Secured Transactions
Chapter 17: Introduction to Secured Transactions
Debtor
Value
Transaction
Obligation
Creditor
Intro: It is understandable that someone extending credit in a sale or loan transaction
wants to be sure of repayment. Some debtors are so solvent and trustworthy that a
promise to pay is enough. This is said to be unsecured. However, this is not always the
case and the seller may require that the debtor obtain a surety (called a co-signer,
guarantor and in UCC article 3 an accommodation party). Or securing the debt by
nominating some of the debtors current or future property as collateral.
Subject of Art. 9
See-9-109
Lets look at some basic definitions under article 9.
A “lien” is an interest in the debtor’s property given by the law to protect a creditor. If a
debtor voluntarily grants such an interest, it is called a “consensual lien”. If a
consensual lien is taken in the debtor’s real property, then the lien is called a
“mortgage.” A consensual lien in personal property is called a “security interest” and is
governed by article 9. An involuntary lien can also be created by the courts called a
“judicial lien.” A “statutory lien” is created by statute or common law in favor of
certain creditors the law deems worthy of protection. For example, liens given to
landlords, mechanics and even attorneys. In addition, if you fail to pay taxes the federal
government can file a “tax lien”. Allows the federal government or state to collect.
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I.
Bankruptcy
Bankruptcy law provides for the development of a plan that allows a debtor, who is
unable to pay his creditors, to resolve his debts through the division of his assets among
his creditors. This supervised division also allows the interests of all creditors to be
treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to
stay in business and use revenue generated to resolve his or her debts. An additional
purpose of bankruptcy law is to allow certain debtors to free themselves (to be
discharged) of the financial obligations they have accumulated, after their assets are
distributed, even if their debts have not been paid in full.
Bankruptcy law is federal statutory law contained in Title 11 of the United States Code.
Congress passed the Bankruptcy Code under its Constitutional grant of authority to
"establish. . . uniform laws on the subject of Bankruptcy throughout the United States."
See U.S. Constitution Article I, Section 8. States may not regulate bankruptcy though
they may pass laws that govern other aspects of the debtor-creditor relationship. See
Debtor-Creditor. A number of sections of Title 11 incorporate the debtor-creditor law of
the individual states.
Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy
Courts. These courts are a part of the District Courts of The United States. The United
States Trustees were established by Congress to handle many of the supervisory and
administrative duties of bankruptcy proceedings. Proceedings in bankruptcy courts are
governed by the Bankruptcy Rules which were promulgated by the Supreme Court under
the authority of Congress.
There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called
liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves
the appointment of a trustee who collects the non-exempt property of the debtor, sells it
and distributes the proceeds to the creditors. Bankruptcy proceedings under Chapters 11,
12, and 13 involves the rehabilitation of the debtor to allow him or her to use future
earnings to pay off creditors. Under Chapter 7, 12, 13, and some 11 proceedings, a trustee
is appointed to supervise the assets of the debtor.
II.
Pre-Code Security Devices
Students who know nothing other than article 9 may not appreciate the wide variety if
devices the UCC replaced.
Benedict v. Ratner (U.S. Supreme Court, 1925)
Facts: Hub Carpets received certain loan money from Ratner (D). In return, Ratner (D)
received a lien on all past and future accounts receivable. Unless the lien was foreclosed
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upon, all indicia of ownership in the accounts was retained by Hub. No recordation of the
lien of any sort was made. Hub then filed for bankruptcy. Benedict, the Bankrupcty
trustee (P), filed an action to void the lien as the preferential transfer.
Posture: The district court upheld the validity of the lien, and the court of appeals
affirmed.
Issue: When a bankrupt gives a lien on accounts to a creditor but retains all indicia of
ownership, is the lien voidable in bankruptcy?
Held: Yes; Reversed
Rule: When a bankrupt gives a lien on accounts to a creditor but retains all indicia of
ownership, the lien is voidable in bankruptcy
Analysis:
Court says: When a bankrupt gives a lien on accounts to a creditor but retains all indicia
of ownership, is the lien voidable in bankruptcy.
The bankruptcy code allows: a trustee to void prefiling fraudulent transfers. This is
determined by the state law.
Here: state law declares as fraudulent a lien on or other security interest in property
which is unrecorded, the transferor retained apparent possession.
Ratner argues: that this rule should not require delivery, as does transfer of chattel.
However: it is not delivery that matters but rather dominion.. When a transferor retains
the indicia of dominion over any kind of property, a secret transfer of title can work a
fraud on the transferors future creditors and is, therefore, a fraudulent transfer.
Book Notes: the evil under attack in this case is the secret lien that other creditors do not
know about. If it is enforced by the courts, the other creditors who were deceived by the
debtors apparently unencumbered prosperity are hurt. But, although the court in this rule
against creditors security interest, most creditors took comfort from the decision because
the court indicated methods by which the lien would of survived the trustees attack. Here
are the major devices.
Common
Law devices
most of
which have
replaced!
a) Pledge: In a pledge the debtor (called a pledgor) gives physical possession of the
collateral to the creditor (called the pledge) until the debt is paid. Possession than
perfects the creditors interest in the collateral (even against the bankruptcy
trustee).
b) Chattel Mortgage: The debtor could always mortgage land, so why not have
something similar for personal property (chattels)?
c) Conditional Sale: see problem 260
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Problem 260
Facts: J sold N a used car for 900 to be paid in 3 payments of 300. The contract was oral
and when she missed the second payment the car was repossessed. N sued J for
conversion. Who should win?
Answer: Nancy, because the contract was oral and no security interest was present so
why should they be allowed to take the car.
§ 2-702. Seller's Remedies on Discovery of Buyer's Insolvency.
(1) Where the seller discovers the buyer to be insolvent he may refuse delivery except for
cash including payment for all goods theretofore delivered under the contract, and stop
delivery under this Article (Section 2-705).
(2) Where the seller discovers that the buyer has received goods on credit while
insolvent he may reclaim the goods upon demand made within ten days after the
receipt, but if misrepresentation of solvency has been made to the particular seller
in writing within three months before delivery the ten day limitation does not apply.
Except as provided in this subsection the seller may not base a right to reclaim
goods on the buyer's fraudulent or innocent misrepresentation of solvency or of
intent to pay.
(3) The seller's right to reclaim under subsection (2) is subject to the rights of a buyer in
ordinary course or other good faith purchaser under this Article (Section 2-403).
Successful reclamation of goods excludes all other remedies with respect to them.
Most people assume that the unpaid seller always has the right to repossess. This is not
true. The unpaid seller may repossess only in 3 situations.
1. When 2-702 applies
2. When the buyer has specifically granted the seller a security interest in the object
sold and
3. When the seller sues and recovers judgment and has the seller seize the property
as part of the judgment.
D. Factors Lien: This was used by the textile industry. This was a way of financing
in this industry.
F: Field Warehousing: He is not too interested in this. However, it is still around
today.
Chapter 18: The Scope of Article 9
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I.
Security Interest Defined. See 1-201(37) and 9-109(a).
1-201(35) "Security interest" means an interest in personal property or fixtures which
secures payment or performance of an obligation. "Security interest" includes any interest
of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a
promissory note in a transaction that is subject to Article 9. "Security interest" does not
include the special property interest of a buyer of goods on identification of those goods
to a contract for sale under Section 2-401, but a buyer may also acquire a "security
interest" by complying with Article 9. Except as otherwise provided in Section 2-505, the
right of a seller or lessor of goods under Article 2 or 2A to retain or acquire possession of
the goods is not a "security interest", but a seller or lessor may also acquire a "security
interest" by complying with Article 9. The retention or reservation of title by a seller of
goods notwithstanding shipment or delivery to the buyer under Section 2-401 is limited
in effect to a reservation of a "security interest." Whether a transaction in the form of a
lease creates a "security interest" is determined pursuant to Section 1-203.
9-109. SCOPE
(a) [General scope of article.] Except as otherwise provided in subsections (c) and (d),
this article applies to:
(1) a transaction, regardless of its form, that creates a security interest in personal
property or fixtures by contract;
(2) an agricultural lien;
(3) a sale of accounts, chattel paper, payment intangibles, or promissory notes;
(4) a consignment;
(5) a security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5), as
provided in Section 9-110; and
(6) a security interest arising under Section 4-210 or 5-118.
Problem 261
Facts: Assume that a state statute gives someone doing repairs a possessory artisans lien
on the property repaired. Mr. Baker took his car into Macks Garage for repair but could
not pay the full bill and Mac would not let him have the car back. Is Macks artisan lien an
article 9 security interest? See 9-109(d)(2).
Answer: No; 9-109(d)(2). This article does not apply to: (2) a lien, other than an
agricultural lien, given by statute or other rule of law for services or materials, but
Section 9-333 applies with respect to priority of the lien. An artisans lien is not covered
by article 9. Comment 10 says only consensual lien where here it is created by a statute.
Question 2: what if prior to the repair work, Mr. Baker signed a statement giving Macks
Garage a right to repossess the car if the bill wasn’t paid , does this create a security
interest under the code?
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Answer: Yes; Except as otherwise provided in subsections (c) and (d), this article applies
to: (1) a transaction, regardless of its form, that creates a security interest in personal
property or fixtures by contract.
II.
Consignments (see handout: this will not be tested or leases)
A true consignment is neither a sale nor a security device; it is a marketing procedure by
which the owner of goods, the consignor, sends (consigns) them to a retailer (consignee)
for sale to the public. The retailer does not buy the goods (so no sale takes place). If they
cannot be sold then they are returned to the consignor.
Problem 263
Facts: Antiques Are US was the largest antiques store in the city, a well-known place
where antique dealer could hire out space and exhibit their wares with the store handling
the sales and taking a commission and returning the unsold goods. If the store takes out a
loan will the banks security interest reach the dealers items if the dealers have never
completes the steps required by consignors under article 9? See 9-102(a)(20)(a)(iii)
Answer: No; "Consignment" means a transaction, regardless of its form, in which a
person delivers goods to a merchant for the purpose of sale and: (A) the merchant: (iii) is
not generally known by its creditors to be substantially engaged in selling the goods of
others.
In Re Fabers, Inc
Facts: Mehdi & Co. (P) a dealer in oriental carpets delivered certain carpets to Fabers Inc
(D) a carpet retailer in Conn. The agreement provided that carpets remained the property
of (P) until sale and that funds received from any sale remained the property of the P.
Fabers filed for bankruptcy. P then petitioned to reclaim the goods from the bankrupt
estate. The dealer made did not follow the UCC.
Issue: May a consignor of goods to a bankrupt be unable to reclaim the goods upon the
consignees bankruptcy?
Held: Yes; The goods were subject to the claims of the creditors and beyond the reach of
the P.
Rule: A consignor of goods to a bankrupt may be unable to reclaim them upon the
consignees bankruptcy.
Analysis:
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Under UCC 2-326: goods delivered for resale are subject to the claims of the possessors
creditors.
Unless:
1. The seller is generally known by his creditors to sell goods on consignment or
2. The deliverer of the goods (consignor) complies with article 9 filing provisions
Here: P did not comply with article 9 and Fabers was known to sell goods for
consignment.
Thus: The goods were subject to the claims of the creditors and beyond the reach of the
P.
Problem 264
Facts: LS, an artisan who handcrafted his wares, created a large sword and took it to
Weapon World, who sold either manufactured items by themselves or items bought from
others. The sword was worth 25,000 and he asked Weapon World to sell it for him. Is
this an article 9 consignment that would require him to take steps to protect his interest
against the stores creditors?
Answer: Yes; the consignee is not generally known by its creditors. LS should use article
9 steps.
III.
Leases (will not be on the final exam)
A problem similar to the applicability of article 9 to consignments occurs when the
parties disguise a secured sale as a lease. If it’s a lease then the creditors cannot take it
but if it’s a secured sale than the creditors can get it.
In Re Architectural Millwork of Virginia (west district of Virginia)
Facts: This is a chapter 11 bankruptcy proceeding. Before filing for Bankruptcy,
Architectural Millwork (debtor D) entered in to an agreement with Associates leasing (P)
for the lease of a freightliner truck. The agreement provided for the sale of the truck at
the end of the lease. This agreement required the sale of the truck for a residual value.
The debtor also entered in to a lease for a forklift with Komatsu in which the forklift
could be purchased for a dollar after all scheduled payments. The D, debtor, selected the
goods without input from the P and P never inspected the goods before or after the
agreement.
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Issue: Is a lease agreement intended as a security agreement where it gives the lessee an
option to become the owner of the property for nominal consideration upon completion
of the lease term and is intended as a true lease where the consideration is not nominal?
Held: Yes
Rule: A lease agreement is intended as a security agreement where it gives the lessee an
option to become the owner of the property for nominal consideration upon completion
of the lease term and is intended as a true lease where the consideration is not nominal.
Analysis:
UCC 1-207(37): Provides that a security interest is created where the lease provides that
upon compliance with the terms of the lease the lessee shall become, or has the option of
becoming, the owner of the property for no additional consideration or nominal
consideration.
Here: the Komatsu agreement falls within the plain language of this section because it
provided an option to purchase the equipment for a dollar once all payments were made.
Consequently: the agreement should be characterized as a security interest.
The Freightliner agreement is less clear: here this was simply an option to buy for the
set residual value.
Under the UCC: if the debtor (D), could not avoid paying Associates (P) the value of the
payments due under the lease and could become the owner of the truck for a nominal or
no consideration upon compliance with the lease terms, then the agreement created a
security interest.
(1) The first of these 2 conditions is met: D had to pay the full value of the
consideration due under the lease, whether at the natural end or upon early termination.
(2) Second condition not met: the 9,625 is not nominal or no consideration given
that the truck cost 38,000.
Thus: it fails as a security interest and this does not make it a true lease.
IV. Other Transactions
Problem 267
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New Mexico v. Gulf Ins.: On motion for summary judgment, the district court
apportioned interpleaded funds between appellant, the contractor's surety, and appellee,
the contractor's creditor. Appellant challenged the judgment, contending that it had
superior rights under the doctrine of subrogation. The issue, of whether a surety that
issued performance and payment bonds and then satisfied claims against the
contractor by paying laborers and materialmen had superior rights as against the
contractor's secured creditors to final progress payments and retained funds held
by the project owner, was one of first impression in New Mexico. In reversing the
judgment of the lower court, the appellate court concluded that appellant surety had
superior rights. Federal case law firmly established that a surety's subrogation rights
were superior to secured creditors whose interests were perfected under the
Uniform Commercial Code, and part of the purpose of withholding final progress
payments and retained funds was to protect the interests of the surety.
V.
Exclusions from Article 9
See 9-109(c) and (d).
9-109. SCOPE
(c) [Extent to which article does not apply.] This article does not apply to the extent
that:
(1) a statute, regulation, or treaty of the United States preempts this article;
(2) another statute of this State expressly governs the creation, perfection, priority, or
enforcement of a security interest created by this State or a governmental unit of this
State;
(3) a statute of another State, a foreign country, or a governmental unit of another State
or a foreign country, other than a statute generally applicable to security interests,
expressly governs creation, perfection, priority, or enforcement of a security interest
created by the State, country, or governmental unit; or
(4) the rights of a transferee beneficiary or nominated person under a letter of credit are
independent and superior under Section 5-114.
(d) [Inapplicability of article.] This article does not apply to:
(1) a landlord's lien, other than an agricultural lien;
(2) a lien, other than an agricultural lien, given by statute or other rule of law for
services or materials, but Section 9-333 applies with respect to priority of the lien;
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(3) an assignment of a claim for wages, salary, or other compensation of an employee;
(4) a sale of accounts, chattel paper, payment intangibles, or promissory notes as part of
a sale of the business out of which they arose;
(5) an assignment of accounts, chattel paper, payment intangibles, or promissory notes
which is for the purpose of collection only;
(6) an assignment of a right to payment under a contract to an assignee that is also
obligated to perform under the contract;
(7) an assignment of a single account, payment intangible, or promissory note to an
assignee in full or partial satisfaction of a preexisting indebtedness;
(8) a transfer of an interest in or an assignment of a claim under a policy of insurance,
other than an assignment by or to a health-care provider of a health-care-insurance
receivable and any subsequent assignment of the right to payment, but Sections 9-315
and 9-322 apply with respect to proceeds and priorities in proceeds;
(9) an assignment of a right represented by a judgment, other than a judgment taken on a
right to payment that was collateral;
(10) a right of recoupment or set-off, but:
(A) Section 9-340 applies with respect to the effectiveness of rights of recoupment or
set-off against deposit accounts; and
(B) Section 9-404 applies with respect to defenses or claims of an account debtor;
(11) the creation or transfer of an interest in or lien on real property, including a lease or
rents thereunder, except to the extent that provision is made for:
(A) liens on real property in Sections 9-203 and 9-308;
(B) fixtures in Section 9-334;
(C) fixture filings in Sections 9-501, 9-502, 9-512, 9-516, and 9-519; and
(D) security agreements covering personal and real property in Section 9-604;
(12) an assignment of a claim arising in tort, other than a commercial tort claim, but
Sections 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds; or
(13) an assignment of a deposit account in a consumer transaction, but Sections 9-315
and 9-322 apply with respect to proceeds and priorities in proceeds.
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A. Federal Statutes
Its no doubt that the UCC, a state statute cannot displace Federal Law. From the way
UCC 9-109(c)(1) is worded, however, note that UCC does apply to the extent that the
Federal statute does not answer the problem presented. In United States v. Kimbell
Foods, the supreme court decided that, as a matter of federal law, the relative priority of
private consensual liens arising in favor the US government under various leading
programs is to be decided under non-discriminatory state law (I.E. the UCC), unless a
federal statute clearly provides otherwise.
Philko Aviation, Inc. v. Shacket
Facts: P bought an airplane from Smith. On Smiths assurances that he would handle the
paperwork, the P did not record the purchase with the FAA. Smith then entered into a
fraudulent transaction wherein he sold the airplane to Philko (D). P then filed a
declaratory action against D. The d/c held that the plane belonged to the P.
Issue: Will one who purchases an airplane but does not record the sale with the FAA
have inferior title to a subsequent purchaser?
Held: Yes; The Federal Aviation Act does have such an effect. Thus it preempts.
Rule: One who purchases an airplane but does not record the sale with the FAA will have
inferior title to a subsequent purchaser.
Analysis:
US supreme courts issue: Does the Federal Aviation Act of 1958 prohibit all transfers of
the title to aircrafts from having validity against innocent 3rd parties unless the transfer
has been evidenced by a written instrument, and the instrument has been recorded with
the FAA? We conclude the Federal Aviation Act does have such an effect.
Under the Act: all transfers of airplanes must be registered with the FAA to have
priority over subsequent purchasers for value.
Congressional Intent: shows that congress intended to preempt state laws.
B. Landlords Liens and Other Statutory Liens
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Subsection (d)(1) and (2) of 9-109 exclude statutory liens from article 9; but what about
the following situations.
(d) [Inapplicability of article.] This article does not apply to:
(1) a landlord's lien, other than an agricultural lien;
(2) a lien, other than an agricultural lien, given by statute or other rule of law for
services or materials, but Section 9-333 applies with respect to priority of the lien;
Problem 268
Facts: C opened his bookshop and the landlord wanted security for the rent. They signed
the lease agreement providing that all the inventory (books) would be subject to a lien in
the landlords favor and could be seized and sold if C defaulted in the rent payments. Is
the lien required to be perfected under article 9?
Answer: They created the consensual lien and are thus required to be perfected and the
code does not allow non-consensual. Here we have a contract and article 9 is triggered.
Persky v. Guyuron, 2000 WL 1867407, Defendant claims that Article 9 of the Uniform
Commercial Code is inapplicable in this case because it does not apply to the creation or
transfer of a security interest in real estate. However, this action was brought to
recover the personal property, including the dental equipment, located in the suite
formerly occupied by Dr. Block. Because defendant is claiming a security interest in
such personal property, we must apply the U.C.C. to determine which party's
security interest takes priority.
C. Wage Assignments
Claims to wages were once fertile source of collateral but statutory regulation has killed
this.
Problem 269
Facts: C was an independent insurance agent and to get a loan he gave the bank a
security interest in all present and future commissions. Does article 9 cover this?
Answer: Determine if this type of earning is a wage under article 9. Courts have held that
this is not a wage.
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D. Non-Financing Assignments
The 9-109(d)(4) through (7) exclusions of some transfers of accounts, chattel paper,
payment intangibles and promissory notes is meant to be an exclusion of all such
assignments of a non-financing nature.
9-109. SCOPE(d)(4) through (7)
(d) [Inapplicability of article.] This article does not apply to
(4) a sale of accounts, chattel paper, payment intangibles, or promissory notes as part of
a sale of the business out of which they arose;
(5) an assignment of accounts, chattel paper, payment intangibles, or promissory notes
which is for the purpose of collection only;
(6) an assignment of a right to payment under a contract to an assignee that is also
obligated to perform under the contract;
(7) an assignment of a single account, payment intangible, or promissory note to an
assignee in full or partial satisfaction of a preexisting indebtedness;
Problem 270
No; is the answer to all
E. Real Estate
Except for fixtures, real estate security interests are not covered by article 9, but what
happens when the paperwork creating them (mortgage itself) are used when the
mortgagee itself seeks a loan?
See official comment 7 to 9-109.
F. Other Exclusions
Problem 272
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No; this is a consumer account. However whether such account can be used for collateral
will differ from state to state.
Chapter 19: The Creation of a Security Interest
I.
Classifying The Collateral
Article 9 divides “collateral” [defined in 9-102(a)(1] into many categories.
Goods: read 9-102(a)(44); cf 2-105
1.
2.
3.
4.
Consumer goods (9-102(a)(23)
Equipment (9-102(a)(33)
Farm Products (9-102(a)(34); and
Inventory (9-102(a)(48).
Quasi-Tangible Property (pieces of paper used as collateral)
1. Instruments (9-102(a)(47) and 3-104)
2. Investment Property (stocks, bonds and rights to accounts containing same) (9102(a)(49);
3. Documents (warehouse receipts and bills of lading) (9-102(a)(30) and 1-201(15)
and
4. Chattel Paper (9-102(a)(11)
5. Letters of Credit Rights (9-102 (a)(51)
Intangible Property (property not having any significant physical form)
1. Accounts (9-102(a)(2) Health Insurance receivables (9-102(a)(46)
2. Deposit Accounts (9-102(a)(42) and Payment Intangibles (9-102(a)(61)-these are
a subcategory of general intangibles.
Problem 273: Classifications
DEFINITIONS
UNDER ARICLE
9. FOR THE
FINAL EXAM,
THE QUESTION
WILL BE VERY
BASIC!
a. A professional pianist piano? Equipment
b. Cattle fattened for sale? Farm products
c. Mobile home? This is a consumer good.
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d. The right to sue for breach? General intangible or an account.
The test to be used is 9-102(a)(2) whether the contractual cause
of actions is in the list of 9-102(a)(2)
e. Pencils? They are inventory because they are consumed in the
course of business.
f. A liquor license? This is a general intangible
g. Curtains bought by a lawyer for the law office is equipment.
What if later used as consumer goods do they become consumer
goods? No; they were originally classified as office equipment.
See In Re Morton.
h. Aunt used agreement to loan money to nephew is a payment
intangible.
In Re Morton
Facts: Morton (D) purchased a truck subject to a purchase money security interest held
by Maine National Bank (P). The vehicle was bought for personal use but later he
began using it for business. When D filed for Bankruptcy, the Bank (P’s) security
interest attached by way of valid security agreement between the seller of the truck and
Morton (D). When the security agreement was filed, the seller filed a financing
agreement with the town clerk, as required. The trustee in bankruptcy attacked the
security interest, contending that because the vehicle was primarily used for employment,
a second financing statement had to be filed with the secretary of state for the security
interest to be perfected.
Issue: Under UCC 9-109, should the court restrict its determination to the buyers
intended use of the collateral at the time of purchase as opposed to the actual use of the
collateral after purchase?
Held: Yes;
Rule: Under UCC 9-109, a court should restrict its determination to the buyers intended
use of the collateral at the time of purchase as opposed to the actual use of the collateral
after purchase.
Analysis:
Court says: Under UCC 9-109, a court should restrict its determination to the buyers
intended use of the collateral at the time of purchase as opposed to the actual use of the
collateral after purchase.
To do otherwise would require constant surveillance of the collateral after the security
interest attaches.
The car was bought for personal use and only later did it become used for employment.
Accordingly, the purchase money security interest of the Bank (P) was perfected.
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QUESTIONS:
What will be the result where a car buyer tells the seller he wants the car for personal
family use, but is lying and really plans to resell it on his own lot?
Problem 274
Facts: Mercy Hospital needs financing and calls you as an attorney with this question.
Many of it patients are members of various health plans and when they come in for
treatment they sign paperwork authorizing the hospital to seek payment from their health
insurance coverage provider. The hospital always has a large amount of receivables in
the process of collection. When the hospital wants to borrow money can it use the
monies due to it from the various health plans as collateral? YES See 9-109(d)(8) and 9109(a)(46)
UCC 9-109(d)(8)
(d) [Inapplicability of article.] This article does not apply to: (8) a transfer of an interest
in or an assignment of a claim under a policy of insurance, other than an assignment by
or to a health-care provider of a health-care-insurance receivable and any subsequent
assignment of the right to payment, but Sections 9-315 and 9-322 apply with respect to
proceeds and priorities in proceeds;
UCC 9-102(a)(46) "Health-care-insurance receivable" means an interest in or claim
under a policy of insurance which is a right to payment of a monetary obligation for
health-care goods or services provided.
Problem 275
Facts: Passport Credit issued millions of credit cards internationally, sending them to
cardholders, who then used them in millions of transactions with merchants. The
merchants would then send the paperwork to Passport for reimbursement minus the fee.
Can passport use the credit card transactions as collateral for a loan? YES See 9109(a)(3)
9-109(a)(3) [General scope of article.] Except as otherwise provided in subsections (c)
and (d), this article applies to: (3) a sale of accounts, chattel paper, payment intangibles,
or promissory notes;
Problem 276
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a. Milk is a farm product and in the hands of a retail purchaser it is a
consumer good. Inventory is inventory even though the customers eat it at
the store.
b. A certificate deposit is an instrument
c. IGNORE
d. A tax refund is an intangible
e. IGNORE
f. Your checking account is a deposit account. This is a new type of
collateral under the revised article 9. Consumer accounts are only covered
as to proceeds.
g. A computer program is a general intangible.
h. The monthly rental obligation owed to a landlord, who wants to use these
as collateral for a loan. This is not allowed but a promissory note is
allowed as a “instrument” that is automatically perfected.
Morgan County Feeders, Inc v. McCormick
Facts: Allen owned cattle, which he got for recreational cattle drives on his recreational
business. He entered into an agreement to sell 56 heads of cattle to McCormick (D).
Morgan County Feeders (P) holder of a perfected security interest in the cattle, seized
them before they were delivered to D. The trial court concluded that the cattle owned by
Allen were equipment, rather than inventory, and were thus subject to Morgan County
Feeders security interest. D appeals.
Issue: Are goods in a business, equipment when they are fixed assets or have, as
identifiable units, a relatively long period of use?
Held: Yes; affirmed
Rule: Goods in a business are equipment when they are fixed assets or have as
identifiable units, a relatively long period of use.
Analysis:
Under the UCC goods are classified as consumer goods, equipment, farm products, and
inventory.
The parties agree: That cattle constitutes goods under the UCC and they agree they are
not farm products.
They disagree as to whether they are inventory or equipment: Goods are inventory,
even though not held for sale, if they are used up or consumed in a short period of time in
the production of some end product.
17
Allen did not acquire the cattle for the principal purpose of immediate or ultimate sale
or lease but to use for recreational cattle drives.
Thus: the t/c was right in that cattle are equipment.
Problem 227
Facts: Sam was a lawyer who loved investing. When Elvis Pressley died he managed to
get one of the guitars. He kept it for years to let it appreciate in value and did not use it. If
he uses the guitar for a loan how should it be classified?
Answer: This is tough! It may be “equipment” or “consumer goods”. However, he
plans on using them for investment. Thus, the court may put the guitar in the catchall
section.
Problem 278
Facts: How would you categorize the car lease contracts that Dime-A-Minute Rental cars
use as collateral when it borrows money from a bank? If he uses an electronic version,
can it be used as collateral? See 9-102(a)(31).
Answer: “Chattel paper” is how it would be characterized. The chattel paper becomes
less and less paper due to the advances of technology.
Problem 279
The state of M has enacted a statute giving unpaid crop dusters lien on crops of the
farmer. This is a statutory lien. Is this nonetheless an article 9 transaction requiring
compliance with article 9 rules? See 9-102(a)(5) and 9-109(a)(2) and (d)(2)
9-102(a)(5
a) [Article 9 definitions.] In this article: (5) "Agricultural lien" means an interest in
farm products:
(A) Which secures payment or performance of an obligation for:
(i) Goods or services furnished in connection with a debtor's farming operation; or
(ii) Rent on real property leased by a debtor in connection with its farming
operation;
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(B) Which is created by statute in favor of a person that:
(i) In the ordinary course of its business furnished goods or services to a debtor in
connection with a debtor's farming operation; or
(ii) Leased real property to a debtor in connection with the debtor's farming
operation; and
9-109(a)(2) and (d)(2)
General scope of article.] Except as otherwise provided in subsections (c) and (d), this
article applies to: (2) an agricultural lien;
(d) [Inapplicability of article.] This article does not apply to: (2) a lien, other than an
agricultural lien, given by statute or other rule of law for services or materials, but
Section 9-333 applies with respect to priority of the lien;
II.
Technical Validity of the Forms
The creation of an article 9 security interest typically involves 2 documents: (1) the
security agreement and (2) the financing statement. The security agreement is the
contract between the debtor and the creditor by which the debtor grants to the creditor
(the secured party) a security interest in the collateral. See 9-102(a)(73). This section of
the book explores the technical requirements for valid security agreements and financing
statements.
A. The Security Agreement
Where the collateral is in the possession of a secured party (a pledge), no written security
agreement is required by law (though one is still desired for evidentiary reasons). Where,
however, the property leaves the creditors control, 9-203 becomes relevant and creates
technical problems.
9-203. ATTACHMENT AND ENFORCEABILITY OF SECURITY INTEREST;
PROCEEDS; SUPPORTING OBLIGATIONS; FORMAL REQUISITES
(a) [Attachment.] A security interest attaches to collateral when it becomes enforceable
against the debtor with respect to the collateral, unless an agreement expressly postpones
the time of attachment.
(b) [Enforceability.] Except as otherwise provided in subsections (c) through (i), a
security interest is enforceable against the debtor and third parties with respect to the
collateral only if:
(1) value has been given;
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(2) the debtor has rights in the collateral or the power to transfer rights in the collateral
to a secured party; and
(3) one of the following conditions is met:
(A) the debtor has authenticated a security agreement that provides a description
of the collateral and, if the security interest covers timber to be cut, a description of the
land concerned;
(B) the collateral is not a certificated security and is in the possession of the
secured party under Section 9-313 pursuant to the debtor's security agreement;
(C) the collateral is a certificated security in registered form and the security
certificate has been delivered to the secured party under Section 8-301 pursuant to the
debtor's security agreement; or
(D) the collateral is deposit accounts, electronic chattel paper, investment
property, or letter-of-credit rights, and the secured party has control under Section 9-104,
9-105, 9-106, or 9-107 pursuant to the debtor's security agreement.
(c) [Other UCC provisions.] Subsection (b) is subject to Section 4-210 on the security
interest of a collecting bank, Section 5-118 on the security interest of a letter-of-credit
issuer or nominated person, Section 9-110 on a security interest arising under Article 2 or
2A, and Section 9-206 on security interests in investment property.
(d) [When person becomes bound by another person's security agreement.] A person
becomes bound as debtor by a security agreement entered into by another person if, by
operation of law other than this article or by contract:
(1) the security agreement becomes effective to create a security interest in the person's
property; or
(2) the person becomes generally obligated for the obligations of the other person,
including the obligation secured under the security agreement, and acquires or succeeds
to all or substantially all of the assets of the other person.
(e) [Effect of new debtor becoming bound.] If a new debtor becomes bound as debtor
by a security agreement entered into by another person:
(1) the agreement satisfies subsection (b)(3) with respect to existing or after-acquired
property of the new debtor to the extent the property is described in the agreement; and
(2) another agreement is not necessary to make a security interest in the property
enforceable.
(f) [Proceeds and supporting obligations.] The attachment of a security interest in
collateral gives the secured party the rights to proceeds provided by Section 9-315 and is
also attachment of a security interest in a supporting obligation for the collateral.
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(g) [Lien securing right to payment.] The attachment of a security interest in a right to
payment or performance secured by a security interest or other lien on personal or real
property is also attachment of a security interest in the security interest, mortgage, or
other lien.
(h) [Security entitlement carried in securities account.] The attachment of a security
interest in a securities account is also attachment of a security interest in the security
entitlements carried in the securities account.
(i) [Commodity contracts carried in commodity account.] The attachment of a
security interest in a commodity account is also attachment of a security interest in the
commodity contracts carried in the commodity account.
Problem 280
Facts: FB bought a computer on credit and the store made him sign a “conditional sale
contract”, where he agreed that title would remain with the store until he fully paid for his
purchase. The contract described the computer but not the security interest. Does it
qualify as a security agreement under 9-203?
Answer: Yes; you do not need any particular words and thus this satisfies 9-203, as long
as it is authenticated (signed).
In Sommers v. International Business Machines, 640 F.2d 686, the court held that
appellees' security interest was not perfected under Tex. Bus. & Com. Code Ann. §
9.402) since it was not signed by debtor. A photocopy of the security agreement, rather
than the original, was filed with the Secretary of State, and such copy did not contain
debtor's original signature under § 9.402(a). There was nothing on the photocopy to
indicate an intention to authenticate the writing as a financing statement.
B. The Financing Statement
This is commonly called by its form number, UCC-1-is the document filed in the
appropriate public office by the creditor (secured party) to perfect the creditors rights in
the collateral against later parties. 9-516 lists other things that need to be on the financial
statement before the filing office will accept it.
C. Debtor’s Identity
When the financing statement is filed it will indexed in the debtor’s name.
Problem 281
21
Facts: Harry Fellini ran a movie theatre called Fellini’s Art Theatre, but since he was the
sole proprietor, that was a trade name. He gave a security interest in the business
equipment to Sharkteeth Finance Company. The financing statement calls for a listing of
the debtors name.
B. Should the parties use the business name or individual name? See 9503(C)
The code says that the individual name is the only one to use. If they have a partnership
they use this name because they are an organization
C. If the theatre were run as a partnership, would the partnerships name be
used as the debtors name? See 9-503(a)(4)(A) and official comment 2.
9-503. NAME OF DEBTOR AND SECURED PARTY
(a) [Sufficiency of debtor's name.] A financing statement sufficiently provides the name
of the debtor: (4) in other cases: (A) if the debtor has a name, only if it provides the
individual or organizational name of the debtor.
Problem 282
Nazar v. Bucklin Nat'l Bank (In re Erwin), 50 U.C.C. Rep. Serv. 2d (Callaghan) 933
The trustee argued that the debtor's name on the financing statement was seriously
misleading because the trustee's electronic search by the debtor's full legal name did not
reveal the financing statement filed under the debtor's nickname. The trustee contended
that an individual's full legal name was an individual debtor's "correct name." The court
noted that a search query using the debtor's last name, last name and first initial, or last
name and nickname would have revealed the creditor's financing statement and security
interest. The issue of correct names for individuals was not addressed by Article Nine of
the Uniform Commercial Code. Because Kan. Admin. Regs. § 7-17-22(a) contemplated
that some human judgment would enter into a search for records pertaining to
individuals, the searcher had to be reasonably diligent. The court held that the use of
the debtor's nickname was sufficient under Kan. Stat. Ann. § 9-503(a) (Supp. 2002),
which did not require the use of an individual debtor's full legal name, nor expressly
prohibit nicknames or common derivations for an individual's first name. The
nickname was a "correct name" and was not the equivalent of a trade name.
Problem 283
Facts: Barbara Song borrowed 50,000 from Octopus National Bank in order to start a
new business. Barbara and the bank signed a security agreement showing her as the
debtor and giving ONB an interest in the inventory and equipment. ONB duly filed a
financing statement. Barbara then got married and changed her name to Barbara Dancer.
She then borrowed another 50,000 from another bank which loaned her the money after
22
finding no encumbrances on the businesses inventory or equipment. Did ONB lose its
security interest when it failed to re-file when her name changed? See 9-507(c) and
official comment 4.
Answer: No; Comment 4 says “Subsection (b) provides that, as a general matter,
post-filing changes that render a financing statement inaccurate and seriously
misleading have no effect on a financing statement. The financing statement remains
effective. It is subject to two exceptions: Section 9-508 and Section 9-507(c). Section 9508 addresses the effectiveness of a financing statement filed against an original debtor
when a new debtor becomes bound by the original debtor's security agreement. It is
discussed in the Comments to that section. Section 9-507(c) addresses a "pure" change of
the debtor's name, i.e., a change that does not implicate a new debtor. It clarifies former
Section 9-402(7). If a name change renders a filed financing statement seriously
misleading, the financing statement is not effective as to collateral acquired more than
four months after the change, unless before the expiration of the four months an
amendment is filed that specifies the debtor's new correct name (or provides an incorrect
name that renders the financing statement not seriously misleading under Section 9-506).
As under former Section 9-402(7), the original financing statement would continue to be
effective with respect to collateral acquired before the name change as well as collateral
acquired within the four-month period.
9-507. EFFECT OF CERTAIN EVENTS ON EFFECTIVENESS OF FINANCING
STATEMENT
(c) [Change in debtor's name.] If a debtor so changes its name that a filed financing
statement becomes seriously misleading under Section 9-506:
(1) the financing statement is effective to perfect a security interest in collateral acquired
by the debtor before, or within four months after, the change; and
(2) the financing statement is not effective to perfect a security interest in collateral
acquired by the debtor more than four months after the change, unless an amendment to
the financing statement which renders the financing statement not seriously misleading is
filed within four months after the change.
9-310. WHEN FILING REQUIRED TO PERFECT SECURITY INTEREST OR
AGRICULTURAL LIEN; SECURITY INTERESTS AND AGRICULTURAL
LIENS TO WHICH FILING PROVISIONS DO NOT APPLY
(c) [Assignment of perfected security interest.] If a secured party assigns a perfected
security interest or agricultural lien, a filing under this article is not required to continue
the perfected status of the security interest against creditors of and transferees from the
original debtor.
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Problem 285
Facts: When Robin Oakapple found he could not get a loan unless he had collateral, he
got permission from his foster brother, Richard Dauntless, to use Richards yacht as
collateral. Should the lender make both sign the security agreement (only Robin signed
the promissory note)?
Answer: Richard is the debtor here because he is the boats owner thus he must sign.
Robin here is an obligor.
D. Description of the Collateral
One of the great fears of those opposed to article 9’s original adoption was that it would
lead to creditor overreaching in demanding too much collateral.
Problem 286
Facts: Peter Poor signed a security agreement and financing statement in favor of the
Total Finance Company, giving the company a security interest in “all personal property
debtor now owns or ever owns between now, the end of the world or his death, whichever
occurs first. Does this perfect an interest in his guitar? Compare 9-108 and 9-504.
Answer: No; it is not specific enough. The security agreement (the contract) needs more
specificity.
9-504.
INDICATION OF COLLATERAL
A financing statement sufficiently indicates the collateral that it covers if the financing
statement provides:
(1) a description of the collateral pursuant to Section 9-108; or
(2) an indication that the financing statement covers all assets or all personal property.
In Re Grabowski
Facts: This case involves a priority dispute between (D) Bank of America and (D) South
Pointe regarding their security interest in farm equipment (tractors) owned by the debtors.
Both lenders filed financing statements perfecting their interests. Bank of America, the
first to file, described its collateral in general terms and listed the debtors' business
address, rather than their home address where the collateral was located. South Pointe, by
contrast, described the collateral more specifically and included the debtors' home
address. South Pointe contends that Bank of America's description was ineffective to
perfect the Bank's security interest in the equipment and that South Pointe has a superior
interest by reason of its subsequently filed financing statement. Grabowski filed this
Chapter 11 proceeding to reorganize their farming operation in Washington and Perry
counties, Illinois. The debtors have been engaged in farming at this location for the past
30 years.
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Held: Despite the generality of the first lender's description, it was sufficient to notify
subsequent creditors that a lien existed on the debtors' property and that further inquiry
was necessary to determine the extent of the lien. Thus, the court found no merit in the
second lender's argument that the description of the first lender's collateral was too
general to fulfill the notice function of a financing statement under the Uniform
Commercial Code. The debtors' business, address was not part of the lender's description
of its collateral and, thus, did not serve to limit the collateral subject to the lien. In
addition, the financing statement listed the names of the debtors, and not the name of the
debtors' business.
Analysis:
Bank of America claims a prior security interest in this equipment by virtue of a security
agreement signed by the debtors in December 1998. The Bank's financing statement,
filed on December 31, 1998, identifies the debtors as "Ronald and Trenna Grabowski"
and lists their address as "12047 State Highway # 37, Benton, Illinois 62812." The
financing statement describes the Bank's collateral as:
All Inventory, Chattel Paper, Accounts, Equipment and General
Intangibles.
South Pointe subsequently obtained a lien on the debtors' equipment in January
2000. South Pointe's financing statement, filed January 18, 2000, identifies the debtors as
"Ronald and Trenna Grabowski" at "P.O. Box 38, Dubois, Illinois 62831" and describes
South Pointe's collateral as:
JD 1995 9600 combine . . ., JD 925 FLEX PLATFORM . . ., JD 4630
TRACTOR . . ., JD 630 DISK 28' 1998 . . . .
South Pointe asserts that Bank of America's financing statement, although prior
in time, was insufficient to perfect the Bank's interest because it failed to place
other lenders on notice of Bank of America's interest in the subject equipment.
Specifically, South Pointe notes that the Bank's financing statement contained the
address of the debtors' farm equipment business rather than that of the debtors'
home where their farming operation is located and, further, that it failed to
mention any specific items of equipment or even make reference to "farm
equipment" or "farm machinery."
The UCC sets forth the requirements for a creditor to obtain and perfect a
security interest in personal property of the debtor. Section 9-203 governs the
attachment and enforcement of security interests through the parties' execution of
a security agreement, while § 9-502 relates to the requisites of a financing
statement filed to perfect the creditor's interest against the interests of third
parties. Both sections call for a description of the debtor's property.
25
However, the degree of specificity required of such description depends on the
nature of the document involved -- whether it is a security agreement or financing
statement -- and the purpose to be fulfilled by such document.
Section 9-108 sets forth the test for sufficiency of a description under the UCC, stating:
(a) . . . a description of personal . . . property is sufficient, whether or not it
is specific, if it reasonably identifies what is described.
Examples of descriptions that meet this "reasonable identification" test
include identification by "category" or by "type of collateral defined in the UCC."
While § 9-108 provides a flexible standard for determining the sufficiency of a
description in a security agreement…
§ 9-504 provides an even broader standard with regard to a financing statement. This
section states:
A financing statement sufficiently indicates the collateral that it covers if
the financing statement provides:
(1) a description of the collateral pursuant to Section 9-108; or
(2) an indication that the financing statement covers all assets or all
personal property.
Thus: in the case of a financing statement, a creditor may either describe its
collateral by "type" or "category" as set forth in § 9-108 or may simply indicate its
lien on "all assets" of the debtor.
The Court concludes that Bank of America's financing statement was sufficient
to perfect its security interest in the subject farm equipment and that the Bank's
interest, being prior in time, is superior to that of South Pointe.
Problem 287
In re Boogie Enterprises, Inc., 866 F.2d 1172: Appellee creditor entered into a loan
agreement with a corporation that subsequently filed a Chapter 11 bankruptcy petition.
Appellant bankruptcy trustee filed suit against one of the corporation's customers and
obtained a settlement. Thereafter, appellant sought a declaration in the bankruptcy court
that appellee did not have an interest in the settlement proceeds by virtue of a financing
statement filed pursuant to Cal. Com. Code § 9203 that asserted an interest in the
corporation's "personal property." The district court reversed the bankruptcy court's grant
of summary judgment to appellant. On appeal, the court reversed because it found
26
that the financing statement's description of the collateral as "personal property"
was insufficient to satisfy Cal. Com. Code § 9402's requirement that collateral for a
loan must have been described with sufficient specificity to allow a reasonable
identification of the collateral. Thus, the court found that the financing statement,
which merely described the collateral as "personal property" was insufficient to
Problem 288
Claytor v. Shenandoah Warehouse Co. (In re Shenandoah Warehouse Co.), 202
B.R. 871: The debtor gave a security interest to the creditor. The interest was in accounts
receivable. At issue before the court was whether the accounts receivable included
after-acquired receivables as well as those held at the time the security agreement
was executed. The court held that the use of the words "accounts receivable" in the
security agreement included accounts receivable existing as of that date and all accounts
receivable of the debtor generated during the term of the security agreement. Because
neither Virginia courts, nor any federal court interpreting Virginia law, had addressed the
question before, the court looked to decisions in other jurisdictions. The court also noted
that the UCC, and specifically its section § 9-110, advised courts not to require the
most exact and detailed description possible. A majority of courts had adopted the
view that, where the security agreement covered "all" inventory or accounts
receivable, but contained no specific reference to after-acquired property, it was
reasonable to assume that after-acquired receivables were included because of the
revolving nature of the receivables and a resulting floating lien.
Problem 289
Chase Manhattan Bank, N.A. v. J & L General Contractors, Inc., 832 S.W.2d 204
Appellant bank brought suit against appellees alleging that the company had defaulted on
a promissory note, breached a guaranty agreement and unlawfully converted property in
which appellant had a perfected security interest. The trial court awarded appellant
judgment on the note obligation but not on the guaranty and denied appellant any further
relief. The court affirmed judgment on the note obligation and reversed on the guaranty
obligation as appellee agreed that the trial court did err on that point. The court affirmed
the remaining points of error, and held that the description of the property in the
financing statement was not unambiguous and clear, therefore the financing
statement was insufficient to perfect a security interest in appellee's equipment.
Because the security interest was not perfected, appellant's claimed security interest
was cut off by the subsequent purchase by appellee company. Further, the court held
that the corporate veil should not be pierced, as there was no evidence of a sham to
perpetuate a fraud.
Problem 290
27
In re Martin Grinding & Machine Works, Inc., 793 F.2d 592 Prior to filing for
bankruptcy, a debtor executed loan documents and a security agreement in which a
secured creditor took a security interest in the debtor's “machinery, equipment, furniture,
and fixtures.” The security agreement, however, inadvertently omitted inventory and
accounts receivable from its description of the secured collateral. In the bankruptcy
proceeding, the creditor claimed a security interest in the property omitted from the
security agreement. The bankruptcy court dismissed the creditor's claim and the district
court affirmed that decision. On the creditor's appeal, the court ruled that, pursuant to
9-201 and 9-203, because the security agreement unambiguously described the
collateral in which the security interest was granted the creditor was barred from
establishing, via the loan documents, which was parol evidence, that the property
omitted from the security agreement was intended by the parties to be covered by
the security agreement.
Problem 291
Abacus 12 plus all other equipment→ see page 933
Problem 292
In re Bollinger Corp., 614 F.2d 924: A third party made a loan to the debtor. As
evidence of the loan, the debtor executed a promissory note and signed a security
agreement with the third party giving it a security interest in certain machinery and
equipment. The debtor entered into a loan agreement with appellee. Appellee paid off the
remaining balance to the third party in return for the third party's assignment of the
original note and security. The debtor executed a promissory note to appellee containing
a provision that the note was secured by a security agreement. No formal security
agreement was ever executed. Appellee recorded a new financing statement signed by
the debtor. The debtor was adjudicated bankrupt. A receiver sold some of the debtor's
equipment but agreed that appellee would receive a credit on its secured claim. Appellee
asserted a secured claim against the debtor. The bankruptcy court entered judgment for
appellee and the district court reversed. The court of appeals affirmed.
NOTE: see the note on 934 to see what a wise creditor will do.
III. Attachment of the Security Interest
Attachment is the process by which the security interest in favor of the creditor becomes
effective against the debtor. Perfection is the process by which the creditors security
interest becomes effective against most of the rest of the world. The steps needed for
attachment are described in 9-203. They are
1. The security agreement must be signed
2. The creditor must give value (1-201)
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3. The debtor must have some rights in the collateral
A security interest ''attaches'' when the three essential elements of Section 9-203 have
occurred. This section requires that: (1) the debtor either have signed a written security
agreement describing the collateral or the collateral be in the possession of the secured
party pursuant to agreement; (2) value have been given by the secured party; and (3) the
debtor have rights in the collateral. Absent any one of these three, there is no attachment.
Likewise, upon the concurrence of all three, attachment occurs instantaneously.7
One must be careful to separate this concept from perfection, which deals with the
question of the relative effectiveness of the security interest against competing claims.
While the concept of an unperfected but nevertheless effective security interest does not
exist under certain provisions of Article 8 relating to securities, it is alive and well under
Article 9 .Similarly, the concept may exist, depending on particular state law, with regard
to titled vehicles or other similarly specialized collateral.
What is Value: Another point on the triangle of attachment is value given by the secured
party. Section 1-201(44) removes any doubt that ''value'' must be current. It clearly states
that value may arise out of an antecedent obligation, may be the result of forbearance,
may arise as the result of a loan or other financial commitment or, finally, may be the
bare minimum necessary to support a simple contract.
§ 9-203. Attachment and Enforceability of Security Interest; Proceeds; Supporting
Obligations; Formal Requisites.
(a) [Attachment.] A security interest attaches to collateral when it becomes enforceable
against the debtor with respect to the collateral, unless an agreement expressly postpones
the time of attachment.
(b) [Enforceability.] Except as otherwise provided in subsections (c) through (i), a
security interest is enforceable against the debtor and third parties with respect to the
collateral only if :
(1) value has been given;
(2) the debtor has rights in the collateral or the power to transfer rights in the collateral
to a secured party; and
(3) one of the following conditions is met:
(A) the debtor has authenticated a security agreement that provides a description of
the collateral and, if the security interest covers timber to be cut, a description of the
land concerned;
(B) the collateral is not a certificated security and is in the possession of the secured
party under Section 9-313 pursuant to the debtor's security agreement;
(C) the collateral is a certificated security in registered form and the security
certificate has been delivered to the secured party under Section 8-301 pursuant to the
debtor's security agreement; or
29
(D) the collateral is deposit accounts, electronic chattel paper, investment property, or
letter-of-credit rights, and the secured party has control under Section 9-104, 9-105,
9-106, or 9-107 pursuant to the debtor's security agreement.
(c) [Other UCC provisions.] Subsection (b) is subject to Section 4-210 on the security
interest of a collecting bank, Section 5-118 on the security interest of a letter-of-credit
issuer or nominated person, Section 9-110 on a security interest arising under Article 2 or
2A, and Section 9-206 on security interests in investment property.
(d) [When person becomes bound by another person's security agreement.] A person
becomes bound as debtor by a security agreement entered into by another person if, by
operation of law other than this article or by contract:
(1) the security agreement becomes effective to create a security interest in the person's
property; or
(2) the person becomes generally obligated for the obligations of the other person,
including the obligation secured under the security agreement, and acquires or succeeds
to all or substantially all of the assets of the other person.
(e) [Effect of new debtor becoming bound.] If a new debtor becomes bound as debtor
by a security agreement entered into by another person:
(1) the agreement satisfies subsection (b)(3) with respect to existing or after-acquired
property of the new debtor to the extent the property is described in the agreement; and
(2) another agreement is not necessary to make a security interest in the property
enforceable.
(f) [Proceeds and supporting obligations.] The attachment of a security interest in
collateral gives the secured party the rights to proceeds provided by Section 9-315 and is
also attachment of a security interest in a supporting obligation for the collateral.
(g) [Lien securing right to payment.] The attachment of a security interest in a right to
payment or performance secured by a security interest or other lien on personal or real
property is also attachment of a security interest in the security interest, mortgage, or
other lien.
(h) [Security entitlement carried in securities account.] The attachment of a security
interest in a securities account is also attachment of a security interest in the security
entitlements carried in the securities account.
(i) [Commodity contracts carried in commodity account.] The attachment of a
30
security interest in a commodity account is also attachment of a security interest in the
commodity contracts carried in the commodity account.
§ 9-204. After-Acquired Property; Future Advances.
(a) [After-acquired collateral.] Except as otherwise provided in subsection (b), a
security agreement may create or provide for a security interest in after-acquired
collateral.
(b) [When after-acquired property clause not effective.] A security interest does not
attach under a term constituting an after-acquired property clause to:
(1) consumer goods, other than an accession when given as additional security, unless the
debtor acquires rights in them within 10 days after the secured party gives value; or
(2) a commercial tort claim.
(c) [Future advances and other value.] A security agreement may provide that
collateral secures, or that accounts, chattel paper, payment intangibles, or promissory
notes are sold in connection with, future advances or other value, whether or not the
advances or value are given pursuant to commitment.
Thrift, Inc. v. ADE, Inc.
Facts: The car dealer obtained inventory financing from the financier, who perfected its
security interests in the dealer's inventory by filing a financing statement pursuant to Ind.
Code § 26-1-9-101 et seq. The financing statement included a security interest in the
dealer's after acquired inventory. Then, the seller (ADE) entered an agreement to sell
three automobiles to the dealer. The seller gave the dealer possession of the three
vehicles and the dealer agreed to pay the seller later. The financier advanced the dealer a
portion of the sales price and executed a trust receipt agreement, giving the financier a
security interest in the motor vehicles. The dealer defaulted and the financier took
possession of the dealer's inventory, including the three automobiles in question. The
financier demanded the titles of these vehicles and the seller demanded their return.
Posture: The trial court ruled for ADE.
Issue: Does the security interest in after acquired goods attach upon the debtors receipt of
autos for resale, even if the vendor has not yet received payment?
Held: Yes; The court held that the dealer acquired an interest in the collateral when it
received possession of the automobiles from the seller pursuant to their contract. Thus,
the court held that the financier's secured interest attached at that time.
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Rule: A security interest in after acquired goods attach upon the debtors receipt of autos
for resale, even if the vendor has not yet received payment.
Analysis:
Court says: A security interest in after acquired goods attach upon the debtors receipt of
autos for resale, even if the vendor has not yet received payment.
9-204: of the UCC provides that article 9 does not apply to autos, which are not
inventory.
However, 9-109(i) defines inventory, and the autos fell within the definition.
ADE argues: that Devers merely had possession of the autos and because he did not have
title thereto, he had no right to encumber the vehicles.
However, 9-401(i) of the UCC states that when property is delivered to a buyer the only
interest that can be retained is that of a security nature.
Here: ADE delivered the autos but purported to retain title. This it could not do against
the creditor of Devers.
Thus: Thrifts security interest prevails.
Problem 293
This is an explanation of the material we will cover. 941. This problem asks when a
security interest attaches based on 2-501. Identification does give buyer an insurable
interest in the goods, and, in some cases, the right to demand the goods from the seller
and the right to recover from third parties for damages to the goods. UCC § 2-401 and §
2-501.
In Re Howell Enterprises, Inc.
Facts: Tradax and Howell Enterprises devised a plan wherein Tradax would sell rice it
milled to a 3rd party in Howells name. The buyer purchased the rice through a letter of
credit made out to Howell but intended to be passed on to Tradax. Accidentally, the letter
was listed by the bookkeepers as an account recievable. Howell filed for bankruptcy
before the letter of credit matured. First National Bank, which had a perfected security
interest in Howells accounts receivable, claimed the right to the letters proceeds. Tradax
made a similar claim. The trial court held for the bank and Tradax appeals.
Issue: May a party having a security interest in accounts receivable be able to claim an
item therein when it is incorrectly entered as such an account?
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Held: No; the court held that appellee debtor could not claim any interest in the
customer's account or the proceeds of the letter of credit under 9-203 because the rice was
always owned by appellant. The court held that mere possession of a letter of credit was
insufficient to establish a right to collateral upon which to base a security interest.
Rule: A party having a security interest in accounts receivable may not be able to claim
an item therein when it is incorrectly entered as such an account.
Analysis:
A security interest cannot attach unless: the debtor giving the interest has rights in the
collateral. When the creditor has no such rights than no interest attaches.
When a debtor incorrectly enters an item an account receivable when in fact it has no
interest in such an item, a party having a security interest in such accounts obtains no
rights in this item, as the interest never attached.
Here: Howell never had any rights in the letter of credit, so no security interest favoring
the bank ever attached to it.
Chapter 20: The Perfection of the Security
Interest
Introduction: If a security interest is perfected, it is senior to most later creditor interest,
especially that of the trustee in a bankruptcy action. Read UCC 9-308. Note that a
security interest must first attach before perfection is possible.
The UCC’s most common means of perfection is by having the secured party (the
creditor) file a financing statement in the appropriate place. In fact, UCC 9-310 presumes
that the filing of a financing statement is the usual way of perfecting a security interest in
debtor property. However, the code does allow perfection in other ways.
Perfect the Security Interest (LEXIS)
A security interest is perfected only when it is attached and an act of perfection has been
completed. The act of perfection is most commonly the filing of a financing statement
though other forms of perfection are possible or even required in certain circumstances.
Perfection generally involves the secured party's giving notice to the world of its security
interest in certain property of the debtor. Perfection is absolutely vital (1) to the priority
of the security interest over the interests of other claimants to the same property and (2) to
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the security interest's survival in the event of the debtor's bankruptcy. Thus, the
practitioner must pay particular attention to executing the requirements for perfection
properly.
There are five methods for perfection: (1) filing of a financing statement; (2) possession
of the collateral by the secured party; (3) automatic perfection upon attachment; (4)
control of the collateral by the secured party; and (5) notation of the security interest on a
certificate of title. Note that all five methods are not available in any given transaction
and that in some transactions require use of a particular method. For example, filing of a
financing statement is required to perfect security interests in general intangibles, and
9-308. WHEN SECURITY INTEREST OR AGRICULTURAL LIEN IS
PERFECTED; CONTINUITY OF PERFECTION
(a) [Perfection of security interest.] Except as otherwise provided in this section and
Section 9-309, a security interest is perfected if it has attached and all of the applicable
requirements for perfection in Sections 9-310 through 9-316 have been satisfied. A
security interest is perfected when it attaches if the applicable requirements are satisfied
before the security interest attaches.
(b) [Perfection of agricultural lien.] An agricultural lien is perfected if it has become
effective and all of the applicable requirements for perfection in Section 9-310 have been
satisfied. An agricultural lien is perfected when it becomes effective if the applicable
requirements are satisfied before the agricultural lien becomes effective.
(c) [Continuous perfection; perfection by different methods.] A security interest or
agricultural lien is perfected continuously if it is originally perfected by one method
under this article and is later perfected by another method under this article, without an
intermediate period when it was unperfected.
(d) [Supporting obligation.] Perfection of a security interest in collateral also perfects a
security interest in a supporting obligation for the collateral.
(e) [Lien securing right to payment.] Perfection of a security interest in a right to
payment or performance also perfects a security interest in a security interest, mortgage,
or other lien on personal or real property securing the right.
(f) [Security entitlement carried in securities account.] Perfection of a security interest
in a securities account also perfects a security interest in the security entitlements carried
in the securities account.
(g) [Commodity contract carried in commodity account.] Perfection of a security
interest in a commodity account also perfects a security interest in the commodity
contracts carried in the commodity account.
I.
Perfection by Possession
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Problem 294
Facts: Your client, “A”, owns a diamond that is currently on display at X museum. B
has given a down payment to buy the stone and will pay the remainder on 3 payments
before getting possession. They fill out a form giving “A” a security interest in his own
diamond until the stone is paid off.
Issue: Can “A” perfect a security interest in the diamond by simply notifying the
museum of the sale and telling the museum to hold it for his benefit until she makes
payment in full, thus creating an escrow arrangement in which possession is held by the
escrow agent? See 9-313(c), (f), and (g).
Answer: Under article 9 the bailee must acknowledge an authenticated record.
9-313. WHEN POSSESSION BY OR DELIVERY TO SECURED PARTY
PERFECTS SECURITY INTEREST WITHOUT FILING
(c) [Collateral in possession of person other than debtor.] With respect to collateral
other than certificated securities and goods covered by a document, a secured party takes
possession of collateral in the possession of a person other than the debtor, the secured
party, or a lessee of the collateral from the debtor in the ordinary course of the debtor's
business, when:
(1) the person in possession authenticates a record
acknowledging that it holds possession of the collateral for the
secured party's benefit; or
(2) the person takes possession of the collateral after having authenticated a record
acknowledging that it will hold possession of collateral for the secured party's benefit.
(f) [Acknowledgment not required.] A person in possession of collateral is not required
to acknowledge that it holds possession for a secured party's benefit.
(g) [Effectiveness of acknowledgment; no duties or confirmation.] If a person
acknowledges that it holds possession for the secured party's benefit:
(1) the acknowledgment is effective under subsection (c) or Section 8-301(a), even if the
acknowledgment violates the rights of a debtor; and
(2) unless the person otherwise agrees or law other than this article otherwise provides,
the person does not owe any duty to the secured party and is not required to confirm the
acknowledgment to another person.
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Problem 296
KNOW FOR EXAM
Facts: Karate, Inc was karate school and they pledged 36 of the promissory notes given
by customers for a loan. The parties signed a security agreement and the finance
company took possession of the notes. The president of Karate then asked the bank for
one of the notes back so that he could present it to the customer for payment. The bank
gave him the note on the 6th of April. He put it on his desk and forgot about it. On
October 12th the school went bankrupt. Does the bank have perfected security interest in
any or all of the promissory notes. See 9-312(g) and (h).
Answer:
9-312. PERFECTION OF SECURITY INTERESTS IN CHATTEL PAPER,
DEPOSIT ACCOUNTS, DOCUMENTS, GOODS COVERED BY DOCUMENTS,
INSTRUMENTS, INVESTMENT PROPERTY, LETTER-OF-CREDIT RIGHTS,
AND MONEY; PERFECTION BY PERMISSIVE FILING; TEMPORARY
PERFECTION WITHOUT FILING OR TRANSFER OF POSSESSION
(g) [Temporary perfection: delivery of security certificate or instrument to debtor.]
A perfected security interest in a certificated security or instrument remains perfected for
20 days without filing if the secured party delivers the security certificate or
instrument to the debtor for the purpose of:
(1) ultimate sale or exchange; or
(2) presentation, collection, enforcement, renewal, or registration of transfer.
(h) [Expiration of temporary perfection.] After the 20-day period specified in
subsection (e), (f), or (g) expires, perfection depends upon compliance with this article.
II.
Automatic Perfection
Automatic perfection means that the secured party needs only make sure that its security
interest has attached and perfection is thereby accomplished without the need fro any
further steps.
A. Purchase Money Security Interest in Consumer
Goods
The various qualifying transactions are listed in 9-309.
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9-309. SECURITY INTEREST PERFECTED UPON ATTACHMENT
The following security interests are perfected when they attach:
(1) a purchase-money security interest in consumer goods, except as otherwise provided
in Section 9-311(b) with respect to consumer goods that are subject to a statute or treaty
described in Section 9-311(a);
(2) an assignment of accounts or payment intangibles which does not by itself or in
conjunction with other assignments to the same assignee transfer a significant part of the
assignor's outstanding accounts or payment intangibles;
(3) a sale of a payment intangible;
(4) a sale of a promissory note;
(5) a security interest created by the assignment of a health-care-insurance receivable to
the provider of the health-care goods or services;
(6) a security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5), until
the debtor obtains possession of the collateral;
(7) a security interest of a collecting bank arising under Section 4-210;
(8) a security interest of an issuer or nominated person arising under Section 5-118;
(9) a security interest arising in the delivery of a financial asset under Section 9-206(c);
(10) a security interest in investment property created by a broker or securities
intermediary;
(11) a security interest in a commodity contract or a commodity account created by a
commodity intermediary;
(12) an assignment for the benefit of all creditors of the transferor and subsequent
transfers by the assignee thereunder; and
(13) a security interest created by an assignment of a beneficial interest in a decedent's
estate.
Problem 297 (page 949)
A.) It required more than 10 days/consumer goods and thus the interest did not attach.
B.) Yes
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C.) No, this was not used for the purpose of the unit 9-103(a)(2). They can protect
themselves by making the check out to a co-payee and make sure they buy the actual
goods.
D.) Finance company. If you are properly perfected you will always beat the bank.
In Re Short
Facts: P entered into a retail installment contract to buy bedroom furniture. The entire
balance was due in one year. The contract to pay the debt, which granted a security
interest in the furniture, was assigned to American General Finance (D) on the date of
signing. One year later, P executed a note with American (D), which consolidated the
furniture debt with other debts. The note allowed monthly payments, an it listed the
collateral as a continued purchase money interest in the bedroom furniture as well as well
as some other household items owned by P. There was no indication that D had a
purchase money security interest in these other items. P then goes bankrupt and moved to
avoid Americans (D) lien on all the furniture, contending that the refinancing destroyed
the purchase money character of the lien and therefore the lien should be exempt from
creditor process pursuant to Bankruptcy code 11 USC 522(f). [chapter 7].
Issue: Does a purchase money security interest retain its character when the debt is
consolidated with other obligations, thereby escaping unavoidability under the
bankruptcy code?
Held: Yes
Rule: A purchase money security interest retain its character when the debt is
consolidated with other obligations, thereby escaping unavoidability under the
bankruptcy code 522(f).
Analysis:
There is a split of authority among the circuits concerning whether a purchase money
security interest is extinguished when the original purchase money loan is refinanced
through renewal or consolidation with another obligation.
One line of cases holds that a purchase money security interest is automatically
"transformed" into a non-purchase money interest when the proceeds of a renewal note
are used to satisfy the original note. [Automatic transformation]
The second line of cases, rejecting the "all or nothing" approach of the transformation
rule, holds that a lien may be partially purchase-money and partially nonpurchase-money
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and that the purchase money aspect of a lien is not automatically destroyed by
refinancing or consolidation with other debt. [Dual status]
Having considered the rationales for both the "automatic transformation" and
"dual status" rules, this Court finds that the dual status rule more closely adheres to
the statutory language of § 9-107 while effectuating the policy behind § 522(f)(2).
In this case, the consolidated loan was in part a purchase money security interest an in
part a non-purchase money security interest.
Therefore: D’s lien remains on the bedroom furniture to the extent that the purchase
money debt remains, but the motion to avoid is granted for the non purchase money lien.
Blacks Def: purchase-money security interest. A security interest that is created when a
buyer uses the lender's money to make the purchase and immediately gives the lender
security (UCC § 9-103); a security interest that is either (1) taken or retained by the seller
of the collateral to secure all or part of its price or (2) 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 that value is in fact so used. • If a buyer's purchase of a boat, for
example, is financed by a bank that loans the amount of the purchase price, the bank's
security interest in the boat that secures the loan is a purchase-money security interest.
Treatise Notes: In determining whether a perfected purchase money security interest in
consumer goods is lost when two or more retail installment contracts are consolidated,
the courts refer to two rules: the "transformation rule" and the "dual status rule."
According to some authorities that have adopted a rule known as the "transformation
rule", if collateral secures not only its own purchase price but also that of other items, the
purchase money security interest that existed before the "add-on" procedures is
transformed into nonpurchase money status, unless a statutory or contractual mechanism
exists for determining the extent of the purchase money interest. Thus, if consumer goods
secure any indebtedness other than their own, and there is no formula for application of
payments, the security interest in those goods is not a purchase money security interest,
and it has been held that a purchase money security interest in collateral is transformed
when consolidated with a subsequent nonpurchase money loan.
On the other hand, some authorities have held that a secured obligation may possess a
dual status by having a purchase money part and a nonpurchase money part and that a
purchase money security interest is not transformed to a nonpurchase money interest by
reason of add-on debts, or cross collateralization, or by reason of the fact that the
collateral secures additional costs. Under the dual status rule, the existence of a
nonpurchase money security interest in goods does not terminate the purchase money
security interest in such goods, to the extent that the collateral continues to secure its own
price, even though it may also secure the payment of other articles. In other words, under
the dual status rule, a security interest may have the status of a purchase money security
interest to the extent that it is secured by collateral purchased with loan proceeds, and the
39
status of a general security interest to the extent that the collateral secures obligations
unrelated to its purchase.
Problem 298
Facts: F Motors decided to buy an expensive Oriental rug for its main office. The seller
allowed them to take it back to the office to see if they wanted to keep it. All of the
equipment of F Motors was covered by a perfected floating lien with Bank O. As soon as
F gets possession of the rug (and before it makes up its corporate mind whether they want
to buy the rug) does the banks lien attach? See 2-326(1) and (2).
Answer: NO
§ 2-326. Sale on Approval and Sale or Return; Consignment Sales and Rights of
Creditors.
(1) Unless otherwise agreed, if delivered goods may be returned by the buyer even
though they conform to the contract, the transaction is
(a) a "sale on approval" if the goods are delivered primarily for use, and
(b) a "sale or return" if the goods are delivered primarily for resale.
(2) Except as provided in subsection (3), goods held on approval are not subject to the
claims of the buyer's creditors until acceptance; goods held on sale or return are
subject to such claims while in the buyer's possession.
Notes: floating lien. 1. A lien that is expanded to cover any additional property obtained
by the debtor while the debt is outstanding 2. A lien that continues to exist even when the
collateral changes in character, classification, or location.
Facts: They did decide to purchase the rug so it signed a K with the seller and made a
down payment. To finance the rest of the installment payments, F borrowed the money
from the AAA Bank giving it a security interest in the rug. Does the AAA’s security
interest qualify as the purchase money kind? See 9-103(a) official comment 3 and the
next case.
Answer: Yes (he thinks the decision of the case below is wrong).
9-103. PURCHASE-MONEY SECURITY INTEREST; APPLICATION OF
PAYMENTS; BURDEN OF ESTABLISHING
(a) [Definitions.] In this section:
(1) "purchase-money collateral" means goods or software that secures a purchase-
40
money obligation incurred with respect to that collateral; and
(2) "purchase-money obligation" means an obligation of an obligor incurred as all or
part of the price of the collateral or for value given to enable the debtor to acquire rights
in or the use of the collateral if the value is in fact so used.
Comment 3: "Purchase-Money Collateral"; "Purchase-Money Obligation";
"Purchase-Money Security Interest." Subsection (a) defines "purchase-money
collateral" and "purchase-money obligation." These terms are essential to the description
of what constitutes a purchase-money security interest under subsection (b). As used in
subsection (a)(2), the definition of "purchase-money obligation," the "price" of collateral
or the "value given to enable" includes obligations for expenses incurred in connection
with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight
charges, costs of storage in transit, demurrage, administrative charges, expenses of
collection and enforcement, attorney's fees, and other similar obligations.
The concept of "purchase-money security interest" requires a close nexus between the
acquisition of collateral and the secured obligation. Thus, a security interest does not
qualify as a purchase-money security interest if a debtor acquires property on unsecured
credit and subsequently creates the security interest to secure the purchase price.
General Electric Capital v. Spartan Motors
Facts: A predecessor of GECC (P) entered into an “inventory Security Agreement” with
Spartan (D) in connection with its floor plan financing of the dealerships inventory. By
assignment of the agreement, GECC (P) obtained a blanket or “dragnet” lien on Spartans
inventory to secure a debt in excess of 1 million dollars. The security agreement was
filed with the county clerk and Secretary of State. Spartan the signed a new wholesale
security agreement with GMAC in which GMAC agreed to finance Spartan (D)
inventory, which was duly filed. GMAC notified GECC (P) of its competing security
interest. GECC (P) sued Spartan (D) seeking 1.1 million dollars representing money ten
due to GECC (P) under its agreement with Spartan (D). Spartan then filed bankruptcy
and stopped doing business. GECC (P), GMAC and MBNA took possession and
liquidated their respective collateral. GECC (P) settled all of its claims against all the
defendants except GMAC, which it is accused of converting 2 Mercedes Benz cars in
violation of security interest. The court granted GECC (P) motion for s/j.
Issue: May a purchase money security interest be obtained under the UCC 9-107 even
where the debtor first obtains the property and is later reimbursed by the purported
purchase money security interest creditor?
Held: Yes; The court agreed with the secured lender, and held that U.C.C. § 9-107(b) did
not require that the secured lender pay the funds directly to the seller of the cars or that
the loan occur prior to the sale. The secured lender was able to show that the advance was
made to enable the auto dealer to purchase the collateral, and that the sequence of loan
41
first and acquisition second was not required as this practice was common and routine
between the parties. The agreement between the secured lender and the auto dealer was
adequately specific to identify the collateral, and the lender was timely put on notice.
Rule: A purchase money security interest be obtained under the UCC 9-107 even where
the debtor first obtains the property an is later reimbursed by the purported purchase
money security interest creditor
Analysis:
A perfected purchase-money security interest provides an exception to the general
first-in-time, first-in-right rule of conflicting security interests. Thus, a perfected
purchase-money security interest in inventory has priority over a conflicting prior
security interest in the same inventory (see, UCC 9-312 [3]).
However, as the Supreme Court, Dutchess County, observed, the purported purchasemoney security interest must fit within the Uniform Commercial Code definition to
qualify for the exception.
Uniform Commercial Code § 9-107 defines a "purchase money security interest" as
a security interest:
"(a) taken or retained by the seller of the collateral to secure all or part of its price; or
"(b) 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".
The issue here is therefore whether GMAC's payment as reimbursement to Spartan after
it had acquired the two Mercedes-Benz vehicles on two different occasions qualifies as
an "advance" or "obligation" that enabled Spartan to purchase the cars, such that GMAC
acquired a purchase-money security interest in the vehicles.
There are 2 arguments against such a finding:
Firstly, of the few courts to construe Uniform Commercial Code § 9-107 (b), many have
been reluctant to decide that a purchase-money security interest has been created where,
as here, title to and possession of the merchandise have passed to the debtor before the
loan is advanced.
Secondly, the literal wording of the agreement between GMAC and Spartan appears to
accord GMAC purchase-money secured status only when the finance company paid
Spartan's "manufacturer, distributor or other seller" directly.
42
Accordingly, the Supreme Court of NY (T/C) erred when it found that, having
financed the two vehicles at issue here by way of reimbursements--"the very opposite of
an advance"--GMAC did not acquire a purchase-money security interest pursuant to
Uniform Commercial Code 9-107 (b). Rather, since GMAC has established--and GECC
does not deny--that GMAC was "obligated" to give value to enable Spartan to acquire
rights in the two Mercedes-Benzes, and the purchase and loan transactions were only
days apart, it is clear that Spartan's purchase and GMAC's subsequent reimbursement
were sufficiently "closely allied" to give GMAC a purchase-money security interest in
the subject vehicles. Under these circumstances, we conclude, upon searching the record,
that GMAC is entitled to retain the proceeds of the sale of the two contested vehicles and
to summary judgment against GECC.
B. Certain Accounts and Other Intangibles
Read 9-309(2) and official comment 4. The courts have split over whether the major test
is “significant part” (percentage test) or “casual or isolated transaction”.
9-309. SECURITY INTEREST PERFECTED UPON ATTACHMENT
The following security interests are perfected when they attach: (2) an assignment of
accounts or payment intangibles which does not by itself or in conjunction with other
assignments to the same assignee transfer a significant part of the assignor's outstanding
accounts or payment intangibles;
In Re Wood
Facts: Larkin (P), an attorney, loaned Wood (D), another attorney, $10,000. Larkin (P)
later took as a security a lien on Woods (D) contingency interest in 2 cases Wood (D)
was handling. Larkin (P) had other wise no experience in using accounts receivable as
security interests. Wood (D) later file for bankruptcy. Larkin (P) brought an action
seeking to enforce his security interest. The court found the lien invalid and Larkin (P)
appeals.
Issue: Will the fact that a person is a sophisticated lender impact his ability to claim a
security interest in accounts receivable?
Held: No;
Rule: The fact that a person is a sophisticated lender does not impact his ability to claim
a security interest in accounts receivable.
Analysis:
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UCC 9-302: exempts from the general requirements of the filing of a financing statement
to perfect security interest in accounts receivable those situations where the assignment of
such accounts do not do not constitute a significant part of the accounts of the assignor.
This is meant to cover isolated or casual assignments, where neither party may be aware
of or have reason to suspect the applicability of article 9.
The tests which have been developed in this area look to the percentage of the assignors
accounts that are give for security and regularity, or lack thereof, of such assignments.
Here, the Bankruptcy court properly found that the assignment fell within the exemption
of 9-302.
However: the court concluded that because Larkin (P) was an attorney and therefore a
sophisticated lender, he was not entitled to invoke the exception.
This was not correct as the section does not mention lender sophistication.
Problem 299
Facts: O National Bank sold all the promissory notes it was holding to Last National
Bank. Remember that this is an article 9 transaction. Must Last National file a financing
statement or make sure it has possession in order to perfect its security interest? See 9309(4).
Answer: Here we have automatic perfection.
9-309. SECURITY INTEREST PERFECTED UPON ATTACHMENT
The following security interests are perfected when they attach: (4) a sale of a promissory
note.
Problem 300
Answer: Here we have automatic perfection upon attachment.
III.
Perfection by Filing [INTERESTED IN TESTING FOR EXAM]
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Filing a Financing Statement (LEXIS)
Filing a financing statement is the most common method of perfecting a security interest
in most types of collateral. To properly perfect through filing, the lawyer must know (a)
where to file and (b) what to file. The question of whether to file may be further
subdivided into (1) which state to file in and (2) which office with that state.
Revised Article 9 has greatly simplified the choice-of-law rules governing multi-state
transactions. Under the new statute, the secured party should file the financing statement
in the state where the debtor is located for all types of collateral except fixtures, timber to
be cut, and as-extracted collateral. The debtor's location varies depending upon the type
of debtor involved. Individual debtors are located at their principal residence. Debtors
that are corporations or other registered organizations are located in the state under whose
laws they are organized. For a corporation, this state will be the state of incorporation. A
non-registered business organization that has only one place of business is located at its
place of business. If such an organization has more than one place of business, it is
located at its chief executive office.
Once the proper state for filing has been chosen, one must then select the correct filing
office within that state. After the latest revision of Article 9, almost all security interests
will be filed centrally with the Secretary of State (or other central filing office designated
by a particular state). Only security interests in fixtures, timber to be cut, and asextracted collateral are filed in the real estate records in the county in which the
associated real estate is located.
Now having decided where to file, the practitioner must determine what to file--i.e., what
information is required on a financing statement. Under Revised Article 9, only three
items are necessary on a financing statement: the debtor's name, the name of the secured
party or its representative, and an indication of the collateral. The Code rules, however,
make it clear that the filing officer may, and in fact must, require additional information
on the financing statement: the addresses of both parties, the debtor's identity as an
individual or an organization, and, if the debtor is an organization, certain information
about the debtor's organization. The practitioner should use the forms provided in Article
9 or by the filing office.
The financing statement is effective for five years from the date of filing. To continue the
effectiveness of the filing beyond the five years, the secured party should file a
continuation statement within six months before the end of the five-year period. In
addition, significant changes in the debtor's name and changes in the debtor's location will
trigger the need to file a new financing statement. These issues and others regarding the
validity of the financing statement and the mechanic of filing are discussed in subsequent
chapters of the Treatise.
A.
Mechanics of filing
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Problem 301
Luker v. United States (In re Masters), 273 B.R. 773 The debtor borrowed money
from the creditor and provided the creditor with a security interest in certain property.
The creditor filed a financing statement, which was accepted and filed by the filing
officer. The creditor executed a subordination of its lien, which was filed. At the time the
subordination was filed, the filing officer erroneously terminated the creditor's financing
statement. The debtor filed a bankruptcy petition. A search did not disclose the financing
statement and the trustee sold the collateral. The trustee filed an adversarial complaint to
avoid the creditor's lien and the creditor filed a motion for summary judgment. The court
ruled that presentation for filing of a financing statement and tender of the filing fee or
acceptance of the statement by the filing officer constituted filing and that a mistake by
the filing officer did not affect the perfection of the creditor's security interest where
the financing statement presented was proper even though no notice was given to
subsequent searchers.
9-516. WHAT CONSTITUTES FILING; EFFECTIVENESS OF FILING
(a) [What constitutes filing.] Except as otherwise provided in subsection (b),
communication of a record to a filing office and tender of the filing fee or acceptance of
the record by the filing office constitutes filing.
9-517. EFFECT OF INDEXING ERRORS
The failure of the filing office to index a record correctly does not affect the effectiveness
of the filed record.
B.
Other Filings
Problem 302
Facts: Octopus National Bank had a security interest in the equipment of the Weekend
Construction Company for which it filed a financing statement in the proper place on
May 1 2009. Antitrust National Bank took a security interest in the same collateral and
filed its financing statement on May 2, 2009 in the same place.
A. How long is the financing statement effective? See 9-515(a)
9-515. DURATION AND EFFECTIVENESS OF FINANCING STATEMENT;
EFFECT OF LAPSED FINANCING STATEMENT
(a) [Five-year effectiveness.] Except as otherwise provided in subsections (b), (e), (f),
and (g), a filed financing statement is effective for a period of five years after the date of
filing.
46
Compliance
here is all you
need for
perfection!
B. If ONB files a continuation statement on May 1, 2006 is its perfected position
continued? See 9-515(d) and 9-510(c).
9-515. DURATION AND EFFECTIVENESS OF FINANCING STATEMENT;
EFFECT OF LAPSED FINANCING STATEMENT
(d) [When continuation statement may be filed.] A continuation statement may be filed
only within six months before the expiration of the five-year period specified in
subsection (a) or the 30-year period specified in subsection (b), whichever is applicable.
C. If ONB never files a continuation statement at all, after May 1, 2014, does it
nevertheless retain its priority over ANB? See 9-515(c)
9-515. DURATION AND EFFECTIVENESS OF FINANCING STATEMENT;
EFFECT OF LAPSED FINANCING STATEMENT
(c) [Lapse and continuation of financing statement.] The effectiveness of a filed
financing statement lapses on the expiration of the period of its effectiveness unless
before the lapse a continuation statement is filed pursuant to subsection (d). Upon lapse, a
financing statement ceases to be effective and any security interest or agricultural lien
that was perfected by the financing statement becomes unperfected, unless the security
interest is perfected otherwise. If the security interest or agricultural lien becomes
unperfected upon lapse, it is deemed never to have been perfected as against a purchaser
of the collateral for value.
D. It will gain perfection but not priority.
Problem 303
She can have the bank file a termination statement. The damages will be computed under
625.
Problem 304
The bogus filings will be dealt with the same provisions used in the last problem also 9518 has an additional remedy.
IV. Perfection by Control
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Wanted us to read on our own.
Chapter 21: Multi-State Transactions
I.
General Choice of Law Rules
9-301. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY
INTERESTS
Except as otherwise provided in Sections 9-303 through 9-306, the following rules
determine the law governing perfection, the effect of perfection or nonperfection, and the
priority of a security interest in collateral:
(1) Except as otherwise provided in this section, while a debtor is located in a
jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection
or nonperfection, and the priority of a security interest in collateral.
(3) Except as otherwise provided in paragraph (4), while negotiable documents,
goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the local
law of that jurisdiction governs:
(A) perfection of a security interest in the goods by filing a fixture filing;
(B) perfection of a security interest in timber to be cut; and
(C) the effect of perfection or nonperfection and the priority of a nonpossessory
security interest in the collateral.
Problem 305
Answer: The creditor should file in Wyoming but the collateral is on Ohio and once she
pays 75% of the debt the creditor will be unable to collect.
Problem 306
Answer: The financing statement should be filed in Delaware because it is the
Corporations state of registry.
Problem 307
Answer: You have a 4 month period to refile. But if they merge with a DC firm they
have one year.
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Problem 308
9-316. CONTINUED PERFECTION OF SECURITY INTEREST FOLLOWING
CHANGE IN GOVERNING LAW
(b) [Security interest perfected or unperfected under law of new jurisdiction.] If a
security interest described in subsection (a) becomes perfected under the law of the other
jurisdiction before the earliest time or event described in that subsection, it remains
perfected thereafter. If the security interest does not become perfected under the law of
the other jurisdiction before the earliest time or event, it becomes unperfected and is
deemed never to have been perfected as against a purchaser of the collateral for value.
II.
Certificates if Title
§ 2-403. Power to Transfer; Good Faith Purchase of Goods; "Entrusting".
(1) A purchaser of goods acquires all title which his transferor had or had power to
transfer except that a purchaser of a limited interest acquires rights only to the extent of
the interest purchased. A person with voidable title has power to transfer a good title to a
good faith purchaser for value. When goods have been delivered under a transaction of
purchase the purchaser has such power even though
(a) the transferor was deceived as to the identity of the purchaser, or
(b) the delivery was in exchange for a check which is later dishonored, or
(c) it was agreed that the transaction was to be a "cash sale", or
(d) the delivery was procured through fraud punishable as larcenous under the criminal
law.
Problem 309
9-303. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY
INTERESTS IN GOODS COVERED BY A CERTIFICATE OF TITLE
(a) [Applicability of section.] This section applies to goods covered by a certificate of
title, even if there is no other relationship between the jurisdiction under whose certificate
of title the goods are covered and the goods or the debtor.
Krigel v. Mercedes-Benz Credit Corp. (In re Stanley), 249 B.R. 509: Debtor, who
had an Iowa driver's license, bought a tractor, on which defendant had a security interest.
49
Debtor moved from Kansas to Missouri, where he filed for bankruptcy. First, the
bankruptcy court failed to follow the necessary analytical process for determining which
state's law governs plaintiff's ability to avoid the security interest. Had the bankruptcy
court done so, it would have first looked to the law of Missouri, where debtor filed his
voluntary petition for bankruptcy. Second, regardless of whether the bankruptcy court
first looked to the law of Missouri, Iowa or Kansas, the court erred in concluding that the
Uniform Commercial Code-Article 9 choice of law provision -- which all three states
have adopted -- did not mandate the use of Kansas law to determine perfection of the
lien. Third, the bankruptcy court erred in concluding that Kansas had no authority to issue
a certificate of title to debtor's tractor. Fourth, under Kansas law, the security interest
was properly perfected and took priority over plaintiff's interest as hypothetical lien
creditor.
Problem 310
UCC 9-303 comment 6. External Constraints on This Section.
The need to coordinate Article 9 with a variety of nonuniform certificate-of-title
statutes, the need to provide rules to take account of situations in which multiple
certificates of title are outstanding with respect to particular goods, and the need to
govern the transition from perfection by filing in one jurisdiction to perfection by
notation in another all create pressure for a detailed and complex set of rules. In an effort
to minimize complexity, this Article does not attempt to coordinate Article 9 with the
entire array of certificate-of-title statutes. In particular, Sections 9-303, 9-311, and 9316(d) and (e) assume that the certificate-of-title statutes to which they apply do not have
relation-back provisions (i.e., provisions under which perfection is deemed to occur at a
time earlier than when the perfection steps actually are taken). A Legislative Note to
Section 9-311 recommends the elimination of relation-back provisions in certificate-oftitle statutes affecting perfection of security interests.
Ideally, at any given time, only one certificate of title is outstanding with respect to
particular goods. In fact, however, sometimes more than one jurisdiction issues more than
one certificate of title with respect to the same goods. This situation results from defects
in certificate-of-title laws and the interstate coordination of those laws, not from
deficiencies in this Article. As long as the possibility of multiple certificates of title
remains, the potential for innocent parties to suffer losses will continue. At best, this
Article can identify clearly which innocent parties will bear the losses in familiar fact
patterns.
50
Chapter 22: Priority (this is the main area)
I.
Simple Disputes
When the debtors financial situation collapses, the creditors all scramble to seize the
debtors assets. The basic provision on priority is 9-317 which lists the parties prevailing
over n unperfected security interest (one that has attached but the creditor has failed to
take the steps to perfect).
9-317. INTERESTS THAT TAKE PRIORITY OVER OR TAKE FREE OF
SECURITY INTEREST OR AGRICULTURAL LIEN
(a) [Conflicting security interests and rights of lien creditors.] A security interest or
agricultural lien is subordinate to the rights of:
(1) a person entitled to priority under Section 9-322; and
(2) except as otherwise provided in subsection (e), a person that becomes a lien creditor
before the earlier of the time:
(A) the security interest or agricultural lien is perfected; or
(B) one of the conditions specified in Section 9-203(b)(3) is met and a financing
statement covering the collateral is filed.
(b) [Buyers that receive delivery.] Except as otherwise provided in subsection (e), a
buyer, other than a secured party, of tangible chattel paper, documents, goods,
instruments, or a security certificate takes free of a security interest or agricultural lien if
the buyer gives value and receives delivery of the collateral without knowledge of the
security interest or agricultural lien and before it is perfected.
(c) [Lessees that receive delivery.] Except as otherwise provided in subsection (e), a
lessee of goods takes free of a security interest or agricultural lien if the lessee gives
value and receives delivery of the collateral without knowledge of the security interest or
agricultural lien and before it is perfected.
(d) [Licensees and buyers of certain collateral.] A licensee of a general intangible or a
buyer, other than a secured party, of accounts, electronic chattel paper, general
intangibles, or investment property other than a certificated security takes free of a
security interest if the licensee or buyer gives value without knowledge of the security
interest and before it is perfected.
(e) [Purchase-money security interest.] Except as otherwise provided in Sections 9-320
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and 9-321, if a person files a financing statement with respect to a purchase-money
security interest before or within 20 days after the debtor receives delivery of the
collateral, the security interest takes priority over the rights of a buyer, lessee, or lien
creditor which arise between the time the security interest attaches and the time of filing.
Problem 312
Facts: E bookstore borrowed 10,000 from Bank signing a security agreement giving the
bank a floating lien over the stores inventory. Bank was negligent and never filed the
financing statement. Martin was an unpaid creditor of the bookstore that sued on a debt
and recovered it from the book store. It then had the sheriff levy on the inventory. Who
gets paid first when the inventory is sold?
Answer: Martins; According to 9-317 a security interest is subordinate to the rights of a
person that becomes a lien creditor before the earlier of the time.
Problem 313
9-322. PRIORITIES AMONG CONFLICTING SECURITY INTERESTS IN AND
AGRICULTURAL LIENS ON SAME COLLATERAL
(a) [General priority rules.] Except as otherwise provided in this section, priority among
conflicting security interests and agricultural liens in the same collateral is determined
according to the following rules: (2) A perfected security interest or agricultural lien has
priority over a conflicting unperfected security interest or agricultural lien.
Problem 314
Facts: J ran a clothing store and needed money. He went to 2 banks B1 and B2. Both
banks made him sign a security agreement. B1 filed 1st but did not loan J money or
make a commitment until November 10. On October 2nd, B2 loaned the money and filed
a financing statement. J did not pay either bank.
a. Did both banks have a security interest assuming they filed in the proper place?
That is can they both have perfected interest in the same collateral.
b. Remembering that attachment is a prerequisite to perfection, 9-308, and that
attachment cannot occur until the creditor gives value, decide which bank has the
superior right to the inventory.
Comment 4 of 9-322 Competing Perfected Security Interests. When there is more
than one perfected security interest, the security interests rank according to priority in
time of filing or perfection. "Filing," of course, refers to the filing of an effective
financing statement. "Perfection" refers to the acquisition of a perfected security interest,
52
i.e., one that has attached and as to which any required perfection step has been taken.
See Sections 9-308 and 9-309.
Example 1: On February 1, A files a financing statement covering a certain item of
Debtor's equipment. On March 1, B files a financing statement covering the same
equipment. On April 1, B makes a loan to Debtor and obtains a security interest in the
equipment. On May 1, A makes a loan to Debtor and obtains a security interest in the
same collateral. A has priority even though B's loan was made earlier and was perfected
when made. It makes no difference whether A knew of B's security interest when A made
its advance.
The problem stated in Example 1 is peculiar to a notice-filing system under which
filing may occur before the security interest attaches (see Section 9-502). The
justification for determining priority by order of filing lies in the necessity of protecting
the filing system--that is, of allowing the first secured party who has filed to make
subsequent advances without each time having to check for subsequent filings as a
condition of protection. Note, however, that this first-to-file protection is not absolute.
For example, Section 9-324 affords priority to certain purchase-money security interests,
even if a competing secured party was the first to file or perfect.
Problem 315
Facts: When 1st Nat bank took a perfected security interest in the inventory of J the
agreement said that the inventory would secure not only the current loan, but all
future advances whatever kind. 6 months later it loaned J an additional 10,000 and
had him sign a new note for that amount. Do the existing filed financing statement and
security agreement need to be altered in any way or are they sufficient to protect the
bank? See 9-204(c) and comment 5. NO
9-204(C). AFTER-ACQUIRED PROPERTY; FUTURE ADVANCES
(c) [Future advances and other value.] A security agreement may provide that
collateral secures, or that accounts, chattel paper, payment intangibles, or promissory
notes are sold in connection with, future advances or other value, whether or not the
advances or value are given pursuant to commitment.
Future
advances
clause
5. Future Advances; Obligations Secured. Under subsection (c) collateral may secure
future as well as past or present advances if the security agreement so provides. This
is in line with the policy of this Article toward security interests in after-acquired
property under subsection (a). Indeed, the parties are free to agree that a security interest
secures any obligation whatsoever. Determining the obligations secured by collateral is
solely a matter of construing the parties' agreement under applicable law. This Article
rejects the holdings of cases decided under former Article 9 that applied other tests, such
53
as whether a future advance or other subsequently incurred obligation was of the same or
a similar type or class as earlier advances and obligations secured by the collateral.
Problem 316
9-323. FUTURE ADVANCES
(a) [When priority based on time of advance.] Except as otherwise provided in
subsection (c), for purposes of determining the priority of a perfected security interest
under Section 9-322(a)(1), perfection of the security interest dates from the time an
advance is made to the extent that the security interest secures an advance that:
(1) is made while the security interest is perfected only:
(A) under Section 9-309 when it attaches; or
(B) temporarily under Section 9-312(e), (f), or (g); and
3. Competing Security Interests. Under a proper reading of the first-to-file-or-perfect
rule of Section 9-322(a)(1) (and former Section 9-312(5)), it is abundantly clear that the
time when an advance is made plays no role in determining priorities among conflicting
security interests except when a financing statement was not filed and the advance is the
giving of value as the last step for attachment and perfection. Thus, a secured party takes
subject to all advances secured by a competing security interest having priority under
Section 9-322(a)(1). This result generally obtains regardless of how the competing
security interest is perfected and regardless of whether the advances are made "pursuant
to commitment" (Section 9-102). Subsection (a) of this section states the only other
instance when the time of an advance figures in the priority scheme in Section 9-322:
when the security interest is perfected only automatically under Section 9-309 or
temporarily under Section 9-312(e), (f), or (g), and the advance is not made pursuant to a
commitment entered into while the security interest was perfected by another method.
Thus, an advance has priority from the date it is made only in the rare case in which it is
made without commitment and while the security interest is perfected only temporarily
under Section 9-312.
The new formulation in subsection (a) clarifies the result when the initial advance is
paid and a new ("future") advance is made subsequently. Under former Section 9-312(7),
the priority of the new advance turned on whether it was "made while a security interest
is perfected." This section resolves any ambiguity by omitting the quoted phrase.
Example 1: On February 1, A makes an advance secured by machinery in the debtor's
possession and files a financing statement. On March 1, B makes an advance secured by
the same machinery and files a financing statement. On April 1, A makes a further
advance, under the original security agreement, against the same machinery. A was the
first to file and so, under the first-to-file-or-perfect rule of Section 9-322(a)(1), A's
54
security interest has priority over B's, both as to the February 1 and as to the April 1
advance. It makes no difference whether A knows of B's intervening advance when A
makes the second advance. Note that, as long as A was the first to file or perfect, A
would have priority with respect to both advances if either A or B had perfected by
taking possession of the collateral. Likewise, A would have priority if A's April 1
advance was not made under the original agreement with the debtor, but was under a new
agreement.
Problem 317
Facts: X pledged his stamp collection to the bank for a loan (it was oral and no financing
statement was signed). The bank put the collection in the bank. X later borrowed money
from his Dad and gave him a signed security agreement on the stamps. Dad then filed the
financing statement in the correct place.
a. Who has priority?
Answer: Here the Bank has priority since it has “possession”. This also satisfies 203.
b. If X goes to the bank and takes the collection home so he can add new stamps but
then returns it does the answer change? At c/l the bank could do this for a limited
purpose without losing perfection. Has this doctrine survived the code?? See 9313(d)
Answer: No; there is no such doctrine. If perfection of a security interest depends upon
possession of the collateral by a secured party, perfection occurs no earlier than the time
the secured party takes possession and continues only while the secured party retains
possession.
c. If bank makes X sign a security agreement and then gives him the collection but
never files a financing statement who wins? See 9-308(c).
Answer: The father would win here because the Bank should of filed a financing
statement. Now, they are not relying on possession. However, if the father would of filed
first they lose.
9-308. WHEN SECURITY INTEREST OR AGRICULTURAL LIEN IS
PERFECTED; CONTINUITY OF PERFECTION
55
(c) [Continuous perfection; perfection by different methods.] A security interest or
agricultural lien is perfected continuously if it is originally perfected by one method
under this article and is later perfected by another method under this article, without an
intermediate period when it was unperfected.
Problem 318
In re Johnson, 9 B.R. 713 Debtor filed for bankruptcy. Creditor bank filed a complaint
seeking relief from the automatic stay imposed by 11 U.S.C.S. § 362(a) in regard to a
vehicle that it contended secured repayment of a loan to the debtor. The court dismissed
the complaint, finding that the vehicle did not secure repayment of the debt. The court
reasoned that a secured creditor who sought to enforce a future advance clause with
respect to consumer goods had the burden of showing that the subsequent indebtedness
was a consumer debt. Creditor bank failed to produce any evidence indicating that the
debtor's loan was in the nature of a consumer debt.
In Re Wollin
Facts: Prior to Moody and Wollin (debtors) filing for bankruptcy under chapter 13 the
Oregon Credit Union had extended lines of credit and issued credit cards to the debtors.
Advances against the lines of credit were secured by vehicles that were to be purchased
by the loans. All the loans had identical dragnet clauses that provided for crosscollateralization on other loans. The debtors objected to the proof of claim. The chapter
13 trustee recommended confirmation and the court took the latter under advisement.
Issue: To be enforceable, must a dragnet provision in a consumer loan meet a strict
“same class” test for subsequent loans and specifically reference antecedent loans?
Held: Yes
Rule: To be enforceable, a dragnet provision in a consumer loan must meet a strict “same
class” test for subsequent loans and specifically reference antecedent loans
Analysis:
Bank argues: the dragnet clause should be enforced according to its plain meaning.
Thus: in the case of the Moody’s, the Ford Bronco should secure their VISA charges
because the charges are either “any other amount” owed “in the future” or because they
are the same type of debt, namely consumer debt.
The code rejects the same
class test. Know the 3 views.
This is jurisdictional.
56
Court says: we reject both plain meaning arguments.
First: for all future advances to be covered by a dragnet clause, they must be of the same
class as the primary obligation and must be very closely related. This is true in the
commercial settings.
Here the VISA charges are not sufficiently related to the loan for the truck because a loan
to purchase a vehicle “differs both in scope and solemnity” from the miscellaneous
charges typical of a VISA account.
As to the antecedent loans (earlier lines of credit) P again argues that the plain meaning
of the dragnet should apply.
Court says: Majority view is to apply the plain meaning and the minority require the
clause the “specifically reference” antecedent debt.
We adopt the “specific reference test: Thus, since the antecedent debts were not
specifically referenced the vehicles do not secure them.
Problem 319
A merger like this shows how a vicious application of the drag net would affect. In this
case, it would it not apply because it was no the intention of the parties.
II.
Purchase Money Security Interest
A. The Basic Rule
See 9-103, 317(e) and 324(a),(b & (d)
9-103. PURCHASE-MONEY SECURITY INTEREST; APPLICATION OF
PAYMENTS; BURDEN OF ESTABLISHING
(a) [Definitions.] In this section:
(1) "purchase-money collateral" means goods or software that secures a purchasemoney obligation incurred with respect to that collateral; and
(2) "purchase-money obligation" means an obligation of an obligor incurred as all or
part of the price of the collateral or for value given to enable the debtor to acquire rights
in or the use of the collateral if the value is in fact so used.
57
(b) [Purchase-money security interest in goods.] A security interest in goods is a
purchase-money security interest:
(1) to the extent that the goods are purchase-money collateral with respect to that
security interest;
(2) if the security interest is in inventory that is or was purchase-money collateral, also
to the extent that the security interest secures a purchase-money obligation incurred with
respect to other inventory in which the secured party holds or held a purchase-money
security interest; and
(3) also to the extent that the security interest secures a purchase-money obligation
incurred with respect to software in which the secured party holds or held a purchasemoney security interest.
(c) [Purchase-money security interest in software.] A security interest in software is a
purchase-money security interest to the extent that the security interest also secures a
purchase-money obligation incurred with respect to goods in which the secured party
holds or held a purchase-money security interest if:
(1) the debtor acquired its interest in the software in an integrated transaction in which it
acquired an interest in the goods; and
(2) the debtor acquired its interest in the software for the principal purpose of using the
software in the goods.
(d) [Consignor's inventory purchase-money security interest.] The security interest of
a consignor in goods that are the subject of a consignment is a purchase-money security
interest in inventory.
(e) [Application of payment in non-consumer-goods transaction.] In a transaction
other than a consumer-goods transaction, if the extent to which a security interest is a
purchase-money security interest depends on the application of a payment to a particular
obligation, the payment must be applied:
(1) in accordance with any reasonable method of application to which the parties agree;
(2) in the absence of the parties' agreement to a reasonable method, in accordance with
any intention of the obligor manifested at or before the time of payment; or
(3) in the absence of an agreement to a reasonable method and a timely manifestation of
the obligor's intention, in the following order:
(A) to obligations that are not secured; and
58
(B) if more than one obligation is secured, to obligations secured by purchase-money
security interests in the order in which those obligations were incurred.
(f) [No loss of status of purchase-money security interest in non-consumer-goods
transaction.] In a transaction other than a consumer-goods transaction, a purchasemoney security interest does not lose its status as such, even if:
(1) the purchase-money collateral also secures an obligation that is not a purchasemoney obligation;
(2) collateral that is not purchase-money collateral also secures the purchase-money
obligation; or
(3) the purchase-money obligation has been renewed, refinanced, consolidated, or
restructured.
(g) [Burden of proof in non-consumer-goods transaction.] In a transaction other than a
consumer-goods transaction, a secured party claiming a purchase-money security interest
has the burden of establishing the extent to which the security interest is a purchasemoney security interest.
(h) [Non-consumer-goods transactions; no inference.] The limitation of the rules in
subsections (e), (f), and (g) to transactions other than consumer-goods transactions is
intended to leave to the court the determination of the proper rules in consumer-goods
transactions. The court may not infer from that limitation the nature of the proper rule in
consumer-goods transactions and may continue to apply established approaches.
9-317. INTERESTS THAT TAKE PRIORITY OVER OR TAKE FREE OF
SECURITY INTEREST OR AGRICULTURAL LIEN
(e) [Purchase-money security interest.] Except as otherwise provided in Sections 9-320
and 9-321, if a person files a financing statement with respect to a purchase-money
security interest before or within 20 days after the debtor receives delivery of the
collateral, the security interest takes priority over the rights of a buyer, lessee, or lien
creditor which arise between the time the security interest attaches and the time of filing.
9-324. PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS
(a) [General rule: purchase-money priority.] Except as otherwise provided in
subsection (g), a perfected purchase-money security interest in goods other than
inventory or livestock has priority over a conflicting security interest in the same goods,
and, except as otherwise provided in Section 9-327, a perfected security interest in its
59
identifiable proceeds also has priority, if the purchase-money security interest is perfected
when the debtor receives possession of the collateral or within 20 days thereafter.
(b) [Inventory purchase-money priority.] Subject to subsection (c) and except as
otherwise provided in subsection (g), a perfected purchase-money security interest in
inventory has priority over a conflicting security interest in the same inventory, has
priority over a conflicting security interest in chattel paper or an instrument constituting
proceeds of the inventory and in proceeds of the chattel paper, if so provided in Section
9-330, and, except as otherwise provided in Section 9-327, also has priority in
identifiable cash proceeds of the inventory to the extent the identifiable cash proceeds are
received on or before the delivery of the inventory to a buyer, if:
(1) the purchase-money security interest is perfected when the debtor receives
possession of the inventory;
(2) the purchase-money secured party sends an authenticated notification to the holder
of the conflicting security interest;
(3) the holder of the conflicting security interest receives the notification within five
years before the debtor receives possession of the inventory; and
(4) the notification states that the person sending the notification has or expects to
acquire a purchase-money security interest in inventory of the debtor and describes the
inventory.
(d) [Livestock purchase-money priority.] Subject to subsection (e) and except as
otherwise provided in subsection (g), a perfected purchase-money security interest in
livestock that are farm products has priority over a conflicting security interest in the
same livestock, and, except as otherwise provided in Section 9-327, a perfected security
interest in their identifiable proceeds and identifiable products in their unmanufactured
states also has priority, if:
(1) the purchase-money security interest is perfected when the debtor receives
possession of the livestock;
(2) the purchase-money secured party sends an authenticated notification to the holder
of the conflicting security interest;
(3) the holder of the conflicting security interest receives the notification within six
months before the debtor receives possession of the livestock; and
(4) the notification states that the person sending the notification has or expects to
acquire a purchase-money security interest in livestock of the debtor and describes the
livestock.
Problem 320
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A) Under 309(1) no filing is needed for perfection. Here we have equipment and they
should at least adopt the policy of asking them how they plan to use the goods. If
you make them write it you may scare them out of the deal.
B) When the 20 grace period expires so will the perfection.
The problem here is that
Lewyn did not file and perfect
to have priority.
Galleon v. Lewyn Machinery
Facts: Lewyn (P) entered into a sales transaction with buyer Galleon (D) for a piece of
equipment. Delivery was to occur upon payment. By accident the machine was delivered
prior to payment. Lewyn (P) then sent an invoice requesting payment within 30 days. A
week after delivery Central Bank and Trust entered into a security arrangement with
Galleon (D) and perfected a security interest in the equipment. Upon Galleons (D) default
Lewyn sued to recover the machine.
Issue May a seller who mistakenly delivers a product to a buyer prior to payment and
does not file a financing statement lose priority to a subsequent creditor who takes a
security interest.
Held: Yes
Rule: a seller who mistakenly delivers a product to a buyer prior to payment and does not
file a financing statement loses priority to a subsequent creditor who takes a security
interest.
Analysis:
Court says: A seller who delivers goods to a buyer whom he then bills is a credit seller,
the legal equivalent to a purchase moneylender.
Under UCC 9-312(4): a purchase money lender will have priority over all other secured
creditors if he files a financing statement within 10 days of a debtors receipt of the
monies or goods purchased there within.
Here Lewyn did not file a financing statement.
Therefore as a creditor it lost its priority to the bank.
Problem 321
Facts:
Answer: She is out of luck.
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ITT Industrial Credit Co. v. Regan, 487 So. 2d 1047 Petitioner credit company
challenged an order holding that its purchase money lien was subordinate to respondent
mortgage holder's lien on after acquired property. The court affirmed and remanded and
found that respondent's security interest was entitled to priority over petitioner's purchase
money security interest only if petitioner failed to perfect within the 10-day grace period
provided by Fla. Stat. ch. 679.312(4) (Supp. 1984). The court held that upon remand, if
the trial court determined that petitioner was not entitled to the purchase money priority
because of late filing, the priority problem was to be resolved under ch. 679.312(5), and
respondent was entitled to priority over petitioner in the after acquired property without
regard to the debtor's equity in the property.
Problem 322
Answer: Hart wins.
9-326. PRIORITY OF SECURITY INTERESTS CREATED BY NEW DEBTOR
(a) [Subordination of security interest created by new debtor.] Subject to subsection
(b), a security interest created by a new debtor which is perfected by a filed financing
statement that is effective solely under Section 9-508 in collateral in which a new debtor
has or acquires rights is subordinate to a security interest in the same collateral which is
perfected other than by a filed financing statement that is effective solely under Section
9-508.
(b) [Priority under other provisions; multiple original debtors.] The other provisions
of this part determine the priority among conflicting security interests in the same
collateral perfected by filed financing statements that are effective solely under Section 9508. However, if the security agreements to which a new debtor became bound as debtor
were not entered into by the same original debtor, the conflicting security interests rank
according to priority in time of the new debtor's having become bound.
COMMENT 3 to 9-324: Purchase-Money Priority in Goods Other Than Inventory
and Livestock. Subsection (a) states a general rule applicable to all types of goods except
inventory and farm-products livestock: the purchase-money interest takes priority if it is
perfected when the debtor receives possession of the collateral or within 20 days
thereafter. (As to the 20-day "grace period," compare Section 9-317(e). Former Sections
9-312(4) and 9-301(2) contained a 10-day grace period.) The perfection requirement
means that the purchase-money secured party either has filed a financing statement
before that time or has a temporarily perfected security interest in goods covered by
documents under Section 9-312(e) and (f) which is continued in a perfected status by
filing before the expiration of the 20-day period specified in that section. A purchasemoney security interest qualifies for priority under subsection (a), even if the purchasemoney secured party knows that a conflicting security interest has been created and/or
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that the holder of the conflicting interest has filed a financing statement covering the
collateral.
Normally, there will be no question when "the debtor receives possession of the
collateral" for purposes of subsection (a). However, sometimes a debtor buys goods and
takes possession of them in stages, and then assembly and testing are completed (by the
seller or debtor-buyer) at the debtor's location. Under those circumstances, the buyer
"takes possession" within the meaning of subsection (a) when, after an inspection of the
portion of the goods in the debtor's possession, it would be apparent to a potential lender
to the debtor that the debtor has acquired an interest in the goods taken as a whole.
A similar issue concerning the time when "the debtor receives possession" arises when
a person acquires possession of goods under a transaction that is not governed by this
Article and then later agrees to buy the goods on secured credit. For example, a person
may take possession of goods as lessee under a lease contract and then exercise an option
to purchase the goods from the lessor on secured credit. Under Section 2A-307(1),
creditors of the lessee generally take subject to the lease contract; filing a financing
statement against the lessee is unnecessary to protect the lessor's leasehold or residual
interest. Once the lease is converted to a security interest, filing a financing statement is
necessary to protect the seller's (former lessor's) security interest. Accordingly, the 20day period in subsection (a) does not commence until the goods become "collateral"
(defined in Section 9-102), i.e., until they are subject to a security interest.
B. Inventory and Livestock
Problem 323
B) No; because he does not have to receive the notice. You do not have to receive it you
only have to send it.
9-324. PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS
(b) [Inventory purchase-money priority. Subject to subsection (c) and except as
otherwise provided in subsection (g), a perfected purchase-money security interest in
inventory has priority over a conflicting security interest in the same inventory, has
priority over a conflicting security interest in chattel paper or an instrument constituting
proceeds of the inventory and in proceeds of the chattel paper, if so provided in Section
9-330, and, except as otherwise provided in Section 9-327, also has priority in
identifiable cash proceeds of the inventory to the extent the identifiable cash proceeds are
received on or before the delivery of the inventory to a buyer, if:
(1) the purchase-money security interest is perfected when the debtor receives
possession of the inventory;
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(2) the purchase-money secured party sends an authenticated notification to the holder
of the conflicting security interest;
(3) the holder of the conflicting security interest receives the notification within five
years before the debtor receives possession of the inventory; and
Kunkel v. Sprague National Bank
Facts: Two creditors both claimed first priority security interests in the same cattle. The
district court affirmed the bankruptcy court's summary judgment that the purchase money
security interest (PMSI) creditor had priority over appellant creditor's earlier security
interest in the cattle or held in the alternative that appellant did not have a security
interest in the cattle because the debtor lacked rights in the collateral as required by the
Uniform Commercial Code (UCC).
Rule: A purchase money security interest (PMSI) has superiority over an earlier
perfected interest where: (a) the PMSI is perfected at the time the debtor receives
possession of the inventory; (b) the PMSI creditor gives written notification to all holders
of competing interests that had UCC-1; (c) the competing secured creditor receives
notification within 5 years before the debtor receives possession of the inventory and (d)
the notification state that the person expects to acquire a PMSI in the inventory of the
debtor and describing such inventory.
Analysis: The court reversed the latter holding but affirmed the judgment. Under a
feedlot agreement, the debtor purchased interests in 1900 head of cattle from the PMSI
creditor who financed the cattle purchases. For each transaction, the debtor executed a
loan agreement and promissory note. The court found that for each transaction a sale had
occurred; the PMSI creditor had constructively delivered the cattle to the debtor and had
possession of the cattle on the debtors behalf; debtor had title to and owned the cattle; the
PMSI creditor, as bailee, had lost his UCC art. 2 remedy of refusing to deliver the cattle;
and the debtor had "rights in the collateral" sufficient for appellant's security interest to
attach.
Problem 324
Standard prevails
9-324. PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS
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(g) [Conflicting purchase-money security interests.] If more than one security interest
qualifies for priority in the same collateral under subsection (a), (b), (d), or (f):
(1) a security interest securing an obligation incurred as all or part of the price of the
collateral has priority over a security interest securing an obligation incurred for value
given to enable the debtor to acquire rights in or the use of collateral; and
(2) in all other cases, Section 9-322(a) applies to the qualifying security interests.
COMMENT 13 Multiple Purchase-Money Security Interests. New subsection (g)
governs priority among multiple purchase-money security interests in the same collateral.
It grants priority to purchase-money security interests securing the price of collateral (i.e.,
created in favor of the seller) over purchase-money security interests that secure enabling
loans. Section 7.2(c) of the Restatement (3d) of the Law of Property (Mortgages) (1997)
adopts this rule with respect to real property mortgages. As Comment d to that section
explains:
the equities favor the vendor. Not only does the vendor part with specific real estate
rather than money, but the vendor would never relinquish it at all except on the
understanding that the vendor will be able to use it to satisfy the obligation to pay the
price. This is the case even though the vendor may know that the mortgagor is going to
finance the transaction in part by borrowing from a third party and giving a mortgage to
secure that obligation. In the final analysis, the law is more sympathetic to the vendor's
hazard of losing real estate previously owned than to the third party lender's risk of being
unable to collect from an interest in real estate that never previously belonged to it.
The first-to-file-or-perfect rule of Section 9-322 applies to multiple purchase-money
security interests securing enabling loans.
Problem 325
Facts: B lets an art store exhibit and sell her art. Then the Bank who had a perfected
floating lien seized everything in the store. Can the bank do this?
Answer: Yes: however, many states have statutes that would protect the artists.
Murphy v. SouthTrust Bank of Alabama, N.A., 611 So. 2d 269 A creditor gave a
dealership a credit line loan and perfected its security interest in inventory and proceeds.
The dealership's president agreed to display an owner's car on the lot and to remit to him
the proceeds. The dealership defaulted under the credit agreement. The owner told the
creditor that he did not have an interest in the car and that he had sold it to the dealership.
A credit union made a loan to a buyer to finance the purchase of the car. After the owner
informed the credit union that he owned the car, the credit union filed an interpleader
action against the creditor, owner, and the president. The owner and creditor filed claims
to the interpleaded funds. The owner appealed the order granting summary judgment to
the creditor. The court found that the owner's delivery of the car to the dealer was a
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consignment under 2-326 because the car was sold under the dealer's name and the
owner did not give public notice of any retained interest. The court found that the
creditor's perfected security interest had priority over the owner's because he failed
to file a financing statement or comply with 9-114.
III.
Control and Priority (NOT ON TEST)
A. Control Over Investment Property
How is a security interest taken in investment property? There are 2 ways (1) the filing
of a financing statement and /or the taking control over the investment property with the
latter trumping the former. Control is defined in 8-106 with similar rules in commodity
contracts in UCC 9-106(b).
B. Control Over Deposit Accounts
Problem 327
Facts: Computer World INC. desires to borrow money from Bank “A” which will grant a
revolving credit line of credit, secured in part by the bank account tat computer world
maintains with at Last Nat. Bank. I am the attorney for Bank “A”. Tell them how to
perfect this security interest in this bank account and which methods of control specified
in 9-104 would be the safest.
9-104. CONTROL OF DEPOSIT ACCOUNT
(a) [Requirements for control.] A secured party has control of a deposit account if:
(1) the secured party is the bank with which the deposit account is maintained;
(2) the debtor, secured party, and bank have agreed in an authenticated record that the
bank will comply with instructions originated by the secured party directing disposition
of the funds in the deposit account without further consent by the debtor; or
(3) the secured party becomes the bank's customer with respect to the deposit account.
(b) [Debtor's right to direct disposition.] A secured party that has satisfied subsection
(a) has control, even if the debtor retains the right to direct the disposition of funds from
the deposit account.
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C. Control over letters of credit rights
Letters of credit (subject of UCC article 5) are an increasingly popular means of
financing various transactions. If one party does not trust the other to make payments at
an agreed upon time, the party may require that the payment be made directly by a bank
of good repute. If this is done the bank will issue a letter of credit to the person to whom
payment shall be made (called the beneficiary) specifying the circumstances under which
the bank will honor drafts drawn on it by that person.
IV.
Buyers
Section 9-201 states what White and Summers calls the “golden rule”.
9-201. GENERAL EFFECTIVENESS OF SECURITY AGREEMENT
(a) [General effectiveness.] Except as otherwise provided in [the Uniform Commercial
Code], a security agreement is effective according to its terms between the parties,
against purchasers of the collateral, and against creditors.
(b) [Applicable consumer laws and other law.] A transaction subject to this article is
subject to any applicable rule of law which establishes a different rule for consumers and
[insert reference to (i) any other statute or regulation that regulates the rates, charges,
agreements, and practices for loans, credit sales, or other extensions of credit and (ii) any
consumer-protection statute or regulation].
(c) [Other applicable law controls.] In case of conflict between this article and a rule of
law, statute, or regulation described in subsection (b), the rule of law, statute, or
regulation controls. Failure to comply with a statute or regulation described in subsection
(b) has only the effect the statute or regulation specifies.
(d) [Further deference to other applicable law.] This article does not:
(1) validate any rate, charge, agreement, or practice that violates a rule of law, statute, or
regulation described in subsection (b); or
(2) extend the application of the rule of law, statute, or regulation to a transaction not
otherwise subject to it.
Section 9-320(a) and 9-317(b) are one of the sections that fits into the “except” language.
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9-320. BUYER OF GOODS
(a) [Buyer in ordinary course of business.] Except as otherwise provided in subsection
(e), a buyer in ordinary course of business, other than a person buying farm products
from a person engaged in farming operations, takes free of a security interest created by
the buyer's seller, even if the security interest is perfected and the buyer knows of its
existence.
9-317. INTERESTS THAT TAKE PRIORITY OVER OR TAKE FREE OF
SECURITY INTEREST OR AGRICULTURAL LIEN
(b) [Buyers that receive delivery.] Except as otherwise provided in subsection (e), a
buyer, other than a secured party, of tangible chattel paper, documents, goods,
instruments, or a security certificate takes free of a security interest or agricultural lien if
the buyer gives value and receives delivery of the collateral without knowledge of the
security interest or agricultural lien and before it is perfected.
A corollary to 9-201 is 9-315(a)(1)
Problem 329
Facts: B bought a TV from a retail TV seller. A month later the seller went bankrupt and
a minor functionary from Octopus National Bank showed up at B’s and asked for the tv.
The bank said that they had a perfected security interesting all of the sellers inventory and
since seller had not paid its debt they were repossessing the tv.
What should B tell the bank? GET LOST: SHE TAKES FREE FROM THE
INTEREST! See 9-320 Except as otherwise provided in subsection (e), a buyer in
ordinary course of business, other than a person buying farm products from a person
engaged in farming operations, takes free of a security interest created by the buyer's
seller, even if the security interest is perfected and the buyer knows of its existence.
Would it matter if B knew that ONB had a perfected security interest in the sellers
inventory? See comment 3 of 9-320: NO
3. Buyers in Ordinary Course. Subsection (a) derives from former Section 9-307(1).
The definition of "buyer in ordinary course of business" in Section 1-201 restricts its
application to buyers "from a person, other than a pawnbroker, in the business of selling
goods of that kind." Thus subsection (a) applies primarily to inventory collateral. The
subsection further excludes from its operation buyers of "farm products" (defined in
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Section 9-102) from a person engaged in farming operations. The buyer in ordinary
course of business is defined as one who buys goods "in good faith, without knowledge
that the sale violates the rights of another person and in the ordinary course." Subsection
(a) provides that such a buyer takes free of a security interest, even though perfected, and
even though the buyer knows the security interest exists. Reading the definition together
with the rule of law results in the buyer's taking free if the buyer merely knows that a
security interest covers the goods but taking subject if the buyer knows, in addition, that
the sale violates a term in an agreement with the secured party.
As did former Section 9-307(1), subsection (a) applies only to security interests created
by the seller of the goods to the buyer in ordinary course. However, under certain
circumstances a buyer in ordinary course who buys goods that were encumbered with a
security interest created by a person other than the seller may take free of the security
interest, as Example 2 explains. See also Comment 6, below.
Example 1: Manufacturer, who is in the business of manufacturing appliances, owns
manufacturing equipment subject to a perfected security interest in favor of Lender.
Manufacturer sells the equipment to Dealer, who is in the business of buying and selling
used equipment. Buyer buys the equipment from Dealer. Even if Buyer qualifies as a
buyer in the ordinary course of business, Buyer does not take free of Lender's security
interest under subsection (a), because Dealer did not create the security interest;
Manufacturer did.
Example 2: Manufacturer, who is in the business of manufacturing appliances, owns
manufacturing equipment subject to a perfected security interest in favor of Lender.
Manufacturer sells the equipment to Dealer, who is in the business of buying and selling
used equipment. Lender learns of the sale but does nothing to assert its security interest.
Buyer buys the equipment from Dealer. Inasmuch as Lender's acquiescence constitutes
an "entrusting" of the goods to Dealer within the meaning of Section 2-403(3) Buyer
takes free of Lender's security interest under Section 2-403(2) if Buyer qualifies as a
buyer in ordinary course of business.
Would it matter if she bought it a liquidation sale and was told by the store owner
that they were going bankrupt next week? See 33 UCC Rep. Serv 554: NO
In re Fritz-Mair Mfg. Co., 16 B.R. 417In early 1981, the debtor orally agreed to sell a
pump jack to the buyer, who paid for it on April 23, 1981. Sometime after the payment,
but before April 30, 1981, the unit was moved to a corner of the debtor's shop, as the
debtor and the buyer had agreed. On April 30, 1981, while the unit was still on the
debtor's premises, the debtor's bankruptcy petition was filed. The buyer claimed the unit
and requested it be given to him, arguing that he was a buyer in the ordinary course of the
debtor's business. The trustee contended that the transfer of the unit to the buyer should
be disallowed as a voidable preference under § 547 of the Bankruptcy Code. The court
held that the rights to the unit turned on whether title to it had passed to the buyer under
state law and noted that under Texas law, title to goods passed to a buyer once physical
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delivery of the goods was completed. The court found that delivery had occurred once the
unit was moved to the corner of the debtor's shop and that title to it passed to the buyer at
that time. The court also held that the buyer was a buyer in the ordinary course of
business because he had no knowledge that the sale violated any security interest.
International Harvester v. Glendenning
Facts: Barnes, an International Harvester Company (P) dealer sold to Glendenning (D) 3
tractors worth 16,000 (Glendenning knew they were worth 23,000). When he sold the
tractors P wrote that they sold for 24,700 and the D knew why he had done this (because
P had a purchase money security interest in the tractors). D later sold the tractors. P later
brought a conversion action. The trial held that D was a purchaser in the ordinary course
of business who took free of international harvesters lien. P appeals.
Issue: Does a vendee purchase in the ordinary course of business if he is aware of
improprieties in the transaction?
Held: No
Rule: A vendee does not purchase in the ordinary course of business if he is aware of
improprieties in the transaction.
Analysis:
To be a buyer in the ordinary course of business within the meaning of UCC 9-307
requires that the buyer of acted in good faith without knowledge that the sale to him is
ion violation of the rights of a 3rd party.
Here D was an experienced seller of International Harvester (P) products had ample
reason to know that the reason for the falsification of the record of sale was to deceive
International Harvester into thinking that its security interest had not been impaired.
This is not good faith and the jury was wrong.
Book Notes: Even where the code is silent about good faith requirements, UCC 1-203
imposes one. Good faith is implied.
Problem 330
Facts: Deering was a textile maker and routinely sold to M, a firm that finished the
product. M would then sell to T a wholesaler. While the textiles were still in Deerings
warehouse M contracted to buy them from Deering and signed a security agreement to
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that effect and giving Deering a financing statement which it duly filed. In turn, M sold to
T which paid M but delayed taking possession so that they remained in Deerings
warehouse. Deals of this type were common in the textile industry and all parties knew of
the others interest. Unfortunately, M became insolvent and never paid Deering for the
textiles and he therefore refused to deliver them to T. T sues who wins? See 9-320
comment 8
Answer: The seller prevails here. E ssentially, it is whomever possesses the goods.
Tanbro has a remedy because he can sue for breach of warranty of title.
Possessory Security Interests. Subsection (e) is new. It rejects the holding of Tanbro
Fabrics Corp. v. Deering Milliken, Inc., 350 N.E.2d 590 (N.Y. 1976) and, together with
Section 9-317(b), prevents a buyer of goods collateral from taking free of a security
interest if the collateral is in the possession of the secured party. "The secured party"
referred in subsection (e) is the holder of the security interest referred to in subsection (a)
or (b). Section 9-313 determines whether a secured party is in possession for purposes of
this section. Under some circumstances, Section 9-313 provides that a secured party is in
possession of collateral even if the collateral is in the physical possession of a third party.
Book Notes: What constitutes a buyer in due course?
UCC 1-201: "Buyer in ordinary course of business" means a person that buys goods in
good faith, without knowledge that the sale violates the rights of another person in the
goods, and in the ordinary course from a person, other than a pawnbroker, in the business
of selling goods of that kind. A person buys goods in the ordinary course if the sale to the
person comports with the usual or customary practices in the kind of business in which
the seller is engaged or with the seller's own usual or customary practices. A person that
sells oil, gas, or other minerals at the wellhead or minehead is a person in the business of
selling goods of that kind. A buyer in ordinary course of business may buy for cash, by
exchange of other property, or on secured or unsecured credit, and may acquire goods or
documents of title under a preexisting contract for sale. Only a buyer that takes
possession of the goods or has a right to recover the goods from the seller under Article 2
may be a buyer in ordinary course of business. "Buyer in ordinary course of business"
does not include a person that acquires goods in a transfer in bulk or as security for or in
total or partial satisfaction of a money debt.
First National Bank v. Ford Motor Credit
Facts: Heritage Ford obtained its inventory from Ford Motor Co. It financed its
inventory through Ford Motor Credit (D) which took a security interest in the vehicles
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old to heritage. Seeking additional funds, officers of Heritage took out 2 loans from First
National Bank (P), secured by 2 vehicles which the officers had signed over to
themselves. Heritage went out of business and defaulted on the loans. Ford Motor Credit
repoed the cars. First National filed an action to assert its interest in the vehicles. The
trial court held for P.
Issue: Does a lender issuing credit secured by inventory have priority over a creditor with
purchase money interest in the inventory?
Held: No; Reversed
Rule: A lender issuing credit secured by inventory does not have priority over a creditor
with purchase money interest in the inventory.
Analysis:
UCC 9-312(3): provides that a purchase money creditor has priority over all conflicting
secured creditors if he perfects at the time of receipt of the inventory by the debtor.
UCC 9-307: provides that a purchaser in the ordinary course of business will take the
inventory free of the lien that the vendor had previously given.
However: under the facts of this case, this rule does no good for the bank.
Heritage was not a buyer in the ordinary course of business so there signing over the
vehicles to themselves did not extinguish Ford Motor Corps (D) lien.
Thus: Ford perfected security interest prevails
Problem 332
Facts: Ex parte General Motors Acceptance Corp., 425 So. 2d 464: A debtor financed
the purchase of a car with a loan from a creditor and received a certificate of ownership
showing the creditor as the first lienholder. A purchaser bought the car from the debtor's
used car lot using a loan from the bank, which had a security interest in the car. The
debtor delivered a copy of the title applications to the purchaser but failed to note the
prior lien, pay the balance due the creditor on the loan, or obtain the original title
certificate. The creditor filed an action against the purchaser in detinue and conversion
and sought a declaratory judgment that the creditor's security interest in the car had
priority over the banks.
Held: The court held that the sale from the lot was a sale from inventory to a buyer in the
ordinary course of business, pursuant to 9-307(1), by a debtor who was in the business of
selling goods of that kind. Because the purchaser took free from the perfected security
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interest created by the seller, the bank's security agreement was valid and it received the
benefit of the purchaser's protection.
Problem 333 (ignore holder in due course stuff)
Facts: Wonder Spa pledged 50 of its promissory notes to the Conservative State Bank in
return for a loan. The bank took possession of the notes. The spa asked for 10 of the notes
back for presentment to the makers for payment and they turned over the notes which
Wonder Spa sold (discounted) to ONB, a bona fide purchaser without knowledge of the
Conservative Banks Interest. The resale was in direct violation of Spas and CSB’s
agreement. Which bank gets the instruments?
Answer:
9-312. PERFECTION OF SECURITY INTERESTS IN CHATTEL PAPER,
DEPOSIT ACCOUNTS, DOCUMENTS, GOODS COVERED BY DOCUMENTS,
INSTRUMENTS, INVESTMENT PROPERTY, LETTER-OF-CREDIT RIGHTS,
AND MONEY; PERFECTION BY PERMISSIVE FILING; TEMPORARY
PERFECTION WITHOUT FILING OR TRANSFER OF POSSESSION
(g) [Temporary perfection: delivery of security certificate or instrument to debtor.]
A perfected security interest in a certificated security or instrument remains perfected for
20 days without filing if the secured party delivers the security certificate or instrument to
the debtor for the purpose of:
(1) ultimate sale or exchange; or
(2) presentation, collection, enforcement, renewal, or registration of transfer.
9-331. PRIORITY OF RIGHTS OF PURCHASERS OF INSTRUMENTS,
DOCUMENTS, AND SECURITIES UNDER OTHER ARTICLES; PRIORITY OF
INTERESTS IN FINANCIAL ASSETS AND SECURITY ENTITLEMENTS
UNDER ARTICLE 8
(a) [Rights under Articles 3, 7, and 8 not limited.] This article does not limit the rights
of a holder in due course of a negotiable instrument, a holder to which a negotiable
document of title has been duly negotiated, or a protected purchaser of a security. These
holders or purchasers take priority over an earlier security interest, even if perfected, to
the extent provided in Articles 3, 7, and 8.
(b) [Protection under Article 8.] This article does not limit the rights of or impose
liability on a person to the extent that the person is protected against the assertion of a
claim under Article 8.
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(c) [Filing not notice.] Filing under this article does not constitute notice of a claim or
defense to the holders, or purchasers, or persons described in subsections (a) and (b).
Problem 334 (Garage Sale Exception)
Facts: “A” Audio bought a stereo receiver on credit from Voice of Japan an electronics
store giving it a purchase money security interest in the receiver. Voice of Japan did not
file a financing statement. 6 months later when “A” still owed 300, he held a garage sale
and sold the receiver to Nancy for 200 cash. If “A” stops making payments can Voice of
Japan take it back from Nancy? See 9-320(b)
Answer: NO
9-320(b). BUYER OF GOODS
(b) [Buyer of consumer goods.] Except as otherwise provided in subsection (e), a buyer
of goods from a person who used or bought the goods for use primarily for personal,
family, or household purposes takes free of a security interest, even if perfected, if the
buyer buys:
(1) without knowledge of the security interest;
(2) for value;
(3) primarily for the buyer's personal, family, or household purposes; and
(4) before the filing of a financing statement covering the goods.
Problem 335
A.) Yes; Production Credit Asso. v. Nowatzski, 90 Wis. 2d 344: The creditor made a
loan to the debtors and in return the debtors gave the creditor a security interest in all
their farm equipment. The debtors defaulted, but turned over some of the farm equipment
to the transferee for another loan. The creditor brought the conversion action after the
transferee refused to return the collateral. The court found that the transferee had a right
to possess the collateral under Wis. Stat. § 409.311, but he took the property subject to
the creditor's right of possession. The security agreement was not invalidated upon
transfer because an unconsented transfer was a default under the security
agreement. When the transferee refused to surrender the collateral, a conversion
action was the creditor's appropriate remedy. The court found that the valuation of
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the converted property at the time of trial, rather than the time of conversion, was
not erroneous because it reasonably compensated the creditor.
(c) Yes; page 1037
Problem 336
Facts: Paul Pop was a rock singer whom the Octopus Nat. Bank loaned 8,000 so he could
buy stereo equipment for his road show. On April 2nd Paul purchased the equipment and
on April 10th ONB filed its financing statement in the proper place. However, in the
meanwhile on April 8th Paul sold the equipment to Used Stereo Heaven. Who has the
superior claim?
Answer: First you must classify if this is equipment or consumer goods. This is
equipment. Here the filing statement was within the 20-day grace period and ONB has a
superior claim. Thus, ONB prevails. You would have a different result if this were
consumer goods.
Problem 339
Facts: T bought a sailboat with money borrowed from ONB, which took a security
interest therein and properly filed a financing statement. T sold the boat to a boat yard
telling them of the banks interest and payments they owed to ONB. The Boat Yard then
resold to Mr. X who paid full value as an innocent buyer believing that Boat Yard had
good title. ONB did not get its payments and repossessed the boat from Mr. X. Has Mr.
X’s property been converted or do they fit into 9-320(a)?
Answer: Dubner answer: ONB would recover because under 320(a). Here the created by
the buyers seller causes the problem for Mr. X. You can argue that 320(a) should be
extended to apply to Mr. X. However, this conflicts with the plain language. Here 2-312
would be a remedy for Mr. X as a breach of warranty of title.
9-320(a) BUYER OF GOODS [Buyer in ordinary course of business.] Except as
otherwise provided in subsection (e), a buyer in ordinary course of business, other than a
person buying farm products from a person engaged in farming operations, takes free of a
security interest created by the buyer's seller, even if the security interest is perfected
and the buyer knows of its existence.
V.
Article 2 Claimants
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Intro: this section shows the interplay between article 2 and 9.
Problem 342
Facts: Jack was a traveling salesman who needed new luggage for work and got them
from Alligator Fashions, which reserved a security interest and filed a financing
statement. Jack then sold the luggage to Mark, who paid with cash after Jack lied to him
and said they were alligator (they were old smelly dirty lizards). When Mark learned of
this, he revoked his acceptance under UCC 2-608 and claimed a security interest in the
goods. [See 2-711(3)] On learning of the resale Alligator Fashions decided to repossess
the luggage. Who is entitled to the luggage? See 9-110.
Answer: Mark has priority under 2-711 and 9-110 because he had possession. Thus, he
prevails over Alligator even though they filed first.
9-110. SECURITY INTERESTS ARISING UNDER ARTICLE 2 OR 2A
A security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5) is subject
to this article. However, until the debtor obtains possession of the goods:
(1) the security interest is enforceable, even if Section 9-203(b)(3) has not been satisfied;
(2) filing is not required to perfect the security interest;
(3) the rights of the secured party after default by the debtor are governed by Article 2 or
2A; and
(4) the security interest has priority over a conflicting security interest created by the
debtor.
Problem 343
Facts: Baldwin was a author who decided to self publish his latest book and market it
directly to retailers. He received an order from C and he shipped the goods immediately
along with an invoice for the price. 2 days later he learned C was broke and could not
pay. What can he do? See 2-702
Answer: he may reclaim the goods upon demand made within ten days after the receipt,
What if 2 weeks before he shipped the books C had sent him a letter lying about his
financial condition; now how long does he have to make his reclamation demand?
See 2-702(3) He has 3 months.
Answer: but if misrepresentation of solvency has been made to the particular seller in
writing within three months before delivery the ten day limitation does not apply.
§ 2-702. Seller's Remedies on Discovery of Buyer's Insolvency.
(1) Where the seller discovers the buyer to be insolvent he may refuse delivery except
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for cash including payment for all goods theretofore delivered under the contract, and
stop delivery under this Article (Section 2-705).
(2) Where the seller discovers that the buyer has received goods on credit while insolvent
he may reclaim the goods upon demand made within ten days after the receipt, but if
misrepresentation of solvency has been made to the particular seller in writing within
three months before delivery the ten day limitation does not apply. Except as provided in
this subsection the seller may not base a right to reclaim goods on the buyer's fraudulent
or innocent misrepresentation of solvency or of intent to pay.
(3) The seller's right to reclaim under subsection (2) is subject to the rights of a buyer in
ordinary course or other good faith purchaser under this Article (Section 2-403).
Successful reclamation of goods excludes all other remedies with respect to them.
In re Arlco, Inc.
Facts: Arley (maker of home furniture) and Home Fashions Outlet, Inc. (retail store)
each filed a petition under chapter 11. Galey & Lord, Inc. is a fabric manufacturer that
sod sold goods on credit to Arley. Before the chapter 11, Galey (p) wanted to reclaim
goods it had shipped to Arley (D) pursuant to UCC 2-702. held a perfected security
interest in substantially all Arley's assets, including accounts receivable and inventory.
All of Arleys assets were then sold under an asset purchase agreement. Galey (p) then
moved for summary judgment for the right to reclamation which the Bankruptcy trustee
opposed because Galey was subject to CIT’s perfected security interest.
Issue: Is a sellers reclamation claim to goods it has sold a debtor in bankruptcy subject to
the claim of a holder of a perfected security interest in the debtors assets and rendered
valueless upon sale of the goods where the secured claim exceeds the value of the
reclamation claim?
Held: Yes; Plaintiff's reclamation claim was rendered valueless because proceeds from
the disposition of the defendant's goods were used to pay lender's secured claim, and the
value of any right plaintiff had to an administrative claim or replacement lien, pursuant to
11 U.S.C.S. § 546, was zero.
Rule: A sellers reclamation claim to goods it has sold a debtor in bankruptcy is subject to
the claim of a holder of a perfected security interest in the debtors assets and is rendered
valueless upon sale of the goods where the secured claim exceeds the value of the
reclamation claim.
Analysis:
.
U.C.C. § 2-702, as enacted in various jurisdictions, ordinarily forms the statutory right
upon which sellers base their reclamation demand.
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Thus, as previously noted, the reclaiming seller must establish the requirements of the
relevant U.C.C. section and remains subject to its limitations.
Pursuant to U.C.C. § 2-702(3), the seller's right to reclamation is "subject to" the rights
of a good faith purchaser from the buyer.
Court says: that the right of a reclaiming creditor is subordinate to that of a good faith
purchaser does not automatically extinguish the reclamation right.
Most courts have treated "a holder of a prior perfected, floating lien on inventory . . . as
a good faith purchaser with rights superior to those of a reclaiming seller.
CIT here is a good faith purchaser with rights superior to those of a reclaiming seller.
Galey contends that because U.C.C. § 2-702(3) refers to the reclaiming seller's interest
as being subject to the interest of a good faith purchaser "under this Article," only parties
acquiring their interests under Article 2 of the U.C.C. are the type of good faith
purchasers encompassed within the protection of U.C.C. § 2-702(3). (Thus, article 9 not
included).
Court says: good faith is honesty in fact.
Court says: an analysis of the code shows that the definition of purchaser is broad
enough to included an article 9 secured party.
Thus, in the instant case, if CIT qualifies as a good faith purchaser pursuant to U.C.C. §
1-201 and gave value pursuant to U.C.C. § 1-201(44), then pursuant to U.C.C. § 2-403,
even if Arley had voidable title to the goods, it could transfer good title under Article 2 to
CIT.
Galey argues: that a determination as to CIT's good faith cannot be made on summary
judgment because there is a factual issue as to CIT's good faith.
However, Galey has not challenged the validity of the lien nor has it asserted that there
was any misconduct by CIT.
Court says: the secured creditor with a floating lien remains a good faith purchaser even
if it terminates funding with knowledge that sums are owed to third parties, as long as the
decision concerning the funding was commercially reasonable.
Galey's conclusory assertions concerning the absence of good faith by CIT are not
sufficient to create the fair doubt required to show that the issue is genuine. Galey makes
no allegation of misconduct by CIT in its negotiations with Arley or in its compliance
with the terms of the financing agreement with Arley.
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Problem 344
Facts: ONB held a perfected security interest in all cattle owned by Family Farms.
When it became obvious that the farm was failing financially, ONB decided to pull the
plug. But before doing so they wanted to make sure that the cows were fed so they called
Cow Chow and encouraged them to make another delivery even though they had not
been paid for earlier shipments. They did not mention that they were about to foreclose
on the fattened cattle. Cow Chow was an unsecured creditor which ONB was well
aware of. Is ONB required to give Cow Chow any money from the sale of the cows?
Answer: Yes; In Ninth Dist. Production Credit Ass'n v. Ed Duggan, Inc., 821 P.2d
788 the court held that where a secured creditor encourages a transaction and
is benefitted by the transaction between its debtor and an unsecured creditor that
enhances the value of the secured collateral, the secured creditor may be held liable to the
unsecured creditor on the theory of unjust enrichment.
VI. Statutory Liens
Problem 345
Forrest Cate Ford, Inc. v. Fryar, 62 Tenn. App. 572The repairman made numerous
repairs to four trucks owned by defendant. The repairman did not retain possession of the
trucks and when defendant failed to pay the repair bills, the repairman instituted
attachment proceedings to enforce its lien. Two banks held recorded security interests
against the trucks that pre-dated the repairs, and they intervened in the attachment
proceedings. The trial court held that the banks' recorded security interests were superior
to the repairman's lien. On appeal, the court affirmed. Under 9-310, the repairman had
to retain possession of the trucks in order to maintain the priority of his statutory
lien under Tenn. Code Ann. § 64-1901 et seq. over the banks' security interests.
Because he did not retain possession of the trucks, the repairman's lien lost its
priority to that of the banks' security interests.
VII. Fixtures
Introduction: see problems he gave out on fixtures. See 9-334(a). Goods become fixtures
when they sufficiently relate. This is strictly jurisdictional. For example, strawberry trees
are personal property in one jurisdiction but may be fixture in another.
Article 9 out of necessity had to make a special rule for the creation and perfection of
fixture. See 9-109(a) and 9-501(a)(1)(b)
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9-109. SCOPE
(a) [General scope of article.] Except as otherwise provided in subsections (c) and (d),
this article applies to:
(1) a transaction, regardless of its form, that creates a security interest in personal
property or fixtures by contract;
(2) an agricultural lien;
(3) a sale of accounts, chattel paper, payment intangibles, or promissory notes;
(4) a consignment;
(5) a security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5), as
provided in Section 9-110; and
(6) a security interest arising under Section 4-210 or 5-118.
9-501. FILING OFFICE
(a) [Filing offices.] Except as otherwise provided in subsection (b), if the local law of this
State governs perfection of a security interest or agricultural lien, the office in which to
file a financing statement to perfect the security interest or agricultural lien is:
(1) the office designated for the filing or recording of a record of a mortgage on the
related real property, if:
(B) the financing statement is filed as a fixture filing and the collateral is goods that are
or are to become fixtures;
9-334. PRIORITY OF SECURITY INTERESTS IN FIXTURES AND CROPS
(a) [Security interest in fixtures under this article.] A security interest under this
article may be created in goods that are fixtures or may continue in goods that become
fixtures. A security interest does not exist under this article in ordinary building materials
incorporated into an improvement on land.
(b) [Security interest in fixtures under real-property law.] This article does not
prevent creation of an encumbrance upon fixtures under real property law.
(c) [General rule: subordination of security interest in fixtures.] In cases not
governed by subsections (d) through (h), a security interest in fixtures is subordinate to a
conflicting interest of an encumbrancer or owner of the related real property other than
the debtor.
(d) [Fixtures purchase-money priority.] Except as otherwise provided in subsection (h),
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a perfected security interest in fixtures has priority over a conflicting interest of an
encumbrancer or owner of the real property if the debtor has an interest of record in or is
in possession of the real property and:
(1) the security interest is a purchase-money security interest;
(2) the interest of the encumbrancer or owner arises before the goods become fixtures;
and
(3) the security interest is perfected by a fixture filing before the goods become fixtures
or within 20 days thereafter.
(e) [Priority of security interest in fixtures over interests in real property.] A
perfected security interest in fixtures has priority over a conflicting interest of an
encumbrancer or owner of the real property if:
(1) the debtor has an interest of record in the real property or is in possession of the real
property and the security interest:
(A) is perfected by a fixture filing before the interest of the encumbrancer or owner is
of record; and
(B) has priority over any conflicting interest of a predecessor in title of the
encumbrancer or owner;
(2) before the goods become fixtures, the security interest is perfected by any method
permitted by this article and the fixtures are readily removable:
(A) factory or office machines;
(B) equipment that is not primarily used or leased for use in the operation of the real
property; or
(C) replacements of domestic appliances that are consumer goods;
(3) the conflicting interest is a lien on the real property obtained by legal or equitable
proceedings after the security interest was perfected by any method permitted by this
article; or
(4) the security interest is:
(A) created in a manufactured home in a manufactured-home transaction; and
(B) perfected pursuant to a statute described in Section 9-311(a)(2).
(f) [Priority based on consent, disclaimer, or right to remove.] A security interest in
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fixtures, whether or not perfected, has priority over a conflicting interest of an
encumbrancer or owner of the real property if:
(1) the encumbrancer or owner has, in an authenticated record, consented to the security
interest or disclaimed an interest in the goods as fixtures; or
(2) the debtor has a right to remove the goods as against the encumbrancer or owner.
(g) [Continuation of paragraph (f)(2) priority.] The priority of the security interest
under paragraph (f)(2) continues for a reasonable time if the debtor's right to remove the
goods as against the encumbrancer or owner terminates.
(h) [Priority of construction mortgage.] A mortgage is a construction mortgage to the
extent that it secures an obligation incurred for the construction of an improvement on
land, including the acquisition cost of the land, if a recorded record of the mortgage so
indicates. Except as otherwise provided in subsections (e) and (f), a security interest in
fixtures is subordinate to a construction mortgage if a record of the mortgage is recorded
before the goods become fixtures and the goods become fixtures before the completion of
the construction. A mortgage has this priority to the same extent as a construction
mortgage to the extent that it is given to refinance a construction mortgage.
(i) [Priority of security interest in crops.] A perfected security interest in crops growing
on real property has priority over a conflicting interest of an encumbrancer or owner of
the real property if the debtor has an interest of record in or is in possession of the real
property.
(j) [Subsection (i) prevails.] Subsection (i) prevails over any inconsistent provisions of
the following statutes:
[List here any statutes containing provisions inconsistent with subsection (i).]
George v. Commercial Credit
Facts: After Fosket contracted to buy a large mobile home, he executed a real estate
mortgage to Highway Mobile Homes Sales which assigned the loan to Commercial
Credit (P). Once the mobile home was assigned to Fosketts property, he applied for a
homeowners insurance policy and then removed the wheels to make it a permanent home.
Also, the home was never again placed on the highway or moved. Foskett lived in it until
forced to leave by the trustee (George)(D) in bankruptcy. Commercial (P) challenged
Georges interest in the mobile home arguing that it had become a fixture under the state
law. This, Commercial (P) argued made then secured with an interest superior to that of
George. The d/c ruled in (p) favor.
Issue: Where a personalty takes on the nature of real property, does it become a fixture?
Yes
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Rule: where a personalty takes on the nature of real property, it becomes a fixture.
Analysis:
Court says: This rule follows from common law cases.
One of theses cases gave 3 tests to make the determination: That case held that the
three tests for determining whether facilities remain personalty or are to be considered
part of the realty are 1) actual physical annexation to the realty; 2) application or
adaptation to the use or purpose to which the realty is devoted, and 3) intention of the
person making annexation to make a permanent accession to the freehold.
In view of our holding that this particular mobile home had become a fixture under
Wisconsin law and that the law of fixtures may, by law, be applied to mobile homes in
that State, the Judgment of the District Court must be and is
Affirmed.
Problem 346
Facts: M Railway went to ONB and asked to borrow money, using as collateral its
extensive network of railroad. ONB consults you. The track is in a total of 117 counties.
Must it file a financing statement in each? See 9-501(b) and 9-102(a)(80)
Answer: No; In 501(b) the section authorizes this.
9-501. FILING OFFICE
(b) [Filing office for transmitting utilities.] The office in which to file a financing
statement to perfect a security interest in collateral, including fixtures, of a transmitting
utility is the office of []. The financing statement also constitutes a fixture filing as to the
collateral indicated in the financing statement which is or is to become fixtures.
9-102. DEFINITIONS AND INDEX OF DEFINITIONS
(a) [Article 9 definitions.] In this article:
(80) "Transmitting utility" means a person primarily engaged in the business of:
(A) operating a railroad, subway, street railway, or trolley bus;
(B) transmitting communications electrically, electromagnetically, or by light;
(C) transmitting goods by pipeline or sewer; or
(D) transmitting or producing and transmitting electricity, steam, gas, or water.
Lewiston Bottled Gas v. Key Bank of Maine
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Facts: Key Bank (D) contended that its security interest in after acquired fixtures of a
debtor had priority over one having PMSI. 90 a/c units.
Rule: A party with a security interest in after acquired fixtures has priority over one
supplying purchase money credit on such fixtures, who had not complied with article 9’s
financing statement rules.
Analysis:
One having a PMSI in fixtures will have priority over one having a pre-existing
security interest in after acquired fixtures.
However; 9-402(5) requires the financing statement perfecting the interest list the name
of the record owner of the property.
UCC: 9-313(a) says fixtures are goods that are physically annexed to real property.
Problem 349
Williams v. Peoples First Nat'l Bank & Trust Co. (In re Allen), 221 B.R. 232; Before
the debtors filed Chapter 7 bankruptcy, a creditor perfected his lien on the debtors' mobile
home by noting the lien on the title. The trustee sought to avoid the lien under 11
U.S.C.S. § 544(a)(1) by bringing a complaint. The creditor sought to dismiss the
complaint, which the court did. The court held that under 9-313(4)(d), it was not
necessary for the creditor to file his lien in any records. Even assuming that the mobile
home had been so attached to the realty so as to become part of the realty itself, the
provision in the Illinois statute that granted priority to a fixture filer over a hypothetical
judgment lien creditor like the trustee. Noting the lien on the title was adequate under 3202 and therefore satisfied 9-313(4)(d). The fixture filing requirements of 9-302(1)(d)
did not require a subsequent filing.
Maplewood Bank and Trust v. Sears, Roebuck & Co.
Facts: Plaintiff Maplewood Bank and Trust is the holder of a first purchase money
mortgage dated September 20, 1988 and recorded on October 5, 1988 on premises owned
by defendants Edward and Terre Capers. The original mortgage debt was for $ 121,000.
On May 31, 1989, Sears, Roebuck and Company (Sears) filed a Financing Statement
covering a completely new kitchen, consisting of "new countertops, cabinets, sinks,
disposal unit, dishwasher, oven, cooktop and hood," installed in the mortgaged premises
at the request of the Capers after they executed a Security Agreement. The Financing
Statement, known as the UCC-1 form, filed by Sears gave notice that Sears had a
security interest in the new kitchen installed in the mortgaged premises in the sum of $
33,320.40. On August 18, 1989 the Capers executed a second mortgage on the
previously mortgaged premises to defendant New Jersey Savings Bank for the sum of $
34,000. That mortgage was recorded on August 23, 1989. When the Capers eventually
defaulted in the payments due plaintiff and Sears, plaintiff declared the entire unpaid
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balance on the mortgage was due. Nonpayment of the entire balance plus interest
prompted plaintiff to file its complaint for foreclosure on November 5, 1990 and an
amended complaint on or about December 6, 1990. Sears filed an answer and a
counterclaim. Sears sought a declaration that its debt was "prior to the mortgage of the
plaintiff" and, among other things, to compel plaintiff to "pay [Sears] the amount due on
its Agreement."
Held: The court affirmed the lower court's decision and held that defendant's security
interest was limited to the fixtures and did not extend to the realty.
Rule: A first mortgage is entitled to priority over a fixture financier in the funds realized
from a foreclosure sale of the mortgaged premises.
Analysis:
By statute, Sears' purchase money security interest, when perfected, "has priority
over the conflicting interest of an encumbrancer or owner of the real estate
Next we must focus upon the remedies available to a purchase money security interest
lienholder upon default by the debtor.
The UCC provides at 9-313(8) that:
When the secured party has priority over all owners and encumbrancers of the real estate,
he may, on default, subject to the provisions of subchapter 5, remove his collateral from
the real estate but he must reimburse any encumbrancer or owner of the real estate who is
not the debtor and who has not otherwise agreed for the cost of repair of any physical
injury, but not for any diminution in value of the real estate caused by the absence of the
goods removed or by any necessity of replacing them
Thus based on the plain language of § 9-313(8), Sears has two options: removal
of the fixtures or foregoing removal of the fixtures.
Court says: We decline the creative approach by Shanker (page 1084).
We are also persuaded that Sears is not entitled to any remedy, other than
removal of the fixtures, based on equitable principles. Sears knew its remedy was
limited to removal upon default. Indeed, the Retail Installment Contract and
Security Agreement prepared by Sears and signed by the Capers provided that the
Capers were giving Sears a "security interest under the Uniform Commercial
Code in all merchandise purchased under this contract and the security interest
allows Sears to repossess the merchandise" in the event the Capers did not make
payments as agreed.
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Problem 353
Facts: Farmer got a mortgage for his home through ONB. The mortgage said that
it applied to all growing things or all things attached thereto. He then gave a
security interest in his crop to X. If X files the financing statement properly will
it prevail over ONB?
Answer: Yes; they prevail.
U.C.C. § 9-334
(i) [Priority of security interest in crops.] A perfected security interest in crops
growing on real property has priority over a conflicting interest of an
encumbrancer or owner of the real property if the debtor has an interest of record
in or is in possession of the real property.
THE END
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