approval by a group of creditors
2. In re Excello Press, page 330 How should we establish
commercial reasonableness? Main question in a deficiency
action is the commercial reasonableness of the disposition of the
collateral, with the secured party bearing the burden of
persuasion. Oral notification producing actual knowledge is
“notice.” If the debtor did not receive notice, the court may use
the omission (along with other factors) to inform its assertions of
commercial reasonableness. Only if the secured party establishes
the commercial reasonableness of its sale need it try to prove the
market value using secondary evidence, such as appraisals and
sales of similar equipment. If the secured party can prove that
sale was commercially reasonable, it has proved the market value
of the collateral
D. 9-628: Limitations on Liability
The Limits on Article 9
I.
9-109 and Excluded Areas
A. The Main Rule is 9-109(c): This article does not apply to the extent that:
1. a statute, regulation, or treaty of the US preempts this article;
2. another statute of this State expressly governs the creation,
perfection, priority, or enforcement of a SI created by this state
or a governmental unit of this State
3. a statute of another state, foreign country or a governmental unit
of another state…expressly governs creation perfection, priority,
or enforcement of a SI created by the state, country of
governmental unit
B. Inapplicabilty of Article: 9-109(d): this article does not apply to:
1. a landlord’s lien, other than an agricultural lien
2. a lien, other than an agricultural lien given by statute or other
rule of law for services or materials…
3. an assignment of a claim for wages, salary, or other
compensation of an employee…
4. (10) says: a right to recoupment or set-off, but
a. Section 9-340 applies w/ respect to the effectiveness of
rights of recoupment or set-off against deposit accounts
b. Section 9-404 applies with respect to defenses or claims of
an account debtor
5. (11): on the whole A9 does not apply to real estate
C. 9-311: Step-Back provision: Extent to which A9 is limited by Federal
Law: Except as otherwise provided in subsection (d), the filing of a FS is
not necessary or effective to perfect a SI in property subject to: 1) a
statute, regulation, or treaty…
1. In other words, FS aren’t effective to perfect when there is a
federal law which dictates when priority is acquired over the
rights of a lien creditor
2. This is different from the old scheme, which focused on whether
there was a parallel/ alternative recordation scheme. Now the
focus is what the fed scheme says about the posture of a lien
creditor as to priority
II.
Intellectual Property
A. Copyrights:
1. 17 USC 205: Recordation of transfers and other documents
a. Conditions for Recordations: Any transfer of copyright
ownership or other documents pertaining to a copyright
may be recorded in the Copyright Office if the document
filed for recordation bears the actual signature of the person
who executed it…
b. (c): Recordation of a document in the Copyright Office
gives all persons constructive notice of the facts stated in
the recorded doc, if—
a. the doc or material specifically identifies the
work…
b. registration has been made for the work
c. (d): Priority bt Conflicting Transfers: As between two
conflicting transfers, the one executed first prevails if it is
recorded , in the manner required to give constructive
notice under subsection c, within one month after its
execution in the US or within two months after its
execution outside the US, or at any time before recordation
in such a manner of the later transfer. Otherwise the later
transfer prevails if recorded first in such a manner and if
taken in good faith, for valuable consideration or on the
basis of a binding promise to pay royalties, and without
notice of the earlier transfer
2. 17 USC 101: a transfer of copyright ownership is an assignment
mortgage,…or any other conveyance, alienation or
hypothecation of a copyright of any of the exclusive rights
comprised in a copyright, whether or not it is limited in time or
place of effect, but not including a nonexclusive license
3. Knowledge Matters: In the Copyright regime, knowledge matters
but in A9 knowledge is irrelevant, so there is an issue of which
system controls:
a. In re Peregrine Entertainment, page 351: Issue was
whether a SI in a copyright was perfected by filing in the
Copyright Office; crt says that recording in the Copyright
Office rather than filing a FS under A9 is the proper
method for perfecting a SI
b. The knowledge requirement creates the problem of circular
priority.
i.
Footnote 10 of Peregrine, page 356: Filing
under the Copyright system creates a lot of
debtor monitoring; have to search every
individual copyright rather than searching for
debtor names. In comparison to A9 this is
confusing and expensive.
B. Patents
1. Does a SI have to be filed with the Patent Office in order to
perfect?
a. 35 USC 261: an assignment, grant, or conveyance shall be
void against any subsequent purchaser or mortgagee for a
valuable consideration, without notice, unless it is recorded
in the Patent Office
b. In re Cybernetic Services, Inc, page 360 Because 35
USC 261 concerns only transactions that effect a transfer of
an ownership interest in a patent, the Patent Act does not
preempt A9, thus their SI was perfected by filing a FS; so
just have to fill in UCC (this is the same for trademarks)
i.
Note: this is just 9th circuit, but it is the leading
decision
C. Bottom Line: for intellectual property, uncertain where to file, file in both
1. Copyrights
a. Peregrine says must filed with Copyright Office
b. Status under Revised Article 9 unclear and limited to one
court anyhow
c. Change to lien creditor focus in 9-311 might matter here
2. Patents
a. Cybernetic Services says file in UCC records
b. Just 9th Circuit
c. By limiting key provision in 35 USC 261 to title
transactions, avoids application of federal scheme to SI
recording
3. Trademarks
4. Caselaw says file in UCC records
III.
Set-off Rights and Leases
A. Set-offs – Rights arise nonconsensually outside of A9
1. New A9 brought in deposit accounts which made it necessary to
provide a setoff exclusion again
2. Previous version of A9 did not have a setoff exclusion because it
did not seem necessary; “might as well exclude fan dancing”
3. Section 9-109(d)(10) provides that this article does not apply to a
right of recoupment or set-off
a. Recoupment arises as to debts (I owe you, you owe me),
while set-off relates often to fees involved in the
management of an account
4. 9-340: Implements a regime that is protective of recoupment and
set-off rights:
a. (a) A bank with which a deposit account is maintained may
exercise any right to recoupment or set-ff against a SP that
holds an interest in the deposit account
i.
This subsection states the general rule and
provides that the bank may effectively exercise
rights of recoupment and set-off against the SP.
The exception to this rule is contained in (c)
b. (b)…the application of this article to a SI in a deposit
account does not affect a right of recoupment or set-off of
the SP as to a deposit account maintained with the SP
i.
this means that a bank may hold both a right of
set-off against and an A9 SI in the same deposit
account. By holding a SI in a deposit account, a
bank does not impair any right of set-off it
would otherwise enjoy
c. (c) The exercise by a bank of a set-off against a deposit
account is ineffective against a SP that holds a SI in the
deposit account which is perfected by control under 9104(a)(3), if the set-off is based on a claim against the
debtor
i.
this is the exception: if the SP has control under
9-104, (ie if it has become the bank’s customer),
then any set-off exercised by the bank against a
debt owed by the debtor (as opposed to a debt
owed to the bank by the SP) is ineffective. The
bank may, however, exercise its recoupment
rights effectively
5. National Acceptance, page 374 Issue: whether the Bank’s right
of set-off was subordinate to the P’s SI in the proceeds deposited
in the debtor’s deposit accounts. Crt stated that Bank chose to
ignore evidence which would have led a reasonable man to
conclude that the funds deposited in the deposit accounts were
encumbered by the liens of third parties, or at least to inquire
whether such interests existed. This knowledge or notice was
sufficient to preclude any right of set-off it might otherwise have
had and rendered its actions unlawful…
a. Applying the Law: Old Article 9
b. Was this a setoff? There were some questions regarding
scope of prior set-off exclusion
c. Once outside of Article 9, many states applied a knowledge
test, barring setoff if the bank knew of or should have
known of the rights of the security party in the deposit
account
d. Here
i.
If within Article 9, Old 9-201 controlled, and
secured party wins
ii.
If outside Article 9, under Virginia common
law, bank with deposit accounts had knowledge,
and SP wins
e. Applying the Law: New Article 9
f. Focus on two situations: original collateral interest arising
through control and proceeds interest
g. Original Collateral Control Interest
i.
Presumably a question of contract; see 9-340(c)
h. Proceeds Interest
i.
SP will lack control of deposit account; 9-340
and 9-341 suggest that setoff will be effective
i. Here
i.
Bank with set-off right would win
B. Drawing the line between a transaction governed by A9 and a transaction
outside of A9 when no specific statutory attention has been paid to the
problem:
1. Medomak, page 380 Nov 19-21 –
2. Different ways of structuring transaction, where underlying
economics is the same, lead to dramatically different priority
rights
3. Underlying transaction:
a. Underwood gets raw materials from supplier
b. Underwood sends raw materials to Medomak
c. Medomak processes raw materials and sends them back to
Underwood.
d. Medomak has granted a SI to Bank for all assets and AAP
e. Question is: If Medomak goes belly-up can Bank take an
interest in the raw materials?
i.
Set-off
i. If Underwood “sells” the raw materials on
credit; and
ii. Medomak “sells” the finished product back
on credit; and
ii.
iii.
iii. Underwood applies set-off to its loan and
pays Medomak the difference
1. Then NO SI for bank. This is a setoff
Bailment
i. Underwood lends raw materials to
Underwood for processing and then pays a
processing fee.
1. Then NO SI for bank because
Medomak has no rights in the
collateral.
USC loan
i. Underwood lends $ to Medomak to buy the
raw materials which it purchases from the
supplier; and
ii. Buys finished product from Medomak
1. Then YES bank has SI because
Underwood hasn’t filed.
C. Leases:
1. In re Mahoefer Packing, page 392 Issue is whether a written
agreement bt the trustee of the bankrupt D and the SP covering
the equipment is a true lease under which the SP is entitled to
reclaim its property from the bankrupt estate, or whether it is
actually a lease intended as security in which case the SP’s
failure to file a FS to perfect its interest renders it subordinate to
the trustee. Crt says that when the lessee has the right to
terminate the transaction, it is not a conditional sale, and thus
concluded that the agreement was a true lease. I.e. should focus
on what we think people will do at the end of the lease: a) in
situations where we think that lessee will keep property, then this
sounds like a sale; b) if we know they’ll give up the property,
then sounds like a true lease (then don’t have to file a FS)
2. Leases
a. No filing required for true lease, so SPs seeking to avoid
filing, if any, could mold secured transactions into leases
b. 1-201(37) provides extensive guide for distinguishing true
leases from false leases
c. Consequences of false lease status is that “lessor” will be
treated as having sold the property and having attempted to
reserve title, giving rise to a deemed security interest under
1-201(37)
d. No filing will have been made usually, so the SI will be
unperfected
e. Key for determining false lease is whether “lessee” is on
the hook to pay under the lease for the remaining economic
life of the goods
3. More important issue – if debtor goes bankrupt, positions of
leasor and SP very different. Leaseholder can opt out of
bankruptcy. SP cannot.
IV.
Included Transactions: Sales of Accounts and Securitizations
A. 9-109(a)(3): General Inclusion of Sales of Accounts, CP, Payment
Intangibles and Promissory Notes
1. Traditionally, difficulty with separating SIs in accounts and sales
lead to desire to require filing for both
2. This was done by including sales of accounts and chattel paper in
Old Article 9
3. Revised Article 9 expands this
B. Corresponding changes to key definitions: security interest, debtor,
secured party, collateral Definitions:
1. Payment intangible means a general intangible under which the
account debtor’s principal obligation is a monetary obligation.
9-102(a)(61)
2. Promissory note means an instrument that evidences a promise to
pay a monetary obligation, does not evidence an order to pay and
does not contain an acknowledgement by a bank that the bank
has received for deposit a sum of money or funds. 9-102(a)(65)
3. Collateral means the property subject to a SI…and includes
accounts chattel paper payment intangibles, and promissory
notes…9-102(a)(12)
4. Debtor means a person having an interest, other than a SI or
other lien in the collateral whether or no the person is an obligor
or a seller of accounts, chattel paper, payment intangibles or
promissory notes… 9-102(a)(28)
5. Secured party means (a) a person in whose favor a security
interest is created or provided for under a SA, whether or not any
obligation to be secured is outstanding; ….a person to which
accounts, chattel paper, payment….have been sold..9-102(a)(72)
C. Article 9 Does Not Define a True Sale
9-109 Comments 4 and 5
1. Comment 4: neither this Article nore the definition of security
interst delineates how a particular transaction is to be classified.
2. Comment 5: nothing in this section or any provision of A9
prevents the transfer or full and complete ownership of an
account, chattel paper, an instrument, or a payment intangible in
a transaction of sale
D. Perfection and Path Dependence
1. Perfection rules for sales of accounts and CP as before: file as to
accounts, either as to CP, but as to CP, possession or control can
be better (see 9-330)
2. Price of bringing Payment Intangibless and Promissory Notes
into the statute: automatic perfection (9-309(3,4))
E. Consequences of Failing to Perfect a Sale
1. What is an “unperfected” sale?
a. Octagon Gas: Debtor/seller must retain an interest in the
“sold” property. This had bad implications for bankuptcy
2. 9-318: Not So
a. Sub a says sale is complete
b. Sub b says debtor is deemed to have equivalent rights to
those held prior to sale
3. This will support superior position for lien creditor or secured
creditor or subsequent purchaser (see example below 9-318
comment 3)
a. Bottom line: Other creditors can still go after Buyer if
buyer does not perfect. But this does not affect the rights
as between the Seller and the Buyer. Seller retains no
interest.
4. Important to clearly state that Seller retains no interest because:
a. Surplus and Deficiency
i.
Debtor/seller has no right to surplus or
deficiency (9-608(b), 9-615(e))
b. Bankruptcy
i.
Sold assets are not part of bankruptcy estate.
Ordinary collateral is part of the estate.
ii.
This would defeat the entire purpose of
secuitization which is to make assets
bankruptcy remote.
5.
i.
Octagon Gas Systems, page 410: Octagon
refused to recognize any interest that was held
by Rimmer in the System gas sale proceeds
(they claimed that because Rimmer was not a
party to the Agreement, that they do not have an
enforceable interest) and failed to pay them.
Court found that Rimmer had an account; that
Rimmer should be treated like a SP because
under A9 a sale of accounts is treated as if it
creates a SI in the accounts and accounts sold by
a debtor prior to filing for bankruptcy remain
property of the debtor’s bankruptcy estate. Thus
court was wrong in saying that A9 was
inapplicable to Rimmer’s interest. New A9
repudiates holding
b.
F. Summary: given the difficulty in separating sales and true SIs when would
it have mattered whether we could distinguish the two?
1. Bankruptcy: Octagon Gas; and
2. Surplus and Deficiency:
a. Major’s Furniture Mart, page 407: Issue is to distinguish
whether the accounts transferred to Castle were to secure
Major’s indebtedness, which would mean that Castle was
obligated to account for and pay over the surplus proceeds
to Major, or whether this was a sale of accounts, in which
case Castle is entitled to all of the proceeds received from
the accounts because the agreement did not indicate
otherwise.
b. Crt found that since Castle tried to shift all of the
obligations of ownership to Major and none of the risks in a
sales relationship existed, this was a SI and Castle needs to
fork over the surplus
c. Key Issues for Separating True Sales from Sec Trans
i.
Exposure to risks of ownership: Does “buyer”
have recourse against “seller” or guarantee from
seller
ii.
If so, less like ownership or true sale, more like
secured transaction
iii.
If not, more likely to find true sale
Security Interests and Interests Arising Outside of A9
I.
Liens:
A. State Liens
B. Federal Tax Liens
1. General Rule: 26 USC 6321: If any person liable to pay any tax
neglects or refuses to pay…the amount shall be a lien in favor of
the US upon all property and rights to property, whether real or
personal will belong to the US.
2. When does the lien arise/ attach?
a. IRC 6322: “…the lien imposed…shall arise at the time the
assessment is made and shall continue until the liability for
the amount so assessed is satisfied or becomes
unenforceable by reason of lapse of time”
b. This assessment consists of a “nonpublic administrative
act”; which is problematic since 3rd parties would not be
aware of the lien.
c. This is solved by IRC 6323(a): the lien is not valid against
a purchases, holder of SI…until notice thereof which notice
thereof which meets the requirements of (f) has been filed.
d. Tax lien filing is effective for 6 years from the date of the
assessment of the tax.
3. Where to file:
a. For personal property, filing should be made in the office
that the State law in which the property that is subject to the
lien designates. IRC 6323 If state law does not designate
an office, then file in office of the clerk of the US dist crt
for the judicial district in which the property is subject to
the lien
b. Personal Property whether tangible or intangible is situated
at the residence of the taxpayer; for corp is it’s the principal
executive office where the business is located.
4. Summary of the system:
a. Gov takes lien to satisfy debt
b. Lien arises when the debt is assessed, but is not valid
against a competing SC until a public filing is made
c. SIs that arise prior to tax lien filing have priority, while
those that arise afterwards are subordinated
5. This makes the system pretty severe: the “in existence”
restriction in the definition of a SI coupled with IRC 6323 means
that if there is a change in the debtor’s property, the SP could
lose priority to the IRS lien. Even though IRC 6323(d) allows a
45 day window after notice of lien has been filed, it is not valid
against a SI that came into existence after the tax filing and
before the 46th day after the filing (that is if there is no
knowledge), need to cut-back:
a. Protections for commercial transactions and financing
agreements
iv.
Rice Investment, page 426: Issue of whether or
not the SI or the federal tax lien had priority;
Since the SP had a SI in D’s after-acquired
inventory, the SI in the inventory had not
acquired at the time of the filing of the tax lien
and thus the tax lien prevails
v.
Choateness: “the SP could not prove that the
property was in existence and owned by the D
on the day the lien was filed, which means that
the SP’s SI in the property was not sufficiently
choate on the date of the tax lien filing”
II.
Fixtures
A. Basic limit of A9 is that it defines rights in personal property; an important
class of SIs are not covered: mortgages of real estate. Issue is policing the
boundary bt these two.
B. Article 9 claimant v. real estate claimant:
1. 9-334: First to file in the real estate records wins
C. Definition of fixture:
1. A9 defines fixture as goods that have become so related to
particular real estate that an interest in them arises under real
estate law. 9-102(a)(41)
2. A fixture filing is defined as a filing of a FS covering goods that
are or to become fixtures….”
3. Wyoming State Farm, page 437: Issue: if pipe has become a
fixture on the irrigated real property, then SP’s SI in after-
acquired farm equipment can only take priority if there was a
timely fixture filing. However, if the pipe is a good, and not a
fixture, then SP has the only valid SI in the pipe.
a. Crt applies following criterion for a fixture: 1) real or
constructive annexation to the realty; 2) appropriation or
adaptation to the use or purpose of that part of the realty to
which it is connected; 3) intention of the party to make the
article a permanent accession. Crt states the real issue is
whether the debtor showed a sufficient subjective intent to
make the pipe a fixture and thus decides that it is not a
fixture (it was removable and the D did not treat the pipe as
part of the realty in other financial situations)
The Secured Creditor in Bankruptcy
I. Three important issues re position of SC in bankruptcy
A. The filing alters the opportunities available to the SC
1.
B.
C.
II.
A.
B.
The filing creates an automatic stay of actions against the debtor
and its property. BC 362. Thus, SC is barred from repossessing
collateral under 9-609 or selling it under 9-610.
a. Instead, automatic stay under BC 362(d)
The filing means that transactions that took place before the bankruptcy will
be examined (avoiding powers of trustee: the trustee gets powers that the D
doesn’t’ get)
How to value the collateral
Preferences:
Preferences are transfers that favor one existing creditor over another
A transfer is a voidable preference under BC 547(b) if:
1.
The transfer must be to or for the benefit of a creditor
2.
The transfer must also be for an account of an antecedent
debt owed by the debtor before the transfer is made. As long as the
transfer was made at the same time as the debt was incurred or before
the debt was incurred, there can be no voidable preference
3.
The transfer must also have been made while the debtor
was insolvent. A debtor is insolvent when its debts, at fair valuation,
exceed the fair value of the property. BC 101(32). A debtor is
presumed to be insolvent on and during the 90 days immediately
preceding the date of the filing. BC 547(f)
a.
A transfer of a SI is deemed to have taken place at
the time the interest takes effect as bt the parties (time of
attachment) provided that the interest is perfected within 10
days of the time it takes effect. BC 537(e)(2)(A). Note: a
transfer is not made until the debtor has acquired rights in
the collateral. BC 547 (e)(3)
b.
If perfection takes place at a later time, the transfer
is deemed to take effect at that time, and the transfer is
deemed to take effect just before the filing of the petition, if
the SI is not perfected by the time the petition is filed or
w/in 10 days of the time the transfer takes effect bt the
parties. BC 547(e)(2)(B) and (C)
c.
Perfection, for personal property and fixtures is
when the creditor on a simple K cannot acquire a judicial
lien that is superior. BC 547 (e)(3).
4.
III.
A.
B.
IV.
A.
B.
The transfer must have been made on or within 90 days of
the filing or w/in 1 year of the filing if the petitioner is an insider
5.
Must make the creditor better off than if not transfer had
been made and the creditor had only enjoyed the what rights it had in
the collective proceeding
Floating Collateral
BC 547(e)(3) solves the problem that is raised by floating collateral by postponing
the moment of transfer until the D acquires rights in the collateral; thus, this
essentially becomes an issue of whether or not the transfer is a avoidable
preference because it improved the position of the creditor
Thus, the question in a floating lien is whether any of the exceptions in BC 547(c)
apply:
1. There is no voidable preference unless the new SI improves the position of
the SC; and
2. that improvement of position is to the prejudice of other creditors holding
unsecured claims. BC 547(c)(5)
Valuation
11 USC 506: “An allowed claim of a creditor secured by a lien on property in
which the estate has an interest…is a secured claim to the extent of the value of
such creditor’s interest in the estate’s interest in such property….”
Determining Value:
1. Rash, page 465: The court states that under BC 506(a), the replacement
value standard (cost that the debtor would incur to obtain a like asset for
the same proposed use) rather than the foreclosure value standard should
be used (what the creditor could realize if it sold the estate’s interest in the
property according to the SA)