Secured Transactions
Professor Thomas D. Crandall
PRIORITY (Secured Creditor against others—not debtor)
May 24, 1999 Class
I.
Introduction (p. 1):
A) 20 to 30 pages for each class
B) Contact him and he will meet on an as need basis.
C) Exam will be multiple choice as well as essay questions. Can bring the code
into the exam and write in the code book. Bring the statutes to the class.
D) Article §1, §9 and bankruptcy code. (Selected commercial statutes from
Commercial paper)
E) Treatise by Aspen, Volume 4 is on Secured Transactions.
May 26, 1999 Class
II.
Scope of Article 9 (p. 7): §9-102, §1-201(37), 9-104 and 9-105
A) Rules of construction and application (§ 1-101, et. seq.)
B) General definitions and principles of interpretation (§1-201, et. seq.)
1) General Principles (§§9-102, 1-201(37), 9-104 & 9-105)(p. 7)
A) Applicability and definitions (§ 9-101, et. seq.): The aim of Article 9 is to
provide a simple unified structure within which the immense variety of
present day secured financing transactions can go forward with less cost
and with greater certainty.
B) Subject matter of Article 9 (§ 9-102) Transactions in which the parties
intend to create security interests in personal property or fixtures
including goods, documents, instruments are included within the scope of
Article 9.
(1) §9-102(1)(a): The scope of Article 9 is directed toward a discrete type
of encumbrance on property or fixtures. “Security Interest” is defined in
Article 1 as “an interest in personal property or fixtures which secures
payment or performance of an obligation.”
C) Perfection of security interests in multiple state transactions (§ 9-103)
D) Article 9 (§9-102): governs any transaction (regardless of its form) which is
intended to create a security interest in personal property or fixtures.
E) §1-201(37): defines “security interest” as any interest in personal property
or fixtures which secures payment or performance of an obligation. The
two part test is that: (1) a transaction creates a security interest if the
consideration the lessee is to pay the lessor for the right to possession
and use of goods is an obligation for the term of the lease not subject to
termination by the lessee; and (2) factors in the second part of the tests
are (a) that the original lease equals or exceeds the remaining economic
life of the goods, (b) upon compliance with terms of the lease, the lessee
has the option to become the owner of the goods or to renew the lease for
the remaining economic life of the goods.
(1) The essential elements of secured transactions and leases are
distinguishable:
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(a) Secured party retains a security interest in goods sold essentially
passes conditional title to the buyer/debtor; the buyer can retain the
goods if the payment obligations are satisfied.. In the event of
default the secured party can repossess the goods. The secured
party must disposes of the goods and applies the proceeds to the
outstanding indebtedness. Any surplus proceeds belong to the
buyer/debtor. A retained security interest is limited to a contingent
interest.
(b) Lessors always retain a residual interest in the leased goods. A
lessor can also repossess the goods following a default by the
lessee. Unlike the secured party, the lessor is not required to
dispose of the goods and need not distribute any proceeds from
their disposition to the lessee.
Secured Creditor v. Other Claimant
Secure Creditor v. Debtor
1) Scope of interest
1) Scope of interest
2) Intent
2) Intent
3) Attachment (§9-203)
2) Attachment (§9-203)
(a) Either possession by creditor w/ debtors agreement or
a Written Security agreement which must contain:
(1) Signature by debtor
(2) Description of collateral or real estate
(b) Value given (creditor gives value)
(c) Debtor must have rights in collateral
Problem 2-1 (p. 8)
(a) Article 9 applies per §9-102(1)(a) and looking at the definition of a “security
interest” in §1-102(37).
(1) There was personal property
(2) There was an objective intent to create a security interest.
(b) Article 9 applies per §9-102(1)(a) and looking at the definition of a “security
interest” in §1-102(37).
(1) There are goods
(2) Intent is objective test
(3) §1-201(37) specifically states that security interest is created when the bill
says “Seller retains title until the goods are paid for…”
Jester v. State of Alabama (p. 8) In this case the court looked to the intent of
the father and son to whether there was a security interest. In this case, the
father had to show that he has a bona fide lienholder’s interest, (2) and whether
the lienholder could not have obtained by the exercise of reasonable diligence
knowledge of the intended illegal use of the property so as to have prevented
such use. The father showed this and he could hold the government from taking
the car.
Questions (p. 13) The father has a security interest in personal property (the
car). This prevented the government from having first right on the car. (There
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may have been a federal statute preemption?) The father probably didn’t have
any idea what his Article 9 rights were.
2) Specific Exclusions From Coverage (p. 13)
A) Excluded transactions (see § 9-104)
(a) If in a federal court case and an Article 9 issue comes up, and it is a
state issue the court will decide which state’s version of Article 9
should be used. However if no state issue then court would look at
UCC Article 9 as Federal common law.
(b) Some areas that are preempted by government include: airplanes,
federally registered ships, copyrights, etc. . The Federal government
will get involved in this because of interstate interests.
B) Definitions; “account”; “purchase money security interest” (§§ 9-105, 9106, 9-107)
C) Classification of goods (§ 9-109)
D) Including sufficiency of description (§ 9-110)
E) Including security interests arising under Article 2 (§ 9-113)
F) Priority of consignments (§ 9-114)
Problem 2-2 (p. 14): No interest. The code only applies to interest in personal
property. (§9-102(a)) Limits to personal property. Also since this is real property
(the farm), this would not come under Article 9 (§9-104(j)). Same reason why the
mortgage on the real estate from the bank would not be covered by Article 9.
Problem 2-3 (p. 15):
(a) Yes it could under §9-109(3) farm products are goods if they are used or
produced in farming operations and are in the possession of the
farmer/debtor. This is only in effect if the farm products have not gone through
a manufacturing process (§9-109 Comment 4)
(b) I believe that Article 9 doesn’t apply to landlord liens (§9-104(b)), or to a lien
given by statute for services or materials (§9-104(c)). If the landlord had her
sign an agreement that specifically provides that the tenant agrees to give
the landlord an interest to secure payment then Article 9 could apply under
§9-102(2). Therefore Article 9 does not apply to liens arising from statutes or
common law, but does apple under contract.
(c) §9-104(i): The right of set-off is explicitly excluded. Proceeds involve a further
scope issue.
(d) §9-105(e) defines a deposit account and under §9-104(l) excludes deposit
accounts.
(e) I§9-104(g) excludes “a transfer of an interest or claim in or under any policy of
insurance.
(f) §9-104(k) does not allow a transfer in whole or in part of any claim arising out
of tort.
In re: Berry (p. 15) This case involves a trustee in bankruptcy v. a creditor. The
trustee in bankruptcy represents the unsecured creditors and he can knock out a
secured creditor if the secured creditor’s interest was perfected before the
bankruptcy. The trustee said this was a wage assignment by an employee (§9104(d)) the court did not agree because the bankrupt party was an independent
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contractor, not an employee. The commissions are a form a personal property
interests, and therefore they could fall under Article 9. Therefore it was not
excluded under §9-104(d).
Note on Scope of Revisions (p. 22)
June 2, 1999 Class
III.
Attachment and Classification of Collateral (p. 23)
A) Introduction (p. 23) ((§9-203, 9-204 both define attachment), 9-201, 9-104,
9-105, 9-106, 9-109, and 9-110):
1) §9-203: security interest can be created only if the parties enter into a
security agreement (§9-203(1)(a). If the collateral is in possession of
secured party then an oral agreement is sufficient. If the secured party
does not take possession of the collateral (a non-possessory security
interest), the security agreement of the parties must be embodied in a
writing signed by the debtor (§9-203(1)(a) that contains a description of
the collateral. In some instances it must also describe any land that may
be affected. It must be signed by the debtor and the creditor must have
given value, and the debtor must have some rights in the property.
Secured Creditor v. Other Claimant
Secure Creditor v. Debtor
1) Scope of interest
1) Scope of interest
2) Intent
2) Intent
3) Attachment (§9-203)
3) Attachment (§9-203)
(a) Classification of collateral
(1) after acquired collateral
(2)
(b) Either possession by creditor w/ debtors agreement or
a Written Security agreement which must contain:
(1) Signature by debtor
(2) Description of collateral or real estate
(c) Value given (creditor gives value)
(d) Debtor must have rights in collateral
B) The Security Agreement (p. 23): (§9-105) Regardless of the manner in
which a transaction is structured “an agreement which creates or provides for
a security interest” is called a security agreement. (§9-105(1)(h))
1) Formality and Form (p. 24)
a) Necessity of a Writing: Whether a written security agreement is
required depends on whether the secured party has possession of the
collateral.
(1) If the secured party has possession of the collateral to which the
security agreement attaches, a written security agreement is not
required. A security agreement is still necessary for attachment but
it may be oral since the collateral is pledged (§9-203(1)(a).
(2) If the secured party is not in possession of the collateral, the
security interest will be valid only if there is a written security
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agreement signed by the debtor and containing a description of the
collateral (§9-203(1)(a))
b) Financial Statements, by themselves are not enough to satisfy the
requirement of a signed security agreement. The reason is that (1) the
security agreement is on that creates a security interest (§9-105(1)) by
language granting the creditor an interest in the collateral – and a
financial statement usually does not purport to create a security
interest. It merely serves as notice to 3rd parties that a security interest
is claimed. (2) Financial statements also are not sufficient because
they are filed before the financing arrangements are complete.
In re: Hance (p. 24) The key to a security agreement is intent. In this case the
debtor claimed that Sears was an unsecured creditor. The Court found that “in
order to create a security agreement there must be (1) a writing, (2) signed by
the Debtor, (3) containing a description of the collateral or the type of collateral.
The court found that the sales-check or invoice by itself created this kind of
security agreement in the merchandise listed on it and is evidence of intent to
create a security interest.
Questions (p. 26):
Hoffman v. Schlegel (p. 27): What qualifies as a security agreement? The
debtor signed two documents, one was an UCC-1 financial statement filed with
the state and the other was an agreement between the parties. The Financial
statement identified the corporation as the debtor, the D as the secured party,
and all fixtures and equipment owned by the Debtor as collateral. The states §9105(1)(l) defines security agreement as an agreement which creates or provides
for a security interest. §9-203(1) requires for it to be enforceable if the collateral
is not in the possession of the secured party (the case here) for it to be in writing
signed by the debtor and containing a description of the collateral. P argued that
the Financial statement and agreement alone do not constitute a security
agreement because the language in both was not explicitly granting a security
interest in the Debtors fixtures and equipment. D said it was the intent of the
parties by the Agreement that she would acquire a security interest in the
debtor’s equipment. You cannot have a security interest unless there is a
document that the debtor intent grants a security interest in the collateral. You
don’t have to have just one document if there are more than one document that
shows the intent (composite document rule). The court found that intent was
enough, and that they looked to the transaction as a whole in order to determine
a security interest.
Gibson Co. Farm Bureau Cooperative Ass’n v. Greer (p. 29): As long as
debtor has signed a writing (financial statement) which contains description of
collateral and, if collateral consists of crops or timber, of land concerned, it is
question of fact for trier of fact whether parties intended the writing to create a
security agreement (§9-203(1)). Although financial statements alone will not, as a
matter of law, qualify as security agreement, and although use of bare-bones
financial statement as security agreement is not encouraged, as long as
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financing statement contains description of collateral and is signed by debtor, it is
question of fact for jury whether parties intended to create security interest (§9203(1)). The finding of the trial court was upheld and the appellate court
overturned. This S.C. of Indiana found that the financing statement alone will not
suffice, but the intent in the whole deal (other documents (e.g. promissory note,
loan contract, probably showed this).
Question and Note (p. 36):
2) Signature Requirement (p. 36) The debtor must sign the security agreement.
(§9-203(1)). This may be done by any means satisfying the requirements of §1201(39). Any symbol used by a party to authenticate a writing is sufficient – e.g.
a typed signature if affixed with the requisite intent to authenticate the writing. It
is not necessary that the secured party sign the security agreement.
Problem 3-1 (p. 36): In order to make it a valid security agreement the court
would have to find that If the secured party is not in possession of the
collateral, the security interest will be valid only if there is a written security
agreement signed by the debtor and containing a description of the collateral (§9203(1)(a)). In order to validate the security agreement that “in order to create a
security agreement there must be (1) a writing, (2) signed by the Debtor, (3)
containing a description of the collateral or the type of collateral.
Secured Creditor v. Other Claimant
Secure Creditor v. Debtor
1) Scope of interest
1) Scope of interest
2) Intent
2) Intent
3) Attachment (§9-203)
3) Attachment (§9-203)
(a) Either possession by creditor w/ debtors agreement or
a Written Security agreement which must contain:
(1) Signature by debtor
(2) Description of collateral or real estate
(b) Value given (creditor gives value)
(c) Debtor must have rights in collateral
4) Types of collateral
a) 4 Goods (§9-109)
(1) Consumer Goods
(2) Equipment
(3) Farm Products
(4) Inventory
b) 5 Intangibles
(1) Chattel paper: (you either have 2 secured creditors or 1 creditor and 1
lessor/ or2 debtors or 1 debtor and 1 lessee). There has to be a writing
that evidences a monetary obligation and a security interest in specific
goods.
(2)
3) Description of Collateral (p. 37): §9-402(l): A financial statement must
contain “ a statement indicating the types, or describing the items of collateral.
The test for determining the sufficiency of a property description required under
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Article 9 is in §9-110: “Any description of personal property or real estate is
sufficient whether or not is specific if it reasonably identifies what is described.”
(a) Classification of Collateral (p. 37) §9-109 Classification of Consumer
Goods, Equipment, Farm Products, Inventory. Where uses are mixed,
it is classified as it’s primary use.
Problem 3-2 (p. 38):
(a) Inventory §9-109(4)
(b) Inventory §9-109(4)
(c) Consumer Goods §9-109(1)
(d) Equipment (look to debtor) §9-109(2)
(e) Inventory §9-109(4)
(f) Farm Products §9-109(3)
(g) Inventory §9-109(4)
(h) Inventory §9-109(4)
(i) Equipment §9-109(2)
(j) Farm Products §9-109(3)
(k) Equipment §9-109(2)
(l) Inventory §9-109(4)
(m)Equipment §9-109(2) Not to 3rd parties, there is an estoppel theory that would
kick in. As between an innocent 3rd party.
(n) Equipment §9-109(2)
(o) Inventory §9-109(4)
Problem 3-3 (p. 38): Azar would have collateral in chattel paper. Retail
installment contract contained a writing that evidences a monetary obligation and
a security interest in specific goods. The first debtor in this case was CD who
agrees to purchase and gives a security interest in the front end loader to Azar in
the retail installment contract. This is a property interest in the hands of Azar. The
value (property right) to Azar is the payment and interest because of CD’s
agreement.
This is a contract right. This (the property right in the retail installment) can be
assigned or kept by Azar. Azar could sell or assign the property right to someone
else, or give a security interest in this piece of paper (retail installment
agreement). The outright sale will create an Article 9 right under §9-102(1)(b).
The sale of a chattel paper creates an Article 9 security interest. Azar’s bank
would have a security interest in the retail installment. It is only chattel paper
when a 3rd party takes interest in the monetary obligation and the interest in
specific collateral. ONLY BECOMES RELEVANT WHEN A DEBTOR BECOMES
OBLIGED TO A CREDITOR AND A CREDITOR SELLS IT OR USES IT AS
COLLATERAL TO ANOTHER CREDITOR.
Problem 3-4 (p. 39): Bank takes a security interest in an account. An account
debtor means a person who is obligated on an account, chattel paper or general
intangible. CD construction has a contract to serve (construct) and the city of
Newport has a contract to pay. The contractor could sell the promise to pay by
Newport, assign it or grant a security interest and get a loan. 9-203(1)(b) says the
sale of an account creates a security interest. §9-106 says it is an account
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because it is any right to payment for goods sold or for services rendered
whether or not it has been earned by performance. The 3rd party has no greater
right than the party they received the account from.
THE ABOVE ARE TWO TYPES OF COLLATERAL THAT ARE USED QUITE
HEAVILY BY CONSTRUCTION COMPANIES, RETAILERS, MANUFACTURERS.
June 7, 1999 Class
Chattel Paper (§9-105(1)(b): This is a security agreement and a right in specific goods
Intangible Personal Property – No Writing
(1) Account (§9-106): Is a security agreement in intangibles. Any right to payment for
goods sold evidenced by an instrument or chattel paper whether or not it has been
earned by performance.
(2) General Intangibles (§9-106): Personal property, that is not goods, accounts, chattel
paper, document and instruments. (a negative category, if not in the others, it is in
this).
(a) Liquor license, trademarks, copyrights, patents, royalties, right to money from
real estate sold, etc.
Problem 3-5 (p. 39): General Intangibles
Problem 3-6 (p. 39): (Bill of lading tells who has the rights to the goods that are
being held by a carrier)Chattel Paper under §9-105(1)(f)
Problem 3-7 (p. 40): (Promissory note (payable to order/on demand of a specific
sum evidences right of payment and is not itself a security interest) Chattel Paper
under §9-105(1)(f):
Sloppy Descriptions (p. 40):
§9-203: says must have description of the collateral
§9-110: says only need to have enough description to reasonably identify:
(1) “All debtor’s property”; “All consumer goods”; “All personal property”;
“All debtor’s assets.” = too broad
Address of place must be sufficient to describe or creditor out of luck.
Problem 3-8 (p. 40): No. This does not reasonably identify the collateral (§9110).
Change in Usage (p. 41):
See page 4 of outline (CL estoppel) also see §1-103 which says where the code
doesn’t say you can use CL
Problem 3-9 (p. 41): The estoppel theory makes a lot of sense.
Problem 3-10 (p. 42): Both descriptions (if true) are adequate under the UCC.
The test for determining the sufficiency of a property description required under
Article 9 is in §9-110: “Any description of personal property or real estate is
sufficient whether or not is specific if it reasonably identifies what is described.”
C) Debtor Must Have “Rights in the Collateral” (p. 42): Before a security
interest can attach, the debtor must have “rights in the collateral.” This makes
sense since a debtor can hardly grant a security interest in property in which
the debtor has no interest. §9-203(1)(c)). Right of collateral is not defined by
the code, but it seems to mean that the debtor must have some ownership
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interest or right to obtain possession. The term rights is defined to include
remedies §1-201(36).
Trust Co. Bank v. Gloucester Corp. (p. 42): Scallop’s were sold by Sigma to
Gloucester. The invoice was assigned to the Bank. The sale was conditional on
the terms of net 30 days after FDA approval. Sigma went belly up. Bank filed to
recover interest against the secured creditors of Sigma for conversion. The buyer
(Gloucester) had rights in the scallops when they were “identified” there were
sufficient rights in the credit buyer in those scallops. §2-501(1): When an item is
identified to the K, then there are rights in the collateral.
After Acquired Collateral §9-204(1): (p. 44): If intend to have security interest in
after acquired collateral (any collateral that the debtor gets after attachment, then
must state this in the security agreement.
(1) Financial Statement: does not need description of the after acquired
collateral in the financing statement. Exceptions:
(a) Minority view: don’t need description of after acquired collateral for some
types of collateral (rationale: SI in this type of collateral is presumed to
include after acquired collateral because it is assumed that the debtor will
regularly be acquiring new collateral w/I this description):
 Account
 Inventory
 (a few courts) Farm products
(2) Security Agreement: can attach by saying: “all (equipment) now owned and
hereafter acquired by debtor” NOTE: never need a description of an afteracquired collateral in the financing statement (§9-204)
(3) Proceeds: §9-306(1):
(a) = whatever is received by the debtor when the debtor disposes of the
collateral. 2 types:
 Cash proceeds: §9-306(1) = money, checks, deposit accounts and the
like (money from leasing of collateral)
 Non-cash proceeds: i.e. trade truck for boat.
(b) Rule – SI attaches in proceeds upon disposition of the collateral (if
collateral identifiable).
 Has to be shown that the proceeds are traceable back to the original
collateral (identified). Identification can sometimes be a problem (i.e.
cash proceeds in an account w/ other funds).
D) Creditor Must Give “Value” (p. 46): The security interest cannot attach until
the creditor has given value (§9-203(1)(b). This is usually an advance of
money or a delivery of goods, but may be anything satisfying the definition of
value in §1-201(44). Under this section, a person gives value for rights in
collateral by acquiring them:
1) In return for any consideration sufficient to support a simple contract;
2) As security for a preexisting claim or in partial or total satisfaction thereof;
3) By accepting delivery under a preexisting contract for purchase; or
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4) In return for a binding commitment to extend credit – whether or not the
credit is ever drawn upon.
Page 5 of outline ends at Future Advance (p. 48 of book)
June 9, 1999 Class (pp. 50-72)
IV.
Perfection (p. 50): A creditor or seller retaining a security interest in some of the
debtor’s personal property may later learn that other parties claim a competing
interest in the same property. The step that a secured party can take to enhance
their position with respect to other potential competing claimants is called
perfection.
A) Introduction (p. 50): The methods for attaining perfection are in §9-302
thorough §9-306. In most cases the secured party may obtain perfection
either by filing (i.e. with Secretary of State) or by taking possession of the
collateral. When the collateral is held by a bailee who has not issued a
negotiable document of title, perfection by notification is possible; e.g. the
secured party may obtain perfection by notifying the bailee of the secure
party’s interest. For a few special situations the Code provides that a security
interest is perfected w/o any of the above actions on the part of the secured
party. Such perfection is called automatic perfection, or perfection by
attachment.
B) Perfection by Filing Under Article 9 (p. 51):
§9-303: Perfection = attachment + applicable perfection steps: “A security
interest is perfected when it has attached and when all of the applicable steps
required for perfection have been take.”
Perfection=
(1) Attachment (§9-203) (SaVeD)
(a) Signed writing w/ description of collateral (unless collateral in
possession of the creditor).
(b) Value given. (§1-201(44))
(c) Debtor has rights in the collateral
(2) + Applicable steps for perfection. 3 types of steps (FAP):
(a) Filing of financing statement (most common)
(b) Automatic (rare, because it gives no notice) (one case this is
allowed under §9-302(1)(d) purchase money security interest in
consumer goods)
(c) Possession of creditor
Applicable steps for perfection described in:
(1) §9-115: Investment Property
(2) §9-302: When filing is required to perfect security interest; security
interests to which filing provisions of Article 9 do not apply.
(3) §9-305: When possession by secured party perfects security interest
w/o filing.
(4) §9-306: Proceeds; secured party’s rights on disposition of collateral.
§9-304(1): provides that no security interest in money or instruments may be
perfected by filing.
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§9-302: (assuming 9-203 attachment) a financing statement (commonly
called a UCC-1) must be filed to perfect all security interests except the
following:
(1) a security interest in collateral in possession of the secured party
under §9-305.
(2) A security interest in consumer goods, but filing is required for motor
vehicle required to be registered; and fixture filing is required for
priority over conflicting interests in fixtures to the extent provided in §9313.
(a) Only have to file UCC-1 for motor vehicles which are not yet titled.
§9-302: Relevance of perfection to Disputes (steps needed to make security
interest binding:
Creditor/Debtor
Priority
Scope
Scope
Attachment
Attachment
Perfection
1) When to File (p. 51):
2) What to File (p. 51):
§9-402: A financing statement is sufficient if it gives the names of the debtor
and the secured party, is signed by the debtor, gives an address of the
secured party from which information concerning the security interest may be
obtained, gives a mailing address of the debtor and contains a statement
indicating the types, or describing the items, of collateral. A financing
statement may be filed before a security agreement is made or a security
interest otherwise attaches. When the financing statement covers crops
growing or to be grown, the statement must also contain a description of the
real estate concerned…”
§9-402(7): What debtor name needs to be in the financing statement? A
financing statement sufficiently shows the name of the debtor if it gives the
individual, partnership or corporate name of the debtor, whether or not it adds
other trade names or names of partners…
(1) If debtor is:
(a) individual, then need individual’s name
(b) partnership, then need partnership name
(c) corporation, then need corporation name
§9-402(2): Both debtor and creditor need to sign the UCC-1 unless:
(1) debtor moves to another state
(2) after name change of debtor, for new financing statement for afteracquired collateral.
(3) Proceeds under §9-306 if the security interest in the original collateral was
perfected. This financing statement must describe the original collateral.
§9-402(8): Financing Statement Saving Clause (like 9-110 is for the security
agreement).
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(1) A financing statement substantially complying with the requirements of this
section is effective even though it contains minor errors which are not
seriously misleading.
(a) Address, Name on UCC-1 – Minor errors which are not seriously
misleading not fatal
(i) Definition of minor errors
1) mistake in address – if debtor well known, not as serious
2) TEST: the more the court feels that someone could find the
debtors name, the more it will let the error slide
3) NOTE: no address at all is fatal.
4) Rationale: the financing statement is there to allow other
potential creditors know that there is a Security Interest in the
collateral. The potential creditor must at lest be able to find a
UCC-1 on file regarding the potential debtor.
(b) Description of Collateral in the financing statement
(a) RULE: description of the collateral on the financing statement does
not need to be as specific as the description on the security
agreement (See American Restaurant below)
Problem 4-1: (p. 51)
Notes: (p. 51) Revised Article 9’s Treatment of Debtor’s Signature:
Problem 4-2: (p. 52):
Problem 4-3: (p. 52):
Notes: (p. 52) Revised Article 9 and Address Requirement:
Problem 4-4: (p. 52):
Notes: (p. 52): Revised Article 9’s Treatment of Name Requirement:
American Restaurant Supply Co. v. Wilson: (p. 52):
Thorp Commercial Corp. v. Northgate Industries, Inc.: (p. 54): In this case Franklin
National Bank made several loans to Northgate pursuant to a security agreement
between them. There was a future advance clause in the security agreement which
served as a basis to establish that Franklin National Bank was a secured party in the
same collateral with respect to future loans. Because the bank had already filed a
financing statement with the Minnesota Secretary of State with respect to the collateral
and it preceded the filing by Thorp Commercial Corp., Franklin National Bank prevailed
even with respect to future advances (§9-312(7)).
Description on the UCC-1 can be very broad, only has to contain a description of the
type of collateral (here “assignment accounts receivable”) Only warns subsequent
creditors, not identify the collateral exactly. Only has to identify the type of collateral §9110.
Note: attempt to limit collateral in the UCC-1 may fail. (Holding that the description of
the collateral of “assignment accounts receivable” did not limit the collateral to exclude
after acquired collateral.
Questions: (p. 61):
Notes on Revised Article 9: (p. 61):
3) Where to File (p. 62):
§9-401: Where is the proper office(s) to file a Financial Statement?
12
(1) 3rd alternative subsection (most common one used) –
(a) Identify type of collateral, then use (a), (b), or (c) category:
(i) For “all other” types of collateral, category (c).
1) If place of business in only one county = dual (Sec. Of State and
local county)
2) If places of business in more than one county, In Sec. Of State
office (no local filing if more than one place of business)
Problem 4-5: (p. 62):
Problem 4-6: (p. 63):
4) Mechanics and Duration of Filing (p. 63):
(1) filings by clerk §9-405, §9-406, §9-407, §9-403, §9-404
(a) Rule: if creditor does everything correctly and filing officer messes
up, creditor not liable (used to sue filing officer, but now there are
immunity statutes). Subsequent creditors bear risk (Like a race
statute).
(2) Filing lapse – What causes a filing lapse?
(a) §9-403: expiration of 5 year period
(b) §9-404: filing of a termination statement by the secured party.
(c) Removal of the collateral from the state.
(3) If debtor changes location w/I the state, no new filing required w/
regard to original collateral. If debtor changes name, no new filing
required to continue perfection of the security interest of the original
collateral. BUT:
(a) After Acquired Collateral: (received by the debtor after attachment)
– New filing of financial statement necessary to prevent lapse of
perfection in cases where the security interest covers after-acquired
collateral.
(b) §9-407(7): Where the debtor so changes his name or in the case of
an organization its name, identity or corporation structure that a
filed financing statement becomes seriously misleading, the filing is
not effective to perfect a security interest in collateral acquired by
the debtor more than 4 months after the change, unless a new
appropriate financing statement is filed before the expiration of the
time.
(c) §9-402(7): A finalized financing statement remains effective with
respect to collateral transferred by the debtor even though the
secured party knows of or consents to the transfer.
(d) Problem: Often have transfer and name change at same time when
a new corporation is formed (see Taylorville)
Problem 4-7: (p. 65):
In Re: Taylorville Eisner Agency, Inc. (p. 65): Use (b) or (c) above in this case?
Majority rule: apply (c), and thus no new financing statement needed to keep perfection.
NOTE: Prof. Disagrees w/ the rule, in that if the secured party knows of the name
change, §1-103 should be allowed to estopp the creditor from asserting that it did not
13
need to file a new financing statement in a priority dispute (because other creditor did
not get notice to its detriment when it relied on the lack of action, w/ knowledge of the
secured party).
Minority Rule: should require new financing statements in these dual cases where the
secured party is aware of the change in name.
Question and Note: (p. 70):
How long does financing statement last before it lapses?
(a) §9-403(2): 5 years
(b) §9-403(3): Continuation statement: if filed w/I 6 months prior to expiration of the 5 yr.
Period, secure party can file a continuation which will renew the financing statement
another 5 years.
(c) §9-404(1): Termination statement:
Problem 4-8: (p. 70):
C) Perfection by Possession (p. 71):
(i) not possible for accounts or general intangibles
(ii) the secured party can only perfect by taking possession w/ the consent of
the debtor.
(iii) possessory security interest are rare.
D) Automatic Perfection (p. 71):
§9-302(1)(d): a PMSI in consumer goods is automatically perfected
§9-302(1)(e): an assignment of accounts which does not alone or in
conjunction with other assignments to the same assignee transfer a
significant part of the outstanding accounts of the assignor.
E) Defining Purchase Money Security Interests (p. 71):
(i) Critical to determine if SI is a PMSI in priority disputes (automatic
perfection if PMSI in consumer goods).
(ii) §9-107: PMSI – two types:
(1) Seller – If a SI taken or retained by the seller of the collateral to secure
all or part of its price; or
(2) Creditor – If SI taken by a person who by making advances or incurring
an obligation gives value to enable the debtor to acquire rights in or the
use of collateral if such value is in fact so used.
(a) NOTE: If creditor lends money to pay for something already
purchased and takes a SI, this is not a PMSI.
(b) NOTE: IF creditor lends money to help debtor purchase, and
another creditor does the same, they both have a PMSI.
(c) NOTE: Money lent to buy something which is already in the
possession of the debtor is still PMSI if the item not purchased until
the creditor gives value.
Example 1: May has possession of a dozer on 10/22/98 on
approval, but had not agreed to buy the dozer until 12/1/98, at
which time she obtained the secured loan from the Bank = PMSI
Minority Rule: pre-possession + agreement to buy = purchase, so
would be no PMSI in above example.
(iii) Assignment of PMSI:
14
(1) Any time a purchase money security interest is assigned, it retains
PMSI status (assignee retains what the assignor has).
Problem 4-9: (p. 71):
June 14, 1999 Class
Review:
I.
Secured Creditor v. Other Claimants
A) Status of secured creditor
B) Status of other
Claimant
1) Attachment
(same questions if
a) §9-203
also secured creditor)
b) Classification of collateral
(1) after acquired collateral
C) If other than secured cred.
(2) Future Advances
(must ask other quest.)
(3) PMSI
(4) Proceeds of Collateral
D) Resolve priority dispute
2) Perfection §9-303
a) Filing
b) Poss.
c) Auto.
V.
Introduction to Priorities (p. 73):
Problem 5-1: (p. 73) The dentist (as a creditor who failed to take all the steps
required by law to create or protect his interest in the office equipment) might still
prevail under the theory that the creditor has an “equitable” lien (i.e. one that
would be recognized by courts of equity). However, under §9-203, Comment 5,
equitable liens are not recognized. §9-201 explains the dentists position.
Problem 5-2: (p. 74) In this case, Molly would be a unsecured “general” creditor
who acquired a lien on Sally’s property by judicial process and she is now a
judicial lien creditor. The variable to look at here is when did the lien creditor’s
interest arise? It typically arises at the time the sheriff levied (the sheriff seized
the property). In some states the levy could be construed as being when the
court clerk issued the writ of execution. since Mike is an unperfected secured
creditor he won’t have a protected security interest against Molly per §9301(1)(b). §9-312(5)(a): [for two secured, perfected creditors] first to file or
perfect win
Problem 5-3: (p. 74) For the trustee in bankruptcy, a judicial lien was
automatically created on all the Sally’s nonexempt property at the moment the
bankruptcy petition was filed. §9-301(1)(b) (Same as above) 1) Was trustee a
lien creditor? (§9-301(3)and §544(a) of the Bankruptcy Code tells status of
trustee; 2) §9-301(1)(b).
Problem 5-4: (p. 74) The general rule would be that the priority would go to
whichever secured party is the first either to file or perfect the security interest
(whichever is earlier), provided there is no period thereafter when there is neither
filing nor perfection. §9-312(5). This would give the party who files first top priority
– even though a Mike, as the first creditor, perfected later by taking possession
15
after Frank’s filing. Conversely the interest perfected by Mike, by possession
rather than filing is entitled to priority over a filed interest only if the non-filing
creditor in fact perfected before the other creditor’s filing.
Problem 5-5: (p. 74) The interest perfected by Frank, by possession rather than
filing is entitled to priority over a filed interest only if the non-filing creditor in fact
perfected before the other creditor’s filing.
Problem 5-6: (p. 74) In this case John advanced money to Marvin so that Marvin
could acquire an interest in a crane. John would have a “purchase money
security interest” (§9-107) and would stand in a different position than First
Finance. The Code states that a purchase money security interest (in collateral
other than inventory) takes priority over conflicting security interests in the same
collateral if the interest (as it was done in this case) was perfected when Marvin
took possession of the crane or within 10 days (20 days in some states)
thereafter. §9-312(4).
Perfection=
(1) Attachment (§9-203) (SaVeD)
(a) Signed writing w/ description of collateral (unless collateral in
possession of the creditor).
(b) Value given. (§1-201(44))
(c) Debtor has rights in the collateral
(2) + Applicable steps for perfection. 3 types of steps (FAP):
(a) Filing of financing statement (most common)
(b) Automatic (rare, because it gives no notice)
(c) Possession of creditor
VI.
Equipment Financing (p. 76):
A) Introduction (p. 76)
B) Basic Priority Rules: (p. 77): First in time; first in right – general section =
(a) §9-312(5)(a): [for two secured, perfected creditors] first to file or perfect
wins.
(b) §9-312(5)(b): if two unperfected creditors, first to attach wins.
(1) Winner takes all = one who has priority will get enough pay what the creditor
owed him + expenses, and what’s left goes to the next creditor in line of
priority.
(2) §9-401(2): If good faith mistake in filing financing statement
(a) if more than one type of collateral, the filing is sufficient to satisfy any of
the types as to which the filing did comply.
(b) The filing is effective against any person who had knowledge of the
contents of the filing statement
16
Knowledge = (definition in §1-201 – Notice = subjective, reason to
know) Knowledge = subjective, really knew.
1) must have “knowledge of the contents of the financing
statement” = have to know more than just that there is a SI,
need to know “contents” FS as stated in §9-402(1), which is 1)
description of the collateral; 2) names and addresses of the
parties.
2) Knowledge of the contents of the security agreement is not
knowledge of the financing statement, BUT
a) if prospective party knew debtor by name, and say SA w/
description of collateral, could be enough (may not need to
know the addresses) §9-401(2).
b) Good faith = subjective test throughout Article 9.
Problem 6-1: (p. 77)
(a) The general rule would be that the priority would go to whichever secured
party is the first either to file or perfect the security interest (whichever is
earlier), provided there is no period thereafter when there is neither filing
nor perfection. §9-312(5). This would give the party who files first top
priority – even though a Friendly Finance, as a later creditor, perfected
first by filing on 8/1 and Bob’s Bank did not file properly until 9/15.
Therefore Bob’s interest is perfected. (Friendly = $1MM / Bob = $500K)
(b) §9-401(2) A filing made in good faith, but not in every place required is
effective as to any collateral for which the filing did comply with the
requirements of the Code. If is also effective against any person who has
knowledge of the contents of the improperly filed statement. In this case
Bob’s Bank has a perfected security interest, and Friendly Finance had
knowledge of the incomplete filing. Therefore Bob would have an interest
of $1MM in SDI’s equipment. If Friendly Finance had no knowledge of
Bob’s filing, then they would have the larger security interest.
(c) §9-312(5)(b): So long as conflicting security interests are unperfected, the
first to attach has priority. Friendly had a signed agreement, gave value,
and debtor had rights in property on 8/1/ where Bob’s has a signed
agreement, gave value and debtor had rights n the property on 7/1.
Therefore Bob would win the priority battle
C) Future Advance Issues (p. 78): FA = advances of value by the creditor that
occur subsequent to the creditor’s initial advance of value – that is, the initial
advance of value necessary for initial attachment of the security interest.
(1) §9-204: must have a FA clause in the SA, or if want to get FA later the debtor
must execute another SA to show intent to give up interest in the collateral.
(a) RULE: w/o FA clause, the SA only provides an interest in the original
collateral.
(b) After acquired collateral clause – indicates the intent to extend the SI to
collateral acquired by the debtor after the date of the original attachment.
(2) As between two secured creditors, who will have priority as to future
advances?
i.
17
(a) §9-312(7): As between two secured creditors, whoever has filed or
perfected first has priority IF:
i.
there was a FA clause in the SA, or
ii.
the debtor issued a new SA at the time of the FA
1) w/ no FA clause in the original SA, the alter agreement would be
necessary to document the debtor’s intent to extend the SI in
the collateral beyond the initial extension of value by the
creditor.
iii.
If there was a FA clause in the original SA, some courts hold that
the SA is only effective if the FA covers the same class of collateral
(i.e. consumer goods, then FA on equipment would not be
acceptable.
(3) Secured Creditor v. Lien Creditor: §9-30(4):
(a) w/ knowledge of the lien creditor, the secured creditor has 45 days to
make advances – as long as there is a FA clause or a new SA.
(b) After that, no protection as to the future advances if he has knowledge of
the secured creditor (see §9-301(4)).
Allis Chalmers Credit Corp. v. Cheney Investment, Inc. (p. 78) There was a
financing purchase at Och’s who sold a tractor to a farmer (Katlin). Katlin entered into
the agreement, there was a security agreement and the contract was assigned to Allis
Chalmers. They filed a Financial Statement and carried the paper. A month later, Katlin
enters into another transaction to borrow money from Chenney Investments who to a SI
into the tractor. Katlin then purchased a new piece of equipment, which AC combined
both financing agreements together. Katlin defaulted. AC must prove that they had the
same status in the future advance as they had in the initial advance. Cheney is trying to
show that AC only has priority in the amounts of the initial advance.
Question: Does a SC have to have a FA clause in a SA to establish they
Rule: As between two secured creditors, who will have priority as to future advances?
§9-312(7): As between two secured creditors, whoever has filed or perfected first
has priority IF:
(1) there was a FA clause in the SA, or
(2) the debtor issued a new SA at the time of the FA
(3) w/ no FA clause in the original SA, the alter agreement would be necessary to
document the debtor’s intent to extend the SI in the collateral beyond the
initial extension of value by the creditor.
(4) If there was a FA clause in the original SA, some courts hold that the SA is
only effective if the FA covers the same class of collateral (i.e. consumer
goods, then FA on equipment would not be acceptable.
Finding: The priority was with AC up to the amount still owed on the initial agreement.
A financing statement that was valid and ongoing can be used to set the date as to set
the date as to the perfected secured creditors priority against another perfected secured
creditors claim. In this case, AC used the original security agreement to show this.
Note: (p. 87)
Problem 6-2: (p. 88): In this case, since the initial security agreement showed the
contemplation of the debtor to pay the debt to AC. AC was the first to file and would be
18
seen as the first to perfect based on the filing of the initial agreement. Therefore under
§9-301(b) the lien creditor would not take priority over the perfected secured interest of
AC. There is a cutoff time on lien creditors under §9-301(4) but this would not be
relevant if both creditors were secured creditors.
June 16, 1999 Class
ASPEN SERIES ON SECURED TRANSACTIONS BY CRANDALL
D) Superiority Rights of Certain Purchase Money Security Interests (p. 88):
i.
Two types of PMSI described at §9-107
ii.
§9-312(4) PMSI in collateral other than inventory –
(1) has priority in the collateral (or its proceeds) over a conflicting security interest
where the other party filed first in cases where:
(a) The PMSI is perfected at the time the debtor receives possession of the
collateral, or w/i 10 days thereafter
(b) When does 10 day period start?
(i)
No problem usually, debtor buys at same time gets possession.
BUT – 2 views for “sale on approval”-(defined in code):
1) ½ of courts say in sale on approval agreement the 10 days do
not start until buyer gives approval and agrees to buy.
2) ½ of the courts say in sale on approval agreement the 10 days
starts as soon as the buyer gets possession.
3) See In re Prior Brothers.
(c) PMSI can be assigned – assignee gets exactly what the assignor has
(d) PMSI as to future advances? – NO!!! Value is not given there to purchase
anything §9-107 says you are a PMSI to the extent that you meet the
definition.
(e) What if money given to buy something, there is a PMSI intended, and then
this money is put in bank and other funds go to buy the item?
(i)
This is factual question – money going in the bank is always being
shifted around. Probably will not say the money did not “in fact” go
to allow the debtor to get value in the collateral, unless significant
time lapse.
1) Ultimate protection for secured creditor, to see that the value
given goes to “in fact” allow the debtor to get the collateral, then
creditor can make check out directly for the collateral, or debtor
bring bill over and have it paid directly.
(2) Proceeds – does the secured creditor w/ super-priority have that priority
extended to proceeds?
(a) §9-314(4): - PMSI in collateral other than inventory = yes
(b) §9-314(3): - PMSI in inventory – only extends to cash proceeds.
In Re: Prior Brothers, Inc. (p. 89)
Note (p. 95)
Problem 6-3: (p. 95)
Problem 6-4: (p. 96)
VII. Inventory (p. 98)
19
A) General Principles (p. 98)
1) Different from other types because the inventory has to be sold, involves a
shifting pool of collateral.
2) Floating Lien = a SI in a type of generically described type of collateral,
which attaches to whatever property of that type the debtor happens to
have at any given time. (Accounts and chattel paper use this type also.)
B) Basic Priority Rules (p. 100)
3) Basic Priority Rules:
(1) §9-312(1)(a) for the non PMSI SI’s in inventory
(2) §9-312(3) for PMSI’s in inventory (most SI’s in inventory are PMSI’s).
Rules for inventory PMSI to have priority over another secured
creditor:
(a) the PMSI must be perfected at the time the debtor receives
possession of the inventory.
(b) Notification in writing must be given to the holder of the other SI IF
that person has filed a financing statement.
(c) The holder of the conflicting security interest must receive the
notification before the debtor receives possession of the inventory
(if his does occur, the notification will be good for 5 years); and
(d) The notifier must state that he has or expects to acquire a PMSI in
the inventory of the debtor, and describe the inventory by item or
type (must be a specific description, not enough to just say “I am
going to get a PMSI in the debtors collateral)
(i) What is “notification?” --§1-201(26) (Defines notification and
receive)
1) §1-201(26) –notification—a person “notifies or “gives” a
notice or notification to another by taking such steps as may
be reasonably required to inform the other in ordinary course
whether or not such other actually comes to know of it.
2) §1-201(26) –receives—a person “receives” a notice or
notification when:
(a) it comes to his attention; or
(b) it is duly delivered at the place of business through which
the contract was made or at any other place held out by
him as the place for receipt of such communications.
Revision Note: (p. 101)
Secured Creditor v. Buyers and Lessors of Inventory (p. 101)
(1) Relevant Sections are: §9-307(1), 9-306(2), 9-307(2), 9-301(1-c),
9103(2), 9-308, 9-309, 9-201 (default section).
(2) Biggest problem for financier of inventory is: “What happens to the SI
when the goods are sold or leased?”
Fleetwood Credit v. RI Hospital Trust (p. 101)
(3) §9-306(2): starting point—SI continues in collateral not withstanding
sale, exchange or other disposition (see problem 7-8) UNLESS:
(a) the disposition was authorized
20
(i)
§9-306(2): will give basic rule on whether the SI continues.
This is true regardless of who has priority (e.g. under §9307(1). Example: A finances B’s inventory and takes a SI
which is perfected. B sells some of the inventory to C, and
the sale is not authorized (this, under §9-302(2), the SI
continues). However, C is s BOCB, and takes free of the SI
under §9-307(1). D, a BOCB buys the collateral cannot use
§9-307(1), since the SI was not created by “…his seller.”
(ii)
If the transfer is authorized, then the SI is gone for good.
(iii)
3 kinds of buyers protected under §9-306(2):
1) NON-BOCB
2) Buyer of Farm Products (excluded from §9-307(1)),
3) Buyers who are BOCB but who do not buy from a seller
who created the SI (“A BOCB takes free of a SI created
by his seller…“ If SI not created by his seller, then BOCB
does not take free of the SI.)
Note and Questions: (p. 104)
C) Rights of Buyers and Lessees (p. 104)
(4) §1-201(9) Definition of BOCB (KNOW FOR EXAM)
(a) a person who in good faith
(b) without knowledge that the sale to him is in violation of the
ownership rights or security interest of a 3rd party in the goods
(c) buys in the ordinary course of business
(d) from a person in the business of selling goods of that kind, (but
does not include pawnbroker. All persons who sell minerals and the
like [including oil and gas] as well-head or mine-head shall be
deemed to be persons in the business of selling goods of that kind)
(e) “Buying” may be for cash or by exchange of other property or on
secured or unsecured credit and includes receiving goods or
documents of title under a pre-existing contract for sale but does
not include a transfer in bulk or as security for or in total or partial
satisfaction of a money debt.
(i)
“bulk transfer” does not apply to sales of inventory (these
usually indicate that the seller is in trouble, so no BOCB in
that situation. However, it is normal to have bulk transfers in
inventory, so these are excluded from the definition).
(5) §9-307(1) – Protection of Buyers of Goods
(a) A BOCB (other than a person buying farm products from a person
engaged in farming operations) takes free of a security interest
created by his seller (even though the SI is perfected and even
though the buyer knows of its existence.)
(i)
Does not protect any BOCB who does not buy from seller
who created the SI (“A BOCB takes free of an SI created by
his seller…”
Problem 7-1: (p. 105)
21
Sears Consumer Financial Corp. v. Thunderbird Products (p. 106)
(ii)
Any way to protect the remote BOCB?
1) §2-403(2) –says – “Any entrusting of possession of
goods to a merchant who deals in goods of that kind
gives him power to transfer all rights of the entruster to a
BOCB.”
(a) Only applies in context of where the Secured Creditor
himself entrusts the collateral.
(b) Example: A has a SI in B’s boat. B defaults and A
asks C, a seller of boats, to repo the boat and store it.
C puts the boat up for sale, and D buys it. Can A repo
boat? Held: No. The SI continues under §9-306(1)
because the sale was not authorized. However, D is
not protected by §9-307(1), because D did not buy the
boat from a seller who created the SI. D is a remote
seller. But A, the secured party, entrusted the boat to
B, so under §2-403(2), A must bear the risk of loss.
RULE: Where the Secured Party itself entrusts the
collateral, or acquiesces in it entrustment, as occurred
here, §2-403(2) governs.
(c) Example: A purchases a motorboat with money
borrowed from Bank. Bank takes a SI in the boat. A
sells the boat to C, a Marina boat seller, who then
sells it to D. A defaults and Bank traces his boat to D,
and sues him for conversion. D’s lawyer points to §2403 and requests that the case be dismissed. Who
wins? Held: Bank does. §2-403(2) does not apply
except where the secured creditor himself entrusts
the collateral to a seller of items of that kind.
Question and Note: (p. 113)
Problem 7-2: (p. 113)
Problem 7-3: (p. 114)
(b) §9-307(2) (Crandall says this is one of the most common sections
that students don’t understand)
(i)
In the case of consumer goods (as held in the hands of the
debtor, not buyer),
(ii)
A buyer takes free of a SI even though perfected if he buys
w/o knowledge of the SI (w/o knowledge of it period)
(iii)
for value,
(iv)
for his own personal, family, or household purposes (the
buyer here, not the debtor)
(v)
unless prior to the purchase the secured party has filed a
financial statement covering such goods.
22
1) called the garage sale section because have to look at
both the way the collateral is being held by the debtor,
and used by the buyer.
(c) §9-201 – default section
(i)
If buyer loses under §9-306 and §9-307, this section
controls. Says that the holder of the SI takes priority over the
purchasers of the collateral.
(d) §9-306(2) What is Authorization?
(i)
Especially in sales of inventory, the SC will authorize some
sale of the collateral, because the sales will be needed to
allow the debtor to pay the SC.
(ii)
§9-306(2) – SI continues despite transfer, sale or other
disposition of the collateral UNLESS the disposition was
authorized in the SA or otherwise.
1) If SA is silent as to authorization, this does not mean that
there is no authorization. The courts will look to see if
authorization is implied (CD, CP, waiver, etc.)
Production Credit Ass’n of Baraboo v. The Pillsbury Co. (p. 114)
2) Can be explicit authorization, but usually this is not the
case. Most of the time there is a condition under which
the sale will be authorized. Split opinion as to these:
a) Majority Rule = If there is any type of condition on
the sales at all, this must be met or no sale is
authorized.
b) Minority Rule = look at the type of condition. If it is:
(1) One in which the seller is obligated to do
something (i.e. seller must get prior approval, or
seller must get prior approval, or seller must pay
the proceeds to the SC) then if the condition does
not occur, the sale is still authorized, because
condition is not in the control of the buyer. (The
purchaser pays the debtor, but cannot control
what is done with the proceeds.)
(2) One in which the buyer has to do something (i.e.
the SP notifies all buyers of the collateral that they
should make the check out directly to the SC.) In
that case, the condition is in the control of the
buyer, and if the condition not met, there is no
authorization.
(3) Rationale is to not make the buyer an insurer for
the actions of the debtor.
Question: (p. 116)
Northern Commercial Co. v. Cobb (p. 116)
(a) Validity of Summary Judgement Based on Authorized Sale (p. 117)
1) Based on Security Agreement and Financing Statement (p. 117)
23
2) Based on Other Evidence in the Record (p 119)
Questions: (p. 120)
(iii) Analysis for “authorization” under §9-306(2)
1) Is there a condition?
a) Majority says no authority period unless fulfilled.
b) Minority says if condition no fulfilled, will still find
authorization unless condition was in control of buyer
(buyer had to fulfill condition).
2) If not authorization in SA (silent on matter, or says no
authorization), then look to see if there has been an
implied authorization or waiver (intentional relinquishment
of a known right).
Gretna State Bank v. Cornbelt Livestock Co. (p. 120)
a) waiver occurs after the SC knowingly allows the
condition to slide maybe 3-4 or more times. Example:
a bank finances all of a farmers cows, and takes a SI
in them. The SA says that there is no authorization to
sell without prior written consent of the SC. However,
the SC never enforced this, and the debtor sold cows
many times, with the full knowledge of the SC. Held:
this is a wavier of the condition, and there was
authorization for the sale.
b) What if SA had anti-waiver clause? Majority view is
that this can also be waived.
c) How can you re-establish the condition after waiver?
Person already affected under a SA, would be hard to
change, because already waived. But, send out letter
to those not yet affected , say condition will be strictly
enforced, and hold to it. And for other already affected
under their SA, at time of new SA reasserts condition,
must hold to CP which sticks to the condition.
d) Absence of authorization – the absence itself is only
one factor. Look to the CP and CD of the parties to
see if authorization implied.
Notes and Question: (p. 125)
Problem 7-4: (p. 125)
June 18, 1999 Class
D) Commingled Goods, Processed Goods, and Accessions (p. 125)
Farmers Cooperative Elevator Co. v. Union State Bank (p. 126)
Problem 7-5: (p. 129)
E) Article 2 Rights (p. 129)
In Re MacMillan Petroleum (Arkansas), Inc. (p. 130)
Questions: (p. 134)
F) Consignment (p. 134):
(4) Secured Creditor v. Consignor –
24
(a) §2-326(3)—Consignment = a “sale or return” K, since the goods are
delivered primarily for resale. If goods are sold, they are paid for; if
they are not sold, they are returned.
Consignor retains title:
(i)
Not a SI in theory, because does not fit §1-201(37) definition
“a property interest that secures payment or performance of
an obligation. Because delivered for sale, and because the
consignor retains title, acts in a way like a SI (§1-201(37))
says “the retention or reservation of title by a seller of goods
not withstanding shipment or delivery to the buyer is limited
in effect to a reservation of a security interest”
(ii)
§2-326 – consignee’s creditors may seize the goods despite
the consignor’s ownership unless certain requirements met:
1) sign law (put up sign notifying customers of the
consignment) – not in use much today.
2) Demonstrate that the consignee was “generally known by
his creditors to be substantially engaged in selling the
goods of others.”
3) Comply w/ Article 9 filing provisions:
a) filing provisions are §9-114. Basically identical w/ §9312(3). Must file a financing statement and give prior
notice to the inventory financier of the consignment.
b) As practical matter, t be totally protected, treat the
consignment as if it were an inventory PMSI. Follow
§9-114.
In Re: Creative Goldsmiths of Washington, D.C. (p. 135)
Notes and Questions: (p. 139)
Problem 7-6: (p. 139)
June 21, 1999 Class
Title of a Vehicle: This is a means of knowing and proving ownership of the motor
vehicle. The creditor keeps the title until you have paid for the motor vehicle. In order to
get a new title you have to prove that the motor vehicle is paid for.
Registration of a Vehicle: This is a taxing instrument for the state. This can take place in
more than one state.
VIII. Motor Vehicles and Other Title Goods (p. 141):
A) Introduction (p. 141):How to perfect a motor vehicle.
If titled perfection must be by lien noted on the certificate of title.
1) Filing a financing statement will not suffice when the vehicle is covered by
2)
B) Ohio new car vehicles use §9-401 (Alternative 3)
C) §9-302(3)(b): If cars should be titled when new and inventory or not.
D) When buying a new car the owner will get a certificate of title and
E) “Buyer in the Ordinary Course” v. Article 9 Secured Creditor (p. 144)
1) Where titling and reg. is in a state
25
DBC Capital Fund, Inc. v. Snodgrass (p. 144):Is one who buys a vehicle but does not
get title not
Problem 8-1: (p. 147): To prove the subjective test of honesty, you can
only prove this indirectly by using objective evidence. This is basically
done by what a group of reasonable persons would think in the same
circumstances. §1-201(9) states that the buyer is not a BOCB because the
buyer is not buying because it is for the partial satisfaction of debt. A
BOCB must give new value. The new value could be argued the $15K he
paid in cash. The person in this case is a BOCB to the extent of $15K and
the creditors would get priority of $700, the BOCB to $15K, and creditors
for anything beyond this.
Schultz v. Bank of the West, C.B.C. (p. 147): 1987, the Muirs bought a MH. In 1988
Muirs took a loan out from Bank and gave the Bank a SI, which the bank perfected.
1992 Muirs put MH on consignment w/Gatley Motors. Gatley was in the business of
selling goods like this. Schultzes bought the MH from Gatleys, and did not know of the
SI, not what that the MH was being sold on consignment. Gatley did not forward any
money to Muirs. Gatley then filed for bankruptcy. Schultzes learned of the SI at that
time, and brought suit to declare that they took free of the SI. §9-201: says that unless
otherwise provided security creditor wins against all others unless we look at
exceptions. Issue: can the Shultzes claim §9-307(1) and take free from the Bank?
Held: Yes. §1-201(9) does not require the person the buyer is buying from and
anticipates that this may be an agent of the one holding title. The Schultzes bought from
one “in the business of selling goods of that kind.” The Schultzes bought from a seller
who created SI (created by his seller) because in §9-307, the “seller” is the one who
holds title. The Schultzes take free of the SI created by his “seller.” Dissent: argues that
the seller has to be the same person in both §9-307 and §1-201(9).
Professor agrees with majority on this case.
IX.
Statutory Liens (p. 156)
X.
Security Interests in Agricultural Transactions (p. 166)
1)
2)
June 23, 1999 Class (pp. 169-202): How is this section set up to preserve the rights of
the secured creditor and the buyer (Food Security Act in the back of UCC book).
3) Buyers of Farm Products v. Secured Creditor (p. 169)
A) Problem: §9-307(1) excluded buyers of farm products from that section.
Such persons could not claim BOCB (Buyer in the Ordinary Course of
Business) and take free of a SI.
(1) Meant that buyers of farm products often had to pay twice: 1) for
the products; 2) to the holder of SI, when that secured creditor sued
the buyer for conversion, UNLESS: §9-306(2): the sale was authorized
(then the SI would not continue, and the buyer would not be liable)
(a) Auctioneers or other parties selling for the seller were also liable for
conversion against the superior security holder.
26
(b) filing for farm products was also local, and buyers would therefore
have to check the county in which they were grown in order to see
if there was a SI.
(2) Food Security Act, 7 USC §1631: response to problems w/ excluding
buyers of farm products from §9-307(1). Congress passes act to
protect farm product buyers.
(a) Policy: why shouldn’t entire Article 9 be a matter of federal law?
Professor thinks that:
(b) Purpose of Act: to provide protection of buyers in the ordinary
course of business against secured creditors whether their interest
is perfected and whether or not the buyer knows of the existences
of such an interest (like §9-307(1). Also applies to auctioneers.
(3) 2 options given in the Food Security Act:
(a) Central Filing:
1) must be filed in addition to the Art. 9 financing statement. File w/
Secretary of State. Has more extensive requirements than
financing statement.
2) statement must contain
(b) Debtor to Provide the Secured Creditor w/ a list of Prospective
Buyers (and selling agents of the debtor)[other States adopted this
option];
(c) NOTE: §9-306(2) still has effect – if creditor authorizes a sale “in
the security agreement or otherwise” the buyer would take free of
the SI even if the buyer had notification.
(d) NOTE: nothing in the Food Security Act affects §9-301(1)(c):
Buyers of farm products take free of unperfected SI’s.
(e) Only one protected under the Food Security Act = 1) buyers of farm
products; 2) auctioneer (seller) of farm products (commissioned
merchants:
Food Services of America v. Royal Heights, Inc. (p.170)
Facts: Royal ran an orchard and agreed to deliver its crops to America to process and
sell. America is a commission merchant who sells farm products on commission.
America loaned royal $100K and obtained a perfected security interest in Royal’s crops
as collateral on the loan. Later Zirkle leant $100K to Royal and filed a financing
statement 6 months after America and claimed they had a secured interest in Royals
crops. Zirkle sold the crop and applied the proceeds against the loan. America argues
that Royal failed to repay the loan, and later sued both Royal and Zirkle. The trial court
granted a summary judgment in favor of Zirkle, basing its decision on the Food Security
Act. Court of Appeals reversed and remanded for trial. Court of Appeals felt Zirkle was
both a commission merchant and a junior lienholder. Said the Federal Act did not
provide Zirkle in its capacity as a lender with priority over a prior perfected lienholder.
Findings: The Food Security Act, in this case, does not preempt the state law rules on
creation, perfection, or priority of a security interest. In this case there was no protection
for a commission merchant (or auctioneer, who acts as one) if that merchant also lends
27
to the seller of the farm products. In such case, the lender who takes a SI is competing
against any other secure creditor under §9-312(5)(a) (first to file or perfect wins).
4) Revised Article 9. (p. 178)
XI.
Possessory Security Interests (p. 180)
1) Introduction (p. 180):
a) Types of collateral which may be perfected by possession
b) Types of collateral which cannot be perfected
In re: Allen (p. 180): Allen sold his interest in some real property to Partnership. He
took a promissory note and Deed of Trust as payment. TCA title company held the note
and Deed of Trust, with Allen as the beneficiary. TCA was the collection agent for the
debtor (Partnership). Later, Allen assigned his interest in the note and Deed of Trust to
Casa Grande. Casa Grande notified TCA, and recorded its interest in the County
Recorders Office. Allen filed for bankruptcy, and Casa Grande asserted priority in the
note and Deed of Trust against the bankruptcy trustee (who is treated as a lien creditor
status §9-301(3) as of the time of filing of bankruptcy or in §544 of the bankruptcy
code). The trustee asserted that the SI was not perfected (under §9-301(1)(b)); because
Casa Grande did not take possession., and therefore, it had priority over the
unperfected SI under §9-301(1)(b).
Issue: Was there possession?
Held: Yes. Because the 3rd party had possession and Casa Grande, the new
beneficiary, notified the 3rd party. Therefore, TCA was a proper agent of Casa Grande
under §9-305, and there was perfection by possession. (of which an instrument,
according to §9-304, can only be perfected by possession).
Problem 11-1 (p. 183): The Rolex is probably perfected by Hank under §9-305
where goods, may be perfected by possession. However, in the case of the limo,
is not perfected by possession. A Motor Vehicle must be perfected by lien noted
on the title. There still could be perfection on the watch if there had been a filing
of financing statement.
Hank would have automatic perfection for 21 days. If Johnny does not give the
watch to Hank, Hank must refile (§9-304(5)). Under §9-304(4) Hank would also
have21 days temporary automatic perfection after attachment to take possession
or file.
3) Care of Collateral in Creditor’s Possession (p. 184)
Problem 11-2 (p. 184): §9-207(1) Maria had duty of reasonable care. The
burden would be on Maria and she must show that the loss could not be
foreseen or prevented by her returning on the day the note was due. In this case
Maria probably would lose the money she loaned Miguel. She knew that the
money was due on 3/1 and opted for a vacation.
Problem 11-3 (p. 184): §9-207(1) Fluctuating values of collectibles, the general
rule would be that the credit union is not responsible for the ring that Bill (debtor)
wanted back because the market was volatile. There is no liability on the part of
the credit union and they cannot be forced to give the ring back (except by payoff
of the SI).
Problem 11-4 (p. 184): §9-201(1) & §9-201(2)(b). In this case First Federal Loan
28
XII.
would have to show that they exercised reasonable care. They would have to
show that the loss could not be foreseen or prevented by the exercise of
reasonable precautions.
Problem 11-5 (p. 185): §9-201(1) The Bank took the plane (collateral( by filing
suit and having the sheriff levy execution on the plane. Rebecca may be within
her rights, because the Bank has the duty to show reasonable care was taken
with the collateral. Creditor cannot absolve itself from liability by possession of a
3rd party.
Fixtures and Realty-Related Interests (p. 186):
3 issues:
a) What happens when we have a Real Estate document, and then use
that as collateral?
b) What is the definition of Fixture?
c) What are the limits of the priority disputes in fixtures? (§9-313)
1) Borderline Collateral (p. 186)
a) Real Estate is excluded from Article 9.
b) Use of a note secured by a mortgage as collateral for a loan – is governed
by Article 9.
c) Types of borderline transactions:
Buyer ---------------------------promise to pay-----------------------Seller
Can be: Note + Deed of Trust; Note + Mortgage; or Land Contract
d) §9-104(j) says Article 9 does not apply to the creation or transfer of any
lien on real estate, including a lease or rent.
Rodney v. Arizona Bank (p. 186): Vasquez gave a promissory note to Clonts and also
a Deed of trust to secure the mortgage. Vasquez and Clonts agreed that State Title
would hold the agreements. Clonts wants to get paid now, so he sells his interest to the
Fidlers. Fidlers assigned their interest to Security Pacific Bank. Security Pacific notified
State Title that they have they have Fidler (Clonts) interest. Fidlers sold their interest
again (a big no no) to Rodney. Rodney files an interest in the Deed of Trust with the
county recorders office. Security Pacific has a priority dispute between them and
Rodney. The question here is was Rodney perfected? Rodney argues they perfected
under real estate law, and Security Pacific has a perfected security interest under Article
9 (the payments by Vasquez). When Fidlers gave an interest in the note = the deed of
trust to secure the repayment of loan from Security Title created a security interest and
therefore an Article 9 interest. At this stage there was the creation of an article 9
security interest. The right of payment from real estate (in the form of a promissory note)
creates a security interest §1-201(37). Rodney had an outright sale. You don’t perfect
under Article 9 by filing in the real estate court. Possession is the only way to perfect the
instrument (promissory). Where the holder of evidence for the right of payment for real
estate uses the right to secure payment, he has created a security interest under Article
9. The definition of collateral is the property (in this case the instrument) subject to a
security interest, and includes accounts and in this case it is a general intangible by
default.
29
e) Land Contract = general intangible, §9-304, cannot perfect by
possession.
Problem 12-1 (p. 191)
2) What on Earth is a Fixture ? (p. 191):
a) what is a fixture?
In re: Gain Electronics Corp. (p. 192) (IGNORE THIS CASE):
Lewiston Bottled Gas Co. v. Key Bank of Maine (p. 196):
Problem 12-2 (p. 199) see the book
3) Perfection in Fixtures/Fixture Filing (p. 199):
b) §9-313: Only applies to the holder of real estate + fixture v. holder of SI in
fixtures.
4) Priorities in Fixtures (p. 200)
c) §9-313: Priority disputes:
(1) §9-313(7): Default rule: A fixture filing is not generally needed. In cases
not covered by §9-313(1-6), a SI in fixtures is subordinate to the
conflicting interest of an encumbrancer or owner of the related real
estate who is not the debtor.
(a) Exceptions: §9-313(1-6)
(2) §9-313(8): one who has priority in fixtures can repossess them, but
cannot
June 25, 1999 Class (Friday) (pp. 201-239)
Problem 12-3 (p. 201): Buyer buys furnace, installs – seller retains a SI. Bank
has the mortgage on the house (mortgage states it covers fixtures).
(a) Under §9-313(4)(d) If the central air conditioning system is considered an
appliance, described as “replacement appliances used by the debtor or his
family , then O’Hara, as the secured party financing the replacement (since
this is new AC it is assumed that there was old) of domestic appliances in
non-commercial owner-occupied contexts need not concern himself with real
estate descriptions or records. The priority of a mortgage would have no
effect on the perfection by O’Hara. This is a PMSI §9-107(a)
(b) §9-313(7): (DEFAULT RULE) O’Hara’s security interest would not have
priority over any conflicting interest by Kennedy, as predecessor in title of the
owner and he would continue to have an interest of record in the RE. (There
was no fixture filing so Kennedy would win. If there had been a fixture filing )
(c) §9-313(4)(c): O’Hara would win in this case.
REVIEW THIS PROBLEM IN DETAIL: Problem 12-4 (p. 201): If this can
be considered a fixture under §9-313(1)(a) then §9-401(3):does not affect this
case if the property can become a fixture and is classified as such. §9-201 would
really gives validity of the security agreement over any other section. Use §9313(4)(b) for a fixture filing §9-401(2) and §9-401(5) and §9-313(1)(b) would give
the details of how to file. Even though the mobile home was attached and
become part of real estate in the transaction the filing on the certificate of title
continues effective even though the use of the collateral (mobile home) has
changed (permanent structure), which controlled the original filing has changed.
30
Therefore Acme Bank would still have priority§9-307(2) is not applicable because
a consumer buyer from a consumer cannot win.
Problem 12-5 (p. 202): §9-313(4)(a): Since the SI is a PMSI, and the interest
was perfected by a fixture filing within 10 days (6/7 to 6/15 = 8 days), Helpful
Hardware has an interest in the RE. That Perfected Interest in the furnace has
priority over the conflicting interest of Chaste Bank. If the mortgage was a
construction mortgage, the SC would lose under §9-313(1)(c), and §9-313(6).
5) Rights of the Secured Party Upon Default (p. 202):
Default Rule: §9-313(7): (In cases not covered by §9-313(1-6), a SI in fixtures is
subordinate to the conflicting interest of an encumbrance or owner of the relate
estate who is not the debtor. Exceptions are §9-313(1-6)
§9-313(8): one who has priority in fixtures can repossess them, but cannot just
barge in and breach the peace.
a) must pay for any damages done to the building
b) do not have to pay for the lowered value of the RE which occurs
because the fixtures are removed.
c) No right to the proceeds of the fixtures (Capital Federal) Can’t get cut
out of proceeds on the sale of the fixtures, only have a right to
repossession. Rationale: to give an interest in the proceeds of fixtures
would give an interest in RE, and that is outside the scope of Article 9.
Capital Federal Savings & Loan Association v. Hoger (p. 202)
Problem 12-6 (p. 210): Use §9-313(4)(b) for a fixture filing §9-401(2) and §9-401(5) and
§9-313(1)(b) would give the details of how to file. Based on the rights under §9-313(8)
that when the secured party in fixtures and accessions has priority over other interests
in the real property and the secured party is entitled to remove the collateral, I would
advise that they enter into a negotiation or Western Resources should remove it’s
collateral. The effect would be that they would be liable for any damages or repair
necessitated by removal, but not for any diminution of the value of the property caused
by removal (§9-313). Practically (in Kansas) the house could not be sold without an
furnace and AC and therefore of less value to the Bank.
XIII.
Accounts (p. 211)
1) General Principles (p. 211)
(1) §9-106: “Account” means any right to payment for goods sold or lease or for
service rendered which is not evidenced by an instrument or chattel paper,
whether or not it has been earned by performance.
Non-recourse Financing: This is an outright sale. (Credit Card Issuer is the
creditor and the Business which allows the credit card use is the seller).
Recourse Financing: 30 day line of credit, this could be sold to a bank, but
the right to payment could be purchased back.
(a) If someone takes an interest in someone else’s right to receive a stream of
payments, this may be an account.
31
(i)
if the right to payment is embodied in a note, then not an account,
but a promissory note, or instrument (commercial paper rules would
apply)
(ii)
If the right to payment is embodied in chattel paper, then not an
account, but chattel paper (§9-105) (a writing or writings which
evidence both a monetary obligation and a security interest in or a
lease of specific goods)
(iii)
If it is a right to payment for real estate sold or leased, then not an
account, because account is only a right to payment for “goods”
sold or leased, and real estate is not a good.
2) Applicability of Article 9 Rules (p. 213)
(2) Attachment of accounts:
(a) §9-203: signed writing w/ a description of the collateral, value given,
debtor has to have rights in the collateral.
(i) if intent to have SI in after acquired collateral, should put an after
acquired collateral clause in the SA, but if fail to put this in for an
account, it may be OK (financing statements never need after acquired
collateral clause).
(3) Perfection of Accounts:
(a) cannot be perfected by possession, §9-305 (nothing to possess, since not
represented by a writing)
(b) account must be perfected by filing, §9-401, 3rd section, 1(c) – central
and local filing.
(c) Automatic Perfection of an Account:
(i)
§9-302(1)(E): Can have automatic perfection of an account if the
assignment of the account does not alone or in conjunction with
other assignments to the same assignee transfer a significant part
of the outstanding accounts of the assignor.
(ii)
How to tell if the assignment account is not a “significant part” of the
outstanding accounts of the assignor, and therefore automatically
perfected? Majority Rule: Must satisfy two tests:
1) casual or isolated test: if the creditor is not the assignee of
many accounts, and the assignment in issue is a fairly unusual,
or “casual or isolated” occurrence, then this test satisfied (hard
to have a bank meet this test)
2) percentage test: the $$$ amount of the debtor’s overall
accounts assigned (numerator) compared to the total amount of
the outstanding accounts (denominator). If below 10% then
there is no problem, most say 20% no problem. Over 20% is
definitely considered a significant amount, and you would have
to file a financing statement.
a) Note: some courts do not allow accounts which the creditor
knows to be uncollectible to be part of the overall part of the
debtor’s outstanding accounts and they knew that they were
32
uncollectible. (e.g. if the debtor has a total amount of
outstanding accounts of $1MM, but only $300K are known to
be collectable, then the denominator would be $300K)
(d) §9-104(f): Article 9 does not apply to the following types of accounts:
(i)
accounts that are a part of a sale of a business
(ii)
accounts which are assigned for purposes of collections.
In re: B. Hollis Knight Co. (p. 214): Trustee in Bankruptcy (status of lien creditor §544
of Bankruptcy Code, §9-301(1)(b)). Was the bank perfected as to the accounts. The
bank filed a finance statement and the issue was that the SC’s mistake in attempting to
file the finance statement failed to list BHK as a creditor and had no valid local filing.
(Local and General filing were required in this state). Was there automatic attachment.
Where there is attachment and there is no necessity for filing then there is automatic
attachment. This is applicable under §9-302(1)(b) where the accounts assigned are not
a significant part of the assignor (debtor). If the debtor assigns/sells accounts to an
Article 9 Secured Creditor the transaction is not required to file. The tests used was two
part in this case: casual or isolated test: if the creditor is not the assignee of many
accounts, and the assignment in issue is a fairly unusual, or “casual or isolated”
occurrence, then this test satisfied (hard to have a bank meet this test) and percentage
test: the $$$ amount of the debtor’s overall accounts assigned (numerator) compared
to the total amount of the outstanding accounts (denominator). If below 10% then there
is no problem, most say 20% no problem. Over 20% is definitely considered a
significant amount, and you would have to file a financing statement. The bank got into
problems because they screwed up in the filing of the financing statement. This case
said you only have to meet one of the tests, but majority says to meet both tests.
June 28, 1999 Class (pp. 217-254)
3) Subrogation Rights of 3rd Parties (p. 217):
§1-103: Supplementary General Principles of Law Applicable: Unless the
UCC displaces them, the principles of law and equity apply.
§9-104 (h) (i) (j): Judgements, setoffs, rights, and tort claims generally do not
serve as collateral in commercial transactions.
National Shawmut Bank of Boston v. New Amsterdam Casualty Co. (p. 218): Case
involves a contractor who took out a surety bond for a government contract pledging
earnings from the contract. This assignment was not recorded. Then the Contractor
obtained a line of credit from the bank and the bank filed a financing statement covering
this assignment in compliance with various laws. No written notice was given to the
surety, even though the Assignment of Claims act required it. Contractor defaulted on
the project and loan, bringing the performance bond into play and defaulted on the loan.
The Bank filed a complaint naming the surety as D when both tried to satisfy their
respective claims. Trial court in Mass., w/o a jury dismissed the complaint by the bank
and ordered judgement for the surety.
Issue: What extent, if any does the doctrine of subrogation survive the passage of
Article 9 of the UCC.
Holding: Under the UCC the surety is looked at as an “insurer” of the contractor, and
logically it would be looked at as one of the contractor’s creditors and would be subject
33
to priorities as listed in the UCC. (unsecured creditor v. secured creditor). The surety
has acted as more than an insurer of the contractor, they have also insured the
government for a completed project, the suppliers and laborers for payment, and the
contractor. Court felt that equitable subrogation was the key and the finding for the
surety was upheld. The collateral in this case is an Account (right to progress
payments). §9-106 The equitable right of subrogation is superior to Article 9 according
to the court, because the code does not discuss this.
A Surety has the right of subrogation to the extent that it pays off the principle
debtors obligation. (The surety has whatever rights the debtor had) Surety is
subrogated to the rights of the contractor.
XIV. Chattel Paper and Leases (p. 224):
1) Introduction (p. 224)
(1) What is Chattel Paper? §9-105(b):
(a) A writing or writings which evidence both a monetary obligation and a
security interest in specific goods or a lease of goods– (typical
example is an installment K, or “Conditional Sales Contract or Retail
Installment Contract and Security Agreement”)
(i)
When the transaction and by an instrument (or series of
instruments), these writings together constitute chattel paper.
1) Must attach the security agreement to the note (stapling OK,
paper clip probably not)
(ii)
Lease – A lease + SI = chattel paper also.
In re: The Benefit Funding Group, Inc. (p. 226): BFG and 4 related corporate entities
leased equipment. Several Banks claimed they had security interests in the leases of
the equipment.
Issue: The question that was asked was whether the Banks had perfected their interest
in chattel paper. This can be done be filing or possession.
Holding: Trustee alleged that the possession was faulty because the Banks did not have
the original documents, and the court agreed. The Banks also needed to have evidence
that the security interest was in specific goods, and there had been some turnover in the
equipment (there was substitute equipment and not the original equipment) Goods are
not interchangeable in chattel paper. If there was perfection by filing the issue was that
filing under a trade name. In fact the bank filed under the trade name and corporate
name per §9-402(7). The trustee said that the trade name must come first. The court
said that it does not matter which name comes first (The code does not really say which
name comes first, so the filing officer will normally cross file both names. If the filing
officer screws up, it is still considered that the filing was proper per the secured
creditor).
2) Secured Parties and 3rd Party Assignees (p. 234)
(2) How does a SI in Chattel paper arise?
(a) Seller sells TV on installment K. Then Seller wants to get loan form the
Bank, uses the K as collateral – the Bank takes a SI in “Chattel Paper.”
(i)
Can also sell installment K, and the buyer would be buying
Chattel paper.
34
1) If sale of Chattel Paper, the buyer is secured creditor, since gets
rights in equipment.
2) If sale, usually the buyer has to follow the terms of the writing
(CP) that he buys (i.e. must follow terms of the original
installment K.) Usually the new assignee collects payments, but
the assignor can still do this upon agreement.
3) If Chattel Paper 2 SI’s exists:
a) the original one in the original installment K (which is the
chattel paper) +
b) the security interest the subsequent secured creditor has in
the chattel paper.
(b) When does a SI arise in Chattel Paper?
(i)
Document: (When it is sold or used as collateral)
(ii)
Lease -(3) How does one perfect a SI in chattel paper?
(a) Filing: §9-401
(b) Possession: §9-304
(c) NO AUTOMATIC PERFECTION IN CHATTEL PAPER
(4) Priority Disputes in Chattel Paper:
(a) Dispute arises where there are two buyers of the chattel paper – who
wins in the situation?
(i)
§9-312: first to file or perfect
1) Do chart if both perfected by filing, whichever was first to file or
perfect.
2) If one perfects by possession, one by filing, then look at the
earliest date of perfection – earliest one to perfect wins.
Problem 14-1 (p. 235) Payments on account and payments on chattel paper are
proceeds. Bank has no security interest on the accounts, only on the chattel
paper. Another way to argue this might be that under §9-312 Marshall was the
first to file and perfect they would win. Even though Tarp perfected by possession
– earliest to perfect would win. If both parties had taken a security interest in
chattel paper and Marshall Bank had priority as to the Chattel paper. If
Southfence took the checks in as payment on the chattel paper and paid Tarp
with the checks then Tarp would be a HIDC as long as they had no notice of any
claims or defenses. §3-302(6) and §9-309 (Rights of a HIDC) NOT TESTABLE
AREA.
Problem 14-2 (p. 236): §9-306(5)(a) If the table was collateral at the time of sale
for an indebtedness of Merry Belles which is still unpaid, the original security
interest attaches again and continues as a perfected SI.
General Motors Acceptance Corp. v. Third National Bank in Nashville (p. 236): Pick
up truck was sold by dealer and received a promissory note (chattel paper) and
installment contract (promise for payments) as proceeds to the sale of inventory. The
installment contract taken in by debtor (auto dealer) said he would hold onto the paper
until the promissory note is paid off, but it is sold to Bank instead. GMAC has a
35
perfected interest in the chattel paper. The truck is turned back in. The Bank as an
unpaid transferee of the chattel paper has a SI in the goods against the transferor. Such
SI is priority to the SI asserted under §9-306(5)(a) to the extent that the Bank has
priority under §9-308(b) (from §9-306(5)( b)
Problem 14-3 (p. 239):
(1) This never fit the description of the financial statement §9-312 is applicable
NUTS is not perfected and Friendly is perfected. Since MUCK has financing
arrangements with NUTS (secured party financing inventory) and Friendly
(purchaser of chattel paper).
Problem 14-4 (p. 239):§9-308(b) Bucksa Bank has priority in the chattel paper
because as purchaser of chattel paper, Bucksa gave new value and takes
possession of it in the ordinary course of business and has priority over a
security interest in the chattel paper or instrument which is claimed merely as
proceeds of inventory subject to a SI (§9-306) even though he knows that the
specific paper or instrument is subject to the SI.
3) Leases (p. 239):
Lease or Sale? §1-201(37) (p. 240)
(1) Issue – is it a real lease, or is it a sale on credit (Hard to Distinguish)
(a) Basic distinction – a sale transfer ownership, a lease does not.
(b) Problem that complicates – can file an Article 9 financing statement for
a lease because there is so much uncertainty: If the lease is
determined to truly be a sale, the lessor is covered in a priority dispute.
Problem 14-5 (p. 241): (1) Lease under §1-201(37) (2)
Problem 14-6 (p. 241): Lease under §1-201(37) This is a true lease because the
lessee has the right to terminate without penalty.
Addison v. Burnett (p. 241): In this case the failure to recognize that a lease was
involved by the lessee was the dispute. If under lease Article 2A, if secured creditor part
5 of Article 9. The secured creditor (lessor) has to dispose of the leased item.
Lease as an Alternative to a Credit Sale (p. 249)
(c) §1-201(37): Rules to determine if lease or sale:
(i)
If the lease can be terminated at-will, then it is a true lease
1) If not terminable at will, then may or may not be a lease.
(ii)
If at the end of the lease term, the lessee becomes the owner of
the goods, then it is a sale.
(iii)
If the lease term is equivalent to the useful value of the goods
(time) – then it is a sale (A lease must retain some ownership
value).
(iv)
If at the end of the lease term, the lessee can obtain ownership
of the goods for no or nominal consideration, then it is a sale.
1) How to determine nominal? Less than 20% of the FMV of the
item at the time of transfer of ownership.
Problem 14-7 (p. 252):
XV.
Instruments, Investment Securities, General Intangibles (p. 253)
36
1) Instruments: §9-105(1)(i) (p. 253): An instrument is a promissory note – a
writing which evidences a right to the payment of money and is not itself a
security agreement or lease.
Problem 15-1 (§3-104(1), 3-302(1), 9-304, and 9-308) (p. 254) (Don’t do)
June 30, 1999 Class (pp. 261-275 and pp. 276-299)
3) General Intangibles (§9-106) (p. 261): A general intangible is something
which does not fit in with any other classification of collateral.
(a) a liquor license is a general intangible (so is a gaming license)\
(i) but, if SC gets the license, cannot just open his own store, still has to
independently meet state requirements
(b) Federal regulatory type of licenses can be general intangibles (i.e. FCC
license – cannot automatically operate under it, but could control it.)
Brown v. Yousif (p. 262):
State Street Bank and Trust v. Arrow Communications Inc. (p. 266):
Question: (p. 275)
XVI. Multi-State Transactions (p. 276)
1) Introduction: (§1-105, §9-103) (p. 276):
(a) EXTREMELY IMPORTANT: must know which state law applies, so know
how to perfect (filing, etc.) If file in wrong state, then not perfected, and
would lose priority dispute.
(b) Must include this as part of analysis:
(c) How do you tell which state’s law is applicable?
(i) First ask, what kind of collateral do I have under §9-103 (doesn’t
Problem 16-1 (p. 278)
(a) Inventory: §9-103(1)(d) Even though the SI was property perfected in the
state where the collateral was originally located, if the Circuit City moves the
collateral to another state (w/ or w/o the SC’s knowledge or consent), a reperfection in the new state would be required w/I 4 months of removal. Under
§9-303(2) as long as the SC re-perfects the SI in the new state w/I the 4
month period (by a new filing or taking possession), the interest is deemed
perfected from the date of the original perfection –i.e. there is a “relation back”
as against subsequent interest holders.
(b) Accounts: §9-103(3) has no readily visible “home base” and for these assets
the Code provides that SI must be perfected under the laws where the debtor
is located.
(c) Inventory of New (§9-103(1)(a)) & Used Cars (§9-103(1)(b)): §9-302(3)
expressly exempts from any filing requirement any personal property covered
by certificate of title under state law. §9-302(4) provides that in states having
certificate of title systems, compliance with those laws is the only way in
which a SI can be perfected in collateral subject to the laws.
(d) Chattel Paper: §9-103(4): The location of the chattel paper rules, since
perfection is by possession. Where the SI interest in chattel paper is
perfected by filing, the Code reverts to the rule applicable to general
intangibles that the filing must be in the “debtor’s location.” The rationale for
37
this is that chattel paper is readily transportable, and there may even be
duplicate copies of the paper, therefore, the safest place to search for such
filing is at the debtor’s location, rather than checking each state in which the
debtor may have assets.
(e) Investment Property: §9-013(6)(b): if sub (f) of this section does not apply
since it is assumed that this is not a publicly traded security, but it is
certificated, during the time that a security certificate is located in a
jurisdiction, perfection of a SI, the effect of perfection or non-perfection, and
the priority of a SI in the certificated security represented are governed by the
laws in which the security is located.
(f) General Intangible: §9-103(3) Royalty is not an account because it is not for
services rendered. They are considered general intangibles.
2) Documents, Instruments, and Ordinary Goods (§9-103(1) (p. 278)
Problem 16-2 (p. 278): This depends as to when the collateral was identified to
the contract is when dealers interest was perfected. But assuming that the
financing statement identified the specific tractor at the filing on March 4 th then
§9-103(1)(b) governs the perfection of the SI on Willie. The rule states that
except as otherwise provided in this subsection, perfection and the effect of
perfection or non-perfection of a SI in collateral are governed by the law of the
jurisdiction where the collateral is when the last event occurs on which it based
the assertion that the SI is perfected or unperfected. The “event” on which the
dealer can base it’s assertion that it is perfected under §9-203 are the conditions
of attachment (SC gives value, debtor gave rights to the collateral), plus the other
steps taken by the dealer to perfect. The “last effect test” looks to the law of
Virginia, the state where Willie is physically located (the situs) when the last
events occur to determine whether the SC has perfected properly. Willie was
located in North Carolina when the financing statement was filed. The law of
perfection is determined where the last situs of Willie was. Therefore there would
have to be a filing in North Carolina under their §9-401 (locally). The dealer could
refile on March 7 in Virginia to perfect in Willie. KNOW WHERE THE
COLLATERAL IS LOCATED.
Gennet v. Fason (p. 279) The trustee argued that the time for re-filing started to run
when review this case.
July 12, 1999 Class (pp. 286-306 )
Problem 16-3 (p. 286):
3) Good Covered by Certificates of Title (§9-103(2)) (p. 286) Not under §9103(2) unless the goods are titled.
Orix Credit Alliance, Inc. v. Heard Family Trucking, Inc. (p. 287) Just because the
people lived in a state under where the title was not issued.
Chrysler Credit Corporation v. Religa (In Re Males) (p. 290): Males (debtors) lived in
New Hampshire and the Chrysler Credit Corporation (secured party) properly obtained
a New Hampshire certificate listing its lien on their cars. The debtor then moved to New
York, where they registered the cars and obtained license plates. The State of New
York, however, never issued a new certificate and the secured party thus was never
contacted and asked to surrender its old certificate. More than 4 months after they
38
moved, the debtors filed for bankruptcy relief and their trustee argued that the secured
party had become unperfected under §9-103(2)(b). The 2nd Circuit held that the car had
not been “registered” in New York within the meaning of the Code, even though the
debtors had advised that state of their presence and had obtained license plates.
According to the court, “registration” requires that the new state issues a certificate of
title upon being advised of a debtor’s presence, not just issue license plates. Unless a
new certificate is issued to the debtor, the rights of the 3rd parties will not be prejudiced.
As a policy matter the drafters were probably worried that another state might issue a
clean certificate to the debtor, who could then use it to mislead 3 rd parties.
4) Accounts, General Intangibles, and Mobile Goods (§9-103(3)) (p. 299)
Problem 16-4 (p. 299):Assuming the collateral (equipment) is changing locations during
the attachment and perfection, the last-event test may get sticky as to where the
property is located. If a judgement creditor of WCI levies on the equipment not in the
jurisdiction of last event, before the equipment is returned to Kansas, the creditor would
;obtain a priority over Friendly Finance. The last-event test directs that a filing must be
in Kansas, Missouri, and Nebraska, a filing in Kansas alone would not be enough.
Under the other states priority rules, if they are the same as Kansas, if §9-103(1)(b) is in
effect in all states, the judgement creditor would qualify as alien creditor and take
priority over the unperfected secured party.
In this case look at §9-103(3)(d) the debtor’s ( WCI) chief place of business
(home office) in Kansas is where financing statement should be filed.
XVII. Proceeds (p. 300)
1) General Considerations (§9-306 & §9-203) (p. 300)
2) Defining Proceeds (p. 300)
Problem 17-1 (p. 300)
In re: Mintz (p. 301)
Citizens Savings Bank, Hawkeye, Iowa v. Miller (p. 303): Off-springs are not a
proceeds in the place
3) Attachment (p. 305)
Problem 17-2 (p. 305)
July 14, 1999 Class (pp. 306-330, 347-352, 354-359, 382-388)
Bombardier Capital, Inc. v. Key Bank of Maine, et. al. (p. 306): The proceeds arose
from the disposition of collateral in which one SC#1 had a SI in and the other SC#2 had
SI in. In this case the court said that where the proceeds arose from multiple creditors
and you have to look at it on a pro rata case. LOWER INTERMEDIATE BALANCE. (i.e.
$100K is owed to one and $50K to another then any proceeds 1/3 and 2/3 would be the
split).
4) Perfection (p. 311): Perfection attempts to provide notice to third parties of
the security interest. Three basic methods of perfection exist: filing a UCC-1
financing statement; filing a copy of the security agreement; or taking
possession or control of the collateral.
Perfection under the UCC
The UCC distinguishes between different types of collateral. In turn, the
appropriate method of perfection turns on the type of collateral.
39
The most common method of perfection is filing a UCC-1 financing statement
with a central authority, such as the Secretary of State. A financing statement
is not the security agreement (although it can be); it need only contain the
names of the parties and a summary description of the collateral, among
other things. See UCC § 9-402(1).
With some types of collateral, most often fixtures (personal property attached
or affixed to real property, such as the chairs in class) and farm products, you
must also file locally with someone like the county recorder.
Finally, a secured creditor can perfect by taking possession of the collateral.
Pawn shops engage in this brand of perfection. Indeed, with some types of
collateral such as negotiable promissory notes, perfection is the only
acceptable method of perfection.
Perfection and Real Property
Perfection of an interest in real property typically requires recordation of the
entire security agreement (the mortgage) in the place where real property
deeds are recorded. In addition to execution and delivery, state law often
requires acknowledgement (having the signatures notarized or otherwise
attested to).
Assignment of real property rents presents a problem. Under the law of many
states, the secured creditor must exercise or attempt to exercise some
dominion and control over the rents in order to perfect (or, technically, to
make choate) the interest in the rents. Appointment of a receiver, or the
sending of notices to tenants to pay all rents to the secured party directly,
typically satisfies this requirement.
Problem 17-3 (p. 311): The sales slip that Sam signed was an account. Since
there was only a SA on the “inventory” and not the account there is no
attachment or perfection in that type of Karen’s collateral. However, since this is
also proceeds of the inventory, according to §9-306, there is an attachment since
it is identifiable, and there would be perfection as well, since §9-306(3)(a) and
§9-301, the filing for the inventory and for the account would be in the same
place.
Problem 17-4 (p. 311): However since the SA mentioned only inventory, any
account which Karen has which did not arise as proceeds would not be attached
(§9-306(2)) and perfected (§9-306(3)(a))(…if the proceeds are acquired with
cash proceeds, the description of collateral in the financing statement must
indicate the types of property constituting the proceeds..) as well.
Problem 17-5 (p. 311):
(a) The bulldoze is equipment and as such must be filed in two places where the
other equipment only had to filed in one location, according to §9-306, there is
an attachment since it is identifiable, and there would be perfection as well,
since §9-306(3)(a) and §9-301, the filing for the tractor et.al. and for the
tractor would be different.
40
(b)
(c) §9-306(3)(b) The lowest intermediate balance rule would apply.
Problem 17-6 (p. 311):
Problem 17-7 (p. 312): The question here is who has priority? Both have
perfected SI uner 9306(6)(b) PMSI would have a super priority under 9-312(4).
In re: Kerner Printing Company, Inc. (p. 312): 1) Although 9-406 allows a SC to file a
release as to the financing statement you have to make sure this is what you want to
do. In this case the SC did this in certain equipment that was sold by the debtor and
then turned around and claimed a SI in the proceeds. The courts said you can’t do this.
Once you lose the SI in the original collateral, you can’t claim attachment to a proceed
when you have lost your attachment to the original collateral. 2) The SC was still able to
win as to the chattel paper because the debtor made an assignment of the chattel paper
to the original SC. This would be found under §9-102(2)(b).
5) Security Interest in Proceeds v. Bank’s Right of Setoff (p. 321):
a) Cash Proceeds
(1) Identifiable? 9-306(4)(a-c)
(a) §9-306(4)(a): if perfected as to cash proceeds under (3), then are
perfected here (also if single account containing identifiable
proceeds)
(b) §9-306(4)(b): identifiable cash proceeds, not commingled (does not
happen very often).
(c) §9-306(4)(c): checks which have not been deposited yet in an
account.
(2) Co-mingled? Then only have perfection under §9-306(4)(d)
(a) §9-306(4)(d):
(i)
Can never get more than what was deposited less than 10
days before bankruptcy.
(ii)
Have to show that the proceeds were from this disposition of
the collateral
(iii)
Have to apply the lowest indeterminable balance rules
(iv)
Bank has set-off rights- (where bank is also a creditor, can
draw on the account) –
 Majority Rule: Bank usually loses under §9-201 against
the secured creditor.
 Minority Rule: If Bank makes set-off right notation on the
account before the SC becomes perfected SC, then first
in time rule applies, and the Bank wins.
Pennsylvania National Bank & Trust Company v. CCNB Bank, N.A. (p. 322):
Bank of Kansas v. Hutchinson Health Serv., Inc. (p. 325)
July 19, 1999 Class (REVIEW §547 of the BANKRUPTCY CODE)
PREFERENCES SHOULD BE LOOKED AT AND IS DEFINED IN §547(b). The Trustee
has no right to avoid a SI unless there is a preference as defined in §547(b). The
TRUSTEE MUST MEET ALL 5 AREAS OF PREFERENCES TO MEET THIS.
41
ANTECEDENT MEANS DID THE DEBT OF THE DEBTOR AFTER THE DEBT?
§547(e): WHEN THE TRANSFER OCCURS
§547(c): EVEN IF A PREFERENCE IS DETERMINED, THE EXCEPTIONS ARE
LISTED HERE.
XVIII. IRS Liens:
A) To make this affective the IRS must file the lien. If a SC is first in filing, they
are first In regards to collateral. Future advances the SC must make the advance
w/o knowledge and w/I 45 days or the SC has no priority as respect to the future
advance.
XIX. Bankruptcy (pp. 347-352; 354-359; 382-388): Governed by the Federal
Bankruptcy Code KNOW CHAPTER 544 and 547 FOR EXAM
A) Introduction (p. 347):
1) Chapter 7 deals with liquidation (straight bankruptcy).
2) Chapter 9 Limited to municipalities
3) Chapter 11 reorganization, business will continue to have time to pay its
debts – many big businesses have used this.
a) debtor handles (call Debtor in Possession, or DIP)
B) Effect of Filing – Automatic Stay
1) Bankruptcy Code §362 imposes an automatic stay of virtually all actions
that might affect the bankruptcy proceedings.
a) Prevents the SC from taking from repossessing, perfecting, taking
judicial action
C) Unperfected SI
D) Effect of Filing – General (p. 352)
E) Effect of Filing – After Acquired Property (p. 352)
b) Scope of the Stay §362(a-b) (p. 354)
Problem 19-2 (p. 354)
Commercial Credit Corp. v. Reed (p. 355)
F) Delayed Perfection and Attachment –Strong –Arm Clause, Preferences,
etc. §9-301 and Bankruptcy Code §544(a).(p. 382)
Problem 19-4 (p. 387)
PREFERENCE: B.C. §547(b): Determine if there is a preference
1) Determine if there was a preference
a) §547(b)(1) grant of a SI occurs when there is attachment
b) §547(debt that is created must be prior to the transfer for there to be a
42
c) Transfer must occur when §547(f) debtor is insolvent (debts exceed your assets
or you are unable to pay your debts)
2) Dd
Review 19-4 (p.387 see notes)
574(b) with (e) was designed to see if the debtor during the period of insolvency tried to
better their position.
When can a trustee defeat an Art. 9 security interest because it improves the position of
the creditor (547(b). 547(e) tells you the time of the transfer by looking at when
attachment and perfection occurred.
19-4 (p. 387)
(a)
1) When was debt created? 6/1
2) Attachment created? 6/1
3) Perfection? 6/7
4) When did transfer occur? §547(e)(2)(B) transfer occurred on date of perfection
5) Transfer made on account of an antecedent debt? Debt occurred on 6/1.. Transfer
on 6/1. This was made while the debtor was solvent. NO.
(b)
1) When was the debt created?
2) Attachment created?
3) Perfection?
4) When did the transfer occur? §547(e)(2)(B) transfer occurred more than 10 days
after debt occurred, therefore this is an antecedent debt. The time of transfer was
when the debtor was insolvent. The time of transfer was within the 90 days
preceding the filing of bankruptcy. All of §547 is met, therefore the Bankruptcy
Trustee would win.
(c)
1) When was debt created?
2) Attachment created?
3) Perfection occurred? 6/15
4) When did the transfer occur? §547(e)(2)(B) transfer occurred more than 10 days
after the debtor occurred, therefore it is an antecedent debt. The time of transfer was
when the debtor was insolvent. The time of transfer was before the 90 days
preceding the filing of bankruptcy. Therefore no preference to the Trustee
(d)
1) When was debt created? 6/1
2) Attachment created? 6/6
3) Perfection? 6/15
4) Bankruptcy filing 8/15
5) When did transfer occur? 6/6
6) True transfer occurred when Attachment = value+debtor has rights in collateral
43
7) This is a transfer for an antecedent debt. §547(e)(2) debt occurred before the time of
transfer. §547(e)(2)(A): Time of transfer was while the debtor was insolvent and
within the 90 day window.
(e)
1) Time of transfer 6/4
2) This was for an antecedent debt, but it occurred before the debtor was insolvent.
Therefore there was no preference and the Trustee would lose. There is no
preference.
§547(c): EXCEPTIONS TO PREFERENCE
(c)(1): Substantially Contemporaneous :
PROCESS FOR SECURED TRANSACTIONS:
Secured Creditor v. Other Claimant
Secure Creditor v. Debtor
1) Scope of interest
1) Scope of interest
2) Intent
2) Intent
3) Attachment (§9-203)
2) Attachment (§9-203)
(a) Classification of collateral
(b) After acquired
(c) Proceeds
(d) Perfection (fixture filing, don’t assume that filing perfected look at all
ways to this) side rules to fixtures and proceeds 9-306(3-5) are all
about how to perfect in proceeds, multi-state issues, is there a PMSI
(e) Either possession by creditor w/ debtors agreement or
a Written Security agreement which must contain:
(1) Signature by debtor
(2) Description of collateral or real estate
(b)Value given (creditor gives value
(b) Debtor must have rights in collateral
Other Claimants:
1) Another SC go through above steps.9-312 (priority) 9-308,
2) Buyer 9-201 , 307(1-2( 301(1)(c)( 306(2)
3) Trustee in Bankruptcy
4) Statutory Lien Holder
5) Lien Creditors
6) Creditors of a consignee
7) Surety is treated like a debtor
8) Surety with an equitable subrogation right against a SC (not in Art. 9)
Priority Section is applied
44
June 21, 1999 Class (1 factor pattern and a-h off of the fact pattern)
XX. Default (Chapter 20) Secured Creditor and Debtor:
A) §5 of the UCC – Perfection not relevant – is a matter between the SC and the
debtor, so only need proper attachment (9-203). So, in analysis, always check
for attachment before checking for default.
B) Default – not defined in the UCC §9-503 says “in default under a SA,” so
default is usually defined directly in the SA.
1) No right to cure – usually there is no right to give extra time given, if one
payment missed = default.
2) Good Faith and Subjective Catchall provision: usually in SA a provision
says “creditor may declare itself to be in default.” A creditor cannot
exercise such a provision unless has GF.
3) GF and objective Default: What about foreclosure after debtor objectively
defaults, i.e. misses one payment?
a) Maj. Rule: GF not relevant to how creditor acts when debtor does
objective breach.
b) Min. Rule: GF is relevant
4) Waiver/Estoppel – in code§1-103
a) Waiver: intentional relinquishment of a known right.
b) Estoppel: where one changes position to their detriment in reliance on
your actions, you can be bound to those actions and what they
implicitly or explicitly declare (intent not relevant)
(1) easier to prove than waiver (no intent needed)
c) Anti-Waiver Clause – are they binding? Maj. says yes.
d) Retraction of Waiver – by telling other party that it will now be expected
to hold to the literal conditions of the agreement (gets it back ot square
one).
C) §9-503 – Creditor’s Option on Default –
1) Judicial Repossession/Replevin (detinue) §9-503 – defined as “judicial
process” in §9-503. Is an action for only the collateral (not full secured
debt) called a “replevin” action.
a)
(1)
2) Self Help Repossession §9-503 says party can get the collateral as long
as he does not breach the peace.
a) What is breach of the peace?
b) Duty of reasonable care - §9-207 duty of reasonable care applies when
the SC repos the collateral.
c) Items of Personalty in Vehicle – must return these promptly or will be
liable for conversion.
3) Lawsuit (9-503 “judicial action”): can bring a lawsuit for the amount due
(which, if there is an acceleration clause, but upon any other property of
the debtor.
4) Collection §9-502 – If the collateral is accounts, according to 9-502(1) the
SC has the right to notify the “account debtor” (the person who owes
45
money to the debtor) that he is from now on to pay the SC and not the
debtor.
D) §9-504 – Disposing of the Collateral after repo
1) SC can sell or lease or otherwise dispose of the collateral. Proceeds of the
sale go to:
a) 9-504(1)(a): to the expenses for the repo, the paying of the lawyer, etc.
b) 9-504(1)(b): to pay off the creditor debt.
c) 9-504(1)(c): to any 2nd in line SI (if the 2nd in line gives notice prior to
distribution of the proceeds)
d) If any left after the above, then:
(1) 9-504(2) – debtor gets the surplus (usually nothing left)
e) If the collateral did not suffice to pay off the creditor debt, the SC can
sue the debtor for the deficiency 9-504(2)
(1) If the underlying transaction was a sale of account of chattel paper,
the debtor liable for any deficiency ONLY if the SA so provides.
E) §9-504(3) – How SC may dispose of collateral
1) How sale must be conducted: SC can sell, lease, or dispose of any or all
of the collateral in its then condition of following any commercially
reasonable preparation or processing.” Disposition is subject to several
restrictions:
a) Commercially reasonable:
(1) Notice: 9-504(3), the notice must be given (unless falls under
exceptions),
(2) If commercially reasonable sale the rebuttable presumption is that
in a sale there was enough money in the sale (Creditor can show
this is not true)
(3) Ohio says in consumer goods case that if there is a deficiency in
the sale, the sale is still commercially reasonable.
(4) Accounting for surplus: 9-504(2) -b) Adequate price:
(1) Could a better price have been gotten?
(2) Wholesale or Retail Standard to be used?
(a)
(3) Self-Dealing by the SC
(a) Any sign of self-dealing or unfairness by the SC is likely to result
in the sale being declared to be commercially unreasonable.
 SC “bids-in” at a sparsely attended auction, gets the collateral,
then sells it for much higher shortly thereafter. Held: This is
commercially unreasonable.
 SC knows that some possible bidders are interested in
collateral, but does not give them notice, and gets it himself.
Held: this is commercially unreasonable.
(4) Private Sale:
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(a) If the SC decides to sell the collateral at a private sale, he
should generally procure more than one bid, or could be
Commercially un-reasonable.
F) §9-505 Strict Foreclosure
G) §9-506 Debtor’s Right to Redeem Collateral: q
<
H) §9-507 Consequences for the SC who does not follow §5 correctly
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